Legislature(2005 - 2006)Anch LIO Conf Rm
11/21/2005 01:00 PM House OIL & GAS
| Audio | Topic |
|---|---|
| Start | |
| Discussion Regarding Independent Oil and Gas Companies in Alaska | |
| Adjourn |
* first hearing in first committee of referral
+ teleconferenced
= bill was previously heard/scheduled
+ teleconferenced
= bill was previously heard/scheduled
ALASKA STATE LEGISLATURE
HOUSE SPECIAL COMMITTEE ON OIL AND GAS
Anchorage, Alaska
November 21, 2005
1:10 p.m.
MEMBERS PRESENT
Representative Vic Kohring, Chair
Representative Nancy Dahlstrom
Representative Lesil McGuire (via teleconference)
Representative Norman Rokeberg
Representative Berta Gardner
Representative Beth Kerttula (via teleconference)
MEMBERS ABSENT
Representative Ralph Samuels
OTHER LEGISLATORS PRESENT
Representative Mike Chenault (via teleconference)
Representative David Guttenberg (via teleconference)
Representative Mike Hawker
Representative Peggy Wilson
COMMITTEE CALENDAR
DISCUSSION REGARDING INDEPENDENT OIL AND GAS COMPANIES IN ALASKA
- HEARD
PREVIOUS COMMITTEE ACTION
No previous action to record
WITNESS REGISTER
MARK HANLEY, Manager
Public Affairs for Alaska
Anadarko Petroleum Corporation
Anchorage, Alaska
POSITION STATEMENT: Testified in support of incentives for oil
production in Alaska.
KEN SHEFFIELD, President
Pioneer Natural Resources Alaska, Inc.
Anchorage, Alaska
POSITION STATEMENT: Testified in support of incentives for oil
production in Alaska.
ARLEN EHM, Geological Consultant
Anchorage, Alaska
POSITION STATEMENT: Testified in support of incentives for
small-sized oil companies in Alaska.
KEN BOYD, Oil and Gas Consultant
Anchorage, Alaska
POSITION STATEMENT: Testified on the subject of incentives for
oil production in Alaska.
MARK MYERS, Former Director
Division of Oil and Gas
Department of Natural Resources
POSITION STATEMENT: Testified on the subject of incentives for
oil production in Alaska.
DAVID BOELENS, Vice President
Alaska Operations
Aurora Power Resources Inc.; Aurora Gas, LLC; Aurora Well
Service; and Shirleyville Enterprises LLC
Anchorage, Alaska
POSITION STATEMENT: Testified regarding laws affecting
independent oil companies in Alaska.
DAN DONKEL
Anchorage, Alaska
POSITION STATEMENT: Testified in support of incentives for
independent oil companies in Alaska.
PAUL CRAIG, Owner
Trading Bay Energy Corporation
Anchorage, Alaska
POSITION STATEMENT: Testified on the bonding difficulties for
independent oil companies in Alaska.
DAVE LAPPI, President
Lapp Resources
Anchorage, Alaska
POSITION STATEMENT: Testified in support of incentives for small
oil companies in Alaska.
JIM WHITE
Alaskan Crude Corporation
Anchorage, Alaska
POSITION STATEMENT: Testified that the oil industry is over-
regulated in Alaska.
ACTION NARRATIVE
CHAIR VIC KOHRING called the House Special Committee on Oil and
Gas meeting to order at 1:10:15 PM. Representatives Kohring,
Gardner, Rokeberg and Dahlstrom were present at the call to
order. Representatives McGuire (via teleconference) and
Kerttula arrived as the meeting was in progress.
^^DISCUSSION REGARDING INDEPENDENT OIL AND GAS COMPANIES IN
ALASKA
CHAIR KOHRING relayed that the committee would be seeking ideas
and recommendations from independent oil and gas companies
regarding how the state can spur development and make it easier
for them to operate in the state. He said that he is frustrated
by the fact that the state is not developing its resources as
aggressively as he thinks it should. Although Alaska has the
greatest potential of all the states, currently there are only
four wells being drilled, he said. He said the ideas and
recommendations offered during this meeting could potentially
engender forthcoming legislation.
1:13:42 PM
MARK HANLEY, Manager, Public Affairs, Alaska Region, Anadarko
Petroleum Corporation (Anadarko), after mentioning that he would
be referring to a PowerPoint presentation, said that generally
the system is working. There have been a lot of new companies
showing up in Alaska over the last five or six years, he
remarked, such as "Armstrong," "British Gas," Devon [Energy
Production Company, L.P], "ENI," Petro-Canada [Alaska Inc,],
"Pioneer," "Shell," "Talisman," Ultrastar Exploration LLC, and
others. Therefore, he surmised, the things currently being done
are actually having the desired impact. On the issue of wells
being dug, he noted, it takes longer in Alaska - perhaps even as
long as 10 years - from "first thought" to actual production.
Therefore, the price of oil right now doesn't matter as much as
what the price will be between the years 2015 and 2030. Mr.
Hanley, referring to his PowerPoint presentation, went on to
describe some of Anadarko's financial and operational aspects.
1:17:55 PM
MR. HANLEY relayed that Anadarko tends to look for larger anchor
fields, which are larger, stand-alone facility fields and tend
to be farther away from existing infrastructure. Such fields
tend to be higher-risk/higher-reward operations, he said. New
companies provide competition, partner opportunities and
educational opportunities, he stated. Referring to his
PowerPoint presentation, he said "independents" are important
because of the tremendous amount of resources in Alaska,
although accessing those resources does come with challenges,
such as high costs, long "lead times," and limited
infrastructure relative to other places.
1:20:07 PM
MR. HANLEY explained that companies need stable taxes,
reasonable regulations and access to infrastructure and acreage.
With regard to acreage access, he suggested that current state
and federal programs are working well and should be continued.
With regard to the issue of regulations, he said that although
there has been lot of progress made in recent years to the
regulatory process, there is always room for further
improvement; he mentioned a couple of recent regulatory changes
which have assisted what he characterized as "North Slope
orientated" companies. Regarding stable taxes, he remarked that
Alaska has had such for some time and opined that this has
attracted companies. In fact, he added, the five-year incentive
program on the North Slope that was adopted a few years ago has
influenced the decision-making process of companies like
Anadarko.
MR. HANLEY pointed out that the results of any incentive program
won't be seen in the first [few years] of implementation, and
therefore the state should consider extending current incentives
for another five years, beyond July 2007. He explained that the
incentives are necessary because one can't predict what the
price of oil will be in 10 years; therefore, incentives such as
those for upfront exploration are helpful in convincing
companies to start drilling now. Mr. Hanley offered his
understanding that there has been talk of rewriting North Slope
tax structures as the gasline negotiations continue. This is of
concern because it creates uncertainty. He reminded the
committee that the issues for independents aren't necessarily
the same as for the existing players on the North Slope.
MR. HANLEY then turned to infrastructure access, which has been
an issue for some time. Currently, the access on the oil
pipeline is good. The concern for Anadarko, he related, is in
relation to the rates. Anadarko is currently before the Federal
Energy Regulatory Commission (FERC) with a challenge to the
interstate tariffs, which Anadarko believes is as much as $1.70
a barrel too high. That can have a fairly significant impact on
exploration economics, he opined. Mr. Hanley said that a
gasline is needed because it will, with proper access, encourage
and accelerate gas and oil exploration. Mr. Hanley concluded by
acknowledging that although some may not view [gasline
negotiations] moving as aggressively as some would like, one
must keep in mind Alaska's unique circumstances. He predicted
that there will be an increase in the number of wells.
1:28:17 PM
REPRESENTATIVE ROKEBERG inquired as to whether there is a
timeframe with regard to restructuring the taxes.
MR. HANLEY answered that [Anadarko] has expressed its preference
for 60-90 days. He emphasized that it will be much more
complicated than the open season regulations. Thirty days is a
short time for evaluation, he opined. In further response to
Representative Rokeberg, Mr. Hanley confirmed that Anadarko does
business in areas with varying tax structures. He offered to
get back to the committee with additional data.
1:30:52 PM
REPRESENTATIVE ROKEBERG inquired as to the recommendations Mr.
Hanley would give to the governor in regard to the contracts in
play at this time.
MR. HANLEY related his belief that [Anadarko and other
independents] have educated the governor's staff regarding fair
access at a reasonable price. In further response to
Representative Rokeberg, Mr. Hanley opined that it would be
beneficial for there to be additional contractual provisions
beyond those of FERC. For example, although there is facilities
access, not all facilities are regulated by FERC. Knowing the
rules of the game before investing is important, he opined. He
highlighted that the negotiations are complicated, and therefore
as much time as possible is necessary to review the contract.
1:33:02 PM
CHAIR KOHRING thanked Anadarko for its investment in Alaska. He
then offered to work with Mr. Hanley on an extension of the tax
incentives currently in place.
1:34:56 PM
KEN SHEFFIELD, President, Pioneer Natural Resources Alaska,
Inc., (Pioneer), began by informing the committee that Pioneer
began its investment in Alaska in early 2003 with the drilling
of three exploration wells in the Beaufort Sea. In 2003,
Pioneer significantly expanded its acreage position and then
opened an office in Anchorage in 2004. Pioneer now employees 22
people in Alaska, he said. In 2004 Pioneer concluded
exploration agreements with ConocoPhillips Alaska, Inc.
(ConocoPhillips) and Anadarko across a vast portion of the
National Petroleum Reserve-Alaska (NPR-A) and has assembled a
substantial portfolio with an interest in more than 1.6 million
gross acres across the North Slope. More recently, Pioneer
acquired a 10 percent working interest with the option to
acquire an additional 40 percent interest and possibly succeed
ConocoPhillips as the operator of the cosmopolitan unit in the
Cook Inlet.
MR. SHEFFIELD opined that for independent companies such as
Pioneer the challenges to building a business in Alaska are
formidable. First, the remaining North Slope resources are
nothing like the original fields on the North Slope. Second,
the North Slope is one of the highest cost areas in the world
regarding capital, lease operating and transportation. Third,
the North Slope projects have comparatively long cycle times.
For instance, the time between purchasing a lease to
drilling/selling oil takes from 5-10 years. Finally, the
largest challenge of independents on the North Slope is
uncertainty. Mr. Sheffield said: "To be successful, we must
properly assess and make provision for a number of uncertainties
related to future oil and gas prices, current and potential
future fiscal policy, regulatory processes, and access to
infrastructure, not to mention exploration risk." The long
cycle times for Alaska projects require investments to be made
against a long-term view for oil and gas prices. Although the
current price is over $50 a barrel, he said that the 10-year
average weighted price is less than $25 a barrel. Due to the
cumulative effect of all the costs, the long time between
investment and cash flow, and the odds of finding a discovery
large enough to justify new infrastructure, it's difficult for
many of the remote exploration areas on the North Slope to
project acceptable full-cycle returns. In 2003 the state
initiated exploration incentives which encouraged Pioneer and
others to invest more significantly in infrastructure-challenged
areas such as NPR-A. Mr. Sheffield opined that the state should
consider the effectiveness of the existing program and extend
the credits beyond the current expiration of July 2007.
1:39:15 PM
MR. SHEFFIELD pointed out that for exploration nearer existing
infrastructure, facility access and commercial terms aren't
known with a high degree of certainty. Furthermore, the impact
of third-party production into existing facilities is
significant and complex. Currently, Pioneer is engaged with the
Kuparuk River Unit owners in cooperative negotiations to access
facilities to process production from the proposed Oooguruk
development. Mr. Sheffield opined that the state must provide a
stable and competitive environment for new investors. Moreover,
the state needs to ensure that any future changes to tax policy
don't adversely impact the resources that independents are
working to commercialize. Although the state has made
improvements in its regulatory process, permitting remains
complex and time consuming, he said. Therefore, the state
should look to the Alaska Oil and Gas Association (AOGA) and the
permitting methodologies of other states for additional
streamlining opportunities.
MR. SHEFFIELD stated that although Pioneer currently has no oil
production, it envisions the establishment of a core producing
area by 2010. Pioneer is facing major investment decisions over
the next few years, including a sanction decision on the
Oooguruk development project. Mr. Sheffield concluded:
Alaska needs billions of dollars of new investment
required to find and develop fields to maintain
production near current levels. Large independents
have global portfolios with the ability to shift
investment to areas with the best return and lowest
risk. Higher commodity prices are opening up
significant lower risk resource plays in the Lower 48.
As decision makers in Alaska focus on the future, my
hope is that they will stay informed, recognize the
cyclical nature of oil prices and make decisions in
light of what is best for the long-term future of the
state, growing new supplies of oil and gas, and
keeping Alaska competitive for investment.
1:41:30 PM
REPRESENTATIVE ROKEBERG asked if Pioneer has tracked the various
areas in regard to the credit benefits.
MR. SHEFFIELD answered that to date the vast majority of
Pioneer's investments have been in NPR-A. At this point, the
majority of Pioneer's investments in the Central North Slope
haven't met the requirements to receive the credits. However,
Pioneer does have future investments that will likely meet the
credit requirements.
1:42:56 PM
CHAIR KOHRING recalled Mr. Sheffield's comments on the
complicated nature of permitting, and encouraged Mr. Sheffield
to share specific ideas he has with the committee. Chair
Kohring then turned attention to coal bed methane and asked
whether Mr. Sheffield believes the regulations for the coal bed
methane industry are onerous and should be modified.
MR. SHEFFIELD said that he wasn't familiar with the details of
the coal bed methane regulations. He explained that Pioneer
came into that process late and its decision to relinquish its
acreage were primarily technical. However, he noted that the
uncertainty of the regulatory process also influenced Pioneer's
decision.
CHAIR KOHRING said that he would be happy to entertain any
suggested changes necessary if Pioneer again becomes interested
in coal bed methane exploration.
1:45:26 PM
ARLEN EHM, Geological Consultant, relayed his background,
including his Bachelor and Masters degrees in geology. He noted
that he has been involved in exploration in Alaska for over 40
years. He further noted that over the last 29 years he has been
a geological consultant with clients including federal and state
departments as well as individuals. Mr. Ehm said that he would
restrict his remarks to how to attract and encourage independent
oil and gas companies to invest, explore, and do business in
Alaska. He said the term independent "is often used to
differentiate those companies that are vertically integrated,
usually the majors, from those that are not so integrated,
usually smaller companies of an size. This vertical integration
refers to the company being involved with all phases of the oil
and gas industry, including acquisition, exploration,
production, processing, transportation, and marketing. Since
size isn't necessarily a factor ... large non-integrated
companies often refer to themselves as independent companies.
For the purposes of my testimony I do not include companies the
size of Anadarko, Pioneer, Kerr-McGee, Marathon as independents
whether or not they are vertically integrated."
MR. EHM related his understanding that the purpose of the
hearing was to address the concerns of small companies, which he
referred to as the true independents. He said that the larger
companies can and do solve problems by "throwing money at the
problem." However, independents don't have the resources for
such resolution. He said that his testimony would also relate
to potential operators who may be considering coming to Alaska.
He clarified that he doesn't include lease brokers as
independent operators - they are in the business of acquiring
and brokering leases, not operating. He stated that he has
encouraged about 25 independent companies to come to Alaska, and
nearly all declined in order to avoid the risk and expense of
exploring in Alaska. He said that high potential is not
incentive enough to come. Companies are not interested in
Alaska because of high entry costs, high operating costs, high
risk, permitting problems, excessive bureaucracy, excessive
environmental constraints, remote exploration targets, long lead
times, seasonal operation restrictions, lack of infrastructure,
and seasonal access. High entry and operating costs and high
risk are not problems that the state can or should address, he
said, however, if the policies of the state cause these factors
to increase, the state should then correct its policies. Mr.
Ehm emphasized that he is vehemently opposed to anything
remotely suggesting state funding.
MR. EHM then turned to permitting problems and said entities
interested in operating in Alaska have reason to be concerned.
He then related examples of permitting problems in which he was
involved. He also related that each agency has regulations that
must be followed, although he has been told that agencies have
discretionary powers superseding the regulations. He recalled
that a few years ago he spoke at an conference during which he
called for an ad hoc panel to evaluate all permitting
regulations. Although the proposal received a round of
applause, no such panel has ever been assembled. Some permit
reform is taking place, but it's woefully inadequate, he said.
Governor Murkowski requested that Mr. Ehm compile a report with
regard to the problems he encountered while permitting several
wells for a client. His report included suggestions to appoint
a working body of knowledgeable individuals charged with
cataloging all existing regulations impacting the acquisition of
oil and gas drilling and production permits. He said the
working body would develop the following: a unified, integrated
information gathering system covering all agencies to avoid
duplication; consistent forms available for applicants to file
on line; an accessible system for retrieval by all of the
agencies; and creation of review boards of knowledgeable
specialists who can write and rewrite regulations as necessary.
Mr. Ehm identified the largest problem as the coastal zone
questionnaire/form, of which only a fraction of the questions
actually apply to oil and gas operations. This form needs to be
simplified as to purpose, he stated. He opined that oil and gas
operations could and should be covered by two pages rather than
the nine pages that are currently used.
1:56:46 PM
MR. EHM said there should be considerably more information and
cooperation exchanged between the agencies to avoid excessive
bureaucracy. He said that the environmental community will
always be a force, and "by its very nature Alaska seems to be
their playground." He said the industry has to comply with laws
that environmentalists have promulgated, but he said the state
could be more active in supporting exploration for the
extraction of oil and gas resources. Remaining access issues,
which were mentioned earlier, are of concern [for independents]
as well. However, the state only has varying degree of control
over some of them. He discussed some of the difficulties with
regard to the lead-time between a lease sale and
drilling/exploration. He also discussed the lack of
infrastructure as well as seasonal operation restrictions. The
problems of remote exploration are exacerbated by the state, he
said, because regulations require operators to remove roads if
the wells accessed by the roads are not successful.
1:59:16 PM
MR. EHM concluded by opining that the state can attract and
encourage independent companies to come to Alaska by
implementing the aforementioned suggestions. He said larger
companies will come to Alaska without any additional incentives.
He then suggested that the state establish economic incentives
for companies below a specified minimum size, such as lowering
the state royalty for the initial production as well as lowering
severance and property taxes. He reminded the committee that
the independents are the ones that fill in gaps after the major
[larger] companies have left.
2:00:17 PM
MR. EHM, in response to Representative Wilson, indicated that he
would provide the letter he wrote to the governor.
2:00:52 PM
REPRESENTATIVE ROKEBERG expressed his concern with the problems
Mr. Ehm has had with the bureaucracy and suggested that anyone
being hassled by bureaucracy should bring it to the attention of
the legislature. He acknowledged that the legislature can't
change the regulations without passing another statute.
CHAIR KOHRING echoed Representative Rokeberg's comments.
2:04:27 PM
KEN BOYD, Oil and Gas Consultant, informed the committee that he
is a former director of the Division of Oil & Gas and a
consultant to EnCana Oil and Gas, Inc. (EnCana). He explained
that EnCana, upon arriving in Alaska, looked much like Anadarko,
such that it was well capitalized and knowledgeable. EnCana
immediately partnered with Anadarko to purchase gas leases in
the Foothills and became involved with the McCovey well,
although it wasn't successful. Mr. Boyd opined that EnCana had
the same goals and needs as outlined by Mr. Hanley. With regard
to why EnCana left, Mr. Boyd said it was simply a corporate
decision to become an unconventional oil company that had no
relation to Alaska.
2:07:39 PM
MR. BOYD recalled 10 years ago when [oil and gas discussions]
always included the same needs of stable taxes, reasonable
permitting and access to land. He said access to land isn't of
such concern anymore. The state's leasing program 10 years ago
was done on a nomination basis and was messy, and from that came
legislation implementing areawide leasing. The area leasing
worked and continues to work today. Therefore, he suggested
areawide permitting. The state now leases in five different
areas, which are fairly distinct in regard to geology and
permitting. He reminded the committee of the creation of the
best interest findings [with regard to the areawide leasing
option]. Every year DNR goes out for substantial new
information, which requires mitigating the change alone. He
questioned why such a process wouldn't work for permitting
because it allows one to think over the matter while starting
with a core understanding that has been learned over time.
2:14:51 PM
REPRESENTATIVE ROKEBERG asked if Mr. Boyd believes that access
issues for areawide leasing and exploration licensing have been
solved for the wildcat areas.
MR. BOYD replied yes, adding that exploration licensing fills in
the gaps where there is no leasing. He opined that the
exploration licensing program has resulted in a well in the
Copper River Basin and perhaps some wells to come in the Nenana
Basin, which, he argued, wouldn't have been drilled under the
old program.
2:16:16 PM
REPRESENTATIVE ROKEBERG asked Mr. Boyd's opinion of the
exploration investment credits in NPR-A.
MR. BOYD said he believes that exploration credits and other
incentives can work, although they work mostly for smaller
companies and only for projects on the margin. "I don't think
it will cause a dumb well to become a good well," he stated. He
expressed the need for incentives to be carefully crafted and
said that Alaska will never drill as many wells as Alberta.
2:18:06 PM
REPRESENTATIVE ROKEBERG recalled that when Mr. Boyd was the
director of the Division of Oil & Gas, he had to administer net
profit share leases. He asked whether Mr. Boyd believes the
concept of frontloading investment payback is beneficial and
should be looked at.
MR. BOYD said he does not know what has been proposed, but that
net profit share leasing isn't a good system.
CHAIR KOHRING expressed interest in obtaining further details
from Mr. Boyd regarding how an areawide permitting system could
be established.
2:21:12 PM
MARK MYERS, Former Director, Division of Oil and Gas, Department
of Natural Resources, said the state has a real opportunity to
develop a stronger, diversified industry base. After working on
the aforementioned for five years with the state, he said a
level playing field is critical, and part of the government's
role should be to ensure the playing field is fair. Therefore,
the regulated utilities and pipelines need effective regulation
that is well thought out, well designed, and fairly implemented.
Because of the remoteness of many of the river basins, access to
infrastructure is critical. The state can continue to review
building critical infrastructure, such as the proposed road from
the Arctic National Wildlife Refuge (ANWR) to Point Thompson.
Furthermore, once infrastructure is created, the value of that
to everyone is visible. Therefore, key infrastructure nodes can
be facilitated by government, although they ultimately require
industrial development. The aforementioned is apparent in NPR-
A's alpine development.
MR. MYERS opined that the state needs to negotiate fairly with
companies; although once commitments are made the companies must
be held to them, particularly in regard to explorers. As the
basin has more competition, the state should hold firm to its
commitments to turn over that land quicker.
2:26:29 PM
MR. MYERS said facility access is another major issue. He
explained that nearer infrastructure plays would be best
developed by using existing capacity and facilities. To achieve
the aforementioned, commercial agreements between all parties is
necessary. To date, explorers haven't been successful in
obtaining that commercial access. He highlighted that the
problem with commercial access is not uncommon, although other
areas such as the North Sea have addressed the issue. The
legislature, he opined, will have to become involved to reach a
resolution with commercial access. He highlighted that the good
news is [that resolving the commercial access problem] would be
a win-win situation such that a handsome rate of return could be
paid to the existing facility owners while the state would enjoy
more production, accelerated development, and less environmental
impact.
MR. MYERS noted his agreement with Mr. Boyd that it's
appropriate to do anything that can be done to streamline
permitting without minimizing its importance. However, the
state does need to take care when it changes major policies like
oil and severance taxes as it effects different operators
differently, and therefore the dialogue should be public for
everyone involved to respond. He acknowledged the difficulty to
do so when political goals are involved. Mr. Myers pointed out
that with more exotic state ownership structures there are
significant questions if the state is a competitor with the
companies it's trying to attract. With regard to incentive
programs, he suggested reviewing those that have been effective
in generating the intended behavior in order to determine which
programs to retain and remove. Mr. Myers said he is proud of
some of the incentives passed by the legislature, such as those
on the automatic royalty reduction on the platforms. With
regard to new incentives, he encouraged the legislature to
review what will impact the [targeted] behavior. He stressed
the need to hold the administration to what the legislature
intended with the laws that it passes. Mr. Myers identified the
royalty reduction program as one that's working as intended. In
conclusion, he urged the committee not to reinvent the wheel,
not to shortcut the public process, and to know the intended
consequences of a proposed incentive.
2:33:12 PM
CHAIR KOHRING turned attention to seismic information
accumulated by seismic banks and asked if that information could
be shared with companies interested in evaluating formations to
determine the potential for oil and gas.
MR. MYERS answered that generally seismic data is acquired by
companies to sell it to specific parties, or it's done on a
specific request by a company or a consortium of companies.
Under state statute that data stays confidential forever,
although well information is made public after a certain time.
He acknowledged that the timeframe the information is
confidential must be long enough that the commercial value and
proprietary nature of it is preserved. He opined that after
perhaps 10-20 years, [the seismic data] should be made public.
He noted that in a few cases some seismic data is made public.
For entities that take advantage of the 40 percent incentive
credit, the data becomes public after 10 years. Mr. Myers
related his belief that it would greatly enhance the viability
of new entrants if the older data were made publicly available.
2:34:54 PM
CHAIR KOHRING thanked Mr. Myers for his work with the
legislature over the years.
2:35:19 PM
REPRESENTATIVE ROKEBERG agreed that the legislature should
review what it has passed and determine what's working. He
asked how the legislature would do that. He further asked if
the legislature should hire consultants to perform a review.
MR. MYERS reminded the committee that during budgetary review
the agencies go through the missions and measures process. That
process could be required to include evaluation of the amount of
money spent, the number of wells drilled and the number of new
discoveries. He agreed that the Division of Oil & Gas or the
Department of Revenue could check its work. He recalled that
the division did review many of the incentives and that data
could've been shared with the legislature, although it takes
time and an individual in the legislature to review it.
Therefore, he recommended that the legislature retain an oil and
gas consultant to perform the aforementioned. In the short-
term, he suggested requesting that the agency do so every five
or so years. In further response to Representative Rokeberg,
Mr. Myers explained that the royalty reduction under [AS
38.05.180(j)] allows [the incentive to be in place] before
production, which provides DNR flexibility and allows the upside
to be captured. Mr. Myers specified that he is aware of two
outstanding applications.
2:37:53 PM
REPRESENTATIVE ROKEBERG asked if the legislature should review
its boilerplate language in the state's leases.
MR. MYERS said he believes there is a requirement, although not
in the primary term of the lease. Therefore, in eligible
jurisdictions, a drilling commitment is required after the fifth
year. One approach, he said, is leases could be conditioned to
require either drilling or relinquishment on an earlier date.
Another approach, he said, is that after a lease reaches its
primary term, "we" form units and commit a drilling. At that
point, the department has historically required a specified
number of wells to be drilled within a specified time. He
opined that the aforementioned commitments become the basis of a
stronger drilling commitment such that failure to meet [those
commitments] means the relinquishment of the acreage and
sometimes reimbursement to the state for what the state lost by
not releasing it. Point Thompson is an example of a lease with
such a requirement for this winter. That requirement has been
stayed, and therefore the state missed the opportunity to have a
critical well drilled. If the state allows that, the division
can no longer negotiate those commitments and feel confident
that those commitments will be held. If there's a political way
to undo it, the commitments are meaningless, he stated.
Therefore, there should be very good reasons for changing such
commitments. He then expressed the need for the government to
fairly and consistently manage its commitments. He said
independent companies either drill or relinquish, and typically
the major companies will honor the commitment or relinquish the
acreage and pay it back. But once the state "starts interfering
with that natural process, then there's really no ability for
the state to enforce any of its negotiated provisions."
2:41:39 PM
DAVID BOELENS, Aurora Power, Aurora Gas LLC, Aurora Well
Service, Shirleyville Enterprises LLC, informed the committee
that "we" have five existing producing gas fields on the west
side of Cook Inlet. There have been quite a few successes and
some disappointments since arriving in Alaska in 2000. Mr.
Boelens said that he doesn't really view other independents as
competition because Alaska is a very tough environment. Many
issues and challenges have arisen with regard to operating in
Cook Inlet, some of which have already been mentioned, such as
access to existing pipeline infrastructure, the need for new
infrastructure, fiscal stability, royalty and tax valuation,
regulatory and permitting, contractor support, and the need for
incentives focused on Cook Inlet gas issues. Access to existing
pipelines and infrastructure in Cook Inlet is critical, he
opined. He noted that there has been some progress on pipeline
issues with the Regulatory Commission of Alaska. He added that
there needs to be economical ways to get to the pipelines if the
state is going to attract new independent operators to Cook
Inlet.
MR. BOELENS highlighted that on the west side of Cook Inlet
there are no bridges, and everything has to be brought in on
landing craft or flown in. Mr. Boelens said that "we" have
ended up in the position of re-opening and building roads,
building bridges, extending power lines or setting generators,
and other things that wouldn't have to be done in other parts of
the country. Therefore, he suggested that the state could
review having some role in development, like bridges and roads,
on the west side of Cook Inlet. Furthermore, much of the lands
that have been developed in the Cook Inlet are either offshore
or around the coast, where putting a runway, for instance,
couldn't be done today. He said surrounding game refuge
regulations and winter sea ice can restrict activity, making
operations in the Cook Inlet costly.
2:47:25 PM
MR. BOELENS agreed with earlier testimony regarding the need for
fiscal stability and [consistent] rules. He requested not
changing the rules to accommodate North Slope operations without
considering the impacts to Cook Inlet operations. With regard
to royalty and taxation for independents, Mr. Boelens noted that
there is the prevailing value trap, which specifies that the
royalty and taxation is going to be paid on the prevailing
value, which is the average of a series of utility contracts.
However, the larger producers tend to have those utility
contracts, and thus new producers can't get the contracts and
have to find someone that needs gas, or they must sell gas to an
entity that already has a contract. That can sharply reduce the
selling price, he noted. He said, "if it's an arm's length deal
between the producer and whoever they're selling the gas to,
that should be good enough for taxation, and the state did fix
that in the case of Agrium. The new contracts with Agrium were
at the value that it was cut; it's not at the average of
Chugach's electric or ENSTAR's or anybody else's contract, as
far as what they're going to pay the royalty taxes on."
2:49:30 PM
REPRESENTATIVE ROKEBERG related his understanding then that the
royalty and taxes are being paid based on other values, not the
actual cost of the sale of the transaction.
2:49:46 PM
MR. BOELENS agreed. He said regulatory and permitting have
gotten better; however, he related his experience in installing
a power line and "it was an eye-opener." He said his company
did the wetland assessment, the coastal zone management process
and the storm water plan, which made permitting expenses about
one third of the total $125,000 project cost. He mentioned
spacing exceptions and acknowledged that state employees are
merely enforcing the regulations, however he questioned whether
they always make sense. With regard to utility contracts, he
said, new companies have the issue of what they're going to do
with their gas. Therefore, it's a big issue for new entrants to
discover a situation in which there are no unmet requirements
because the utilities have dedicated 100 percent to the existing
producers. He related that prospectors love the geology of Cook
Inlet until the question arises regarding how one will sell the
gas. Although he acknowledged that Agrium will buy gas, but the
future of Agrium is unclear. "So there's some real uncertainty
here having utilities with all these unmet requirements met," he
said.
MR. BOELENS, in response to Representative Rokeberg's question
about unmet requirements, said, "ENSTAR has signed these tiered
contracts where Unocal will supply the gas and Marathon will
supply the gas."
REPRESENTATIVE ROKEBERG surmised then that there's no market for
future reserves that may be discovered if ENSTAR is the only
buyer.
MR. BOELENS concurred, adding that his concern is that there is
no set-aside on these utility contracts for another producer.
REPRESENTATIVE ROKEBERG asked if set asides are typical in other
jurisdictions.
MR. BOELENS pointed out that normally the market wouldn't be
stranded; "You find your gas, you put it in the system, and off
it goes." Furthermore, he pointed out there isn't a critical
mass with regard to good support contractors, as in the Lower
48, but the legislature probably can't address that.
2:55:58 PM
MR. BOELENS, turning attention to incentives, informed the
committee that [Aurora Gas] has drilled eight new wells, five
side tracts and "three non-rig work-over interventions,"
spending about $38.6 million. Two of the eight wells have been
dry, he said, and if the dry wells were the first ones drilled,
the company would not be in Alaska today. There aren't
incentives for small producers to mitigate a situation like that
and to want to remain or enter Cook Inlet. He noted that he
didn't want a give-away program, so he questioned how incentives
could be structured.
2:58:18 PM
REPRESENTATIVE ROKEBERG addressed the lack of incentives, and
said he thought the legislature passed a Cook Inlet credit.
MR. BOELENS said his company was able to take advantage of the
seismic credit, but there is no incentive for drilling the
wells, and he believes the company is not eligible for anything
"when you consider where we operate."
REPRESENTATIVE ROKEBERG said that he believes the incentives
have been specific to certain prospects or for lower capacity.
MR. BOELENS noted that his company's Nicolai Creek field
qualified for a royalty reduction.
REPRESENTATIVE ROKEBERG said he believed that the legislature
passed a facilities tax credit for gas "about three years ago."
He asked if that helped for delivering the gas from the well
site to the distribution system.
MR. BOELENS replied no.
REPRESENTATIVE ROKEBERG recalled that Marathon "was quite
involved in that," and he thought it had broader applications.
MR. BOELENS said his company has talked about allowing a
producer of coal bed methane "to come over the top of what we've
got and work out a deal to access pipelines and compressors ...
we're happy to see them come."
REPRESENTATIVE ROKEBERG asked of his company has encountered
coal.
MR. BOELENS said yes, and coal is a big drilling hazard, "in
fact Beluga coal fields overlie a lot of the stuff that we're
doing."
REPRESENTATIVE ROKEBERG asked what kind of incentives would help
his company operate and would invite competition.
MR. BOELENS said he would like to see a program to support rural
bridges and roads, as well as a reasonable incentive for well-
drilling costs to mitigate risk. He said he did not know
exactly what that incentive would look like.
3:02:03 PM
REPRESENTATIVE CHENAULT asked if Aurora Gas LLC looked at House
Bill 61, regarding an income tax credit.
MR. BOELENS answered that it depends on how a company is
structured; it doesn't help a limited liability company.
The committee took an at-ease from 3:04 p.m. to 3:06 p.m.
3:06:33 PM
DAN DONKEL said he would like improvements in attracting
independent oil and gas exploration in Alaska. He noted that he
has over 20 years of experience in the oil and gas business. He
said he has witnessed dramatic improvements in Alaska over the
past years due to excellent laws that were recently passed. He
said Alaska is heading in the right direction, and every Alaskan
should be grateful to the legislature for the following: an
increase in acreage limitation, the reduction of state-wide
royalties, tax credits, the Alaska Stranded Gas Development Act,
areawide lease sales, shallow gas leasing, the economic limit
factor, exploration incentive credits, and discovery royalties
for Cook Inlet. He opined that it was not an easy task for the
legislature to "accomplish all these great achievements." He
stated that the legislature needs promotional and education
materials to promote those incentives. He suggested funds to
create publications; "It doesn't cost that much, and we can use
recycled paper." He said if independent producers become aware
of the welcome mat that Alaska has put out, the state would see
an increase in the average daily rig count, "like we have in
Texas."
MR. DONKEL stated that there is much more room for improvement
as evidenced by Alaska having only one percent of what Texas has
in terms of drilling rigs. Only seven rigs are active in
Alaska, he noted, and with four million acres of leases, there
is only one well for every million acres. He said Alaska needs
more wells. He said if Alaska builds the gasline, "they will
come." If Alaska makes regulations that inspire people to drill
and risk capital, "I think we can make for a better Alaska."
CHAIR KOHRING said he likes that comment, "Tear down that wall,
reminiscent of Ronald Reagan."
MR. DONKEL said the state needs to tear down the wall of only
seven rigs versus the 600 rigs in Texas. He said at the
Resource Development Council, he asked the question of Exxon,
ConocoPhillips Alaska, Inc., and British Petroleum, and only
Anadarko responded. Anadarko said it will never happen, but Mr.
Donkel said he disagreed because Alaska is 2 1/2 times as large
as Texas. But he said Alaska is dead last in the number of rigs
of all oil-drilling states, and "this is a sure sign that the
rules and policies are out of sink with the rest of the nation,
and need to be revised and improved upon."
3:13:52 PM
MR. DONKEL said he has been in court during all his years in
Alaska due to "unreasonable, discriminatory, and unlawful acts
by state agencies." He noted that the Department of Natural
Resource and its Division of Gas violated his right to own oil
and gas leases in the Cook Inlet. He said the Redoubt Shoal oil
field was taken away from him, and the actions of DNR were
unforgivable, and caused his company to be dissolved. He
discussed his altercations and court actions with state
agencies, and said "this isn't the sort of incentives that
independent risk takers, or anyone else, find welcoming when
they consider coming to Alaska."
3:18:54 PM
MR. DONKEL related another court case illustrating the
difficulty in operating in Alaska, "even with all the great laws
that this legislature has passed in recent years." He said the
problem is that the state owns 99 percent of Alaska, and "if we
have a dispute with our landlord, they are our judge, jury and
executioner." He noted that DNR was separated from the Alaska
Oil and Gas Conservation Commission (AOGCC), but the same law
firm still represents both. The 11th amendment of the
Constitution guarantees sovereignty, he said. He told the
committee that he came to Alaska in 1986 as oil prices were
crashing and was the only one buying leases. "I bought 100,000
acres. Formed an oil company. Living the American dream," he
said. People asked him why he never drilled, and he said that
the rules changed. He spoke of a former judge who heard a DNR
director say that DNR can do anything it wants to small oil
companies and they can't do a "damn thing about it." He said
his company, Danco, got "beat up pretty badly," but that he
dissolved the company and didn't go bankrupt. Now his clients
get royalty checks every month, he noted, because he never gives
up. He said it is time for change.
3:24:17 PM
MR. DONKEL said Alaska should consider Kansas as a self-insured
state, and the untouched oil spill contingency fund proves that
we have don't have "renegades coming up here and making a mess."
He suggested eliminating every single bonding requirements in
the state. He said the state could "back it up with the 470
fund. That way you will see massive amount of people coming to
Alaska." He said if anyone spills oil, other oil companies will
"tar and feather and run out [that operator] of town themselves.
You won't have to do it." The state doesn't need the bonding
requirements, he added, as well as the oil spill contingency
plan which kills competition. He said, "We should have the
right to trial de novo" because the state owns 99% of all the
land and shouldn't be judge and jury. "Absolute power corrupts
absolutely," he said, and the governor appoints the oil and gas
commissioners, the attorney general and others. He said if
Alaska could double its "rig count" it could double the size of
the Alaska Permanent Fund check. He said Alaska should elect
the Attorney General, and should consider creating an Alaska
version of the Texas railroad commission, and have all oil and
gas agencies under one roof with an elected three-person
commission. Oil is a major source of income for the state, he
said, so the state should spend the money to "make the best
system of justice money can buy." He said what works in Texas
can work in Alaska. He said he does not know one person in
Alaska who is actually producing a well. Mr. Donkel asked how a
stripper well could produce four or five barrels a day when a
$1.2 million bond is required. He said he has hope and faith in
this committee. He said the Alaska capital should be moved to
Pt. McKenzie so it will be closer to him. Mr. Donkel offered to
help the committee in its mission to achieve a better Alaska.
And he said the state needs to produce more oil for the good of
the country.
[Due to technical difficulties, the transmission stopped at 3:32
p.m.]
3:34:26 PM
PAUL CRAIG, Owner, Trading Bay Energy Corporation, said he would
like to testify on bonding, but noted that there are six areas
that need area-wide permitting, because there is a large
difference between onshore and offshore drilling in Cook Inlet.
He said he has gone through the permitting process for three
wells in 1996. In that process he had to pay $1 million in
bonds to DEC for oil spill contingencies, $100,000 to AOGCC, and
$10,000 to DNR, he stated. He said he quickly discovered that
no one sells those bonds in Alaska, "even if I had the cash to
put a million dollars up as security for the bond, bonding
companies weren't very interested in issuing me that financial
instrument for fear that by doing so they would not just be
responsible for the million dollars that I've already posted,
but that putting their name on the line may put them in the path
of much greater financial responsibility if there were another
disaster such as the Exxon Valdez."
MR. CRAIG said that in 1996, he researched bonding requirements
for a single well around North America, and Kansas only required
a "cement bond" at the top of the well, or a $0 bond. Oklahoma
had the highest at $55,000. He said the average bond
requirement was $13,950, and he figured that Alaska requirements
were 76 standard deviations from the mean. "It's crazy," he
said, "there is not justification for that." Oil spills do not
occur with properly equipped exploratory wells, but with
transportation and production, he opined. He said independents
have no interest in "tying up a million dollars capital ... when
they could be drilling two, three, four wells in the lower 48
with that capital and generating revenue from it." He noted
that it is not an issue for larger companies. If the state
wants smaller companies to come, changes need to be made, he
stated. On a positive note, he said, after 12 years of effort,
one of the two companies he owns will be drilling the Hannah
prospect. He said things are possible when partnering with
other small entities. He said that laws have improved but only
1-2 percent of the changes that need to be made, have been made.
3:41:40 PM
CHAIR KOHRING said he looked forward to discussing bonding.
3:41:49 PM
REPRESENTATIVE ROKEBERG asked Mr. Craig if he had to put up
actual cash.
MR. CRAIG said that unlike insurance, bonds need an asset to
back it up. He said with a liquid asset, companies would
consider giving him a bond. "Obviously people are getting these
bonds somehow and meeting their bonding requirements," he said.
REPRESENTATIVE ROKEBERG asked Mr. Craig if he was aware that
bonds have been issued by insurance underwriters in Alaska.
MR. CRAIG said that back in 1996 he was not assured that he
could acquire a bond even if he had a $1 million asset to post,
but he guessed that if he had $1 million cash, he could get the
bond, but he could probably do something more profitable with
the money. Bonding is a large barrier to small companies, he
said. In his Hannah prospect, he is the minority interest-
working partner, and by partnering with Aurora he can get the
project done. He can "slip around" the $1 million requirement
because he won't be drilling through oil.
3:45:48 PM
DAVE LAPPI, President, Lapp Resources, Inc., said he will
discuss disincentives for small companies in Alaska, including
land access, permitting, bonding, and regulation of production.
He said that land is accessible and available for lease, but
smaller companies need lower prices. The bidding process is not
suited to small independents, he said, and he proposed reducing
the minimum bid in exchange for a shorter lease term. He also
suggested allowing exploration license applications year round
instead of only in April to encourage more exploration and
development. He said Alaska should reinstitute the shallow gas
leasing program, with controls in populated areas to mitigate
some of the impacts. He said the program would result in
commercial production in areas that are not served by gas
pipelines or are running short of gas, like the Cook Inlet
Basin. He said he thinks the permitting process needs to be
streamlined further with a set of standard pre-approved
applications. He also suggested eliminating air quality permits
for individual drill sites, and instead permit the drilling rig,
not the drill site. He said the rig could have an annual I/M
test like cars do now. The air quality permits can be very
expensive if DEC decides to require computer modeling of the air
quality around the rig site, he added. He noted that the state
gets billions of dollars in various production taxes on oil and
gas each year, and it should consider underwriting some of the
costs and self-bond the risks associated with exploratory
drilling. He said actual spill statistics prove that most of
the risk of a large spill is from transportation and production
of oil. He said that the regulation of production needs to be
fair and impartial regarding leasing, exploration and drilling.
Very few companies will come if the perception is that Alaska
favors large companies over small companies, he said. He
concluded that improvements be made and, "the measure of success
would be that individual Alaskans actually have working interest
in oil and gas producing assets of their own."
3:51:29 PM
CHAIR KOHRING asked Mr. Craig to elaborate on his suggestion of
a streamlined permitting process.
MR. LAPPI said a standard drilling application approved speedily
at a low cost would be good. He said the shallow gas leasing
program is good, and if others have problems with the impacts of
the program, he said he thinks there are ways to mitigate them.
The leasing program should not be based on competitive bid but
on "application first in, first served."
3:53:10 PM
REPRESENTATIVE ROKEBERG asked about Mr. Craig's review of the
"the most recent rewrite, making shallow gas part of an
exploration license."
MR. LAPPI said he has not seen that proposal.
REPRESENTATIVE ROKEBERG said the legislature adopted it about
two years ago.
MR. LAPPI said he is not familiar with it.
REPRESENTATIVE ROKEBERG said it relies, in large part, on DNR's
regulatory scheme which was being promulgated.
MR. LAPPI said that as part of the shallow gas leasing program
there were changes that defined a shallow gas well as one that
was drilled for gas at less than 3,000 feet, "and I don't think
that those provisions were changed when the legislature
abolished the shallow gas leasing program."
REPRESENTATIVE ROKEBERG told Mr. Craig to take a look at it.
3:55:54 PM
JIM WHITE, Alaskan Crude, informed the committee that crude has
been produced and sold in Alaska for almost 100 years. He knows
of no Alaskan that is producing or selling crude, and his
friends in Oklahoma and Texas "think it is an atrocious
circumstance." He said that it is a systemic problem and
without change there will be another 100 years without an
Alaskan producing crude in the state. The bulk of this wealth
leaves the state, he said, and this should be the most important
thing the legislature should address in the next session. The
state disallowed the landowner from owning their minerals since
1958.
CHAIR KOHRING said that those that he has served with in the
legislature have been friendly toward the industry.
MR. WHITE said, "If you were to pick a state and a plan to limit
competition for a country or an area, you got the perfect road
map." He said Alaska has been producing oil for decades and a
person could count the producers on one or two hands. To change
the roadmap, he said, "You need to gut the regulation and go
back and take a look at all these issues."
4:00:25 PM
REPRESENTATIVE ROKEBERG asked about a distinction between a 500-
barrel prospect, and how one could determine that without
seismic data.
MR. WHITE answered that often a fairly accurate guess can be
made from previous drilling in the area. He said he is getting
ready to re-enter a well that was drilled in 1985 and closed in
1986 and has enough information to guess the well's potential
output. To re-enter requires a six-month, $70,000 contingency
plan process, and it is outrageous, he opined.
REPRESENTATIVE ROKEBERG said it makes it difficult to define it.
MR. WHITE said there are ways to make reasonable projections.
REPRESENTATIVE ROKEBERG said with Mr. Donkel's suggested self-
insurance, a producer would not have that limitation.
MR. WHITE said, "Before that tanker run into that rock and
spilled all that oil down there, I'm having a hard time
connecting what's relevant between the tanker running into a
rock and me drilling a well." He said he has no knowledge of a
well blowing out in all the years of Alaska oil production,
"that hadn't been cleaned up by the guy that blew it out."
4:06:00 PM
REPRESENTATIVE ROKEBERG said that was because there is a
regulatory requirement to clean it up.
MR. WHITE said he knows if he doesn't build a well according to
industry practices and state rules, the state can shut the
production down and impose a fine. He said the state has
"absolute overkill in policing wells."
REPRESENTATIVE ROKEBERG said he doesn't disagree, but the
public's perception is that the government is going to protect
the environment on one hand and encourage development on the
other. He asked how to design a statute to do that.
MR. WHITE asked what problems the state had prior to current
rules.
REPRESENTATIVE ROKEBERG said there wasn't the political pressure
to keep the environment clean.
MR. WHITE said the environment was clean and problems didn't
happen. If they did happen, he continued, operators would lose
their bonds and they would be out of business.
REPRESENTATIVE ROKEBERG said the state needs to design statute
to avoid a fly-by-night entity "with no recourse, no balance
sheet, and walking out the door after he mucks up the drill
site."
MR. WHITE said that there is an arduous set of circumstances to
comply with prior to permitting, and the AOGCC polices the
industry.
REPRESENTATIVE ROKEBERG expressed concern about a potential fly-
by-night LLC, and stressed that the state needed to limit
bureaucracy at the same time as protecting the public interest.
4:12:34 PM
MR. WHITE said a fly-by-night person would not have the finances
to drill a well. He discussed the ability of a "home-grown
Alaskan" entering the oil business and keeping the wealth within
the state. He suggested that Alaska will become a ghost town if
Alaskans are kept from getting into the oil business.
ADJOURNMENT
There being no further business before the committee, the House
Special Committee on Oil and Gas meeting was adjourned at
4:15:28 PM.
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