Legislature(2025 - 2026)GRUENBERG 120
02/18/2025 01:30 PM House ENERGY
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| Audio | Topic |
|---|---|
| Start | |
| Presentation(s): Cook Inlet Update, House Energy Committee | |
| Adjourn |
* first hearing in first committee of referral
+ teleconferenced
= bill was previously heard/scheduled
+ teleconferenced
= bill was previously heard/scheduled
| + | TELECONFERENCED | ||
ALASKA STATE LEGISLATURE
HOUSE SPECIAL COMMITTEE ON ENERGY
February 18, 2025
1:33 p.m.
DRAFT
MEMBERS PRESENT
Representative Ky Holland, Co-Chair
Representative Donna Mears, Co-Chair
Representative Bryce Edgmon
Representative Cathy Tilton
Representative George Rauscher
Representative Mia Costello
MEMBERS ABSENT
Representative Chuck Kopp
COMMITTEE CALENDAR
PRESENTATION(S): COOK INLET UPDATE~ HOUSE ENERGY COMMITTEE
- HEARD
PREVIOUS COMMITTEE ACTION
No previous action to record
WITNESS REGISTER
JOHN CROWTHER, Deputy Commissioner
Department of Natural Resources
Anchorage, Alaska
POSITION STATEMENT: Co-presented the PowerPoint, titled "Cook
Inlet Update."
WESTON NASH, Commercial Analyst
Division of Oil and Gas
Department of Natural Resources
Anchorage, Alaska
POSITION STATEMENT: Co-presented the PowerPoint, titled "Cook
Inlet Update."
ACTION NARRATIVE
1:33:46 PM
CO-CHAIR HOLLAND called the House Special Committee on Energy
meeting to order at 1:33 p.m. Representatives Rauscher, Mears,
Edgmon, Tilton, and Holland were present at the call to order.
Representative Costello arrived as the meeting was in progress.
^PRESENTATION(S): Cook Inlet Update, House Energy Committee
PRESENTATION(S): Cook Inlet Update, House Energy Committee
1:36:31 PM
CO-CHAIR HOLLAND announced that the only order of business would
be an update on Cook Inlet oil and gas.
1:37:10 PM
JOHN CROWTHER, Deputy Commissioner, Department of Natural
Resources (DNR), co-presented the PowerPoint, titled "Cook Inlet
Update" [hard copy included in the committee packet]. He noted
that the department had recently presented to the committee on
the usage of oil and gas in Cook Inlet. He stated that this
presentation would overview the current gas production and
drilling activity, updating any new production profiles. He
stated that the presentation would also address the recently
finalized Kitchen Lights Unit (KLU) royalty modification, as
this royalty modification is important to insure gas in Cook
Inlet in the near term.
1:38:35 PM
WESTON NASH, Commercial Analyst, Division of Oil and Gas,
Department of Natural Resources, co-presented the PowerPoint,
titled "Cook Inlet Update." On slide 2, he stated that most of
the oil production in Cook Inlet occurred from the 1960s to the
1980s, and currently this is the "serious tail end of
production," as the resources have been largely depleted. He
noted that the major usage of the gas has been for exports.
CO-CHAIR MEARS expressed appreciation that slide 2 showed the
aggregate decline in the resource, as well as the decline in the
different locations. She noted that Cook Inlet is "not a small
area." She pointed out that infrastructure already exists in
each area of Cook Inlet, and this infrastructure would need to
be built to develop new areas.
MR. CROWTHER stated that many of the oil wells are located in
the same fields, with peak production occurring many years ago.
He continued that the chart on the slide shows that the resource
is aging, even though there is still robust activity.
1:41:39 PM
MR. NASH moved to slide 3, which charted gas production by
field. He noted that the startup date of each field has been
included, as this reinforces the age of the fields. He pointed
out that the four main fields in Cook Inlet have produced 72
percent of the total 2024 production. He noted that the average
start date of these four fields had been 60 years ago or more.
He stated that the committee has seen slide 4 before, but in
this iteration, the exact well activity has been included. He
explained that with the decline of production it would take more
drilling to maintain the same production. He stated that some
exploratory wells have been drilled, but these are not
producing. He added that 19 wells had been drilled in 2024, but
this added only 60 percent of production.
MR. CROWTHER clarified the location of the exploratory wells on
the slide. In response to a question from Co-Chair Holland, he
stated that last year Furie Operating Alaska, LLC, drilled one
new oil well located in the area of KLU. He added that the
operator would be working to drill additional wells this year.
In response to a follow-up question on whether only 9 percent of
drilled wells would end up producing, he stated that there are
two types of wells. He explained that an exploratory well would
be a well that locates a new resource. He added that
exploratory drilling had not been successful in 2024. He stated
that a development well would be a well drilled in a known
field. He explained that development wells normally have a very
high success rate; however, this past year these wells were only
producing at 60 percent.
MR. CROWTHER, in response to a question from Co-Chair Mears
concerning aging oil fields, explained that when a field has
been in production for a long time, there is less pressure in
the field. Because of less pressure, he said a new well drilled
into the field would either have a lower initial production rate
or a faster production decline.
1:48:07 PM
MR. NASH moved to slide 5 and discussed the Cook Inlet gas
forecast. He stated that this slide has been updated with
production through December, using the economic limits. He
explained that when a field is economically negative, the
production would be stopped. He noted that the chart on the
slide has been updated with a decline curve analysis, and this
shows production coming in at a lower rate. As Mr. Crowther
discussed, he pointed out that this shows a faster decline. He
remarked that the slide reflects the current producing wells in
Cook Inlet.
MR. NASH, in response to a question from Co-Chair Mears
concerning the Plan of Development (POD) process, stated that
these PODs are typically done on an annual basis, with some
occurring longer. In response to a follow-up question
concerning the data used for the forecast, he stated that each
year during the oil forecast DNR would consult with operators.
1:51:16 PM
MR. NASH moved to slide 6, which showed the production outlook,
annualized per billion cubic feet per year. He explained that
this shows the amount of the resource for sale for utilities.
He stated that the slide also shows that once drilling ceases,
production declines steeply. He emphasized that this is based
on known production.
CO-CHAIR HOLLAND pointed out the flat demand curve extending
into the future, and he questioned the assumptions made that
resulted in this. He suggested that there could be a rise in
future demands, and new renewable projects could affect this.
MR. CROWTHER responded that DNR assumes a flat demand of the
resource, and he noted the complexity around demand. He pointed
out that DNR focuses more on the supply side in order to meet
near-term demand. He expressed hope that there would be growth
in the future, but no forecast analysis has been done on changes
in demand. He discussed other solutions affecting demand, such
as a large-scale gas line, which would require growth. He added
that electricity demand could be met by other energy generation
sources. He reiterated that, for the purpose of the forecast,
future demand has not been the focus.
CO-CHAIR MEARS questioned DNR's forecast of the remaining gas in
the developed fields.
MR. CROWTHER, in response, pointed to the chart on slide 6, as
the blue bars represent the existing fields in production and
the expected wells to be drilled up to the year 2030. He added
that there are other Cook Inlet resources that could be brought
to market and added to this chart.
MR. NASH moved to slide 7 and noted that the blue bars on the
chart represent the same production level as seen on the
previous slide, while the green bars represent the gas reserves
remaining without applying the economic limit. He stated that
the yellow bars represent projects that are not yet developed,
explaining that this represents a combination of risk
production. He stated that the light blue bars represent the
production of all the projects that are soon to be developed.
He noted that this chart shows that everything above the black
line could be put into storage. He stated that the orange bars
represent gas that would be produced in the future. He
reiterated that this chart shows only the development of known
resources up to the year 2039.
MR. CROWTHER expressed the opinion that this is an optimistic
chart, and he advised that realism be used when considering the
needed work and capital and the geological risks. He discussed
the work needed to make the chart a reality. He suggested that
the projection would not happen unless dynamic action is taken.
2:02:06 PM
CO-CHAIR MEARS discussed the helpfulness of the chart, as the
Cook Inlet gas resource needs to be retained as long as possible
for the state.
MR. NASH moved to slide 9, titled "Approved Kitchen Lights Unit
Royalty Modification Summary." He stated that royalty
modification for KLU was recently approved by DNR. He expressed
the understanding that this modification would prolong the life
of this oil and gas field. Without this modification, he
suggested that the field would have a negative cash flow by the
middle of the year. He discussed the details of the
modification, as seen on the slide.
CO-CHAIR HOLLAND expressed the understanding that a contract
between a seller and a buyer for this gas had already been made
without royalty relief. He expressed the opinion that this
denotes there was not "an economic cliff." He questioned the
need for royalty relief for KLU.
MR. CROWTHER responded that DNR must "be careful not to speak
for the operators and the market participants." He pointed out
that DNR's analysis was done on the "full suite" of information
it had, including capital, operational costs, field activity,
and risk assessment. He explained that when there is a
potential for a field going cash flow negative, this becomes a
concern. He expressed the opinion that this contract could have
significant operational challenges. He emphasized that DNR
takes a failure scenario seriously, and he further discussed
this. In response to a follow-up question, he stated that a
future slide would address the cash-flow modeling, which shows a
full royalty versus a reduced royalty. He explained that a
reduced royalty would still produce an incremental direct
benefit to the state of $36.38 million. In response, he stated
that the royalty is 3 percent, and the $36.38 million would be
all state revenue, which includes some other elements. He
remarked that the specific royalty amount would be seen in a
future slide.
2:12:44 PM
MR. NASH moved to slide 10, titled "KLU Background Unit
Location." He went over the timeline of KLU, as seen on the
slide. Per KLU's background, he showed the detailed lease
information on slide 11. He pointed out KLU's unique ownership
structure, noting that all the overrides were prior to
unitization in 2010. He explained that the state approved this
in 2010, but it has had no opportunity to approve a future
assignment, and the current situation reflects this.
CO-CHAIR HOLLAND questioned whether changing the overriding
structure had been discussed during the bankruptcy process of
Furie Operating Alaska, LLC.
MR. CROWTHER expressed the understanding that there would be
property interest associated with the Overriding Royalty
Interest (ORRI), and this continues for the life of the lease,
even throughout a bankruptcy process. In response to a follow-
up question, he stated that DNR has the authority to approve the
creation of ORRI, and when it is created it becomes a property
right of its own. He continued that DNR has the right to
approve the selling of the underlying lease, but this would only
be the transfer of the lease interest.
2:18:06 PM
MR. NASH moved to slide 12, which addressed KLU's production
history. He pointed out that the slide shows the importance of
each well in the unit. He stated that KLU was producing about
9,100 thousand cubic feet per day (Mcf/d), but with the royalty
modification and the additional well KLU is expected to produce
about 14,000 Mcf/d. He discussed the risk that results when
wells stop producing.
CO-CHAIR HOLLAND pointed out the new types of wells created in
Cook Inlet and questioned whether the testing of these new wells
would create a risk.
MR. CROWTHER responded that the Alaska Oil and Gas Conservation
Commission has the responsibility of conducting these tests, and
he deferred the question to this commission. He noted that
DNR's main interest would be the recovery of the resource.
2:21:38 PM
MR. NASH moved to slide 13 and pointed out the results of the
various scenarios listed. He noted that the baseline used had
no royalty modification. He reviewed each scenario, noting the
royalty amount to the state and the projected end of each
field's life. He noted the variables that contributed to the
viability of each scenario.
CO-CHAIR HOLLAND, concerning the state's royalty revenue,
expressed the understanding that ratepayers would be paying
this. He questioned DNR's stance on this, as this could be an
argument for royalty reduction.
MR. CROWTHER responded that DNR has a constitutional and
statutory mandate to maximize royalty value to the state. He
discussed the profitability of this mandate concerning the North
Slope and for past Cook Inlet wells. He noted the different
paradigm that now exists in Cook Inlet; however, he pointed out
that DNR's statutory directive has not changed. He stated that
this is the legal justification for the royalty modification.
In addition, he expressed the importance of the additional gas
supply the royalty modification would provide. He expressed the
understanding that the legislature would decide any future
approach for a Cook Inlet royalty. In response to a follow-up
question on what the legislature could do, he stated that
currently the governor has not brought forward a proposal. He
stated that currently the department is using its authorities to
do everything in its power to "bring gas forward."
REPRESENTATIVE RAUSCHER questioned whether there is a model that
shows royalty loss versus ratepayer loss.
MR. CROWTHER responded that DNR does not do consumer-cost
models, as it does not have the authority to assess and protect
the impact on consumers. Instead, he stated that DNR would only
consider this when making resource decisions. He noted that
other agencies would have more responsibility to consumers, such
as the Regulatory Commission of Alaska and the utilities. In
response to a follow-up question concerning royalty loss, he
expressed the understanding that field production would be
smaller, as larger production in the field would risk a closure.
He expressed the opinion that this is not a royalty loss, but a
modification that leads to more supply, less consumer price
impacts, and more state royalty. In response, he expressed the
opinion that the modelling for royalty modification was robust.
He pointed out that the cost of operations would drive the life
of the field. He stated that when the life of the field ends,
so does the royalty for the state. He reasoned that if the life
of the field were extended, the royalty to the state and the gas
supply would also be extended.
2:33:27 PM
MR. NASH moved to slide 14, titled "Quantified Benefits of
Royalty Modification." He stated that the slide shows how the
royalty modification would help the continued development of
KLU, as it quantifies the real benefits to the state. He
paraphrased from the slide, as follows [original punctuation
provided]:
• 14.36 million (NPV 12.5) more in State royalty
• 10.5 years of KLU field life extension
• 63,228 million cubic feet of additional gas
• $5.89 million (NPV 12.5) more in production tax
• $16.13 million (NPV 12.5) more in State's share of
property tax
• $36.38 million (NPV 12.5) incremental direct revenue
to the State
CO-CHAIR HOLLAND questioned whether these revenues would be
subject to development tax credits.
MR. CROWTHER expressed the understanding that the tax credits
have expired or been repealed by the legislature; therefore, no
tax credits could be applied. In response to a follow-up
question on the amount of the overriding interest and the amount
the state would be losing, he stated that to get this amount,
the $14.4 million on the first bullet on the slide would need to
be multiplied by 4.
MR. NASH clarified that the royalty modification of 3 percent
interest is only in place until the gross revenue target is met,
which would be in roughly eight years. He added that there
would also be a decline in the production tax.
CO-CHAIR HOLLAND questioned how much of the $14.4 million would
be included before the gross revenue amount is reached.
MR. CROWTHER responded that this would be a complex calculation
limited by data confidentiality. He expressed the understanding
that after the royalty modification is met, there would be some
continued production.
MR. NASH moved to slide 15 and stated that this is in reference
to the ENSTAR Natural Gas contract that Furie Operating Alaska,
LLC, signed in 2024. He stated that the slide summarizes the
facts of the contract. He noted that the price would be
different if royalty relief had not been granted.
2:39:12 PM
CO-CHAIR MEARS thanked the presenters and made closing comments.
CO-CHAIR HOLLAND questioned DNR's current view of what could be
expected in the future concerning more royalty relief requests.
He questioned what the legislature could do to help producers
develop more gas and oil fields. He expressed the understanding
that royalty relief is one of the tools to facilitate
development.
MR. CROWTHER responded that DNR foresees a variety of
activities. He noted that many fields have development
commitments, and DNR would look at these, field by field, to
ensure developers are making the most aggressive proposals so
there would be production sooner. He stated that DNR plans to
hold the developers to these proposals. He discussed specific
examples and DNR's authorities.
2:44:06 PM
CO-CHAIR HOLLAND thanked the presenters and made closing
comments.
2:45:13 PM
ADJOURNMENT
There being no further business before the committee, the House
Special Committee on Energy meeting was adjourned at 2:45 p.m.
| Document Name | Date/Time | Subjects |
|---|---|---|
| DNR presentation Cook Inlet Update HENE 02-18-25updated.pdf |
HENE 2/18/2025 1:30:00 PM |
HENE DNR Presentation 2.18.25 |