Legislature(2005 - 2006)Anch LIO Conf Rm
08/18/2006 09:00 AM House RESOURCES
| Audio | Topic |
|---|---|
| Start | |
| Prudhoe Bay Corrosion Crisis | |
| British Petroleum - Alaska | |
| Patrick H. Vieth - Cc Technologies | |
| Attorney General, Department of Law | |
| Alaska Oil & Gas Conservation Commission | |
| Department of Revenue | |
| Commissioner Menge, Cabinet Team Leader | |
| Department of Environmental Conservation | |
| Adjourn |
* first hearing in first committee of referral
+ teleconferenced
= bill was previously heard/scheduled
+ teleconferenced
= bill was previously heard/scheduled
ALASKA STATE LEGISLATURE
JOINT MEETING
HOUSE RESOURCES STANDING COMMITTEE
SENATE RESOURCES STANDING COMMITTEE
August 18, 2006
9:00 a.m.
MEMBERS PRESENT
HOUSE RESOURCES
Representative Jay Ramras, Co-Chair
Representative Ralph Samuels, Co-Chair
Representative Paul Seaton, Vice Chair (via teleconference)
Representative Carl Gatto
Representative Gabrielle LeDoux
Representative Harry Crawford
Representative Mary Kapsner
SENATE RESOURCES
Senator Thomas Wagoner, Chair
Senator Fred Dyson
Senator Kim Elton
MEMBERS ABSENT
HOUSE RESOURCES
Representative Jim Elkins
Representative Kurt Olson
SENATE RESOURCES
Senator Ralph Seekins, Vice Chair
Senator Ben Stevens
Senator Bert Stedman
Senator Albert Kookesh
OTHER LEGISLATORS PRESENT
Representative Kevin Meyer
Representative Les Gara
Representative Mike Chenault (via teleconference)
Representative David Guttenberg (via teleconference)
Senator Gretchen Guess (via teleconference)
Senator Hollis French
COMMITTEE CALENDAR
PRUDHOE BAY CORROSION CRISIS PRESENTATIONS BY: BRITISH
PETROLEUM - ALASKA; COMMISSIONER MENGE, CABINET TEAM LEADER;
ALASKA OIL & GAS CONSERVATION COMMISSION; DEPARTMENT OF
ENVIRONMENTAL CONSERVATION; DEPARTMENT OF REVENUE; ATTORNEY
GENERAL
PREVIOUS COMMITTEE ACTION
No previous action to record
WITNESS REGISTER
Presenters were:
STEVE MARSHALL, President
BP Production
BILL HEDGES, Manager of Corrosion
Strategy and Planning, BP
PATRICK H. VIETH, Senior Vice President
CC Technologies, Inc.
DAVID W. MARQUEZ, Attorney General
Department of Law
JOHN NORMAN, Commissioner/Chair
Alaska Oil & Gas Conservation Commission(AOGCC)
Department of Administration
CATHY P. FOERSTER, Commissioner
Alaska Oil & Gas Conservation Commission
Department of Administration
BILL CORBUS, Commissioner
Department of Revenue
MICHAEL MENGE, Commissioner
Department of Natural Resources (DNR)
KURT FREDRIKSSON, Commissioner
Department of Environmental Conservation (DEC)
ACTION NARRATIVE
CHAIR THOMAS WAGONER called the joint meeting of the House and
Senate Resources Standing Committees to order at 9:00:49 AM.
Senators Elton, Dyson, and Wagoner and Representatives Ramras,
Samuels, Gatto, LeDoux, were present at the call to order.
Representatives Seaton (via teleconference), Kapsner, and
Crawford, and Senator French arrived as the meeting was in
progress. Also in attendance were Representatives Kevin Meyer,
Les Gara, Mike Chenault (via teleconference), and David
Guttenberg (via teleconference), and Senators Hollis French and
Gretchen Guess (via teleconference).
^PRUDHOE BAY CORROSION CRISIS
9:01:22 AM
CHAIR WAGONER announced that the only order of business would be
the presentations related to the Prudhoe Bay Corrosion Crisis.
CHAIR WAGONER let it be known that the purpose of the
presentations is for fact-finding. He said BP is being given a
chance to follow up on a short meeting that took place
previously.
^BRITISH PETROLEUM - ALASKA
9:03:09 AM
STEVE MARSHALL, President, BP Production, outlined four points
that he would cover: the reason the decision was made to shut
down the Prudhoe Bay oil field; the steps that are being taken
to safely and expediently get back into production; the
corrosion program that is used to manage corrosion on the North
Slope; and the employee concerns program for both BP staff and
contractors on the North Slope. He explained that the August 6
decision to shut down the Prudhoe Bay field was made primarily
to "avert the potential of a major incident."
MR. MARSHALL said he has worked with BP for 29 years and has
spent half of the time in Alaska. He first arrived in Alaska in
1978, just when the pipeline was begun, and he reported that the
company is facing the prospect of another 50 years of business
here. He introduced some of the other presenters. He stated
that over the last two weeks BP has worked hard to attempt to
come to grips with its discovery [of corrosion in the pipeline]
on August 6. He commended the following groups for their
cooperation and in providing both insight and oversight: the
Department of Revenue (DOR), the Department of Natural Resources
(DNR), the Alaska Oil and Gas Conservation Commission (AOGCC),
the Department of Environmental Conservation (DEC), and the
federal Department of Transportation and Environmental
Protection Agency. He credited the hard work of all the
agencies in enabling BP to maintain production from the Western
area of Prudhoe Bay. He reported that BP has exceeded
production of over 200,000 barrels per day for the last two
days. He relayed that BP is now focused on doing what it can to
bring the Eastern area of Prudhoe Bay up to speed as quickly and
safely as possible.
9:07:18 AM
MR. MARSHALL turned to the decision to shutdown. He stated that
in early August, BP received the results of a "smart pig" survey
that had been run in late July on the Eastern transit lines -
the lines to the far east of the field. He said BP had been
sequentially "pigging" a number of its lines in response to a
spill that occurred in March. He said, "One of the things we
committed to and worked with ... DOT on was to systematically
maintenance pig and smart pig all of our transit lines." The
first of those lines - the Lisburne line - was successfully
pigged in June, and the line was pronounced fit for service - a
status still met today. That line produces about 18,000 barrels
a day, he noted.
MR. MARSHALL continued:
The results received from the Flow Station 2 to Flow
Station 1 section of line ... showed ... a number of
anomalies or defects ..., which was a concern and a
surprise to us; we were not expecting to see that kind
of severe corrosion or severe wall loss. After
receiving those results, typically what you do from a
smart pig is go out and corroborate or confirm the
indications from the smart pig with ultrasonic
testing, ... [which is] generally regarded as one of
the most accurate tools to confirm wall thickness,
corrosion in pipe and in oil field infrastructure.
On the morning of August 6, we found some insulation
that had been oil stained on the pipe at one of the
locations. We immediately took the decision ... -
given that this was an indication that was
communication with the fluid in the pipe - to shut
down ... Flow Station 2. That was about 35,000
barrels a day. That precautionary action then
depressured the line and proceeded to inspect the
further locations that had been identified from the
smart pig run.
About two to three hours later, as we were inspecting
one of the other locations, we saw a leak to tundra,
which we were able to arrest and put drip pans
underneath. But because we were now seeing two ...
potential spots which had oil communication, we were
very concerned about what was happening here. We
contained the spill; I think the spill right now is
estimated at about 23 barrels. The cleanup is
complete, and we're working through the normal process
on that. The indications ... were very much a
surprise on the back of the March spill on the Western
area line, and it was that which challenged our team
to say, "Did we understand what was happening here?"
This was not anticipated ..., and we said we don't
fully understand and cannot predict. We lost
confidence in our ability to predict what the
condition of the lines [was]. We made the decision
then ... - out of an abundance of caution - to shut
down the field until we could confirm and verify that
the remaining transit lines were indeed fit for
service. And only then would we consider continued
operations.
... We're still seeking answers to the cause for the
pitting corrosion that we've experienced, and we'll
only know the results of that once we complete
[LaBarge, Inc.] testing of the steel. That will be
some time away. But really, because this was an
unknown, as operator, we believe the only prudent
action - the only responsible action - ... to prevent
the potential of a major spill was to shut down the
field.
9:11:42 AM
MR. MARSHALL relayed that over the last weeks, BP has been
working 'round the clock inspecting the Western area lines. He
said BP initially focused on the Eastern area of the field,
estimating it would take three to five days to complete an
orderly shutdown and "do the freeze protection." Consideration
was given toward understanding "the implications to provide fuel
gas" for other fields, the Northstar Unit, and the first three
pump stations. He said hundreds of ultrasonic test inspections
were conducted, and he credited many agencies for their
assistance. Mr. Marshall stated, "Indeed, on Friday of last
week ..., five days after the Flow Station 2 incident, we made a
decision to keep that line in service." Notwithstanding that,
he noted that crews are continuing their inspection on that line
around the clock, through the use of such technology as forward-
looking infrared sensors and hydrocarbon detectors, as well as
performing visual inspections. He said BP expects that line to
remain in service "through to when we can actually do the
maintenance pigging and smart pigging in the weeks to come."
9:14:47 AM
MR. MARSHALL said the Eastern Operating Area, save Lisburne,
remains "shut in." Inspections on the line are continuing from
Flow Station 1, past flow station three, to skid 50. He said
the insulation there is more difficult to remove, because of
differences in "the final coatings that were put on the line."
He said BP's intention is to demonstrate that the line is in
reasonable condition to bring back into production and/or pig
the line. He stated, "In the event that that transit line from
Flow Station 1 to Pump Station 1 proves not to be fit for
service, we are looking at a number of by-pass options, as
reflected on a handout in the committee packet, entitled,
"Prudhoe Bay Pipeline Schematic." He continued:
Those are tie-ins that our engineering team has
identified, which would bring, basically, full
production from the eastern side of the field into
existing lines - either the Endicott line or the
Lisburne line - both of which have been confirmed to
be in good condition.
The Endicott line was originally sized to be able to
produce the full production from Endicott, but there
is capacity in that line for the volumes from Flow
Station 1 and from Flow Station 2.
MR. MARSHALL said 340 engineers and inspectors are working
tirelessly on "these dual fronts." Still to be done is the
detailing engineering and material procurement. He indicated
that the pipe is available, the company is still "sourcing the
valves," and as soon as the detail engineering is completed, BP
will be in a better position to share with everyone what it
estimates the completion time to be for resumption of the
eastern side of the field.
MR. MARSHALL stated, "We're working on parallel paths. One is
the inspection, which so far has proven the line to be in
similar good condition to the western area line, but I do
caution that ... we don't have as many inspection points. That
is proceeding as quickly as we possibly can." He said BP made
the announcement and commitment to purchase 16 miles of
replacement transit line piping, which has been ordered and is
scheduled for delivery in Alaska "on the fourth quarter." He
explained, "That would be the backstop to replacing all of those
lines."
9:18:29 AM
MR. MARSHALL commented on BP's role as an operator, stating that
the company is responsible for all the safe operation of the
field and the condition of the infrastructure, including the
transit lines. He stated that BP thought it had understood the
state of the lines, but obviously it did not. He stated the
company's commitment to continually improve its corrosion
program, and stressed its responsibility for keeping the western
area producing and bringing the eastern area up as soon as
safely possible.
9:19:39 AM
MR. MARSHALL then turned to the corrosion program. He stated
that corrosion is a fact of oil fields that the company attempts
to manage. Many factors are involved, including the amount of
residual carbon dioxide, water, and solids that exist, how
effective inhibition is, what the geometry of the lines are,
whether there are low spots, and if there is bacteria. Only
through laboratory testing can BP be able to definitively say
what exactly caused the corrosion on the line.
MR. MARSHALL, to explain why BP did not suspect there was
corrosion in its lines, pointed out the "Oil Process Flow"
handout that relates the process utilized by Prudhoe Bay, and he
reviewed the process with the committee. He said once the oil
has gone through the process, it is called "sales quality
crude," and it is, at that point, considered to have lower risks
of corrosion. He said that BP has a comprehensive corrosion
management program. Each year BP performs over 100,000
inspections and involves a number of technologies, including
ultrasonic testing, x-rays, and pigging. In fact, each year 370
maintenance pigs are run. Furthermore, three to five in-line
smart pigs are utilized to supplement the pigging operation. On
any given year, he reported, BP repairs between 250-300 pipes;
many of those pipes are small-bore piping inside BP's gathering
centers and flow stations. He then related what BP has done in
the way of maintenance over the course of the last years. On
any given day, 225 people are inspecting and monitoring the
condition of BP's infrastructure, but because of the discovered
gap, the company will provide an even more comprehensive
program, including smart pigging in the future and reanalyzing
its entire corruption program.
9:26:03 AM
MR. MARSHALL addressed transit line inspections. He said many
people have asked why BP did not pig the lines [that were found
to be corrupted]. He explained that BP started with the
assumption "that this was sales-quality oil, with the water,
CO2, and solids pretty much removed," and that it met the
pipeline specifications for Alyeska Pipeline Service Company
("Alyeska"), which is part of BP's contractual requirement. He
stated that BP believed that the risk and the expectation of
corrosion were both considered to be low. He said smart pigging
was done in 1990 and 1998, and in the latter year, less than two
cubic yards of solids were removed from the western area lines.
The smart pig information confirmed that the western line was
fit for service. He related, "The 1998 smart pig run for the
west is indeed our baseline, even today." Annual ultrasonic
testing has been done on that line to confirm the inspections."
When BP took over the eastern field in 2000, he said, ultrasonic
testing was done on the eastern transit lines, which confirmed
that the line was in good condition and corroborated the results
from the smart pig run on the western line only two years
earlier. He offered further details. He said, "We had no
reason to believe, certainly given the testing that was done,
that the east was in any different shape." He said BP continued
to monitor the eastern lines on an annual basis. Over the
course of the last 18 months, ultrasonic testing indicated a
slight increase in the corrosion rate on the line between
gathering centers one and two, thus BP increased the frequency
of testing and number of points tested, and it commissioned a
smart pig for 2006. However, that run did not take place before
the March spill. Mr. Marshall said plans for the future will
include whatever technology necessary.
9:30:03 AM
MR. MARSHALL acknowledged that many BP employees have voiced
concerns, and he said the company wants to know about these
concerns in order to address them. He listed the following
forums that can be used by employees: management; employee-run
safety committees; an anonymous world-wide internet program
called, "Open Talk"; a toll-free telephone health, safety, and
environmental hotline; another toll-free number to a contact
outside the company; and, upcoming, an ombudsman to address
Alaskan and "broader American issues." Beyond that, he related,
employees are free to raise concerns through outside channels,
such as the media. He stated, "Regardless of the source of
those concerns, we treat them all seriously. The only thing we
need is specifics ... [in order to] do a responsible
investigation. We look into everything we hear about ...
internally or using external resources. We just want to
understand the issue, get to the bottom of it, and take the
appropriate action." He reported that over the last five or six
years, the safety committees alone have addressed over 600
safety concerns covering a broad spectrum.
MR. MARSHALL stated that there has been concern that BP is
focused on cost management to the detriment of "the things that
we need to do." To that he informed the committee that while
production has declined, costs have increased considerably as
specified in the handout. He stated, "We are committed to do
what it takes to keep that field as robust and healthy as we
possibly can. We are ... investing." He offered examples of
areas in which spending has increased.
9:34:32 AM
MR. MARSHALL related that BP has a great staff. He stated he is
confident that production will be back as soon as possible.
Since March, a gap in the system has been identified in BP's
corrosion system. The result, he said, will be a better system,
not only to protect the effected pipelines, but to protect the
entire infrastructure. He concluded:
From this adversity we will enhance our capability.
We all benefit from that, whether it's the State of
Alaska, your constituents, the nation. I deeply
regret the problems we've caused the state and the
nation from these actions and the condition of Prudhoe
Bay. We will emerge stronger.
9:36:19 AM
SENATOR DYSON inquired as to when corrosion monitoring began,
particularly on the western side.
MR. MARSHALL deferred to Mr. Hedges, but said, to date, BP has a
capable corrosion management team consisting of a core BP staff
that is supplemented by contractors who provide much of the
inspection expertise. Since March, a new technical group has
been created in order to review corrosion planning, and that
group reports directly to Mr. Marshall.
9:39:36 AM
SENATOR DYSON recalled that in the mid- to late-'80s, BP laid
off many in the state. He said he found it a stretch that 225
people are actively looking at corrosion on the North Slope on
any given day. He inquired as to how many employees BP has
operating the flow stations and gathering centers, for example.
MR. MARSHALL replied that of the 225, approximately 200 are
contracted staff and 25 are BP employees. He deferred to Mr.
Hedges to provide further detail.
9:40:57 AM
BILL HEDGES, Manager of Corrosion, Strategy and Planning, BP,
confirmed that BP has approximately 25 employees between the
North Slope and Anchorage and 200 contractors who work mainly on
inspection services and other corrosion-related activities. He
added that the number is not exact, because for example, BP
tends to have more employees in the summer than in the winter.
9:43:04 AM
SENATOR DYSON stated that the implication is that all the
employees are experts; they are not field hands doing manual
labor that enables inspection, but are trained experts in
corrosion.
MR. HEDGES responded, "No, that would include everybody
associated with corrosion, so it will include the removal of
insulation. But they're all professionals in their own field.
Even activities such as removing insulation is a skilled
operation on the North Slope."
SENATOR DYSON said, "So, ... you didn't mean to infer that each
one of those people ... specifically had advanced training in
corrosion itself, but they're a part of the team that's working
on the problem."
MR. HEDGES answered, "That is correct, Senator."
9:44:03 AM
CO-CHAIR SAMUELS asked if there has been a change in the quality
of the oil from the flow station and whether procedures for
testing need to be changed.
MR. MARSHALL replied that the oil from the Prudhoe Bay field has
remained fairly the same, with one exception: in the far west
of the field the oil produced is viscose. Because that
reservoir is shallower, it is typical for the sands to come up
through the well into the gathering center, at which point BP
tries to accumulate them and remove the ... solids. He stated,
"We suspected, after the March spill, the solid carryover from
Gathering Place 2 was one of the key factors of what had caused
some accelerated corrosion in that ... line. It still remains a
strong working theory around what happened there. There are no
similar sands and solids from the reservoir in other parts of
the field." He said he thinks that, largely, the crude oil
quality and the specification - which is .35 percent - has
remained the same.
9:46:49 AM
REPRESENTATIVE GATTO remarked that an article in yesterday's USA
Today said BP has used smart pigs and found 16 anomalies in 12
locations and has not done so since the early 1990s, relying
instead on other tests. He read: "After the March spill of
267,000 gallons, the ... U.S. Pipeline and Hazardous Material
Safety Administration ordered the company to use smart pigs to
test the line. ... The agency has criticized BP for not doing
the testing sooner." He asked that Mr. Marshall comment on some
of the accusations from USA Today.
MR. MARSHALL, in response to the comment about 16 anomalies in
12 locations, confirmed that was accurate reporting. He said
those anomalies indicated wall-thickness losses of between 70
and 81 percent. He said, "We were in the process of verifying
those anomalies with ultrasonic testing when we discovered the
contaminated insulation." He said although some people think
smart pigging is the only tool, it is actually only one; a more
accurate tool is actually ultrasonic testing. The two tools
combined, he said, provide a good picture.
MR. MARSHALL reiterated that BP had based its assessments on the
pigging that it had done on its western area lines in 1990 and
1998, and the pigging done there demonstrated that those lines
were in good condition. Mr. Marshall said BP did not just
accept that, it followed up with ultrasonic testing. Clearly,
he said, BP was not quick enough to identify a threat to that
line; a smart pig was ordered for 2006, but "was going to be
done too late." Ultrasonic testing was instituted on the
eastern line when BP took it over in 2000. In response to Co-
Chair Samuels' question, he said, "We believed that the
condition would be broadly similar to that which has been pigged
only two years earlier. The ultrasonic testing that we did on
those eastern lines indeed confirmed ... that the line was in
good condition." He said the events of the last two weeks
showed that that was incorrect, and he repeated that BP will fix
that problem.
9:51:38 AM
SENATOR ELTON related his understanding that Mr. Marshall's
testimony to the legislature 7-10 days ago was that "the line"
had not been pigged since 1992. He stated that he has heard
subsequent to that that BP has issued a clarification that "it
hadn't been pigged in 1992, and it had not been pigged since
1977." He asked if that is correct.
MR. MARSHALL clarified as follows:
In 1992, the eastern area lines - the flow through
Pump Station 1 lines - were pigged. They maintenance
pigged [and] cleaned ... with some success. I mean
they were pigged to the point where a smart pig was
run. What ARCO was unable to get was good data from
that pig. What I can't [indisc -- coughing] was
whether that was because of the incompleteness of the
pigging or the solids, or whether or not there was a
problem with the ... pig run itself. But that line
was pigged in 1992 and a smart pig was attempted.
SENATOR ELTON asked if it had been determined that no good data
had been procured.
MR. MARSHALL deferred to Mr. Hedges.
MR. HEDGES related that he had spoken with somebody who had been
involved in that smart pigging program, and that person's
recollection was that the line had been cleaned successfully
enough that [ARCO] was confident enough to put a smart tool into
the line. The data that was produced by the smart tool was
terrifying, he said; it suggested that the entire pipe was fully
corroded. He continued:
They went back and did spot checks, as code and
standards would recommend you to do, and found
actually that the line was in very good condition. It
raised questions about the tool. There was some
research done, and in fact the tool was subsequently
withdrawn from the market. It was in the early days
of smart pigging. And consequently, although a tool
was run, there was no smart pig later associated with
the eastern line until we recently ran one in July on
the upper section.
9:54:34 AM
SENATOR ELTON referred to Mr. Marshall's written testimony,
which relates that BP actively encourages its workforce to raise
issues of concern and promote open communications in many
forums. Senator Elton said through performing a search on the
Google search engine on the internet, he reached an
understanding that BP employees may not fully agree with Mr.
Marshall's statement. He said he found that a few years ago, BP
employees came to Mr. Marshall with complaints, but those
complaints were dismissed. There were allegations by some of
the BP employees of "harassment and intimidation when it came to
maintenance issues."
MR. MARSHALL said that he is aware of those issues, which he
said were investigated comprehensively, and for which
appropriate action was taken. He stated that he has not been in
the position of dismissing any safety concerns or allegations
during his time in Alaska. However, he pointed out that BP is a
large organization, and not a perfect one. He stated that it is
his responsibility to ensure that everyone in the entire
workforce believes the same thing, which he said is a huge
challenge, but one to which he is committed. He stated, "Until
every ... one of the 4,000 people that are on the slope at any
one time truly believe[s] that it is okay to raise a concern
without reaction, we haven't done our job."
9:57:10 AM
SENATOR ELTON recalled that there was another gentleman who had
raised maintenance concerns related to safety valve and
corrosion issues, and he said he would like to know what
happened after that gentleman's allegations were made four or
five years ago.
MR. MARSHALL recalled that upon his arrival in September 2001,
there had been a number of allegations made about maintenance
backlogs. He said he instituted a weekly meeting of his
integrity management team to address these issues. He said he
has been determined to eliminate these issues, and he indicated
that there are no backlogs regarding equipment and maintenance.
He stressed the importance of listening to the people in the
field.
SENATOR ELTON said he appreciates that part of the discussion
has to do with BP's history before Mr. Marshall's arrival. He
recalled a report in the Wall Street Journal, as well as the
Anchorage Daily News regarding a safety valve issue that was
reported, but took four years to fix. He said he would like Mr.
Marshall to respond to that issue.
MR. MARSHALL stated that every time BP receives allegations it
looks into them. He said he can recall over 100 allegations
from various letters from outside the company, and the company
has dug into each one, correcting things when it can. He said
he is conscious that a track record takes a long time to build
and a short time to lose. He said BP is on a path of rebuilding
its track record, and clearly what has happened over the last
few weeks has been a big setback in that regard.
10:01:31 AM
SENATOR ELTON expressed his appreciation of Mr. Marshall's
presence. He said he would like to hear whether BP thinks there
is a state responsibility for the problems that have arisen over
the last few weeks, or if the company believes that the issue is
theirs and there ought not be any impact on the state treasury
through taxes or credits or any other form. He said he wants to
know whether BP is planning to finance the repairs on its own,
or whether it expects assistance from the State of Alaska.
MR. MARSHALL said BP's focus has been on the swift and safe
restoration of production, while pursuing inspections and
bypasses. He asked Senator Elton to confirm that he is asking
if BP will be seeking state assistance on the funding of the
repairs.
SENATOR ELTON clarified that he is interested in whether BP is
going to use state taxes or state credits to help finance any of
the repairs that are necessary, or whether Mr. Marshall fully
expects that it is the obligation of BP.
10:03:36 AM
MR. MARSHALL responded that money isn't the object; BP will
backstop and fund whatever it takes to get the production back
on line. He said BP will work with the existing system, make
changes where necessary, and replace equipment wherever it can.
He stated, "I have not really spent a lot of time thinking about
the implications of that."
SENATOR ELTON said he would appreciate BP's consideration of the
issue.
10:04:30 AM
REPRESENTATIVE LEDOUX inquired as to what programs BP offers to
protect workers who come forward with comments or criticism
regarding BP's maintenance practices. For example, she asked if
there is any method by which a worker can file a complaint
anonymously.
MR. MARSHALL replied yes. He said anonymity has been perfected
through a number of methods, and as long as people "raise the
specifics," BP can and does investigate the issues.
REPRESENTATIVE LEDOUX asked Mr. Marshall what he would do
differently, in regard to BP, if he could turn back time 10
years.
MR. MARSHALL, characterizing that as a hypothetical question,
said clearly the events of the last few weeks and months have
shown that the investment BP has made over the last five years
has been insufficient, and the company will take steps to
correct that moving forward.
REPRESENTATIVE LEDOUX asked what those steps are and how they
will prevent current events from happening in the future.
MR. MARSHALL said that he is proud to work for a company that is
committed to learn from its experiences - good and bad. He said
BP will have to operate transit lines in a fundamentally
different way. He said BP will incorporate maintenance pigging,
smart pigging, ultrasonic testing, and whatever other technology
necessary it needs to bring. It is reevaluating its entire
corrosion program, and the company will look at its
infrastructure with an eye to answering the questions.
REPRESENTATIVE LEDOUX asked when BP thinks it realistically will
have a more advanced program in place.
MR. MARSHALL said new pipe has been ordered and will arrive
later this year, and whatever new programs are installed will be
in place "to accompany those new lines in service." Going
forward from this point, he said, the goal is to complete the
maintenance and smart pigging of the remaining lines.
Currently, he reported, the western area lines are in good shape
and will be pigged and smart pigged as soon as possible.
Furthermore, inspections on the five miles of eastern line are
being conducted; so far, the results show that that line is in
good condition.
REPRESENTATIVE LEDOUX raised the issue of the number of
employees, noting that it is "up to 225 employees," which she
pointed out means it could be any number from zero up to 225.
She asked Mr. Marshall how many people are working on the North
Slope on average, on any given day.
MR. MARSHALL said the number varies depending on the season. He
deferred to Mr. Hedges.
10:12:27 AM
MR. HEDGES estimated that the number of employees could be a
minimum of 100 on any day, up to 250.
CHAIR WAGONER asked whether BP expects any employee layoffs due
to the shut down of part of the field.
MR. MARSHALL answered no. He explained that BP is keeping the
facilities idled - "keeping them warm" - and is producing oil in
flow stations one and three. Furthermore it is producing gas to
keep the fuel gas running, producing oil for the purpose of
freeze protection, continuing to run seawater for the injection
wells, and seeking to take advantage of the throttle back by
performing critical maintenance. He mentioned redeploying
drilling work because of the use of diesel. He relayed that
employees were assured that their jobs are secure, because it
was an issue that was raised.
CHAIR WAGONER asked when the eastern [line] will be back up and
running.
MR. MARSHALL replied that only after completing the engine
reassessment will he be able to provide a definitive date. He
said inspections are continuing "at pace," working with various
state and federal agencies.
10:15:15 AM
CO-CHAIR RAMRAS asked, "What umbrella are these activities going
to fall under in the long term? Force major, negligence, ...
deferred maintenance, or something else?"
MR. MARSHALL, seeking clarification, said that BP has been
focused on understanding what has caused the situation of
unexpected corrosion in its lines and what can be done to ensure
the supply of crude oil is maintained to both the Alaska and
West Coast refineries. He said BP has indicated that it will
backstop all the Alaskan refinement as needed to ensure
sufficient supplies to "keep them running." The company has
also purchased 4.5 million barrels of crude oil to ensure
adequate supplies to the west coast.
10:17:18 AM
CO-CHAIR RAMRAS asked what BP's long-term goals are with regard
to addressing the damage that has been done to people's
perception of the integrity of the Trans-Alaska Pipeline System
and Alaska's ability to pursue environmentally safe drilling of
the Arctic National Wildlife Refuge.
MR. MARSHALL said he understands the impact the recent pipe
corrosion has had on both BP's and Alaska's reputation. He
restated that a track record, though long to build, is quick to
be lost. He said although there is no comprehensive plan in
place, BP is focused on learning and doing something about the
experience it has had, and he stated that the company will work
tirelessly to put in place whatever it takes to restore
confidence in it operations. He said BP knows the importance of
being an environmental steward, which is why it made the
decision to shut down the field in an orderly manner.
10:21:30 AM
REPRESENTATIVE CRAWFORD related that some years back one of his
friends was involved in ARCO's corrosion crew and ARCO brought
corrosion concerns to light that subsequently were not addressed
to the extent they should have been. He said the recent spill
comes as no surprise, because his friend told him that it was
not a matter of if it was going to happen, but rather a matter
of when. He indicated that he has given much thought to the
matter. He said, "I don't know that there's a question that can
be asked about this now, it's just I hope we all do a lot better
in the future."
MR. MARSHALL said he has reviewed as many documents as possible
to discover whether specific concerns have been raised about the
transit lines. Corrosion, he said, has been a fact from day
one; corrosion inhibitors have been incorporated into the system
since the beginning. He related that particularly in the
upstream areas where there is 12 percent carbon dioxide,
corrosion can "eat" a quarter of an inch per year, left
unchecked. So far, in going through the documents, Mr. Marshall
said, nothing specifically related to the transit lines in
question has been discovered.
The committee took an at-ease from 10:25:37 AM to 10:33:16 AM.
10:33:23 AM
REPRESENTATIVE SEATON asked if there is an estimate as to "why
the leak occurred at that time, four hours into the operation
there."
MR. MARSHALL said it had been about 15 minutes since the leak
started when the original estimate was made of five barrels at
six gallons per minute. He said he would have to reconfirm how
long the leak had been occurring at the new estimate of 22 or 23
barrels. He said although BP does not have a definitive answer
at this stage, it is not inconceivable that the pressure shock
from shutting down the system could have finally triggered the
leak; that answer may be illuminated through further
investigation.
10:35:06 AM
MR. MARSHALL, in response to a follow-up question from
Representative Seaton, related his belief that a 10-inch pipe
[is used for the bypass lines] and is on location on the slope.
He said, "We've been able to source that with the corporation of
Alyeska and, I believe, [ConocoPhillips Alaska, Inc.]. We are
trying to source the remaining materials - the metering, the
valves, and other fittings - that will be necessary to get that
in. We are proceeding in parallel with all of the other
inspection and pigging efforts, and that activity will proceed
in parallel until we've got it completed." Mr. Marshall
mentioned that there are options to pursue, naming bypasses from
Flow Stations 1 through 3, and he indicated BP's plan to restore
the entire Eastern Operating Area to production as quickly as
possible.
10:36:35 AM
REPRESENTATIVE SEATON said he had heard reports that maintenance
pigging was not done on the transit lines because the filters
could not handle the amount of sludge that was inside them. He
asked if that report is accurate.
MR. MARSHALL said he classifies the initial estimates of solids
in the line after the "GC2" spill as worst-case scenario,
because upon a subsequent technological check, that estimate was
found to be about 10 times too high. He said BP has determined
it will be able to do complete pigging with the estimate of
solids in each of the lines, by installing one of two
"crossovers." He explained that crossover A will allow BP to
pig from Skid 50 and put the solids into Flow Station 3 and
dispose of them from there. He noted that there is also a
parallel activity being completed by Alyeska, which will allow a
line to be installed to put the solids into one of the Pump
Station 1 tanks. Mr. Marshall estimated that by early September
[2006], BP will have two methods of pigging those lines and
capturing the solids in a way that will not affect the
strainers, meters, or any part of Pump Station 1.
REPRESENTATIVE SEATON asked if there was consideration of not
doing pigging prior to the spill.
MR. MARSHALL responded that he can't comment on what Alyeska's
position might have been prior to the March spill. He
continued:
We identified the slight increase ... in corrosion
rate on the GC2 line in the fourth quarter of last
year. We did order and schedule a smart pig run in
the summer of this year, and that was something that
was being planned at the time of the March spill. We
were going to have to find a way to deal with the
solids in that line, measure them, and work with
Alyeska to deal with them. Certainly the events since
March have ... forced us to examine two possibilities:
one to cross over the solids to flow station three,
and one to put in an additional cross over at Pump
Station 1 so we can handle any of those solids with
minimal impact to the ongoing operations.
REPRESENTATIVE SEATON asked Mr. Marshall to check whether there
had been any contact with Alyeska in the last several years
prior to the March spill in regard to pigging the line and
Alyeska's concerns about whether there was too much sludge to
handle that pigging. He recollected that the federal government
had required 12 wells to be shut down for testing. He asked Mr.
Marshall to describe the progress of that testing and whether or
not that shut down was based upon corrosion concerns.
MR. MARSHALL surmised that Representative Seaton was referring
to well cellars, in which there were indications of oil. He
clarified that BP made the decision to shut down those wells; it
was not a shut down mandated by the federal government. He
estimated that the shut down occurred three or four weeks ago to
check the integrity of the wells and to ensure that there were
at least two barriers between the reservoir and the surface.
The tests were completed, and "each of those wells did confirm
good integrity to the reservoir." He said each of the wells is
designed with insulation materials, and it is that material
which has leaked through the surface casing; a number of the
wells has exhibited some corrosion from snow and rain melt
running down the side of a shallow section of the well. He said
BP is in the process of identifying repair plans to fix the
wells.
10:42:18 AM
MR. HEDGES provided his resume to the committee, which relates
his experience and education in corrosion. He stated that BP
has large infrastructure, with a team in place that manages
several corrosion risks, and the company works with regulatory
agencies to overview its programs. He said BP's programs are
acknowledged as very comprehensive, and it is working hard to
close the gaps that resulted in the leaks in March. He provided
an illustration of the corrosion process for which there is much
science. Corrosion, he explained, is an electrochemical
phenomenon.
10:47:16 AM
MR. HEDGES reviewed the various infrastructure of the pipeline.
He noted that BP has 3,500 regulated vessels, 750 regulated
tanks. Platforms are regulated as well. The new EPA
requirements will mean many more tanks will be incorporated into
a regulated environment. Mr. Hedges reported that in addition
to oil production, BP produces a record 9 billion standard cubic
feet of gas per day. He said BP also produces 1.5 million
barrels of water per day, which is a 75 percent average water
cut; for every oil barrel there are three barrels of water.
MR. HEDGES said that within its facilities, BP faces a variety
of corrosion risks, particularly from water, without which
corrosion cannot exist. Many fields begin their life with
little water, but as they get older, water starts to come
through and corrosion problems begin and continue as the field
ages. He said carbon dioxide gas can dissolve into the water
and cause a mild, corrosive acid. Solids, he relayed, can
create different environments and shelter bacteria.
Furthermore, he stated that if fluids are flying at a high
velocity, they can remove metal - a process known as erosion.
Bacteria, he said, can produce organic gas byproducts which can
cause corrosion. Mineral acids are used in operations to
stimulate reservoirs, and BP must be careful to manage those
acids. How fast the fluids are flowing down the pipe also
influences corrosion, he said. He noted that BP has programs to
manage corrosion, and those programs have oversight by
government agency.
MR. HEDGES listed four forms of corrosion: inside, outside,
spread, or localized; more than one type of corrosion can occur
at a time. He offered some examples (indisc. -- other voices
overlapping on recording). He mentioned the corrosion
management team and noted that BP has 21 programs to address all
the risks and threats. He said the company makes extensive use
of contractors for program execution and works closely with
regulators. Mr. Hedges related that during his year with BP, he
has attempted to foster as open a dialog with regulators as
possible. He reported that the budget this year is $72 million.
Those operating Alaska's pipeline have access to BP's global
corrosion network.
10:53:14 AM
MR. HEDGES related the types of corrosion control programs that
BP has. He said often pipes are made thicker to allow for some
of the steel to corrode. To address conditions that are
particularly aggressive, he said, BP can use corrosion
resistance alloys - referred to as stainless steel. He said the
Endicott facility is made significantly out of what is called,
"duplex stainless steel." He reported that BP pumps
approximately 3 million gallons of corrosion inhibitor each year
and spends approximately $35 million a year on chemicals. He
asked the committee to think of corrosion inhibitors as
chemicals that are injected into the pipeline and mixed with the
fluid inside, thereby traveling down the pipeline leaving a
single molecular layer all around.
MR. HEDGES confirmed reports that BP dilutes its chemicals,
explaining that because it costs approximately $1 a gallon to
send the chemicals up from Houston, Texas, to the North Slope,
they are sent up in super concentrated form, and BP dilutes them
so they can be pumped through the line. That practice saves BP
approximately $3 million dollars a year. Management ensures BP
does not "go to high velocity," which would cause erosion
problems. The condition of the pipelines is tracked carefully,
he said, and when they come to the end of their useful service
life, plans are in place to repair or replace them as necessary.
10:55:50 AM
MR. HEDGES turned to the subject of pigs and provided photos and
models of the various types of pigs to the committees. He
defined pigs as "pieces of equipment designed to travel down
pipelines and either clean them or gather information around the
condition of the pipeline." He said if there is any residual
corrosion, there should be corrosion inhibitor in place to deal
with it. He then provided a graph of corrosion rates over time
since the 1990s. Corrosion rates came down in the 1990s, but at
a price of having to pump more corrosion inhibitors in the
pipeline. In fact, BP has to pump more corrosion inhibiting
chemicals into its pipelines in Alaska than are used in many
other parts of the world, due to Prudhoe Bay's aggressive
conditions. He discussed the "coupon" approach to corrosion.
He explained that coupons are "strips of metal made of the same
material as the pipeline which we insert into the pipeline." He
said there are other approaches that allow BP to get a
continuous feed of corrosion rate data. He stated that where
inhibitors exist there is great protection, but where they are
missing there can be "great problems." In the late 1980s and
early 1990s, when water started to be produced in Prudhoe Bay,
corrosion became a problem, and in the early to mid 1990s,
control programs were put in place to lower the corrosion rates
to well below BP's target of "2NPY." He then referred to charts
regarding to the effectiveness of the coupons, and he explained
the use of averaging. Mr. Hedges then reviewed the ultrasonic
testing and radiographic testing programs, which are methods
used in addition to smart pigging. BP chooses from its variety
of inspection programs to target the specific mechanisms
previously mentioned. He talked about how BP chooses locations
to test. First, it repeats testing in areas that have shown to
have corrosion to see if the areas have become worse. Also, BP
chooses new areas to find out if anything new is happening; it
chooses those new spots, both through corrosion engineering
judgment and by random selection. In recent years, he said,
external corrosion has become a problem, and there is a program
to address that issue.
11:05:47 AM
MR. HEDGES said corrosion probability was considered to be low
in the transit lines and, until this year, with monitoring
inspection, Mr. Hedges said, BP was doing "fairly well with no
leaks in 29 years." He provided an ultrasonic scan of the leak
area for the committees to review, which illustrates "discrete"
pitting - "not one giant network running into each other." In
summary, Mr. Hedges said BP has clearly identified a gap and is
working as fast as possible to fix that gap.
^PATRICK H. VIETH - CC TECHNOLOGIES
11:08:34 AM
PATRICK H. VIETH, Senior Vice President, CC Technologies, Inc.,
informed the committees that CC Technologies works in the area
of corrosion around the world. He said his expertise is
primarily in the area of the development and implementation of
integrity management programs for pipeline operators.
Specifically, he said, he develops programs to prevent the
likelihood of failures, through methods such as in-line
inspection, hydrostatic testing, defect assessment, and fitness
for purpose. He stated, "It is my job to bring together the
experts within our company, to take a look at the available
information, and provide input to BP throughout this process."
He offered further details. He said CC Technologies has been
involved in assessing the information produced and providing
input to BP related to the Western Operating Area (WOA), and it
is currently doing similar work related to the Eastern Operating
Area (EOA).
11:13:28 AM
REPRESENTATIVE LEDOUX inquired as to how long the corrosion has
been forming.
MR. HEDGES responded that BP would like to know the answer to
that question, as well. He said the company does have some data
from running the smart pig in 1998, which produced a baseline
assessment. He said BP was tracking the damage in the pipeline
every year following that assessment, but was not seeing any
significant changes until some slight increases [in corrosion]
were found in 2004-2005. He said BP was following those
increases and, based on them, ordered a smart pig run scheduled
for this year. Unfortunately, the leak occurred on March 2,
2006, before the smart pigging was run.
11:14:35 AM
REPRESENTATIVE CRAWFORD mentioned one article said BP had not
had a leak, whereas another article [from April 2001] said there
had been five leaks in three months - one rupture resulting in
92,000 gallons of seawater and crude oil on the tundra.
MR. HEDGES specified that when he said BP hadn't had any leaks,
he was referring to the oil transit line sections; he explained
there have been leaks in other parts of the infrastructure.
11:15:29 AM
SENATOR DYSON said he is mindful of the sanctity of the
relationship between CC Technologies as contractor and BP;
however, he said the legislature has an overriding
responsibility for the people's oil, the money it brings in, and
the care of the environment. He said, "I'm wondering if
there'll be any restrictions on the reports that you get from
these various experts here that won't be available, either to
the regulators or ultimately to the public, on the nature of ...
what the investigations find."
MR. VIETH said BP allowed outside agencies to participate and
learn about new findings in "real time." To that, he remarked
that many of the presentations and results that he has prepared
over the last week have been seen simultaneously, for the first
time, by both BP and other agencies.
MR. MARSHALL reinforced that he is personally committed to have
information available to anyone interested.
11:17:48 AM
SENATOR ELTON recalled that the presenters had said that [the
events of] March 2 helped identify a significant gap. He asked
if, either prior to or following that date, there had been any
review done of the Kauffman report mandated in the merger
agreement that identified significant corrosion problems, or if
there had been time to review the 2001 BP report that identified
significant staff and maintenance issues.
MR. HEDGES responded that in his year at BP he has reviewed some
of BP's annual reports and was actively engaged in publishing
the 2005 reports, but he has not read the Kauffman reports from
previous years.
SENATOR ELTON expressed concern that there are four- to five-
year-old reports that identified gaps, but it took a
catastrophic incident that affected state revenues and gas
markets to catch BP's attention. He said he is trying to figure
out what happened between the time that reports that identified
a gap were available and the March 2 incident, and what the
operator's response to those reports were.
MR. MARSHALL said he cannot recall the specifics of the 2001
report without refreshing his memory. Notwithstanding that, he
surmised that in any year, gaps will be identified and issues
will need to be addressed and corrected. He stated that he
wasn't aware of any of the reports that identified corrosion in
the transit lines. He said he would like to clarify that the
first indications that BP had that the transit lines began to
experience an increase of corrosion was in the 2004-2005 time
frame, as Mr. Hedges previously noted. The last inspection done
on the GC2 transit line was, he estimated, in September of 2005,
and it was judged then that BP needed to increase the frequency
of inspection and commission the smart pig run to get a
reestablishment of the condition of that line.
SENATOR ELTON said he remains confused with regard to pipeline
corrosion; he questioned why corrosion was not an issue
following the Kauffman report.
MR. MARSHALL said, "What we're talking about here is one
hundredth of that pipeline system." He said he suspects that
the Kauffman reports speak largely to many of the lines more
likely to have corrosion issues, for example, those with high
carbon dioxide and water. He reiterated that it is only
recently that corrosion has presented as a problem on the oil
transit lines. He offered, "Certainly we'd be happy to go back
and try and provide a summary of the findings and put that into
context for you."
11:23:42 AM
CO-CHAIR RAMRAS said he believes that BP is a careful company,
thus he wants to know if the spill is characterized as: an act
of God, a physical depreciation of the line that went unchecked
for a significant period of time that lead to 70 percent
failure, or deferred maintenance that was not addressed in a
timely fashion.
MR. HEDGES replied that BP is still in the middle of an
investigation, and until the mechanism is proven, it would be
foolish to speculate.
CO-CHAIR RAMRAS restated his question for Mr. Marshall.
MR. MARSHALL responded that he is not able to say at this point,
but he is working to find out.
11:27:01 AM
CO-CHAIR RAMRAS asked if the Kuparuk River Unit or other major
fields are at risk for similar problems.
MR. MARSHALL deferred to ConocoPhillips Alaska, Inc., the
operator of the Kuparuk River Unit.
11:27:51 AM
CO-CHAIR RAMRAS inquired as to the revenue flow. He asked if
the oil will come through in the later life of the line or push
through to recapture lost volume in the next calendar year, and
how that would affect the state treasury.
MR. MARSHALL said he would be happy to provide "a more detailed
analysis of that question." He proffered that certainly the oil
that would have been produced from the east lines today that is
not being produced will remain there. He said BP is continuing
to inject sea water and produce water in flow stations one and
three; one benefit of that is that the company is able to keep
the pressure in the reservoir as high as possible. Typically,
he noted, when a field or portion thereof is shut down, the
field comes back with "flush production" - increases in
production for some time. He said he would need to talk to BP's
reservoir engineers to get a better understanding of that.
CO-CHAIR RAMRAS said that would be appreciated.
11:31:20 AM
CHAIR WAGONER pointed out that all the documents being presented
to the joint committee are available on the following web site:
www.akrepublicans.org, and through either the link for the
Senate or the House Resources Standing Committee.
The committee took an at-ease from 11:32:02 AM to 11:35 a.m.
^ATTORNEY GENERAL, DEPARTMENT OF LAW
11:35:16 AM
DAVID W. MARQUEZ, Attorney General, Department of Law, stated
that this hearing should assure the people of Alaska and the
rest of the United States that the administration and
legislature "are diligent and vigilant in overseeing the
responsible development of Alaska's important natural gas and
oil resources." He introduced attorneys serving on his own task
force, as well as other related individuals present. He said a
thorough fact-finding investigation of BP's management of the
North Slope oil field is taking place. After the investigation
is complete, appropriate legal action will be taken to protect
Alaska's interest. Corrosion issues of the past, present, and
future will be considered, relating to what damage has been done
and how "the risk that this will ever happen again is
significantly reduced or eliminated."
ATTORNEY GENERAL MARQUEZ reported that yesterday, through the
authority of the Department of Environmental Conservation (DEC),
subpoenas were issued to BP and other Prudhoe Bay unit
leaseholders with regard to documents related to corrosion
dating back to 1996. After BP announced the complete shutdown
of the Prudhoe Bay field, Governor Frank Murkowski announced the
formation of a special cabinet team, which included Commissioner
Mike Menge, the commissioners of DEC and the Department of
Revenue (DOR), John Katz, in Washington D.C., and Attorney
General Marquez. The goal of the team was to protect the
environment, develop an action plan, and get oil production up
and running.
ATTORNEY GENERAL MARQUEZ said he formed an internal task force
within DOL, which was headed by Deputy Attorney Generals Susan
Parks and Craig Tillery, and made up of experienced attorneys,
for the purpose of recommending the proper legal courses of
action for the state to pursue and, at the right time, to
implement those recommendations. One consideration is to
determining whether BP, and possibly other parties, can be held
legally responsible for losses incurred by the state.
ATTORNEY GENERAL MARQUEZ said he appreciates BP's efforts to
quickly address the effects and causes of the corrosion and
consequent spill and the apologies of BP's executives and
managers. Acknowledging the shortcomings of the company's
maintenance corrosion control programs, he said, reflects
favorably on BP's intentions to address this serious issue.
Furthermore, Attorney General Marquez acknowledged that billions
of barrels of oil have flowed through safely and reliably to
market. He said Alaskans go to work every day on the North
Slope with the best of intentions to perform their jobs safely
and in an environmentally sound manner. Nevertheless, he stated
his deep concern regarding the practices that led to the current
situation. Attorney General Marquez said apologies are not
enough; the problem must be corrected, and BP must make all
necessary efforts to ensure that other existing problems are
identified and resolved.
11:42:09 AM
ATTORNEY GENERAL MARQUEZ said there is an ongoing criminal
investigation related to both the March and August spills, which
involves DEC investigators and the DOL environmental prosecutor.
He said he is not at liberty to discuss the investigation, in
order to preserve its integrity, and also because the state is
working cooperatively with federal authorities. Pursuant to
Federal Rule of Criminal Procedure VI, he said, the subject
matter of a federal grand jury investigation is confidential.
He stated, "Any successful criminal prosecution at the state
level will require that the state prove that the actions taken
or omitted were criminally negligent." He said criminal
negligence is defined in AS 11.81.900. Title 46 of the Alaska
Statutes contains several provisions related to oil spills, he
noted. Violations are criminalized in AS 46.03.790; any
criminally negligent violation of a DEC statute, regulation,
order, or permit is a misdemeanor. It becomes a felony, he
said, if the spill is 10,000 barrels or more. The recent
incidents, he noted, are well below that threshold. Attorney
General Marquez said under these provisions, the maximum penalty
for an individual for a misdemeanor is one year in jail and a
$10,000 fine. For an organization, the maximum penalty for a
misdemeanor is a fine of $200,000 or three times the pecuniary
gain to the defendant or up to three times the damage or loss
caused by the defendant's conduct. He listed the penalties for
a felony offense.
11:44:59 AM
ATTORNEY GENERAL MARQUEZ turned to civil remedies available to
Alaska. He stated:
Under Alaska law, a person who discharges petroleum
into or upon the waters or land of the state, in
violation of AS 46.03.740, is liable in a civil action
to the state or a sum assessed by the court in an
amount not more than $100,000 for the initial
violation, [and] no more than $5,000 for each day the
violation continues. The award shall reflect when
applicable reasonable compensation for adverse
environmental effects, costs incurred by the state in
detection, investigation, and attempted correction of
the violation, and the economic savings realized by
the person in not complying with the requirement.
In addition, the liability under AS 46.03.760(a), a
person who violates AS 46.03.740 is liable to the
state for the full amount of actual damages caused by
the state by the violation, including direct and
indirect costs associated with the abatement,
containment, or removal of the pollutant, restoration
of the environment, and all incidental administrative
costs.
A person found liable under any other state law for an
unpermitted discharge of crude oil in excess of 18,000
gallons faces a potential civil penalty up to a
maximum of $500 million. For example, a person is to
be charged a penalty of $8 per gallon for the first
420,000 gallons of crude oil discharge, and $12.50 per
gallon for amounts in excess of 420,000. If subject
to the $500 million statutory maximum, the court shall
assess four times the penalty if it finds that the
discharge was caused by the gross negligence or
intentional act of the person. Additionally, pipeline
owners and operators are strictly liable for the
state's response cost. Owners and operators are also
liable for damages, including injuries, property, loss
of income, loss of means of producing income, or loss
of economic benefits.
If the state sues for civil assessment for penalties,
then it may recover full reasonable attorneys' fees
and costs, and the operator must pay restoration
damages to restore the environment to its pre-spill
condition. Owners and operators are liable for
natural resources damages, such as damages to the
tundra. The owners and operators of a facility from
which there is release of oil are strictly liable,
jointly and severally, for damages resulting from an
unpermitted release. Damages are statutorily defined
as including loss of income, loss of the means of
producing income, or the loss of an economic benefit.
If the field shuts down and any resulting loss of tax
and royalty revenue is seen as the result of the
release, then AS 46.03.822 will provide a cause of
action for lost tax and royalty revenue.
The Alaska Supreme Court, in the case Kodiak Island
Borough v. Exxon Corp. - a 1999 case - recognized that
the legislature intended AS 46.03.822 to allow for
broader damages to government entities than those
compensable with common law. There may be issues
regarding extra costs due to decreased flows through
TAPS. It is known that the state's royalty and tax
interest in North Slope production are calculated on
the wellhead value of the oil. The wellhead value for
oil that is shipped intrastate is determined by
subtracting the transportation cost, TAPS tariff, plus
any tariff for shipping upstream of Pump Station 1,
plus tanker costs from the market price at the
purchasing refinery. Higher TAPS tariffs thus result
in a lower wellhead value on which state royalties and
taxes are calculated.
Because of TAPS, current TAPS tariff rates are
through-put driven; any reduction of total barrels
shipped on TAPS may result in a higher cost per barrel
tariff rate applied to remaining through-put. In
turn, these higher tariff deductions would result in
lower state royalties and taxes on all remaining TAPS-
shipped oil, even if no additional costs are incurred
to taps operations from the corrosion problem. Of
course, additional costs arising from the corrosion
problem may show up in the tariff also. Cost revenues
to the state, therefore, may be consequential damages
caused by BP conduct and that of others.
ATTORNEY GENERAL MARQUEZ said enforcement tools are also
available to the state. For example, a person responsible for
the discharge of oil must immediately contain and clean it up.
He noted the following authority of DEC: to take over the clean
up if not done adequately; to investigate the spills and issue
subpoenas to reserve records and evidence; to obtain search
warrants to investigate actual or suspected pollution incidents;
to inspect oil terminal facilities, pipelines, and exploration
production facilities to ensure pollution control; to perform
its own inspection of the structural integrity in operating and
mechanical systems of pipelines in oil facilities in the absence
of timely and adequate inspection by other agencies; and to
issue notice of violation, requesting the violator to cease and
desist the violations and explain why the violation occurred and
how the problem will be cleaned up or repaired.
11:51:06 AM
ATTORNEY GENERAL MARQUEZ relayed that DOL is reviewing the
state's rights under various leases, unit agreements, state
statutes, and common law. He predicted that the claims most
likely to arise will be those based on principals of contract
law - specifically, those claims based on breach of both
expressed and implied terms of the applicable oil and gas lease
and the unit agreements. He continued:
Section 19 of the lease expressly provides that the
lease contemplates the reasonable development of said
land for oil and gas as the facts may justify, and
that upon the discovery of oil or gas in paying
quantities on the land, the lessee shall drill such
wells as a reasonably prudent operator would drill,
having due regard for the interest of the lessor -
that's the state - as well as the interest of the
lessee - that's the oil company. A reasonably prudent
operator is someone who represents him or herself to
possess an expertise in matters relating to the
technology and operating practices of the oil and gas
industry that most persons do not have, and must
consider the lessor's - in our case the state -
interest while pursuing his or her own.
To that end, Section 20 of lease correspondently
provides that the lessee - the oil company - shall
exercise reasonable diligence in drilling, producing
and operating wells on said land unless consent to
suspend operations is temporarily granted by the
lessor. This section further provides that the lessee
shall carry on all operations in a good and workman-
like manner in accordance with approved ... methods
and practices, having due regard for the prevention of
waste of oil and gas.
This mandate is also echoed in Section 4.2 of the unit
agreement, which requires that working interest owners
shall, with due diligence, develop the unit area in
accordance with good engineering and production
practices. In this case, the matter of what
constitutes "good and workman-like manner," and
"reasonable," and "prudence," are issues of fact to be
determined later.
Ordinarily, lessees are bound by implied terms or
covenants, in addition to express terms and leases,
and our leases include implied duties. Addressing the
relationship between the state and its oil and gas
lessees, the Alaska Superior Court ..., by Judge - now
Justice - Carpeneti, in the ANS royalty litigation,
held that oil and gas producers have an obligation to
act as reasonably prudent operators in performing
their duties under the lease. A reasonably prudent
operator standard obliges the operator to act in good
faith, with competence, and with due regard to the
interest of the lessor - the state - as well as its
own interest. This obligation includes reasonableness
and prudence regarding the technology and operating
practices of the industry.
Judge Carpeneti explained that lessors cannot take
actions that injure a lessor's right to recover the
benefit under a lease. [The] prudent operator
standard imposes an affirmative duty to do certain
things in a given, factual scenario, he said. In the
same scenario, the covenant of good faith and fair
dealing commands the lessee to refrain from doing
anything to injure the lessor's right to receive
benefits under the oil and gas lease.
The covenant to conduct operations with reasonable
care and due diligence is of particular relevance to
the ... case. In this matter, the types of claims
that generally fall under this covenant are that the
lessee has damaged the royalty interest by operating
negligently, carelessly, or incompetently, and that
the lessee failed to use advanced production
techniques. An argument may also be available that
BP's breached the covenant to conduct operations with
reasonable care and due diligence.
11:55:24 AM
ATTORNEY GENERAL MARQUEZ said the state may have causes of
action under the express and implied covenant; however, he
emphasized the importance of not treating BP unfairly at this
stage of the investigation or unjustifiably raising the
expectations of the public and legislature "with regard to the
opportunity to recover damages under these theories." The state
will have to establish fact as information unfolds, and will
need to assess the relevant industry standards and review BP's
documents, in order to determine whether BP's conduct fell below
those standards. Then there is the question of allowable
damages, he said. Monetary damages, he related, generally are
measured by lost royalties or taxes - those monies that would
have been paid had production continued uninterrupted. He
continued as follows:
A difficulty in application of the damages remedy is
the proper measure of the damages. For example, where
the breach results in no permanent loss of oil or gas
and the action is either for failure to produce the
oil now, rather than later, the value of the royalty
or tax that would have been paid on the production
from the well, had it been operating properly at the
time, may be considered double recovery, since the
state may receive a royalty or tax, once again, when
the oil is eventually produced. Other measures of
damages may include the time value of royalties or
taxes received later rather than now. Also, the
interest on the sum that would have been paid the
state if no breach had occurred. Overall, it is
difficult at this time to ascertain the precise
measure of damages from BP's acts or others' acts or
omissions until the field comes back into full
production. We are examining, in addition to the
previously discussed remedies, whether there may be
more attenuated damaged claimed.
ATTORNEY GENERAL MARQUEZ stressed the importance of BP's acting
quickly to mitigate damages for the purpose of getting the field
up and running to the capacity that it was running prior to the
shutdown as soon as safely possible. He expressed a serious
concern as being whether production can resume to the level it
was prior to the shutdown after production is resumed.
11:58:17 AM
ATTORNEY GENERAL MARQUEZ, regarding future legislation,
regulation, and other actions, said he wants to ensure that all
state agencies have the authority needed, with no regulatory
holds between federal and state authorities. He said the
appropriateness of the criminal and civil sanctions are being
reviewed, as well as the oil and gas leases, for the purpose of
deciding "whether future leases should have provisions that more
expressly deal with these types of maintenance situations and
more explicitly set forth our rights and remedies as lessor."
11:59:17 AM
CO-CHAIR SAMUELS, regarding Attorney General Marquez' previous
statement that the owners and operators are jointly and
[individually] liable, noted that the owners would also include
the ExxonMobil Corporation and ConocoPhillips Alaska, Inc. He
asked for further explanation regarding those companies'
liabilities as opposed to solely BP's liability.
ATTORNEY GENERAL MARQUEZ responded that there is a potential
liability relating to any direct action against any of the other
parties, including contractors and other owners. He said there
will not be payments for the same damages.
CO-CHAIR SAMUELS asked if the state gets involved with
commercial relationships.
ATTORNEY GENERAL MARQUEZ answered that certainly the state will
review communications between all parties to determine "what
relationship may have caused damage to the state."
12:01:58 PM
SENATOR ELTON said he is interested in knowing how the federal
investigation implicates the state investigation, and whether or
not there are things one can or can't do, or should or shouldn't
do because of an ongoing federal investigation.
ATTORNEY GENERAL MARQUEZ reminded the committee of the ongoing
criminal investigation involving state and federal agencies and
his inability to speak to it. With regard to other factual
investigations of a noncriminal manner, he deferred to the
commissioners of DEC and DNR with regard to how the state's
teams are working with the federal teams.
12:03:46 PM
REPRESENTATIVE LEDOUX asked if there is a criminal or civil
action for negligence, in the absence of a suit on the lease or
contractual suit and with no oil spill.
ATTORNEY GENERAL MARQUEZ reminded Representative LeDoux of the
statutory provisions he cited during his testimony that are
related to a spill. He stated, "With regard to any actions we
may have under a lease, if we've been damaged because of the
operator that lessens the prudence and is not up to the industry
standards, we would still have a claim, even if there were not a
spill."
12:05:20 PM
CHAIR WAGONER announced that the committee would be [in recess]
until 1:15 p.m.
1:17:22
CHAIR WAGONER called the Joint House and Senate Resources
Standing Committee back to order.
^ALASKA OIL & GAS CONSERVATION COMMISSION
1:17:26 PM
JOHN NORMAN, Commissioner/Chair, Alaska Oil & Gas Conservation
Commission(AOGCC), Department of Administration, noted that he
had submitted written testimony, and, rather than reading it, he
said he would try to address some remaining concerns that might
be in the minds of the legislators present. He said there has
been question related to whether there is a risk in shutting
down part of the pipeline. He indicated that upon consideration
of the question, AOGCC sees no evidence that a one-time,
temporary shutdown of oil production from the Eastern Operating
Area of the Prudhoe Bay reservoir will damage the reservoir. He
said the pipeline operator has informed the commission that BP
plans to continue water flood and gas cap injections into the
reservoir, which will benefit the line by allowing the pressure
to be maintained and build up. When production is resumed, he
said, it is possible that one or more wells may not come back on
line in the same fashion that they were producing before;
however, Commissioner Norman said, AOGCC does not think that
will result in any decrease in ultimate recovery, because other
wells can be utilized to produce the same reserves or the
operator can perform "workovers" to access the reserve.
COMMISSIONER NORMAN said another potential risk identified
relates to the timing synergies of oil production and gas
pipeline startup. He explained, "Producing gas from Prudhoe Bay
while there's still oil in the ground to be reproduced will put
ultimate oil production at risk." He said the commission has
previously corresponded with the legislature in this regard, and
he said he believes that that type of reservoir behavior is
understood: the gas represents energy in the reservoir. The
more oil that can be recovered before beginning major gas sales
from the reservoir, he said, the less oil is at risk when large-
scale gas off-take begins in the future. He stated, "Obviously
this particular slow-down delays rather than accelerates
recovery of oil, and thus could possibly have some negative
impact upon total ultimate recovery."
COMMISSIONER NORMAN said a greater concern is to identify the
cause of the leaks and to have everyone involved working to
ensure this is not repeated. He said there are also safety
considerations related to the integrity of the well. The AOGCC,
through its experience reacting to conservation-related mishaps,
has procedures in place dictating how wells are to be restarted
and pressures monitored. He predicted, "As long as the
operator, upon restart of each well and bringing pads into
operation, follows these procedures, we do not believe restart
will be a problem."
1:21:41 PM
SENATOR ELTON raised the issue that it has been reported over
the years that Alaska does not have as many inspectors working
in the fields as other jurisdictions that produce much less oil.
He asked if that is still the case and what the appropriate
level of regulatory staff would be.
MR. NORMAN responded that the commission believes Alaska has the
resources to do the job. He said, "An adequate number of
inspectors would be the number needed to ensure compliance with
Alaska's regulations." He said currently, 100 percent of the
time there is at least one inspector on the slope; 75 percent of
the time there are two inspectors. He mentioned inspectors that
work out of Kenai, and said the total number of inspectors is
five. He admitted that it would be nice to have more
inspectors; however, he emphasized the high level of experience,
competency, and dedication that each of the inspectors exhibit.
Commissioner said if time permitted, he could offer examples of
a number of enforcement actions that have resulted from the
careful oversight of those inspectors.
SENATOR ELTON indicated that he would like the commissioner to
supply that information to the committee members. He noted that
it has also been reported that the inspectors do not perform
surprise inspections, but rather schedule inspection times with
the oil companies. He asked if that was and is still true.
COMMISSIONER NORMAN said generally the inspectors schedule with
the companies because the inspection is for a particular
purpose; however, he pointed out that there have been times when
inspectors were at a site for one purpose and "picked up a
violation on other things." He said often inspectors witness
tests done on safety valve system and blowout prevention
equipment, for example.
SENATOR ELTON said he has been told that Louisiana does surprise
inspections on offshore oil rigs. He asked if the standard that
Commissioner Norman described is considered the standard in
other oil producing regimes.
COMMISSIONER NORMAN answered yes. He revealed that the reason
he can answer thus is that within the past year he had a tour as
the national chair of the Interstate Oil & Gas Conservation
Commission and had the chance to interact with all the other
regulatory agencies. Notwithstanding that, he said he doesn't
want to leave the impression that surprise inspections are not
done. He said he meant to indicate that very often the
inspections are for the purpose of witnessing testing of
particular pieces of equipment, which requires the inspector to
be on site at a particular time.
1:26:34 PM
SENATOR ELTON stated his understanding of Commissioner Norman's
answer that oftentimes inspectors are present when the industry
is doing tests. He questioned whether the inspectors set a time
with the industry, or if they wait to be invited when the
testing is done.
1:27:12 PM
CATHY P. FOERSTER, Commissioner, Alaska Oil & Gas Conservation
Commission, Department of Administration, said typically "we
invite ourselves and we don't give a lot of notice." She said
the right personnel has to be on location to do the testing of
specific equipment. Typically, she explained, an inspector will
call a pad operator and say, for example, "I intent to be at
drill site three this afternoon to witness safety valve system
tests on all the wells on that pad; have the appropriate person
there to conduct those tests." She pointed out that the
inspectors test equipment that has to run all the time, so it's
not as if the industry would not have it operable and then
quickly turn it on when the inspector shows up; therefore, it is
not necessary to have surprise inspections.
SENATOR DYSON asked if the inspectors witness the calibration of
meters.
COMMISSIONER NORMAN answered that's correct.
SENATOR DYSON asked, "If there was a discrepancy between meters
that might have detected a leak ... and if the operator was
ignoring it, how would you know?"
COMMISSIONER FOERSTER explained that the only meters over which
AOGCC has authority are the custody transfer meters, so if there
are meters on either side of a leak that aren't adequately
calibrated to be together, the commission would not have the
information to detect that. She explained, "What we do is we
prove the oil meters; we get an oil sample of a set size that we
can accurately determine, and then we run it through the meter
to make sure that the meter measures the volume that we know
we're sending through. But we only do that for the custody
transfer meters."
SENATOR DYSON asked what other kind of equipment the inspectors
look at.
COMMISSIONER NORMAN replied, "We look at virtually the entire
operation." He said, in drilling, pressures far greater than
"anything we're talking about with this particular transit line"
are encountered. He offered examples ranging from 100 pounds
per square inch (psi) to 10,000 psi, and he emphasized the
importance of being able to monitor those pressures. He spoke
of gauges and hydrogen sulphide measures that are used. He said
inspections are made to ensure that the integrity of the well is
intact and that there are at least two competent barriers "that
will prevent whatever that produced or injected substance is
from escaping in any way into the environment that could be
harmful." He indicated that the following categories fall under
the responsibility of AOGCC: all equipment, the subsurface
strata, the reservoirs, the destination of substances when
injected, the protection of fresh water, and the underground
injection control program.
1:31:54 PM
CO-CHAIR RAMRAS directed attention to the last bulleted point on
page 3 of Commissioner Norman's written testimony, which read as
follows:
In order for production to be restored in a timely
manner, there will likely be modifications that will
require our involvement as the operator continues to
pig lines and to look for alternate routes for the
transportation of EOA oil.
CO-CHAIR RAMRAS questioned how a numerical value can be
determined regarding loss of revenue. He indicated that it must
be determined whether the oil will be recaptured in 2007 or
2008, or perhaps will go "to the end of the train in 2030." If
the latter, he said, the oil may be at risk, because by then,
presumably, "we will be bringing gas out and, potentially, those
barrels that could have been recovered right now will be lost
forever."
COMMISSIONER NORMAN suggested that that question could be
answered more fully later. Notwithstanding that, he proffered
that a period of lost production is anticipated. However, when
production begins again, it is expected to be "at a higher level
or flush as you used." Then, he said, those lines should begin
to converge and should "return to normal." He continued:
Now, exactly when or how, we don't know yet in the
fullness of time; but insofar as damages to the state
are concerned, it will depend upon whether we have
enhanced - I'll use the word enhanced or flushed -
production whenever the field starts up, that will
offset this.
COMMISSIONER NORMAN pointed out that his comments relate
strictly to the physical resource recovered; however, he noted
that there also is the time value of money with which AOGCC
normally does not concern itself.
1:36:22 PM
COMMISSIONER FOERSTER said that the operator has very
sophisticated tools for creating estimated production forecasts,
and the state uses that data in conjunction with its own
prediction tools. She related, "So, we can compare what we have
predicted with what we actually see ... to see if the losses are
recovered."
CO-CHAIR RAMRAS referred to page 5 of the aforementioned handout
and read [original punctuation provided]:
This incident is a wake up call of all of us in
Alaska. We face declining production and aging
infrastructure. This event leaves no question that
there is a need for State regulation of the design,
construction, installation, operation and maintenance
of critical oil and gas infrastructure in Alaska.
CO-CHAIR RAMRAS asked whether it is possible to ask the AOGCC to
pass some guidelines prior to January, so that the legislature
can implement precisely what Commissioner Norman is
recommending. He stated his concern about the reputation of the
State of Alaska, as well as the protection of the environment
and income stream. He opined that those three issues are
clearly the most important ones on the table.
COMMISSIONER NORMAN surmised that after some time, "things will
be back to normal" He predicted, "The greatest harm is going to
be done to perception, particularly to those not in Alaska.
Alaskans will digest this and ... move on, and perhaps everyone
will be better for it." With regard to Co-Chair Ramras'
specific question, he noted that currently there are other
agencies with statutory jurisdiction over pipelines, for
example, DEC, DNR, and the RCA. He suggested that if, after
listening to the testimony, the legislature's decision is that
AOGCC should be tasked, then the commission would be willing to
accept that; however, he said he is not convinced at this time
that AOGCC is the best agency to be the lead in that regard.
CO-CHAIR SAMUELS asked how long it would take before the state
gets its money back on a net present value basis.
COMMISSIONER FOERSTER replied that she does not know.
CO-CHAIR SAMUELS asked if the state has access to the company's
own production forecast.
COMMISSIONER FOERSTER replied that it is information that could
be requested.
CO-CHAIR SAMUELS asked if the shutdown will result in a steeper
decline curve because of reservoir engineering.
COMMISSIONER FOERSTER said that is not expected.
CO-CHAIR SAMUELS asked, "How will you know when you've equalized
what would have been? ... Is it more an economic question for
[the Department of] Revenue, or is it going to more of an
engineering-type question, or is it a strictly a legal question
that the courts will decide?"
COMMISSIONER NORMAN responded that there have been studies and
extensive "modeling" done of the entire reservoir; therefore, it
is possible to project some trend lines, "ignoring this event,"
and then compare the event with those trend lines to figure out
the differences and draw some conclusions "with some level of
scientific and engineering confidence," to say, "This is where
we would have been but for this event, and this is where we are
because of this event."
The committee took an at-ease from 1:43:08 PM to 1:46:33 PM.
^DEPARTMENT OF REVENUE
1:46:45 PM
BILL CORBUS, Commissioner, Department of Revenue, offered a
presentation outlining the potential financial impacts to the
state resulting from the Prudhoe Bay shut down. He reminded the
committee that his presentation is based on assumptions and the
scene continues to change. He began by informing the committee
that the state's revenues consist of five components: royalties
on oil and gas; severance tax on oil and gas, property taxes on
oil and gas, corporate income taxes on oil and gas, and non-oil
revenues consisting of corporate income tax on nonpetroleum
corporations and a myriad of other taxes and fees. He directed
attention to the fiscal year 2007 (FY 07) budget as presented on
slide 3 of his PowerPoint presentation. The revenues in that
budget, he noted, were based on an assumption that oil would be
produced at the rate of 825,000 barrels a day, with an average
price of oil for the fiscal year of $53.60, and severance taxes
would be based on the old economic limit factor (ELF) system.
He said the presentation will focus on two different production
and price scenarios in an attempt to specify the potential loss
of revenue to the state under the various scenarios and the
effect on the day-to-day, monthly, and yearly budget. He said
the presentation would also offer a look at the state's
liquidity.
1:50:36 PM
COMMISSIONER CORBUS turned attention to the slide entitled ANS
Crude Oil & natural gas liquids (NGLs) Production. On an
annualized basis, if 825,000 barrels a day were produced for 365
days of a year, the total would amount to about 300 million
barrels. If Prudhoe Bay were to produce roughly 200,000 barrels
a day, the total loss would be approximately 69 million barrels
for August through June, or 23 percent of the total budgeted
production. The second scenario, he said, is considerably more
optimistic; it assumes that for the month of August, Prudhoe Bay
will produce about 200,000 a day and will ramp up to normal
production level by the end of December. Under that set of
assumptions, total production will be down by about 21 million
barrels for the year and total production will be off by about 7
percent of the total budgeted production.
1:53:47 PM
MR. CORBUS moved on to a PowerPoint slide that shows crude oil
prices. He characterized the graph as having an upward trend,
but with some spikes along the way. Those spikes, he explained,
correspond either with major international events or changes in
the supply. He noted that the day after Prudhoe Bay's
announcement that its production would close down, the price of
crude oil rose $2.22 [per barrel]. Yesterday, he said, the West
Texas Intermediate (WTI) price of oil froze at $70.06. He said
the budget assumed a price of $53.60. He explained, "When we're
talking about the price we assume, that is for the price for ...
Alaska North Slope (ANS) oil delivered to the West Coast." He
clarified that that is not the same price as WTI shown on the
graph. He stated that the difference between the WTI and [the
ANS] is called the differential, and in recent times, [ANS]
"North Slope oil" has been about $1.30 below WTI.
COMMISSIONER CORBUS said fortunately FY 07 is off to a good
start; for the first two months of the fiscal year, the August
average price of West Coast oil has been $71.31, which is
approximately $18,31 ahead of budget.
COMMISSIONER CORBUS said the second price scenario reviews the
future. He turned to the PowerPoint slide showing a spreadsheet
of WTI Futures Prices. The spreadsheet, he explained, places
the value for contracts for oil that will be delivered in the
future. He pointed out that a column on the right of the slide
shows that of the total transactions occurring for future
periods "falls dramatically off after the month of December."
He said the futures also indicate a higher price for fuel in
future. Commissioner Corbus said the department is somewhat
nervous about using this as a method of projecting the price of
oil, because so few transactions are occurring beyond September
to give comfort in regard to the value of oil. He said the
state has a better track record in predicting oil prices than
the futures market does. He then highlighted the next
PowerPoint slide regarding ANS Crude Oil Price Scenarios -
futures prices compared to revenue sources book prices.
2:00:53 PM
COMMISSIONER CORBUS continued his presentation in regard to
comparisons. He referred to the cumulative losses due to the
Prudhoe Bay Unit shutdown as illustrated on slide 13 of the
PowerPoint. Assuming a pessimistic scenario of 200,000 barrel a
day production throughout the remainder of the year, the futures
price shows a revenue loss of about $2 billion a year, while the
revenue source book price shows a loss of approximately $1.1
billion. Using the more optimistic scenario of 400,000 barrels
a day production, the futures prices show a loss to the state of
approximately $815 million, whereas the amount lost using the
revenue source book would be $460 million. He noted that the
following assumption had to be made in calculating the severance
taxes under the new production profits tax (PPT) system: an
investment for FY 07 of $1.45 billion; an average operating cost
of $4.00-plus per barrel; and a disallowance for heavy
maintenance of 30 cents per barrel, which would result in about
$80 million that won't be included as capital expenditures.
2:03:36 PM
COMMISSIONER CORBUS addressed Co-Chair Ramras' earlier question
as to when the lost production will occur and whether, when the
oil is produced, it will be produced at the same favorable
market prices as today or be lower or higher than today's market
prices. He then directed the committee's attention to the
PowerPoint slide showing the monthly cash flow versus the
budget. He noted that for the months of September through
January, the cash flow projections were based on severance taxes
computed on the old ELF-based system. Beginning in February, he
said, severance taxes and payments will be based on the estimate
using the PPT methodology of tax rates. He stated, "And then
for the month of March, there's going to be a true up to cover
the period from the effective date through ... December - the
difference between the ELF-based system and the PPT system, [a]
net profit system." He said there is a major influx of cash.
The next slide shows the same analysis assuming the optimistic
production forecast, in which an August through December ramp up
from 200,000 to 400,000 barrels a day results in the same
circumstances in which there is a favorable cash flow from
February to the end of the year reflecting the impact of the new
PPT taxes. The futures prices at year's end, under the
pessimistic production scenario, he summarized, would still
result in the state being about $2 billion ahead of budget;
however, if successful in getting production back up to normal
by the end of December, that number would be about $3.2 billion.
He stated:
Under the assumptions that we will return to the
budgeted price of $53.60, we find that we will still
have a budget surplus for either the optimistic or
pessimistic production forecast. Now, this is indeed
a favorable picture just from strictly the cash flow
point of view. We must keep in mind that this is
greatly impacted, at least in the case of the $53.60
scenario, by the fact that we have a good head start
in cash flow for the months of July and August, due to
the fact that prices are quite a bit higher than
projected. And in all cases, the impact of the PPT is
very substantial compared to what we had assumed when
the budget was prepared and adopted last ... spring.
2:10:01 PM
COMMISSIONER CORBUS moved on to the state's liquidity situation.
He reminded the committees of the existence of the
constitutional budget reserve fund, which currently sums $2.3
billion. He said the state has the authority to borrow from
that fund month to month, but must pay it back before the end of
the fiscal year. He said there is also the permanent fund
earnings reserve fund in the amount of $2.5 billion, but it
can't be accessed without the legislature's approval.
Commissioner Corbus concluded that regardless of the
assumptions, the loss to the state is substantial. However, due
to the higher oil prices for the fiscal year to date and
incremental revenues from the PPT, it's unlikely that the state
will have to cut spending to [avoid] a deficit. Moreover, the
state has substantial reserves to address cash flow timing
issues and, with legislative approval, to cover a deficit.
2:13:16 PM
CO-CHAIR RAMRAS asked if, prior to the shut down of Prudhoe Bay,
the production of 825,000 barrel-a-day production was on track.
COMMISSIONER CORBUS replied that production was below 825,000
barrels; however, generally speaking, production tends to be
lower in summer and catch up in the winter.
2:13:56 PM
SENATOR ELTON inquired as to the magnitude of what BP will be
able to write off because of "the investment that we now
recognize as needed to correct the problem."
COMMISSIONER CORBUS said that the department doesn't have any
information with regard to the cost of the repairs. He said the
department assumes investments of $1.45 million, which is higher
than was assumed during all the discussions previously held on
the PPT. He said the department determined that with the higher
oil prices, there was an incentive to increase the investment
and take advantage of trying to hold taxes down. He mentioned
statutory provisions for disallowance for 30 cents per barrel,
which are to cover situations such as the present. It turns out
that $80 million will be disallowed, whatever the cost of making
the repairs.
2:17:03 PM
^COMMISSIONER MENGE, CABINET TEAM LEADER
MICHAEL MENGE, Commissioner, Department of Natural Resources
(DNR), said the department is the lease manager and draws its
ultimate authority for regulation from the leases. He explained
that there is a patchwork of regulatory authority - federal,
state, and local - but ultimately DNR, by virtue of the lease
and the right of way, has the ability to exercise any necessary
authority to exercise the lease. Currently, he relayed, the
appointed task force is working on six topics: operation of the
Western Operating Area; operation of the Eastern Operating Area;
reduced flow impacts to the Trans-Alaska Pipeline System;
impacts to other Prudhoe Bay Unit operations, other fields, and
in-state refineries; a transit pipeline replacement plan; and
the implementation of a system integrity oversight. He said one
of the first steps the department will take is to measure the
effectiveness of the quality control program, including spot
checks, which allows the effective gauging of the entire system
with a minimal amount of resource and personnel. He specified
that it is important to decide what to monitor, to ensure the
quality control program of each company is effective in
maintaining a safe operating system, and to carry out quality
control spot checks.
2:27:06 PM
COMMISSIONER MENGE provided a flow chart with regard to where
the aforementioned entity will reside. He said the organization
will be co-located with DNR's joint pipeline office, because of
the expertise that is already available there. He expressed
pride in the quality control program that the government and
Alyeska assembled over the last decade, characterizing it as
probably the best in the world outside of the nuclear industry.
2:28:19 PM
CHAIR WAGONER requested additional copies of the report be sent
to the committee.
COMMISSIONER MENGE obliged, but noted that they are also
available online.
^DEPARTMENT OF ENVIRONMENTAL CONSERVATION
2:28:50 PM
KURT FREDRIKSSON, Commissioner, Department of Environmental
Conservation (DEC), referred to a handout which begins with the
six elements of a good regulatory program: unambiguous
statutory authority; documented basis for concern; protective
standards; rational regulatory scheme; documented compliance;
and enforcement. The department's broad authority includes not
only crude oil but also noncrude oil activities, as shown on the
next page of the handout. He stated that although spill
prevention is the topic of the day, it is important for the
committee to understand DEC's role in oil spill response. He
echoed Attorney General Marquez' remark that any person causing
an oil spill must immediately contain and clean up that spill to
the satisfaction of DEC on behalf of the state. Regarding both
the GC2 and Flow Station 2 spill incidents, Mr. Fredrickson said
BP "and others" responded in an exemplary manner; the spills
were contained, oil was removed, damage to health and wildlife
was prevented, and the impact to the environment was minimized.
Moreover, Mr. Fredriksson said DEC expects that the area
impacted will be fully restored within the next year or two.
COMMISSIONER FREDRIKSSON stated that DEC pursues its goals for
spill prevention response "through development of regulations in
a disciplined manner, using a risk-based approach based upon a
documented basis of concern. He listed the following
considerations: historical spill data; lack of other federal or
state agency regulation of the facility or operation; request by
the public or other government agencies to regulate a facility
of operations; and the environmental risk posed by a particular
type of facility or operation. He said there are many different
types of pipelines on the North Slope. He said leak detection
for crude oil transit lines was first imposed by EPA in 1992,
and those same requirements remain on the books today. In 1999,
DEC identified pipeline integrity associated with the aging
infrastructure of Prudhoe Bay. He explained, "That occurred
when BP and ARCO merged, and there was a commitment by industry
to extend the life of the Prudhoe Bay field." He reminded the
committee that BP's policy is to invest heavily in the recovery
of the oil and to extend the life of the Prudhoe Bay field. He
continued:
The initial steps to manage the risk posed by the
aging infrastructure of the North Slope included a
commitment imbedded in the North Slope Charter
Agreement to develop a performance management program
for corrosion monitoring, maintenance, and inspection,
and evaluate if a documented basis of concern existed
for further regulation.
COMMISSIONER FREDRIKSSON noted that the handout contains the
actual language taken from the charter agreement, with respect
to corrosion. At the bottom of the page, he pointed out, the
following additional environmental commitments are listed:
cleanup of abandoned sites; cleanup of abandoned empty barrels;
cleanup of existing BP and ARCO sites; closure of inactive
reserve pits; commitment to North Slope spill response; renewed
commitment to the Oil Pollution Act of 1990; replacement
vessels; and marine operations. He noted that he provided a
copy of all of the reports required under the charter agreement,
including annual reports that are then reviewed by the third-
party consultant, Kaufman Engineers.
2:36:32 PM
COMMISSIONER FREDRIKSSON stated:
Subsequent spill data and other information provided
to DEC under the charter agreement indicated a
documented basis for concern with respect to further
regulation of the flow lines. The documented basis
for concern led DEC to increase its regulatory
corrosion control requirements in response to an
unacceptable increase in the transit spills from flow
lines. Following two years of study and public
review, this last month I adopted regulations that
will impose additional corrosion control requirements
on the flow lines.
COMMISSIONER FREDRIKSSON emphasized the need to realize that
this matter is complicated; state resources must be matched to
the appropriate level of oversight. He explained that expanded
oversight and more in-depth analysis requires more engineering
expertise, technical training, and technical consultants.
Following the GC2 spill of March 2006, DEC joined DNR and the
OGCC to create an arctic pipeline technology team to coordinate
the state's pipeline priority oversights. The purpose and
structure of the team, he said, is described in the memorandum
of agreement, which is shown as the last part of the DEC
handout. He said Commissioner Menge described DEC's plan for
improving the state's system integrity oversight, to be built
upon the interagency coordination of the pipeline technology
team and the joint pipeline office model. Moreover, he said,
DEC has enlisted the support of North Slope operators to expand
its technical knowledge of pipeline corrosion control systems;
both BP and ConocoPhillips Alaska, Inc. have provided funding to
conduct a pipeline technology conference in Alaska to examine
the latest technology and best practices for corrosion
management, monitoring inspection, and leak detection for oil
pipelines operating in arctic conditions.
2:38:51 PM
SENATOR ELTON said it has been easy to point the finger at BP
over the last few weeks, and there has not been a lot of focus
on the issue of the state's responsibility in ensuring that the
proper regulatory efforts are being made. He recalled a
statement made by Mr. Fredriksson that transit lines contain oil
only - no water. Conversely, he recollected that there had been
previous testimony by BP that there is water in the transit
lines.
COMMISSIONER FREDRIKSSON said he believes that there is water
within the transit lines, albeit a small amount compared to the
flow lines that contain a potentially large volume of water and
gas.
SENATOR ELTON asked Mr. Fredriksson to confirm that regarding
the issue of pipeline corrosion, the Kauffman reports focused on
the flow lines rather than the transit lines.
COMMISSIONER FREDRIKSSON specified that the Kauffman reports are
a review of the BP and ConocoPhillips Alaska, Inc. reports
submitted by the companies. He stated his belief that after its
review of the oil companies' information, Kauffman advised DEC
that the corrosion problem was presenting itself in the flow
line "to a much greater extent than we were lead to believe with
respect to the transit lines." In response to a follow-up
question, he said he thinks DEC did independent analysis of the
data that came from Kauffman.
2:42:31 PM
SENATOR ELTON related his understanding that until 1985, there
were DEC regulators stationed in Prudhoe Bay. He asked if there
have been any people from DEC stationed on the North Slope
subsequent to that time.
COMMISSIONER FREDRIKSSON replied yes. He said DEC, DNR, and
perhaps staff from the Alaska Department of Fish & Game have
staff in a joint office located on the North Slope.
SENATOR ELTON asked if the responsibility of the staff on the
slope is to perform permit reviews or act as "cops in the
field."
COMMISSIONER MENGE explained that the DNR staff on the North
Slope are essentially permit monitors; they look at the various
permits, authorizations, leases, and right-of-ways, and then
focus on stipulations related to a best interest-finding
process. To date, he said, that staff has primarily ensured
that all stipulations [are followed].
COMMISSIONER FREDRIKSSON said that much the same applies as it
relates to DEC staff on the North Slope; they are primarily
there for inspection purposes.
2:44:48 PM
SENATOR ELTON said during his search online, he was struck by
comments that BP employees had made regarding maintenance that
implicated both employee and environmental safety. He asked
what DEC's response was in reading newspaper articles about the
spill and BP employees' concerns about corrosion and safety.
COMMISSIONER FREDRIKSSON said many of those issues have been
brought to the attention of DEC by Charles Hamel in Washington,
D.C. He said he has also received complaints from individuals
in Alaska, but it is sometimes difficult to get more information
from people if they have concerns related to confidentiality,
even though DEC ensures its own confidentiality. He said DEC
takes that feedback seriously and not only pursues information,
but also lets the person who brought it know what was
discovered.
2:47:31 PM
SENATOR ELTON requested a list showing the chain of command of
on-site staff. Furthermore, he said he would like to know what
percentage of the state jobs on the North Slope consists of
permit review and what percentage consists of doing the
necessary inspections. He also inquired as to what the
department's request has been over the last five years to reach
the necessary level of compliance inspection and what the
results have been related to those requests.
COMMISSIONER FREDRIKSSON agreed to provide that information. He
related that he is proud that, particularly in the area of water
and air, DEC has actually increased its commitment "in
measurable terms of staff."
SENATOR ELTON specified that he is more concerned with the
effort in the Prudhoe Bay Unit, as compared to air quality in
Dutch Harbor, for example.
COMMISSIONER FREDRIKSSON noted that there have been concerns
about air quality on the North Slope, and he reiterated that he
would provide Senator Elton with the requested information.
2:50:18 PM
CHAIR WAGONER requested information as to which state and
federal agencies are responsible for what programs on the North
Slope.
COMMISSIONER MENGE agreed to provide that information. He
reiterated the concept of the patchwork of authority in the
area, saying that some people on the North Slope have a lot of
authority, while others have implied authority, and still others
have authority "by virtue of assumption of programs." He said
the first thing the department will do is identify all the state
and federal agencies with regulatory authority, and then it will
outline the scope of that authority and how it is best
implemented. He said the concept of a coordinated state and
federal oversight program is to first identify a problem, then
determine a procedure to remediate that problem, and third, to
sit down as a group and decide who has the best authority
available to exact change as quickly as possible. He concluded,
"But it all rests ... on our ability to understand exactly who
has authority to do what. ... It will be a living document
[such] that we can give you a broad overview, and then I promise
you over time it will develop into a very detailed assessment of
precisely which organization and individuals have what
authorities to exercise."
CHAIR WAGONER said the committees would consider hearing a
presentation from Commissioner Menge sometime in September.
COMMISSIONER MENGE said he would be happy to offer such a
presentation to help the committees understand how each of the
programs evolved and the control systems that are in place to
ensure that all the requirements of the state are met.
Furthermore, he noted that there is "a huge futuring component
in there." A lot of quality risk assessment is done. He
offered further details. He talked about risk analyses
regarding where the critical components in the system are, for
example, the central gas facility, transit lines, and the
central power plant. He said, "There are crucial components
within any engineering system, that if there is a problem with
them, then the entire house of cards comes down." He said the
state can never reach a point where it can say there will never
be another accident, but it can take extraordinary measures to
ensure it does everything in its power to anticipate where
accidents occur and what might be done to prevent them.
2:54:40 PM
ADJOURNMENT
There being no further business before the committee, the joint
meeting of the House and Senate Resources Standing Committees
was adjourned at 2:55 p.m.
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