HOUSE BILL NO. 110 "An Act relating to the interest rate applicable to certain amounts due for fees, taxes, and payments made and property delivered to the Department of Revenue; relating to the oil and gas production tax rate; relating to monthly installment payments of estimated oil and gas production tax; relating to oil and gas production tax credits for certain expenditures, including qualified capital credits for exploration, development, and production; relating to the limitation on assessment of oil and gas production taxes; relating to the determination of oil and gas production tax values; making conforming amendments; and providing for an effective date." 2:30:34 PM DANIEL SEAMOUNT, GEOLOGY COMMISSIONER, CHAIR, ALASKA OIL AND GAS CONSERVATION COMMISSION, (AOGCC), introduced a chart titled "Approved Permits to Drill for Each Year (1996 - 2010) Statewide: Oil, Gas and Alternative Energy Wells and Wellbores" (Page 17 of a PowerPoint presentation titled: "Alaska Oil and Gas Conservation Commission (AOGCC)"). The chart showed the number of approved permits for all oil, gas, and alternative energy wells that had been drilled in the state. The cost of oil appeared in a green line that overlaid the chart and the permit scale ranged from 0 to 400. With the exception of 1999 and 2000, there were slightly under 250 permits issued per year. He highlighted a correlation between the dip in oil prices in 1998 and 1999 and the lowest number of wells drilled in the past 20 years; however, with recent high oil prices there could have been an inverse correlation. He was not certain about the reason related to the decrease in the number of permits that were issued around 2004 and 2005, but AOGCC planned to look at the compiled total footage drilled to determine whether the oil wells were more complex and took more time. Mr. Seamount addressed Page 18 related to wells drilled on the North Slope: "Approved Permits to Drill for Each Year (1996 - 2010) North Slope: Oil-Related Wells and Wellbores." He explained that the chart looked very similar to the one on Page 17 because the North Slope was "king" when it came to the number of oil wells drilled and very few wells had been drilled in other locations including Cook Inlet. He discussed the actual work done by actual investors: "Alaska Oil and Gas Conservation Commission" (Page 19). He explained that the charts looked very similar to the numbers for permits to drill on Page 17 because operators tended to follow through on their plans in Alaska. He noted that this was not the case in other areas such as the Rocky Mountains where a significant number of permits issued were never used. He discussed that Mr. Davies, Petroleum Economist, AOGCC, had developed the pie chart: "Alaska 2010 Wells and Wellbores" (Page 20). The chart showed that there had been total of 183 wells drilled in 2010 and did not account for wells drilled by operators who were still in the process of submitting their completion reports. Out of 183 wells drilled the Arctic Slope accounted for 125 producer wells, 39 service wells, and 4 exploration wells. The remaining wells were located in Cook Inlet and other areas of the state. 2:36:37 PM Mr. Seamount pointed to a chart that showed oil, gas, and alternative energy exploration wells drilled: "Exploratory Wells and Wellbores Statewide: Completed, Suspended or Abandoned (1996-2010)" (Page 21). The chart looked similar to the ones shown on Pages 17 and 18 that were related to permits to drill. There was low exploration and price in 1999 and 2000. In 2010 the number of wells drilled exceeded the number of permits (shown on the far right-hand side of the page) because many of the applications for permits to drill had been submitted in 2009. He remarked that out of the 15 exploration wells drilled in 2010 only 7 were oil or gas exploration. Representative Gara indicated that that the numbers discussed by Mr. Seamount did not match the numbers on Page 21. Mr. Seamount clarified that there had been 15 wells drilled in 2010 by 9 operators. Representative Gara wondered whether 2011 was the year that only one exploratory well was drilled. Mr. Seamount replied in the affirmative. He communicated that 2011 would be an abysmal year for exploration. Mr. Seamount discussed Page 22: "Exploratory Wells and Wellbores Statewide: Completed, Suspended or Abandoned (1996-2010)," that related only to oil and gas. There was low exploration and price in 1999 and 2000, but there was an inverse correlation between exploration and price that began in 2005. He examined development and service wells on Page 23: "Development and Service Wells/Wellbores Statewide: Completed, Suspended or Abandoned (1996-2010)." The chart did not include exploration wells and was similar to the total wells drilled because of the small number of exploration wells. ConocoPhillips (shown in red) and BP (shown in green) made up the largest percentage of the development and service wells depicted on the graph. A handful of newer producers including Pioneer, ENI, and Savant accounted for most of the remaining percentage beginning around 2008. There had been a dip in the number of wells drilled beginning in 2004 and 2005, but it had remained relatively level through 2010. 2:40:08 PM Representative Costello asked for a breakout of the completed, suspended, or abandoned wells that were listed on Page 23. Mr. Seamount replied that he would provide the information to the committee. He added that very few of the wells shown had been abandoned and that the majority were actively producing oil or injecting fluids to keep the reservoir pressure up. Representative Costello wondered whether Mr. Seamount supported a claim made in another committee that the legacy companies did not take into account taxes or the price of oil in their data represented on the chart. Mr. Seamount responded that he did not have enough information to answer the question and that he was not privy to that company detail. Co-Chair Stoltze provided a baseball analogy in reference to the difficulty he had experienced in following all of the information on the production and operation wells. Representative Guttenberg wondered whether there was a rule of thumb regarding the allowable lag time between the submittal of a development plan and the installation of a well. Mr. Seamount replied that it was highly variable depending upon how desirable a project was to a company's management team. He reflected on one prospect in Wyoming that had taken nine years to be drilled. Representative Guttenberg remarked that the variables were incalculable, for instance a company could be highly interested in a project and then discover that there were no rigs available. Mr. Seamount replied that there were numerous variables that could delay a project, including economic, government, litigation, and more. Representative Guttenberg had heard of circumstances in which a company had interest in drilling a well but it was unable to do so because access to a rig was not possible until the following season when an ice road could be built. Mr. Seamount agreed. He observed that the logistics in Alaska were more challenging than those in the Lower 48. 2:44:26 PM Representative Gara wondered why Page 22 showed that there were five exploratory well developers but did not indicate the number of wells. Mr. Seamount explained that the scale shown on the left (x-axis) of the chart related to the number of wells drilled. Representative Gara asked about the difference between Pages 21 and 22. Mr. Seamount responded that Page 21 included oil, gas, and alternative energy and Page 22 only included oil and gas. Representative Gara wondered whether Page 14 only included information about the North Slope. Mr. Seamount replied that Page 14 related to statewide oil and gas exploratory well permits, excluding alternative energy. Representative Gara asked whether there was a page that showed exploratory well permits for the North Slope only. Mr. Seamount responded that he would provide a chart with the data to committee members. Representative Gara believed that the focus of the debate on ACES [Alaska's Clear and Equitable Share] centered on the North Slope and not on other areas of the state. Mr. Seamount answered that information was included later in the presentation about the wells that had been drilled on the North Slope. Representative Gara queried whether the suspended and abandoned wells were drilled during the year they were presented on Pages 21 and 22 or whether they had been drilled in prior years. Mr. Seamount replied that the wells were drilled in the year in which they appeared on the chart. He expounded that wells in close proximity to infrastructure were completed and those that were farther away were not. 2:48:37 PM Representative Wilson wondered whether there was a review process to determine why wells were suspended or abandoned to ensure that the appropriate tax credits were applied. Mr. Seamount replied that there were four petroleum engineers that monitored the situation closely and that approval for a company to abandon a project was required. He elaborated that it was necessary for a company to have a good reason for abandoning one area to drill in another and that an extensive review took place. Representative Wilson wondered whether the information on abandoned wells was public. She noted that it would be helpful for her to know why the wells were abandoned. Mr. Seamount remarked that he could provide the committee with the information. He added that there was a two-year confidentiality rule on exploration wells but the rule did not apply to development wells. Co-Chair Thomas wondered whether there were inactive wells that might be activated once a tax system that was more desirable for oil companies was implemented in the state. Mr. Seamount was not aware of anyone using the particular strategy. He noted that there were quite a few areas in the state that were capable of production but were not currently under production due to various issues related to infrastructure or government. Co-Chair Thomas asked whether the issue was related to state or federal permitting. Mr. Seamount responded that he was not aware of any situation in which state government was inhibiting production. 2:52:10 PM Representative Gara observed that oil companies had also stopped production by prohibiting access to others. He cited an example in which Conoco had prevented a company from gaining access to land by denying it the ability to cross land owned by Conoco. Mr. Seamount was not aware of the particular situation. Representative Costello asked whether a company could slow the rate of production on an active well. Mr. Seamount replied that a company could slow the wells when gas ratios became too high and for a variety of other technical reasons. Representative Costello wondered whether there were other reasons for slowing a well. Mr. Seamount could not think of any other economic or additional reasons. Mr. Seamount discussed that Page 24 titled "Development and Service Wells/Wellbores Statewide: Completed, Suspended or Abandoned (1996-2010) by BP Exploration (Alaska), Inc," was similar to Page 22 and 23 but only included BP Exploration Alaska. He relayed that 99 percent of the wells were in Prudhoe Bay, Milne Point, and Point McKenzie and were all in the North Slope. Page 25 titled "Development and Service Wells/Wellbores Statewide: Completed, Suspended or Abandoned (1996-2010) by ConocoPhillips Alaska, Inc.," related only to ConocoPhillips Alaska, Inc. He reported that the majority of the company's development and service wells were located in Kuparuk and Colville River. Additionally, the company did not take much risk, but their activity had been fairly constant over the years. Mr. Seamount directed attention to Page 26 titled: "Completed, Suspended and Abandoned Oil and Support Wells and Wellbores - North Slope Only 1996-2010." The wells were broken out by type, the oil producers were shown in green, the oil injectors were shown in blue, and waste ejector wells were indicated in black. He highlighted that the same trends that were present on the previous slides applied to Page 26 as well. He discussed a bar chart on Page 27 titled "Alaska's Active Drilling and Workover Rigs for Each Quarter (2005-2010)," that related to statewide oil, gas, and alternative energy. The light green portion of the bars represented drilling rigs and the dark green portion represented workover rigs. He delineated that there were 15 or more active drilling and workover rigs per quarter from 2005 to the fourth quarter of 2008; but there was a sharp decline in 2009 through 2010. The price of oil that was relatively high was represented as a dark green line and, with the exception of 2006 showed no correlation with the active rigs. 2:57:13 PM Representative Gara wondered whether the dip in the price of oil in 2009 explained the lower number of active rigs one and a half years later given that plans to drill were done two years in advance. Mr. Seamount supposed that was a possibility. Representative Gara asked whether the chart included directional drilling rigs or whether the smaller rigs in 2009 and 2010 were rigs that drilled horizontally. He had heard that the number of rigs had declined as directional drilling had increased. Mr. Seamount responded that most rigs were extended reach and that the majority were horizontal. Representative Gara wondered how long it had been the case that most rigs were extended reach and horizontal. Mr. Seamount believed it had been since 1999 or 2000. Mr. Seamount addressed Page 28: "Alaska's Active Drilling Rigs for Each Quarter (2005-2010)." He explained that drilling rigs were often swapped out to do workovers. He noted the correlation between the number of workover rigs and the cost of oil on Page 29: "Alaska's Active Workover Rigs for Each Quarter (2005-2010)." He reported that many of the workover rigs had been switched over from drilling rigs and that the payoff would be quicker because workover rigs were less expensive. Representative Hawker asked for clarification that Page 28 included oil, gas, and alternative energy statewide. Mr. Seamount replied in the affirmative. He noted that 2010 was the only year on the page that included alternative energy rigs and that it would be necessary to subtract three from that year to obtain oil and gas rigs only. Representative Hawker wondered whether alternative energy wells were drilled prior to 2010 as a result of the extraordinary number of permits that were issued to the Department of the Interior in 2008. Mr. Seamount believed that the Department of Energy had drilled nine wells in the previous two years. Representative Hawker asked whether the chart on Page 28 included the alternative energy wells in 2008 and 2009. Mr. Seamount responded that coalbed methane was not considered an alternative energy. 3:03:07 PM Representative Costello asked about an earlier statement that workover rigs tended to follow the price of oil more closely because they were more cost effective for the oil companies. Mr. Seamount responded that he had interpreted the data that way. Representative Costello wondered why there was an exception in the fourth quarter of 2009. She asked whether there was another factor at play during that time. Mr. Seamount was not aware of another factor at play. Mr. Seamount moved on to Page 30: "Well Workover Activities for Each Year (North Slope Only) 2003-2010." Workovers had reached a significant number of over 400 per year since 2003. A high of 582 had been reached in 2008 when oil price had been at its peak. He detailed that 500 workovers out of 3000 development wells in Alaska was a significant percentage. Representative Guttenberg wondered what constituted a workover. Mr. Seamount replied that typically a workover or drilling rig was set directly over the well and that the wellbore was drilled and modified to increase production or to fix a leak, etc. Representative Guttenberg remarked that it took a lot to move a rig and that 500 times in one season was significant. Mr. Seamount believed that it was expensive. Representative Gara asked about the difference between workover rigs and development rigs. Mr. Seamount explained that a development well involved drilling a new hole in the ground, whereas a workover did not. Representative Gara asked whether rigs had been moved 558 times in 2010 to perform workovers. Mr. Seamount replied that sometimes a series of workovers was done on the same wellbore; however, a high number of moves were represented in the number. 3:07:07 PM Representative Gara wondered where well workover activity and expense fit within the goal to maintain and enhance oil production. He asked whether the higher number of well workovers in 2010 compared to those conducted in 2007 was indicative of an attempt to enhance or stabilize oil production. He discussed that development wells and exploration wells were used to locate oil. Co-Chair Stoltze remarked that the committee would be able to discuss some of the issues in the presentation with other presenters as well. Mr. Seamount responded that a significant portion of well workover activity was aimed at production increase or maintenance. Representative Doogan asked for clarification regarding the number of wells that were represented on Page 29. Mr. Seamount responded that they were average numbers for the quarter. When a rig only worked for two months out of a quarter the number was represented as a fraction. Representative Doogan wondered whether "four and a fraction" rigs were used during the third quarter of 2010. Mr. Seamount replied that one of the rigs may not have been active for the entire quarter and was therefore represented as a fraction. 3:11:01 PM Mr. Seamount discussed the baseline of 200,000 barrels of oil produced per day that was represented on Page 32: "Alaska's Average Daily Oil and NGL Production Rate." He did not know about the significance of the number but believed that it was very low. He explained that at 200,000 barrels per day that Alaska's production level would be below that of North Dakota; however, the probability was not high given that Alaska had shale oil as well. He detailed that Page 33: "Alaska's Average Daily Oil and NGL Production Rate," represented a six percent production decline that AOGCC estimated would take place without any new development or production. At the six percent decline rate the state would see production of 200,000 barrels per day by 2030. Page 34 represented the same information but included a scenario in which a new Alpine sized field came online in 2018(shown in yellow). With the discovery of a new field the time it took to reach the level of 200,000 barrels per day would extend to 2033. A chart on Page 35 also showed the same information but included the hypothetical discovery of another Northstar in 2018 (shown in bright blue). The chart indicated that regular production would begin in 2024 and that a drop to 200,000 barrels per day would be delayed until 2035. Co-Chair Thomas wondered whether there was public information on the results of a drilling operation that had occurred in Yakutat years earlier. Mr. Seamount responded that the information was public, but due to the length of time that had passed the records may not be complete. Co-Chair Thomas discussed that the first oil produced in Alaska had been in a small village named Katalla that was later designated as a wilderness site by former President Roosevelt. He surmised that it should be possible to drill diagonally offshore to gain access to the oil that still bubbled out of the ground in the village. Mr. Seamount believed that with new technology, production from shale, and with over 20 basins in Alaska, there was a very bright future for oil and gas development in the state. Co-Chair Stoltze wondered whether ethanol was still popular in North Dakota and other areas. Mr. Seamount opined that North Dakota may have forgotten about ethanol given their current focus on shale oil. Representative Gara wondered how much shale oil would be included in the pipeline when it was produced in the future. Mr. Seamount believed that shale oil had a lot of potential and recommended that he speak with Paul Decker and Kevin Banks at the Division of Oil and Gas [Department of Natural Resources]. Representative Gara wondered how much it would cost to build a processing facility for a field that produced 30,000 barrels per day. He had heard others recommend the idea of providing a processing facility credit to monetize smaller fields. He thought that without a processing sharing agreement that a small oil field could not currently justify building its own processing facility. Mr. Seamount did not have an estimate. He noted that he would provide the committee with the name of one of the smaller oil companies that had built its own facility for a "little" field that produced 200 million barrels per day. 3:18:38 PM Vice-chair Fairclough wondered whether potential redundancies between state and federal regulations were reviewed. She believed that North Dakota had the advantage of drilling on private property versus federal or state land. Mr. Seamount replied that state regulations were slightly more stringent than federal and that they were fairly streamlined. Vice-chair Fairclough wondered whether there were any suggestions related to increasing federal government drilling compliance in the state. She had received several non-flattering photos of federal drilling operations in Alaska from AOGCC Commissioner Cathy Foerster. Mr. Seamount replied that AOGCC had spoken with Senators Mark Begich and Lisa Murkowski and with John Katz [staff to Governor Parnell] at the recent Energy Council meeting in Washington D.C. The local Department of Interior office in Anchorage was not able to ask for the money and had recently been notified of the AOGCC's intent to push for federal funding to take care of the problem wells that existed. He recommended that others encourage federal Interior Secretary Ken Salazar to provide more funds to fix the wells in an orderly way. He believed that that $200 million would be a good start. Representative Hawker wondered whether Mr. Seamount agreed with the Department of Revenue (DOR) production estimates that indicated 90 percent of all estimated future onshore North Slope production would come from Alaska's existing legacy fields. Mr. Seamount believed the forecast was very conservative and that the discovery of another large oil field was still possible. Representative Hawker wondered how probable it was that another onshore development existed. Mr. Seamount believed that another field existed, but it might not be discovered. Representative Hawker asked whether Mr. Seamount believed that the DOR estimate was incorrect and that another massive development of unfound oil would occur. Mr. Seamount opined that DOR had to be conservative and that it was not possible to bank on the discovery of another Prudhoe Bay in the near future. He believed that another field did exist but did not know that it would be found. Representative Hawker wondered about the viability of the projections by venture capital company Great Bear. The company had never drilled a well, but was making plans to create a program that would develop 200 wells per year. 3:25:40 PM Mr. Seamount replied that similar operations were currently underway in locations such as North Dakota and although the logistics in Alaska were more difficult, there was a possibility that it would be feasible in the state. Representative Hawker asked whether there were enough rigs available to develop 200 wells per year. Mr. Seamount answered that there were not and that the company would have to bring rigs in. Representative Hawker asked about the validity of previous testimony provided by AOGCC commissioners that a lack in facility access on the North Slope had never resulted in the failure to produce a barrel of oil. He agreed with earlier testimony regarding the importance of the Department of Interior, Bureau of Land Management well compliance situation. Mr. Seamount believed that testimony made by other AOGCC commissioners was accurate. He clarified that twelve years earlier AOGCC had assumed that access to North Slope exploration would have been too expensive and therefore, had not asked for access. Co-Chair Thomas wondered how to access shale oil. He had heard that large oil companies did not work with shale oil and that it would take smaller independent companies to access the large amount of shale oil that Alaska had to offer. Mr. Seamount replied that historically the smaller companies were the originators of exploration for things like coalbed methane and shale gas. He relayed that big companies tended to follow later. Co-Chair Thomas asked for a definition of shale oil. Mr. Seamount explained that conventional oil flowed easily and had high permeability, whereas shale oil was located in very tight rock similar to cement and it was necessary to drill and break the shale into fractures to allow the oil that was trapped in the mud layers to flow out. 3:29:48 PM Co-Chair Stoltze hoped that DOR Commissioner Butcher would help to fill in the gaps regarding the economic issues. He appreciated the depth of the presentation. Vice-chair Fairclough noted that DOR had provided two packets dated March 15, 2011, in response to committee member questions (copy on file). Co-Chair Stoltze thanked Mr. Seamount for his time and testimony. HB 110 was HEARD and HELD in committee for further consideration.