Legislature(2017 - 2018)BUTROVICH 205
03/05/2018 03:30 PM Senate RESOURCES
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| Audio | Topic |
|---|---|
| Start | |
| Presentation: Bonding, Idle Wells, and Orphan Liability | |
| 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
March 5, 2018
3:30 p.m.
DRAFT
MEMBERS PRESENT
Senator Cathy Giessel, Chair
Senator John Coghill, Vice Chair
Senator Bert Stedman
Senator Kevin Meyer
Senator Bill Wielechowski
Senator Click Bishop
MEMBERS ABSENT
Senator Natasha von Imhof
COMMITTEE CALENDAR
PRESENTATION: BONDING, IDLE WELLS, AND ORPHAN LIABILITY
- HEARD
PREVIOUS COMMITTEE ACTION
No previous action to record
WITNESS REGISTER
CATHY FOERSTER, Commissioner
Alaska Oil and Gas Conservation Commission (AOGCC)
Anchorage, Alaska
POSITION STATEMENT: Provided overview of idle wells and orphan
liability.
JIM BECKHAM, Deputy Director
Division of Oil and Gas (DOG)
Department of Natural Resources (DNR)
Anchorage, Alaska
POSITION STATEMENT: Provided presentation of state oil and gas
bonding policies.
HOLLIS FRENCH, Commissioner
Alaska Oil and Gas Conservation Commission (AOGCC)
Anchorage, Alaska
POSITION STATEMENT: Answered a question on the idle well
overview.
ACTION NARRATIVE
3:30:12 PM
CHAIR CATHY GIESSEL called the Senate Resources Standing
Committee meeting to order at 3:30 p.m. Present at the call to
order were Senators Bishop, Meyer, Stedman, Wielechowski, and
Chair Giessel. Senator Von Imhof was excused.
^Presentation: Bonding, Idle Wells, and Orphan Liability
Presentation: Bonding, Idle Wells, and Orphan Liability
3:30:37 PM
CHAIR GIESSEL announced the presentation on bonding, idle wells,
and orphan liability and turned the discussion over to the
Alaska Oil and Gas Conservation Commission (Alaska Oil and Gas
Conservation Commission (AOGCC).
3:31:05 PM
CATHY FOERSTER, Commissioner, Alaska Oil and Gas Conservation
Commission (AOGCC), Anchorage, Alaska, said she was asked to
speak today about AOGCC's concerns with idle wells and well
abandonment liability. First, she reminded them about what their
responsibilities and activities. She said AOGCC is an
independent quasi-judicial body that holds hearings and make
rulings on things such as well spacing and other exceptions,
pool rules, gas offtake allowables. Every day they grant or deny
permits for such things as drilling wells and performing sundry
well work. By statute they have three commissioners; one must be
a petroleum geologist, Dan Seamount; one must be a petroleum
engineer, and that is her; the third must have training and
experience relevant to the oil and gas industry, and that seat
is held by Hollis French. On staff they have two geologists, six
engineers, nine field inspectors, and several IT, data
management, and administrative support staff.
3:32:46 PM
SENATOR COGHILL joined the committee.
3:33:45 PM
MS. FOERSTER said the AOGCC is charged with preventing waste and
encouraging greater ultimate recovery of hydrocarbon and
geothermal resources, protecting fresh groundwater sources,
protecting correlative rights, and protecting human safety
during drilling well work and well operations. People often
confuse their roll with that of the Department of Natural
Resources (DNR), but they are very different. DNR serves as the
landowner representative for the state on all state lands and
AOGCC's job is to ensure that state's resources are developed
for the maximum benefit of the state.
She said the AOGCC regulates the industry everywhere throughout
the state not just on state lands. They try to encourage greater
ultimate recovery, protect against waste, and protect fresh
groundwater. Occasionally, because they are an independent
agency, the DNR comes before them as a plaintiff, but the
department has no greater standing before them than any other
agency. That is why their independence is so important. For
example, if the Governor could fire her at will, then every
decision would be in favor for the DNR. Once a commissioner is
confirmed, the governor has to have cause in order to fire him
or her or they are in for the full six-year term. That allows
latitude to make decisions based on the statutory requirements
they were charged with protecting.
3:35:26 PM
She reported that drilling and well work activity continued at a
fairly steady pace in 2017. BP and ConocoPhillips continued to
drill and work over wells in Prudhoe Bay, Kuparuk, and
Coleville. Hilcorp continued drilling and fixing broken wells in
Cook Inlet, Milne Point, and at the other North Slope fields
they acquired from BP in 2015.
In 2018, they expect BP, ConocoPhillips, and Hilcorp development
activities to continue at about the same pace. What the others
are planning to do is still a little unclear to them.
MS. FOERSTER said ConocoPhillips will drill 6-8 exploratory
wells this year all in the Greater Moose's Tooth area. Eni is
drilling one well at Spy Island and Glacier has an exploratory
well permitted in the Badami area.
The other significant well work is plugging and abandonments
(P&A), which she would detail later in the presentation. But
several operators are plugging wells with no future utility
and/or with mechanical integrity issues, a very good thing.
SENATOR BISHOP asked if Eni is drilling with an extended reach
rig on Spy Island.
MS. FOERSTER said she didn't know what rig they are using.
SENATOR BISHOP said they had commissioned a new drill rig.
MS. FOERSTER said they are using the new rig.
3:36:59 PM
She said $50 million was originally appropriated from the Healy
and Stewardship Act of 2013 to the Bureau of Land Management
(BLM) for travesty well clean-up, and BLM tells her that if
everything goes well with cleaning up a cluster of five wells at
Wolf Creek this winter, a total of 24 wells will have been
plugged and abandoned and/or have had surface clean-up
completed. As of today, one of those has been successfully
completed. Those are less technically complex, and problems are
not expected. BLM estimates that 26 more wells need to be
addressed at a cost of $90-100 million. These wells will cost
more because they are "one-offs" and not located in clusters
where mobilization and demobilization costs can be maximized.
CHAIR GIESSEL asked if these closures can happen only in the
winter.
MS. FOERSTER replied that most of them are out in the middle of
nowhere and require tundra travel permits or winter work,
although a few have been addressed off infrastructure.
3:38:50 PM
SENATOR MEYER asked for a timeframe for the 26 wells that are
left.
MS. FOERSTER replied that they have no money for that work, and
added that she hadn't done a reconciliation to see if she agrees
that it's only 26 wells.
SENATOR MEYER asked what the future plans are for those wells.
MS. FOERSTER answered she would get to that. The two worst
wells, one incapable of flowing oil and the other leaking
methane, were supposed to have been covered in the original $50
million. Unfortunately, BLM and its contractor chose to ignore
AOGCC directives and instead used an unacceptable procedure to
attempt to "poor boy" the job leaving both wells in such bad
shape that fixing them will be very costly, if possible. The
Simpson well is still capable of leaking oil. There is no money
to clean it up and they have no plans to do it. The other well,
the Iko Bay wellhead, nicknamed the "whistling well," has been
repaired and no longer leaks methane - for now, she warned.
Should its integrity be compromised, it is still capable of
leaking methane. There is no money left to clean up any more
legacy wells, which leaves the Department of Interior in the
position of finding some.
3:41:28 PM
SENATOR BISHOP asked if her dad was a pipeliner, because one
needs a lot of experience in the industry to use the term "poor
boy." Cross-country pipeliners use a lot.
MS. FOERSTER replied that her dad was a metallurgical engineer
and she didn't have to go to her dad for experience, because she
has 40 years of it in the oil and gas industry.
3:42:24 PM
MS. FOERSTER said the real reason she wants to talk to them
today is they don't want the State of Alaska to become a legacy
well collection site. As oil fields in Alaska mature, and new
and smaller companies come to the state, the threat of orphan
wells increases. In 2016, two new companies went bankrupt. If no
one buys their assets, then the landowner - usually the State of
Alaska - may be left holding the bag for plugging and
abandonment (P&A) liability. For instance, Aurora Gas went
bankrupt with 19 wells and does not exist anymore. Aurora
Exploration, the company that bought six of those wells, has no
legal responsibility to P&A any of them. Ten of those wells are
on CIRI land, who fortunately as the landowner made a deal with
the prior owner to clean up those wells, and CIRI is enforcing
that clause.
She said the State of Alaska will be on the hook for the
remaining three wells and she expects the DNR will "get a nasty
letter from my agency" telling them to clean them up. This is
just a microcosm of what will happen to the 5,300 other wells in
the state.
3:45:28 PM
Also, in 2016, two companies relinquished leases that had wells
on them, and by Alaska law, the operator is required to P&A all
wells before relinquishing them. But if they don't do that and
the landowner doesn't tell them before they are relinquished,
the state is chasing them down the road trying to get them to
clean up as they disappear into oblivion, which goes back to the
story of the landowner being responsible.
3:46:39 PM
MS. FOERSTER said the rest of her presentation would be on AOGCC
concerns relating to idle wells and orphan well liability. A
trend has started that she didn't think would turn around soon.
The state has about 5,300 wells, about 900 of them idle, and
that number increases as our oil and gas infrastructure matures.
A lot of new little operators are coming into the state. For
instance, BP just sold a lot of their stuff to Hilcorp. New
operators have also been enticed to come to Alaska through
exploration incentives. Often they don't have huge financial
resources, so now there is an increasing number of operator
bankruptcies. This results in an increasing number of landowner
liabilities - State of Alaska - for the cost of plugging and
abandoning the wells.
3:48:30 PM
MS. FOERSTER said this problem won't go away and multiple
approaches will be needed to make sure Alaska doesn't become a
legacy well site. Over 4,000 of these wells are on the North
Slope, but close to 1,000 of them are in Cook Inlet, which is
also "Alaska's playground." Her suggested solutions include:
1. Decrease and manage the number of idle wells in the
state. AOGCC has an initiative in which they bring in
each operator every year and review their idle well
list. They identify wells that all can agree have no
future utility and the wells that have mechanical
integrity issues that are either a current threat or a
future threat and aren't fixable. It seems to be
working well, but it's a slow process and doesn't
bring additional money into the general fund.
2. Change the way bonding is done. Now regulations say
when an operator comes to the state they have to get a
bond for no less than $100,000 for the first well and
no less than $200,000 for the total blanket of
operations in the state. This means the state's bonds
for the 2,000 abandoned wells on the North Slope is
$200,000 and that can't even pay for the engineering
study to do the estimate of what it would cost to plug
them all.
3. Establish legal authority to go back on former
operators if the new ones default. This would require
a change to statutes.
This is a multi-billion-dollar problem. If Kuparuk and
Prudhoe Bay get sold to someone who doesn't have the
financial wherewithal to P&A those wells, the state
has three choices:
- go back on the old operator
- ask the legislature for money
- just let the problem exist
SENATOR WIELECHOWSKI asked what the existing legal requirements
are for companies when they stop using wells.
3:54:09 PM
MS. FOERSTER answered the law requires an operator to plug and
abandon all the wells on a lease before relinquishing it.
However, if a company goes bankrupt, like Aurora Gas did, what
do you do?
SENATOR WIELECHOWSKI asked if there is bonding legislation
currently and if AOGCC has regulatory authority to set it at
appropriate levels.
MS. FOERSTER answered the commission can set the bonding higher,
but they really don't know the right answer. It would cost BP a
couple of pennies on the dollar, but it might cost 50 cents on
the dollar for a little independent. Hilcorp can't afford to
bond Milne Point, Endicott, and North Star. The more financially
secure a company is, the cheaper it is to get a bond but also
the less worried the state is about it having one.
3:55:47 PM
SENATOR WIELECHOWSKI asked as wells become idle on the North
Slope what is done now.
MS. FOERSTER answered a variety of things: now, if an operator
on the North Slope has a well they know there is no future
utility for it, they will plug it, but operators hang on to a
lot of wells for future utility. For instance, if the state had
required BP to plug all the idle wells at Prudhoe Bay before
cold tubing technology evolved, they couldn't have gone back
into them for more production.
3:57:28 PM
She said the practice of going back on former operators isn't
unheard of in the oil and gas world. Two states, California and
Kansas, have statutes allowing them to do that. California
recently did it to ExxonMobil that sold Platform Holly, off
Santa Barbara, to a little company that didn't have the
financial wherewithal to plug it when they were done. A
landowner can write it into their lease, like CIRI does, and DNR
is doing more of that sort of thing. But putting sufficient
money to do this into a bank account with the state as a co-
signer needs to go along with the language.
If the commission is given this authority, it can be used to go
back on operators at the time the legislation is put in place,
but she didn't know if they could go back on prior operators
before that. Or an idle well fee could be assessed; it would be
an annual fee that increases over time and it could go into a
fund specifically for orphan well clean-up. For example, every
idle well will cost $100 in the first year; if you have 300 idle
wells that comes to $30,000. But next year, each idle well will
cost $500 for a total of $150,000. The next year it will cost
$1,000 per well and the next $5,000. Pretty soon, it will be
financially lucrative to get rid of those wells. The only
problem with a fund like that is that it can be used for
whatever the legislature wants.
4:02:13 PM
SENATOR STEDMAN said assuming company X leaves the state with an
abandoned well, how does that tie in with platforms and roads.
MS. FOERSTER answered that DNR is the landowner and is
responsible for the surface clean-up, and sometimes they want
the road, the platform, or the infrastructure. The DNR
commissioner has worked well with operators in the past to take
care of the state's interests. For instance, he has asked an
operator to not plug a well because of a potential.
CHAIR GIESSEL thanked her and invited DNR's Jim Beckham forward.
4:04:00 PM
JIM BECKHAM, Deputy Director, Division of Oil and Gas (DOG),
Department of Natural Resources (DNR), Anchorage, Alaska, said
the division issues oil and gas leases that have a clause
requiring the lessee to return the land in a condition that is
satisfactory to the state.
He said the department has several bonding gates:
1. The initial operation's lease level of $100,000
2. A unit bond, which is a collection of leases, and
requires a statewide bond of $200,000
3. A unit bond can be applied to all leases and that
is $500,000. These monies are earmarked for
dismantlement, removal, and restoration activities
(DR&R).
4. Finally, when an operator or a lessee wants to
assign or sell their interest in the lease, an
assignment bond may be required.
4:06:10 PM
In 2009, Mr. Beckham said, the Pacific Energy Resources Limited
bankruptcy identified the significant exposure the state had.
Fortunately for the state, other people stepped in and picked up
the significant assets and moved forward. Recognizing the state
had dodged a bullet coupled with the fact that major companies
are now moving to small and mid-sized limited liability
companies, the division started to look at the state's
increasing liability on the various leases and units. DNR has
basically chosen to reach out to the new lessees to talk about
their liabilities and their plans for them at the time of
assignment in formal DR&R agreements.
4:08:29 PM
MR. BECKHAM said the department also started coordinating with
the Alaska Oil and Gas Conservation Commission (AOGCC) when Ms.
Foerster brought their attention to limiting the state's
liability during the lease relinquishment process.
4:09:19 PM
He said there are a number of ways to cover the liability (that
is only for the percent of interest a company has in the lease
or unit) in a dismantlement, removal, and restoration agreement
(DR&R). Publicly traded companies are on the top of the spectrum
and are required to list an asset retirement obligation (ARO) in
their financial statements. Typically, the department doesn't
know the details, but it knows the rolled-up amount and assumes
the funds are set aside to address a company's obligations as it
relates to its lease in Alaska.
The full faith and credit of the parent company is another
vehicle that can be used for the obligations of a limited
liability company. The department can also have signatory
authority on cash deposited into a bank, known as "sinking
funds." A company can also use certificates of deposit issued in
the name of the state in an amount for the estimated obligation.
Performance bonds can also be issued to guarantee a specific
performance on the unit or the lease and those would be sold to
pay for the action should that operator or lessee not perform.
4:11:24 PM
MR. BECKHAM said they are constantly improving their processes
to get more coverage for the units, wells, and infrastructure.
DOG is responsible for the surface assets that are constructed
to access the mineral estate and they look at everything in
their agreements including the well bore. Some comprehensive
agreements include plugging and abandoning the well, and he is
working with the commissioner to make sure the operator or
lessee is not paying twice for the same issues.
4:12:11 PM
CHAIR GIESSEL asked if the $100,000 bond is enough to remove
infrastructure on the surface of a lease.
MR. BECKHAM responded that the figure seems low, but a lot of
times the initial operations on a lease are minimal. It's either
building a gravel pad or an ice road for winter activities, and
when they pull out, nothing remains. One company has drilled two
wells from an existing pad that does not belong to them and
posted bonds for both leases the well bore touched. When they
left, nothing was there other than the plugged and abandoned
wells.
SENATOR WIELECHOWSKI asked if the administration supports any of
the AOGCC proposals they have heard today to deal with these
bonding issues.
MR. BECKHAM replied that he is not aware of what the
administration supports. However, the AOGCC and the DOG are
working to ensure that any kind of obligation left on a lease or
at a unit site is adequately addressed so the state isn't stuck
with the bill.
SENATOR WIELECHOWSKI asked if the federal government could
require the state to clean up the wells if they are abandoned in
the future.
MR. BECKHAM replied that he didn't know.
4:14:28 PM
MS. FOERSTER responded that she didn't know if they could, but
they never have. Oklahoma, Texas, Kansas, and California have
thousands of idle wells and the federal government hasn't
required them to be cleaned up.
4:15:04 PM
SENATOR COGHILL asked how hard it has been to go back to prior
lessees for plugging and abandonment.
MS. FOERSTER replied they have never had cause to do that and a
bond had been used for P&A only once before. However, Alaska is
a young oil and gas state, and it is getting to the point of
having to deal with issues it has never had before.
CHAIR GIESSEL asked if DNR had used any bonds.
MR. BECKHAM answered they had not, but they are probably at the
doorstep of doing that with recent bankruptcies and unattended
wells.
SENATOR COGHILL asked what statutory limitations there are.
MS. FOERSTER replied that Alaska's statutes and regs require an
operator to plug and abandoned every well before he relinquishes
his lease, but if he has no money, what good is the law?
SENATOR BISHOP remarked the federal government won't clean their
own wells up and how could they come here and require Alaska to
do it.
SENATOR COGHILL asked how they are keeping track of each lease
and well bore. Are they catalogued differently?
MR. BECKHAM replied that they are aggressively pursuing
dismantlement, removal, and restoration agreements with
companies at the time of assignment. They are also approaching a
couple of companies that have multiple holdings throughout the
state to work out an agreement that covers everything.
4:18:45 PM
CHAIR GIESSEL thanked Mr. Beckham for presenting today and said
they would reach out to him with their questions. She asked Ms.
Foerster to provide the production data update.
MS. FOERSTER displayed a graph of average oil production for the
state since 1960 saying it looks pretty much the way it always
has and skipped to the next one that detailed the last 18 years.
In looking for something positive, she noted that there was no
decline this year. Prudhoe Bay was flat and maybe up a tiny bit.
Oooguruk, Knight, Nikiatchuq, and Point Thomson production was
up a little bit, too. Kuparuk stayed flat, also. Coleville is up
a bit and ConocoPhillips is continuing to expand there. This is
all good news.
4:21:08 PM
The next graph depicted exploratory well drilling and she said
Alaska has had a whole rainbow of explorers over the years. In
2017, Hilcorp drilled a handful of tiny "postholes" to learn
more about the lay of the land for other things they are going
to do. They have all been plugged. Accumulate drilled a well and
this year ConocoPhillips is going to be drilling; Eni is going
to be drilling as well as Cook Inlet.
SENATOR WIELECHOWSKI remarked that 2017 had the lowest
exploratory well count since 2003.
MS. FOERSTER said that was right, but 2018 is going to be up,
closer to 10.
4:22:18 PM
MS. FOERSTER said the next picture was development and service
drilling of wells and well branches. She added that every branch
of a multi-lateral is counted as a separate well. BP's drilling
activity was down; ConocoPhillips' was holding strong; Hilcorp
has picked up on their drilling, along with a couple other
little companies. It's down a little bit from 2016, but not a
lot. Whatever they did, even though they did a little less
drilling, production was up a little bit.
4:23:15 PM
The workover activities slide was split into three groups. Dark
green is work that is done to enhance production like a frac job
or an acid stimulation. That was held constant for the last few
years. The repairs group is down a little bit. The other
category is for things like converting a well from water
injection to gas injection or other sorts of workovers that
don't fall easily into the repair or enhancement category. That
level of work is down a little but not too bad and it is
expected to be similar next year. A lot of these activities came
from production wells on the North Slope.
The next biggest chunk of activity was service wells on the
North Slope and a bunch of little "strat-test" that Hilcorp did
to learn more about the shallow geology. Another slide just
compared 2016 to 2017. That concluded her testimony.
CHAIR GIESSEL thanked her.
4:24:49 PM
SENATOR MEYER said the third bar graph on the right side: is
that supposed to be the price of oil?
MS. FOERSTER answered yes.
SENATOR MEYER asked if the price of oil went down to $30 in
2014; what was he misreading?
4:25:32 PM
HOLLIS FRENCH, Commissioner, Alaska Oil and Gas Conservation
Commission (AOGCC), clarified that the price of oil is the graph
behind the bar charts and it dips down to $30 in 2015/16. The
dip Senator Meyer was referring to was in 2016.
4:26:31 PM
CHAIR GIESSEL, finding no further questions, adjourned the
Senate Resources Committee meeting at 4:26 p.m.
| Document Name | Date/Time | Subjects |
|---|---|---|
| Senate Resources - Hearing Agenda - 3 - 5 - 2018 .pdf |
SRES 3/5/2018 3:30:00 PM |
|
| AK Oil & Gas Conservation Comm Presentation to Senate Resources - 3 - 2 - 2018.pdf |
SRES 3/5/2018 3:30:00 PM |
Oil and Gas |
| DNR Presentation to Senate Resources - 3 - 5 - 2018 .pdf |
SRES 3/5/2018 3:30:00 PM |
Oil & Gas |