Legislature(1995 - 1996)
02/13/1996 10:11 AM O&G
* first hearing in first committee of referral
= bill was previously heard/scheduled
= bill was previously heard/scheduled
HB 394 - GAS & COAL METHANE LICENSES & LEASES CHAIRMAN ROKEBERG said it was not the intention of the Chair to move HB 394 today. Number 1900 REPRESENTATIVE OGAN, sponsor HB 394, said this bill spurs the development of coal bed methane gas. He said this methane gas is a high quality gas produced from high quality coal and is similar to North Slope gas. This gas has great potential, statewide, for coal bed methane development, primarily in the bush areas. Currently, the state of Alaska spends $20 million on power cost equalization in rural Alaska. He said coal bed methane gas could mitigate the state's expenditure for power cost equalization. REPRESENTATIVE OGAN said transportation of diesel fuel is hazardous and expensive. He mentioned the problem of leaking storage tanks in the bush communities, an issue which has not been addressed. Natural gas is a clean source of energy that could potentially occur in many rural regions. Locally occurring coal bed methane gas could supply fuel for the production of electricity, as well as heat, for rural community homes. Legislation such as HB 394 could help rural Alaska become energy independent. REPRESENTATIVE OGAN said the development of coal bed methane gas could stimulate the economy as it allows small, independent companies to enter the gas market. He said HB 394, or a similar version, makes environmental sense. REPRESENTATIVE OGAN said HB 394 is not the final version as discussions with the private sector and the Administration have unveiled problems with this version and it is undergoing revision based on those discussions. He said this is a first attempt and would welcome discussion and suggestions to help resolve the hurdles to the ultimate passage of HB 394. Number 2019 DAVID LAPPI, President, LAPPI Resource, Incorporated, was next to testify. He said LAPPI Resource is an independent oil and gas exploratory (indiscernible due to pens near microphone). He said his company is very interested in developing coal bed methane gas, especially in rural Alaska. He referred to Representative Ogan's testimony and reiterated the problems associated with diesel fuel in the bush. He said diesel fuel is expensive and can be messy to handle and store. He added that in certain areas, small gas developments can happen if aimed at local markets. MR. LAPPI said he is encouraged by the committees review of the laws relating to oil and gas development, specifically as they relate to coal bed methane gas development. He encouraged further work on HB 394 and said he would be in Juneau on Thursday and Friday to meet and assist with any questions. He referred to a letter, sent by fax, identifying four areas that need to be addressed in HB 394. Number 2107 REPRESENTATIVE BRICE asked if any coal bed gas was being used in the state. Number 2114 MR. LAPPI said no, there is no coal bed gas production in the state of Alaska. He said in the lower 48 states, there is a production of one trillion cubic feet per year increasing on a yearly basis. Most of the coal bed gas production is centered around the east coast in the Appalachian Basin. He then cited other areas of coal bed gas production including, the Black Warrior Basin in Alabama as well as the San Juan Basin in Colorado and New Mexico. He predicted that coal bed gas production will be one of the growth areas in the natural gas industry in the lower 48 states. MR. LAPPI said that in Alaska, with half of the United State's coal reserve, an opportunity is available to build on successful enterprise in the United States which would supply gas to potential markets. REPRESENTATIVE BRICE asked for a brief overview of the four areas where there might be marketable gas reserves, as mentioned in the letter. When it was clarified that the four areas were areas of HB 394 that needed adjustment, Representative Brice asked for information regarding geographical areas and asked if this would be the western coal reserve. Number 2190 MR. LAPPI said yes, and added that work done by the Division of Oil and Gas (DO&G), over the last few years, identified the Upper Cook Inlet Basin and western North Slope as having the greatest potential for large gas reserves. He mentioned it is unknown whether the interior basins have quantities of coal and coal bed methane gas. Number 2214 REPRESENTATIVE BRICE asked for information regarding the transportation of this gas. Number 2225 MR. LAPPI said it could be transported through a pipeline by liquefying or pressurizing the methane gas. He said the best method is to drill the well close to the local market. He cited the example of Fort Yukon, which has a vast resource of this gas 1200 feet below the streets of the town as identified by the drilling done in the summer of 1994. He said a question remains as to whether this gas is producible. He said this type of situation, where both gas and a market are available, is the most desirable. MR. LAPPI said areas, which do no have local gas reserves, could be served by small liquification plants with a up to 50 mile pipelines in bush conditions. It could also be served by compressed gas. Number 2279 CHAIRMAN ROKEBERG asked for a description of the drilling project currently being done in the Matunuska Valley and whether the drilling rigs had blow-up prevention. He asked what other safety materials and equipment would be used on those shallow gas rigs. Number 2306 MR. LAPPI said the pilot project was derived from a well the DO&G drilled in the Spring of 1994. He said the well had identified and quantified amounts of coal bed gas. He said the state determined that there were similar quantities of gas, as found in the lower 48 states. He said the state left it up to the private sector to commercialize that gas resource in the Upper Matanuska Valley. He said if this project is successful his company will attempt projects in rural areas which are currently served by high priced equalized fuel. MR. LAPPI said his company uses the same type of drilling rigs and similar types of equipment used by conventional oil and gas companies. He said the main difference is due to the shallow areas where the coal bed gas is located. Currently the well is at 2,100 feet, as compared to the depth of standard oil and gas wells. Due to this factor, the equipment can be down-sized considerably. He said obtaining this small equipment has been a problem, but one that they are working on to reduce the cost of coal bed gas extraction. He said large rigs with a 20,000 foot capacity can do the job, but it is an expensive, logistical problem to get them to the site. MR. LAPPI said his company would use the same types of blow-out prevention equipment used on conventional oil and gas equipment. Number 2400 REPRESENTATIVE OGAN asked what Alaska statutes and regulations are obstacles to extracting the coal bed gas in a cost effect manner. He then asked Mr. Lappi to describe the permit process which allowed his company to drill in Houston. Number 2416 MR. LAPPI said there are three things that prevent coal bed gas drilling in the state, they include access to the land at a reasonable price, cost of bonding because of the three bonds or insurance policies the state of Alaska requires, and the third is regulatory reform. TAPE 96-9, SIDE B Number 000 MR. LAPPI said the Houston site had five wells drilled in the late 1950s and early 1960s searching for oil deposits. The wells vary from a shallow well of 1,000 feet to a deeper well of 6,109 feet. He said the wells were abandoned because there was no pipeline or market for gas at that time. He said LAPPI Resources applied to the Alaska Oil and Gas Conservation Commission (O&GCC) in the summer of 1995, to establish a new gas field based on the presence of gas which was demonstrated by the previous drill hole. MR. LAPPI said the O&GCC then established the Houston gas field and set up a number of rules which govern the development of the Houston coal bed gas pool. He said this is the first time a set of rules was established pertaining to coal bed gas development. He said modifications in those rules will most likely be made, based on other coal bed gas developments. He said the new rules reduce the bonding requirements on (indiscernible due to overlapping voices) bonds from $100,000 per well to $10,000 per well because they are shallow wells in an acceptable area. MR. LAPPI said another change is the (indiscernible due to overlapping voices) requirements that the Department of Environmental Conservation (DEC) has a bond or insurance policy for $1 million for exploration wells drilled in the state. He said gas production wells are not required to bond under the DEC's rules. Therefore, a couple of bonds have been reduced because the site had an established gas pool in a developed area. Number 082 MR. LAPPI said the requirement of a $1 million bond, when developing a shallow gas resource in a rural area will probably be a disincentive. Number 138 REPRESENTATIVE OGAN asked how many independent gas companies there were in Alaska, similar to LAPPI Resource, Incorporated. Number 145 MR. LAPPI said he could probably count the number on one hand and probably have a finger or two left over. He added that it is a fledgling industry, but added that coal bed gas could lead to the development of a number of new companies. Number 177 REPRESENTATIVE OGAN asked how the number of companies compared to other parts of the country. Number 185 MR. LAPPI said in the lower 48 states, the Department of Energy estimated that there were about 8,000 oil and gas companies actively doing business. Number 195 JAMES HANSEN, Leasing/Evaluation, Division of Oil and Gas Department of Natural Resources, was next to testify on behalf of the Administration. He said the DO&G has been at the forefront of efforts to encourage coal and methane developments in the state. He referred to the well that was drilled in the Matanuska Valley and the Governor's CIP proposal for $400,000 (indiscernible due to paper ripping) 97. The proposal was that a three year study be done to further define coal bed methane development in the state. The Administration encourages any promotion of state resources. He said coal bed methane is a resource that should be studied and tapped for future development. MR. HANSEN said currently all the authority that is necessary to conduct (indiscernible due to paper rustling)...introducing a brand new program to specifically provide exploration of coal bed methane. This program would be one more program the DO&G would have to deal with in addition to its current oil and gas leasing (indiscernible due to paper shuffling.)" ...as we have to do by law each year." He stated concern about the concept of segregating the gas resources below 3,000 feet because it would lead to complications with leasing and lead to extensive litigation by the various companies wanting to extract their resources. He said there is a problem with combining shallow gas and the coal bed methane gas in HB 394. Cook (indiscernible due to microphone feedback) "a lot of the gas there is produced from conventional gas reserves probably with resource from the coals." So, it is a problem if you take a shallow gas and treat it differently than a deeper gas. He repeated that a study was being composed by the Department of Geological and Geophysical Surveys to study coal bed methane potential drilling. Number 368 MR. HANSEN stressed studying the issue before it is tapped. He said coal bed gas has potential in the Cook Inlet and western (indiscernible) Alaska, but it is an unknown potential in the interior basins. The state need to study and determine facts about the interior basin in Alaska before we press on. Another question needing to be resolved is who owns the coal bed methane in the state. Is it owned by the coal people or is it owned by the oil and gas people. In the lower 48 states, this question has been addressed, with each state is treating it differently. There is also a question of who would oversee the leasing program. He said the Administration knows what needs to be done. MR. HANSEN said if it is only a question of bonding issues, then legislation can handle this issue. He said the addition of a new program would answer that bonding issue. Number 424 REPRESENTATIVE GARY DAVIS asked if the coal bed gas methane was a subservice right of the state, and asked if there were provisions granted to the coal companies that gave them this right. Number 424 MR. HANSEN said the question arises when you have a coal company extracting coal who then discover gas. At that point, does this gas belong to the coal company or the gas company. He said this question has been addressed by various state supreme courts with different conclusions. He added that you can have leases for both gas and coal in the same area. Number 482 REPRESENTATIVE OGAN suggested that the Administrations's concerns stem from several discussions about having a coal bed methane on a coal type lease. Ken Boyd, the director of DO&G, said that 3,000 feet and above would be an acceptable number as there are no coal bed gas reserves in the Cook Inlet below that number. He said drilling above 3,000 feet would mitigate some of the environmental concerns. He applauded the Administration's efforts to study whether coal bed methane gas is cost effective. He suggested that government should provide incentives to the private sector to explore resources, rather than having the government do everything. He concluded that HB 394 attempts to make land available, make the leases simple, and make reasonable bonding requirements so that the private sector is able to go out and explore these areas. Number 567 CHAIRMAN ROKEBERG received clarification that there were coal seams below 3,000 feet in Alaska. He then asked if DO&G broke down the origins of coal bed methane gas and petroleum related gas in the Cook Inlet. Number 593 MARK MEYERS, Petroleum Engineer, Division of Oil and Gas, Department of Natural Resources, answered Chairman Rokeberg's question. He said all natural gas is basically the same as it is derived from hydrocarbons formed from many sources. Lake deposits and coal commonly produce natural gas. Rocks that were produced from marine and marine life (indiscernible due to overlapping voices) produce natural gas. In addition, the same source rocks that generate oil, generate natural gas in basins such as the North Slope. When the rock is subjected to heat and pressure, the oil is actually destroyed, and the natural gas remains. MR. MEYERS said, in Cook Inlet, the coal is the primary source of natural gas. On the North Slope there are tremendous reserves of natural gas in the fields at Prudhoe Bay, somewhere around the figure of 44 trillion cubic feet located in depths less than 3,000 feet. Some of the gas on the North Slope is frozen and some of it is pre-gas. He said this source is derived from the same oil source in the fields. He said natural gas is a resource located in the coal bed reservoir which serves as a trapping mechanism for certain types of gas reservoirs. He said in the lower 48 states it is common for gas to be produced along with coal in that coal bed. MR. MEYERS said there is nothing magical about 3,000 feet. He said that depth is a mechanical or safety issue because at an increased depth the pressures and the chance of encountering oil are more likely to be an issue. He said there is oil less than 3,000 feet and cited examples where this is the case. He said every area must be looked at geologically to determine those types of separations. MR. MEYERS concluded that from a technical perspective, segregating out coal bed gases is very problematic. Number 720 CHAIRMAN ROKEBERG asked if a majority of the gas was derived from coal in the Cook Inlet. Number 740 MR. MEYERS said that was a debated issue, but current opinion is that the gas in the Cook Inlet is derived from coal. CHAIRMAN ROKEBERG asked the estimated gas amount on the North Slope. MR. MEYERS said the estimates in the Kuparuk and Prudhoe Bay Units, for in-place, gas hydrates at shallow depths, to be 37 to 44 trillion cubic feet of gas. This translates into a recoverable 26 trillion cubic feet. Number 782 CHAIRMAN ROKEBERG asked what a gas hydrate was. MR. MEYERS said it is natural gas in a frozen state, some of it being pre-gas and some of it remaining frozen beneath the permafrost. He mentioned the North Slope reserves to point out that there were other natural gas sources besides coal bed methane. He mentioned a gas project in Barrow which will provide gas production from a well less than 2,000 feet deep. He said they have (indiscernible) exploring in that area for conventional gas. In areas such as the western North Slope, there is conventional gas, but it is not economic for the purposes of development. However, it might be economic to develop for a local, rural supply. MR. MEYERS said he was hesitant about supporting HB 394 because it segregates a specific type of gas. He said if you are a small rural community you want to produce all the gas that is available in that well and you don't want to be limited to 3,000 feet especially in the first well. Number 863 CHAIRMAN ROKEBERG asked for clarification on coal bed methane and shallow gas reservoirs. Number 882 MR. MEYERS said he would not differentiate gas found (indiscernible) versus gas found in more conventional sites such as sandstone reservoirs. He said they are all sources of gas. One of the advantages of coal bed methane is that there is less risk of not finding coal then there is finding conventional gas resources. He repeated that coal and coal bed gas are commonly found in the same basin. He said the rural areas need to produce all available gas for economic reasons. He said the 3,000 foot depth for bonding requirements may be an issue, but from a geological standpoint 3,000 feet is not a magical depth at all. He said HB 394 would segregate the mineral state, under leases at a certain depth, which is not a comfortable requirement in regards to the rural community or in areas where you have conventional oil and gas production. Number 975 CHAIRMAN ROKEBERG asked how long it would take a private company to enter state land and develop coal bed methane exploration under current law. Number 1076 MR. HANSEN said under the (indiscernible-low, muffled voice) licensing program would be the fastest way. An (indiscernible-low, muffled voice) "under SB 308 you would have to go through an extensive public comment period." He estimated that the whole process would take a year and a half to two years, from the time the public proposes to develop and area, to the actual licensing. He said this time frame is based on Alaskan law. Number 1146 CHAIRMAN ROKEBERG asked what the cost, to the Department of Natural Resources and related agencies, would be to put a best-interest finding together for that type of license. Number 1158 MR. HANSEN said it takes, a staff of four, six months to write a finding. After that it takes several months to incorporate public comment into a revised finding for a total time commitment of eight months. In addition to that time period, the Division of Land's needs time to do the title work. He said the cost of the proposed program, referring to the attached fiscal note, would be $386,000 for the first year and $352,000 each year after. He said using existing staff would create a problem scheduling existing oil and gas lease sales. He concluded that the current cost to produce a best-interest finding would be $100,000, more or less. Number 1158 TOM CHAPPLE, Program Manager, Industry Preparedness and Pipeline Program, Division of Spill Prevention and Response, Department of Environmental Conservation (DEC), was next to testify. He said his division, as well as the Administration, supports HB 394. He said HB 394 could provide long term environmental benefits if gas development and coal bed methane gas is used to generate space heating and rural electric needs of rural areas. Replacing diesel fuel with natural gas would (indiscernible due to paper shuffling.) MR. CHAPPLE commented on the intention of HB 394 to avoid unnecessary bonding requirement from the DEC. He said HB 394 accomplishes this by limiting wells to less than 3,000 feet and the requirement that the Oil and Gas Conservation Commission (O&GCC) certifies whether there is any likelihood of encountering oil. "We encourage those types of provisions because we would like to see a bill that did not require that level of bonding, if indeed the mission of HB 394 is encourage gas development. The DEC does not regulate gas production as long as we know that (indiscernible) because were not concerned about the spill impact. Overall we would like to see a way that type of objective could still be accomplished in the bill even if some of these concerns of DNR with the particular well depth is of concern." Number 1322 MR. CHAPPLE said the provision of HB 394, of concern to DEC, is if well drilling is taking place for gas and oil is encountered. The way in which HB 394 is drafted, if this scenario happens, the driller is allowed to extract the oil during the time period in which they are submitting an oil spill contingency plan. He said he assumed that this was written, so that the seasonal opportunity would not be lost. He added that there were a number of instances where approval for this contingency plan would not result in a delay. He said putting oil into production would involve a rethinking of the production plan by the exploration company as well as the need for additional geological information. MR. CHAPPLE said contingency plans for exploration oil wells are completed in 60 days or less. He said contingency plans in the North Slope can be done in as few as 30 days because they can be amended on existing plans. He concluded that the provisions in HB 394, allowing drilling to continue, is in conflict with most of the permit requirements (indiscernible due to overlapping voices) Title 46 of Alaska law. Most new activities must apply and obtain their permits before the activity is undertaken, but HB 394 allows the activity to be undertaken before the permits are acquired which could leave some environmental protections on hold or not fully met. Number 1504 CHAIRMAN ROKEBERG referred to the section of HB 394 which excludes the discharge or disposal of waste material or water from activities associated with coal bed methane exploration drilling and asked if the DEC had any problem with that exclusion. Number 1547 MR. CHAPPLE said there was no problem if it is a shallow well. He said a shallow well does not use mud that would be toxic to the environment. There would be a concern about waste disposal for deeper wells. Number 1577 CHAIRMAN ROKEBERG asked if 3,000 feet defined a shallow well. MR. CHAPPLE said he did not know specifically if 3,000 feet is the "magic number." Number 1607 CHAIRMAN ROKEBERG referred to a section of HB 394 which excludes coal bed methane gas from the bonding requirements and asked if it was acceptable to the DEC. Number 1644 MR. CHAPPLE said they found it acceptable because of the provision that the O&GCC to say that no oil is likely to be encountered. He said bonding provides a financial purse in case of an oil spill where the state needs to come in and clean up the spill. Number 1700 CHAIRMAN ROKEBERG said a concern was expressed that no geophysical information might be available in frontier areas. Number 1736 MR. MEYERS said the geology of the interior basin of Alaska is extremely complex and often in areas that are geologically disrupted. He said there is very little well control because there is little control over pressures. He explained that over-pressure can occur in conditions where you have normal pressure gradients, but for some reason certain zones have higher than normal pressures due to the geologic history. He said in the North Slope they have a lot of well control because of those conditions. He added that developing wells in a new areas creates different problems. He said you can take seismographic information and determine the layers of the rocks and possible faults, but doing this type of seismic data is very expensive and cost prohibitive if these types of wells are not commercially viable. This development would be prohibitive if the fuel was going to be used for local energy source. He said until several wells are done in one area you will not have sufficient data to make a determination, placing a heavy burden on the O&GCC. He said the O&GCC would probably need to speak to their level of documentation required in order for them to make that determination. He said, as a geologist, he would find it difficult if he didn't have any well control, especially in interior basins where there is not a lot of geological information. MR. MEYERS repeated that the 3,000 foot level is not a magical number. He said oil and gas producers should address their drilling programs and what mud is used where. He said a well drilled 4,000 to 5,000 feet, under different geological conditions, could use the same kind of mud as wells drilled at 3,000 feet. MR. MEYERS said it is very hard in law to regulate these factors when you are dealing with an unknown geologic quantity of reserves and unknown geology. He said to obtain data about these unknowns is very expensive. CHAIRMAN ROKEBERG said testimony on HB 394 was closed for today. He repeated that it takes over two years, if we know a resource is in place, for any company to go to an area and produce gas. The main purpose of HB 394 is assisting business and rural areas in developing their natural resources to provide energy near their communities. He said current state leasing hinders this development. Number 2056 REPRESENTATIVE OGAN said he wanted to associate himself with Chairman Rokeberg's comments. He said HB 394 benefits rural Alaskans. He would like to see the $20 million power cost equalization mitigated as well as addressing the diesel tank storage unit problem.