Legislature(2021 - 2022)ADAMS 519
03/04/2022 09:00 AM House FINANCE
Note: the audio ![]()
and video ![]()
recordings are distinct records and are obtained from different sources. As such there may be key differences between the two. The audio recordings are captured by our records offices as the official record of the meeting and will have more accurate timestamps. Use the icons to switch between them.
| Audio | Topic |
|---|---|
| Start | |
| Presentation: Alaska's Oil and Gas Competitiveness by Gaffney Cline | |
| Adjourn |
* first hearing in first committee of referral
+ teleconferenced
= bill was previously heard/scheduled
+ teleconferenced
= bill was previously heard/scheduled
| + | TELECONFERENCED | ||
| + | TELECONFERENCED |
HOUSE FINANCE COMMITTEE
March 4, 2022
9:02 a.m.
9:02:20 AM
CALL TO ORDER
Co-Chair Merrick called the House Finance Committee meeting
to order at 9:02 a.m.
MEMBERS PRESENT
Representative Neal Foster, Co-Chair
Representative Kelly Merrick, Co-Chair
Representative Dan Ortiz, Vice-Chair
Representative DeLena Johnson
Representative Andy Josephson
Representative Bart LeBon
Representative Steve Thompson
Representative Adam Wool
MEMBERS ABSENT
Representative Ben Carpenter
Representative Bryce Edgmon
Representative Sara Rasmussen
ALSO PRESENT
Mike Cline, Strategy Advisor and Legal Counsel, Gaffney
Cline; Nick Fulford, Gas/LNG and Carbon Management Senior
Director Americas, Gaffney Cline.
SUMMARY
PRESENTATION: ALASKA'S OIL and GAS COMPETITIVENESS BY
GAFFNEY CLINE
Co-Chair Merrick reviewed the meeting agenda.
^PRESENTATION: ALASKA'S OIL and GAS COMPETITIVENESS BY
GAFFNEY CLINE
9:03:02 AM
NICK FULFORD, GAS/LNG AND CARBON MANAGEMENT SENIOR DIRECTOR
AMERICAS, GAFFNEY CLINE, introduced himself. His
responsibilities with Gaffney Cline included gas and energy
transition.
MIKE CLINE, STRATEGY ADVISOR AND LEGAL COUNSEL, GAFFNEY
CLINE, introduced a PowerPoint presentation titled "State
of Alaska: Alaska's Competitive Position," dated February
2022 (copy on file). He provided an overview of the
presentation on slide 2. The presentation would address
global oil and gas supply and demand and energy transition
implications. The second part of the presentation would
look at Alaska oil and gas competitive strengths and
weaknesses and major trends. The presentation would also
address Alaskas competitive position including costs and
fiscal comparison and key issues going forward. He reviewed
volatility, disruption, and supply in the oil and gas
industry on slide 3. He stated that while it seemed the oil
and gas industry had always been volatile, the last 10 to
15 years had been exceptionally volatile. He elaborated
that the oil price collapse of 2014 through 2016 was a
result of a build up of supply from Oil Producing and
Exporting Countries (OPEC) and the Lower 48 with
unconventional oil methods. He noted that supply driven
downturns tended to be long-term and persistent.
Mr. Cline continued to review slide 3. He relayed that in
2020 a number of factors came together. He detailed that
OPEC Plus members were squabbling amongst themselves and
had decided to have a "little war." The result combined
with the onset of the COVID pandemic was disastrous for the
industry. He elaborated that the situation led to deep cost
cutting, project cancellations, and layoffs, which led to
long-term implications for the industry. He highlighted
that it had not been a regular supply and demand situation.
He expounded that energy transition/renewables were
beginning to gather pace and had a significant impact on
the forward perceptions of where the industry would be over
the next generation.
Mr. Cline highlighted there had recently been extraordinary
price increases for oil and gas. He noted gas prices had
risen especially in Europe and Asia. He detailed that much
of the increase was due to pent up demand and coming out of
the pandemic. Additionally, there were geopolitical
concerns in Eastern Europe with the Ukraine and in the
Middle East. He stated there was a lot of "overhang" on the
way people were looking at oil and gas markets and current
volatility.
9:07:34 AM
Mr. Cline continued to speak to slide 3. He stated there
had been increased pressure on resource owners because of
the impact on production and revenues. He highlighted that
oil and gas companies had generally performed poorly and
investors had demanded better financial performance.
Additionally, investors were pushing for increased
sensitivity to environmental concerns. He planned to
address the elements in more detail.
Mr. Cline moved to slide 4 and stated that the volatility
and 2014/2015 had been a supply driven issue that tended to
carry on; however, the issues had all been seen before. He
believed it was important to think about what had changed
because it would have a profound effect for everyone in the
industry including Alaska and companies working in Alaska.
He pointed out that increasing energy demand had not
changed and would continue indefinitely. He relayed there
were different things that may drive more rapid increases
in demand. He explained that how the demand was met had
changed. He detailed that historically coal, oil, and gas
had been dominate and would continue to be important into
the future. He elaborated that energy transition and
accompanying technological developments, along with global
acceptance of the transition, was a significant change and
would drive changes in the energy mix going forward. He
remarked there were numerous opinions on how quickly the
change was occurring.
9:10:57 AM
Mr. Cline continued to speak about energy transition on
slide 5. He remarked there was a substantial amount of fast
development taking place. He relayed there was global
movement toward accepting the importance of decarbonization
and that measures needed to be taken to achieve it. He
highlighted that 140 nations had committed to extraordinary
reductions in GHG [greenhouse gas] emissions at the COP26
United Nations Climate Change Conference the previous year.
He stated that the U.S. targets for net zero GHG emissions
by 2050 were also extraordinary. Additionally, there were
methane reduction targets agreed to by many countries as
well. He stated the commitments were at a very high level
and he considered whether there would be action to follow
through. He remarked there was quite a bit of buy-in, but
it was falling well short of the high level goals that had
been set. He reported that if the high level goals were to
be met it would require much more significant action and
commitment. He expounded there were many drivers that
result in obtaining the goal or coming close to obtaining
the goal. He stated there was substantial money going into
different initiatives for energy transition. He highlighted
the infrastructure deal in the U.S. as an example that
included funding for electrical vehicle chargers, carbon
capture and underground storage (CCUS), and massive support
for the development of the power grid.
Mr. Cline addressed how energy transition would impact
Alaska. He stated there would be an impact. He pointed out
that Alaska was a fairly high cost producer, and its carbon
intensity was relatively high. He remarked that ideally the
state would take some action to position itself for changes
in the future as people increasingly looked at hydrocarbons
and a price or premium was placed on low carbon sources of
energy. Once that happened, there would be an impact on all
producers. The question was how Alaska positioned itself to
be in as good a position as possible.
9:14:41 AM
Representative Wool referenced Mr. Clines statements that
Alaska was a high cost producer with a high carbon
footprint. He believed BP released data and legislators
heard that Alaska was one of the more profitable areas. He
asked how it reconciled with Mr. Clines statement that
Alaska was expensive. He highlighted that when comparing
all of the companys profits around the world, Alaska was
more profitable.
Mr. Cline replied that the costs of production were
relatively high in Alaska. The presentation would go into
more depth on the subject. He noted that just because the
cost was relatively higher did not mean Alaska was an
unattractive place to do business. He remarked that in the
global context Alaska was competing with the Lower 48 and
the rest of the world.
Representative Wool understood high production cost. He
reasoned a location was attractive if it was profitable,
even if the production cost was high. He referenced
statements about energy transition and electric vehicles.
He asked how the trend would impact the next 20 years. He
highlighted that Ford was splitting into two companies and
one would focus on electric vehicles. He referenced Toyota
and other companies that had plans to produce a certain
percentage of electric vehicles over time. He mentioned new
renewable power plants. He asked how it would impact the
oil and hydrocarbon market in terms of consumption. He
asked if demand for oil would continue to increase.
Mr. Cline responded that people were seeing decelerating
demand for oil, gas, and coal over time. He clarified that
decelerating did not mean eliminating. He stated the fact
there would be a big move into electric vehicles was
important but how the electricity going through the grid
was generated and supported electric vehicles was the most
important. He expected that fossil fuels would continue to
comprise more of the energy mix if renewables were not
ramped up due to cost or technical reasons (including
infrastructure, storage, and other items necessary to make
the system work). How the situation played out would have
an impact on demand and prices. He noted there was
significant uncertainty surrounding the issue because no
one knew how quickly technological adaptation would occur.
He highlighted the high dollar cost of upgrading the power
grid; however, it did not mean it could not be done.
9:19:33 AM
Representative Wool remarked the move was also a
decentralization of the power grid. He knew many people
charged their electric vehicles who charged them with the
rooves of their houses. He thought it would become more
common for the power system of a persons car and house to
become integrated and the need to burn fossil fuel to
charge a car would go down considerably.
Mr. Cline advanced to slide 6 and discussed competition for
investment dollars and capital markets. In addition to
impacting resource owners like Alaska, the situation was
having a significant impact on oil and gas companies of all
sizes. The performance of oil and gas companies relative to
other asset classes in the stock market had been relatively
poor in recent years. He noted it was pretty good
currently, but over time performance had been relatively
poor. He stated that investors and fund managers had begun
to take a vigorous view of what they expect in terms of
financial performance. He elaborated that companies were
having to take numerous things into consideration when they
decide where to invest and what projects to do. He
highlighted there was greater selectivity related to new
projects and where to invest. He elaborated people were
getting out of or backing off from some areas.
Additionally, a lot of money that would have historically
gone into oil and gas investments was being returned to
shareholders in buybacks and dividends.
Mr. Cline stated there had been divestments as well. He
understood Alaska had seen a shifting from "the BPs to the
Hilcorps" and the growing importance of companies like
ConocoPhillips that had taken "the bit between the teeth"
to make the situation work, whereas perhaps some of the
bigger companies were questioning whether to invest
further. All of the changes had made it more challenging
for companies to get the support for doing business in
different areas around the world. He explained the
situation had impacted smaller companies because financing
was difficult to secure. He detailed that when small
companies joined consortiums with larger companies and then
struggled to obtain financing, all of the companies
involved were impacted. He stated there was a fundamental
change occurring with oil and gas companies that he
believed needed to be taken into consideration in the
competitive assessment.
9:23:20 AM
Vice-Chair Ortiz referenced the second bullet point on
slide 6 specifying that "Super-Majors" had initiated
extensive divestment initiatives and focused more heavily
on core regions or projects. He wondered whether the word
"core" related to a geographic region or something else. He
asked for an example of a company to help illustrate the
statement.
Mr. Cline cited BP as an example of a company that had been
divesting worldwide. He explained that BP had exited Alaska
and many other areas and was focusing on the most lucrative
locations. The company was also focusing on reworking its
business model to be more aligned with energy transition
issues. He cited ExxonMobil as another example of a company
trying to divest in a number of places around the world.
The company was really focused on the Permian, Guyana, and
Brazil where it could find the most profitable, largescale
developments that would support the company going forward
for many years. He elaborated that even if an asset was
good, the company considered whether it would significantly
"move the needle long-term." In some cases, big companies
that had made commitments to reduce their carbon intensity
were selling them to companies that were less sensitive on
the issue (meaning the smaller companies carbon intensity
looked better, but in actuality no change had occurred). He
cited Chevron as another example. He stressed the situation
was a serious shift.
Vice-Chair Ortiz thought it seemed like a natural tendency
for companies to focus on key and profitable areas where
longstanding projects would provide longstanding returns.
He asked what was different in the scenario described by
Mr. Cline.
9:26:30 AM
Mr. Cline responded that assets had always been ranked in a
portfolio and companies wanted to get great returns. He
explained that historically there had been "growth for
growth's sake." He elaborated that under the mindset,
companies were not as strict about the rate of return; the
goal was to grow reserves because investors wanted to see
the reserves replacement ratio. He explained that investors
currently cared a lot about the financial performance and
less about the reserves replacement ratio, which had caused
a shift. He considered perhaps companies should have always
been doing what Vice-Chair Ortiz described; however, that
was not the case.
Representative LeBon looked at the term "core regions" on
slide 6 and asked if Alaska's economic, political, and
environmental profile of safely delivering oil, gas, and
coal to market, made Alaska an attractive place to invest.
He asked if there would be increased activity in Alaska as
a result of Alaska doing the right things. He remarked that
the state would not be off fossil fuels in the immediate
future; however, he believed Alaska did the right thing. He
asked if it should give hope that the state's future in the
industry was bright.
Mr. Cline believed Alaska was an attractive oil province.
He believed people placed added value on the predictability
that everything was done well. He relayed that Europe and
Asia Pacific had relied on sources of supply were there
were geopolitical issues (i.e., Russia). He considered that
it perhaps made Alaska more attractive. He believed Alaska
was attractive regardless due to its resources and good
companies and service sector. He expected that Alaska was
also focused on stewardship of the environment and
communities, which was very positive.
9:29:53 AM
Representative LeBon stated the committee had recently
heard from the Alaska Permanent Fund Corporation (APFC)
that the current banking community retreat was not a total
retreat. He asked if the banking community was in total
retreat or keeping a low profile and still willing to
invest in Alaska.
Mr. Cline answered there was a definite retreat among some
sources of finance that would no longer invest; however,
there were many that would still provide funding. He noted
the institutions willing to provide funding would have
standards for companies to meet. He stated the other issue
was whether there was an entity that would lend (e.g.,
private equity) when another company would not. He deferred
to his colleague for additional detail.
NICK FULFORD, GAS/LNG AND CARBON MANAGEMENT SENIOR DIRECTOR
AMERICAS, GAFFNEY CLINE, added that it was useful to think
about the world of finance in the same way as oil and gas
in terms of supply and demand. He stated that the cost of
financing for oil and gas was beginning to rise because of
the beginnings of the scarcity of capital. As a result, it
was becoming a more attractive place to invest. He
characterized the situation as a "double-edged sword." He
highlighted in the Lower 48 there was a willingness of some
of the risk averse lenders to look at more adventurous ways
of funding. He relayed there were the beginnings of a
financially robust platform for banks to lend to for low
carbon forms of energy including CCUS; however, it had a
very long way to go. He believed there would be a
rebalancing as the reality of the expected level of return
from low carbon forms of energy started to hit home. He
believed the key for any oil and gas project was the
necessity of an emissions ready plan to show to lenders. He
continued that even if the emissions side of a project
could not be immediately addressed, as long as a producer
could demonstrate there was a path to do so, it would allay
most of a lender's concerns.
Representative Josephson referenced the presentation's use
of the term divestment. He referenced slide 5 and the
mention of resistance to support unabated fossil fuel
energy. He remarked that Alaska writ large had been upset
about Goldman Sachs' position on investment on the North
Slope. He asked if it was accurate that Goldman Sachs was
not necessarily acting out of environmental altruism. He
elaborated that the firm was looking 50 years out and
seeing wealth creation pivoting away from fossil fuels.
Mr. Cline replied that the firm's motivations were their
own. He believed from the business perspective, Goldman
Sachs and many others see that things were changing.
Investors were seeing in the next 30 years there would be a
significantly changed energy system and if a firm wanted to
be part of the business change, it was necessary to start
immediately. He stated there were many uncertainties about
how things would develop and who would be winners and
losers. He stated that companies like Goldman Sachs would
be placing bets all over the board and wanted to be a big
success in the future. He noted that many companies fell
under this category. He added that no one was entirely
altruistic. He considered perhaps it was serendipity that
business motives and the bigger picture came together.
9:35:22 AM
Mr. Cline advanced to slide 7 and discussed the response to
changes in market conditions. He stated there were things
that resource owners could do to encourage or ensure
continued investment in exploration and drilling. He
remarked that sometimes the things made a big difference
and other times they did not. He highlighted that when
things had gotten bad in 2020, Norway had taken actions to
de-risk exploration and had approved the reimbursement of
exploration costs "at the end of that period." He
elaborated that Norway had recognized that if companies
stopped exploring it would negatively impact project
development in the future. The United Kingdom (UK) had also
done things to encourage companies from halting activities.
He expounded that in many cases, individual production
sharing contracts had been adjusted when times became
difficult.
Representative Wool looked at slide 7 and observed
governments appeared to be reassessing their tax structures
to try to attract business. He asked if it was a trend
where governments were competing more rigorously for the
oil industry.
Mr. Cline answered that he believed some would. He used
Norway as an example. He noted that Norway had very high
government take through taxes; however, it was also careful
to ensure its tax system and regulations were attractive
for companies. He elaborated that Norway was willing to
make "on the fly" adjustments to address particular issues.
He remarked that other countries were struggling with the
question. He detailed there was a debate in the UK where
some did not want any more drilling and others did. He did
not believe there was one answer to the question and
different countries would likely come up with a different
solution. He believed Alaska was thinking hard about the
issue.
Representative Wool asked if the Norway sovereign wealth
fund invested in oil and gas. Alternatively, he asked if
Norway had decided not to invest in oil and gas.
Mr. Cline answered, "I think they have done that." He
described that Norway had a "split" perspective on things.
The country was very environmentally conscious with many
electrical vehicles, while simultaneously, it recognized
the necessity of protecting its oil and gas industry
because it produced the national wealth and had made Norway
a prosperous country.
9:40:09 AM
Mr. Cline turned to slide 9 to discuss the Alaska oil
outlook and its competitive strengths and weaknesses. He
highlighted the state had wonderful resource potential and
exploration had been pretty good over the past 10 to 15
years. There were numerous significant discovered resources
that could be developed and high potential exploration that
could be pursued. Additionally, there were good operators
and investors willing to invest in Alaska combined with a
robust service sector. He characterized it as a fundamental
key strength that most countries would be very happy to
have.
Mr. Cline addressed the weaknesses in Alaska's oil outlook.
He stated that Alaska was not an easy operating
environment. He detailed there was a short window for
development activities, much of the locations were remote
to infrastructure, and there were costs of getting
production to market. He explained that many elements made
it more challenging and higher cost. He highlighted there
were some regulatory environmental issues that had made it
difficult to take the last step to get approval for
development. He cited the Willow project as an example. He
stated that those types of issues were prominent for
Alaska. He thought there was a perception among some people
that there was a lot of potential for change in the form of
additional taxation and that fiscal stability was an issue.
He thought the concern was an issue for many companies. The
bottom line was determining how to convert successful
discoveries into successful developments. He noted it had
been difficult in recent years.
Mr. Cline stated when looking at additional things that
people would be concerned about in the Alaska context,
there were some global issues including volatility. He
detailed that Alaska's developments were conventional and
tended to involve a great deal of upfront investment and
required 20 years or more to achieve their economic
potential. He explained that investors deciding whether to
pursue an investment would look at the 20-year picture. He
pointed out that volatility impacted the projection. He did
not believe it would discourage investors if other
conditions were desirable; however, it was a concern.
Another concern was decelerating demand and energy
transition. He remarked that all major producers were
competing with other producers, as such, Alaska was
competing with the Middle East and the Lower 48 on cost of
production and profitability and whether something was a
low carbon source of energy. The items were all major
issues. He remarked that if price recovery was sustained at
a bit of a higher level, it may create some new
opportunities. He stated that people may begin to adjust
their planning assumptions for projects and may be willing
to do a bit more.
9:44:50 AM
Representative LeBon looked at the graph on slide 9 and
noted the two red dots representing threats under the
Alaska column. He understood the reason for the red dot
under the "operating cost and permitting environment." He
asked why Alaska was the only location shown with a red dot
under "access to capital."
Mr. Cline answered that the chart was very subjective. He
relayed that Gaffney Cline had heard, especially from
smaller companies, that finding project financing in Alaska
was very difficult. He noted that the issue was not as big
for large companies.
Representative LeBon remarked that Alaska was not rewarded
for trying to do the right thing environmentally and being
balanced in its approach between development. He asked if
the state had been damaged by ballot initiatives trying to
change the state's tax structures. He wondered if it had
contributed to the state receiving a red dot [on the chart
on slide 9].
Mr. Cline replied, "Maybe." He elaborated that fiscal
stability was not the only issue, but it was an important
one. He stated to the extent that companies and finance
sources considered the issue and were concerned going
forward, it would influence their opinion.
Representative LeBon surmised that the debate in the past
several years over what the state should tax the industry
had not helped Alaska.
Mr. Cline replied that the issue was prominent, and
companies were wondering which way it would go.
9:47:19 AM
Representative Wool referenced Mr. Cline's mention of
volatility. He asked if times were currently more volatile
historically speaking. He asked if volatility was more of a
threat when other things were also unpredictable.
Mr. Cline confirmed there was always volatility. He stated
it was possible to see the trend when looking at volatility
over a long time horizon, otherwise it was difficult. He
thought the cycles of volatility were beginning to get
closer together. He stated that everything "fell off a
cliff" after 2014/2015. There had been a slow recovery
followed by another downturn. He noted there had not been
much space between the two events. He thought it was
interesting to consider whether volatility would be
impacted by other considerations like energy transition
that had not been present in the past. He stated his
perspective was a bit more "fragile" about the oil and gas
industry because there was a new uncertainty for the
industry's prospects.
Representative Johnson referenced news received earlier in
the day that AIG was pulling back from financing in the
Arctic. She wondered whether marketing or facts were
driving the decisions. She did not necessarily believe
development was responsible for the rising temperature in
the Arctic; however, it was being used as a lobbying
tactic. She remarked that the state had not followed
through on paying tax credits back [to companies]. She
stated that the German company ING had a significant
investment and the situation had made it quite difficult
for the company. She wondered how much the tax credit and
lawsuit had impacted financing in Alaska as opposed to the
impact of environmental concerns.
Mr. Cline answered that he did not know, but he imagined
some people would see it an indication of less stability.
He was aware of the issue, but he did not know how it had
impacted thinking.
9:51:07 AM
Mr. Cline advanced to slide 10 and addressed Alaska and the
Lower 48 developments. He noted that in some ways, Gaffney
Cline found the Lower 48 to be Alaska's biggest competitor.
He stated there were many similarities in the legal and
fiscal system, which attracted the same companies. He
elaborated that companies investing in Alaska often had
portfolios including investments in the Lower 48 as well.
The companies made comparisons between the locations when
trying to decide where they would like to put more rather
than less emphasis. He reported that conventionals and
unconventionals were a real source of competition. He
characterized unconventionals as a unique source of
competition because their development was quite different.
He detailed that unconventionals included factory drilling
where $10 million wells could be started and shut down
quickly. He explained it was much different than a
conventional development where a company invested $8
billion, and the money was paid back over a long time
horizon. He reiterated that Gaffney Cline saw the Lower 48
as a real competitor for Alaska.
Representative Johnson asked how much a reinvigoration of
the Permian Basin factored in. She remarked that it was not
quite the same as the way oil could be produced in North
Dakota. She thought it appeared to be drawing numerous
companies out of Alaska because of its substantial
infrastructure.
Mr. Fulford responded that the Permian revolution was
largely technologically driven with the economics of the
field being transformed. He believed it had turned out to
be a much more substantial "gift" to the oil industry than
was previously seen. He added that along with the oil came
gas as well, which provided an economic lift. There was no
doubt that from an oil industry perspective, the Permian
was where it had been happening for the last three to five
years, which had attracted significant investment that
could otherwise have been looking at Alaska.
Mr. Cline added that with high prices some less economic
conventionals were back in play. He stated it would result
in new production coming on the market quickly.
9:55:10 AM
Mr. Cline turned to slide 11 and discussed oil development,
production, and state revenues. He stated the historical
trend was large basins in Prudhoe Bay and Kuparuk; however,
the basins were mature and declining, and much effort was
being put into keeping the fields as productive as
possible. He spoke to the importance for Alaska to build on
its exploration successes and get some new developments in
place to begin softening the decline or reversing the
trend. He noted there were challenges that would make the
work a little more difficult.
Representative Wool referenced the graph on slide 10
[showing US crude oil production] where Alaska was shown at
a steady decline since 2020. He noted there had been a
similar slope 20 years earlier. He noted that the Permian
Basin had come in and rapidly increased. He asked if the
type of resource extraction in the Permian Basin was more
of a temporary method that went up quickly and fell quickly
as well. He referenced other development potentials in
Alaska such as the Natural Petroleum Reserve-Alaska (NPRA)
that would make the Alaska curve go up if they came to
fruition. He asked if projects in the Permian Basin and New
Mexico were shorter-term.
Mr. Cline responded the nature of development [in the
Permian Basin and New Mexico] was different. He elaborated
the wells could be drilled at a lower cost more quickly. He
noted the wells may not have the same life span as a
conventional well, but companies kept drilling them. The
wells could be turned on and off and companies could hold
drilled and completed wells in addition to drilled and
uncompleted wells in their inventory for use when prices
increased.
Representative Wool asked if the entire reservoir had the
long-term potential. He had heard in the past that when oil
prices were high, all of the faucets would be on and supply
would increase, which in turn caused the price to drop. He
observed that the system was self-regulating. He speculated
that with oil prices at $100 per barrel, there would be
more oil production, which would help supply. He asked if
the Permian Basin reservoir was as robust as the North
Slope. He asked if there was reservoir potential in the
Permian Basin to keep it going.
Mr. Cline answered that the investments made in the Permian
Basin by all of the large companies suggested they believed
it to be the case.
9:59:23 AM
AT EASE
9:59:39 AM
RECONVENED
Mr. Fulford discussed natural gas price volatility from
2020 to 2022 on slide 13. He shared that around 2014/2015
he had been looking at ways to monetize Alaska gas and he
was happy to be back. He stated it was a world-class
project that warranted considerable attention. He
highlighted that natural gas had been propelled to the
forefront of global geopolitics in the past several days
and was the source of considerable political unease,
especially in Europe. As a result, it was a concern
worldwide. He reported that currently the European gas
index stood at about $60 MMBtu, which translated to an oil
price of about $400 per barrel. He stated it was clearly
having a knock-on effect on people's electricity and gas
bills. He believed the topic would likely be propelled into
the headlines for the foreseeable future. He believed it
would cause a hard look at security of supply and the way
Europe in particular sourced its gas. Currently more than
half of US exports from the Gulf Coast were going to
Europe. As a result, Asia buyers had to look elsewhere,
which was part of the price challenge. He explained that as
buyers looked elsewhere, they were focused on the Pacific
Basin, which would be the market for Alaskan gas.
Mr. Fulford relayed that the $60 MMBtu price of gas in
Europe compared to a Henry Hub price of about $5.00, which
was a little higher than usual. He reported that every ship
arriving in Europe from the U.S. priced at the gas index
represented a profit margin of about $200 million. He noted
about two vessels arrived per day. He noted that current
conditions could not be expected to continue, and the
industry generally did not cope well with volatility. There
was an expectation that things would settle back down over
the next months and years. Nevertheless, he believed the
shock to the system would cause a reappraisal of global gas
sources and was likely to push Alaska back up the list in
terms of reliable sources of secure supply.
10:03:41 AM
Mr. Fulford continued to address natural gas price
volatility on slide 13. He relayed that the beginning signs
of trouble in the LNG [liquid natural gas] industry began
in 2018 through 2019 when supply, particularly from the US,
had overtaken demand. He stated there had been an
inexorable price reduction in 2018/2019. He remarked that
when COVID-19 hit, it had been a different effect to that
of oil. Nonetheless, the additional drop in demand had
pushed LNG down to historically low levels where each of
the vessels leaving the U.S. represented a cash loss of
about $8 million. He elaborated there had been a certain
amount of cutback and cargo cancelation to avoid the
losses. He stated the industry had been trying to find its
feet ever since. He relayed that even before the tensions
in Europe, there were already signs of a very tight market,
particularly with China ramping up in demand.
Mr. Fulford stated that one of the features of the LNG
industry was the extraordinary long-term investment it
represented and the huge amounts of capital. He pointed to
the graph on slide 13 and reported that it was not what
stakeholders (i.e., resource holders, liquefaction
companies, and customers) wanted to see. He believed the
implications of the volatility experienced over the past
couple of years would be significant.
10:05:35 AM
Mr. Fulford turned to slide 14 and stated he believed there
would be a significant reexamination of global supply and
demand. In particular, there would be a significant
emphasis on reliability and dependability, something Alaska
could offer "in spades."
Mr. Fulford stated that the energy transition would be a
very material feature for any future gas project in Alaska.
He remarked it would have to be accommodated in various
ways. He relayed that the next wave of the U.S. Gulf Coast
projects was working hard to reduce their carbon intensity
with things like electric drives to bring down emissions
from turbines and carbon capture in storage from the acid
gas removal. He explained that some of the situation was
driven by financial reasons, but most was driven by
customer requirements. He highlighted that about two years
back the French government had vetoed a contract between a
French customer and one of the U.S. producers on the basis
of its carbon intensity. He believed it sent a very strong
message through the community, which would have to be
echoed in any future project in Alaska.
Mr. Fulford specified that finance was the other feature.
He relayed that for any major hydrocarbon project (oil or
gas), the stakeholder requirements of lenders and the
investment committee concerns over long-term capital
markets were driving industry toward zero carbon projects
or projects with a lower carbon intensity. He reported that
all indications were that there would be space for new LNG
in the marketplace from about 2028. He informed the
committee that all signs from China indicated it was
ramping up LNG requirements significantly. He noted it
included the expansion in Qatar.
10:08:37 AM
Representative Johnson thought that about five years back
LNG had been considered to be cleaner and was in the
category of renewable type clean energy, especially in some
of the East Coast states relying heavily on coal. She
stated that as time had progressed it seemed the sentiment
in the U.S. had changed to the belief that it was too much
carbon. She did not know about the rest of the world. She
asked if the impact on oil was also impacting LNG.
Mr. Fulford stated that he was "a gas man through and
through." He relayed that about five years back, gas had
been viewed as a clean burning, lower carbon fuel with a
long future ahead. He had been surprised at the speed gas
had been lumped in with coal and oil as being an
unacceptable fossil fuel. On the optimistic side, there
were zero carbon fuels (e.g., wind and solar) and
conventional fossil fuels like oil and gas. There was
considerable potential and an expectation that hydrocarbons
would be a major part of lowering the carbon intensity of
global supply. For example, gas could be processed into
other fuels like hydrogen in particular. He explained that
blue hydrogen represented a major opportunity for the gas
industry. There were various trials underway to look at
spiking natural gas lines with hydrogen.
Mr. Fulford continued to answer the question from
Representative Johnson. He referenced the undertakings in
COP26 and explained the enormity of the task ahead for most
countries to reach their targets was quite extraordinary.
He detailed it involved a substantial expansion into
electrification of the global economy and the investment it
would bring. In that sense, the idea that oil and gas would
somehow be removed from the global energy equation was not
realistic. He confirmed it would have to be lower carbon
and more would be used for net zero fuels like blue
hydrogen, but it would be a long transition. He considered
the future for Alaska oil and gas and relayed that within a
generation it would become the primary concern; however,
there was time to adapt.
10:12:22 AM
Representative LeBon referenced the term "Alaska clean gas"
that had been in the news. He asked what Alaska clean gas
meant to the market and whether it gave Alaska an advantage
going forward.
Mr. Fulford replied that he was unfamiliar with the term.
He imagined it would involve a lower carbon or lower
emissions product. He highlighted examples from other
locations. He referenced the delivery of net zero LNG
carbons where sellers purchased nature-based offsets to
neutralize the carbon content of LNG cargo. The current
cost was about $2.5 million per cargo (approximately $0.70
MMBtu). He explained the carbon cost was likely lower than
the market would ultimately expend on.
Vice-Chair Ortiz looked at slides 14 and 15 that referenced
Alaska LNG and the project. He asked for verification the
slides were referring to the LNG pipeline project.
Mr. Fulford answered that the Gaffney Cline overview was
based on the current public domain perspectives on the
project that involved a gas treatment plant on the North
Slope, a gas pipeline to Cook Inlet, and an LNG facility.
10:14:36 AM
Vice-Chair Ortiz asked if things were changing in
relationship to potential ways LNG energy could be
harnessed in terms of things like fuel cell technology. He
wondered whether there was potential for new technologies
to allow Alaska to pursue other ways of harnessing the
energy as opposed to the large investment in a pipeline.
Mr. Fulford responded there were many ways in which the
large resource in Alaska could be reexamined and various
ways to monetize the resource conventionally or in a lower
carbon environment. He highlighted direct exports from the
North Slope using the same technology as the Yamal project
in Siberia as a concept under active consideration. He
informed the committee that the area of technology that had
moved on the most in the past five to ten years was
floating LNG or small scale LNG. He reasoned that while it
did not match the scale of the resource, it could be used
as a way to start to access the resource.
Vice-Chair Ortiz asked if Mr. Fulford had used the term
"floating LNG."
Mr. Fulford responded affirmatively. He explained that
floating LNG involved putting a liquefaction plant on a
vessel. Mozambique and Senegal both had projects using a
large floating vessel holding a liquefaction plant. He
detailed there was a ship-to-ship transfer onto an LNG
carrier. He explained it was relatively expensive
technology if done conventionally; however, one of the
advantages was the ability to get gas to market relatively
quickly while additional phases were carried out (i.e.,
land or platform based).
10:17:07 AM
Representative Wool asked about the bullet point on slide
14 "given the energy transition, this could be the last
chance to monetise the substantial gas resources in a
traditional manner." He asked if there was a nontraditional
manner.
Mr. Fulford replied that he believed the environment in
Alaska was suitable for blue hydrogen carbon capturing
storage. He detailed there were a number of ways to
reexamine the resource and consider exploitation in a
completely different way by processing the gas before it
left the North Slope and capturing the carbon. For example,
blue ammonia was another potential form of energy exports
that could be adopted. He reported that to some extent the
ambient temperature in Alaska helped the processes in terms
of efficiency. The technologies were examples of
nontraditional ways to monetize the gas in Alaska.
Representative Wool asked for verification decarbonizing
meant stripping the carbon off of methane and getting
hydrogen to result in a carbon-free fuel. He surmised the
carbon was then quarantined somewhere in the ground or
something similar.
Mr. Fulford agreed. He elaborated there were a number of
the projects using the [carbon stripping] method in the
Gulf Coast area. He elaborated that all of the projects
were leveraging the 45Q tax credit, which offered up to
$50/ton of CO2 (which was geologically sequestered). He
detailed that although the credit would only support
relatively high efficiency carbon removal technologies,
there were measures in Washington, D.C. to increase the
credit to $85/ton or more. He noted that it started to
incorporate a range of other technologies. Separately,
there were hydrogen credits available. He stated it was
part of a federal policy to incentivize the production of
zero carbon fuels to the point where the value of carbon
globally was sufficient to support conventional investment.
He noted how long it would take was difficult to know.
Representative Wool referenced hearing about policies
coming into play that called for a percentage of renewable
production. He thought the governor had a proposal for 80
percent by 2040. He considered that if Alaska had a low
cost energy source it would attract business and lower
utility costs for Alaskans. He reasoned if there was also a
policy calling for 80 percent renewables, it would
discourage the development of domestic gas for Alaska,
which may or may not impact export projects. He believed
many people who wanted a pipeline in Alaska wanted it to
reduce high heating costs in state. He asked if it had been
factored into the decision profile.
10:21:32 AM
Mr. Fulford answered that he had become aware of some of
the challenges with winter heating bills and fuel
(particularly in the northern part of the state) when he
had been in Alaska often in 2014 and 2015. He stated that
the gas resource represented relatively low hanging fruit
in terms of an ability to rapidly reduce some of the costs.
He relayed that incorporating gas into a regulated mix of
generation would present challenges unless the mix included
hydrogen fuel of some sort.
Representative Johnson shared she had seen some of the
different types of experimental attempts to take carbon out
of the air. She asked for an update on the technology. She
knew there were many people working on the issue, the tax
credits were being leveraged, the Infrastructure Investment
and Jobs Act (IIJA) bill contained substantial related
money, and Canada had made it a priority. She stated that
what she had seen taking place was still a long way from
being very usable other than capturing carbon at the source
(versus out of the air).
Mr. Fulford referenced the $50/ton credit being offered
through 45Q, which went some way to facilitate the complex
chemical procedure. He stated it was clear that a much
higher carbon cost or benefit was required to drive the
types of more complex technologies that would start to make
a big difference. He referred to Representative Johnson's
reference to direct air [carbon] capture, which was a very
energy intensive way of removing CO2. Based on current
technology, it would require a higher carbon price or
credit than was currently available. He mentioned the low
carbon fuel mechanism in California. For example, some of
the carbon capture projects in Texas were based on
exporting low carbon fuel to California and getting a
credit. He stated that the method of building up a series
of credits to support the high cost of the technologies was
starting to be looked at.
10:25:12 AM
Mr. Fulford turned to slide 15 and discussed the "high
level guideline project economics compared to other global
sources of LNG - breakeven analysis to China (central
case)". He relayed the analysis was based largely on the
work done years back that had been continued. He was aware
the Alaska Gasline Development Corporation (AGDC) had been
working to examine the cost of the project and had
suggested that some of the costs [in the analysis] could be
reduced substantially. One of the mechanisms under
consideration was the use of a federal guarantee, which
would reduce the risk associated with the project
substantially. He communicated that the slide was a high
level assessment and did not necessarily incorporate the
most recent work.
Mr. Fulford relayed that in order to compete effectively,
the primary competition for gas would be the Lower 48,
particularly the next wave of LNG projects getting
underway. He detailed that the projects in the Lower 48
benefitted from lower construction costs less
infrastructure investment. He explained there was a
structural disadvantage the Alaska project would have to
address. He stated that the gas resource represented a
potentially low source of gas and the shipping cost to Asia
was far less. He concluded that for any monetization of
Alaska LNG, cost reduction and efficiencies would have to
be prioritized.
Representative LeBon asked if Gaffney Cline had contacted
AGDC for input on the cost estimates when preparing the
presentation.
Mr. Fulford replied in the negative. He detailed that
Gaffney Cline would be happy to discuss the topic with AGDC
and understand some of the latest developments. He
communicated that Gaffney Cline had a copy of the Wood
Mackenzie report, which included some substantial costs
savings of about 30 percent from the revised financing
arrangements and perceived lowering of risk. He had been
more surprised by the reductions in capital cost of the
plant and pipeline, particularly in light of the 250
percent increase in the cost of steel in the past two
years. He noted the rise in steel cost was proving a
substantial constraint to a number of oil and gas
developments worldwide. For example, the Trans Mountain
Pipeline in Canada had increased from around $9 billion to
over $20 billion during the course of construction. Much of
the increase was due to the price of steel. He was happy to
discuss any revised pricing available.
10:29:20 AM
Representative LeBon asked if Gaffney Cline had included
input from the Wood Mackenzie Report in its analysis.
Mr. Fulford answered that that the "Wood Mac" report was
largely based on assumptions provided by AGDC. He had no
reason to disagree with the conclusions drawn by the
report. He believed the focus "for that" would be in the
assumptions.
Representative LeBon stated there was an expectation that
liquefaction costs were higher in Alaska than in the U.S.
gulf. He asked if there was a finite or definable source
for the conclusion.
Mr. Fulford highlighted the nature of the environment and
challenges involved in construction made LNG Canada a good
reference point (several hundred miles south). Based on
reports, the costs involved in liquefaction were 40 to 60
percent higher than some of the greenfield projects on the
Gulf Coast.
Representative LeBon asked if the presenters generally
agreed with the Wood Mac report conclusions on the Alaska
LNG project.
Mr. Fulford responded that he would not disagree if the
report concluded Alaska LNG would have a competitive
delivered price into Asia (if the assumptions used were
correct). He communicated that Gaffney Cline would agree
with the expectations where market prices may stabilize.
10:31:40 AM
Mr. Cline added that Gaffney Cline would want to understand
the assumptions better to fully be able to get behind them.
Representative LeBon thought the conclusion would be to do
a deeper dive and have communication with those involved in
the Alaska LNG project.
Representative Thompson observed that he had served on the
House Finance Committee in 2015 and 2016 and the numbers
appeared to be the same as they had been back then. He
noted that in 2015 and 2016 the oil companies were going to
build the pipeline, which drove the cost "sky high." He
thought it required a deeper dive. He observed that the
Gaffney Cline presentation showed supply would be a little
over $11 whereas the Wood Mackenzie report showed it could
likely be done for $6.50 to $6.70. He wanted to see more
information.
Mr. Fulford highlighted a feature of the Wood Mac and the
analysis was the very material impact of the different
financing arrangements being contemplated in the report. He
explained that the cost of debt and overall project hurdle
rates reflecting a perceived lower risk, likely accounted
for two-thirds to three-quarters of the cost reduction.
There were cost features involving the capital cost to
liquefaction pipeline, but the key difference between the
numbers in the Gaffney Cline analysis and those in the Wood
Mac report revolved around finance.
10:34:22 AM
Mr. Fulford turned to slide 16 and discussed Alaska LNG. He
summarized that everyone was well aware of the scale and
quality of the gas resource in Alaska. He highlighted there
had been a long history of attempts to monetize the gas in
Alaska. The key constraint had been the cost compared to
other competing sources. He stated there was no doubt the
LNG industry had learned a substantial amount from its
mistakes over the past several years. He highlighted that
CapEx [capital expenditure] control and more efficient EPC
[engineering, procurement, and construction] contracting
were having an impact. He stated that the opportunity to
enhance a project through various methods to reduce its
carbon intensity was advantageous. He advised that the
project would have to compete with the Lower 48 and it
should be the prime focus for any competitive analysis.
10:36:04 AM
Mr. Cline moved to a section on Alaska's competitiveness
factors. He stated that companies focused on a number of
different issues when considering an investment. The first
consideration was resource potential. There were also
issues of cost, the hydrocarbon market conditions, and
issues around fiscal stability. He recognized that resource
potential [in Alaska] was good. However, costs were high.
He reported that development costs in Alaska ranged between
$8 to $15/barrel, which was relatively comparable to other
high cost developments around the world. Operating costs
were also comparable to other high cost developments at
around $7 to $12/barrel. He highlighted that transport
costs in Alaska were much higher, which was a key
differentiating factor. He stated that cost would not
necessarily discourage investors, but it was one of the
factors that would be carefully considered.
10:38:18 AM
Mr. Cline looked at a fiscal comparison on slide 19. He
remarked that it was not possible to change resource
potential or cost, but the fiscal aspects were changeable.
The slide included a chart that included the government
take in number of jurisdictions around the world. He
pointed to Norway at the right of the chart reflecting high
government take and the UK on the left with relatively low
government take. He categorized Alaska's government take as
relatively high in comparison. He pointed out that not all
government take was the same. He detailed that Alaska had a
royalty that companies paid upfront. He noted in a general
sense, companies would rather wait until they were
profitable before delivering "the take." He identified it
as one of the key distinctions between different
jurisdictions.
Mr. Cline stated it was always useful in the discussion to
have "a Norway" because the country had a particular
method. He elaborated that Norway had a very high
government take with a 78 percent marginal tax rate, but
the take was all income based. He explained that its
government take occurred once projects hit their payout and
going forward. He believed the concept was something that
made the system tolerable for companies. He stated that
Alaska had property tax and royalty, which he believed were
important factors.
Representative Josephson stated that one of the reforms
that had been discussed was to the per barrel credit. He
stated the industry made the case that it was part and
parcel of the overall hybrid system including the gross tax
and profit tax. He noted that the per barrel credit had an
"odd" reverse progressive element. He stated there was
criticism that the state was paying the credit where
companies would be doing development and production
regardless. He asked if it was a large disincentive to the
industry that would result in changed development behavior
if the $8/barrel credit was reduced to $5/barrel for all
fields.
Mr. Cline responded that there were two ways of addressing
the question. The first was to consider whether the
specific standalone change would be tolerable or
intolerable. He suspected the change would not be a
"backbreaker" on its own. The second was to consider what
impact any tax change had on perceptions of fiscal
stability in Alaska. He explained the change [to the per
barrel credit] on its own may be manageable; however, when
combined with existing concerns that overall discouraged
development activities, there may be a downside risk.
10:43:02 AM
Representative Wool observed that the transport costs
reflected in the top portion of the bar graph on slide 19
appeared to all be equal. He noted that Mr. Cline had shown
transport costs differently on the previous slide. He asked
for an explanation regarding the difference.
Mr. Cline replied that in order to do a fiscal comparison,
the costs had been normalized and set at an equal level,
where the only difference [between the locations on slide
19] was the fiscal terms. The method had been used for
purposes of analysis only. He agreed that in reality the
costs would be different because the locations all faced
different conditions. The differences had been backed out
of the analysis to obtain an apples-to-apples fiscal
comparison.
Representative LeBon referenced Representative Josephson's
previous question about how a reduction in the per barrel
credit from $8 to $5 would be perceived by industry. He
stated his understanding of Mr. Cline's answer that it
would send a message about the tax environment in Alaska
and would discourage investment.
Representative Johnson considered the system in Alaska that
included government take and a royalty for Alaska as part
of the take. She thought it seemed that any other location
outside of Alaska would have a royalty share going to the
lease owners. She had always had difficulty considering the
royalty share as part of the government take. She asked for
an explanation.
Mr. Cline replied that any form of take going to the
government was a form of government take.
Representative Johnson clarified her question. She used
Texas as an example and explained that a nongovernmental
royalty owner received a royalty share for their property.
She explained that in Alaska, the royalty share was added
to the state's government take because it was the
government and royalty share owner. She wondered why the
royalty was included in the government take when it should
be considered a royalty share no matter who the owner was
because it was not part of the state's tax regime.
Mr. Cline answered that he was not sure how to answer the
question. He would follow up.
Vice-Chair Ortiz stated his understanding of Representative
Johnson's question. He explained that Gaffney Cline was
considering royalties as part of Alaska's government take.
He asked if royalties going to private owners in Texas were
factored in when considering overall take. He asked if the
royalties in Texas should be considered when comparing
Alaska and Texas. If the royalties in Texas were not
considered, he reasoned royalties should be taken out of
the government take equation in Alaska when comparing the
locations.
10:46:56 AM
Mr. Cline answered that due to the nature of private
ownership there were many different ways companies had to
pay. He relayed that Gaffney Cline considered it to be
government take even if it was taken by a private owner. He
explained that when making investment decisions a company
had to consider royalty regardless of who was receiving the
payment (i.e., the state, federal government, or private
owner).
Mr. Cline discussed Alaska competitiveness globally on
slide 20. He reported that overall Gaffney Cline found
Alaska to have a fairly competitive environment. He
highlighted it was evidenced by some important operators
increasing their exposure and making it clear how Alaska
was part of their overall portfolio (e.g., ConocoPhillips
and Hilcorp). He stated it was a positive trend indicating
Alaska was a destination for oil and gas investment.
Another positive was the relatively good exploration
results that had occurred over the past 10 to 12 years.
Nevertheless, it was important to understand it was a
significant issue if it was difficult to mature discoveries
into commercial developments. He elaborated that companies
deciding whether to invest considered it took years to get
to an investment decision and reach economic potential. He
stated the risks were significant considerations.
Representative LeBon asked if Alaska's regulatory
environment was positive, neutral, or improving.
Mr. Cline did not find the state's regulatory environment
to be negative. He remarked that his answer was anecdotal
as he had not done a study on the topic. However, on the
federal side there were concerns there would always be
challenges to getting a development done, including
challenges associated with permitting and environmental
impact statements. He highlighted the Willow project as an
example. He made a comparison to other places in the world
where it did not seem to be as difficult. He cited Norway
as an example and explained the country had very high
environmental and health and safety standards, but the
system was relatively transparent, and it was possible to
see when things would begin and end. He believed regulatory
visibility was very important for companies. He was
uncertain the regulatory visibility existed currently in
Alaska.
Representative LeBon stated that additional regulatory
overview on the Willow project was currently underway. He
asked if the action not only would potentially delay Willow
but make Alaska less attractive as well. He asked when
compared to other global locations, whether Alaska was
being rewarded for being a good steward of its lands and
compliant with regulatory rules.
10:51:47 AM
Mr. Cline answered that there was not a problem with high
standards [in Alaska]. He clarified the issue was whether a
company could go through a process that was relatively
transparent and predictable and get to the end within a
reasonable timeframe. He believed everyone would agree
being good stewards of the environment and communities
needed to happen. He highlighted it was a real concern if a
company did not know when it would happen and if there
would be new issues arising. He was certain Alaska was
committed to being a good steward of its environment and
would do whatever it took. He imagined the lack of
visibility on how things would work was frustrating for the
government and companies [in Alaska].
10:52:57 AM
Mr. Cline moved to slide 22 and discussed Alaska
development scenarios. He addressed the need for new
developments to offset declining production. He discussed
why it was important and how much it could contribute to
investors and the state. He shared that Gaffney Cline had
done an analysis that included two types of developments:
1) large, major material developments like Pikka and Willow
that required new infrastructure hubs, 2) incremental
developments that could leverage off of big developments to
become profitable.
Mr. Cline looked at the large "Pikka scale development" on
slide 23. He detailed that a project of this scale required
some very large investments including a new infrastructure
hub; however, the project would also generate significant
revenues over its lifespan. The Gaffney Cline model showed
the large scale project would generate [new state revenue
of] $6 billion to $7 billion over 20 years. Additionally,
other incremental developments could build around the
project, which had been a pattern in the oil and gas
industry in Alaska. He pointed out that the replacement of
declining production would be good for key infrastructure
like the Trans-Alaska Pipeline System (TAPS) to keep
tariffs down and ensure throughput was above the operating
threshold. He highlighted that large scale developments
were not easy due to the very high cost. He pointed to a
graph on slide 23 showing project cash flows going deep
into the red and then curving back up. He explained that
companies had to put their money upfront and go deep into
the project before any reward was reaped over time.
Companies had to consider whether they would be able to
realize the profile and what the associated risks were. He
concluded that the "Willows" of the world were very
important going forward.
Mr. Cline discussed incremental developments on slide 24.
He highlighted the importance of incremental developments
and explained they tied into the existing hub
infrastructure. He elaborated that the projects could be
brought into development relatively quickly because of the
existing infrastructure and could make a big contribution
on top of the large scale projects. He relayed that the
analysis showed the development on slide 24 generating $150
million or more per year and as much as $1.5 billion in
state revenue. The information demonstrated the importance
of the new developments and the opportunity cost of not
doing them.
10:57:00 AM
Mr. Cline provided concluding remarks on slide 25. He
relayed that Gaffney Cline found Alaska to be an attractive
oil and gas province. The analysis also found new
developments were needed in order to maintain the momentum.
He stated the "Willows and Pikkas of the world" would be
very important. The large projects would also be costly and
challenging. He communicated it would be very helpful if
regulatory visibility and fiscal stability could be managed
to the extent possible. He highlighted that global
competition was fierce and would continue to increase.
Representative LeBon referenced the use of the term
regulatory visibility. He asked if the phrase could be
interpreted to mean regulatory stability. He asked how the
terms differed.
Mr. Cline clarified that visibility was knowing what was
required, what would happen, and when. He stated that the
regulation may be very challenging. He remarked that an
environmental impact statement may mean a detailed
emissions analysis was needed. He explained that stability
pertained to a situation where there was uncertainty about
what would happen and there was change that may have been
unexpected when the original decision had been made.
Representative LeBon remarked that some of his questions
had attempted to help define the regulatory element as
being reasonable, encouraging investment, and functioning
on a timeline that produced successes. He asked if the
presenters viewed the Alaska regulatory environment as
positive for investment. He cited the process the Willow
project was going through as an example.
10:59:45 AM
Mr. Cline answered that what the Willow project had gone
through was not positive or helpful. He clarified that he
did not disagree with whatever the appropriate requirements
were; however, to start and stop and lose a year was
difficult.
Representative Johnson noted there was a $10 million
appropriation in the budget for research on heavy oil
primarily related to identifying the large Ugnu formation.
She did not know what was taking place globally in terms of
heavy oil research. She asked for comment on the heavy oil
potential.
Mr. Cline answered there were a number of heavy oil
projects including oil sands. He did not have a
comprehensive knowledge of the issue, but the projects were
high carbon and would be disfavored. He stated it would be
an additional hurdle for any heavy oil project. He
explained the projects were high carbon because of the
nature of the fluid and due to the energy they used. He
elaborated that many locations, likely including Alaska,
would be focusing on thermal projects that used heat to
make the oil flow. As such, the projects were huge
consumers of energy, which made the projects relatively
higher carbon. He stated the situation meant needing to do
more to manage the carbon intensity, which would increase
cost.
11:01:50 AM
Representative Johnson wondered if the product was higher
value due to its composition.
Mr. Cline replied that he was not aware of anything.
Representative Wool asked Mr. Cline to elaborate on the
carbon footprint of Alaska oil production. He asked where
Alaska ranked. He assumed the Permian Basin used less
carbon to produce oil. He believed Alaska was one of the
few oil locations using oil to energize the operations. He
understood that many locations used natural gas instead. He
noted that the natural gas in Alaska was pumped back into
the ground, whereas other locations extracted natural gas
to operate the system.
Mr. Cline replied that using natural gas in operations was
normal. He reported that in old contracts years back, the
gas could be used. He stated that gas was generally lower
carbon than using diesel. He supposed more diesel was used
in Alaska operations because gas was unavailable.
Mr. Fulford elaborated that the primary focus of many oil
and gas companies in terms of getting a foot on the energy
intensity ladder was to do a benchmarking appraisal to
establish the low hanging fruit related to carbon intensity
reduction. He elaborated that the typical process used a
marginal abatement curve that looked at upstream and
midstream operations and at what could be done. He stated
that methane emissions were just as important as CO2. He
explained that methane emissions were a good example of how
it was possible to reduce the carbon intensity of an
upstream operation and save money at the same time. He
relayed it was the process many producers in Alaska were
going through. He noted that the state was probably
starting from a higher starting point, but that was not to
say that a lot could be done at a relatively low cost.
11:04:51 AM
Representative Wool remarked that people made statements
that Alaska operated safe and clean drilling operations
more so than other locations. He believed the presenters
were saying that the statement may be true, but Alaska was
one of the higher carbon emission locations compared to the
Lower 48 and perhaps other areas. He remarked on the goal
to reduce greenhouse gases. He stated that if a lot of
emissions resulted from the production of a product, which
would also release greenhouse gases, it was not very
desirable, especially when oil companies were under the
microscope. He asked if Alaska's carbon footprint from the
oil industry was significantly higher than in the Lower 48.
Mr. Cline replied that he was not certain about the
comparison to the Lower 48. He recalled that the emissions
were relatively high in Alaska. He stated it would be one
of the issues Alaska needed to address going forward as
there was more of a price or premium being put on carbon.
There were some things that were relatively straight
forward, low cost, or profitable to address, which everyone
in the industry was focused on. He expounded there would be
subsequent phases where it would become more challenging.
11:06:48 AM
Representative Johnson asked what the presenters saw in
their analysis that could increase production in Alaska.
She highlighted regulatory issues as an example.
Mr. Cline replied that it was important to manage the
perceptions of fiscal stability as much as possible. The
key goal of any government was to have an appropriate level
of government take and to find all of the important things
that needed to be done. He noted the importance of giving
whatever support the state could to enable projects like
Willow to get over the goal line and to encourage new
projects. He understood there was only so much the state
could do because it was not all at the state level. He
remarked that companies were doing a good job managing and
optimizing existing legacy fields like Prudhoe Bay. He
emphasized the need to avoid penalizing existing
operations. He remarked that although the assets were
declining, they were extremely important to overall
production.
Co-Chair Merrick thanked the presenters for the
presentation. She reviewed the schedule for the following
meeting.
ADJOURNMENT
11:09:06 AM
The meeting was adjourned at 11:09 a.m.
| Document Name | Date/Time | Subjects |
|---|---|---|
| Alaska Gaffney Cline Oil Gas Competitiveness 3.4.22 FINAL.pdf |
HFIN 3/4/2022 9:00:00 AM |
HFIN |