Legislature(1995 - 1996)
01/23/1996 09:00 AM House O&G
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* first hearing in first committee of referral
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+ teleconferenced
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HOUSE SPECIAL COMMITTEE ON OIL AND GAS
January 23, 1996
9:11 a.m.
MEMBERS PRESENT
Representative Norman Rokeberg, Chair
Representative Scott Ogan, Vice Chair
Representative Gary Davis
Representative Bill Williams
Representative Tom Brice
Representative Bettye Davis
Representative David Finkelstein
MEMBERS ABSENT
None
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."
- PASSED CSHB 325(O&G) OUT OF COMMITTEE
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
11/14/95 (H) MINUTE(O&G)
01/18/96 (H) O&G AT 10:00 AM CAPITOL 124
01/23/96 (H) O&G AT 09:00 AM CAPITOL 124
01/26/96 (H) RES AT 08:00 AM CAPITOL 124
WITNESS REGISTER
JEFFREY LOGAN, Legislative Aide
to Representative Joe Green
Alaska State Legislature
State Capitol, Room 24
Juneau, AK 99801
Telephone: (907) 465-4931
POSITION STATEMENT: Provided information on HB 325
ED BEHM, Heavy Oil Team Leader
Milne Point Unit
OXY USA, Incorporated
Midland, Texas 79710
Telephone; (915) 685-5673
POSITION STATEMENT: Commented on HB 325
BRUCE POLICKY, Manager
Milne Point Unit
BP Exploration (Alaska) Incorporated
900 East Benson Boulevard
Anchorage, Alaska 99519
Telephone: (907) 564-5232
REPRESENTATIVE JOE GREEN
Alaska State Legislature
State Capitol, Room 24
Juneau, AK 99801
Telephone: (907) 465-4931
POSITION STATEMENT: Sponsor of HB 325
KENNETH A. BOYD, Director
Division of Oil and Gas
Department of Natural Resources
3601 C Street, Suite 1380
Anchorage, Alaska 99503-5948
Telephone: (907) 762-2547
POSITION STATEMENT: Commented on HB 325
CHARLES LOGSDON, Chief Petroleum Economist
Oil and Gas Audit Division
Department of Revenue
550 West Seventh Avenue, Suite 570
Anchorage, Alaska 99501
Telephone: (907) 276-1363, Extension 265
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
ACTION NARRATIVE
TAPE 96-1, SIDE A
Number 000
The House Oil & Gas Special Committee was called to order by
Chairman Norman Rokeberg at 9:11 a.m. Members present at the call
to order by Chairman Norman Rokeberg were Representatives Rokeberg,
Ogan, G. Davis, Williams, Brice, and B. Davis. Representative
Finkelstein was absent. A quorum was present. This meeting was
teleconferenced to Anchorage/
HB 325 ROYALTY SUSPENSION: N. SLOPE HEAVY OIL
CHAIRMAN ROKEBERG announced that the agenda was HB 325. He
announced that at the November 14, 1995 meeting a committee
substitute for HB 325 was adopted, version 9-LS1122\K.
Number 250
JEFFREY LOGAN, Legislative Aide to Representative Joe Green who is
the sponsor of HB 325, was first to testify. He said a thorough
review of CSHB 325 has not been done, but he urged committee
support for HB 325.
Number 302
REPRESENTATIVE SCOTT OGAN asked for a brief outline of the CSHB
325.
Number 310
CHAIRMAN ROKEBERG announced that Representative Joe Green had
joined the committee. Chairman Rokeberg then gave a brief overview
of the changes in CSHB 325 which included changes in the language
from the United States code definition of heavy oil to a definition
of 20 degrees API gravity. Additionally CSHB 325 provides a
ceiling of $15 per barrel of oil, in the event that there is an
increase of prices. The last change was an addition of a sunset
provision after ten years.
Number 522
REPRESENTATIVE OGAN moved for the adoption of CSHB 325, version 9-
LS1122\R. Hearing no objections it was so ordered.
Number 545
ED BEHM, Heavy Oil Team Leader, Milne Point Unit, Occidental Oil,
Incorporated, was next to testify. He gave a brief overview of
Occidental Oil Company and stated that the Milne Point Unit is a
significant asset to Occidental. He referred to a hand-out with
the front page reading, "Who is Occidental Oil and Gas
Corporation." He said a pilot project in the Schrader Bluff has
produced about 3,500 barrels of oil per day. The wells have
produced steady rates of oil but on a marginal rate. He described
heavy oil as having low gravity, being thick, produces slowly over
a long period of time, it is disadvantaged in market place
especially with the North Slope transportation costs, and it is
capital intensive.
MR. BEHM said Occidental did a project five years ago in which they
dug 21 wells in order to proof up technology. They spent $126
million, producing 275 barrels of oil per day per well for an
expected recovery of 13 million barrels making the recovery rate at
$9.30 per barrel making it uneconomical.
MR. BEHM said HB 207 was seen as a positive change in Alaskan
legislation. He said the key is to get the project to a
competitive investment level with other opportunities worldwide.
He said that a 15 percent rate of return is needed to cover
overhead, cost of capital, and some risk Occidental thinks that
more Schrader Bluff wells could be drilled by as early as the
Spring of the 1995 forecast. He said this 15 percent rate of
return has been listed in other sources worldwide.
MR. BEHM said studies in the Schrader Bluff area determined the
rate of return at 12.8 percent with a payback period of 6.5 years.
These figures are not conducive to investment, but with the support
of straightforward legislation such as HB 325 they can be
economically viable. With proposed legislation in HB 325, the rate
of return drops to 15.9 percent with a payback period of 5.4 years
and a profit of $100,000 per well. He said this is not a windfall
profit to oil companies.
MR. BEHM talked about the effects on the state with the development
of heavy oil. He said a company will reinvest in wells every year,
for a total investment time of ten years. So, the state will end
up receiving more revenues from more wells at the conclusion of the
royalty holiday.
Number 1179
CHAIRMAN ROKEBERG asked if Occidental would be able to take
advantage of CSHB 325 in terms of the settlement agreement between
Occidental and the Department of Natural Resources.
Number 1200
MR. BEHM said he could see no affect of CSHB 325 on the
settlement. Occidental is honoring the terms of the settlement
which states that they cannot benefit from changes in state law for
a four year period. He added that at the time of the settlement,
heavy oil development at Schrader Bluff was not even a
consideration.
Number 1246
CHAIRMAN ROKEBERG reviewed the terms of the Occidental litigation.
He then asked what Occidental future would be in capital
development if royalty relief was not granted.
Number 1284
MR. BEHM said Schrader Bluff is roughly half of the potential of
the unit and if it were deemed noncommercial, it would limit
Occidental's investment in the state of Alaska.
Number 1320
CHAIRMAN ROKEBERG asked if it would cause Occidental to follow the
25 oil companies that have left the state.
Number 1339
MR. BEHM said, as a corporate philosophy, assets are not kept that
cannot produce. He added that there would be a high risk of
Occidental leaving within the next two years and it would be his
recommendation that they do so. Heavy oil investment would not
happen without supporting legislation.
Number 1390
BRUCE POLICKY, Manager, Milne Point Unit, BP Exploration (Alaska)
Incorporated, was next to testify. He said that his
responsibilities include subsurface development at Milne Point.
Mr. Policky referred to a handout titled "Heavy Oil Potential at
Milne Point" in his testimony. He said the most promising thing
that BP has discovered at Milne Point is that although production
rates are low, they hold up over time. He said that between
Schrader Bluff and the West Sak River there are an estimated 26
billion barrels of oil. Currently there is only .3 percent under
development in this area.
Number 1572
MR. POLICKY said from the first pilot project oil companies have
learned how to drill and complete wells in heavy oil areas,
especially how to manage production and costs. This completion
technology can be utilized in future developments. He said BP is
currently setting a platform for future developments slated for
1998. The objective is to demonstrate lower capital costs and
higher production rates from the well, or at least what would be
feasible. In 1995, six wells were drilled at a cost of $15
million. There have been some construction delays in those wells
involving the commission of heaters to bring well on line. This
phase should be completed within the next two weeks and no later
than the end of February. The delays did not have to do with the
wells, but with the surface facility work. He said there are
promising developments with electric submersible pump life which
has reduced operating costs.
Number 1807
MR. POLICKY said that in the past the cost of drilling a well in
the Schrader Bluff area was $2.4 million. Currently the cost of
drilling a well with the completion costs to $1.6 million to $1.7
million. Work has been done to develop this area with fewer pads
and less infrastructure as nearly half the costs of the development
are spent in this area. He discussed new technology including
frac packing, electric submersible pumping and heat trace
technology.
Number 1980
MR. POLICKY said BP would need cost reductions, increased
production and development incentives in order to increase
investment in this area. He noted the recently passed fiscal note
which was passed with the belief that increased production and
decreased costs would be all that would be needed to begin heavy
oil development. Mr. Policky stated that BP has yet to come up
with a development strategy with just those two factors that would
draw international investment.
Number 2050
MR. POLICKY said that within Schrader Bluff there are 2 billion
barrels with an ultimate recovery between 200 million to 800
million barrels. He stated that perhaps this biggest plus for
development of Schrader Bluff would be the expansion into adjacent
fields. He said the experience and the increased technologies will
be advantageous when you move to other more low lying fields with
oils containing lowered API gravities.
Number 2174
MR. POLICKY said HB 325 would reduce uncertainty, encourage
development through less dependance on higher initial production
rates, and it would accelerate the pace and increase development
scope. In Schrader Bluff the time lag from incentive to start of
investment is short because of the existing infrastructure. He
said that because of the immaturity of the project, the ultimate
project scope remains uncertain at this stage.
Number 2200
CHAIRMAN ROKEBERG asked about the decline rates of production in
the oil wells.
Number 2234
MR. POLICKY said decline rates at a Schrader Bluff well experience
a steep decline in a period of six months to a year. A typical
well begins with a 300 barrels of oil per day, dropping down to 200
barrels of oil per day. He said long term decline rates of about
6 percent a year at Schrader Bluff compared with 15 to 20 percent
at Kuparuk and 18 percent at Endicott.
Number 2267
CHAIRMAN ROKEBERG asked if there is a flat production line as a
result of continued reinvestment and development of the field.
Number 2277
MR. POLICKY said there is a nine year period of development of a
well. The first two years consist of the development of a facility
followed by continued drilling. He said there is a 30 to 70
percent production split and inherent within this is a 16 percent
recovery factor. He said that enhanced recovery projects would
boost that production rate.
Number 2335
CHAIRMAN ROKEBERG received confirmation those factors cause the
difference between the figures of 300 million and 800 million.
Number 2350
MR. POLICKY said there are risks of delay and development
especially in the area of development momentum. He added that
anytime projects are delayed economic benefits are deferred and
values lost as well as losing the infrastructure.
REPRESENTATIVE GREEN referred to the Occidental testimony and asked
about the possibility of projects going forward without the royalty
holiday.
MR. POLICKY said that the project might or might not go forward.
He added that the project would accelerate with the royalty holiday
as it pushes investment past the hurdle rate.
SIDE B
Number 000
REPRESENTATIVE GREEN asked if the fiscal note was realistic in its
supposition that projects would be developed without royalty
holidays.
MR. POLICKY said it is not certain development would occur without
incentives.
Number 22
REPRESENTATIVE BRICE asked about employment expectations.
Number 65
MR. POLICKY said that there are two periods of development. The
initial stage of the first two years would see the employment of
350 people, about two-thirds Alaska hire. The second stage would
result in 60 direct jobs a majority of them being locally employed.
Number 106
CHAIRMAN ROKEBERG pointed out pages 18 and 19 of the report titled,
"An Opportunity to Develop Alaska's Heavy Oil Resources."
which listed the impacts of heavy oil development. He received
confirmation that this would be a near term impact because of the
infrastructure that is already in place.
Number 198
CHAIRMAN ROKEBERG asked if you had a step-out or a directional well
that went down the bore hole, into a different lens of production,
beyond whatever you were producing, for purposes of the HB 325,
would this be listed as a new well.
Number 215
MR. POLICKY repeated the question by saying that if you had a well
and complete it within a particular zone and then sometime later we
move up into a second zone, when the question was confirmed, he
answered that he would not consider that a second well.
Number 254
CHAIRMAN ROKEBERG asked for the differences in revenue to the state
listed in the Occidental testimony.
MR. POLICKY said figures were developed by creating a ratio to the
amount of barrels produced rather than to no increased investment
and production.
Number 265
REPRESENTATIVE OGAN asked Mr. Policky to speculate on the overall
potential for heavy oil is and how it would affect the life of the
pipeline.
Number 284
MR. POLICKY said the University of Alaska-Anchorage study said that
increased flow of oil means decreased tariffs which results in
decreased field costs. If the life of the pipeline is extended
this results in the increased well head value, in existing fields,
of approximately $60 million to $80 million. Within the Milne
Point Unit, total production field rates could reach 60,000 barrels
per day and rates could be higher within the Kuparuk River Unit as
well.
CHAIRMAN ROKEBERG recognized the attendance of Representative
Finkelstein at 10:05 a.m.
Number 370
KENNETH A. BOYD, Director, Division of Oil and Gas, Department of
Natural Resources, was next to testify. He announced that he was
accompanied by Bill Van Dyke. He said that HB 325 does not include
any economic analysis. He said the presentations by Occidental and
BP do provide some numbers but not the information backing those
numbers. He said that these numbers might be applicable to any
operator on the North Slope. He said the numbers of five years,
500 barrels, assume that all operators on the North Slope will have
the same analysis. He added that there is no assurance that oil
companies will continue to produce oil past the five year royalty
holiday. The Administrations position is that HB 207 is a better
vehicle to craft royalty reduction.
Number 498
MR. BOYD said that the testimony of Mr. Policky is not enough
guarantee that multilateral wells would be interpreted as just one
well by other oil companies.
Number 530
REPRESENTATIVE FINKELSTEIN asked if there were any provisions in
the royalty law that would address misuse of the royalty reduction.
Number 561
MR. BOYD said the Administration believes the 3 percent floor would
hold. He added another factor that would prevent misuse is
Occidental's settlement with DNR. After HB 325 oil companies would
not be able to use HB 207 on the leases that were changed from 20
percent to 12.5 percent.
Number 604
CHAIRMAN ROKEBERG asked for a methodology for the fiscal note where
the Division of Oil and Gas is estimating a per well change in
revenues of $28,000 per well per year.
Number 615
MR. BOYD said they took the 500 barrel per day maximum, and
multiplied it 12.5 percent royalty rate and then multiplied it by
a net factor of $10 a barrel, multiplied by 365 days.
CHAIRMAN ROKEBERG pointed out that if no wells are drilled then the
loss to the state is zero which was confirmed by Mr. Boyd who then
reiterated the Administration's position.
Number 667
REPRESENTATIVE WILLIAMS asked for a written explanation from the
Division of Oil and Gas as to how HB 207 would effect heavy oil.
He questioned the logic of the Administrations criticism of a
guarantee that heavy oil wells would still produce after the five
year royalty suspension. He then asked what type of guarantee the
Administration would want.
Number 735
MR. BOYD said there is no guarantee in any provision, but that HB
207, as compared to HB 325, allows the commissioner to make the
decision, on whether or not an oil development needs assistance,
based on real economic analysis.
Number 788
REPRESENTATIVE WILLIAMS asked if HB 207 would cause problems in
project development delay.
Number 830
MR. BOYD said that HB 207 would require an application process and
the analysis process which would take an estimated three to six
months.
Number 860
REPRESENTATIVE FINKELSTEIN asked the history of applications from
the North Slope oil industry under past or present provisions.
Number 870
MR. BOYD said no oil company has applied under the new provisions.
Number 908
CHAIRMAN ROKEBERG asked if Alaska had granted any type of royalty
reduction under prior statute.
Number 928
MR. BOYD described the settlement with Occidental.
Number 969
CHAIRMAN ROKEBERG asked and received confirmation that HB 325 does
not need the commissioners or the Governor's approval.
MR. BOYD said HB 325 would have only minor administrative costs.
He then expressed concern as to potential cost to the state if the
analysis required under HB 207 were not done.
Number 1027
CHAIRMAN ROKEBERG asked if the long range predictions of increased
revenues to the state under HB 325 out weigh the short term losses
in revenue.
Number 1060
MR. BOYD said there is no way he could answer that question.
REPRESENTATIVE FINKELSTEIN asked if historically the position of
the administration is to weigh each situation on a case by case
basis and to utilize the resources at the DNR and the Division of
Oil and Gas. This question was affirmed by Mr. Boyd at which time
Representative Finkelstein stated that HB 325 eliminates any
administrative discretion.
Number 1139
CHARLES LOGSDON, Chief Petroleum Economist, Oil and Gas Audit
Division, Department of Revenue, was next to testify. He said the
fiscal note is based on the DOR's Fall 1995 forecast from predicted
royalties, as communicated by the industry, from the Schrader Bluff
area.
Number 1199
CHAIRMAN ROKEBERG received confirmation that the fiscal note of a
negative $50 million is based on the development plans of BP but
that it does not include the potential development of 230 wells
over nine years in Schrader Bluff alone. He then restated the
testimony as to possible increased revenues for heavy oil
development and asked if it would be a fair analysis of the
situation.
Number 1295
MR. LOGSDEN stated that this is an unanswerable question as it all
revolves around the ability to project oil prices and said he is
unprepared to answer it.
Number 1323
REPRESENTATIVE FINKELSTEIN reiterated the argument that because of
the employment factor there are short term as well as long term
benefits to the state. He said that because we do not generate a
personal income tax or a sales tax isn't this factor a negative
loss to the state because of the public services provided.
Number 1390
MR. LOGSDEN said the focus on has been on the state revenues side
and not on other factors.
Number 1416
CHAIRMAN ROKEBERG asked if the CSHB 325 fixed well head price of
$15 would be a fair amount.
Number 1446
MR. LOGSDEN said he believes that royalty suspension could be done
under the DNR's supervision, but said the $15 amount would be a
step in the right direction to truncate the risk to the state.
Number 1487
CHAIRMAN ROKEBERG asked if the $15 relates to the $24 federal
government West Texas Intermediate price.
MR. LOGSDEN said that it would be in the ball park considering the
added costs associated with heavy oil and the transportation costs.
Number 1530
CHAIRMAN ROKEBERG said there is a difference between the DOR's Fall
and the Spring Forecast of 1995 especially in regards to the
peripheral smaller wells, such as those located in Schrader Bluff.
MR. LOGSDEN said he assumed that the difference involves the
proposed development schedule in Schrader Bluff.
Number 1624
JON TILLINGHAST, Attorney, OXY USA, Incorporated, was next to
testify. He explained that HB 207 was a general royalty reduction
bill for all types of fields in all parts of the state. At the
development of HB 207 it was felt that the special considerations
regarding heavy oil development should be addressed in a separate
bill. He said that HB 207 uses a prolonged royalty reduction and
precludes royalty suspension. He said the administrative process,
required of major producers as well as small producers, is the
same.
Number 1864
REPRESENTATIVE FINKELSTEIN asked why the provision of HB 207,
involving a minor 3 percent expense to the industry, arrived at by
consensus, is now being questioned.
Number 1969
MR. TILLINGHAST referred to the handout titled "An Opportunity to
Develop Alaska's Heavy Oil Resources" and specified page 39 which
was a comparative analysis of the different fiscal impacts. He
said the differences between the royalty suspension compared to the
5 percent royalty found in HB 207 was not significant over time,
but noted the significant negative impact upon the state in the
long run with a 5 percent royalty. He then added that if you add
the administrative costs with the costs of the administrative
process it is significant. He said it cost Occidental $200,000 the
last time they went through the process.
Number 2126
MR. TILLINGHAST said DNR's position in regards to prolonging the
economic life of a well has historically been interpreted as
prolonging operating revenue and not assisting with inducement of
capital investment.
Number 2208
REPRESENTATIVE GREEN pointed out that HB 207 is discretionary, and
because HB 325 is not it is more likely to induce industries to
develop heavy oil.
Number 2254
CHAIRMAN ROKEBERG mentioned that HB 207 received a 3 percent floor
in the Senate Finance Committee.
Number 2312
REPRESENTATIVE FINKELSTEIN asked about amending HB 207 to eliminate
the floor.
Number 2345
MR. TILLINGHAST mentioned the difficulties about just changing one
section of HB 207. He then reiterated the administrative costs
involved and its hinderance on smaller companies. He said
Occidental would not apply, even if they could under HB 207,
because of the costs and the time lag. In Occidentals case the
settlement took one to two years.
CHAIRMAN ROKEBERG said he was going to hold off on a amendment for
a floor.
TAPE 96-2, SIDE A
Number 000
REPRESENTATIVE WILLIAMS made a motion that CSHB 325 be moved out of
committee.
REPRESENTATIVE FINKELSTEIN objected to the motion. He requested a
hearing on a proposed amendment in which heavy oil fields can
receive a royalty reduction consideration.
CHAIRMAN ROKEBERG said that Representative Finkelstein was somewhat
out of order in that he had not prepared a written version of the
proposed amendment. He said that in the interests of the committee
they would vote on Representative Williams motion.
Number 80
REPRESENTATIVE FINKELSTEIN again requested that he be allowed to
submit his proposed amendment. A discussion ensued regarding
whether or not it was an amendment to HB 325 or whether it was a
separate bill.
CHAIRMAN ROKEBERG called for a vote on the motion to pass CSHB 325
out of the House Special Committee on Oil and Gas. Representatives
Rokeberg, Ogan, G. Davis, Williams, and B. Davis voted yea.
Representative Finkelstein voted nay. Representative Brice was
absent for the vote. The motion to pass CSHB 325 succeeded.
ADJOURNMENT
There being no further business to come before the House Oil & Gas
Special Committee, Chairman Rokeberg adjourned the meeting at 10:47
p.m.
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