Legislature(2015 - 2016)ANCH LIO AUDITORIUM
07/19/2016 01:00 PM Senate RESOURCES
Note: the audio ![]()
and video ![]()
recordings are distinct records and are obtained from different sources. As such there may be key differences between the two. The audio recordings are captured by our records offices as the official record of the meeting and will have more accurate timestamps. Use the icons to switch between them.
| Audio | Topic |
|---|---|
| Start | |
| Presentation: Plan of Development for the Prudhoe Bay Unit | |
| Adjourn |
* first hearing in first committee of referral
+ teleconferenced
= bill was previously heard/scheduled
+ teleconferenced
= bill was previously heard/scheduled
ALASKA STATE LEGISLATURE
SENATE RESOURCES STANDING COMMITTEE
July 19, 2016
1:00 p.m.
Anchorage LIO
MEMBERS PRESENT
Senator Cathy Giessel, Chair
Senator Mia Costello, Vice Chair
Senator John Coghill
Senator Peter Micciche
Senator Bill Stoltze
Senator Bill Wielechowski
MEMBERS ABSENT
Senator Bert Stedman
OTHER LEGISLATORS PRESENT
Senator Anna MacKinnon
Representative Dave Talerico, via teleconference
Representative Mike Hawker, via teleconference
Representative Kurt Olson, via teleconference
Representative Dan Saddler
Representative Craig Johnson
Representative Liz Vazquez
Representative Geran Tarr
Representative Cathy Tilton
Representative Andy Josephson
COMMITTEE CALENDAR
PRESENTATION: PLAN OF DEVELOPMENT FOR THE PRUDHOE BAY UNIT
- HEARD
PREVIOUS COMMITTEE ACTION
No previous action to record.
WITNESS REGISTER
CATHY FOERSTER, Chair
Alaska Oil and Gas Conservation Commissioner (AOGCC)
Anchorage, Alaska
POSITION STATEMENT: Explained AOGCC rulings on allowable offtake
of gas at Prudhoe Bay and Pt. Thomson.
ANDY MACK, Commissioner Designee
Department of Natural Resources (DNR)
Juneau, Alaska
POSITION STATEMENT: Spoke to DNR procedures.
PAUL DECKER, Manager
Resource Evaluation Section
Division of Oil and Gas
Department of Natural Resources
Anchorage, Alaska
POSITION STATEMENT: Gave an overview of Prudhoe Bay petroleum
fields.
CORRI FEIGE, Director
Division of Oil and Gas
Department of Natural Resources
Anchorage, Alaska
POSITION STATEMENT: Described the oil and gas plan of
development (POD) for the Prudhoe Bay unit.
MARK COTHAM, Contract Attorney
Alaska Department of Law
Houston, Texas
POSITION STATEMENT: Explained that it is appropriate to request
marketing plans from the working interest owners of Prudhoe Bay.
ACTION NARRATIVE
1:00:34 PM
CHAIR CATHY GIESSEL called the Senate Resources Standing
Committee meeting to order at 1:00 p.m. Present at the call to
order were Senators Coghill, Costello, Wielechowski, and Chair
Giessel.
^Presentation: Plan of Development for the Prudhoe Bay Unit
Presentation: Plan of Development for the Prudhoe Bay Unit
1:01:47 PM
CHAIR GIESSEL said she wanted to provide the public and members
of the committee with an in-depth discussion of the plan of
development (POD) for petroleum resources in the Prudhoe Bay
unit on the North Slope. The topic has been in the media for the
last few months, and letters have been exchanged between the
Alaska Department of Natural Resources (DNR) and the Prudhoe Bay
unit operator, which is BP Alaska.
CHAIR GIESSEL explained that a plan of development is required
under Alaska regulation and is submitted annually for review and
approval. It describes how a resource is going to be developed
in the upcoming year. The POD is approved-or not-by DNR. If it
is deemed insufficient, DNR can propose modifications. If the
operator agrees to the revisions, then the plan of development
goes forward. In the case of the Prudhoe Bay unit, DNR has
proposed changes to next year's POD, and if the proposed
modifications are not accepted by the operator and there is no
approved plan of development, the current plan could expire.
Under 11 AAC 83.343, no development activity can be allowed
without an approved POD.
CHAIR GIESSEL noted that Senator Stoltze and Representative Tarr
joined the meeting.
1:04:28 PM
CHAIR GIESSEL said the letters from the administration have
asserted that the Prudhoe Bay unit should have a plan of
development for the gas. "I think all Alaskans are aware that
we've been developing the oil, but now the DNR is requesting
there be a plan of development for the gas." The state is also
requiring the companies to provide gas marketing plans, she
stated, which is a new policy. The Prudhoe Bay producing
companies contend that a plan to develop the gas is premature
and that it would violate antitrust laws if they were to share
their marketing strategies. She noted that the DNR letters are
posted on the BASIS website, and they state that there is a duty
to make the gas available from Prudhoe Bay to third party
projects on commercially reasonable terms in the absence of a
binding commitment to progress to a major gas sale. The
companies say this is unprecedented. "We're here to find out
more," she said. She added that elected officials represent
Alaskans, and she wants to make sure resource committee members
understand so that their voice can be heard appropriately, and
they can make appropriate decisions should it come down to that.
CHAIR GIESSEL noted that Representatives Talerico and Olson
joined the meeting via teleconference.
1:06:57 PM
CHAIR GIESSEL announced that there will be testimony from the
Alaska Oil and Gas Conservation Commission (AOGCC), and she
noted that many Alaskans do not know about this commission,
which was established prior to statehood. Its main functions are
to prevent waste and to protect the public interest in the
production of oil and gas. In 1978, the present commission was
formed as an independent quasi-judicial agency of the state,
with powers and duties described in statute, including its
responsibility to prevent the waste of resources. She then
welcomed Representative Josephson to the meeting.
1:07:42 PM
CATHY FOERSTER, Chair, Alaska Oil and Gas Conservation
Commission (AOGCC), Anchorage, said that she has been asked to
discuss the rulings that AOGCC made on gas offtake allowables
from Prudhoe Bay and Pt. Thomson in anticipation of major gas
sales from the North Slope in 2025. There is no regulatory piece
for AOGCC in a plan of development; however, because preventing
waste and encouraging greater ultimate recovery are part of
their statutory mandate, if the AOGCC sees something in a POD
that is counter to either of those objectives, "we could then
call a hearing of our own motion and pursue something that we
didn't like in a POD."
1:09:24 PM
CHAIR GIESSEL asked who "we" refers to.
MS. FOERSTER explained that she is representing the AOGCC, which
is supposed to have three commissioners but now only has two.
She noted that she is the chair of the commission and is also
the engineering commissioner. Statute requires an engineering
commissioner who has at least ten years of petroleum engineering
experience. The other commissioner is Dan Seamount, and he fills
the statutory requirements of having a petroleum geologist with
at least ten years of experience. The statute also calls for a
public member with knowledge and experience relevant to oil and
gas issues, but that position is currently vacant.
1:10:18 PM
MS. FOERSTER said there was an existing Prudhoe Bay gas offtake
allowable set at 2.7 BCF [billion cubic feet] per day, "but I
call that the over-my-dead-body allowable," because it was set
in the 1970s when it was thought that Prudhoe Bay would recover
8 billion barrels of oil, and enhanced oil recovery techniques
were not well understood. The thought was to get the gas at the
same time as getting the oil, but if that first gasline had been
built, "we probably would have gotten 8 billion barrels out of
Prudhoe Bay, and we would have gotten a lot of gas too, but we
wouldn't be meeting here today." There would have been Kuparuk
but probably not Nikaitchuq, Oooguruk, Alpine, or "all those
other little satellites that have come on over the years,
because Prudhoe Bay would be dead now." Instead, it has produced
about 12 billion barrels and has over 2 billion left to produce.
1:12:07 PM
MS. FOERSTER said she calls it over-my-dead-body, because "we
needed to see a specific case for gas offtake with timing and
rate and see the analysis of the offsetting oil and gas losses
before we could grant an allowable, but we knew that that
allowable was based on premises that were no longer accurate."
CHAIR GIESSEL asked her to explain the connection between gas
and oil in simple terms for the listening public.
MS. FOERSTER said she will get to that. The Prudhoe Bay operator
presented a specific case of a volume of offtake starting in
2025, and AOGCC made a ruling based on that very specific case.
She noted that it is the only data that has been presented to
the commission, so that is the only scenario that it has made a
ruling on. Pt. Thomson has a different set of concerns, but
there was no offtake allowable in place for that gas at all, and
now there is, and it is 1.1 BCF per day. The bottom line is that
the two allowables together provided sufficient offtake to meet
the proposed 2025 project.
MS. FOERSTER stated the AOGCC has five statutory mandates
relating to oil and gas production: protect human safety;
protect fresh ground waters; prevent hydrocarbon waste;
encourage greater ultimate recovery; and protect correlative
rights, which relates to a landowner stealing someone else's oil
and gas. Preventing waste and encouraging greater recovery are
the two mandates that are relevant in this discussion. She said
that all proven gas on the North Slope of any quantity is at
Prudhoe Bay and Pt. Thomson, and there is a lot of it. It has
been deemed stranded, as there is no way to get it to a market.
1:15:22 PM
MS. FOERSTER said since AOGCC is charged with encouraging
greater hydrocarbon recovery, it is her job to help see that the
gas gets to market. At Prudhoe Bay there is 22 trillion cubic
feet (TCF) of gas that the operators say they can recover, and
Pt. Thomson has 6 TCF that operators expect can be recovered.
Along with encouraging recovery, the AOGCC has a mandate to
prevent waste. When gas is taken from an oil field before all of
the oil has been produced, some oil will be lost. Taking the gas
too soon will cause some of the oil to be lost forever. Taking
gas from a condensate field like Pt. Thomson before the
condensate has been recovered will cause some condensate to be
left in the ground forever. It is a fact; it is just physics.
1:16:47 PM
MS. FOERSTER said there are 2.5 billion barrels of oil left in
Prudhoe Bay, and that is huge and about same amount Kuparuk has
produced in its entire life. There is a lot of condensate at Pt.
Thomson, an amount almost equal to the oil that Swanson River
has produced since it came on line 50 years ago. This is a
significant resource that needs to be protected.
CHAIR GIESSEL asked for a definition of condensate for the
listening public.
MS. FOERSTER explained that condensate is a lighter end liquid
that is in the gas in a gas reservoir. In a reservoir like Pt.
Thomson, it is under pressure and temperature and called a dense
fluid. It is not really a liquid or gas, it is kind of in
between, but as it comes to the surface, the liquids drop out
and it changes to a light oil.
1:18:48 PM
MS. FOERSTER reiterated that allowing gas to be sold before all
of the oil and condensate have been recovered will result in the
waste of some liquid, but not allowing the operators and the
state to take advantage of what might be the only window to get
the gas would not encourage greater ultimate resource recovery,
so there are tradeoffs. The people at AOGCC have been studying
the effects of gas sales on the loss of liquid recovery since
before Ms. Foerster arrived in 2005, and they are convinced that
they can trust the technical validity of BP and Exxon's reserve
reservoir models. She said, "We've participated with BP and
Exxon in running sensitivities on those studies to assist in
optimizing both liquid and gas recovery and understanding the
dynamics of protecting the oil versus protecting the gas." She
said she feels good about the data and the conclusions of AOGCC.
From the day that she got to the AOGCC, she thought it would be
very difficult for BP and Exxon to convince them to approve
major gas sales during her tenure, as she thought it would be
further out in the future. "What I've been telling you guys is
this: for Prudhoe Bay, later is better, less is better,
accelerating production of the oil beforehand is better, and
developing and implementing strategies to mitigate those losses
once the gas production begins is better." That's just the way
it is, she stated. The less gas taken, the slower the damage to
the remaining oil. One strategy to mitigate the losses that
"they've been working on for several years" is called gas-cap
water injection.
1:21:49 PM
MS. FOERSTER noted that she has been saying that "the monkey's
going to be on Exxon's back to prove to us that blowing down the
gas cap is the only feasible way to establish commercial
production from Pt. Thomson," rather than cycling the gas back
in to keep the reservoir pressure up and allowing condensate to
come out. She has said that the operators will get fully behind
North Slope gas sales when the timing is right for them, and, in
general, when it is right for them, the timing is right for
Alaska. She noted a public hearing last August where the Prudhoe
Bay owners testified in support of major gas sales from Prudhoe
Bay starting in 2025. A few days later, the Pt. Thomson owners
testified in support of allowable offtake from that field
starting in 2015. On October 15, 2015, AOGCC issued orders
allowing offtake at 3.6 BCF per day at Prudhoe Bay and 1.1 BCF
per day at Pt. Thomson starting in 2025.
1:23:24 PM
MS. FOERSTER showed a slide summarizing the important parts of
rulings by AOGCC for Prudhoe Bay and Pt. Thomson. In addition to
the allowable offtakes that were granted to the operators, the
AOGCC put in some caveats. In five years, BP must provide a
report on its oil recovery acceleration activities and the
results of those activities. "In other words, you've told us
that you're going to do all of these things to accelerate oil
production so that 2025 will be the right time," and rather than
trusting their word, they will have to demonstrate it. "We also
asked that they give us some studies on CO2 injection-different
alternatives for it-but we gave them approval for that but
contingent on the results of those studies." The operators asked
for authority to dispose of the CO2, but AOGCC does not have
jurisdiction. It is under the EPA [Environmental Protection
Agency], and AOGCC does not have primacy for that class of
underground injection control, "so we weren't able to give them
anything on that except the EPA's phone number." At Pt. Thomson,
in addition to the allowables, AOGCC stipulated that prior to
the major gas sales, Exxon must demonstrate that cycling is not
feasible. Pt. Thomson started up on a pilot cycling project
earlier this year, and AOGCC will watch and see how that goes.
1:25:08 PM
MS. FOERSTER noted that AOGCC can call a hearing to reconsider
these decisions, along with any other decisions it makes, at any
time. It is a promise to Alaskans that AOGCC will keep an eye on
this and make sure that 10 years later decisions are still the
right ones. If things evolve, AOGCC will stay in touch.
1:26:04 PM
CHAIR GIESSEL asked Ms. Foerster to discuss CO2.
MS. FOERSTER explained that carbon dioxide is a gas entrained in
hydrocarbon gas in Prudhoe Bay and Pt. Thomson, and it is not
combustible for use as a fuel. It is a waste byproduct. In the
Lower 48, the CO2 might be used as an EOR (enhanced oil
recovery) product. On the North Slope, the CO2 might be able to
be used as an EOR, but it might not, and those are the studies
the operators will be performing over the next several years.
1:27:40 PM
SENATOR STOLTZE asked when the governor will appoint the third
AOGCC commissioner.
MS. FOERSTER stated that the governor can appoint the public
member any time, "and we're optimistic that he's going to," and
three heads are better than two. She noted that Commissioner
Seamount's term ends at the end of February 2017 and two
commissioners are required for a quorum.
SENATOR STOLTZE observed that the governor could appoint a new
quorum and a majority. He asked, "What is the contestability and
the "appealability", and what are the standards that you
establish and the professional and the legal standards, and is
it common to have a ruling contested or appealed?"
MS. FOERSTER answered that it takes agreement of at least two
commissioners to make a decision. In the time she has been
there, she has never had two against one, but that should not be
too surprising, because decisions are based on the laws of
physics and the statutes and regulations set out by the state.
"There's just no latitude in our decisions." If the science
supports it, and it fits into the laws, "it's pretty darn black
and white." She said she has not seen a decision that all three
commissioners did not come to or a decision that the staff
recommended against. If AOGCC makes a decision that the affected
party does not like it, the party can request a rehearing, and
if they disagree, they can then take it to court.
SENATOR STOLTZE said his observation is that "you might be the
one on two to one under certain scenarios."
SENATOR WIELECHOWSKI suggested that economics also factors in
somewhat. He asked how much oil is expected to be lost from
Prudhoe Bay by allowing a 3.6 BCF offtake, and if there will be
loss of oil if the allowable gas offtake is increased. "How do
you balance that? Do you do a net-present value for the state?"
There must be a financial metric that is used, he added.
MS. FOERSTER answered that she did not recall the exact number
for losses, but it is based on a model that is based on
assumptions that are likely to change, but it will be in the
hundreds of thousands of barrels at Prudhoe Bay. There are over
2 billion barrels left to produce, much of that in the next 10
years, but there will still be enough oil left to have those
losses. "This was presented to us as this is, or may be, our
only window of opportunity." It was looked at it in terms of
losing 28 TCF of gas, so on the basis of heating value,
independent of price, 1,000 cubic feet of gas is worth about
one-sixth of a barrel of oil. She gave the example of losing
300,000 barrels of oil, which would equate to 1.8 BCF of gas,
"and there is a boatload more than 1.8 BCF of gas to be lost."
1:34:09 PM
MS. FOERSTER said that the ideal scenario would be to not lose
the oil but still get the gas. "But we were given one scenario
and told that that scenario may be the only scenario, so we
evaluated that scenario."
SENATOR WIELECHOWSKI questioned the lack of any economic
analysis on the loss of net present value to the state or the
internal rate of return for the state or for the industry.
MS. FOERSTER stated that the commission does not make decisions
based on economics. ExxonMobil and BP make their decisions on
economics, and there are other departments in the state that
look at money, but "I don't think you have to have a very high
powered calculator to know that this is a good decision as far
as present value."
SENATOR WIELECHOWSKI asked if the state has the ability to say,
for instance, oil is $100 a barrel and is much more valuable
than the gas, so that somebody will be looking out for the
state's treasury.
MS. FOERSTER answered that no one has done that, but that
testimony is always welcome at the AOGCC hearings. The oil that
the state is selling is the same as the oil that the operator is
selling, and if selling 10 extra barrels of oil versus 10 MCF of
gas is better for the operator…. "I think the economics are
going to be pretty much the same for the oil companies versus
the state on the decision to sell the gas or sell the oil in
this particular field." This is a case where "if it's good for
them, it's good for us."
CHAIR GIESSEL said she reviewed a 1996 opinion from Attorney
General [Bruce] Botelho that defines the tension between DNR and
AOGCC. Mr. Botelho points out that DNR actually has economists
available to make those kinds of determinations.
SENATOR WIELECHOWSKI said it would be important, particularly
for Pt. Thomson, where costs are probably very high. The oil
companies have said for years that "they want to blow it down;
it's too expensive to produce." There can be a huge amount of
tension at Pt. Thomson, and there is a need for the state to be
advocating on Alaskans' behalf. There will be tremendous
variation between what Exxon wants and what the state wants when
costs are high but the potential returns to the state are high.
The company has projects all over the world, but the potential
resource is huge for Alaska. He reiterated the need to look
after the state's interest, "and I do think that a lot of times
what's good for BP, ConocoPhillips, and Exxon is good for the
state, but I think Pt. Thomson is probably a little different."
1:37:52 PM
MS. FOERSTER said she would like to think the AOGCC is looking
out for the state.
SENATOR WIELECHOWSKI noted the lack of economic analysis.
MS. FOERSTER said that is true, but it is still looking out for
the best interests of the state, "and we do take input from the
people who do have that information."
1:38:33 PM
REPRESENTATIVE SADDLER noted that the technical determination
only comes at leaseholder requests. The state does not keep a
running tally of when it might be best to start doing gas
offtake versus oil. Is that correct? He asked if the AOGCC
determines the best time to take gas only when a leaseholder
requests it.
MS. FOERSTER said yes and no. If the operator's plan of
development includes something that would create waste or not
encourage greater recovery, AOGCC could step in and have a
hearing. "If we felt that having a gas offtake was something
that the operator wasn't trying to do and it was time, we could
step in and have a hearing about that."
REPRESENTATIVE SADDLER asked if there are policy rules that play
into the decision. What if the laws of physics and state law are
countered in order to meet a marketing window? Would that
override the technical requirements, and who has that role?
MS. FOERSTER said that did go into AOGCC's consideration. There
is a time when it takes more gas to fuel the production of the
oil than the oil is actually worth, "and that happens way
later." But the operator came to AOGCC and said this is a window
of opportunity, so for that testimony, AOGCC said, "if you take
this window of opportunity, your oil losses will be greater than
they would be if you waited longer, but the oil losses will be
less than the gas losses."
1:41:44 PM
REPRESENTATIVE SADDLER asked if a state agency ever asks AOGCC
for a calculation, or does it just serve the lease holders?
MS. FOERSTER said AOGCC serves the State of Alaska, but it
regulates the industry. It also tries to be helpful in answering
questions that are not too onerous.
REPRESENTATIVE SADDLER asked if DNR or anyone from the
governor's office has asked AOGCC for recent assessments.
MS. FOERSTER answered no.
SENATOR COGHILL said technology has shifted, and oil has been
recovered "probably better and better." He has heard that the
gas and water flooding have changed the dynamics of the Prudhoe
Bay field and asked if that changes the calculus of when to take
oil or gas. The reinjection of gas over time actually has
created very, very different dynamics in that field, he added.
MS. FOERSTER answered that technology has changed the timing on
when to take the gas. The original ruling was probably sound
when it was made, but EOR, or enhanced oil recovery, has
advanced. There was not horizontal or multilateral drilling, for
example. That is why AOGCC can revisit its decisions over time.
SENATOR COGHILL asked if CO2 becomes valuable.
MS. FOERSTER said that CO2 as an EOR product is well-known, but
how it can be used on the North Slope has not been fully
evaluated, and AOGCC is asking the operators to evaluate it.
1:45:19 PM
SENATOR COGHILL asked if the primary use of CO2 would be for oil
recovery, but not for gas extraction.
MS. FOERSTER said CO2 is an oil recovery tool.
1:46:23 PM
REPRESENTATIVE SADDLER said he went to Saskatchewan and saw that
CO2 was being sequestered and turned into a value-added product.
He asked if there is any commercial value to the CO2 at Pt.
Thomson.
MS. FOERSTER said that is not her area of expertise.
CHAIR GIESSEL recapped that gas offtake has been authorized for
2025, and AOGCC will continue oversight to ensure oil recovery
is enhanced and waste prevented.
1:47:47 PM
ANDY MACK, Commissioner Designee, Department of Natural
Resources (DNR), Juneau, noted that he has been the designee for
19 days. He introduced other DNR staff who will provide an
overview of the Prudhoe Bay reservoir and the plan of
development process. He referred to a letter he sent to Chair
Giessel telling her he has received all kinds of advice in the
last 19 days, but he has been advised not to discuss
hypothetical scenarios today or what is happening in the
deliberative process.
CHAIR GIESSEL noted an announcement the day before that John
Hendrix was appointed as a special advisor to the governor on
oil and gas. That role is typically filled by the commissioner
of DNR or the director of oil and gas, so she asked which role
Mr. Mack will play and if there will be conflict.
COMMISSIONER MACK said he is delighted to have Mr. Hendrix on
board as he has a very deep and long history in the petroleum
industry. The role of senior advisor is important, and the role
of commissioner is different but includes ample authorities and
responsibilities. Mr. Hendrix will be a tremendous asset to the
state, and he looks forward to working with him.
CHAIR GIESSEL said that the DNR commissioner has the authority
to make a royalty-in-kind and royalty-in-value decision on
Alaska's resources. Who will make that decision?
COMMISSIONER MACK answered that upstream decisions reside in
DNR. Of course, on all major decisions, Alaskans can expect
consultation with the governor's office. Mr. Hendrix may be part
of that conversation, but he does not know to what extent.
1:52:01 PM
PAUL DECKER, Manager, Resource Evaluation Section, Division of
Oil and Gas, Department of Natural Resources, Anchorage,
referred to a slide presentation and the map on slide 3, which
shows the Chukchi and Beaufort Seas in the north and the outer
continental shelf. Federal management occurs offshore beyond
three miles. There is federal acreage onshore, including the
National Petroleum Reserve, Alaska (NPRA), which is about the
size of Indiana. The area has been somewhat explored, and the
most promising results have been in northeastern NPRA, which is
an extension of the Alpine pool of the Colville River unit,
which is coming into production now. He pointed out the
protected Arctic National Wildlife Refuge, Gates of the Arctic
National Park, and the Noatak National Monument and Preserve. He
noted the Arctic Slope Regional Corporation inholdings within
the state-managed Central North Slope lands. The red outlines
denote area-wide lease sales, which includes "our" Beaufort Sea
area-wide sale, and the North Slope area-wide sale, which is
home to really all of the commercially producing oil and gas to
date, other than production beginning in the NPRA. There are
also the area-wide sales in the North Slope foothills, "so we
offer those sales every year, usually in November."
MR. DECKER noted the dark green shapes that represent the extent
of the oil accumulations on the North Slope; so Prudhoe Bay and
Kuparuk figure prominently there. The red spots represent gas
fields, notably the Pt. Thomson accumulation next to the Arctic
Wildlife Refuge. There are several oil and gas-especially gas-
fields along the foothills. He pointed out "the sparseness of
exploration overall" is indicated by black dots, representing
about 600 exploratory wells to date. Many areas, particularly
away from the existing discoveries, are "really very poorly
explored-or sparsely explored."
1:57:26 PM
MR. DECKER moved to slide 4, a map of the Prudhoe Bay unit.
There is an outline of the huge IPA (initial participating area)
that is really one oil and gas pool. It is 30 miles east to west
and up to 15 miles north to south, and it occupies most of the
Prudhoe Bay unit, "so the IPA is the big dog, obviously, at
Prudhoe." It was discovered in 1968, and production started in
1977 with the startup of TAPS [Trans Alaska Pipeline System].
With 38 drill pads and six processing centers, peak production
was in 1987 and about 2 million barrels per day.
1:58:50 PM
MR. DECKER turned to a 3-dimensional schematic of Prudhoe Bay on
slide 5, showing different reservoirs at different depths. He
said there are 13 different "participating areas (PAs)," which
are various reservoirs that contribute to production. The
deepest level is the Lisburne limestone and dolomite. The IPA
reservoir is above that, and it is sometimes referred to as the
Permo-Triassic or the Sadlerochit, Sag, and Shublik formations,
but he terms it as the Ivishak formation. Above that is the
Kuparuk Formation with a number of accumulations. The western
reservoirs are Borealis and Aurora. There are some around the
Point McIntyre field, which are referred to as the Greater Point
McIntyre Area (GPMA). Moving up to the shallowest reservoir,
there is the Schrader Bluff with Orion and Polaris, which are
somewhat viscous. The Orion, Polaris, Aurora, and Borealis
reservoirs are referred to as the western satellites, and they
have one POD. There is another POD for the GPMA area reservoirs,
and there is one for the main IPA reservoir.
MR. DECKER turned to slide 6, a diagram of the Prudhoe Bay
anchor field that made all the other accumulations commercially
accessible. The IPA is really the lion's share of what happens
at Prudhoe Bay. All of the other production is important, and he
listed the number of wells, producers, and oil in each.
2:02:14 PM
MR. DECKER showed slide 7, a Prudhoe Bay reservoir cross
section. It is very heterogeneous with regard to porosity and
permeability, he explained. The lower most portion is lousiest
for oil recovery. Slide 8 shows another cross section. Prior to
development, the reservoir fluids were simply layered in
discreet fluid layers: gas at the top (the gas cap), a thick oil
column (oil leg), and then the heavy oil and tar (HOT). So
everything was nice and simple, he stated.
2:05:16 PM
MR. DECKER said the layers are really complicated now, as they
were jumbled up by fluid movements. By lowering the pressure in
the reservoir, the gas bubble grows and moves down into what
used to be the oil column, he explained. He noted the secondary
(water flood) and enhanced (miscible injections) recovery
projects. Lean gas injection is another mechanism, which is the
injection of the "dry" gas that has been stripped of its
condensate back into the top of the reservoir where that gas is
"hungry to scavenge additional higher chained hydrocarbon
molecules." The lean gas injection is a really big part of the
current recovery, he told the committee.
MR. DECKER said the gas cap water injection is best exemplified
on the lower right of the slide. It is a huge innovation that
the owners have implemented at Prudhoe Bay and not something
that has been the standard procedure. It has had substantial
impacts. He pointed out oil in the diagram that has not been as
effectively swept, which represents a real opportunity to get
that next billion or two barrels out of this reservoir. To do
that, he said, the energy of the reservoir has to be maintained.
MR. DECKER said the Prudhoe Bay IPA was initially modeled to
recover about 9.6 billion barrels of oil. The cumulative
production to date is more than 12.3 billion, and currently the
estimated ultimate recovery (EUR) is about 14 billion barrels-46
percent greater than the original estimate. "That's a remarkable
achievement," he opined. He stated that the WIOs have been
diligent, in his opinion, in maximizing oil recovery as mandated
by the AOGCC, by using coiled tubing sidetracks, horizontal
lateral wells, and well-workover jobs. "We've seen four
successive years of increasing activity for those kinds of oil
recovery jobs." There has been a recognition and exploitation of
the new targets-the opportunities that are created by these
complex oil/water/gas distributions in the reservoir. There has
also been the optimization of vapor phase oil recovery through
the lean gas injection technique. Right now, about 50 percent of
the oil liquids recovered from the Prudhoe Bay pool exists in
the reservoir in the vapor phase, and that is a very effective
mechanism, he stated. There has also been expanded development
of the shallower and thinner lower quality Sag River reservoir,
and there has been lots of infrastructure and facility
maintenance projects over the years that have improved recovery
and extended the life by several decades.
2:10:49 PM
MR. DECKER showed a slide of the Prudhoe Bay timeline. Many
projects came on line between 1977 and 1990, and they made it
possible that by 1990 the estimate of ultimate recovery went up
to 12 billion barrels. He thinks the IPA will eventually be
about 14 billion barrels.
CHAIR GIESSEL noted the arrival of Representative Vazquez and
Senator MacKinnon.
2:12:10 PM
CORRI FEIGE, Director, Division of Oil and Gas, Department of
Natural Resources, explained that a plan of development (POD) is
like an annual checkup with a doctor. Once a PA (participating
area) is formed, the POD is required. The POD is submitted
annually to the division of oil and gas and outlines the
previous year activities and the planned activities for the next
year. It allows the operator to demonstrate that the unitized
resources are being diligently developed and produced.
SENATOR STOLTZE asked who the patient is and who the doctor is.
MS. FEIGE said she sees it as the discourse a patient would have
with a doctor, where the patient comes in and discusses health
issues, last year's diet and exercise activities, and the plan
for the upcoming year. All operations must be conducted under an
approved POD. The regulatory authority is in 11 AAC 83.343,
which states that the POD must include a description of the
proposed development based on the reasonably available
information at the time that the plan is submitted. It must
include the long range proposed development that will delineate
and produce the underlying oil and gas reservoirs and maintain
and enhance recovery once production is established.
2:15:14 PM
MS. FEIGE added that the POD must include any lands that may
reside within the unit that are not yet included in a PA. "The
POD looks for an explanation of the activities that will be
directed at those lands in order to establish PAs and bring that
acreage into production, as well." The division looks for
details of any proposed operations for the upcoming year, and
then it looks for a discussion of any surface locations or
proposed facilities that need to be maintained or developed,
such as pads, camps, and roads.
2:16:18 PM
MS. FEIGE turned to slide 14 to explain the flow of the POD
process. The operator submits its POD at least 90 days before
the prior POD expires. The division has 10 days for a
"completeness review," where the DNR technical teams determine
if anything else is needed. The process is iterative until the
division has the required information. After completeness, the
POD review begins, and it includes technical sessions looking at
the geology, reservoir models, and other data. The process can
continue even if some parts are stalled. "We like to keep it
moving, because of that 90-day clock." The division checks if
prior commitments were fulfilled, which sometimes they are not.
Once, for example, a river flooded drilling sites and impacted
production. "We talk about that; we share that information; we
amend … the plan going forward to be sure we're capturing those
residual activities and bringing them forward."
2:19:16 PM
MS. FEIGE said the division then determines if the POD meets the
regulatory criteria: Does it protect all parties? Does it
promote conservation of all resources? Does it prevent waste? If
there are still outstanding issues or a lack of information, it
goes back around. If parties are at loggerheads, the process
goes into "default and cure," where the division issues a notice
of default. There would be a cure period of not less than 90
days, and without resolution for a producing unit, the POD would
advance to the Superior Court to challenge the leases.
2:21:00 PM
MS. FEIGE said slide 15 is specific to the Prudhoe Bay
participating area. The POD was submitted on March 31, 2016, and
the anniversary date is April 1. At the beginning of the year,
DNR Commissioner Myers issued a letter to all unit operators
saying DNR would seek information related to gas marketing. He
also requested more information on facility sharing to learn
about maximizing existing facilities and about sharing
agreements. That went out to all 62 units in the state on March
24. The unit operator, BP, was then scheduled for the annual
technical field review and submitted its POD for 2016. That
triggered the 10-day completeness period, and the division
determined it needed additional information on infill drilling
schedules and gas handling. The division also asked for an
expanded discussion of marketing toward a major gas sale. On May
2, BP, as operator and working interest owner, responded to the
April 11 letter, and a nuance came to light: BP is a unit
operator, but BP, ConocoPhillips, and ExxonMobil are the working
interest owners in the leases in the unit. BP notified the
division that they do not market unitized resources-it is done
by the working interest owners, and each handles its ownership
portions separately. ConocoPhillips made the same assertion, and
on April 12, the division issued a letter clarifying what the
division needed. "We still needed a bit of an update on an old
CO2 study and a handling study from 2010, and then, again, we
clarified the discussion about marketing information to come in
from the working interest owners."
2:24:57 PM
MS. FEIGE said that on May 17, BP, as working interest owner,
responded to the May 12 request and then, as operator, invited
the division to have another technical session to look at
specifics, and that session did not include any discussion of
marketing. On May 20, the division received a response from
ExxonMobil on marketing. In all letters, the working interest
owners expressed antitrust concerns. Those letters are online
and are included in the committee packet. On June 2, the
division concluded its internal technical review and notified
the commissioner that the division had completed that process.
The administration asked the division, again, to request
information on marketing, "and we did so in an email to the
working interest owners from whom we had heard on the 12th of
June." On the 17th, they all responded with concerns about
sharing information and antitrust laws and because it was behind
the confidentiality agreement of the AKLNG project. On June 30,
the division issued the incompleteness letter and called out
that the IPA technical plans are complete, but the marketing
information is incomplete.
2:27:48 PM
MS. FEIGE said the January letter from Commissioner Myers
provided a new policy direction on capturing the facility-
sharing and marketing information, so the conversations with the
working interest owners are evolving. The letter requested some
very specific information, and typically the agency aims to be
very clear and specific in its requests; however, the division
has learned that it probably was overly specific, and the
conversations around marketing evolved to more general terms.
The regulation relates to the long-term development of the
resource and, in this case, moving that IPA toward a major gas
sale. In summary, the division has an incomplete POD submittal.
As it was reported wrongly in the press, she clarified that "we
are not at a default point. The POD is still incomplete." The
division extended the 2015 POD for the Prudhoe Bay IPA until
November 1, and the discussion on marketing for moving the unit
to a major gas sale is due September 1.
2:30:38 PM
REPRESENTATIVE SADDLER said, "I like you Corri," but the
requests from your division are extraordinary and unprecedented,
and they are very chilling to the oil and gas industry. "What is
the endgame here? What are you trying to do with Prudhoe Bay's
oil production, and what's the relationship with the governor's
plan for a gas pipeline?"
MS. FEIGE said the endgame is to understand where the unit is
headed in terms of a major gas sale. What changed for the IPA
was the new offtake order, and, "for the state, that now places
some real sidebars around a major gas sale at a reasonable time
in the future." It seemed appropriate, at the time, to request a
discussion about what is being done with the unit to prepare
that gas for a major sale.
REPRESENTATIVE SADDLER asked about the implications for the
future of Prudhoe Bay and the governor's gas pipeline plan.
MS. FEIGE said she does not speak for the governor, but the
division does not set policy. Commissioner Mack may want to
respond.
REPRESENTATIVE SADDLER asked, "What's the endgame here?" He said
the commissioner has "tremendous responsibility for the future
wellbeing of our state and our industry." He asked for the plan,
here, and about Alaska's future oil and gas development.
2:32:45 PM
COMMISSIONER MACK said, with respect to the endgame, "We are in
the middle of a process." The letter was sent on June 30, and
more will be known on September 1. There is a discussion, and
one issue is whether some of the requested information exists in
the AKLNG project. He said he prefers to reference the letters.
REPRESENTATIVE SADDLER asked if the division has ever issued
other "one-last-chance letters" for a POD.
MS. FEIGE answered that it has not done so during her tenure of
the last 15 months. She said that such a letter may have been
issued when Pt. Thomson was in dispute.
REPRESENTATIVE SADDLER asked if the POD process is oriented to
getting to a yes or a no.
MS. FEIGE answered that the division works very, very hard and
diligently to arrive at a good negotiated outcome. It is in the
state's interest to continue to see its resources prudently and
diligently developed, but at the same time, the division has
statutory authorities to abide by. The division cannot approach
things through a purely commercial lens. The division has the
right and the responsibility to the people of Alaska to ensure
that the diligence is taking place.
SENATOR MACKINNON asked if the working interest owners requested
any meetings with the division that have been denied.
MS. FEIGE said the owners requested meetings to talk about these
issues, and they requested confidentiality under the AKLNG
confidentiality agreements. There is, as Senator MacKinnon
knows, a firewall between the division as a regulatory agency,
and DNR, as the agency involved in discussions around AKLNG. The
Department of Law (DOL) advised "those requests and the request
for that information be confidential under the AKLNG
confidentiality agreement was too specific and was outside of
the division's authority. Our authority and our confidentiality
regulation is under [AS] 38.05.035, and [the Department of] Law
felt that it would be a breach of that firewall, potentially, to
hold those conversations under the AKLNG CA rather than under
the division's authority. So we opted not-erring on the side of
caution on the firewall around AKLNG-to not hold those
meetings." The working interest owners indicated that they were
not comfortable with having that information specifically under
the DNR 38.05 authority. The state decided to err on the side of
caution.
2:37:34 PM
SENATOR MACKINNON said that is not exactly how she read the
letters. She saw it as a request to meet on the specifics of the
marketing concepts. She said she will reread them, but she felt
that the working interest owners were not trying to use the
AKLNG confidentiality as a firewall. She asked the three
witnesses if they have signed confidentiality agreements with
AKLNG.
CHAIR GIESSEL clarified that only Mr. Decker has signed
confidentiality agreements.
SENATOR MACKINNON asked about evaluating the benefit of the gas
field to Alaskans versus the remaining oil. "Have you done a
study, then, to understand the impact of starting to pull the
gas off?" She believes that the value of the oil is more
significant, "and we have a letter that is okaying some offtake,
but there's quite a few bits of information that need to be
brought into the light of day for us to actually verify that
that offtake can happen. Is that accurate?"
MS. FEIGE said that is accurate. Those studies are due to AOGCC,
not the Division of Oil and Gas.
2:39:47 PM
SENATOR MACKINNON asked if she is saying that there is value in
both hydrocarbons, and since January 14, 2016, the division
wants marketing information more specific for gas offtake in 10
years.
MS. FEIGE said that is a correct assessment.
SENATOR WIELECHOWSKI asked if DNR has offered to work with the
working interest owners to insure that confidential information
is protected.
MS. FEIGE said yes. The working interest owners were told that
DNR can hold information confidential under DNR's authority.
SENATOR WIELECHOWSKI asked about advantages of working together.
2:41:17 PM
SENATOR WIELECHOWSKI said that DNR is trying to get information
on how the working interest owners are going to market the gas
resources. Is that in order to work as a team to market the gas?
MS. FEIGE said no, the purpose for seeking the information under
the POD process is to look at the long-range development and
production plans for the unitized resources. The division is
trying to determine if there is an effort to diligently move
toward getting gas to market. She said the unit will roll over,
at some point, where it will be producing more gas than oil.
SENATOR WIELECHOWSKI noted that other jurisdictions typically
have private landowners. Is it common for landowners to request
this kind of information to ensure that work is actually being
performed?
MS. FEIGE stated that it is very common here, but she does not
have "Outside" information.
2:42:56 PM
COMMISSIONER MACK suggested getting an answer from DOL.
CHAIR GIESSEL noted that AOGCC does not take economic
evaluations of the product into account, but DNR has economists
on staff. How do they play into this?
MS. FEIGE said the division has a commercial section, and
petroleum economists and commercial analysts examine operations
throughout the life of the fields. "We try to stay abreast of
how that field is performing [and] where production is at in an
effort to understand when we may be approaching end-of-field
life, for example." When it comes to the specifics of the value
of oil versus gas, the project economics are fairly critical,
because that will provide the variables for modeling and
evaluations throughout the life of the field. It is something
that the Department of Revenue would use as well.
2:44:44 PM
SENATOR COSTELLO spoke of Ms. Feige's wealth of knowledge and
asked if she trusts that the governor is being forthright about
his vision for the pipeline.
MS. FEIGE said she does not have interactions with the governor
on a pipeline project. There is a firewall.
SENATOR COSTELLO asked about the current operating pipeline that
is funding most of the state government. Is the governor being
forthright with the public about his vision of the future,
considering that this announcement about requesting marketing
information was made very late on a Friday and there was not
press availability?
MS. FEIGE said the governor is very engaged in this process, and
it is a new policy direction. In terms of a sense of trust, her
personal opinion is not relevant, "and we certainly, as a
division, have worked very hard to run a diligent, transparent
process working with the working interest owners and the
operators to get the information that is sought in a fashion
that fits within the bounds of the POD process."
2:47:24 PM
SENATOR COSTELLO said that regulations are written based on
state law in statute books. The POD process is in regulation,
and Ms. Feige said these are new policies that seemed
appropriate. Where does the division get the authority to
request the new information, and is it appropriate?
MS. FEIGE said the regulation looks specifically at long-range
proposed development activities of a unit, specific to and
including bringing resources and maintaining them in production.
The DOL advised the division of implied covenants in oil and gas
leases when the new policy direction was announced. Within the
DL1 lease that the Prudhoe Bay leases are anchored to, there is
a specific call out for production and marketing and sales of
unitized resources. It is through that the implied covenants
attach to the lease and through the existing regulations.
Looking toward the long-term and diligent development of moving
this unit from oil to gas, "then I do believe that that's
appropriate. I believe we have a responsibility through the
division to the people of the state to know that there is
diligence in development of those resources."
SENATOR COSTELLO said she understands the implied duty to market
[resources]. She said she thinks it is troubling to Alaskans if
there is an implied duty to market. Do you think it should be
explicit to show marketing plans?
MS. FEIGE suggested that legal questions on the implied duty to
market or produce should be answered by DOL.
SENATOR COSTELLO said, "I find it interesting that multi-billion
dollar companies would develop a product with no intention to
sell or market it, so I do understand that, and I feel like some
of the questions that I've had today have yet gone unanswered."
2:50:32 PM
CHAIR GIESSEL asked who wrote the letters that have been sent.
Was it the Department of Law or Natural Resources?
MS. FEIGE said all decisions of the division are collaborative
with other agencies. This letter was drafted by the DOL, and her
division made comments and edits.
SENATOR COGHILL said a firewall is important, and that is
probably what is being tested. There is a requirement to market
from AGDC to DNR, and under this POD, DNR is asking for
marketing information, so it looks like the state could put
itself in an ethical problem of having information on one hand
as a marketer and requiring information on marketing from "these
other groups." Should it be there, or should it be thicker? He
said that "under 138, we had given a requirement for marketing
to DNR." The commissioner also has the authority to "value-
switch," he added. The complexity increases with regard to
ethical, legal, and antitrust issues, but once this information
is given from a POD, he asked if it becomes vaulted or if it is
available for other DNR uses.
2:52:28 PM
MS. FEIGE concurred that the firewall is very important, and
part of the evolution is that DNR stepped back from specific,
nitty-gritty terms to terms that are more in line with the
regulations, which is a discussion of long-range development and
what things are needed now to market to help inform the state.
By being less specific, she hopes it "moves us away from issues
of potential conflict around that firewall."
SENATOR COGHILL asked how [the information] is kept from
decisions that are naturally contradictory to other laws.
MS. FEIGE answered that when DNR receives confidential
information under the POD process, it is absolutely held
confidential under AS 38.05.035, and because the information was
received through a regulatory process, the firewall would
separate it from anything on the AKLNG side. The firewall exists
for the operator's protection, she added, and that is why there
was sensitivity around the meetings under the AKLNG.
SENATOR COGHILL said, "Therein lies the credibility problem for
many people. We don't know that those will hold firm. We don't
know that the state can do one thing on one hand and one thing
on the other without bleeding over information. I think that's
going to be a problem as we move forward."
2:55:58 PM
SENATOR STOLTZE said the senior policy advisor was announced
yesterday, and the governor cited a couple of his attributes.
The position is on par with Commissioner Mack and Mr. Hoffbeck
and others, he explained. One attribute was that he was an
advocate of AKLNG. He asked if the advisor will be involved with
confidential agreements. "What will be the constraints,
professionally, ethically, and all the other parameters you
might imagine?"
COMMISSIONER MACK answered that he is currently being advised on
his duties as commissioner. He has great staff to advise him.
"In particular, where I have a role as a reviewer of
[regulatory] decisions, perhaps as a person who would be in a
position where issues are reconsidered or there's a request to
reconsider, there's a couple of things," and the first is to
follow ethics rules and make sure he is well-advised and in a
position to rule in such cases. He said he does not know all of
the precise answers, because he is assuming that Mr. Hendrix is
not subject to a lot of those restrictions and obligations, so,
as a senior advisor or cabinet-level position, he might not have
those obligations. There are certain decisions-and he hesitates
to bring up examples-but there are very specific situations
where he is unable to discuss certain issues with Mr. Hendrix,
because they are either confidential or deliberative, "and I
think he would respect those." There is no doubt that he was
brought on board due to his experience as a 35-year industry
engineer. He said, "It's probably going to come down to a case-
by-case basis. Having said all that, there's a relationship
between some issues that are not regulatory but are
developmentally-minded, and we will be working on those for
sure."
2:59:15 PM
SENATOR STOLTZE said the governor described the recent appointee
as a relationship person. "I guess if he was in the private
sector, he'd be a lobbyist." Relationship is the word the chief
executive chose, and that sounds a lot like lobbying. When a
person is an advocate for a position-and the governor
practically described him as his lobbyist. That was the first
term the governor used was "he's a relationship person." He said
he thinks people have heard the cautions on concerns such as
firewalls. He added that he likes him personally. He was one of
the better wrestlers that came out of Alaska, he explained. He
is a locally-grown person, too. He has stepped into an abyss,
"and there's just cautions, I guess, when the governor hires
somebody sort of self-described as a lobbyist."
3:00:43 PM
REPRESENTATIVE SADDLER said the first paragraph of the
regulations for the POD requirements seems to be most at issue.
He asked Ms. Feige to define "long range." He asked what level
of detail is required, what is missing, and how binding the
requirements are.
MS. FEIGE said "long range" relates to the foreseeable future,
and it will be different for each unit depending on the
projected activities and logical production scenarios. For this
IPA POD, "long range" ties back to the offtake that was issued
in October by the AOGCC, and that had a loose timeline for
moving to a gas-producing unit.
MR. DECKER said that his resource evaluation team looks at
"long-range proposed development activities" in contrast to
paragraph 3, the annual details in the plan of development, and
in many cases, they would be the plans beyond one year.
REPRESENTATIVE SADDLER asked what level of detail is required
and what information is currently missing, because certainly the
working interest operators and owner understood the obligation
they made when they signed a POD.
MS. FEIGE answered that the discussion of marketing a major gas
sale is still missing from the Prudhoe Bay IPA. All the other
information is complete. The level of detail the division
requested in the June 30 letter is on page 9, and it asks for
information concerning marketing plans and activities that will
result in the commencement of a major gas sale and to have those
explained with specific and measurable items, including any
timelines that they could share. The regulation adds the
qualification, "to the extent the information is available."
REPRESENTATIVE SADDLER said the terms are subjective, so the
governor will have the last word, unless the owners do not plan
to litigate every definition. "This is a very big stick that
your division is holding over the production of our main
economic resource in our state and the largest asset for at
least one of the companies operating on the North Slope, so this
is authority that's going to come down again to some subjective
determinations, and that's concerning to me."
3:05:44 PM
REPRESENTATIVE SADDLER asked if the request for this information
is premature or just right.
MS. FEIGE said the request is framed as the regulation requires,
and it asks for information that is available at this time. The
division has the responsibility to ensure diligence for the
development of the resource. "We need to be informed." She said
the discussion is appropriate, and she said to look at the
regulation and the requirements for what is appropriate. It is a
new policy, and DNR is working on this with other unit operators
in the state.
REPRESENTATIVE SADDLER commented that this is a new direction,
and it is disconcerting. Because the stakes are so high and
because the information from the administration is highly
opaque, "that's what gives me, personally, dis-ease, not knowing
what the endgame is," and he asked for information on the
endgame and how DNR will use its authority. "Its absence will
lead to resistance," he opined.
3:08:10 PM
SENATOR WIELECHOWSKI noted that there is not unanimity in
opposing DNR's request for marketing information. He said it is
not disconcerting or troubling at all, it is the division doing
its job. The Alaska Constitution requires that the state get
maximum value for its resources, and the law the legislature put
in place, AS 38.05.180, was written because people in Alaska
"have an interest in the development of the state's oil and gas
resources to maximize the economic and physical recovery of the
resources." He said, "That's what you're doing-that's exactly
what you're doing. You're following the constitution; you're
following the law that the legislature put in place; you're
doing due diligence to make sure the resource is being properly
developed. That's your job. Thank you for doing your job." This
is what any prudent resource owner in the world would do, he
added. The confidential information is to be kept confidential,
and it is a perfectly appropriate request that "the vast
majority of Alaskans would overwhelmingly support what you're
doing."
3:09:45 PM
REPRESENTATIVE JOHNSON said it is always great to follow a good
senator. He would like "to take a 30 thousandth view as opposed
to digging into the weeds." There are four partners and a
pipeline and each own one quarter of the resource, and the state
has a decision to market the gas ourselves or partner with them
to market it for Alaska. "Until we make a decision how we're
going to take our gas or we're going to let them market it for
us, all we're doing is asking for a marketing plan from our
competitors." He said it is like Walmart asking Kmart for its
marketing plan. "They're going to throw you out the door." He
said he does not trust the commissioner with confidentiality,
because he will be the deputy commissioner in the future, and
because of the revolving door where "AOGCC is going to ask
somebody that's on the staff, and you can't help but take that
knowledge and use it at some point," because it is human nature
to use what you know and use it to the advantage of Alaskans.
"And that's, quite frankly, your job." He said he has no belief
that confidentially will be maintained. If the competitors asked
for the state's marketing plan-and the state should have one
because it owns a one quarter-he assumes that the state would
not be prepared to provide it. He said the state has the right
to know, but "we need to take the steps we need to take as a
state to say yes we want it in-kind or yes we want a different
method of doing it or yes we want to partner with you."
REPRSENTATIVE JOHNSON said that he guaranteed that if the state
went to [the operators] and asked them to market it, they would
come to the state with a marketing plan. "But until they can
identify us as friend or foe, I think you're asking for a hurdle
that is just too high for companies." He added that he is not
sure this is not a violation of the FCC. "I'm not sure their
stockholders aren't going to come unglued if they start sharing
marketing plans." He said he does not disagree with the
constitution that the state has a right to know, but until the
state decides if it is a competitor in marketing gas or not, it
is unreasonable for the state to ask those questions. "Car
dealer-anyone-you could walk in and ask for their marketing
plan, they're going to tell to pound sand, and I'll be surprised
if our partners don't tell you to pound sand."
3:12:44 PM
SENATOR MACKINNON thanked the witnesses for advancing recovery
of hydrocarbons that help provide services to the people who
live here. "I firmly believe that the value of what we receive
will be determined, possibly, in your hands." She asked if the
state is continuing to pursue bilateral marketing agreements
with individual working interest owners at Prudhoe Bay.
COMMISSIONER MACK said he cannot discuss it, because it is
covered by the confidentiality agreement.
SENATOR MACKINNON noted that it is in documents that are online.
COMMISSIONER MACK said he has been advised to sign a
confidentiality agreement for the bilateral meeting he is a
party to.
3:15:20 PM
SENATOR MACKINNON referred to a note from "Kyle" saying,
"Discussions should remain confidential, but it's not
confidential now, because you've provided us all the
information." It is hard to understand what is confidential and
not, because some of the documents being referred to as
confidential have been provided here today. If Commissioner Mack
cannot tell the committee if the state is pursuing a bilateral
agreement, she will ask about how to define the state as a
regulator different from a competitor. Alaska partners with
working interest owners of the Prudhoe Bay unit on the AKLNG
pipeline, "and I'm having a difficult time … separating the
Prudhoe Bay and this new requirement from us trying to advance
an AKLNG project." She said her problem is Alaska being a bully
as a regulator. The state is trying to advance an interest
somewhere else as a regulator with information that benefits the
state as a competitor when it goes out into other markets. She
said she wants to monetize the gas and agrees with Senator
Wielechowski. "I want you, on behalf of the people of Alaska, to
get the highest value, but when we start competing as I see us
moving forward, we're actually competing to the bottom, not to
the top." There are group and individual efforts, and she wants
to understand how the state is appropriately acquiring
information as a regulator without jumping into the competitor
role with regard to taking royalty in kind or in gas.
COMMISSIONER MACK said he will check on bilateral conversations
and marketing agreements. So far, the meetings he has attended
have a confidentiality agreement attached. He opined that
Senator Coghill's question was well-informed and thoughtful in
pointing out different interests. He noted being very cognizant
and working very hard to manage a whole range of information and
trying to keep things in their lane. It is very difficult, like
Representative Johnson said, people leave service and go to
another entity and carry personal knowledge. "It is very hard,
in many cases, to distinguish information that you learned six
years ago at one employer and five years ago at your next
employer." He said he recognizes the challenge. The state is in
the middle of a very steady process and will continue through
the process.
SENATOR MACKINNON referred to a 151-page document and said "it"
is under the gas sales agreement between the state and
ConocoPhillips and BP as working interest owners. On page 3,
there is a section on bilateral negotiations, and that is where
she got her previous question about negotiations. Reading from
the document, she said: "During the term of this agreement,
provided that DNR, AKLNG project affiliate," which is everyone
but ExxonMobil, "is continuing and is not indicated, it is
discontinuing its participation in the LNG project…." "To
address the possibility that Conoco [or] BP indicates it does
not intend to continue with the project…." She added,
"Apparently we're pushing Exxon out of here, and Pt. Thomson
gas, at least under this gas term agreement, so, when you can
let me know, that would be helpful on whether we're entering
into those bilateral agreements, but that's where the question
came from."
3:21:03 PM
REPRESENTATIVE TARR referred to the comments about the tension
between being a player and regulator and recalled that the topic
was part of the discussion of SB 138. She asked the commissioner
to review some of those conversations, because there were
concerns at that time. She noted that Ms. Feige said that the
change is the recent approval by AOGCC for gas offtake, which
"puts us in an entirely new world, essentially." She asked: "If
we weren't doing what we're doing now with the plan of
development to further understand that, what would be other
opportunities for us, as the resource manager, to see what that
decision means?" She asked if the POD is the only opportunity
"where we would be able to see that decision and what it means
in terms of resource development in the Prudhoe Bay unit, for
example?"
MS. FEIGE said the POD process is one tool that the state has
for determining how a unit is going to progress. The AOGCC and
the study that Commissioner Foerster referenced are touch points
along a timeline toward moving to a major gas sale, so they too
will be a tool for informing us how Alaska is going there. One
study asks if the escalation of liquid production is
appropriate. The other is the potential use of CO2 for enhanced
recovery. Those two will help determine if Alaska is on the
right path and where the development and the diligence is going.
REPRESENTATIVE TARR noted that those two studies are a few years
out, so the POD is the best tool Alaska has now.
MS. FEIGE agreed.
3:23:35 PM
CHAIR GIESSEL introduced the next speaker, Mark Cotham. She
noted that Mr. Cotham presented at a joint resource committee
meeting in April, 2005, when he was counsel for the Alaska Gas
Port Authority. He was introduced as being with a firm that
focusses on issues such as failing to develop and other producer
royalty claims. At that meeting, he shared that he had been
asked by the port authority to provide a review of the legal
duties and obligations that the producers have with respect to
the Alaska North Slope gas.
MARK COTHAM, Alaska Department of Law Contract Attorney,
Houston, Texas, said he has practiced law in Houston for 34
years, primarily as an oil and gas litigator representing both
operators and royalty owners. For the last 25 years, he has
focused on "failure-to-develop" cases, and he has intensely
studied strategies for royalty owners when wells that should
have been drilled are not drilled. He noted that he has
researched how it can happen that profit-motivated companies do
not undertake development that they should. A partial outgrowth
of that was the testimony he gave before the Legislative Budget
and Audit Committee in 2005, titled Five Common Misconceptions
about Producer Control of ANS Gas and its Relation to the
Pipeline. Considering the years that have passed, his 2005
remarks have withstood the test of time. The obligations that
producers have are not controversial in the oil and gas world.
It is not a controversy, and oil and gas companies would not
even dispute that they have an implied duty to reasonably market
a resource such as gas or oil. In his previous presentation, he
developed the authorities and cases to support that. He noted
that people say, "They own the gas, so Alaska is powerless." At
that time, he explained that the nature of their ownership
interest does not render Alaska powerless. He has spelled out
the rights and responsibilities that oil companies have in this
context.
MR. COTHAM said he has also testified on behalf of the Alaska
Gasline Port Authority before Commissioner [Mike] Menge in
connection with the Pt. Thomson cancelation proceeding. He was
hired last year by the Department of Law to provide legal advice
with respect to the rights and remedies that the state has in
oil and gas matters. He is appearing at this meeting today at
the request of the DOL, and the specifics are subject to
attorney-client deliberative and work-product privileges.
3:28:11 PM
MR. COTHAM said he is not appearing in any official capacity.
Any comments or opinions he has should not be portrayed as
necessarily the position of Alaska agencies, but "I have been
instructed by the Department of Law to be helpful, cooperative,
and try to answer your questions so long as it doesn't impinge
on any of the privileges I've described."
3:29:00 PM
CHAIR GIESSEL asked if it is appropriate for operators to handle
the major gas sales on behalf of unit's working interest owners.
MR. COTHAM answered yes; that would be the typical approach. The
joint operating agreement forms that are established by the
various organizations contemplate that the operator will market
the gas of the non-operators.
CHAIR GIESSEL said, "So, you're saying that BP would be
marketing the gas in the Prudhoe Bay unit for Exxon and Conoco?"
MR. COTHAM said yes. That would be the overwhelmingly typical
relationship in the Lower 48.
CHAIR GIESSEL referred to SB 138, which is the structure the
legislature put in place for a gas pipeline project. Since the
state could become a marketer of its own gas by taking royalty
in kind, how can the state demand gas marketing information from
the Prudhoe Bay unit operator and the other two oil companies
without triggering antitrust issues?
3:30:53 PM
MR. COTHAM said he sees two different questions. One has to do
with a possible conflict or problem in such a relationship, and
the second has to do with antitrust issues. There is a need to
be careful not to take information and use it for any wrong
purpose, "and I know the state would never want to do that."
What is overwhelmingly important, in that context, is a true
understanding of the kind of marketing information that is being
requested. The information that DNR is requesting is just to get
some understanding of the existence of a market and if the
producers plan to market the gas when 2025 comes around. If the
only plan is dependent on the producers building a pipeline, is
there a firm commitment from them to build that pipeline? If the
producers are not going to give the State of Alaska a commitment
to build that pipeline, can the state obtain some information as
to what they are doing to try to get third parties to build it?
It has always struck him that the base assumption is that
producers will just naturally build the pipeline, but in the
Lower 48 "you could probably count on a few hands the number of
pipelines that have been built by producers." One thing that the
state is trying to do by requesting information, is to obtain
either a commitment or the beginnings of a commitment that the
pipeline will be built, or, if there is no commitment toward
this nine-year ticking clock-. He said nine years is about the
time it takes to build a pipeline, so it seems only reasonable
for the state to ask for information on a plan.
3:34:02 PM
MR. COTHAM turned to the topic of antitrust and said he does not
believe it represents a legitimate reason to not obtain
information on marketing. Antitrust laws, as committee members
likely know, are essentially prohibitions against companies
colluding to impair competition. There is absolutely nothing
about DNR requesting producer information on trying to market
this gas-or even to whom-that encourages or involves anti-
competitive behavior. A government has a legitimate need for
that type of information, and its production would be entirely
reasonable, and it would not run afoul of any antitrust laws.
Antitrust laws are subject to the rules of reason, and it has
been shown by precedence that the producers withholding this
basic information is not a valid position at all.
CHAIR GIESSEL said a court would decide that question. "Is there
not the opportunity for the companies to have a reasonable
expectation of profit in terms of determining their desire
market the gas?" Without profit, why force them to produce?
MR. COTHAM explained that with an implied covenant to develop or
market, there is a reasonable expectation of profit as a
precondition. A majority of states have held that if a
sufficient amount of time passes and a producer has not acted,
it then becomes the producer's burden of proof to establish that
they are acting reasonably. It is no longer the royalty owner or
lessor that has to establish that there is a reasonable
expectation of profit.
3:36:58 PM
SENATOR WIELECHOWSKI asked if Mr. Cotham's conclusion that the
state has a right to request this marketing information is legal
is a minority opinion or if it is crystal clear law.
MR. COTHAM answered that it would certainly be his opinion that
it is clear. "I have not read anything in any of the producer
responses that were attempting to justify withholding this
information that would give me pause to think that DNR is not
fully within its legal rights to obtain that information."
REPRESENTATIVE SADDLER asked Mr. Cotham to cite a case in which
the duty to produce is clearly outlined in law.
MR. COTHAM said he will provide his 2005 presentation, which has
about 40 or 50 such cases. One case, for example, is Sauder v.
Mid-Continent Petroleum Corp. 292 US 272 (1934). The US Supreme
Court explains what is reasonably expected of operators of
ordinary prudence having regards for the interests of both the
lessor and the lessee. To explore this issue, this document will
give a comprehensive contextual discussion. He can provide other
information, "but I do not believe that the law that I'm talking
about is at all controversial."
CHAIR GIESSEL said she has that document and will distribute it
to the committee members.
REPRESENTATIVE SADDLER asked Mr. Cotham to help him understand
in what capacity he is speaking.
MR. COTHAM said he is a contract employee of the DOL, and he was
made available to testify. He has no prior clearance for his
opinions today, so he spoke as a private citizen.
3:41:00 PM
CHAIR GIESSEL found no further business to come before the
committee and adjourned the Senate Resources Committee meeting
at 3:41 p.m.
| Document Name | Date/Time | Subjects |
|---|---|---|
| SRES Mtg Notice for July 19, 2016.pdf |
SRES 7/19/2016 1:00:00 PM |
Meeting Notice for SRES July 19, 2016 |
| 2016 gas offtake testimony.pdf |
SRES 7/19/2016 1:00:00 PM |
AOGCC Presentation |
| PBU IPA 2016 POD Presentation Final_071816_GLO.PDF |
SRES 7/19/2016 1:00:00 PM |
DNR Presentation |
| SRES July 19, 2016 Agenda.2.pdf |
SRES 7/19/2016 1:00:00 PM |
Agenda SRES 7-19-16 |
| What is a POD from SRES 2-22-2012.pdf |
SRES 7/19/2016 1:00:00 PM |
What is a POD? |
| 20160719_PrudhoeBay_IPA_POD_2016_AllPublicDocsToDate.pdf |
SRES 7/19/2016 1:00:00 PM |
POD Public documents to date SRES 7-19-16 |
| 2005-04-20 Hosie and Cothan Duty to Market Testimony.pdf |
SRES 7/19/2016 1:00:00 PM |
Duty to Produce discussion from 2005 |