Legislature(2023 - 2024)BUTROVICH 205
04/26/2024 03:30 PM Senate RESOURCES
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| Audio | Topic |
|---|---|
| Start | |
| Presentation: Assessment of Undiscovered Oil & Gas Resources | |
| SB194 | |
| Adjourn |
* first hearing in first committee of referral
+ teleconferenced
= bill was previously heard/scheduled
+ teleconferenced
= bill was previously heard/scheduled
| + | TELECONFERENCED | ||
| + | TELECONFERENCED | ||
| += | SB 194 | TELECONFERENCED | |
| += | SB 217 | TELECONFERENCED | |
SB 194-REDUCE ROYALTY ON COOK INLET OIL & GAS
4:21:18 PM
CO-CHAIR GIESSEL announced the consideration of SENATE BILL NO.
194 "An Act relating to temporarily reduced royalty on oil and
gas from pools without previous commercial sales in the Cook
Inlet sedimentary basin; and providing for an effective date."
4:22:22 PM
DEREK NOTTINGHAM, Director, Division of Oil and Gas (DOG),
Department of Natural Resources (DNR), Anchorage, Alaska, Co-
presented an overview of SB 194. He advanced to slide 2 and
highlighted goals of SB 194:
[Original punctuation provided.]
GOALS OF SB 194
• Railbelt utilities are facing gas supply
shortfalls and the quickest way to fill those
gaps is by producing more gas from Cook Inlet
the only solution in the immediate term
• SB 194 aims to increase available gas supply in
the Cook Inlet to meet expected shortfalls
• Bill will encourage investment in projects with
known, undeveloped gas accumulations by improving
producers' rate of return and payback time
4:23:56 PM
MR. NOTTINGHAM advanced to slide 3 and reviewed the purpose of
SB 194:
[Original punctuation provided.]
SB 194: WHAT THE BILL DOES
• Grants a reduced royalty of five percent for the
first ten years of production from pools in Cook
Inlet that have not previously been produced for
commercial sale
• Includes known resources that are not yet in
production and resources that could be discovered
through further exploration
• Applies to any state land in Cook Inlet, whether
or not in existing fields, units, or leases
• Does not reduce royalties for pools presently in
commercial production
4:24:32 PM
MR. NOTTINGHAM advanced to slide 4:
[Original punctuation provided.]
SB 194 SUMMARY
Section 1: Amends AS 38.05.180(f)(5). The original
statute granted a five-percent royalty rate for oil or
gas for the first ten years but was limited to six
Cook Inlet fields discovered in the 1960s and provided
a deadline of January 1, 2004, for start of production
(in AS 38.05.180(dd)).
"[T]he lessee of all or part of an oil or gas pool in
the Cook Inlet sedimentary basin that, subject to
determination by the commissioner, has not previously
produced for commercial sale oil or gas shall pay a
royalty of five percent on oil or gas produced for
sale from that pool for 10 years following the date on
which the production for commercial sale commences;"
This change modifies the program to:
• Include new production in Cook Inlet, regardless
of discovery date
• Remove limits on eligible volumes of oil or gas
during the ten-year period of reduced royalty
• Require the Department of Natural Resources (DNR)
commissioner to determine eligibility, rather
than being automatic
• Limit eligible production to ten years at the
reduced royalty rate
Section 2: Repeals AS 31.05.030(i) and AS
38.05.180(dd) to conform with the amended AS
38.05.180(f)(5).
Section 3: The legislation takes effect immediately
under AS 01.10.070(c)
4:26:10 PM
CO-CHAIR GIESSEL asked for confirmation that SB 194 does not
have a requirement for firm gas sales to any utilities or
consumers.
4:26:21 PM
MR. NOTTINGHAM confirmed that this is correct.
4:26:28 PM
MR. NOTTINGHAM advanced to slide 5 and explained qualifying
production:
[Original punctuation provided.]
SB 194 QUALIFYING PRODUCTION
Qualifying production:
"[H]as not previously produced for commercial sale oil
or gas" means production from wells or sidetracks
drilled after the bill effective date that would not
have otherwise been recovered from existing wells:
Examples of qualifying production:
• A newly-drilled well or sidetrack from the edge
of an existing or previously-producing
development
• A new well or sidetrack from an unproduced
accumulation of oil and gas
"[S]ubject to determination by the commissioner"
means:
• DNR considers if the source of oil and gas has
produced in the past, proximity to existing
wells, drainage area of existing wells, and
timeframe for recovery from existing wells
Determination process
• The lessee or lessees must jointly or separately
apply for reduction in royalty for one or more
wells
• Data will be supplied with the application, and
DNR may request further data and interpretations
• A well or accumulation may be determined to
receive reduced royalties before a well is
drilled
MR. NOTTINGHAM said that the final royalty provision is distinct
in that it provides the applicant with some certainty before an
investment is made.
4:28:53 PM
SENATOR DUNBAR referred to slide 3, which states that SB 194,
"Does not reduce royalties for pools presently in commercial
production." He shared his understanding that companies plan to
drill on a particular schedule. He asked how to ensure that the
royalty reduction does not apply to wells that were already set
to be drilled along this schedule. He asked if DNR has the data
for which wells are scheduled (and where). He said that the
intention is to stimulate new production - not subsidize
production that was already planned. He emphasized that some
wells are planned a decade into the future. He questioned how
the state would be able to determine whether a well for which a
subsidy has been requested was not already part of a five-year
drilling plan.
4:30:31 PM
MR. NOTTINGHAM replied that DOG believes it can review
individual applications to make this determination. In addition,
DNR can guide this process through regulations to ensure that
only the correct programs are subsidized. He said that DNR does
receive the data for future wells and there are currently wells
that would likely meet the threshold indicated. He expressed
willingness to work with the committee - and to work to create
regulations that would ensure the legislature's wishes are met.
4:31:38 PM
SENATOR DUNBAR clarified that his earlier comments it applied to
all companies. He reiterated that the intention is not to
subsidize wells that are already planned.
4:32:10 PM
JOHNNY MEZA, Commercial Manager, Division of Oil and Gas,
Department of Natural Resources (DNR), Anchorage, Alaska,
advanced to slide 6 and explained the status quo versus royalty
reduction:
[Original punctuation provided.]
STATUS QUO VS. ROYALTY REDUCTION
Status quo
• Future Proved Developed (PD) and Proved
Undeveloped (PUD) gas production will not be
enough to satisfy the demand by the Railbelt
consumers (approx. 70 Bcf/year)
• Although there are known, but undeveloped gas
resources, these have not been sanctioned by
operators under the current royalty rates
• Under the current royalty rates, expected total
revenues to the State from current and expected
development are $652 million for the period 2025
2035
Royalty reduction under SB 194
• If the royalty reduction leads to new investments
in gas projects, then future gas production will
likely meet Railbelt demand for at least the next
ten yearsleading to estimated total revenues to
the State of $788 million for the period 2025
2035
• If the royalty reduction is not successful in
adding significant new gas production (i.e., no
new gas in addition to the PD and PUD gas
forecast), then the State could forgo approx. $26
million over the period 20252035
4:34:33 PM
MR. MEZA advanced to slide 7 and spoke to two graphs that
demonstrate economic modeling:
[Original punctuation provided.]
SB 194: ECONOMIC MODELING
• We assume that a quarter of the gas wells to be
drilled in the future under the proved
undeveloped tranche (PUD) would qualify as "new
production" under SB 194.
• For the period FY 2025 FY 2035, the impact of
SB 194 on revenues to the State is -$26 million
if the known but undeveloped gas resources do not
come online.
• If they do, the impact becomes +$136 million.
• State revenues include royalty (State ownership),
production tax, and property tax (State
ownership).
MR. MEZA explained that the graph on the left depicts the impact
of SB 194 on Cook Inlet gas production. He briefly discussed the
data shown on the graph. He then turned his attention to the
graph on the right and explained that this depicts the
corresponding impact of SB 194 on state revenues. He briefly
discussed the data shown.
4:36:05 PM
SENATOR DUNBAR asked if the companies have confirmed that these
royalty increases would lead to the desired increase in gas
production. He said that he has yet to hear this from the
companies, despite having inquired on several occasions.
4:37:11 PM
JOHN CROWTHER, Deputy Commissioner, Department of Natural
Resources (DNR), Anchorage, Alaska, replied that DNR cannot
speak for the companies. He explained that DNR can speak to its
understanding of project economics combined with representations
that the companies have made publicly. He said that the
Cosmopolitan Unit (BlueCrest) has said that obtaining financing
is the biggest challenge. BlueCrest has also indicated that
royalty is a challenge, as well as access to lending and
capital. He stated that SB 194 does not offer direct lending to
companies; however, it does address return and payback schedules
to make projects more attractive to financiers. He clarified
that DNR believes SB 194 addresses the challenges indicated by
BlueCrest; however, DNR cannot say with certainty that BlueCrest
would sanction by a particular date. He asserted that SB 194
makes financing these projects a more mathematically and
economically attractive proposition for any lender. He said that
the Kitchen Lights Unit (Deutsche Oel & Gas) has indicated
similar challenges. Therefore, DNR believes that SB 194 would
induce activity in the both the Cosmopolitan Unit and the
Kitchen Lights Unit.
4:38:41 PM
SENATOR DUNBAR said that the presentation given by HEX Cook
Inlet, LLC (HEX) broke down costs and challenges and indicated
that the overriding royalty interests (ORRI) were two to three
times more than the royalties.
4:39:03 PM
SENATOR WIELECHOWSKI asked if Mr. Crowther would agree that an
oil (or gas) company that takes out a lease in the state of
Alaska has a legal obligation to produce oil (or gas) when they
can make a reasonable profit. He asked if this is a fair
statement of the law.
4:39:31 PM
MR. CROWTHER replied that he believes this is a general fair
statement of the law.
4:39:38 PM
SENATOR WIELECHOWSKI asked what DNR considers a reasonable rate
of return for Cook Inlet.
CO-CHAIR GEISSEL wondered if this is a question for Mr. Stickel.
SENATOR WIELECHOWSKI emphasized that DNR is responsible for
managing the leases and repeated the question.
4:40:05 PM
MR. CROWTHER deferred the question.
SENATOR WIELECHOWSKI said that a range would be fine.
4:40:27 PM
MR. MEZA replied that DNR models considered that the rates of
return must be commensurate with the risk of developing these
types of resources. He emphasized that there is tremendous
uncertainty in drilling these wells. There is also market
uncertainty that must be considered. He said that, in this case,
a reasonable rate of return would be 15-20 percent.
4:41:14 PM
SENATOR WIELECHOWSKI surmised that companies deciding to move
forward would consider the rate of return under the current
royalties and tax structure and compare this to what the rate of
return would be if royalties were reduced from 12.5 percent to 5
percent. He asked if this is a fair analysis of how the process
should be done.
4:41:38 PM
MR. MEZA replied that when DNR conducts an economic analysis in
an attempt to construct a fair representation of those
investment decisions, a forward-looking analysis is done. He
explained that previous profits generated from existing
production do not affect an investment decision that would occur
in the future. He added that this inherently contains a degree
of uncertainty.
4:42:22 PM
SENATOR WIELECHOWSKI shared that hypothetical fields can be
considered to determine these rates of return based on current
royalties and reduced royalties. He said that this would be
helpful and asked if this has been done. He added that it is
unclear what DNR has based the numbers on.
4:43:01 PM
MR. MEZA replied that DNR has done this analysis and offered to
provide this to the committee. He added that a future slide
addresses some of these hypothetical situations.
4:43:24 PM
SENATOR WIELECHOWSKI asked if it is fair to assume that the
rates of return are less than 15-20 percent - and SB 194 would
bring this number into the 15-20 percent range.
4:43:51 PM
MR. CROWTHER replied that, there are two more dynamics to
consider. He acknowledged that the internal rate of return is a
critical metric. He explained that the uncertainty dynamic and
payback time must also be considered. He directed attention to
the next slide, which touches on these dynamics all working in
context with the delivered cost of supply.
4:44:51 PM
SENATOR WIELECHOWSKI commented that the committee has seen this
analysis many times over the years. He said that they are public
stewards of state dollars and resources. He emphasized that he
is willing to cut royalties down to zero if this is necessary to
make it economically viable for the companies. However, he
emphasized the need for evidence showing that cutting royalties
is necessary for projects to be economically viable. He stated
that he is not interested in giving state dollars and resources
away for free to projects that do not economically need it. He
stated that he needs to see the numbers in order to support SB
194. He pointed out that companies are currently able to seek
royalty relief. He acknowledged that this does not apply to new
fields and wondered if the simplest solution would be to include
new fields in the existing royalty relief statute.
4:45:47 PM
MR. CROWTHER replied that he does not believe DNR would oppose
expanding its authority under the existing royalty relief
statute. He said that DNR believes the approach contained in SB
194 is direct, immediately applicable, and would be put into
action quickly. He emphasized that the timeframe is critical.
4:46:09 PM
CO-CHAIR BISHOP directed attention to the chart on the left side
of slide 7 ("Estimated Impact of SB 194 on Gas"). He shared his
interpretation that, if this was law, there would be a 6.5-year
window with production at 70bcf/year. He commented that this
would hopefully bridge to when liquified natural gas (LNG) is
available. He turned his attention to the chart on the right
("Estimated impact of SB 194 on State Revenue") and shared his
understanding that this indicates doing nothing, which would
result in a 3.5-year window and production under 70bcf/year. He
indicated that the latter would leave the state in a bind.
4:47:18 PM
MR. CROWTHER replied that this is generally correct. He
clarified that the graph on the right is about revenues (status
quo versus SB 194), while the slide on the left shows the status
quo volumes delivered next to additional volumes.
4:47:34 PM
CO-CHAIR BISHOP surmised that the graph on the left could be
extrapolated out to 3.5 years and the state would still be left
in a pinch.
MR. CROWTHER agreed.
4:47:53 PM
MR. MEZA advanced to slide 8 and discussed gas cost of supply:
[Original punctuation provided.]
GAS COST OF SUPPLY
Estimated impact of SB 194 on the cost of supply for
a hypothetical known but undeveloped gas resource
Scenario:
• Investment: $350 million
• Development time: 3 years
• Cumulative production: 250 bcf
• Operating expenditures: $0.5/mcf
• The cost of gas supply is the minimum price that
investors would require to fund this investment.
• This assumes investors require:
• a payback time of 4 years, and
• a minimum annual real return of 15 percent.
MR. MEZA directed attention to the graph on slide 8 illustrating
the cost of supply for a large gas project and the impact of
royalty reduction. He explained that this shows how much ORRI
payments represent for this hypothetical project. He pointed out
that the data also includes production tax, property tax,
royalty payments, operating expense, and capital expense. He
said that this slide attempts to show that, by reducing the
royalty, SB 194 would reduce the cost of supply. He reiterated
that this is a hypothetical example that could represent a large
gas development in Cook Inlet.
4:50:44 PM
SENATOR CLAMAN said that Hilcorp previously indicated that
royalty relief would not impact its production model going
forward. He opined that this does not make sense. He said that
he is trying to understand this in the context of the data DNR
has presented. He shared his understanding that if the cost of
production decreased, this would increase the likelihood of
production. He said that he has also heard concerns related to
the rigs required for drilling. He surmised that BlueCrest needs
an additional drilling rig and wondered whether this is what is
keeping BlueCrest from drilling. He asked how this issue - which
is not impacted by royalties, but instead is a question of
economic viability related to a lack of necessary equipment -
might be addressed.
4:52:53 PM
MR. NOTTINGHAM replied that DNR's understanding is that the
BlueCrest Cosmopolitan project will not require a new jack-up
rig. Instead, part of the investment would include a rig on the
platform that would allow BlueCrest to drill the wells
independent of the Cook Inlet rig situation. He clarified that
this decision has not yet been made. He agreed that there is a
limited number of drilling rigs in Cook Inlet. He surmised that
a company such as Hilcorp likely does not receive enough
incentive from SB 194; however, other companies (BlueCrest and
others) would likely be adequately incentivized. He shared his
understanding that Hilcorp has a mature asset base and surmised
that Hilcorp would not be impacted by a royalty incentive of
this kind. Conversely, smaller producers that do not have mature
assets may - with some incentive - be able to drill better wells
with higher pressure and bigger reserves.
4:54:53 PM
SENATOR DUNBAR commented that these companies are rational
actors and opined that companies would change their comments
based on whether SB 194 was likely to pass. He suggested that
DNR consider what companies said several years ago rather than
what they are saying now. He shared his interpretation of the
graph on slide 8 and noted that SB 194 is expected to bring
90bcf by 2029. He asked how to build against the risk that the
state does not reach 90bcf by 2029 - or, how can the state
ensure that 90bcf is reached by 2029 in spite of the expected
declines and falling revenue caused by royalty relief.
4:56:29 PM
MR. CROWTHER replied that this is the intent of SB 194. He said
that the royalty modifications would materially make these
projects more attractive, leading to sanction and increased
volume. He stated that the intent of SB 194 is to maximize the
recovery of Cook Inlet's resources for Alaskans' use and extend
the runway. He emphasized that this does not mean that a
comprehensive energy plan is not needed in the future. Rather,
SB 194 would make the most of the Cook Inlet resources for as
long as possible. He added that continued, active management by
DNR is necessary to ensure that obligations under plans of
development are followed through on. He indicated that DNR
anticipates a highly competitive environment and therefore
expects to see immediate actions by the producers responding. He
acknowledged that if this is not seen in the next year, the
state would not be on course to 90bcf by 2029. He asserted that
action on SB 194 during the current legislative session is the
way to avoid this scenario.
4:58:00 PM
SENATOR KAUFMAN commented that oil carries more dollar value;
however, gas is the more strategic concern. He asked if there is
any way to bias SB 194 toward gas production and wondered if
there is anything being left on the table by not focusing more
on gas production.
4:58:52 PM
MR. CROWTHER replied that the oil production in Cook Inlet is
critical to the commodity market and the needs of Alaskans. He
agreed that the focus of SB 194 is to boost gas security and
energy security through the natural gas availability. He pointed
out that HB 223 has a lower royalty rate for oil - and lowers
the rate for gas further. He opined that it makes sense to
incentivize all hydrocarbon subsurface development and
exploration. He referred to several gas-only development
possibilities and expressed a willingness to work with the
committee on this. He noted that this would further strengthen
access to gas development.
4:59:55 PM
SENATOR WIELECHOWSKI asked if the incremental gas shown in the
grey bars on slide 7 is predominately from the Kitchen Lights
and Cosmopolitan Units.
5:00:09 PM
MR. MEZA replied yes. He explained that DNR generated these
analyses using public information from Cosmopolitan and Kitchen
Lights Units.
CO-CHAIR GIESSEL requested additional financial data.
5:00:50 PM
CO-CHAIR GIESSEL held SB 194 in committee.
| Document Name | Date/Time | Subjects |
|---|---|---|
| Cook Inlet Oil and Gas USGS SRES Presentation 4.26.24.pdf |
SRES 4/26/2024 3:30:00 PM |
|
| SB 194 DNR SRES Presentation 4.26.24.pdf |
SRES 4/26/2024 3:30:00 PM |
SB 194 |
| SB 217 Amendment #S.3.pdf |
SRES 4/26/2024 3:30:00 PM |
SB 217 |
| SB 217 Amendment #S.5.pdf |
SRES 4/26/2024 3:30:00 PM |
SB 217 |
| SB 217 Amendment #S.7.pdf |
SRES 4/26/2024 3:30:00 PM |
SB 217 |
| SB 217 Amendment #S.9.pdf |
SRES 4/26/2024 3:30:00 PM |
SB 217 |
| SB 217 Amendment #S.11.pdf |
SRES 4/26/2024 3:30:00 PM |
SB 217 |
| SB 217 Amendment #S.12.pdf |
SRES 4/26/2024 3:30:00 PM |
SB 217 |
| SB 217 Amendment #S.13.pdf |
SRES 4/26/2024 3:30:00 PM |
SB 217 |
| SB 217 Amendment #S.15.pdf |
SRES 4/26/2024 3:30:00 PM |
SB 217 |
| SB 217 Amendment #S.16.pdf |
SRES 4/26/2024 3:30:00 PM |
SB 217 |
| SB 217 Amendment #S.17.pdf |
SRES 4/26/2024 3:30:00 PM |
SB 217 |
| SB 217 Amendment #S.18.pdf |
SRES 4/26/2024 3:30:00 PM |
SB 217 |
| SB 217 Amendment #S.14.pdf |
SRES 4/26/2024 3:30:00 PM |
SB 217 |