Legislature(1995 - 1996)
11/14/1995 02:15 PM House O&G
| Audio | Topic |
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* first hearing in first committee of referral
+ teleconferenced
= bill was previously heard/scheduled
+ teleconferenced
= bill was previously heard/scheduled
HOUSE SPECIAL COMMITTEE ON OIL AND GAS
November 14, 1995
2:15 p.m.
MEMBERS PRESENT
Representative Norman Rokeberg, Chair
Representative Scott Ogan, Vice Chair
Representative Gary Davis
Representative Bill Williams
Representative Tom Brice
Representative Bettye Davis
MEMBERS ABSENT
Representative David Finkelstein
COMMITTEE CALENDAR
HOUSE BILL NO. 325
* "An Act authorizing suspension of payment of a portion of the
royalty due the state for initial production of heavy oil from
wells on the Arctic Slope."
- HEARD AND HELD
(* First public hearing)
PREVIOUS ACTION
BILL: HB 325
SHORT TITLE: ROYALTY SUSPENSION: N. SLOPE HEAVY OIL
SPONSOR(S): REPRESENTATIVE(S) GREEN
JRN-DATE JRN-PG ACTION
04/28/95 1633 (H) READ THE FIRST TIME - REFERRAL(S)
04/28/95 1633 (H) OIL & GAS, RESOURCES, FINANCE
10/17/95 (H) O&G AT 01:00 PM ANCHORAGE LIO
10/17/95 (H) MINUTE(O&G)
11/14/95 (H) O&G AT 02:00 PM ANCHORAGE LIO
WITNESS REGISTER
REPRESENTATIVE JOE GREEN
Alaska State Legislature
State Capitol, Room 24
Juneau, AK 99801
Telephone: (907) 465-4931
POSITION STATEMENT: Sponsor of HB 325
BRUCE POLICKY, Manager
Milne Point
BP Exploration (Alaska) Incorporated
900 East Benson Boulevard
Anchorage, Alaska 99519
Telephone: (907) 564-5232
POSITION STATEMENT: Commented on HB 325
JON TILLINGHAST, Attorney
OXY USA, Incorporated
One Sealaska Plaza, Suite 300
Juneau, Alaska 99801
Telephone: (907) 586-1400
POSITION STATEMENT: Commented on HB 325
ED BEHM, Heavy Oil Team Leader
Milne Point Unit
OXY USA, Incorporated
P.O. Box 50150
Midland, Texas 79710
Telephone: (915) 685-5673
POSITION STATEMENT: Commented on HB 325
GEORGE R. FINDLING, Manager
Government and Public Relations
ARCO Alaska, Incorporated
P.O. Box 100360
Anchorage, Alaska 99510
POSITION STATEMENT: Commented on HB 325
ACTION NARRATIVE
TAPE 95-19, SIDE A
Number 000
The House Oil & Gas Special Committee was called to order by
Chairman Norman Rokeberg at 2:15 p.m. Members present at the call
to order were Representatives Rokeberg, Ogan, G. Davis, Williams,
Brice, and B. Davis. This meeting was teleconferenced to
Ketchikan, Fairbanks, Juneau, Matanuska-Susitna, and Anchorage.
CHAIRMAN ROKEBERG announced that the agenda was HB 325, which
authorizes suspension of payment of a portion of royalty due to the
state for initial production of heavy oils from wells on the Arctic
Slope.
HB 325 - ROYALTY SUSPENSION: N. SLOPE HEAVY OIL
Number 023
REPRESENTATIVE JOE GREEN, sponsor of HB 325, read his sponsor
statement into the record:
"HB 325 allows the producers of heavy oil to forgo the payment of
royalty to the state on the first 500 barrels of heavy oil produced
each day, for a period of five years. The heavy oils considered in
this bill is a thick, tar-like, very viscous hydrocarbon that is
more difficult to produce than the lighter, more conventional oil
and gas that we had in Prudhoe and in the Cook Inlet. The purpose
of suspending the royalty is to encourage the lessees of heavy oil
deposits to do field research and hopefully develop the maximum
amount of recoverable oil in a timely manner.
HB 325 requires no application, the suspension that we are talking
about is automatic. In order to receive the suspension the
producer must simply submit documentation to the Department of
Natural Resources (DNR) certifying that the oil produced meets the
definition of "heavy oil" and that is clearly the reference in the
bill, it is a federal determination, 20 gravities or less, 20
degrees API or less, and the operator would monitor the production
rate to satisfy the requirements that are contained in the bill.
HB 325 sends a message, we believe, to potential investors world-
wide that the Nineteenth Alaska Legislature supports the
development of heavy oil.
Number 070
BRUCE POLICKY, Manager, Milne Point, BP Exploration (Alaska)
Incorporated, (BP), was the next to testify. He gave a brief
overview of his responsibilities, parts of which were indiscernible
due to coughing and the recorded voice level. He said it was his
intention to discuss heavy oil development, primarily, within the
Milne Point Unit. He would include a brief history, what was done
last year, this year, and what the Milne Point owners are looking
at as potential development.
MR. POLICKY passed around a handout and pointed out a map of the
North Slope showing the location of various operating units. He
said the ownership is 91 percent BP and 9 percent OXY
USA, Incorporated (OXY). He mentioned that OXY is the only
original owner in Milne Point left. Currently, production for the
Milne Point Unit runs around 25,000 barrels of oil per day. Three
thousand five hundred barrels of this oil comes from the Schrader
Bluff Reservoir which has heavy oil accumulation. Schrader Bluff
extends over a large area. Mr. Policky stated that the Schrader
Bluff Reservoir had 20 billion barrels of oil in place with
gravities of 10 to 20 degrees API. For a point of reference, API
gravity refers to the density of oil, 10 degrees would be the same
weight as water, although the viscosities are very different. He
added that the Schrader Bluff Reservoir, within the Milne Point
Unit, occurs at a depth of about 4,000 feet. The reservoir
temperature is 80 to 90 degrees Fahrenheit on sediment that was
laid down 75 million years ago.
MR. POLICKY again pointed to the handout and asked everyone to look
at a close-up map of the Milne Point Unit. He said it showed the
Schrader Bluff accumulation system from an aerial view. The map
showed three different regions of Schrader Bluff. The first region
was a small development representing 10 percent of the total area
and is known as Tract 14. He then pointed out another area of the
map, and said that these were various developments in progress.
Milne Point owners had taken over these projects beginning in
January of 1994, with most of the development occurring in 1995.
The last area of the map Mr. Policky covered represented potential
future development of a large area with a reservoir of two billion
barrels of oil roughly 10 percent of the heavy oil potential,
spread out between Milne Point and the Kuparuk River Unit. That
potential development would occur within the next two years and, if
it proves to be commercially successful, would continue for ten
years.
MR. POLICKY said that the first development was attempted at Milne
Point by Congress in 1991 in the Tract 14 area. In that
development, six producers and five injectors were drilled. The
project had a low average, initial well rate and high costs both in
capital and operating expenses. Development stopped in 1991, but
the process resulted in several technical hurdles. He cited the
use of artificial lip methods, electrical submergible pumps,
methods to control the fan production from the consolidated sand
were identified, ways to keep the wells from freezing up during
production were developed, and a water flood was started.
MR. POLICKY again referred to the handout, which showed the
production plot of Tract 14, with the top curve showing oil rate in
barrels of oil per day from the entire field and the bottom curve
showing the number of wells that are on production at any given
time. The graph showed the project peaking around 3,500 barrels of
oil per day in late 1991, and going into decline until production
ended in 1993. Mr. Policky said this decline was due to lack of
follow-up development by the Milne Point owners at that time. He
added that the peak rate in 1991 came from 12 to 15 wells, whereas
a typical Prudhoe Bay well may produce 3,500 barrels of oil from
one well. Currently, the range of gravities that are being
produced range from 14 degrees to 19 degrees API.
Number 140
MR. POLICKY showed some oil examples, a 14 degree API from Milne
Point, a 23 degree API from Kuparuk, and a 35 degree API from the
Sak River Reservoir which is located within Milne Point. He said
the higher the temperature of the oil, the lower the viscosity. He
said Kuparuk oil was about 106 degrees, the Schrader Bluff heavy
oil was around 80 to 90 degrees, and Sak River oil around 200
degrees.
Number 153
MR. POLICKY began discussing the future plans of BP, saying that
the 1995 objective was to determine the liability of a larger scope
development depending on the ability to successfully compete for
investment capital. He stated that failure in this area would
delay the proposed 1998 development. This program would
incorporate 300 or more wells with production rates approaching
60,000 barrels of oil per day beginning in the next ten years. He
referred to the handout listing the 1995 BP objectives, including
improving the cost performance ratio of the Schrader Bluff
development, reducing operating capital expenses while increasing
production rate, and reducing the amount of uncertainty. BP has
spent between $13 million and $15 million on the Schrader Bluff
development. The costs for drilling have been from $1 million to
$12 million. To keep wells on line, $2 million has been spent in
operating expenses and about $1 million on facility and reservoir
technical studies.
Number 180
MR. POLICKY said that no new wells have been drilled and BP is
uncertain of how they will preform in the future, but it appears
that drilling and completion costs have been reduced. He added
that the costs were at such a level that production levels, and
development incentives would determine the feasibility of further
development.
MR. POLICKY referred to the next page of the handout, which showed
the technological side of development, and pointed out the
improvement of the completion site at Milne Point. Completion was
defined as the things done to the well after its drilled, to get it
to preform to the desired production and keep your operating
expenses low. He went into detail regarding these completion
technologies such as the artificial lip, and the use of a heat
trace. Mr. Policky pointed to the next page of the handout and
reiterated what events need to occur for large scale field
development to come on line including cost reduction in operating
or capital expense, coupled with development incentives, and
increased production.
Number 221
MR. POLICKY said that HB 325 would not only be a development
incentive, but would also increase production. He estimated that
the total potential was between 200 million to 800 million barrels.
BP has $4 million in their 1996 operating budget for technical
studies, but doesn't have any drilling capital. He stated that he
could not definitively state that, if incentives were or not
available, development would occur. He cautioned that a delay in
development, within the North Slope, puts ultimate recovery at
risk. He added that lower production amounts would make the
project less economically viable and cited examples where this had
happened within the North Slope.
Number 266
REPRESENTATIVE BETTYE DAVIS asked for clarification of the word
"short" in the context of "short time to produce."
Number 276
MR. POLICKY said this time was measured in months and stated that
because the infrastructure was already in place it would reduce the
amount of time needed. He felt that at Schrader Bluff it would
take approximately 6 to 12 months to begin production.
Number 289
CHAIRMAN ROKEBERG asked for information regarding the technology
transfer items from a historical perspective to the technology that
is currently being developed.
Number 296
MR. POLICKY stated that the use of technology is based around
completion efficiencies. One of these methods was first developed
in the Gulf of Mexico and is called fracturing technology. Propane
is injected into the wells to stimulate a high rate of production.
Gravel packs are also installed and sand is placed behind the
screen to control solids production from occurring later. Mr.
Policky added that this technology could be used in the Sak River
and the Kuparuk Unit. He also mentioned that the submersible pumps
run lives have increased from a few minutes to four years. Changes
in run materials, how to keep the wells from freezing up, and how
to control Amp production have lead to the increased run lives. On
a reservoir recovery basis there is some potential enhancement of
oil recoveries through a variety of methods. One of the methods is
a gas injection system which was developed in Prudhoe Bay. The
heat trace system is another method. It places a band of heat tape
across the layers of permafrost to prevent freezing, maintaining
working temperatures of 60 degrees Fahrenheit at a cost of $80,000.
Number 327
CHAIRMAN ROKEBERG asked Mr. Policky to compare temperatures and
difficulties that you face in Milne Point to those in Prudhoe Bay.
Number 329
MR. POLICKY said the temperatures can range from 60 degrees to as
high as 195 degrees Fahrenheit when it came out of the ground. He
added that, without heating the oil, the temperature is about 25 to
30 degrees Fahrenheit.
Number 337
CHAIRMAN ROKEBERG asked if there was both water flooding and gas
injection going on in Milne Point and how much gas is in the gas
gap in the whole west side formation.
Number 340
MR. POLICKY said that there isn't a gas gun in the Schrader Bluff
area and he didn't believe that there is one within the west side.
BP re-injects or produces gas in the Kuparuk Reservoir. He added
that BP is water flooding about half of the Schrader Bluff
accumulation. One of the areas that BP is studying is when and if
you need a water flood. So far it appears that a water flood is
beneficial and it is believed that injecting gas would also be
beneficial.
Number 355
CHAIRMAN ROKEBERG mentioned that this is the only area in the state
where pumps are being used because oil flows naturally.
Number 360
MR. POLICKY stated that he was not aware of any other commercial
pump applications on the North Slope, but said he did not know
about Cook Inlet.
CHAIRMAN ROKEBERG questioned if the expense of lifting this heavy
oil, added to the cost investment which makes it a more difficult
investment decision.
MR. POLICKY said he believes that BP has selected the most cost
effective lifting mechanism for these types of production
characteristics.
Number 368
REPRESENTATIVE BRICE questioned the average life of a well.
MR. POLICKY said a well, with a production rate of 300 to 400
barrels a day dropping down to approximately 200 barrels per day
after the first year, it would have an average life of 20 years.
Number 385
CHAIRMAN ROKEBERG said that the royalty relief grant in HB 325
would be 12.5 percent, more or less, depending on which lease would
be affected. He cited a calculation of an oil well producing 300
barrels per day, sustained on a 30 day basis, would be about
$12,000 in revenue relief granted per month. Chairman Rokeberg
asked, in economic terms, what kind of impact would this royalty
relief have and would the state receive any other money such as
severance taxes as a result of foregoing these revenues.
Number 395
MR. POLICKY answered that the significance of the royalty holiday
depends on how close an oil company is to making a commercially
viable project. He cited factors such as average drilling costs,
facility costs, coupled with what type of production rate you would
need on a loan, and how much improvement you would need to make in
order to make a project commercially viable. He added that
royalty reduction had the same effect as increasing production out
of the well. In numbers, it is felt that to make this project
commercially viable, 400 to 500 barrels of oil per day would be
needed, coupled with half the drilling costs experienced in the
past. In the past, 350 barrels of oil per day were averaged. If
BP can achieve 450 barrels of oil per day, in addition to the
royalty reduction, then it would meet the 500 barrels per day rate
and be commercially viable.
Number 425
CHAIRMAN ROKEBERG reiterated that these are marginal oil wells and
pools of oil, and suggested that the state should work in
partnership with companies to cover their amount of investment. He
added that it was a test bed technology chance for the amount of
money the state would forgo in this area.
Number 440
MR. POLICKY added that the resource is highly variable and the
challenges change as you go to different parts of the field. He
said that incentives would lead to development that wouldn't occur
otherwise. He added that there would be secondary benefits such as
money being spent on construction of housing modules. He said he
didn't believe that Schrader Bluff, in regards to the ELF factor,
would fall out of the severance tax area. He added, that any time
you increase your use of the pipeline system, there is directional
reduction in tariffs that are paid and in corporate taxes if you
are making a profit.
Number 471
REPRESENTATIVE B. DAVIS asked why five years was given as a time
line.
REPRESENTATIVE GREEN said, as opposed to an investment by the
state, an investor time-rates his money, and this creates an in-
house economic barrier. This barrier means that if you don't
recover your money within five years, you have lost the opportunity
for other investments. He said most companies won't think of
investing in anything that wouldn't recover their investment until
after the five year mark.
Number 501
REPRESENTATIVE B. DAVIS asked Mr. Policky if that five year time
line was seen as reasonable to oil companies.
Number 504
MR. POLICKY stated that five years would be the upper time frame BP
would normally build. He added that BP has projects all over years
because of the problem of capital allocation. He said the shorter
the royalty suspension time period the less the significance of the
incentive.
REPRESENTATIVE GREEN interjected that the time frame might be
different if the incentive was directed at the Prudhoe Bay, because
the rates of oil production are so much higher.
REPRESENTATIVE B. DAVIS asked how much money would be lost due to
this incentive.
Number 541
REPRESENTATIVE GREEN said that the state could be losing whatever
production rate the oil companies are losing below 500 barrels per
day. If they produce 499 barrels of oil per day for five years,
the state would be giving up one-eighth of the royalty. He
mentioned that without this incentive it would be unlikely that
there would be any royalty because of the heavy costs associated
with the production of heavy oil.
REPRESENTATIVE B. DAVIS asked if more money would potentially be
available if oil companies were to stay there and produce.
Number 566
MR. POLICKY said he didn't have numbers on the overall economic
outlook. He said he felt it was an opportunity to test the
potentials of the region and establish commercial techniques and
approaches which can be expanded into other regions.
Number 584
REPRESENTATIVE G. DAVIS said that HB 325 provides an incentive for
five years creating production possibilities, after which you have
the royalty on whatever is produced.
REPRESENTATIVE GREEN said that the amount of oil recovered after
five years, at full royalty, would be worth more to the state than
the discounted royalty.
Number 600
REPRESENTATIVE G. DAVIS pointed out that HB 325 concerns the entire
Arctic Slope not just Milne Point or Schrader Bluff, and asked what
the possibilities were for producing heavy oil elsewhere.
Number 612
MR. POLICKY said that possibilities have already been studied in
the Kuparuk River Unit and stated that same difficulties exist
there as they do at Milne Point.
REPRESENTATIVE GREEN said that to his knowledge, Kuparuk River and
Milne Point were the only two regions in the state that were
capable of producing heavy oil.
CHAIRMAN ROKEBERG said that the production and technical problems
would revolve around those pools of oil that may be discovered
because they are heavy gravity oil. It was explained that the
definition in the bill was based on a federal statutory code that
is readily understandable and definable.
TAPE 95-19, SIDE B
Number 000
JON TILLINGHAST, Attorney, Milne Point Unit, OXY USA, Incorporated,
and BP Exploration (Alaska), Incorporated, was next to testify. He
referred to a hand out, presented to the Oil and Gas Policy Council
on June 29, 1995, which indicated that Alaska's fiscal system does
not encourage the development of marginal fields. Mr. Tillinghast
said, in Alaska, no differentiation is given between oil fields,
which inevitably favors the bigger oil wells. He added that both
the Executive and the Legislative Branches are beginning to
recognize that three things need to happen. Those things include
relying on the smaller, marginal reserves that are located on the
North Slope, the second thing is the need for OXY and BP to work
together to solve the economic problems associated with those
marginal oil wells, and the last thing is that Alaska needs to
reevaluate their oil and gas policy.
Number 024
MR. TILLINGHAST said that Alaska needs to increase the number of
oil companies. He said that the heavy oil reserves in the North
Slope are the largest, proven reserves in the country. He added
that the state has not previously included the Schrader Bluff
resources in the Department of Natural Resources (DNR) production
forecast or in the Department of Revenue (DOR) forecast. He said
that the state of Alaska has begun the process to attract new oil
companies.
Number 047
ED BEHM, Heavy Oil Team Leader, Milne Point Unit, OXY USA,
Incorporated, who is responsible for making investment decisions
regarding heavy oil development, was next to testify. He gave some
background of OXY stating that they are an independent company, one
of the top ten in oil revenues, produce 60,000 barrels of oil per
day domestically, and have heavy oil operations in California. He
then reiterated information that Mr. Policky had mentioned
regarding the expected oil output, and the economic disadvantages
of heavy oil.
Number 068
MR. BEHM said the best heavy oil deposits are in the Milne Point
Unit. Those deposits have a 20 to 22 gravity and get progressively
heavier towards the Kuparuk River Unit. Mr. Behm referred to a
page in the handout labeled, "Unlocking the Heavy Oil Potential on
Alaska's North Slope," pointing out maps of the area with various
oil developments. He discussed a previous pilot project where
several methods of obtaining the oil resources were tested, with
the exception of gas injection. When water flooding was tested,
OXY had water breakthroughs adding sand to the oil which added to
the operating expenses. The determination of the pilot was that
flat, long-lived production was the best served by a time frame
royalty incentive.
Number 137
MR. BEHM pointed to a graph on the handout and said that low cost
fracturing technology appeared to be promising. He then referred
to a completion diagram from the handout, and said that the shallow
wells cost about as much as a deep well. The cost averages about
$2.4 million per well to drill with a tariff of $5.60 per barrel.
Number 152
REPRESENTATIVE BRICE asked if Milne Point relies on pipeline income
versus (indiscernible).
MR. BEHM said that "if it is an expense to unit or field or
pipeline it is the same, then it is pipeline income" and pointed
out that this is the only infrastructure within the state of
Alaska.
MR. BEHM gave a Tract 14 summary. OXY spent $126 million on 22
wells between 1991 and 1994. The wells averaged 275 barrels of oil
per day at a cost of $9.30 per barrel which is not cost effective
by North Slope standards. Some cost savings were achieved through
new technology, and OXY is looking towards BP's fracturing
technology. He added that exotic technologies used in warmer
climates would not be economically advantageous on the North Slope.
Mr. Behm mentioned that the hurdle rate, that OXY and the A. D.
Little Report calculated in independent research, was 15 percent
for heavy oil investment in Alaska. He stated that OXY had used
the 1995 Spring DOR Sources Book in the determining the figures.
Number 209
MR. BEHM said that if you build oil wells on a subsidized basis
then the investment is 13 percent with a payback in 6 1/2 years.
He said that an estimated $300,000 are lost per well. He referred
to a chart in the handout listing the key factors for incentives
including some quotes from the AD Little Study. These factors
included specificity, relevancy, certainty, immediacy within the
current window of opportunity, credibility, sufficiency and
necessity. Turning the next page of the handout he referred to it
and mentioned aspects of HB 325 including the suspension of royalty
payments for each new well for the first five years and first 500
barrels of oil per day. He stated that HB 325 was a simple,
automatic process and applicable only to those companies drilling
the heavy oil.
Number 237
MR. BEHM referred to the next page of the handout listing seven
states that have suspension incentives that have worked. He
specified Texas stating that they have a ten year suspension
incentive which had resulted in a 400 percent increase in the
number of wells, receiving a $4 billion increase in gas amounts and
$240 million in sales revenue and created 104,000 employment years
which generated $12 million revenue in sales tax.
Number 262
MR. BEHM said that the five year suspension of royalties under HB
325, means that the oil company investment will take 5.4 years
instead of 6.5 years to recoup. He mentioned another scenario that
if you were to create a 5 percent royalty suspension for the
lifetime of the well, it would reduce state revenue because of the
potential of increased royalties due to higher prices of oil.
Number 295
MR. BEHM referred to the curve Mr. Policky had presented and said
that OXY had a similar set of numbers. He pointed to the handout
listed as "Full Development of Heavy Oil at Milne Point Above and
Beyond Existing Schrader Bluff" and said the numbers listed were
350 oil wells over a ten year period, spending $1.2 billion in
capital with 300 million barrels of oil produced and a peak
production rate of 60,000 barrels of oil per day. The potential
royalties for the state of Alaska would be $60 million in the
future, not including the possible investment loan income. If HB
325 were enacted and heavy oil development occurred, the state
would get $329 million based on the economics of the OXY unit plus
the long range forecast of those wells and the new technologies
that will be developed.
Number 302
MR. BEHM pointed to the last page of the handout and said,
according to these figures, the state of Alaska will be earning
money on these early wells when the oil companies will still be
recouping their capital investment.
Number 318
MR. TILLINGHAST explained that the five year, 500 barrel numbers
have independent justifications. He said that 500 barrels is a
good definition of a marginal field in the North Slope and five
years is the pay off period for investors.
MR. TILLINGHAST said that OXY has restrictions on its ability to
apply for discretionary relief to DNR as a result of a settlement
agreement, therefore OXY would not be eligible for relief under HB
207. He added that HB 207 requires a five percent minimum royalty
and doesn't fit some of the criteria. He mentioned such as
immediacy and certainty. He said that the heavy oil problem has a
specific and focused fix.
Number 349
CHAIRMAN ROKEBERG asked for more information on the settlement
agreement between OXY and DNR.
Number 359
MR. TILLINGHAST said the agreement restricts OXY's ability to apply
for a royalty reduction. He added that there would be an issue as
to whether when the law changed significantly, as it did with HB
207, whether that would be covered in the application made to HB
207. He said his client assumes that HB 207 would restrict them
from doing that and would not go through a discretionary royalty
reduction again because of the time and expense that it cost OXY.
Number 388
REPRESENTATIVE OGAN addressed criticism from the public that the
oil companies would develop these fields anyway with or without a
royalty suspension.
Number 401
MR. TILLINGHAST responded that there is no risk free decision about
whether or not heavy oil extraction would occur in the North Slope
without a royalty suspension. He said the A. D. Little Report
mentioned concerns about putting the development of heavy oil
resources on hold. The report states that at some point in the
twentieth century the TransAlaskan Pipeline capacity is going to
decline, raising per barrel tariffs so that any new marginal
production in the North Slope would not be economically sound. He
added that the pipeline might also close for lack of capacity.
Number 434
MR. TILLINGHAST questioned that if heavy oil production was
profitable, why weren't oil companies already producing it.
MR. BEHM added that the suspension of royalty payments is a good
way of increasing production of heavy oils.
Number 455
CHAIRMAN ROKEBERG asked if the 9 percent of Occidental would be
applicable to OXY not with standing the settlement.
MR. TILLINGHAST said that all the settlement does is prohibit the
discretionary application process.
Number 470
GEORGE R. FINDLING, Manager, Government and Public Relations,
ARCO Alaska, Incorporated was next to testify. He read his
statement into the record:
"Mr. Chairman, for the record, my name is George Findling, I am the
Manager of Government Relations for ARCO Alaska, Incorporated. I
have resided in Alaska for 11 years.
Thank you for the opportunity to testify on HB 325. To summarize,
while the provisions of HB 325 would create significant value in a
West Sak development effort by ARCO and while there is a real merit
for Alaska to incentivize heavy oil development, we can not say at
this time that the provisions of HB-325 will create enough value to
move the West Sak accumulation from unattractive to attractive for
development. Further, it is not clear to us at this time, that the
provisions of HB-325 would be the most efficient in stimulating the
West Sak, the heavy oil accumulation which lies above the Kuparuk
horizon, I would like to elaborate briefly on these points.
ARCO is working to bring West Sak oil into production. In the mid-
1980's, our field work demonstrated a technique that could be used
to complete wells and produce oil at modest rates. Despite these
advances, the West Sak accumulation is currently not competitive
for investment dollars when compared to other world wide
opportunities. Numerous, closely spaced wells and lack of facility
capacity make capital costs relatively high. Low well rates, high
operating costs and uncertain overall recovery rates raise the
ongoing cost structure of the bulk of West Sak to unacceptably high
levels.
Since the West Sak reservoir quality, indicated mainly by seam
thickness, varies over the field, we would expect to develop first
in the best areas, then move to the lesser areas of reservoir
quality. In this scenario, you can envisage that production slowly
builds up over time as the field development expands to new areas
and cost reduction techniques are refined. Now, remember, the
`best' West Sak is not as good in terms of current cost structure
as the `worst' Kuparuk which is the underlying accumulation. So
one key to West Sak is to make its cost structure effective enough
to compete for facility usage against Kuparuk and other resources.
ARCO is trying to find ways to reduce this cost structure and make
a significant amount of West Sak cost competitive. We are
currently doing a strategic and technical `rethink' which we hope
will lead to new, and innovative development approaches. In
essence, we hope that a limited field program in 1996 and 1997 will
be the first step in a phased commercialization which will include
incremental improvements in technology and operating costs. The
details of this program are not yet developed, but I can say that
we will be trying to find ways to reduce our cost structure
substantially at each step so that development can proceed to the
next step.
Our current view is that we need to work through at least this 1996
program to specifically know when royalty modifications will be
needed to make the then next phase of development attractive for
investment.
Our hypothetical analyses to date show that royalty reductions can
provide major improvements in the economics of a marginal heavy oil
field. A royalty holiday, one form of which is contained in HB
325, deserves consideration. Another approach which should be
considered is a general reduction in royalty rate over field life.
To summarize, whether some type of royalty reduction is sufficient
to make the then next phase of the West Sak field attractive for
investment is problematic at this time; but it will likely be
better quantified after our 1996 program.
Mr. Chairman, thank you for the opportunity to testify and I would
be happy to take your questions."
Number 542
CHAIRMAN ROKEBERG asked if ARCO had a formal position on HB 325.
MR. FINDLING said that ARCO is interested in advancing incentives
that would make a marginal project attractive to investors. He
said that he could not say that HB 325 would have that effect.
Number 571
CHAIRMAN ROKEBERG said then it appeared that HB 325 might not
provide enough of an incentive.
MR. FINDLING said that without addressing the state royalty part of
it, the whole project cost structure is out of line and not
attractive for investment. He said that the state needs to get
that cost structure down in order to move ahead. He said that ARCO
looked at the development of these heavy oil deposits with zero
royalty paid and still found it unattractive to investment. He
said that the key is to reduce costs in the operating area.
TAPE 95-20, SIDE A
Number 000
CHAIRMAN ROKEBERG said he wanted to adopt the committee substitute
and hold it over for further testimony and additional hearings
during the session.
REPRESENTATIVE OGAN requested point of order as to whether or not
committees could adopt a committee substitute during the interim.
REPRESENTATIVE G. DAVIS moved to adopt the proposed committee
substitute for HB 325 version 122/x/k, including the proposed
amendment. Hearing no objections, the House Special Committee on
Oil and Gas adopted the committee substitute pending a review of
the rules on what a committee can do with a bill during the
interim.
Number 023
REPRESENTATIVE G. DAVIS asked Representative Green if the
Administration had been provided a copy of HB 325.
REPRESENTATIVE GREEN said he that the Governor is aware of the bill
and is in favor of it to his knowledge. He said his understanding
is that the Governor likes the bill, but doesn't want to get ahead
of the Oil and Gas Policy Council. If HB 325 becomes a
recommendation of that council, then the Governor would be in favor
of it.
Number 035
CHAIRMAN ROKEBERG said the Administration and the (indiscernible)
were invited to be at this meeting, but were unable to attend. He
added that there were a number of leases on Cook Inlet that went up
for sale today. The state will earn $987,000 on this sale, if the
bids are accepted. He that 25 tracts were bid on out of a number
of 100. He said there was only one significant bid of $390,000 was
offered. The balance of the bids ranged in the amount of eight
dollars an acre. He said that six different companies won bids in
the sale which included ARCO, Norcom, UNICAL, Union Texas, Stewart
Petroleum.
CHAIRMAN ROKEBERG said that the committee will be meeting on
December 18, 1995, for a work session. In the morning, the
committee will take up bonding requirements and removal of other
impediments and obstacles to small, independent oil and gas
producers in the state. In the afternoon, of December 18, 1995,
there will be another work session focusing on areawide leasing
and best interest finding legislation.
CHAIRMAN ROKEBERG stated that the next public hearing of HB 325
will occur in the early portion of January.
ADJOURNMENT
There being no further business to come before the committee,
Chairman Rokeberg adjourned the meeting at 3:50 p.m.
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