Legislature(2017 - 2018)BUTROVICH 205
01/26/2018 03:30 PM Senate RESOURCES
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| Audio | Topic |
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| Overview: Oil and Gas Production Forecast | |
| Adjourn |
* first hearing in first committee of referral
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+ teleconferenced
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ALASKA STATE LEGISLATURE
SENATE RESOURCES STANDING COMMITTEE
January 26, 2018
3:30 p.m.
MEMBERS PRESENT
Senator Cathy Giessel, Chair
Senator John Coghill, Vice Chair
Senator Natasha Von Imhof
Senator Bert Stedman
Senator Kevin Meyer
Senator Click Bishop
MEMBERS ABSENT
Senator Bill Wielechowski
COMMITTEE CALENDAR
OVERVIEW: OIL AND GAS PRODUCTION FORECAST
- HEARD
PREVIOUS COMMITTEE ACTION
No previous action to record
WITNESS REGISTER
PAUL DECKER, Petroleum Geologist and Manager
Resource Evaluation Section
Division of Oil and Gas
Department of Natural Resources (DNR)
Anchorage, Alaska
POSITION STATEMENT: Presented overview of the oil and gas
production forecast.
ED KING, Special Assistant to the Commissioner
Department of Natural Resources (DNR)
Juneau, Alaska
POSITION STATEMENT: Presented overview of the oil and gas
production forecast.
ACTION NARRATIVE
3:30:15 PM
CHAIR CATHY GIESSEL called the Senate Resources Standing
Committee meeting to order at 3:30 p.m. Present at the call to
order were Senators Stedman, Bishop, Coghill, Von Imhof, Meyer,
and Chair Giessel. Senator Wielechowski was excused.
^Overview: Oil and Gas Production Forecast
3:31:20 PM
Overview: Oil and Gas Production Forecast
CHAIR GIESSEL announced today's only order of business was the
overview of oil and gas production forecasting by the Department
of Natural Resources.
PAUL DECKER, Petroleum Geologist and Manager, Resource
Evaluation Section, Division of Oil and Gas, Department of
Natural Resources (DNR), Anchorage, Alaska, introduced himself.
ED KING, Special Assistant to the Commissioner, Department of
Natural Resources (DNR), Juneau, Alaska, introduced himself and
said he would be available for questions.
3:32:12 PM
MR. DECKER outlined his presentation: The purpose is to describe
the DNR Fall 2017 production forecast for this fiscal year. He
would provide an overview and highlight production by comparing
the Fall 2017 forecast to actual production and talk about the
reasons for some of the production growth since 2015, a good
news message. He would also make a comparison back to the Fall
2016 forecast and explore the reasons for some of the
differences. He would go into this year's forecast objectives
and review the methodology in following three tranches of
production: currently producing (CP), under development (UD),
and under evaluation (UE), and review some of the adjustments
made to the methodology over the last year to better meet the
needs of the Legislature and the Department of Revenue (DOR). He
would review some of the results, both near term and longer term
and review their forecast relative to recent production.
3:33:17 PM
MR. DECKER said everything in the forecast is probabilistic and
is presented in a range. Happily, production is square in the
mid-range, and overall the average for FY18 is expected to come
in at 550,100 barrels per day. The current departure from the
actual forecast is less than 1 percent.
3:35:05 PM
MR. KING said that 550,000-barrel number is total production
including the North Slope and Cook Inlet. The North Slope number
is more like 533,000 barrels.
3:35:23 PM
MR. DECKER said some of the reasons for the recent growth in
production is from new projects coming on and efficiencies in
some older large fields. The Kuparuk Unit drill site (DS)-2S
(Sharks Tooth) has made a significant contribution as did the
Colville River CD-5. The Prudhoe Bay Unit has increased
efficiency overall which has resulted in holding production
flat, for example: non-drilling rig workovers and bringing back
wells on the inactive list. The reservoir models continue to be
refined, which helps identify targets for additional workovers
or sidetracks and things like that in the subsurface, and the
facilities modeling has come a long way in planning and
maintenance and the turn-around events.
3:37:34 PM
Future projects coming in: the 1H-News Project at the northeast
West Sak in the Kuparuk River Unit is already online and the
GMT-1 Lookout Discovery in NPR-A is going to come on later in
2018. Hilcorp will be drilling a substantial number of wells in
the Kuparuk and Shrader Bluff formations from their new Milne
Point Moose Pad. Further out, the Pikka Horseshoe trend started
development in the north part and is expected to come on line in
2023, and the GMT-2 (further out in NPR-A from GMT-1) another
Jurassic sands Spark Rendezvous accumulation, and the Willow
accumulation from the Nanushuk formation are unfolding.
3:38:45 PM
MR. DECKER said some old discoveries are moving forward, like
Liberty that has been on the books for a couple decades.
Why the difference in the outlook for this year's forecast
versus last year's? Mr. Decker said this year they are
considerably more optimistic. What is up in 2016 that is no
longer true? Not just the forecasters, but the industry in
general, was pretty gloomy about trends on the North Slope, he
said. Everyone was struggling with the price falling. So,
companies decreased their commitments of capital expenditures,
which resulted in 80 percent of the forecasted pools in Alaska
had no plans for new drilling in 2017. All those things
contributed to an increasing decline story as opposed to the
leveling off that they see now.
MR. DECKER said some of the adjustments in this year's forecast
have been made because of the shortcomings in their forecast
last year and explained that in the past they were very focused
on correcting an over-optimistic bias in the long term. This
year, realizing just how important the short-term, month-to-
month seasonal fluctuation numbers are to the legislature and
the Department of Revenue (DOR) introduced seasonal adjustments
and monthly predictions into their forecast.
3:40:40 PM
CHAIR GIESSEL said some of the data that was used in the
previous methodology used some confidential information from the
companies and asked if they are still doing that.
MR. DECKER answered yes. They continue to have those kinds of
meetings and will likely continue them into the future.
SENATOR STEDMAN said he understood that a couple times a year
industry gives them an idea of what they expect capex and opex
to be, so that data can be updated. He asked if this
confidential data is included in those discussions or is this
another data source outside of what they have normally talked
about before.
MR. DECKER replied that this data has been included in the
forecasting process for some time, not directly, but informing
the overall forecast.
MR. KING added that capex and opex information is collected by
the DOR to forecast their tax revenues, but DNR generates its
revenues off royalties, which is gross figure, so they don't pay
as much attention to capex and opex. Data is given to DOR as
taxpayer confidential information and that information is shared
with DNR after DNR has signed confidentiality agreements. That
information is included as under-evaluation (UE) or under-
development (UD) layers of the forecast.
3:43:04 PM
The other half of the forecast, what is normally called the base
forecast (currently producing tranche) is all done with Alaska
Oil and Gas Conservation Commission (AOGCC) data. In the past,
that was done with confidential DOR data and held confidential,
which limited DNR's ability to disaggregate those numbers. Using
publicly-available data for the base forecast, they can now
speak much more confidently and deeply about some of those
fields and their production levels.
SENATOR STEDMAN remarked that the process is similar to what has
been used historically.
MR. KING agreed and added that DNR is using the same data-set,
but the difference is in how the modeling is done. In the past,
"discrete models" were used and now they are using "stochastic
models."
3:44:18 PM
MR. DECKER launched into more of the nuts and bolts and outcomes
of the 2017 forecast. The objective was to provide a 10-year
official production forecast for the Revenue Sources Book
instead of five years, a significant change.
They also tried to increase focus on near-term accuracy by using
monthly calculations of production that show very strong
seasonality, whereas previously they were looking at straight-
line annual trends. More emphasis is now placed on evaluating
currently producing fields as the better predictor of the future
rather than the long-term over-all trend of things.
MR. DECKER said slide 8 shows how the three tranches of
production fall into the forecast. They have different timing
criteria as well as different levels of confidence in how the
prediction is going to work as expected.
-Currently producing (CP): decline analysis from
public data
-Under development(UD): incremental oil from years 2-5
of the forecast - a high chance of success projects
-Under evaluation (UE): likely to occur in years 2-10
of the forecast
He explained that the UE projects don't necessarily have to be
scheduled and part of an annual budget; they are all subject to
the same kind of probabilistic stochastic treatments.
3:47:54 PM
He said slide 9 compared from the Fall 2016 versus Fall 2017
forecast. He explained that the Fall 2016 forecast was called
"the pot of gold," in keeping with the idea that it was a little
bit vague and hard to pin down but what they hoped would happen.
This year they subjected all the projects to the same level of
analysis: monthly rates with seasonal fluctuations versus the
annualized rates and an emphasis on the near term but not taking
their eyes off the ball for a realistic long-range outlook as
well. Three elements of risk were used in evaluating UE projects
this year:
-chance of occurrence of the project within the
forecast window
-first oil start-up date: when actual production
starts
-probabilistic range in the expected profile of the
development if it does come on line
3:49:58 PM
Slide 10 depicted what uncertainty looks like in each tranche
and how it is handled: Overview: Oil and Gas Production Forecast
-CP projects: a relatively small uncertainty range,
especially becomes of the older fields have well-
established behavior. They do decline curve analysis
projects and using special software that has been
developed at their request by Schlumberger to help get
a quantitative estimate of the probabilistic range
from P90-mean-P10 cases
-UD projects: they acknowledge there is more
uncertainty than CP but it's a high likelihood that
they will happen. They assign a 95 percent chance for
each. The magnitude of production: samples from a
range of possible production profiles and do a Monte
Carlo stochastic roll-up comes out with the mean and
the ranges.
-UE projects: least certain, financial risk,
occurrence risk, the price forecast is unsure
3:51:56 PM
Near term focus in 2017
By weighting the decline curve analysis towards 2-5 years
results in a probabilistic range from P90-P10 of what production
in each of those pools should look like in the future. Another
change is giving full credit to all the planned projects in the
UD category. Previously, the thought was that the decline curve
analysis of the historical production inherently factors in some
level of base drilling or work-over activity, which is true, but
they discovered they were underestimating last year UD
production by discounting as much as they did. They find that
this makes for a more accurate near-term production empirically.
Leaving the UD projects in there helps make up for the rate
increases that are also inherent in the historical data that
come from non-drilling rate-adding jobs (the non-rig workovers,
the facilities streamlining, and other operational efficiencies
that are being squeezed out of the fields).
3:53:35 PM
SENATOR STEDMAN asked him to talk a little bit about how they
plan on dealing with 1002 potential and the impact it may have
on Point Thomson.
MR. DECKER replied they do not include ANWR for forecasting
purposes, even in UE projects that haven't resulted in any
discovery of oil. They also exclude it based on expectation of
production within 10 years, all primarily because it hasn't
yielded any discovery to evaluate.
SENATOR STEDMAN said there are expectations of seismic work,
leases, and litigation, and asked if there is any information on
that type of time horizon.
3:55:40 PM
MR. DECKER said he understood the desire to know more about how
ANWR will play out, but he didn't have a good way to address all
those things.
MR. KING said it is difficult to make predictions far out in the
future that have any value. That is why their forecasts are re-
evaluated every year. Historically, the DOR did attempt at
include fields that were yet to be found, and those forecasts
compared to what actually happened were overly optimistic. They
tried to not completely throw out the production from those
fields that aren't well delineated or lack information, but to
honor the amount of information they don't have by applying a
"chance factor," a range of uncertainty around production rate
and when it might occur. Instead of saying a unit or field is
going to come on at 100,000 barrels/day 10 years from now, they
now say: include 5,000 barrels based on what they know now. The
model gets reassessed and updated as they continue to move. If
the project continues to stay on schedule, more contributions
are accounted in the forecast.
MR. DECKER added the DOR's commercial division has undertaken
modeling of potential production and revenues from the ANWR 1002
Area and that should be available on their website. It is quite
separate from the forecasting.
3:58:17 PM
The 2017 forecast results from the mid-1980s were on slide 12
depicting production peaking at over 2 million barrels/day off
the North Slope largely and declining ever since with the
exception of the early 2000s, because of the Alpine/Colville
River discovery coming on line.
Slide 13 highlighted the last three years of actual production
(black line) and added a mean forecast (blue line) going 10
years out. "Whiskers" represent the range of uncertainty growing
longer in the out years of the forecast reflecting less
certainty. He noted the "seamless" join between the history and
forecast, because last year's forecast didn't have that. The
decline was 1.5-2 percent overall.
4:00:12 PM
Slide 14 mapped the medium to long-range UE projects. He said
the future originates sort of in the central part of the western
North Slope and goes west into the middle of NPR-A and those
will probably roll out as a series of developments rather than
all at one time. Smith Bay is some ways out. It is challenged on
location, infrastructure, and technical knowledge. It's too
early to know how it will perform, but it is in the forecast.
SENATOR VON IMHOF said an issue that is becoming more prevalent
is roads connecting these wells in all seasons. When producers
can't access their wells for even an additional month, it has a
ripple effect over time in their ability to produce oil. She
asked his department's opinion on promoting year-round road-
building and asked what has to be done to get permits and
permission to do that.
MR. DECKER said he was here to speak about the forecast and
couldn't speak for the commissioner, but the DNR actively
supports the Arctic Strategic Transportation and Resource
Project (ASTAR) project connecting communities.
MR. KING said they are working on the ASTAR, which was funded
last year to connect communities throughout the North Slope. As
a by-product, they expect those roads to also open some of the
access to resources.
SENATOR VON IMHOF said she would like to learn more about the
step-by-step process in getting ASTAR from concept to
completion: what the roadblocks are and potential growth from
there.
MR. KING said they would take that into consideration as they
prepare materials for the committee.
4:05:08 PM
SENATOR BISHOP commented that 425 miles of road had to be built
to get to Prudhoe Bay. So, we could do this.
MR. KING said as projects come on line and start to decline,
others come on line and replace them. That is what creates the
appearance of a smooth-lined forecast, which is the most likely
scenario.
CHAIR GIESSEL asked where Smith Bay falls in prospectivity.
MR. KING answered that Smith Bay would normally not be included
because it's start of production was beyond five years, but now
that they are looking beyond into the 10-year window, Smith Bay
is in that window if it stays on track. So, the contribution
from Smith Bay is small today, but as they move forward and get
more information, that should increase.
4:07:55 PM
MR. DECKER offered slide 15, a portfolio roll-up of UE projects
plus the 1-H News project, which is now producing. He cautioned
that this is their best estimate of how the overall portfolio
should perform from 10 years out into the future; no one profile
is the most likely outcome for any particular project. The
profile is the product of the risking principles they started
using.
4:11:53 PM
CHAIR GIESSEL asked if the potential capital expenditures that
would happen with the UE projects were included as they
calculated revenues in the Revenue Sources Book.
MR. DECKER answered no, but DOR would take care of that.
SENATOR MEYER thanked them for the presentation. He asked if
Pikka and Willow are about the same size.
MR. DECKER replied that Pikka is estimated at 500-1.2 billion
barrels of oil recovery and Willow may be 300 million barrels.
There may be other reasons the profiles are different, though.
MR. KING added that the clearest distinction is in the number of
exploration wells in those areas: Pikka has 16 exploration wells
and Willow has one. So, a lot more is known about the resource
at Pikka versus the other. Some of the public announcements are
pegging them both at 100,000 barrels/day range, but that doesn't
include number of wells, production rate, how the rate can be
kept, and how fast it will decline. Just looking at a peak rate
isn't a good indication of how much oil is really going to be
produced. There is a lot more uncertainty around timing, as
well. Pikka is almost through the Environmental Impact Statement
(EIS) process; Willow is a lot earlier in that process. But
ConocoPhillips did announce in the Petroleum News about their
exploration activities proving up Willow. So, next year they may
know more.
4:15:08 PM
SENATOR MEYER asked how many wells are being drilled this
winter.
MR. DECKER said there is one at Badami. He hadn't heard about
Liberty having any drilling.
SENATOR MEYER said Hilcorp hopes to drill at Liberty, which is
offshore.
MR. DECKER said that Eni is drilling a 35,000 foot well offshore
of Nikiatchuq. ConocoPhillips has announced at least five
penetrations at Willow and one at Stoney Hill. It is also
drilling Putu 1 and 1A in what is formerly known as the Tofkat
Unit. Those are all part of the Nanushuk Pikka-Horseshoe trend.
The Willow trend is separate, but similar, which could turn out
larger with additional exploration wells and tests being
conducted there.
4:16:54 PM
SENATOR MEYER asked, with the announcement of opening more land
in NPR-A, if he anticipated more lease sales happening soon.
MR. DECKER answered yes; if a lot of lands that are currently
off limits to leasing become available, he would expect to see
future lease sales there and significant participation in
extending that acreage position into lands that are currently
unleasable. ConocoPhillips, and to a lesser degree some others,
have picked up a large swath of acreage over to the eastern
boundary of unleasable acreage and he didn't know why they would
stop there.
SENATOR MEYER said Caelus had mentioned needing $70 oil before
they could actually produce it.
MR. DECKER responded that is very likely Nuna. He said the Nuna
project had received royalty modification investments from DNR
in the past and that may be required in the future.
SENATOR BISHOP commented that he was under the impression this
was the busiest exploration season on the North Slope in the
last 20 years, and the 2004 Revenue Sources Book estimated that
production in 2014 was supposed to be 942,000 barrels/day.
4:19:44 PM
CHAIR GIESSEL, finding no further comments, adjourned the Senate
Resources Committee meeting at 4:19 p.m.
| Document Name | Date/Time | Subjects |
|---|---|---|
| Senate Resources - Hearing Agenda - 1 - 26 - 2018.pdf |
SRES 1/26/2018 3:30:00 PM |
Oil |
| Sen Resources - Oil Production Forecast - 1 - 26 - 2018.pdf |
SRES 1/26/2018 3:30:00 PM |
Oil |