Legislature(2007 - 2008)HOUSE FINANCE 519
01/22/2008 01:30 PM House FINANCE
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| Presentation: Oil and Gas Activities | |
| Adjourn |
* first hearing in first committee of referral
+ teleconferenced
= bill was previously heard/scheduled
+ teleconferenced
= bill was previously heard/scheduled
HOUSE FINANCE COMMITTEE
January 22, 2008
1:35 P.M.
CALL TO ORDER
Co-Chair Meyer called the House Finance Committee meeting to
order at 1:35:35 PM.
MEMBERS PRESENT
Representative Mike Chenault, Co-Chair
Representative Kevin Meyer, Co-Chair
Representative Bill Stoltze, Vice-Chair
Representative Harry Crawford
Representative Les Gara
Representative Mike Hawker
Representative Reggie Joule
Representative Mike Kelly
Representative Mary Nelson
Representative Bill Thomas Jr.
MEMBERS ABSENT
Representative Richard Foster
ALSO PRESENT
Kevin Banks, Acting Director, Division of Oil & Gas,
Department of Natural Resources
GENERAL SUBJECT(S):
The following overview was taken in log note format.
Handouts will be on file with the House Finance Committee
through the 25th Legislative Session, contact 465-6814.
After the 25th Legislative Session they will be available
through the Legislative Library at 465-3808.
^PRESENTATION: OIL AND GAS ACTIVITIES
TIME SPEAKER DISCUSSION
1:36:20 PM Co-Chair Meyer Convened the House Finance Committee in
order to take testimony from Kevin
Banks, Director, Division of Oil & Gas,
Department of Natural Resources on the
statewide oil and gas activities.
1:36:36 PM KEVIN BANKS, Provided members with a handout -
ACTING "State of Alaska, Division of Oil and
DIRECTOR, Gas, Oil and Gas Activities". (Copy on
DIVISION OF File). He provided an overview of
OIL & GAS, current North Slope & Cook Inlet
DEPARTMENT OF investments.
NATURAL
RESOURCES
1:37:20 PM Mr. Banks Referenced Page 29, the North Slope Oil
and Gas Activity from 2006-2008. Pink
boxes represent activity presently
occurring: Chevron, White Hills
Program, Renaissance Umiat proposed
drilling and seismic program, and the
Anadarko-Petro-Canada, Bubik/chandler
drilling program.
He pointed out that the highlighted
programs (15 of them) are intended for
drilling over the next two years.
1:39:51 PM Mr. Banks Continued, the Renaissance Umiat
proposes a winter trail south of the
Dalton Highway for drilling into a
National Petroleum Reserve-Alaska
(NPRA) oil prospect. The Anadarko-
Petro project is strictly gas. There
has been previous exploration in the
others.
1:40:33 PM Mr. Banks Indicated that there are new drilling
techniques. Chevron has stepped into a
delineation program. The delineation
stage of the process is as important as
the actual exploration and could be
more costly, requiring more drilling.
There are greater potentials for
failure as the oil does not flow as
well with other development situations.
1:42:05 PM Mr. Banks Mentioned the activities on the North
Slope and how the new tax bill affects
them. He indicated it is too soon to
determine how it affects new
investments; they are a deductable
cost. The Colville River unit is an
exploration well, intended to be moving
forward in February, 2008.
The Kuparuk River (KRU) project for
ConocoPhillips is advancing, as is the
West Sak Trader Bluff reservoir. They
have drilled eight development wells in
the Tarn reservoir with the KRU,
resulting in application for an
expansion of the Tarn Area.
1:44:14 PM Mr. Banks The Department anticipates good results
from the Oooguruk Unit. Production is
anticipated within the next six months.
A facility access agreement with the
owners is close to being reached.
1:45:07 PM Mr. Banks Referenced Page 33, which indicates the
Anadarko reentering the Jacob's Ladder
Well Unit during the winter drilling
season with a deviated hole to the
Lisburne drilling target.
The Brooks Range Petroleum company is a
prospect, which is north of Prudhoe
Bay. There have been concerns with
facility access.
1:46:12 PM Mr. Banks Indicated that ENI, an oil Italian
company last year, drilled Rock Flour 2
and 3 wells and the Maggiore well. ENI
is the operator for the Nikaitchuq
project, which was rewarded a royalty
modification that lowered the lease
rate to 5% when the prices dropped to
$42 dollars. The project will rely on
its own standalone facility, delivering
oil directly to the Kuparuk pipeline.
1:47:43 PM Mr. Banks Addressed NPRA activities. The federal
government has not yet conducted a
second lease sale. Companies will then
need to formalize those land positions
to be able advance exploration
programs.
1:48:33 PM Representative Inquired about the royalty adjustment
Crawford effect on the Permanent Fund rate.
Mr. Banks explained that if it falls to
5%, then 25% of that 5% would move
directly to the Permanent Fund. The
Fund will share that reduction.
Representative Understood that under the Petroleum
Crawford Production Tax (PPT), indicated that
any lease expenses paid to the owner of
a facility, would be required to count
as income. He questioned if that
should be repealed.
Mr. Banks explained the impact of a net
tax on the facility sharing agreement,
caused by revenue or income paid by the
company wanting access. That amount
would count against the revenue for the
PPT taxes. The margins could grow
before facility sharing, increasing the
facility production tax. The
Department did not realize that there
are "hold-harmless" arrangements and as
a consequence, the company entering
makes the owner "whole" in the
arrangement. By isolating revenue of
the facility owner, the problems could
be solved.
1:52:36 PM Co-Chair Asked the difference of offering a
Chenault royalty reduction versus a tax
reduction.
Mr. Banks replied that the royalty
modification is a tool available to the
Department and the applicant. The
Department evaluates the project, using
the most recent tax statutes in which
the applicant must provide a clear
showing that the royalty reduction is
efficient and effective, changing the
economics of the project. The royalty
modification can lead to a change of
behavior.
1:55:17 PM Co-Chair worried that a royalty reduction could
Chenault reduce the Permanent Fund amount.
Mr. Banks suggested that it would vary
depending on each case and involves
economic scrutiny. That applicant
information can be daunting.
1:56:37 PM Representative Asked if it was essential that the
Gara project be clear and economic. Mr.
Banks said it was.
Representative Gara encouraged
consideration is made for switching to
a tax relief system.
1:57:34 PM Representative Voiced confusion with regard to the
Hawker royalty relief, which lessens the
government take. During Special
Session, there was discussion framing
the Administration's perspective that
higher tax rates create a more
attractive investment climate. He
questioned the change in philosophy to
reduce the rate, encouraging
investment.
Mr. Banks explained that decision had
been based on the date provided by the
applicants and the downside risk
affecting applicant's behavior. At
high prices, the project is economic at
the existing lease rate. The full
lease rate is 12.5%-16 2/3%. The
proposed is triggered above the $42
dollars, at which the lease rate will
drop to 5%. The plan targets one
aspect and one set of outcomes in the
evaluation.
2:01:24 PM Representative Asked if it would be "universally
Hawker applicable". Mr. Banks did not know.
He added that the project is unique and
involves many wells.
Representative Hawker noted that when
prices decline, the arrangement would
not be economically beneficial to the
government. He asked if there were a
normalization of oil prices, would
there be more requests by the
Department for royalty relief
applications. Mr. Banks thought that
was a possibility. Representative
Hawker stressed that statement
contradicts testimony taken during the
Special Session.
2:03:46 PM Representative Pointed out that the cost of facilities
Gara access was higher than anticipated,
questioning if it could be addressed
through the explorer royalty relief
without changing statute.
Mr. Banks responded that changing the
royalty rate (between 12.5% and 5%)
would be addressed on a case by case
base.
2:05:12 PM Representative Recalled testimony regarding the higher
Gara rate, the more attractive the
investment is and questioned why
consideration had been made to reduce
royalty. The higher the tax rate, the
more the applicant gets to deduct.
Mr. Banks interjected that if that was
not enough, royalty relief could be an
option.
2:06:52 PM Mr. Banks Addressed activity in the Cook Inlet.
In the Beluga River Unit,
ConocoPhillips conducted a seismic
survey determining that the area is a
gas prospect. There was an agreement
between the State and ConocoPhillips
for the LNG license. In that
agreement, ConocoPhillips and Marathon
will drill at the Beluga River and
Ninichik Unit. Marathon has also made
a commitment to drill three wells at
the Kenai gas fields. Both companies
have agreed to sell seismic data for
others coming in for exploration
prospects and are addressing unmet
needs of the local utilities.
2:09:47 PM Mr. Banks There is a plan for exploration in the
North Alexander-Escioeta project,
decisions made independently. Not
having a jack-up-rig is a major
impediment for the off-shore
development in Cook Inlet. Those costs
can not be bore by a single well,
requiring a multi year program.
Mr. Banks pointed out that Armstrong
gas, North Fork Unit was moving ahead
with a second well being drilled.
The Aurora Gas/Nicolai Creek Unit is
currently active.
2:11:55 PM Mr. Banks Continued, Pages 25 & 26, indicate the
status of exploration licenses in the
Interior noting the status reports on
licensing in the Interior.
The Nenana Basin was licensed by Andex
Resources and is looking for new
partners for that prospect.
The Healy Coal Bed license has been
receiving support from local
government, being transferred to the
Pacific Energy.
Currently, there are two new
applications for Crooked Creek-Circle
and Houston-Willow licensing. The
licenses will be awarded based on the
size of a work commitment. During the
work, the area is explored and then
converted to an oil and gas lease.
2:13:52 PM Mr. Banks Addressed commercial concerns and the
knowledge of the Department's resource
evaluation staff experience in oil and
gas.
The New Petroleum Systems Integrity
Office (PSIO) developed a monitoring
program. PSIO is moved to the North
Slopes when incidents occur needing
coordination.
The Division anticipates requesting
reservoir modeling performance.
2:16:42 PM Mr. Banks Spoke about the gas produced on the
North Slope minimizing oil lose and how
gas in Prudhoe Bay might contribute to
other units, while attempting to
optimize projects for the use of
natural gas. The timing issues are
important to the Division of Oil and
Gas.
2:17:36 PM Co-Chair Inquired if reservoir modeling would be
Chenault a one time issue.
Mr. Banks responded that the initial
request was for $3 million with a total
of $10 million dollars; a major portion
of that is related to paying
consultants to design and build. He
did not anticipate requesting $3
million every year.
Co-Chair Chenault worried about the
request becoming an operating expense;
presently, it is listed under "other
funds".
Co-Chair Chenault referenced Cook
Inlet, Marathon drilling in the areas
of Beaver Creek/Wolf Lake. He assumed
that gas injection wells into Swanson
River field area were needed during
colder times of the year. He
questioned the efficiency of the
project.
Co-Chair Chenault mentioned the LNG
license extension proposed by the
Administration and worried about the
amount of movement that has appeared on
the concerns. A unique feature is
backing the gas out as performed by
ConocoPhillips.
He acknowledged that many issues remain
on the table, yet applauded the
movement taken by certain companies.
2:23:03 PM Co-Chair Meyer Voiced concerns regarding wildlife
placed on the endangered species list
and how that could affect work on the
North Slope.
Mr. Banks agreed that proposals
affecting the Beluga whale were of a
particular concern. It might affect an
entire area boundary between the Outer
Continental Shelf and the Susitna
River. He reiterated that it is a
concern of the Department.
He anticipated that polar bears would
not be affected by oil and gas drilling
activities contributing to loss of
their habitat. The Continental Shelf
area plays a significant role in the
vitality of the industry in Alaska.
2:25:44 PM Co-Chair Meyer Inquired if the Administration was
attempting to protect those areas while
at the same time, addressing the
species concerns.
Mr. Banks attempted to provide the best
information available when responding
to each major species designation; the
Administration plans to take an
aggressive position when responding to
federal government designations.
2:27:01 PM Representative Commented that the beluga population
Joule was increasing.
Mr. Banks understood that was correct,
however, pointed out there remains
concern. Representative Joule said
that he had spotted some young grey
belugas during the recent summer
months, which was unusual.
2:28:18 PM Vice-Chair Commented on a hearing in the Homer
Stoltze area with the federal government to
discuss the issues.
2:29:10 PM Co-Chair Meyer Inquired about oil and gas activity in
the Nenana area.
Mr. Banks advised that Shell Oil had
acquired leases south of the "sweet
spot" in the off-shore North Aleutian
basin. There exists potential gas in
that small and isolated area.
The last lease sale in the Peninsula
area was in Spring 2007 and it received
one bid. There will be another one
soon. There is now a licensing in the
Nenana area, however, it is speculative
to explore in that region.
2:31:46 PM Co-Chair Meyer Recalled that the first oil discovered
in Alaska was in Yakutat. Mr. Banks
reported that the first was in the
Copper Mine in Endicott and did not
know of any current activity there.
2:32:22 PM Co-Chair Meyer Asked if the Division was satisfied
with the current activity on the North
Slope.
Mr. Banks made clear that there had
been more activity in 2007 than
anticipated is anticipated in 2008.
The programs are expensive with a
process that involves an exploration
phase, delineation, & pre-development
phase. All of which, involve a large
expenditure of money.
It has been advantageous for the NRPA
to have the net tax system in place.
2:34:48 PM Co-Chair Meyer ADJOURNMENT
The meeting was adjourned at 2:36 PM
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