Legislature(2013 - 2014)BARNES 124
01/30/2013 08:00 AM House ENERGY
| Audio | Topic |
|---|---|
| Start | |
| Overviews (s): "who's Keeping the Lights & Heat On?" Problems & Solutions: Presentation by the Department of Natural Resources | |
| Adjourn |
* first hearing in first committee of referral
+ teleconferenced
= bill was previously heard/scheduled
+ teleconferenced
= bill was previously heard/scheduled
ALASKA STATE LEGISLATURE
HOUSE SPECIAL COMMITTEE ON ENERGY
January 30, 2013
8:05 a.m.
MEMBERS PRESENT
Representative Doug Isaacson, Co-Chair
Representative Charisse Millett, Co-Chair
Representative Neal Foster
Representative Pete Higgins
Representative Shelley Hughes
Representative Benjamin Nageak
Representative Andrew Josephson
MEMBERS ABSENT
All members present
OTHER LEGISLATORS PRESENT
Representative Mike Hawker
Representative Mike Chenault
COMMITTEE CALENDAR
OVERVIEWS (S): "WHO'S KEEPING THE LIGHTS & HEAT ON?" PROBLEMS &
SOLUTIONS: PRESENTATION BY THE DEPARTMENT OF NATURAL RESOURCES
- HEARD
PREVIOUS COMMITTEE ACTION
No previous action to record
WITNESS REGISTER
DAN SULLIVAN, Mayor
Municipality of Anchorage
Anchorage, Alaska
POSITION STATEMENT: Provided opening remarks prior to the
presentation by the Department of Natural Resources (DNR).
DAN SULLIVAN, Commissioner
Department of Natural Resources (DNR)
Anchorage, Alaska
POSITION STATEMENT: Provided a PowerPoint presentation
entitled, "Cook Inlet Challenges & Opportunities," and answered
questions.
PAUL DECKER, Petroleum Geologist
Central Office
Division of Oil & Gas (DOG)
Department of Natural Resources (DNR)
Anchorage, Alaska
POSITION STATEMENT: Participated in the PowerPoint presentation
entitled, "Cook Inlet Challenges & Opportunities," and answered
questions.
WILLIAM BARRON, Director
Central Office
Division of Oil & Gas (DOG)
Department of Natural Resources (DNR)
Anchorage, Alaska
POSITION STATEMENT: Answered questions during the PowerPoint
presentation entitled, "Cook Inlet Challenges and
Opportunities".
ACTION NARRATIVE
8:05:10 AM
CO-CHAIR CHARISSE MILLETT called the House Special Committee on
Energy meeting to order at 8:05 a.m. Representatives Josephson,
Higgins, Hughes, Nageak, Isaacson, and Millett were present at
the call to order. Representative Foster arrived as the meeting
was in progress. Representatives Hawker and Chenault were also
present.
8:05:47 AM
^OVERVIEWS (S): "WHO'S KEEPING THE LIGHTS & HEAT ON?" PROBLEMS
& SOLUTIONS: PRESENTATION BY THE DEPARTMENT OF NATURAL
RESOURCES
OVERVIEWS (S): "WHO'S KEEPING THE LIGHTS & HEAT ON?" PROBLEMS &
SOLUTIONS: PRESENTATION BY THE DEPARTMENT OF NATURAL RESOURCES
8:06:02 AM
CO-CHAIR MILLETT announced that the only order of business would
be a discussion of Cook Inlet gas supply, beginning with remarks
by Dan Sullivan, mayor of Anchorage.
8:06:08 AM
DAN SULLIVAN, Mayor, Municipality of Anchorage, stated his
appreciation for the legislature's continuing efforts to meet
the looming shortage of a supply of gas in Cook Inlet. It is
clear that by 2014 or earlier, there will not be enough gas
under contract to satisfy the needs of the local utilities,
although many entities are searching for solutions to the
situation.
8:06:38 AM
DAN SULLIVAN, Commissioner, Department of Natural Resources
(DNR), stated that Cook Inlet gas supply is a "hugely" important
issue and his intent is to provide DNR's and the
administration's perspectives to the committee. There have been
a lot of accurate and less accurate reports in the press
recently on this issue; the goal today is to present information
to the committee and dispel the major differences of opinion.
Commissioner Sullivan acknowledged that there are different
perspectives from the utilities and others, but opined there are
not major disagreements.
8:09:57 AM
CO-CHAIR MILLETT said her constituents are asking whether there
are any producers who are willing to sign a gas contract with
the utilities at this time.
COMMISSIONER SULLIVAN responded that DNR shares the concern
about "gas under contract" and does not believe that everything
is fine. The presentation will show the actions DNR has taken -
directly and tangentially - related to its responsibilities
assigned by the legislature. He stressed DNR wants to talk
about terminology and is aggressively seeking to bring more
companies up to drill more wells and invest, which is the way to
address the problem in the immediate term. However, he agreed,
"the issue of timing is there."
8:12:44 AM
CO-CHAIR MILLET cautioned that there are mixed messages from the
utilities' point of view and from DNR. She acknowledged that
DNR sees a lot of activity in the inlet, but questioned whether
her constituents should feel comfortable in thinking that
"'tomorrow we'll have a gas contract' if that's not the truth."
COMMISSIONER SULLIVAN pointed out that gas contracts are an
issue in the private sector between the utilities and the
producers; however, DNR is encouraging more investment and
production so that gas contracts can happen. Although DNR
cannot guarantee contracts are signed, its focus is to set up a
favorable situation. He agreed that challenges exist and that
the issue of gas not under contract should not be equated with
the issue as to whether the basin is depleted. The presence of
more resource will encourage security, more production, and more
drilling, and DNR will continue to work with other entities to
go forward.
8:14:57 AM
REPRESENTATIVE MIKE HAWKER observed that the presentation today
is not new and there is no disagreement with DNR that the
prospects of the inlet are strong. On the other hand, judging
by a previous study by Petrotechnical Resources Alaska (PRA),
the required level of drilling needed to meet the needs of the
inlet is not adequate. He expressed his concern that DNR
continues to say that there is plenty of gas and attracting more
drilling is the answer; however, the utilities are responsible
for keeping on the heat and lights, and their concern is that
the present level of drilling is not likely to provide
sufficient gas within the necessary timeframe. Representative
Hawker said this is the area of different perspectives and he
asked whether the utilities should be looking at alternatives to
drilling to meet the needs of Cook Inlet.
8:17:31 AM
COMMISSIONER SULLIVAN opined one of the messages today is that
everybody should be taking prudent measures to ensure energy
security.
CO-CHAIR MILLETT warned that in the meantime the utilities will
be importing liquefied natural gas (LNG) which would not be good
for the basin or the state. In the short term, drilling will
not equate to production and gas contracts.
8:18:52 AM
COMMISSIONER SULLIVAN advised this presentation and his
experience confirm that more information and more experienced
people working on a complicated issue is best. He restated that
the reports that DNR is unconcerned are wrong; in fact, DNR is
presenting the path to addressing a very significant challenge,
- with immediate-term actions and longer-term implications -
including importing gas. In addition, this is a problem many
years in the making, and his presentation will show some of the
significant actions the state has taken. In response to the
whole suite of issues that need to be addressed, one action DNR
has taken is bringing in the utilities and the producers to
discuss how to get more gas from the inlet and into storage.
The department can play a problem-solving role and seeks to make
the committee aware of its actions. Commissioner Sullivan
stressed it is critical that all of the players involved work
together, and said the utilities would agree that the best way
to resolve the problem in the immediate term is to get more gas
from the inlet. Regarding long-term solutions for the energy
security issues in Southcentral or the Interior, DNR is 100
percent focused on a gas line from the North Slope. Although it
was reported that DNR does not support a gas line, he clarified
that was not the case.
8:24:53 AM
REPRESENTATIVE NAGEAK said, "I wish we had this ... discussion
for our people in rural Alaska. This [problem of] access to
gas, and the attention that it's getting from the state, because
we have the same problems in our parts of the world where there
is no attention given to the high price that they have to deal
with in all of the villages." He expressed his hope that during
the course of this session the legislature can talk about the
cost of energy for all of the state's citizens.
CO-CHAIR MILLETT agreed that that is the intention of the
committee.
COMMISSIONER SULLIVAN recalled that when the governor talked
about the immediate energy plan of trucking LNG to the Interior
he included the potential to bring energy to rural areas, and
when the commissioner was attorney general the high cost of
energy was the number one issue there. As an aside, he said DNR
recently issued a report locating where resources such as gas,
coal, and geothermal exist in rural communities, all of which
are possible solutions to the energy problem in parts of rural
Alaska.
8:28:14 AM
CO-CHAIR ISAACSON observed that trucking LNG is not going to be
economical for Cook Inlet and construction of the natural gas
pipeline is a decade away. As the gas contracts are going to
expire in 2014 or 2015, he asked whether the state has taken any
action to accelerate production out of Cook Inlet to "fill the
gap between trucking of gas or a gas pipeline construction."
COMMISSIONER SULLIVAN responded that DNR will present a number
of things and ideas to try to make the gap as small as possible
and to push out the point where the gas supply is insufficient.
CO-CHAIR ISAACSON asked, "Can actions by the department result
in gas under contract by 2015 in Cook Inlet."
COMMISSIONER SULLIVAN reiterated that gas under contract is a
private sector transaction between utilities and producers;
hopefully, the presentation will show that aggressive actions by
DNR have increased the number of investors and activity. Much
of this activity is also due to legislative action. He relayed
that what is seen at this time is increased investment,
exploration, and drill rigs, but not increased production yet.
Tax and investment incentives through legislative action have
helped in this regard.
8:33:22 AM
CO-CHAIR MILLETT asked whether DNR views what is happening in
Southcentral as an imminent crisis, or does the department
believe gas contracts will be secured within the next six
months.
COMMISSIONER SULLIVAN said he did not know, but guaranteed the
committee DNR will continue to do its part to help. The
department sees the lack of gas under contract as a serious
problem. He raised the importance of terminology and urged the
committee to hear the testimony from the Division of Oil & Gas.
CO-CHAIR MILLETT restated her question.
COMMISSIONER SULLIVAN answered, "I would say we see ... the
immediate concern ... of a lack of gas under contract as a
significant problem that we're trying to address."
REPRESENTATIVE HAWKER added that failure is not an option.
COMMISSIONER SULLIVAN agreed.
8:35:29 AM
REPRESENTATIVE HIGGINS observed this problem has been known by
DNR for 10 years. Everyone is aware of the shortfall, and he
questioned what has been done in the last 10 years to alleviate
the problem.
COMMISSIONER SULLIVAN explained what has been done in the past
two years: historical records have been searched to see what
actions by the state, regulators, and others have been helpful,
for example, actions by the Regulatory Commission of Alaska
(RCA). In addition, the presentation will update DNR's recent
activities such as bringing together all of the parties active
in the basin.
8:38:57 AM
REPRESENTATIVE HIGGINS referred to one of the conclusions to
DNR's presentation that read:
Long term energy security is also clearly achievable
REPRESENTATIVE HIGGINS opined gas is not a long-term solution
because eventually it will run out. He urged the committee to
look "outside the box" at wind and hydroelectric (hydro) for
long-term solutions.
COMMISSIONER SULLIVAN explained the reference is to long-term
energy security being clearly achievable with regard to Alaska
utilizing all of its enormous available resources statewide.
8:40:45 AM
REPRESENTATIVE HAWKER called attention to another conclusion to
the presentation, which was that importing gas could stifle the
"Cook Inlet renaissance." He asked for the difference between
importing gas from the south or from the north through a
pipeline, and whether DNR would take action to prevent the
importation of gas if the utilities choose to do so.
8:42:02 AM
COMMISSIONER SULLIVAN advised that this is an issue DNR needs to
"look at hard," noting that the governor has said imports are a
last resort. He pointed out there is a difference between
short-term imports to address a shortage, and long-term large
volume imports - the latter of which raises DNR's broader
concern. Although the governor did not say no, this issue must
be put before the state's policy-makers. He cautioned that
under another scenario, long-term large volume imports could
undermine the need for a gas pipeline. Commissioner Sullivan
reiterated the administration's 100 percent support for gas from
the North Slope for all Alaskans, stressing the positive
progress that has been made in the past year by both the Alaska
Pipeline Project (APP) and the Alaska Gasline Development
Corporation (AGDC). In fact, the two top issues DNR is
concerned about regarding the state's energy needs are the
decline in throughput and gas from the North Slope. In the
immediate term, DNR also seeks more production in Cook Inlet.
He restated his purpose to make the committee aware of the
possible implications of the long-term large volume import
option. In response to Representative Hawker's second question,
he said DNR wants energy security and this is an open-ended
question. It is important that all of the affected entities
work together and make prudent decisions for energy security in
the near-term. Commissioner Sullivan said, "So, I think it's
just premature to ... answer that one way or the other, but I
don't see us taking any action that would not be in the interest
of making sure we have energy security."
8:47:17 AM
CO-CHAIR MILLETT relayed that her constituents want to know
whether it is prudent to have both APP and AGDC projects going
forward. She opined there is a fundamental disconnect between
the administration and the legislature's desire for a gas
pipeline. Focusing on one project will prevent the duplication
of work and additional expense. She expressed her belief that
there is a continuing struggle between what the administration
and the public want. Although political power has been invested
in the Alaska Gasline Inducement Act (AGIA), it is not a
solution for DNR to continue to maintain that the two projects
are complementary.
8:48:57 AM
COMMISSIONER SULLIVAN acknowledged that the state is on two
parallel paths regarding the gas pipeline: AGDC and APP.
However, important progress has been made and in fact,
accelerating the gas pipeline is "a huge, huge part of our
work." Last year the governor set benchmarks for APP which have
been met. The parallel paths of the two projects have not been
duplicative because AGDC work has been focused on regulatory
issues, environmental impact statements (EIS), and rights of
way. On the other hand, the APP project is focused on upstream
issues, coordination between leaseholders, producers, and
engineering work. He acknowledged that the work needs to be
accelerated to meet benchmarks set for all four companies, and a
detailed report on the project is due within a month.
Commissioner Sullivan turned attention to other successful
actions by DNR during the last year, and described a very
aggressive campaign through Asia - to market the state's gas
and highlight the progress of both gas line projects - that has
now made Alaska part of the conversation in Asia as a source of
gas. For example, a team from the Korea Gas Corporation, the
largest buyer of gas in the world, came to Juneau to discuss
LNG. He expressed his interest in briefing the committee on
these developments.
8:54:49 AM
REPRESENTATIVE HUGHES appreciated the efforts of the department
over the last two years. Looking back over the last ten years,
she asked whether DNR is missing the tools necessary to prevent
the current mode of crisis management - not just regarding the
situation in Cook Inlet - but to develop a statewide long-term
energy plan "with teeth in it."
8:56:33 AM
COMMISSIONER SULLIVAN gave the example of the way RCA and
Regulatory Affairs & Public Advocacy (RAPA), Civil Division
(Anchorage), Department of Law (DOL), previously looked at
energy issues in the inlet. Both agencies focused almost solely
on price without considering long-term energy security. This is
an area where the administration convinced regulators that the
public interest is a combination of price and security of
supply. At the same time, the legislature emphasized to RCA the
duality of purpose, but he was unsure of whether that helped
with the energy supply issue. He said, "We've been meeting with
every player in the inlet for months, asking the questions that
you are asking."
8:58:54 AM
REPRESENTATIVE CHENAULT agreed that energy is a complicated
issue in the inlet, reminding the committee not to forget about
the abundance of coal. He recalled there were a number of
legislators raising red flags about the gas distribution system
in Cook Inlet over the years. He confirmed that there would not
be interest in Alaska from the Japanese, Koreans, and Chinese if
not for the progress of the gas pipeline projects. Discussion
of the gas pipeline goes back 40 years during many meetings.
Representative Chenault gave Representative Hawker credit for
the successful development of Cook Inlet Natural Gas Storage
Alaska (CINGSA), saying it was an example of recognizing,
addressing, and solving a problem. On the other hand, the Healy
Clean Coal Plant (HCCP) is a 50-megawatt power system that is
not functioning, although every watt of power that moves up and
down the line saves a molecule of gas that can be used in Cook
Inlet and along the Railbelt. He expressed concern that his
constituents do not have a feeling of security because the
choice of heating for Cook Inlet does not have an alternative
source to fall back on. He opined no one is considering the
long-term importation of LNG; in fact, once LNG is imported "the
problem will get fixed." However, a winter failure of the gas
distribution system in Cook Inlet will cause billions of dollars
in damages.
9:03:58 AM
COMMISSIONER SULLIVAN stated his personal interest in the gas
system in Anchorage. The presentation today lays out many other
issues to consider about this situation, a variety of ideas for
solutions, and actions taken by DNR. He spoke of DNR's part in
getting CINGSA online and in time. Regarding coal, he said the
situation with HCCP is "outrageous," and restated the urgency to
commercialize natural gas from the North Slope. He reiterated
that DNR is focused on Cook Inlet and is working in the state's
interest on this and other issues; the ultimate message is the
importance of all working together and that is why DNA
questioned RCA on its role. Commissioner Sullivan urged the
committee to hear the information from the knowledgeable
representatives of DNR.
9:09:05 AM
CO-CHAIR ISAACSON appreciated DNR's desire to be specific on
terms, but said he sees "a disconnect" between its desire and
its vision. He observed that hard work is not always enough to
ensure success and offered to provide the department any tools
that it needs. Co-Chair Isaacson recalled the Alaska Gasline
Port Authority (AGPA) was established by the voters over a
decade ago and has urged for a business relationship with Asia
ever since. He referred to slide 28 of the PowerPoint
presentation that read, "Redouble efforts to continue increased
investment," and asked for the meaning of redouble, and details
on DNR's challenge to "continue to look for ways to
incentivize." He also asked for the real action steps with
actual customers that DNR has taken leading to real dollars,
drill timetables, and production goals to get gas under
contract. The public and the legislature seek a crystal-clear
decisive action used to "defining our timetables and of
productions and whether or not we will even have to consider a
scenario of anything other than a spot purchase of natural gas."
Furthermore, information is needed about other alternatives in
the mix - such as fuel oil and coal - that can circumvent any
shortfall of Cook Inlet gas under contract.
9:13:04 AM
COMMISSIONER SULLIVAN answered that DNR - now, more than in the
past - is very aggressive in seeking potential investors,
companies, and gas customers like KOGAS and Mitsui for the "big
line" or customers for Cook Inlet. The department and U.S.
Geological Survey (USGS) do not believe Cook Inlet is a depleted
basin. From the prospective of DNR, the solution to the problem
of gas under contract in the Cook Inlet basin is to use the
tools from the legislature and "make the case to potential
companies, particularly companies that have a strong track
record of turning around declining basins, and bring capital and
expertise, and that's exactly what we've been doing." These
efforts have been instrumental in bringing Apache Alaska
Corporation and Hilcorp Energy Company to invest in Cook Inlet
and bring its resource to market. In addition, there is a
resurgent interest in lease sales.
9:16:16 AM
REPRESENTATIVE HIGGINS called attention to slide 6 of the
PowerPoint presentation that read:
43 years of exporting LNG to Japan, (approximately 2.5
trillion cubic feet); have never missed a shipment
REPRESENTATIVE HIGGINS warned that to fill the shortfall of gas
for the people of Alaska, eventually shipments will be missed.
He asked whether the bureaucracy of DNR is holding up
production, and if so, there needs to be a change, because DNR
says there is plenty of gas and exploration, but there is no
production.
9:17:21 AM
COMMISSIONER SULLIVAN stated that DNR has done the opposite of
what has been implied and has expended great effort to get more
investment, production, and rigs in Cook Inlet. He acknowledged
that DNR is a big, bureaucratic organization; however, it has
been focused for two years on making its permitting system more
timely, efficient, and certain. These are improvements that
will require legislative changes. He guaranteed DNR's focus on
the North Slope and Cook Inlet; for example, DNR is using
leverage provided by statute against companies that want to
apply for units by requiring certain actions to get a unit.
This is the reason for the surge in activity referred to as the
Cook Inlet renaissance. Commissioner Sullivan credited
legislators for incentives that have attracted new interest, and
for creating the gas storage facility. As an aside, he
described DNR's part in expediting the regulatory approval and
permitting processes for CINGSA.
9:22:07 AM
REPRESENTATIVE JOSEPHSON returned to the question regarding the
lack of production in Cook Inlet and asked if the economics, the
price, or difficulties in drilling were specific factors. He
said he was ready to see DNR's presentation.
COMMISSIONER SULLIVAN called attention to slide 4 and stressed
that there is a transition in Cook Inlet from larger producers,
such as Chevron and Marathon, to mid-size and smaller companies,
which have different expertise. This is a positive trend, but
this type of transition can slow activity and increase
uncertainty. Furthermore, during the transition between Hilcorp
and Marathon, the Federal Trade Commission (FTC) intervened,
which affected progress for months. He advised that the big
companies are "kind of done with Cook Inlet" thus getting
investment from other companies that are motivated to explore is
important. Another common theme to remember is that many
different stakeholders must be brought together, and having the
legislature involved is critical. Slide 5 indicated the most
critical goal is energy security for Alaskans - keeping lights
and power on - along with redundancies, different ideas for
solutions, and jobs; in fact, production and investment in Cook
Inlet is creating many good jobs. Another key issue to consider
is that decisions made now can impact longer-term energy
security goals, which are to accelerate the construction of the
gas pipeline, jobs, and more Cook Inlet production. The
committee should be advised that the challenge of gas under
contract is not the same as a basin that is depleted.
9:28:40 AM
REPRESENTATIVE JOSEPHSON asked for details about the LNG
contracts with Japan.
COMMISSIONER SULLIVAN said that is a question for ConocoPhillips
Alaska. He added that the LNG terminal was built because there
was originally more gas than needed for the demands of the local
market; now the discussion is about ways to address the
immediate concerns and to incentivize more production, which may
mean larger scale projects such as gas for Agrium, Inc. or
Donlin Creek gold mine.
9:30:24 AM
PAUL DECKER, Petroleum Geologist, Central Office, Division of
Oil & Gas (DOG), Department of Natural Resources (DNR), informed
the committee he leads the Resource Evaluation team of
physicists and engineers whose jobs are to objectively
understand the resource base in Alaska and how that impacts the
management of state land. Slide 8 displayed USGS estimates of
the undiscovered volumes of technically recoverable resource in
Cook Inlet. He advised that these volumes do not correlate with
gas under contract or gas reserves available for contract, but
are a big picture look of the basin's remaining potential. The
most recent assessment indicates 19 trillion cubic feet (TCF) of
natural gas and about 650 million barrels of oil and natural gas
liquids (NGLs). These resources may not be in large fields thus
are technically recoverable, but not necessarily economic to
recover. Mr. Decker advised that resources are a much broader
category of oil and gas, and include everything that is
undiscovered, and everything that has been discovered but has
not yet been determined to be economic to produce; only after
resources have demonstrated commerciality can they be placed in
the reserves categories of proved, probable, or possible.
9:33:11 AM
COMMISSIONER SULLIVAN stated that DNR ensures oil and gas
companies are aware of the USGS report.
9:33:45 AM
MR. DECKER continued to slide 9, explaining that peak
deliverability differs from annual average demand, and
Southcentral power demand is cyclical with summer volumes much
lower than in winter. The department works to understand the
volume of resources but does not address the question of peak
deliverability.
COMMISSIONER SULLIVAN said the utilities are focused on
deliverability.
MR. DECKER continued to slide 10, explaining that DNR - as a
land management and resource management agency - has a
responsibility to understand all of the resource in the state
thus the information DNR needs is inherently different than what
the utilities need; also, DNR has a different perspective than
the producers. Because of that difference, the DNR study of
Cook Inlet gas incorporates additional analyses beyond what PRA
has undertaken. He acknowledged that the PRA study is "great
work," and relevant to the need of the utilities, which was for
a decline curve analysis. Although the DNR study is in
agreement with the PRA study at that point, the DNR study goes
further, looking at material balance and geologic volumetric
analyses. The PRA report serves the purpose to help the
utilities understand proved reserves and gas available for
contract.
9:36:44 AM
COMMISSIONER SULLIVAN restated the different perspectives of
utilities, producers, and DNR; in fact, DNR is presenting the
broadest analysis of the resource, which is what the department
- as the state's land and resource manager - should see.
9:37:54 AM
MR. DECKER called attention to slide 12 and further explained
that the PRA study relies exclusively on decline curve analysis
which is complicated to do in a non-steady state production
environment with dynamic swings in demand from summer to winter.
As this non-steady environment may cloud the production from the
reservoir, in 2009, 2011, and 2012, DNR augmented the decline
curve analysis with material balance analysis and geologic
volumetric mapping data from four fields that had sufficient
well-data available. When looking at the material balance
engineering approach, DNR identified about one-third more gas in
28 existing fields. In addition, the geologic volumetric
analysis identified even more possible undeveloped gas. He
again stressed that this is gas believed to be available, but
not necessarily available to put under contract immediately
without further investment. Slide 13 explained material balance
analysis is an industry standard engineering approach that uses
the change in reservoir pressure over time to estimate how much
gas is contained in reservoirs that are in pressure
communication with existing producing wells. He explained that
this is similar to gauging how much air was in a tire by
measuring changes in air pressure as the air leaks out. This
process increased estimates over those identified by decline
curve analysis by about one-third in the reserves category.
Further, after DNR mapped sands into categories, the geologic
volumetric analysis data suggested that with additional
investment of drilling new wells, infill drilling, work on or
recompletion of older wells, or adding compression, "we end up
with significant volumes of gas resource, some of which is going
to be commercial to exploit, we believe, portions of it may
not." Slide 14 indicated that the PRA study predicts a
shortfall in gas production under contract within the next few
years, and Mr. Decker said:
It is obviously a concern for all of us, we're deeply
concerned about it, we don't want that to be
misconstrued, but it really must not be construed to
mean that the gas resources in the basin are depleted,
rather it reflects the fact that not enough new wells
are being drilled to keep pace with the declining
production from the existing wells.
9:44:03 AM
MR. DECKER continued, saying because Cook Inlet is isolated from
the North American spot market, the amount of gas available for
delivery at any given time is a function of sales contracts.
Thus, until companies are assured of a market, there is no
commercial incentive to identify reserves. He restated the
point that two of the major producers in Cook Inlet, Chevron and
Marathon, were in "exit strategy mode" and made alternative
investments.
COMMISSIONER SULLIVAN informed the committee that DNR has sought
to replace incumbent producers with motivated companies that
want to produce more.
REPRESENTATIVE JOSEPHSON said, "Unless Chugach Electric and
[Matanuska Electric Association] are just fibbing, I could
guarantee these operators that there is a demand, so ... I don't
understand how they're feeling vulnerable about whether there
could be a contract for sale."
9:45:40 AM
WILLIAM BARRON, Director, Central Office, Division of Oil & Gas
(DOG), Department of Natural Resources (DNR), stated that these
are very complex business decisions. A company may not have the
volume of gas that is required for a long-term commitment. What
the Cook Inlet market has created is "just-in-time
deliverability." Thus companies drill only enough to produce
for a closed market with a 200 percent difference in
deliverability from summer to winter; in fact, the economics of
drilling a well just for 10 to 20 extremely cold winter days -
with the remainder of days idle, but accruing expenses - does
not add up for a producing company.
COMMISSIONER SULLIVAN reminded the committee of the importance
of storage, which is a tool to address deliverability issues and
the economic alignment between producers and utility companies.
CO-CHAIR MILLETT pointed out not enough gas was produced this
summer to fill CINGSA to capacity.
9:48:45 AM
MR. BARRON advised that those are commercial issues between
independent private parties. He stated that many parties sold
to CINGSA this summer and this winter, and, "many parties also
sold to the LNG contract during this summer ...." Five or six
producers are trying to satisfy five or six utilities, each one
of which has its own perspective and business drivers.
COMMISSIONER SULLIVAN observed that DNR was an atypical but
significant influence in resolving some storage issues between
producers and utilities.
CO-CHAIR MILLETT opined there is no lack of interest in gas
contracts but production is continually the problem. The
legislature has created incentives with credits, and still there
is a decline in production.
COMMISSIONER SULLIVAN agreed, adding that behind pipe assets
that were "frozen" are now approved.
9:52:12 AM
MR. DECKER directed attention to slide 15, saying "this may be
the source of some of the misinterpretation of our message
here," because it is a hypothetical production forecast that
assumes substantial investment, redevelopment activity, and some
exploration success in the basin. He stressed that the actual
years in which the estimated produced volume would come to the
surface and hit the market are entirely hypothetical. Slide 16
illustrated the categorization of Cook Inlet gas volumes using
terminology from the globally-accepted international petroleum
management system to define resources and reserves. The
categories shown were in three tiers with the undiscovered
resources at the bottom. These are sometimes called prospective
resources and were identified by USGS in Cook Inlet. If a well
is drilled and there is discovery, but the discovery is not
shown to be commercial, the resources are categorized in the
middle tier as contingent resources. After a company is "board-
sanctioned to develop those resources," and the resources are
clearly shown to be economic to produce, the resources are
categorized in the top tier in one of three subcategories:
proved - those that are essentially 90 percent certain to
produce; probable - those with a 50 percent chance to produce;
and possible - those with a 10 percent chance to produce. He
explained that the colors of categories match the colors of the
resources and reserves identified in DNR's study [slide 15],
some of which are in the contingent resource category, but
"clearly a lot of it is in the proved or probable or possible
reserves category." Mr. Decker concluded, saying DOG's updated
estimates of probable - or 2P - reserves are about 1.1 trillion
cubic feet (TCF) [of gas] in the remaining 28 fields. Also,
about 355 billion cubic feet (BCF) [of gas] were identified as
undeveloped gas resources: 233 BCF in the Beluga River Unit; 72
BCF in the Grayling Gas Sands Trading Bay Unit; and 50 BCF in
the North Cook Inlet Unit.
CO-CHAIR ISAACSON asked how much of the 1.1 TCF of reserves is
destined for markets outside of Alaska, following the 2.2 [TCF]
that has already left the state.
MR. DECKER was unsure.
CO-CHAIR ISAACSON then asked whether DNR has asked the producers
for their projected sales plans.
MR. BARRON interjected that the LNG export licenses are due to
expire in March, and the operator has not requested an
extension. Therefore, at this time, none of the 1.1 TCF is
committed to outside contracts.
MR. DECKER redirected attention to slide 17 and pointed out that
since DNR's study, new wells have been drilled in some of the
existing fields, most of which have been commercially
successful, and confirming that the resource is there.
9:59:16 AM
COMMISSIONER SULLIVAN continued to slide 18, entitled, "State's
Actions Regarding Cook Inlet." He acknowledged that DNR has not
done a good job of explaining the point that the shortage of gas
under contract does not equal a depleted basin, and what is
needed is to get more gas out. Slide 19 listed the actions the
state has taken that are directly within DNR's core
responsibilities, such as leases and investment. For example,
DNR has been "making the case on this basin" to companies that
are interested in assets that are behind pipe or in exploration.
This is accomplished by the continued dissemination of good news
to new companies and aggressively using leverage over lease
terms "to get more wells being drilled." In addition, DNR has
improved timely and efficient permitting and issues with federal
permitting, the legislature has improved the RCA process, and
DNR's geological survey team has been gathering and publishing
new data on the basin. He reiterated that DNR fast-tracked the
permitting of CINGSA, worked closely with the utilities,
reoriented RAPA, and is reviewing areas affecting energy
security such as HCCP, underground coal gasification (UCG),
hydroelectric, and the Eva Creek wind farm. Other areas not
directly within DNR's purview include expediting the
Hilcorp/Chevron transaction and FTC issues.
10:04:09 AM
COMMISSIONER SULLIVAN continued to slide 23 which illustrated
recent activity in Cook Inlet. He stated it is important for
the legislature to understand the positive activities that have
taken place in Cook Inlet over the past two years which include:
many new players; approximately $500 million has been invested
in 2012; resurging interest in lease sales; increasing number of
rigs; expanded 3D seismic program; and gas storage. In
addition, DNR is focused on oversight to ensure that all of the
new activities and development are without accident. Regarding
the idea that the industry is exploring for oil and not gas,
Commissioner Sullivan said the companies have indicated that if
gas is commercial, it will be developed; however, whether that
development will be enough or in time is unknown. He referred
to publications that have recognized the resurgence of oil and
gas activity in Cook Inlet and assured the committee DNR will
redouble its efforts. Commissioner Sullivan closed, saying DNR
is a strong team that operates at the highest level of integrity
and will provide straight answers and information.
10:10:26 AM
CO-CHAIR MILLETT appreciated DNR's straightforward presentation.
She stated the importance of providing Alaska's gas for
Alaskans.
10:11:34 AM
ADJOURNMENT
There being no further business before the committee, the House
Special Committee on Energy meeting was adjourned at 10:11 a.m.
| Document Name | Date/Time | Subjects |
|---|---|---|
| Comm. Sullivan PowerPoint (H) ENE 01302013.pdf |
HENE 1/30/2013 8:00:00 AM |
Comm. Sullivan's PowerPoint Presentation (H) ENE 01302013 |
| Agenda Energy Committee 01302013.pdf |
HENE 1/30/2013 8:00:00 AM |
(H) ENE Agenda 01302013 |