Legislature(1995 - 1996)
01/26/1996 09:07 AM House RES
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* first hearing in first committee of referral
+ teleconferenced
= bill was previously heard/scheduled
+ teleconferenced
= bill was previously heard/scheduled
HOUSE RESOURCES STANDING COMMITTEE
January 26, 1996
9:07 a.m.
MEMBERS PRESENT
Representative Joe Green, Co-Chairman
Representative William K. "Bill" Williams, Co-Chairman
(via teleconference)
Representative Scott Ogan, Vice Chairman (via teleconference)
Representative Ramona Barnes (via teleconference)
Representative John Davies
Representative Pete Kott (via teleconference)
Representative Don Long
MEMBERS ABSENT
Representative Alan Austerman
Representative Irene Nicholia
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
HOUSE BILL NO. 341
"An Act establishing a tax court to consider and determine certain
taxes and penalties due and collateral matters, and amending
provisions relating to taxpayer challenges to the assessment, levy,
and collection of taxes by the state; and providing for an
effective date."
- SCHEDULED BUT NOT HEARD
PREVIOUS ACTION
BILL: HB 325
SHORT TITLE: ROYALTY SUSPENSION: N. SLOPE HEAVY OIL
SPONSOR(S): REPRESENTATIVE(S) GREEN
JRN-DATE JRN-DATE 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
01/24/96 2522 (H) O&G RPT CS(O&G) NT 5DP 1DNP 1NR
01/24/96 2522 (H) DP: OGAN, ROKEBERG, WILLIAMS, BRICE,
01/24/96 2522 (H) B.DAVIS
01/24/96 2522 (H) DNP: FINKELSTEIN
01/24/96 2522 (H) NR: G.DAVIS
01/24/96 2522 (H) 2 FISCAL NOTES (DNR, DOR)
01/24/96 2522 (H) REFERRED TO RESOURCES
01/26/96 (H) RES AT 08:00 AM CAPITOL 124
WITNESS REGISTER
JEFFREY LOGAN, Legislative Assistant
to Representative Joe Green
Alaska State Legislature
State Capitol Building, Room 24
Juneau, Alaska 99801
Telephone: (907) 465-4931
POSITION STATEMENT: Presented sponsor statement on 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: Discussed Department of Natural Resources'
position on HB 325 and HB 207.
ED BEHM, Heavy Oil Team Leader
Milne Point Unit
OXY USA Incorporated
P.O. Box 50250
Midland, Texas 79710-0250
Telephone: (915) 685-5673
POSITION STATEMENT: Gave presentation on HB 325.
BRUCE J. POLICKY
MPU Exploitation Manager
BP Exploration (Alaska) Inc.
P.O. Box 196612
Anchorage, AK 99519-6612
Telephone: (907) 564-5232
POSITION STATEMENT: Gave presentation on HB 325.
DALE BONDURANT
HC 1, Box 1197
Soldotna, Alaska 99669
Telephone: (907) 262-0818
POSITION STATEMENT: Testified on HB 325.
ACTION NARRATIVE
TAPE 96-8, SIDE A
Number 0001
CO-CHAIRMAN JOE GREEN called the House Resources Committee meeting
to order at 9:07 a.m. Members present in person at the call to
order were Representatives Green, Long and Davies. Members present
via teleconference from Anchorage were Representatives Kott and
Ogan. Members absent were Representatives Williams, Barnes,
Austerman and Nicholia.
HB 325 - ROYALTY SUSPENSION: N. SLOPE HEAVY OIL
Number 0155
JEFFREY LOGAN, Legislative Assistant to Representative Green,
sponsor of HB 325, presented the sponsor statement:
"House Bill 325 allows the producers of heavy oil to forego the
payment of royalty to the state on the first 500 barrels of heavy
oil produced each day, for a period of up to five years. The heavy
oil considered in this bill is a thick, tar-like hydrocarbon that
is more difficult to produce than the lighter, more conventional
oil and gas. 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.
"House Bill 325 requires no application; the suspension is
automatic. In order to receive the suspension, the producer must
simply submit documentation to DNR certifying that the oil produced
meets the definition of `heavy oil' and monitor the production rate
to satisfy the requirements in the bill.
"House Bill 325, we believe, sends a message to potential investors
world-wide that the 19th Alaska Legislature supports the
development of heavy oil in Alaska."
Number 0260
CO-CHAIR GREEN thanked Mr. Logan and called on Kenneth Boyd to
testify. Co-Chair Green mentioned that there had been speculation
that the principles of HB 325 had been covered in legislation
passed the previous year. He asked Mr. Boyd whether his comments
would center around that topic.
Number 356
KENNETH A. BOYD, Director, Division of Oil and Gas, Department of
Natural Resources (DNR), responded via teleconference from
Anchorage. He referred to his testimony at a previous hearing on
HB 325 in the House Special Committee on Oil and Gas and said he
would not repeat that testimony. He explained that DNR was not
objecting to the development of heavy oil. However, under HB 325,
he said, there was no showing of need required to get the relief
requested, regardless of the economics of the company or the field.
He stated that DNR believed HB 207, which had passed unanimously in
the House of Representatives the previous year, was applicable. He
referred to term (B) and said DNR realized there was overhead to
that, in terms of time, but that it protected the state of Alaska's
interests. There was then a real showing of need by each
individual company, he said, with economics differing for each
company and field. Mr. Boyd reiterated that DNR believed HB 207
could be used.
Number 396
CO-CHAIR GREEN replied that there had been concern, at least on his
part, as sponsor of HB 325, because he had been unable to see how
one area containing heavy oil would be included in the three
different categories covered in HB 207. He added he had not seen
that area as a potential field or as an uneconomic field;
therefore, he did not see how it fit within HB 207. Co-Chair Green
asked Mr. Boyd to explain how he thought it might work.
Number 0453
MR. BOYD answered that the point was that it was an uneconomic
field under the current terms; they were asking for relief to make
their field economic. He explained that the premise of HB 207 was
to allow for production that would not otherwise be economically
feasible. He added that there were three different types of
fields, with the first type being a new field. He said that was
where most of the debate had centered, on the idea that the fields
had to be delineated. That was something new in Alaska law.
MR. BOYD concluded by saying that obviously there was some concern;
however, the Administration had no problem with adding a term or
clarifying (B) in HB 207 if that solved the problem. He thought it
would be fairly simple to amend (B) to specifically modify heavy
oil. Personally, he added, he did not believe that was necessary,
but it could certainly be done.
Number 0579
CO-CHAIRMAN GREEN explained his concern that it would not
necessarily fall into the category of a field that had reached its
economic limit, where the cost per barrel had increased. He said
the cost per barrel in this case would go down, due to increased
numbers of barrels produced and technological advances being
implemented. He expressed apprehension there might be a "crack" in
HB 207 that this could fall into.
Number 0586
MR. BOYD replied that again, he did not believe that to be true.
He thought the spirit of the bill was to allow for production not
otherwise economically feasible. He reiterated that he thought (B)
was applicable. He added that if the committee and the companies
were concerned, however, DNR was willing to work to fix HB 207.
Again, he said, DNR did not object to development of heavy oil. It
was everybody's goal. However, DNR thought there should be
economic calculations showing need and how to solve it. He said he
did not believe the answers could be known until the analysis was
done. He asserted that HB 207 provided the opportunity for that
analysis. He reiterated DNR's willingness to try to modify HB 207
to alleviate concerns, despite their belief that it was already
applicable.
Number 0650
CO-CHAIRMAN GREEN responded that his concern was the need for a
degree of certainty, by the applicant, that when dealing with this
specific type of oil, which was difficult and expensive to produce,
there would not be a discretionary response. He said that if HB
207 could be worked to make it certain and nondiscretionary, he
believed there might be an avenue. He added that he understood
DNR's desire to ensure that the yardsticks of production rate and
net-back well head price were reasonable numbers. He asked Mr.
Boyd whether his understanding was that they might be working
toward that end.
Number 0712
MR. BOYD replied that he could not say as to the certainty part.
He said the bill talked about economic fields and pools, which
included any kind of oil that occurred in a field or pool. He
believed DNR could work to fix the bill if, in fact, the committee
believed it needed fixing. Again, he said, those terms and
conditions would be different for each field or pool, as well as
for each company. He added that he could say the Administration
would be happy to work with the committee to look at HB 207 as a
way to ensure certainty. But he could not say that it would become
a "slam dunk" certainty.
Number 0765
CO-CHAIRMAN GREEN suggested they go ahead and discuss the bill in
committee. He expressed a high degree of interest in working with
the Administration on HB 207. He added that at this time, there
might be a "sticking point" on certainty; however, he said, they
might be able to work that out.
Number 0823
CO-CHAIRMAN GREEN welcomed Co-Chair Williams, who joined the
committee via teleconference from Ketchikan. Co-Chair Green then
confirmed that committee members present via teleconference from
Ketchikan and Anchorage had packets from the presenters.
Number 0867
ED BEHM, Heavy Oil Team Leader, Milne Point Unit, OXY USA
Incorporated, gave a slide presentation on behalf of his company,
accompanied by hard-copy handouts containing similar information.
He said he had responsibility for Alaska and California, where OXY
USA also produced heavy oil. He noted that Alaska's ideas the
previous year on trying to attract independent producers had
grabbed OXY USA's interest. He explained that when his company had
first brought their ideas to Co-Chairman Green, Alaska had a pretty
dismal outlook for Schrader Bluff production for the Milne Point
Unit. The Department of Revenue had only expected $60 million to
come from the project. Now, however, that amount could be
increased to $400 million by providing incentives.
MR. BEHM explained that OXY USA, the last original owner in the
Milne Point Unit, was a large independent doing no refining or
marketing, with no financial interest in the TransAlaska Pipeline
System (TAPS). He said OXY USA's economics in Alaska were tied to
well head prices on production. He added that he personally had
been involved since 1984, almost his whole career, trying to make
this project work.
Number 1046
MR. BEHM pointed out that the project was located just north of the
Kuparuk River Unit, which also had heavy oil. Currently, he said,
OXY USA was spending approximately $50 million over a three-year
period developing the deeper zones, which were commercially viable
based on the current economic environment. He said that over the
past four years, the unit had doubled in productive area. He added
that BP Exploration (Alaska) Inc. had done a wonderful job of
exploiting a resource that OXY USA had struggled with during the
entire unit's history.
Number 1073
MR. BEHM explained that OXY USA had three producing horizons at
Milne Point, the deepest being at Sag River, which generated light
oil of about 35 gravity. There, OXY USA produced 500 to 1,000
barrels per day. Most of the production, he said, came from the
Kuparuk Formation, with 24,000 barrels per day. The area they
struggled with, he said, was Schrader Bluff. There, OXY USA
produced 3,000 barrels per day out of a pilot done five years
earlier. They had spent approximately $9 per barrel developing
that pilot.
MR. BEHM explained that the key problems with heavy and light oil
were different. Low-gravity oil, which was thick and sluggish,
took a long time to extract from the wells and was difficult to
move, like ketchup that was hard to get out of a bottle; it was
hard to make money off those wells, which were capital-intensive.
Furthermore, sand control required expensive hardware in the wells.
A typical shallow well, he said, cost as much as a deeper well in
most cases. He added that on federal lands and in countries like
Venezuela and Canada, there had been recognition that heavy oil and
tar sands required special help to develop the resource.
Otherwise, he said, the oil would remain in the ground.
Number 1167
MR. BEHM discussed a map entitled "Schrader Bluff Oil Accumulation"
and said it referred to the four-pad area OXY USA had developed
during their pilot, which was the basis of Mr. Behm's economic
projections. Mr. Behm then referred to information in the handout
entitled "Previous Heavy Oil Experience" and explained that OXY USA
had spent $126 million on 22 wells; on average, those wells
produced 275 barrels of oil per day. In California, OXY USA would
be happy with that production. But with the high cost of doing
business in Alaska and getting the oil to market, he said, that was
an abysmal rate.
MR. BEHM explained that OXY USA expected to recover 13.5 million
barrels of oil. With capital alone, not including operating
expenses and overhead, it cost $9.30 per barrel just to get the
wells in the ground and get the production on line. With a $10
well head price in Alaska, he said, that was a disaster from an
economical standpoint. However, from a technical standpoint, OXY
USA had blazed a trail. Mr. Behm added that the 3,000 barrels per
day currently produced covered OXY USA's expenses. The problem was
in adding more wells to that producing base.
Number 1273
MR. BEHM discussed "hurdle rate," an oil industry term for the
bottom line for making a project budgetable. He pointed out that
the numbers he would show the committee did not include the cost of
borrowing capital; overhead, accounting, legal and environmental
costs; or risk factors. If a company could get a rate of return
greater than 15 percent, he said, there would begin to be profit.
Mr. Behm said there had been a worldwide study, conducted by Arthur
D. Little, that also suggested 15 percent as the rate of return
necessary to make Alaska oil competitive, for example, with
Venezuela, which attracted large amounts of capital for heavy oil
development.
Number 1421
MR. BEHM explained that OXY USA had tried to do a nonspeculative
analysis, using the state of Alaska's forecast for oil prices. He
interpreted data from the handout entitled "Typical Heavy Oil Well
Economics." Specifically, he explained why OXY USA had used data
from the five best wells from their pilot experience; BP was
working hard on technology and OXY USA assumed in the future their
average wells would be as good as those five best wells because of
improved technology. For well costs, they had used an average of
actual money spent drilling wells during their previous experience.
Other actual costs that OXY USA had incurred historically included
facility costs, operating expenses, taxes and other fixed costs.
Many of the numbers used as the basis for projection, then, were
not speculative. If BP could prove up some of the technology they
were working on, he said, OXY USA believed they could get
approximately a 12.8 percent to 13 percent return. The handout
further showed that it would take 6.5 years for OXY USA to get its
money back. He added that in the oil business, where prices
fluctuated heavily, that was a long time to wait for money.
Lastly, he said, if it cost 15 percent just to stay in business,
and their company took a discount rate against a well, for every
well drilled, they lost $300,000 to the company.
Number 1510
MR. BEHM said HB 325 embodied the idea of what OXY USA was
proposing. Basically, HB 325 was applicable to the North Slope,
for heavy oil of 20 gravity or worse. They wanted to suspend
royalty payments on a per-well basis for the first five years and
the first 500 barrels per day. He explained that after that point,
a company should make a profit, which the state of Alaska should
share in with the company. The process had to be simple and
automatic. Simplicity was important. OXY USA could not afford to
spend money on accounting or anything that did not add value.
MR. BEHM referred to data included in the bar graph
handout,"Suspension Incentives in Other Jurisdictions." He said
this idea had been piloted successfully in seven states, with
Texas's high cost gas being a good example. Incentives under this
scenario would be tied to new capital investment for long-lived
projects. As shown in the handout, "The Effect of Royalty
Suspension on Schrader Bluff Economics," the rate of return could
rise from 12.8 percent to 15.9 percent, which would be budgetable.
Payback periods, not including interest, would be shortened from
6.5 to 5.4 years. And finally, instead of losing $300,000 on every
$2 million well drilled, a company would make $100,000. This was
a 5 percent return, he said, and was a reasonable profit. He added
that if BP could advance the technology further, then perhaps OXY
USA could make more than that.
Number 1678
CO-CHAIRMAN GREEN referred to the bar graph showing the company
making 5 percent on their money and asked if that presumed that the
rest of that life would be at normal royalty rates.
Number 1792
MR. BEHM affirmed that was correct. They would revert back to
normal royalty rates. He added that in the oil industry, as soon
as a company made production from a field, that field decreased in
reserve life. If they did not add new wells, they would basically
go out of business. He said that even if royalties started five
years after a well was drilled, it took ten years, if a company
spent money every year developing the full resource, to actually
make a profit on the whole idea. In other words, the state would
start getting royalties five years before the oil company or person
laying out the capital began to see a positive cash flow. Most of
the profits were over the very, very long term. It was a long-
lived asset that would be around for many years once it was
developed.
Number 1791
CO-CHAIRMAN GREEN asked if the reason the state would actually get
royalties before the ten-year period was up was because those first
five-year increments were now starting to pay full royalties.
MR. BEHM said that was correct. If a company began drilling in
1995, royalties would begin in the year 2000. He referred to the
slide presentation and said that if the wells were added together,
they had perhaps a 40-year life. In California, he added, OXY
USA's heavy oil wells had been around since 1914. Once the wells
were there, he said, engineers could make a lot of things happen
over a substantial period of time.
Number 1830
REPRESENTATIVE RAMONA BARNES spoke via teleconference from
Anchorage, expressing that she had been listening to the testimony.
MR. BEHM presented data from the handout entitled "Two Paths for
Schrader Bluff" and addressed a question he had heard earlier. He
stated that OXY USA no longer had a marginal field at the Milne
Point Unit as far as the total project, because they were spending
a lot of money developing the Kuparuk and the Cascade units to the
south. He said they were happy with investing money and were
bringing in good wells. The point was, with the debate, of trying
to attract more capital to the state of Alaska and to do more.
That was why OXY USA had brought the idea forward. He explained
that instead of getting up to a peak and then declining at a rapid
rate, if Schrader Bluff were developed in a long-term program, it
would produce 80,000 barrels per day past the year 2006. He said
their goal as engineers was to add value, and this was a way to add
value where they had seen none before.
Number 1854
CO-CHAIRMAN GREEN asked if it would be fair to say that somewhere
in the range of 60,000 to 80,000 barrels per day would continue the
infrastructure viability, at least somewhat. He asked Mr. Behm if
he had considered benefits for keeping other projects viable, for
example, when the pipeline could no longer operate.
Number 1951
MR. BEHM responded that they had not included any value for paying
royalties on the Kuparuk and other projects. He explained that OXY
USA would not have to abandon those projects so early because fixed
costs would be spread over all the Schrader Bluff barrels as well.
That was a big benefit, he said. By adding more oil to the
pipeline, the tariffs everywhere else would become lower, with the
state of Alaska receiving additional revenues that it would not
have otherwise received, since other fields were on a decline.
MR. BEHM added that in the Lower 48, they had learned that going
out of business was a costly, painful thing to do. It was much
easier to manage an incline than a decline.
MR. BEHM concluded by saying OXY USA was glad the Administration
and the Alaska State Legislature were interested in attracting
independent investment to Alaska. He said OXY USA's original $60
million in royalties to the state might increase to over $400
million if HB 325 was enacted.
Number 1974
REPRESENTATIVE JOHN DAVIES asked Mr. Behm what the Alaska-hire
percentage was at OXY USA.
MR. BEHM replied that BP, not OXY USA, was the operating partner in
Alaska.
REPRESENTATIVE DAVIES asked if that meant that all the investment
opportunities came through BP's operation.
MR. BEHM responded yes, at this time. He added that was 99 percent
true; OXY USA had interest in two gas wells in Kenai that were
uneconomic.
REPRESENTATIVE DAVIES asked if Mr. Behm knew what BP's percentage
was for Alaska-hires.
CO-CHAIRMAN GREEN suggested that question might better be posed to
the BP representative who was to speak at the meeting.
Number 2034
REPRESENTATIVE DAVIES asked Mr. Behm to relate the process involved
in developing a field, given that OXY USA was covering operating
expenses at present on exploration wells, and given that once a
well was in production, it stayed in production for a long time.
He specifically wanted to know how OXY USA actually lost $300,000
per well, without the 5-year "holiday."
MR. BEHM replied that the concern was in recovering capital
investment, as well as day-to-day costs. The Schrader Bluff wells
today, he said, covered day-to-day costs of doing business and were
therefore profitable to operate. But they would not pay back the
capital it took to put the wells in, with the margin available
after expenses. It cost $9 per barrel to put them in, but OXY USA
had to pay $3 to $4 per barrel in operating expenses.
Number 2066
REPRESENTATIVE DAVIES further asked if the five-years/500-barrels-
a-day numbers came from working the spreadsheet. He wondered where
those numbers originated.
MR. BEHM said that was a good question. He explained they had used
trial and error. Once they were above the 15 percent with five
years, they had looked at it and asked why it would make sense to
propose it that way. They had then seen that it tied in to getting
their money back, and everything fell into place.
REPRESENTATIVE DAVIES noted that in a sense, that was sort of a
coincidence.
MR. BEHM agreed and added it just fit that way.
Number 2105
REPRESENTATIVE DAVIES asked about the 500 barrels and whether OXY
USA expected to be producing more or less than that.
MR. BEHM responded that what happened in an oil field development
was a distribution of production. Although an average well made
275 barrels per day, some had produced up to 600 barrels per day
for a period of time. If they could obtain some of the benefits of
the 500-barrel-a-day wells to carry some of the 200-barrel-a-day
wells, on average they figured to net out approximately 400 barrels
per day of early production. It was a way to get the very best
wells to carry the average wells, so that the overall project made
sense. He figured a typical well might be 350-400 barrels per day.
Number 2150
CO-CHAIRMAN GREEN questioned whether with a limit below that, the
five-year payout would then be extended because they would not get
the benefit from the better wells to cover the others.
MR. BEHM replied that if the floor were cut from 500 to 400,
another year of royalty suspension might be needed, for example, to
achieve the same economic result.
Number 2167
REPRESENTATIVE DAVIES asked if the calculation was on a per-well
basis or on an average over the field.
MR. BEHM responded that it was per well.
REPRESENTATIVE DAVIES commented that if an individual well was
producing at 600 barrels, then the state would receive a full
royalty on that top 100.
MR. BEHM affirmed that was correct; the state would get a full
royalty on the increment above that floor amount.
Number 2195
CO-CHAIRMAN GREEN noted that HB 325 differed from HB 207 in that a
company was dealing with individual wells, as opposed to a project.
REPRESENTATIVE DAVIES asked if Co-Chairman Green was saying HB 207
dealt with the whole project.
CO-CHAIRMAN GREEN affirmed that was correct.
Number 2208
REPRESENTATIVE DAVIES stated that he had two other questions. He
referred to Mr. Behm's economics and said that generally he
believed, from what Mr. Behm had shown the committee, that it was
a "Missouri approach." He expressed concern about the assumptions
regarding well costs, facility costs and operating costs. He said
OXY USA was using a relatively small operation as a basis, then
scaling that up and projecting it into a larger operation. Usually
as there was an increase in size, he noted, one recognized some
efficiencies of scale. BP was working on better technology, he
observed. Representative Davies asked Mr. Behm for his opinion on
the sensitivity, in the overall calculations in terms of getting to
the hurdle rate, to well costs, facility costs and operating costs.
He wanted to know what the sensitivity rate would be.
Number 2248
MR. BEHM replied that OXY USA had just completed a post-audit
review on what they considered the commercial development on the
North Slope. He said they had not yet made a 20 percent rate of
return on the good wells they were developing. He did not think
they would be moving the window around a lot as far as rate of
return; he thought they were dealing with small percentages of
difference. He did not see that as a big issue. He gave an
example of an economic scenario and added that he thought making an
analogy between classes was more effective than analyzing every
single marginal heavy oil well for its own merit. He asserted that
they were talking about a struggling class. He further stated that
they could not afford to over-engineer the process.
Number 2305
CO-CHAIR GREEN asked whether, if it were going to cost $500, for
example, and take five years to pay out, a company could, through
technology, reduce the total cumulative cost to $400, with a four-
year payout. He suggested that if money were invested early in the
five-year period, with the payout extended, it would not be a
linear change; it would not be merely a four-year reduction. He
asserted that the sensitivity involved not only the total amounts
but timing as to when the money was invested and when it would be
returned. It was extremely complex.
Number 2337
REPRESENTATIVE DAVIES commented that he thought Mr. Behm's
presentation was reasonable; however, he could not be comfortable
with it without looking at some of the complexities and seeing a
spreadsheet or two. He added he wanted to get a feel for where the
sensitivities were in the calculation. He referred to Mr. Behm's
earlier indication that OXY USA had approximately 9 percent of the
investment at this point, with BP having the remainder.
MR. BEHM affirmed that was correct.
REPRESENTATIVE DAVIES suggested that BP was quite different from
OXY USA in their investment position; BP was a partner in TAPS.
MR. BEHM said that was also correct.
REPRESENTATIVE DAVIES expressed that one of his problems with the
legislation was the different economic positions of the various
companies in the exact same fields. While it might make sense, for
example, to offer a company like OXY USA this kind of break, it
might not make sense to offer BP the same break. Representative
Davies stated that he would like a response to his concern.
Number 2430
MR. BEHM indicated that he could not speak for BP; however, from
his perspective, at 9 percent, this was the largest capital project
that OXY USA had going in the domestic United States. For OXY USA,
it was a significant, core asset. 9 percent of a lot was still a
lot. Furthermore, historically, when Conoco, Chevron and OXY USA
had tried to make a go of it, they had been misaligned. What was
to one company's advantage was not to another company's. He
asserted it was a disaster; nothing got done. He explained that
OXY USA had quit drilling wells and said it was a lose-lose deal
for everybody. Now, on the other hand, having worked hard to align
goals and get companies on equal footing through cross-assignment
of interests on all the tracts, they could do what was technically
and economically best for the unit. Anything divisive they did, he
said, could snowball into a disastrous relationship like the one
they had previously. He added it was a "soft dollar" issue but an
important one; to attract capital to these kinds of projects, he
felt it was better to keep everybody the same.
TAPE 96-8, SIDE B
Number 0001
CO-CHAIRMAN GREEN wondered how closely the state of Alaska could
scrutinize an investor's plans before the project became
overburdened, sending companies to Canada or Venezuela for heavy
oil.
MR. BEHM responded that companies were just asking for enough
incentive to get these projects on the budget. He added that did
not guarantee funding.
Number 0064
REPRESENTATIVE DAVIES explained that the legislature wanted to
encourage the development. But at the same time, the state had a
fiduciary interest in knowing that they were not just taking a
company's word for it. He reiterated that Mr. Behm had made a
reasonable presentation thus far. Nonetheless, Representative
Davies was concerned because HB 207, passed the previous year, was
in his view supposed to have taken care of the problem. He noted
that part of that legislation was the provision that there be a
good faith demonstration that a marginal field was actually
marginal. If it was, the legislature wanted to figure out
concessions to make it happen. If it was not, they would be
suckers to offer the concession. At its lowest common denominator,
he explained, the job of the legislature was to make sure, on
behalf of the people of Alaska, that they were not suckers. He
suggested that the legislature needed to ask a lot of hard,
detailed questions and perhaps actually look at spreadsheets; that,
he said, was what the commissioner would have done under HB 207.
Number 0089
REPRESENTATIVE DON LONG stated that the legislation appeared to be
site-specific. He wondered why it only referred to the North
Slope.
CO-CHAIRMAN GREEN offered to answer that question, as he was
sponsor of the bill. He explained that it was site-specific
because the North Slope was the only place they knew of, other than
Katalla, with heavy oil. It was the area most likely to be
developed. He added that it was not site-specific but actually
time-specific. It provided a window of opportunity for any project
that could be brought on during the short window to enhance the
opportunity to field test concepts and work on technological
advancements. Having been in the oil industry, he added, even with
this incentive there was no guarantee there would be an economic
project. He suggested there might be a way for companies to
squeeze some profit out of it. He stated his belief that it
behooved the state to grant an incentive. He added that there was
no way that all of the 27 billion to 50 billion barrels of heavy
oil on the North Slope, if one considered areas with a heavy oil
residual in the bottom of the reservoirs, could be extracted within
a ten-year window.
Number 0174
REPRESENTATIVE LONG asked why 500 barrels per day had been chosen,
rather than a unit payout.
MR. BEHM replied he would love to answer that question. When
talking payout, auditing and accounting, he said, OXY USA did not
have people to calculate that for every well, every time. Rather,
they preferred to agree on something simple that looked about
right. His company could not afford the administrative costs of
micro-managing every piece of investment.
Number 0225
CO-CHAIRMAN GREEN commented that as Representative Davies had
pointed out, OXY USA was not a member of TAPS, whereas BP was. Co-
Chairman Green noted that there could likely be a difference of
when the payout occurred between the companies as well; this would
double the auditing problem.
MR. BEHM agreed, saying that was the heartburn. OXY USA, a large
independent, was moving to small business ideas because they could
not afford all the costs associated with thinking like big business
used to think.
Number 0225
CO-CHAIRMAN GREEN asked if any committee members had questions. He
noted that BP would be making a presentation and that some of the
questions already posed might be better answered by their
representative.
Number 0260
BRUCE J. POLICKY, MPU Exploitation Manager, BP Exploration (Alaska)
Inc., made a presentation via teleconference in Anchorage. He
explained that he was responsible for subsurface development within
Milne Point, which included the Schrader Bluff heavy oil as well as
other projects. He said he would touch on development history, key
in on BP's activities the past couple of years at Milne Point, and
discuss potential projects under the right economic conditions.
MR. POLICKY referred during his presentation to a handout entitled
"Heavy Oil Potential at Milne Point," dated January 26, 1996. The
page entitled "North Slope Fields" showed a map including Milne
Point, the northernmost producing unit on the North Slope. Mr.
Policky said BP had acquired Chevron and Conoco interests and begun
operating at Milne Point on January 1, 1994. He said BP currently
owned 91 percent of Milne Point, with the other 9 percent owned by
OXY USA. He pointed out the green section of the map, outlining
the Schrader Bluff/West Sak Oil. He commented on the tremendously
large area covered and noted that it went under the Prudhoe Bay,
Milne Point and Kuparuk River units.
CO-CHAIRMAN GREEN noted that only two of the committee members on
teleconference had access to the color presentation.
Number 0373
MR. POLICKY continued, explaining that the total resource for
Schrader Bluff/West Sak approached 26 billion barrels of oil in
place. However, not all the oil was the same in that accumulation.
To the north and east, he said, the reservoir tended to be deeper
and therefore hotter, with higher oil gravities relative to the
rest of the area. He explained that as oil gravity became lower,
it became thicker and harder to produce. Towards the southwest, he
said, the reservoir got shallower and closer to the permafrost,
with even lower gravities. What types of development might work
well in one area might not work in other areas.
Number 0426
MR. POLICKY illustrated the impact of gravity on oil flow by
passing around samples to the committee. The samples were of 35
gravity, 22 gravity and 14 gravity oil; these three oils were
currently being produced at Milne Point, he said.
MR. POLICKY referred to the map entitled "Schrader Bluff Heavy Oil
Development" and said it was a cartoon view. The development at
acquisition was the Tract 14 pilot project. Pink areas on the map
depicted development since 1994, mainly in 1995. Finally, the
largest outline represented the accumulation within Milne Point,
which BP estimated to be 2.25 billion barrels underlying the Milne
Point Unit, of which Tract 14 represented approximately 10 percent.
He noted that Tract 14 actually represented less than 1 percent of
the overall in-place resource. He explained that BP was trying to
go from an extremely small pilot and branch out in developing other
areas. He added that the Tract 14 area was probably one of the
easier places to develop relative to future developments in the
area. However, that was speculative until they actually drilled
wells.
Number 0516
REPRESENTATIVE DAVIES wondered, when Mr. Policky referred to
development in other places, if that meant there were producing
wells there, rather than wells being tested.
MR. POLICKY replied that he would cover that topic. He said BP had
drilled six wells in 1995 in those regions; they were in the
process of completing the wells and bringing them on production in
the coming months.
Number 0544
MR. POLICKY presented a brief history of Tract 14 development.
Started by Conoco in 1991, Tract 14 had either 21 or 22 wells
drilled. The initial rates were approximately 275 barrels per day.
Despite the advancement of completion technology and well
technology, the project economics were not good enough to continue
development. However, although commercial development had ceased,
the project remained on production.
MR. POLICKY explained that he had been involved with the field
since BP took it over. Early on, they had noticed that while the
Tract 14 pilot project produced only 3,000 barrels per day, once
the wells were producing, the performance stayed fairly constant,
with minimal decline compared to that experienced elsewhere. That
was characteristic of heavy oil. BP was encouraged by the
potential and were trying to lay a foundation for future
development.
Number 0617
MR. POLICKY continued, saying that for the current year, BP was
trying to significantly lower the $9.30-per-barrel development cost
by reducing capital requirements and operating costs. He said that
a large degree of uncertainty stifled development; this uncertainty
could be in any number of areas including reservoir performance,
costs or fiscal terms. So far, OXY USA and BP had invested $15
million in 1995, drilling six wells and recompleting three others.
They had also initiated approximately $1 million in reservoir and
facility studies aimed at reducing costs. Although they had seen
some improvement in drilling costs, it was not as good as they had
hoped. Completion costs were still problematic, but they had seen
some improvement in submersible pump life. He emphasized that
there was still a high degree of uncertainty.
Number 0685
MR. POLICKY referred to the cartoon schematic entitled "Schrader
Bluff Technology," which depicted a typical well. First, BP was
attempting to develop a field with fewer new pads, utilizing more
existing infrastructure. Second, frac pac technology was being
used to try to increase production rates; this was a two-edged
sword, however, as frac pacs were one of the largest cost drivers
of the completion. Third, BP installed a sand filter in the well;
this was important to prevent failure of submersible pumps.
Finally, the schematic illustrated heat trace freeze protection.
Mr. Policky noted that Conoco had tried numerous ways of keeping
wells from literally freezing, an essential component of production
in the permafrost. He said the completions totalled approximately
$1 million apiece, with a cost of more than $700,000 to drill a
well. In addition, he said, the facility costs were sizable for
each well, dependent on location, with costs ranging from $500,000
to $1 million per well.
Number 0780
MR. POLICKY said there was more than one way to prove up commercial
viability of a field. BP had been working on cost reductions and
increased production for the past two years; however, those two
items alone did not make this project viable. To be successful,
they needed improved economics. He cautioned that a large-scale
development was unlikely without incentives. He added that there
was a large "prize" at Schrader Bluff, with 2 billion barrels of
oil in place. What was important, however, was not oil in place
but recovery of that oil. BP estimated the potential recovery at
200 to 800 million barrels. Mr. Policky added that BP used a
scenario of recovering 300 million barrels from 230 wells. The
key, he said, was expansion of the adjacent fields.
Number 0808
REPRESENTATIVE DAVIES asked if the 200 to 800 million barrels of
oil at Schrader Bluff was under the Milne Point area.
MR. POLICKY affirmed it was just the Milne Point area. The
accumulations within the Kuparuk River and Prudhoe Bay units would
have at least as great a potential, with more than 20 billion
barrels located within the Kuparuk River Unit. Mr. Policky noted
that oil properties and reservoir depths changed from Milne Point
to the Kuparuk River units; one could not assume similar recovery
rates. He added that BP viewed Milne Point as a "sweet spot" for
the accumulation.
Number 0927
MR. POLICKY addressed potential impacts of HB 325, saying it would
reduce investment uncertainty in a number of areas, defining the
terms companies would work under and assisting with revenue
recovery in the early stages. It would encourage investment and
send a positive signal to BP; it would also accelerate the pace and
increase the scope of development. Mr. Policky clarified that he
would be surprised if they successfully developed the entire heavy
oil resource on the North Slope. Certain areas would always be too
expensive and too challenging to develop. However, with an
incentive program, there would be more development than otherwise.
Number 0985
MR. POLICKY referred to the production profile handout and
explained it was based on actual performance to date from Tract 14.
The graph progressed for 41 years; however, he said, BP's actual
history was only five years.
MR. POLICKY said one approach to heavy oil was delay, to wait and
see how things turned out. However, he was concerned about
development momentum. He noted that in 1985 to 1986, ARCO had also
attempted a heavy oil project in the Kuparuk River Unit, investing
$135 million. They had recovered less than $1 million barrels of
oil; that project remained shut in to date. Five years later,
Conoco had given it another go, with the partners investing $125
million. Although commercial development of that project stopped,
the project did remain on production. Now, five years later, he
said, BP was attempting heavy oil development once again. He
likened the situation to a baseball game, and said if they lost
momentum, it would be the third strike. Mr. Policky concluded his
remarks by saying that to him, any deferral put ultimate recovery
at risk.
Number 1137
REPRESENTATIVE DAVIES asked Mr. Policky about BP's Alaska-hire
rate.
MR. POLICKY replied he believed it to be 87 percent.
REPRESENTATIVE DAVIES asked if Mr. Policky could provide a
geographic distribution as to where those people were from.
MR. POLICKY responded that he did not have that information.
Number 1169
REPRESENTATIVE DAVIES further asked whether Mr. Policky could
provide some sense of how big a difference BP's involvement with
TAPS would make in getting to the 15 percent hurdle rate.
MR. POLICKY replied that it made a difference, but the difference
was pretty small. TAPS had its own operating expenses and cost
structure associated with that, he said. However, being an owner,
there were some benefits to it. BP would also benefit, he
asserted, just as would the state of Alaska, from increased
throughput through TAPS on a project like this. The important
thing with heavy oil was the cost of the wells and the
infrastructure specific to this project. Each company had
different hurdle rates for investments. The good news for BP was
that they had a lot of investment opportunities around the world;
in fact, they had more opportunities than ability to spend capital.
When talking hurdles, it was not only achieving hurdles but
decisions about where to invest.
Number 1220
CO-CHAIRMAN GREEN commented that some people might have the
perception, when looking at the pipeline tariff, that it went
entirely back to the owners. He said that the minuscule amount
that came back to the pipeline owner was not a make-or-break
amount. It might change the time line, but would not determine
whether an investment were made.
Number 1225
MR. POLICKY added that when BP ran economics, they did so without
considering benefits from TAPS, for the very reason Co-Chairman
Green had stated.
Number 1401
DALE BONDURANT testified via teleconference from Kenai, stating
that he was a 48-year resident of Alaska. He said it was a
sickening crime that so many politicians were willing to give
Alaska's publicly owned resources to the "poor" oil companies. Big
oil bragged how willing they were to rape Alaska's public-owned
resources if the state would only be more cooperative. To put it
in a better perspective, he said, oil was under $3 per barrel when
the decision to build the pipeline was made. "Boo hoo," he said,
"it makes me cry. Oil is now over $16, I think today it's $18, a
barrel, and the poor oil companies are really doing Alaska a
favor." Oil companies talked about the billions they had invested
in Alaska, but never said thanks for the trillions they have
profited from Alaska's resources. Now, he said, they were, without
pretense, demanding to be given a valuable, nonrenewable resource
with little or even no royalty tax payments.
MR. BONDURANT continued, saying oil companies complained about the
difficulty of producing in Alaska but adamantly demanded the right
to expand their highly profitable operations. Even when they had
agreed to pay a certain rate of royalty tax, he said, they were not
even willing to meet that obligation. He asserted that the people
of Alaska were the real owners, yet the oil companies would not let
the people know what the real bottom-line profits were. He said
that if estimates of trillions of dollars of profit seemed a
fantastic guess, then the oil companies should qualify it with
actual, audited figures. He noted that there was a downward trend
in settlements, where they now were barely in the $1 million range.
Oil companies continued to threaten to leave Alaska. "Well, good-
bye," he said, adding that those threats were as old as the
industry.
Number 1555
MR. BONDURANT referred to the early stages of the Swanson Oil
Field, when there were threats to stop drilling unless
environmental safeguards were lifted. He said the companies
drilled anyway, and now they pointed out that they can drill within
conservation considerations. However, the industry continued a
history of circumventing such restrictions, pumping back toxic
waste, refusing to monitor storage dumps, resisting proper tanker
escorts and denying the existence of terminal air pollution. Oil
companies spent thousands of dollars on TV, lobbying and public
relations, he said, to propagandize how well they treated Alaskans,
while asking for more cooperation to exploit the people's public
resources. They realized, he said, that the economic returns from
the propaganda outperformed even the profits from oil.
MR. BONDURANT concluded by saying it was a shame how the oil
companies fought royalties even after they had agreed to them.
They were making lots of money in Alaska. If they could not make
money on the oil and did not want to pay Alaska for the oil, they
could leave the oil in the ground.
Number 1750
CO-CHAIRMAN GREEN responded that companies have spent billions of
dollars in Alaska on dry holes. He thanked Mr. Bondurant and
called on Representative Barnes via teleconference.
REPRESENTATIVE BARNES stated that it was a well known fact that
there was not much oil company activity remaining in Alaska.
However, there was activity in Russia, Venezuela and countries in
Asia. She expressed concern about resource development dollars
being pulled out of Alaska and invested overseas because of lower
costs of doing business elsewhere.
Number 1904
MR. BOYD reiterated via teleconference that the Administration
wanted to see heavy oil developed; they wanted to use the vehicles
already established through HB 207 to accomplish this, even if it
required some modification. The Administration thought it
important to evaluate on a case-by-case basis.
Number 1976
CO-CHAIR GREEN asked whether Mr. Boyd or someone else from the
Division of Oil and Gas would be willing to work with the committee
on the legislation.
MR. BOYD replied that it would be his pleasure to do that.
Number 1999
REPRESENTATIVE BARNES said that she understood the bill to be site-
specific for one area. Furthermore, it was an amendment to HB 207.
She said she was ready to make a motion to move the bill from the
committee with individual recommendations.
CO-CHAIR GREEN responded that they could not do that; there was no
quorum present in person as required under the rules. He added
that HB 325 would be heard the following Wednesday. He expressed
concern that if they waited too long to move the legislation, even
though it might be amended again, they might miss the window of
opportunity for the current year; he felt that could become
catastrophic.
Number 2095
REPRESENTATIVE DAVIES asked Mr. Boyd if he could estimate the
response time, assuming HB 207 could be applied or fixed, if a
company came to the Administration with a request for an exemption
under HB 207.
MR. BOYD replied that in his earlier testimony before the House
Special Committee on Oil and Gas, he had said the time frame would
be three to six months. However, in this case, if it were OXY USA
and BP, who already had assembled the necessary information, the
process could probably move more quickly. The uncertainty would
come due to debate as to how to negotiate terms that would allow
the companies to proceed and yet protect the state's interests. He
finished by saying he would stick with three to six months.
Number 2198
REPRESENTATIVE WILLIAMS spoke via teleconference, noting that he
was also a member of the House Special Committee on Oil and Gas.
He mentioned that he had asked the Administration to submit
something in writing specifying their stand on HB 207 and HB 325,
discussing the differences. He added they had received testimony
from ARCO, BP and OXY USA.
Number 2243
MR. BOYD apologized for the delay in responding to Representative
Williams's request. He said the commissioner had a letter on his
desk regarding the legislation that would be sent to Representative
Williams as soon as possible.
Number 2299
REPRESENTATIVE BARNES stated she was a firm believer in windows of
opportunity, not just as they related to this legislation but in
relation to gas on the North Slope as well. She expressed her
strong belief that the state had to look for ways to keep the
pipeline as full of oil as possible; if the oil flow decreased to
a certain number of barrels per day, the pipeline had to be
dismantled and shut down. She believed that the state should do
everything in its power to encourage additional barrels of oil
flowing through the pipeline.
Number 2380
REPRESENTATIVE PETE KOTT spoke via teleconference. He expressed
that they had heard encouraging remarks from the Administration.
He understood that it was possible the Administration would work
with the companies involved to produce heavy oil, even if the
particular legislation on the table did not pass. He said the
companies should be encouraged to continue dialogue with the
Administration to keep the avenue open.
TAPE 96-9, SIDE A
Number 0001
REPRESENTATIVE SCOTT OGAN commented via teleconference, stating
that HB 207 might possibly work; however, he said, it was geared
toward bigger operators that could afford to go through the
scrutiny process. On the other hand, HB 325 removed any ambiguity
about the process. Another important issue, he said, was how much
control the Administration would have over the process. HB 325 was
straight-forward and presented a package that anyone could take
advantage of. He noted that BP was the third operator to work on
the oil field. With that track record, he felt there might be
justifiable reasons to reduce royalties. He concluded that he was
supportive of HB 325.
Number 0121
CO-CHAIRMAN GREEN offered some concluding comments. He reminded
the committee that the legislation affected up to 200 billion
barrels of oil in place. He noted there were an additional 25
billion barrels in the Kuparuk, Milne and Schrader Bluff areas;
these were, however, more difficult to produce. Furthermore, there
were 10 billion to 25 billion barrels of oil in the Tarmat
(SPELLING?) area. Co-Chairman Green asserted that the state should
have the potential to use this as a pilot to possibly unlock major
reserves still in existence.
Co-CHAIRMAN GREEN observed, as an aside, that the industry and the
state had just pushed the 11 billionth barrel of oil through the
pipeline. The $16 billion to $17 billion dollar trust fund in the
permanent fund was the result of oil development in Alaska. He
commented that approximately 20 companies had left the state
because of the difficulty in operating. He asserted that if
incentives were necessary, that was part of the reason for HB 325.
ADJOURNMENT
There being no further business to conduct, CO-CHAIRMAN GREEN
adjourned the House Resources Committee meeting at 10:45 a.m.
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