04/07/1995 03:43 PM Senate RES

              SB 114 HIGH COST MARGINAL OIL WELLS                             
                                                                              
 SENATOR LEMAN announced SB 114 to be up before the committee.                 
                                                                               
 RICHARD FAPPIANO, Engineer, OXY U.S.A., urged a committee                     
 substitute for SB 114 that would address a large potential resource           
 on the North Slope, known as the heavy oil sands.  He explained               
 that they are a subsidiary of Occidental Petroleum that has very              
 large interests.  They have an 8.8% interest in the Milne Point               
 Unit, the smallest unit on the North Slope which is about 12 miles            
 northwest of Prudhoe Bay.  Milne Point produces from the Kuparuk              
 formation and they have no financial interest in TAPS.                        
                                                                               
 This unit is only producing about 25,000 barrels a day and about              
 3,000 of it is from a pilot project called the Shrader Bluff or               
 Tract 14.                                                                     
                                                                               
 The heavy oil sands are a prize on the North Slope, he explained.             
 It's an accumulation of heavy oil in shallow sands that is                    
 estimated to be in excess of 26 million barrels of oil, actually              
 larger than Prudhoe Bay.  It has a huge potential and a number of             
 companies have tried to make an economical project out of producing           
 the heavy oil sands.  He said that full development at Milne Point            
 would involve spending half a billion dollars - mostly in Alaska.             
 Using current technology it is uneconomical to produce.  Something            
 must change for full development.  Through the use of incentives,             
 he thought they could economically develop this resource in the               
 Milne Point unit.  They propose a five year royalty holiday for new           
 wells drilled.  In the lower 48 mostly you see are holidays from              
 severance tax, he explained, because those states are not major               
 land owners like Alaska.  He said this incentive needs to be                  
 predictable and would be simple to administer and would bring money           
 to the state where it now receives none.  This would also give the            
 state an opportunity to pilot the "royalty holiday idea."                     
                                                                               
 Number 500                                                                    
                                                                               
 SENATOR TAYLOR commented why wouldn't we be better off with a huge            
 potential like this entering into almost a joint venture situation            
 as opposed to a royalty holiday where we allow full tax credit back           
 for 50% of drilling and exploration costs and then we share from              
 there on out.                                                                 
                                                                               
 Number 509                                                                    
                                                                               
 MR. FAPPIANO said that the only concern he had with that idea was             
 that there would need to be allowances for the risk associated with           
 that investment. They needed to be certain of the credit.  His                
 experience with other states is that they set a date of expiration            
 so the earlier a company starts, the more benefit it receives.                
                                                                               
 SENATOR TAYLOR said his concern was that there have been great                
 technological break throughs in the oil industry recently.  He said           
 he would like us to move into a true equity position and he agreed            
 that there needed to be some way of assessing risk.                           
                                                                               
 MR. FAPPIANO said they had been trying a lot of things for 10 years           
 now and they haven't made any money, yet.                                     
              SB 114 HIGH COST MARGINAL OIL WELLS                              
                                                                              
 SENATOR LEMAN asked Mr. Fineberg if he wanted to testify now or at            
 a later date when the committee formally took up the bill.                    
                                                                               
 MR. FINEBERG said there are several points he wanted to respond to,           
 but thought it would be more useful for the committee to have the             
 bill before them at the time.