Legislature(2011 - 2012)BUTROVICH 205
03/28/2011 03:30 PM Senate RESOURCES
| Audio | Topic |
|---|---|
| Start | |
| SB85 | |
| HJR19 | |
| SCR9 | |
| Adjourn |
* first hearing in first committee of referral
+ teleconferenced
= bill was previously heard/scheduled
+ teleconferenced
= bill was previously heard/scheduled
| += | SB 85 | TELECONFERENCED | |
| *+ | SCR 9 | TELECONFERENCED | |
| + | HJR 19 | TELECONFERENCED | |
SB 85-TAX CREDIT FOR NEW OIL & GAS DEVELOPMENT
3:40:48 PM
CO-CHAIR WAGONER announced the consideration of SB 85, and
stated that he was maintaining his objection to version E.
3:41:25 PM
CATHY FORESTER, Commissioner, Alaska Oil and Gas Conservation
Commission (AOGCC), said she would respond to questions that
were submitted earlier. As to whether the AOGCC could accept the
current definition of "sustained production," she said the
answer was yes. As to how they feel about using the term "pool"
as the defining mechanism for a new discovery, she said they
don't feel at all good about that. She related that the AOGCC
asked the Interstate Oil and Gas Compact Commission to query
other states and the two that responded warned against using
"pool" because a development has to be well underway before it's
possible to ascertain whether there is more than one pool or
just one blanket pool. To incentivize more than just one
operator to explore and develop, the suggestion was to use some
other than means to define a new discovery, but nobody offered a
good alternative.
CO-CHAIR WAGONER asked if the AOGCC talked to anybody in North
Dakota.
MS. FORESTER replied the states that responded were South Dakota
and Indiana.
CO-CHAIR WAGONER reported that someone from North Dakota told
him their defining mechanism for a new discovery was two
sections of land.
MS. FORESTER responded that AOGCC supports using a reasonable
unit of land, and couldn't give a better answer than that until
there was some production and a fair number of wells.
SENATOR WIELECHOWSKI noted that Great Bear testified there were
multiple strata, and asked if she foresaw difficulties arising
if a lease had three different strata of oil formations.
MS. FORESTER explained that each stratum should be viewed as an
individual pool, because they wouldn't have connectivity or
communication.
CO-CHAIR WAGONER added that North Dakota addresses that
situation the same way. The only difference he found was that if
the oil is on two different levels within the two-section
boundary, there would be six wells instead of three.
MS. FORESTER reiterated that each stratum would be a pool.
SENATOR WIELECHOWSKI asked if one well could theoretically deal
with three pools.
MS. FORESTER answered yes, but an AOGCC permit to co-mingle the
pools would be necessary. Co-mingling would require proof that
the recovery wouldn't create waste; the production would have to
be as good as or better than if each pool was produced
separately.
SENATOR WIELECHOWSKI referenced page 3, lines 16-18, that talks
about qualified development expenditures, and asked if operating
expense (opex) might be included in that type of exploration
well.
MS. FORESTER answered it was the committee's prerogative to
define things in the bill, but in general operating costs are
the costs of producing. Operating costs typically begin once the
well starts to operate, and includes things like performing a
workover to fix broken wells, paying an operator to turn valves
and feeding people who work in the camp. The costs up to the
point that production begins would be allocated to exploration
and development.
CO-CHAIR PASKVAN asked hypothetically how many wells could be
drilled in 365 days at the Bakken Shale Oil Field.
MS. FORESTER replied she didn't have enough familiarity with
that operation to give an answer.
CO-CHAIR PASKVAN asked where he could get an answer.
MS. FORESTER offered to ask the question of Lynn Helms, her
counterpart at IOGCC.
3:49:23 PM
CO-CHAIR PASKVAN clarified that he wanted to know how many wells
each of 20 drill rigs could drill in one year's time. He
explained that that was where they would define the qualified
development expenditure as to whether or not production was
going on.
SENATOR WIELECHOWSKI asked if it presented a challenge to define
heavy oil in a pool.
MS. FORESTER replied there are two groups of heavy and viscous
oil. One is the West Sak/Schrader Bluff, which varies in oil
viscosity from very viscous and hard to produce to less viscous
and easier to produce. The less viscous oil is already being
developed. The other very viscous heavy oil is found in the Ugnu
and a very small area is currently under pilot to see if it can
be produced. A lot of both the West Sak/Schrader Bluff and the
Ugnu are not developable with current technology, and the
defining mechanism for those separate blanket reservoirs would
be on viscosity, not new pool. The low viscosity oil is already
under production, and the high viscosity hard-to-get oil should
be incentivized.
3:51:52 PM
SENATOR STEVENS joined the committee.
SENATOR WIELECHOWSKI asked if she foresaw any problems in
defining a pool of heavy oil.
MS. FORESTER replied the West Sak/Schrader Bluff and the Ugnu
are each individual big pools by the AOGCC's definition. And for
the sake of what the committee is trying to do, the standard
definition of "pool" doesn't work. She said it works in
conventional reservoirs, but not in unconventional reservoirs.
Viscous oil, shale oil and gas and probably coal bed methane are
different.
SENATOR WIELECHOWSKI asked her to describe "sustained
production."
MS. FORESTER replied the definition says production goes into a
sale and doesn't include testing, evaluation and pilots. The
Ugnu is called a pilot, but once it gets into a pipeline it's on
production.
SENATOR WIELECHOWSKI recapped that sustained production means
when it goes in a pipeline.
MS. FORESTER replied that's the definition in the statutes, and
the AOGCC has no difficulty understanding and applying that
definition.
3:55:25 PM
CO-CHAIR PASKVAN asked, in a shale oil field, how long it takes,
on average, from the start of drilling to first production.
MS. FORESTER replied she would ask Lynn Helms that question,
because neither she nor Mr. Seamount had experience with shale
oil or gas development.
CO-CHAIR WAGONER asked if on the first well it would be the well
itself, a pipeline, a treatment plant and an agreement to enter
the TAPS.
MS. FORESTER agreed.
SENATOR WIELECHOWSKI referenced an AOGCC chart and asked if she
could explain the variations in time for bringing on North Slope
oil fields. Kuparuk River Melt Water took a year and one-half to
bring to regular production, whereas Coleville River/Nanook took
six and one-half years and Nokia Chuck at Schrader Bluff took
six and three-fourth years.
MS. FORESTER replied one thing was proximity to the
infrastructure and another was having all the commercial
agreements in place. Any problems with either will slow
progress.
3:58:19 PM
SENATOR STEDMAN asked about the status of AOGCC's data gathering
task regarding how may well feet were drilled.
MS. FORESTER replied it was just about finished and Mr. Seamount
would deliver it the next time he was in Juneau.
SENATOR STEDMAN expressed a desire for the committee to hear the
presentation.
MS. FORESTER confirmed that AOGCC would deliver the presentation
at the committee's convenience.
CO-CHAIR WAGONER thanked Ms. Forester and asked if there were
questions for Mr. Banks.
3:59:53 PM
CO-CHAIR PASKVAN asked Mr. Banks how long it takes in a shale
oil field from the start of drilling to sustained production.
KEVIN BANKS, Director, Division of Oil and Gas, Department of
Natural Resources (DNR), replied a company doing work in North
Dakota said that the actual drilling can go fairly quickly, but
that the fracking process can cause a slowdown, because only a
certain number of frac crews are available. He opined that
Commissioner Forester should be able to provide a good average
estimate based on information from the folks in North Dakota.
He said he wanted to confirm agreement with Commissioner
Forester's comments on viscosity and heavy oil. It's difficult
to know what type of oil will be produced until exploration is
well underway, but how credit is awarded under SB 85 is
certainly the single most important variable in identifying
heavy oil in Alaska. Division staff has been challenged to think
about things like depth of drilling and productivity of a well
as the defining mechanism for heavy oil, but every one of those
things falls short of simply identifying heavy oil by its
viscosity.
SENATOR FRENCH asked how much it costs to drill an exploration
oil well on the North Slope.
MR. BANKS replied the numbers go all over the map. Wells that
were drilled in the southwestern part of the NPR-A cost in
excess of $70-80 million, whereas wells drilled at Pt. Thomson
were probably closer to $100 million. In Alaska, shale wells may
cost $20-25 million depending on the distance from the Haul
Road. He noted that information from an earlier presentation
indicated that the average cost for a well in North Dakota was
$6.1 million.
SENATOR FRENCH asked if those were exploration wells.
MR. BANKS answered no, those were shale wells. He estimated that
a North Slope exploration well that was close to the Haul Road
would cost about $25-30 million.
SENATOR FRENCH asked what would be considered a healthy level of
exploration wells drilled every year, and noted that since 2003
the number was about 10 wells per year.
MR. BANKS answered "the more the merrier."
SENATOR FRENCH questioned whether the focus should be on
encouraging more exploration wells or on the development costs
to bring a pool of oil to production.
MR. BANKS responded that Alaska is challenged with high costs
and remoteness, and the state has very few levers to pull that
would have an effect on cost.
SENATOR FRENCH asked what percent of the cost of an exploration
well is state subsidized through credits under ACES.
MR. BANKS replied it would depend on how far the well was from
existing infrastructure, but it could be the 40 percent direct
exploration credit plus the net operating losses. He offered to
follow up with a more exact answer.
SENATOR FRENCH expressed concern that the bill was unclear with
regard to what it would cost the state. He suggested that an
alternative would be for the state to annually appropriate a
sizeable amount of money to stimulate 10 exploration wells. Once
the money was gone that would be it until the next
appropriation.
4:08:22 PM
CO-CHAIR WAGONER asked how to define an exploratory shale well
as opposed to a production well, and the number of wells that
had been drilled through the shale structures.
MR. BANKS offered to follow up with an exact number, but it was
very few. To define a shale prospect for the purposes of SB 85,
he suggested using area rather than the normal definition of a
pool, because the credit may not be available to anyone else
once the once development and production started on the first
set of wells.
4:11:28 PM
]BRUCE TANGEMAN, Deputy Commissioner, Department of Revenue
(DOR), introduced himself.{
CO-CHAIR WAGONER asked if the committee had any questions for
Mr. Tangeman.
SENATOR FRENCH asked what percent of the cost of an exploration
well is state-subsidized through credits under ACES.
MR. TANGEMAN replied that for the exploration stage companies
would be eligible for up to a 40 percent exploration credit and
a 25 percent net operating loss credit for a total of 65
percent.
CO-CHAIR WAGONER observed that the Great Bear properties had the
advantage of proximity to the pipeline, which would make the
price relatively low for the first well to go into production.
SENATOR STEDMAN referenced Senator French's question and
clarified that the 65 percent would be contributed by the state
and federal government and the remaining 35 percent would come
from industry. He expressed a desire to hear from the
administration or the consultants with regard to where else in
the world that magnitude of credit was available.
CO-CHAIR WAGONER said his understanding of SB 85 was that it
addresses credit for production; it does not cover exploration.
MR. TANGEMAN said DOR's reading of the bill was that it
incentivizes development; the expenses that go into that stage
would be credited against a tax liability once production
starts.
SENATOR FRENCH asked if cost ever precluded development because
his sense was that once a pool of oil is found, there's money to
develop it. The hard part is finding the oil in the first place
and that's where the analysis has to take place.
4:16:27 PM
MR. TANGEMAN suggested he ask DNR that question.
SENATOR FRENCH said Armstrong or some other company that was
actively exploring could say they'd found oil but couldn't get
the money to build a production facility to get it to a
pipeline.
MR. TANGEMAN offered his understanding that FEX was in that
position; they found oil and eventually gave their leases back
to the state.
SENATOR FRENCH said he'd look into that.
SENATOR WIELECHOWSKI asked, under current law, if DOR or DNR
audited qualified capital expenditures.
MR. TANGEMAN replied DOR audits the qualified capital
expenditures.
SENATOR WIELECHOWSKI recalled that Gaffney Kline testified that
there was a worry about gold plating if credits were more than
40 percent. He asked if the administration had concerns about
giving 100 percent for capital expenditures and there being gold
plating.
MR. TANGEMAN replied DOR's concern with SB 85 was how it
interacts with the current tax credit structure. Initially the
bill said a company could take either the existing tax credit
structure or the one proposed under SB 85. Now the bill says the
current tax credit structure would stay in place so the company
would have to carry the costs during the development stage, but
they could be 100 percent reimbursed during the production
stage. DOR's concern with the current language is making sure
that qualified reimbursement is capped at 100 percent.
CO-CHAIR PASKVAN asked if he agreed with Mr. Bank's
interpretation of the current version of SB 85: that the first
shale oil well may be the only one that would qualify for the
credit.
MR. TANGEMAN replied he would defer to Director Banks on the
technical aspects, but that was one of the issues related to the
definition of a pool, and when the clock starts and stops in the
development stage.
CO-CHAIR WAGONER recognized that Representative Bob Herron had
joined the meeting.
CO-CHAIR WAGONER thanked the participants and announced he would
hold SB 85 in committee.
| Document Name | Date/Time | Subjects |
|---|---|---|
| CSHJR 19 sponsor statement.pdf |
SRES 3/28/2011 3:30:00 PM |
HJR 19 |
| HJR 19 - EDT and RES Changes (for Senate Resources).pdf |
SRES 3/28/2011 3:30:00 PM |
HJR 19 |
| HJR 19 - Leg Research Report (revises 3.11.11).pdf |
SRES 3/28/2011 3:30:00 PM |
HJR 19 |
| HJR 19 - Senate Resources Hearing Request.pdf |
SRES 3/28/2011 3:30:00 PM |
HJR 19 |
| HJR 19 - Zero Fiscal Note.pdf |
SRES 3/28/2011 3:30:00 PM |
HJR 19 |
| HJR019C.PDF |
SRES 3/28/2011 3:30:00 PM |
HJR 19 |
| SCR 9_Sponsor Statement.pdf |
SRES 3/28/2011 3:30:00 PM |
SCR 9 |
| SCR 9_Version A.pdf |
SRES 3/28/2011 3:30:00 PM |
SCR 9 |
| SCR 9_Supporting Documents_Juneau AC Letter.pdf |
SRES 3/28/2011 3:30:00 PM |
SCR 9 |
| SCR 9_Supporting Documents_Map.pdf |
SRES 3/28/2011 3:30:00 PM |
SCR 9 |
| SCR 9_Supporting Documents_McDowell Taku Report ExSumm.pdf |
SRES 3/28/2011 3:30:00 PM |
SCR 9 |
| SCR 9_Supporting Documents_News Articles.pdf |
SRES 3/28/2011 3:30:00 PM |
SCR 9 |