Legislature(2011 - 2012)BARNES 124
01/20/2012 01:00 PM House RESOURCES
| Audio | Topic |
|---|---|
| Start | |
| Overview(s): Department of Natural Resources | |
| Overview(s): Shale Oil Task Force Update | |
| Adjourn |
* first hearing in first committee of referral
+ teleconferenced
= bill was previously heard/scheduled
+ teleconferenced
= bill was previously heard/scheduled
| + | TELECONFERENCED | ||
ALASKA STATE LEGISLATURE
HOUSE RESOURCES STANDING COMMITTEE
January 20, 2012
1:04 p.m.
MEMBERS PRESENT
Representative Eric Feige, Co-Chair
Representative Paul Seaton, Co-Chair
Representative Peggy Wilson, Vice Chair
Representative Alan Dick
Representative Neal Foster
Representative Bob Herron
Representative Cathy Engstrom Munoz
Representative Berta Gardner
Representative Scott Kawasaki
MEMBERS ABSENT
All members present
OTHER LEGISLATORS PRESENT
Representative Dan Saddler
Senator Cathy Giessel
COMMITTEE CALENDAR
OVERVIEW(S): DEPARTMENT OF NATURAL RESOURCES
- HEARD
OVERVIEW(S): SHALE OIL TASK FORCE UPDATE
- HEARD
PREVIOUS COMMITTEE ACTION
No previous action to record
WITNESS REGISTER
DANIEL S. SULLIVAN, Commissioner
Department of Natural Resources (DNR)
Anchorage, Alaska
POSITION STATEMENT: Provided a PowerPoint overview of the
Department of Natural Resources.
BRENT GOODRUM, Director
Division of Mining, Land and Water
Department of Natural Resources
Anchorage, Alaska
POSITION STATEMENT: During the Department of Natural Resources
overview, answered questions.
ED FOGELS, Deputy Commissioner
Department of Natural Resources
Anchorage, Alaska
POSITION STATEMENT: During the Department of Natural Resources
overview, answered questions.
WILLIAM BARRON, Director
Division of Oil & Gas
Department of Natural Resources
Anchorage, Alaska
POSITION STATEMENT: Provided a PowerPoint presentation on North
Slope shale oil development and an update on the Shale Oil Task
Force.
ACTION NARRATIVE
1:04:34 PM
CO-CHAIR ERIC FEIGE called the House Resources Standing
Committee meeting to order at 1:04 p.m. Representatives Dick,
Herron, Wilson, Gardner, Foster, Munoz, Kawasaki, Seaton, and
Feige were present at the call to order. Representative Sadler
and Senator Giessel were also present.
^OVERVIEW(S): Department of Natural Resources
OVERVIEW(S): Department of Natural Resources
1:04:54 PM
CO-CHAIR FEIGE announced that the first order of business would
be an overview of the Department of Natural Resources by
Commissioner Sullivan.
1:05:26 PM
DANIEL S. SULLIVAN, Commissioner, Department of Natural
Resources (DNR), stated that a key priority at DNR is to have a
strong, respectful, and responsive relationship with the
legislature and to show this all of DNR's directors are present
in person or online, as was done last year.
COMMISSIONER SULLIVAN noted that decisions on two important
cases before the Alaska Supreme Court were announced earlier
today: the Carlson case, which will have very important fiscal
ramifications for the state both on the case and going forward,
and the Nondalton case, which directly affects DNR. He said
these decisions are victories for the state and reflect the hard
work of the Department of Law as well as the cooperation of the
Alaska State Legislature, which was critical for the Carlson
case.
1:08:48 PM
COMMISSIONER SULLIVAN, in response to Representative P. Wilson,
explained that in the Carlson case the court reversed itself,
admitting that the previous decision to charge the state a
"super high" interest penalty was incorrect and should have been
lower. The savings on the remanded interest rate is a big deal
to the state not only on the case, but going forward. He then
directed attention to the January 1, 2012, op-ed he wrote for
the Fairbanks Daly News-Miner that highlights some of the issues
before the state.
1:11:13 PM
COMMISSIONER SULLIVAN then began his Power Point overview by
pointing out that DNR has revised its mission statement to
simplify it and to synchronize it more closely with what the
department thinks is the constitutional mandate [slide 4]. He
said DNR has also expanded its core services from two to four to
better reflect what all of the department's directors do.
COMMISSIONER SULLIVAN noted that the Department of Natural
Resources manages one of the largest portfolios in the world of
oil, gas, minerals, and renewables such as water, land, and
timber [slide 5]; only 17 countries in the world are larger than
the state of Alaska. Jumping ahead to slide 9, he directed
attention to the oil and gas estimates depicted for Alaska's
North Slope. He also noted that since the last legislative
session, the U.S. Geological Survey (USGS) came out with revised
Cook Inlet estimates, which are quite significant.
Additionally, Alaska has a huge mineral potential, ranking in
the top 10 in the world for important minerals [slide 10].
1:13:21 PM
COMMISSIONER SULLIVAN introduced DNR's two deputy commissioners,
Ed Fogels and Joe Balash, as well as the directors of the
department's seven divisions: Franci Havemeister, Director,
Division of Agriculture; Chris Maisch, Director, Division of
Forestry; Bob Swenson, Acting Director, Division of Geological &
Geophysical Surveys; Brent Goodrum, Director, Mining, Land and
Water; Bill Barron, Director, Division of Oil & Gas; Jean Davis,
Director, Division of Support Services; and Ben Ellis, Director,
Division of Parks & Outdoor Recreation. He then introduced the
following DNR staff members: Kurt Gibson, Director, Gas
Pipeline Office; Tom [Crafford], Director, Office of Project
Management & Permitting; and Mike Thompson, [State Pipeline
Coordinator], office of the State Pipeline Coordinator.
1:20:49 PM
REPRESENTATIVE HERRON recalled that at the committee's 1/18/12
overview of the Division of Agriculture, a witness said that he
could not speak highly enough of director Franci Havemeister and
the work she does. However, the witness didn't believe that was
the impression DNR held of the division. Therefore, the witness
expressed the desire for the Division of Agriculture to be moved
elsewhere. He inquired as to the commissioner's thoughts about
this testimony.
COMMISSIONER SULLIVAN allowed that it is very easy in DNR,
particularly in the commissioner's office, to focus solely on
oil and gas issues and sometimes minerals at the expense of all
the other divisions. He related that last year he committed the
commissioner's office to not do that. Although Ed Fogels has
gotten out to the communities very regularly in addition to
Franci doing a good job, he acknowledged there could be
improvement in terms of him "stepping up more." The
department's commitment is sincere, he continued, and while the
job has probably been half done the department is working on it.
1:23:48 PM
REPRESENTATIVE GARDNER asked if there is any foreseeable
opportunity to obtain the title to the school lands that were
promised at statehood.
COMMISSIONER SULLIVAN stated that he is not up to speed on that
issue, and therefore deferred to Mr. Goodrum.
BRENT GOODRUM, Director, Division of Mining, Land and Water,
Department of Natural Resources, offered to research the issue
and provide any information obtained to the committee.
REPRESENTATIVE GARDNER informed the committee that obtaining
title to the school lands is one of the priorities of the
statewide Parent Teacher Association. She explained that at
statehood, every state was promised grids 31 and 16 of every
community or the equivalent. The aforementioned hasn't occurred
in Alaska. She acknowledged that it takes some federal action
to release these titles.
1:25:19 PM
COMMISSIONER SULLIVAN remarked that the Division of Mining, Land
and Water has made good progress with the federal government in
terms of finalizing some of the issues related to the remaining
land selections with the federal government. He offered to
brief the committee on the land selections issues.
REPRESENTATIVE GARDNER related she has heard there is enough oil
on the North Slope to justify construction of a pipeline, if the
state didn't already have a pipeline. She asked if the
commissioner would concur, regardless of whether or not a
pipeline would be the best way to obtain it.
COMMISSIONER SULLIVAN acknowledged that the estimates are still
very significant. Governor Parnell has laid out his vision,
albeit ambitious, of 1 million barrels per day through the
Trans-Alaska Pipeline System (TAPS). With regard to whether
there are enough hydrocarbons on the North Slope to reach the
governor's vision, he opined that there are. Commissioner
Sullivan further opined that the North Slope is an area of
enormous promise.
REPRESENTATIVE P. WILSON also expressed interest in the issue of
obtaining title to school lands and the follow-up on that.
COMMISSIONER SULLIVAN agreed to get back to the committee on
that issue soon.
1:28:16 PM
REPRESENTATIVE MUNOZ requested that the commissioner speak to
the additional resources the legislature approved last year to
address the backlog of permitting.
COMMISSIONER SULLIVAN opined that addressing the backlog of
permitting was a great example of how the executive and
legislative branches came together to address an important
issue. The department is [reviewing] a strategy with regard to
a comprehensive permitting reform. As mentioned, last year the
governor's budget included an increment of $5-$6 million that
mostly went to the Division of Mining, Land and Water, which has
resulted in significant improvement. In fact, the division has
hired over 30 people, has chosen a system to revamp the
technical aspects of DNR's system, and has made a significant
dent in the backlog. Still, new permit applications are being
received.
MR. GOODRUM informed the committee that since July 1, about 31
employees have been hired and trained. During that time the
division has reduced the backlog by almost 20 percent. As of
December 30, 2011, there remain 2,095 authorizations to process,
which is a reduction of about 560 from July 1, 2011. The
division, he related, has reviewed better tools to provide
better visibility and transparency with the issue. In fact,
next month the division will begin working with IBM on a pilot
project to improve the process.
COMMISSIONER SULLIVAN interjected that although the division
still has a long way to [reduce the backlog and improve the
process]; it's being attacked from a number of different
directions.
1:31:53 PM
REPRESENTATIVE MUNOZ inquired as to whether DNR has the
opportunity to comment to the Alaska Energy Authority (AEA) on
the draft Southeast Alaska Integrated Resource Plan. She
further inquired as to what the plan may mean in terms of
mineral development in Southeast Alaska.
COMMISSIONER SULLIVAN indicated that he wasn't aware of the
aforementioned plan, but would review it.
REPRESENTATIVE MUNOZ related that one issue of concern is the
lack of consideration for existing energy loads for existing and
proposed mines. She clarified that the concern is that the
energy loads of existing and proposed mines aren't being
considered in the recommendations for investment or not.
COMMISSIONER SULLIVAN reiterated he would review the plan.
1:33:30 PM
CO-CHAIR SEATON turned attention to mariculture and the
permitting of shellfish farms. He related his understanding
that no longer will those with a ten-year transferrable permit
be able to apply and obtain a renewal in the ninth year of the
permit, rather in the tenth year one would have to reapply for a
brand new permit. The aforementioned change, he opined, will
cause severe disruption since the mariculture farmer won't know
whether he/she would have a farm or not. This change seems to
run counter to the commissioner's comments in relation to
permitting thus far, he pointed out. He asked whether DNR is
working on resolving the [change in permitting] internally or
does it require a statutory change.
COMMISSIONER SULLIVAN, with regard to the permitting reform,
emphasized that it's an ongoing process to make the system more
efficient. He mentioned that it's important for legislators to
make DNR aware what constituents are saying.
1:36:08 PM
ED FOGELS, Deputy Commissioner, Department of Natural Resources,
informed the committee that the department has been having
internal meetings regarding how to streamline and be more
efficient with the issuance of aquatic farming leases. He
acknowledged that under the current structure it has taken the
department a while to renew the leases. Although not optimal,
in the interim the department has been issuing land use permits
while the lease is being renewed. In part, the department is
reviewing the actual structure and statutes and regulations that
govern aquatic farming in order to determine if any changes can
be made at that point. Also, efforts with the backlog and the
streamlining of the process should help that situation. The
department, he related, is also reviewing the commercial
standard for geoduck farming to ensure it's a realistic
standard.
CO-CHAIR SEATON noted his appreciation of the department's
efforts and encouraged the department to keep the legislature
informed of its efforts with regard to aquatic farming.
MR. FOGELS clarified that DNR is reviewing the renewal
mechanism. He offered that one option could be a mechanism to
extend an existing lease while the renewal is being reviewed and
processed. He acknowledged that it is not optimal to have an
existing lease expire while it is being reviewed for renewal.
1:38:31 PM
CO-CHAIR SEATON then turned attention to the change in the
mission statement, which he characterized as "quite a different
direction." The past mission statement of DNR was: "To
develop, conserve, and enhance natural resources for present and
future Alaskans." However, the new mission statement says:
"Responsibly develop Alaska's resources consistent with public
interest." Co-Chair Seaton then pointed out that, in part, AS
37.07.014(a) says:
Responsibilities of the legislature.
(a) To carry out its legislative power under art.
II, sec. 1, Constitution of the State of Alaska, and
to promote results-based government, the legislature
shall issue a mission statement for each agency and
the desired results the agency should achieve.
CO-CHAIR SEATON noted that although the House Resources Standing
Committee has jurisdiction of this matter, it hasn't been
involved in DNR's change in mission statement. He then asked if
the change in mission statement was done solely through the
executive branch or was the legislature involved in some manner.
COMMISSIONER SULLIVAN answered that to his knowledge the
legislature was not involved in the change in mission statement.
The change, he stated, was the department's effort to streamline
[the language]. The language "Responsibly and within the public
interest" attempts to more succinctly capture the future
generation issues and focus on the [department's] constitutional
mandate. Commissioner Sullivan said that he was unaware of the
constitutional statute regarding mission statements, but said he
is willing to work with the committee.
1:41:40 PM
CO-CHAIR FEIGE returned to the renewal of permits and added that
there are all kinds of commercial use permits for which a
mechanism to make the renewal process smoother would be
[desirable]. Similarly, he expressed interest for designated
department staff to have the authority to extend permits and
such that are being reviewed when they are about to expire.
COMMISSIONER SULLIVAN, regarding permits, related that the
department has been cognizant of the "basis of where they
exist." Therefore, a direct mandate in statute is clear and
[would cause] DNR to return to the legislature regarding the
change whereas statutory provisions that request the agency make
regulations is a looser connection. Furthermore, agencies also
promulgate regulations within the authority granted by the
legislature, although not specifically connected by a statutory
provision. The department will be reviewing the aforementioned,
he said.
1:44:38 PM
COMMISSIONER SULLIVAN, returning to his presentation, directed
attention to slide 12 entitled "TAPS Arresting Throughput
Decline." Although the declining oil through TAPS has been a
critical issue for decades, only recently has the federal
government recognized it as a national issue. The notice by the
federal government is positive and he attributed it to the
department's actions, including op-ed pieces, articles,
testimony, and meetings with the federal government.
Commissioner Sullivan opined that the declining throughput in
TAPS is the number one economic issue on which the state should
be focused, as was related in the governor's recent "State of
the State" speech. He reminded the committee that at the end of
last session, the governor set out a vision and strategy to
implement the vision. Over the last year, DNR has worked
relentlessly to realize the governor's vision and implement his
strategy. The work of DNR and other agencies falls into one of
these five elements outlined on slide 13. This strategy is
starting to bear fruit, he opined. In fact, he stated that this
winter looks to be a busy exploration season, as evidenced by
slide 14 which provides a snapshot of North Slope exploration.
Still, one must remember that even when a large quantity of oil
is found it takes a long time to develop it.
COMMISSIONER SULLIVAN moved on to slide 15 regarding the success
of the North Slope lease sale. He pointed out that the December
North Slope lease sale was extended and DNR made the pitch
regarding why they should bid on acreage in the North Slope to
several companies, which was also done to some extent for Cook
Inlet as well. He noted that DNR coordinated closely with the
federal government in order that the state's sale would be the
same day as the National Petroleum Reserve-Alaska (NPR-A) lease
sale. The aforementioned had a positive impact as it resulted
in companies bidding in both the state and federal areas, which
he opined was beneficial.
1:50:55 PM
REPRESENTATIVE KAWASAKI asked whether DNR has had discussions
with any of the [bidders] regarding how the oil and gas gets to
the pipeline into the main Prudhoe Bay field.
COMMISSIONER SULLIVAN suggested that if significant quantities
of oil were found, the focus of any of the companies would be
[to utilize] state land to get it into TAPS. In further
response to Representative Kawasaki, Commissioner Sullivan said
that [the discussions] with the companies mostly focus on the
exploration work as the companies tend to view these [bids] in
very distinct phases. If oil is discovered, the companies then
perform calculations to determine whether to proceed with
development. Therefore, there hasn't been much discussion
regarding development with any of these companies while they are
in the exploration phase. Upon finding oil, the decision of if
and when to develop it relates to the tax issue.
1:53:27 PM
REPRESENTATIVE KAWASAKI mentioned the bridge over the Colville
River, which after many years of discussion and process, finally
has permits in place. The Colville River Bridge is an example
of plans in the works. He asked if Commissioner Sullivan means
to say that the state doesn't have any plans past exploration.
He further asked if any company has approached the department
regarding roads that will be necessary for future projects.
COMMISSIONER SULLIVAN answered that in terms of roads the state
is considering a number of areas. For instance, the road to
Umiat is part of the five-part strategy. Furthermore, roads-to-
resources tried to coordinate areas where there are high
prospective oil and gas aspects and where infrastructure would
be required. He noted that the stated worked tirelessly on the
CD-5 [Alpine Satellite Development Plan], but the holdup has
been the federal government, which finally reversed itself. He
mentioned that DNR played an important role in that reversal.
1:56:08 PM
CO-CHAIR SEATON, regarding the roads issue, related his
understanding that on the North Slope they have been operating
on a policy of ice roads during exploration. However, testimony
in November 2011 indicated that may not have been most effective
in some areas. He inquired as to whether DNR has the ability to
decide that a gravel road that is traveled by more than one
company makes more sense than an ice road. Or, will a gravel
road only be allowed after there are proven reserves and the
company is applying for development, he asked.
COMMISSIONER SULLIVAN reminded the committee that ice roads have
typically been utilized during the exploration phase in order to
leave a minimum footprint. However, the issue is in regard to
balancing the minimal impact with the costs in an area where the
cost of doing business is very high compared to other
hydrocarbon basins. With regard to whether there is a way to
extend the exploration phase beyond the current three to four
months [when ice roads can be utilized] is being reviewed by
DNR. He offered to get back to the committee on the matter of
whether the use of ice roads is statutory, regulatory, or a best
practice requirement.
CO-CHAIR SEATON remarked that it would be advisable for the
committee to hold hearings on this matter in order to remove
some of the barriers to development.
COMMISSIONER SULLIVAN related that he has frequently heard that
crews are hired for four months in Alaska because that's the
extent of the exploration season. Therefore, even the
exploration period is very costly.
CO-CHAIR FEIGE highlighted that much of the exploration is
heavily incentivized, whereby the state is contributing a fair
amount of tax relief or outright cash. He opined that when the
ice road melts it's the state's/people's money that is soaking
into the ground because incentives were used to build it.
However, if [gravel roads] were utilized, the state/people would
experience more benefits for the funds the state provides to
incentivize the exploration.
COMMISSIONER SULLIVAN said that the roads-to-resources concept
considers that. For example, there has already been a focus on
the road to Umiat.
2:02:00 PM
CO-CHAIR SEATON opined that in this venue those kinds of
conversations with local communities can be held. He pointed
out that facility access is another issue. He then asked
whether DNR is working on facility access issues with existing
companies or is it only a commercial term between existing TAPS
and new players.
COMMISSIONER SULLIVAN related that much of the shale oil task
force work has been focused on conceptualizing shared key
infrastructure, in terms of roads or other aspects. However,
Co-Chair Seaton's question speaks to the present and the future.
Although DNR has continually reviewed facilities' access issues,
such issues have typically played out on the North Slope through
the various entities and private sector companies.
2:04:28 PM
CO-CHAIR SEATON highlighted that the state is incentivizing
upstream costs to a large extent, particularly with high oil
prices. In fact, at times the state is paying as much as 90
percent of the entire cost for the facilities. Therefore, he
wanted to ensure that DNR is reviewing the access that is
provided from the large state investment into the facilities.
REPRESENTATIVE P. WILSON commented that sometimes the state
implements things to help that don't help.
COMMISSIONER SULLIVAN opined that there is no one who doesn't
want to incentivize oil production and put more oil in the
pipeline, it's just a matter of how to do so while avoiding
policies with unintended and negative consequences.
2:07:05 PM
COMMISSIONER SULLIVAN, returning to his presentation and slide
15, returned to his discussion of the December 2011 lease sale.
During that lease sale, DNR tried to attract a diverse group of
investors. The aforementioned was accomplished to some degree,
he opined. Although the state has made a good start, it's far
from the goal of turning around the TAPS throughput.
2:08:12 PM
WILLIAM BARRON, Director, Division of Oil & Gas, Department of
Natural Resources, in response to Co-Chair Feige, answered that
Royale Energy is an independent company from California that
specializes in shale oil and gas development.
COMMISSIONER SULLIVAN remarked that sometimes having the small,
nimble companies is as useful as having the [large] major
companies.
2:09:03 PM
COMMISSIONER SULLIVAN, moving on to slide 16, identified the
significant activity in Cook Inlet, including a combination of a
new USGS study and a state lease sale. The recent Cook Inlet
activity includes a diverse group of companies. He credited the
activity in Cook Inlet to the quite aggressive, competitive tax
and investment incentives available. The department, he
related, has worked very hard at balancing exploration and
safety.
2:10:49 PM
REPRESENTATIVE KAWASAKI directed attention to slide 16 and the
USGS estimates for Cook Inlet. He inquired as to when DNR will
know whether the estimated undiscovered volumes of hydrocarbons
in Cook Inlet are correct or not.
COMMISSIONER SULLIVAN said that the best way to determine if the
estimates are correct is to obtain more players. The more
responsible exploration work in the area, the more ability there
will be to true up the numbers. Although a year-and-a-half ago
committee members likely wouldn't have believed that there would
be a renaissance in the Cook Inlet, that's clearly the case and
the department wants to encourage that. However, he reiterated
the need to do so in a responsible and safe manner.
2:12:57 PM
REPRESENTATIVE KAWASAKI inquired as to when the department would
consider the Cook Inlet estimates correct.
COMMISSIONER SULLIVAN clarified that the Cook Inlet estimates
are technically recoverable but undiscovered. These are the
best guess numbers from looking at a lot of new information, but
are very different from booked reserves. The closer a site is
to booked reserves is almost always a function of exploration
work. The booked reserves on the North Slope are close to the 5
billion barrel range. Still, there is enormous potential on the
North Slope. He reiterated that as more explorers enter Cook
Inlet, the better the numbers will be.
2:14:40 PM
REPRESENTATIVE KAWASAKI related that he is excited to hear about
the additional Cook Inlet gas reserves, but at the same time
cautious because the question becomes "What does that leave for
an in-state gasline?" If there are large booked reserves of
natural gas in Cook Inlet, he questioned how that would impact a
stand-alone pipeline from the North Slope to Anchorage. He
inquired as when the administration will view [a stand-alone
pipeline] as feasible.
COMMISSIONER SULLIVAN highlighted that the administration is
very focused on the high cost of energy in Interior and rural
Alaska. The department believes gas is one of the components of
addressing that high cost. Commissioner Sullivan opined that if
significant resources become available in Cook Inlet, it bodes
well for both the Anchorage area and the state. Therefore, a
renaissance in Cook Inlet is not necessarily bad for the rest of
the state. The department, as is the governor, is focused on
commercializing North Slope gas for two strategic reasons: in-
state needs; maximize that commodity for all Alaskans.
2:17:50 PM
CO-CHAIR SEATON recalled hearing that Nordaq had a gas find such
that it was going for contract sales for 15 million cubic feet
per day for 30 years. He asked if that's the kind of numbers
DNR is hearing. He also asked what trillion cubic feet (tcf)
field would be accessed north of the Swanson Oil Field on land
under the Arctic National Wildlife Refuge (ANWR).
COMMISSIONER SULLIVAN said he doesn't have the specifics on the
Nordaq contract sales. However, it illustrates the promise of
what is going on in Cook Inlet. He clarified that he would
refer to the happenings in Cook Inlet as a "mini-Renaissance"
because he didn't want to overplay it.
2:19:42 PM
REPRESENTATIVE P. WILSON opined that the [increased] activity in
the Cook Inlet would never have happened if the legislature
hadn't put into place incentives to do so.
COMMISSIONER SULLIVAN agreed and said the companies would likely
say the same. The Cook Inlet is probably one of the most
competitive areas in the state and is a good example of what
some tax reductions can do in terms of spurring activity.
2:21:00 PM
CO-CHAIR SEATON interjected that he didn't want to overplay the
incentives because one of the big incentives is the gas
contracts, which create a payable venture. He pointed out that
if the situation was as it was a few years ago when gas was at
$2.50, the incentives wouldn't matter because the companies
still couldn't make money and wouldn't invest. He emphasized
the need to recognize that the gas sales contracts being
approved in Cook Inlet are $6-$9 mcf, which results in a payable
venture. Co-Chair Seaton said he wanted to be sure that those
who want cheap energy don't want to return to $2.00 per mcf gas.
COMMISSIONER SULLIVAN agreed that investment is a function of
the economic returns, which is a function of taxes and price.
Still, Commissioner Sullivan opined that the tax incentives
played a significant role with the mini-Renaissance.
2:22:52 PM
COMMISSIONER SULLIVAN, returning to his presentation, directed
attention to slide 18 entitled "Strategic & Critical Minerals."
He characterized the strategic and critical minerals sector as a
positive for 2011. In this sector there was a lot of activity
in terms of production. Referring to Slide 19, what's quite
impressive from DNR's perspective is that one-third of the 2010
total mineral exploration investment in the U.S. was in Alaska.
Certainly, that includes large projects, but the fact that 34
exploration projects spent over $1 million in 2010 illustrates
that it was broad-based [investment]. The impact of such
investment into mineral exploration on local economies in terms
of jobs and high wages is enormous, particularly in rural
economies. For instance, the Fort Knox mine employs over 800
employees with an average wage of $80,000. He then pointed out
that the map of 2010 mineral exploration projects on slide 20
illustrates how broad based the exploration is. Slide 21
provides the outline of a summit DNR held on Alaska strategic
and critical minerals. The summit was sold out and included at
least one representative of a foreign government, which
indicates the strong interest in Alaska's minerals.
REPRESENTATIVE P. WILSON interjected that she attended the
conference, which she enjoyed.
2:26:32 PM
REPRESENTATIVE FOSTER returned attention to slide 19, and
pointed out that it relates that in 2011 a Nome offshore mineral
lease sale received over $9 million in winning bids for 84
tracts on approximately 24,000 acres. Since the Nome port is
currently at capacity, he asked whether DNR has reviewed ways to
address congestion.
COMMISSIONER SULLIVAN said that this issue has been under
discussion in the office and will likely result in trips to Nome
and Kotzebue to obtain a sense of the issue.
REPRESENTATIVE FOSTER clarified that although Nome is
appreciative and excited about what this offshore mineral lease
sale will do for the economy, it does want to be sure to address
any associated challenges it creates.
2:28:29 PM
COMMISSIONER SULLIVAN continued his presentation with slides 22-
23, which provide an overview of the accomplishments in
agriculture and parks and outdoor recreation as well as the
Alaska boating safety program. He then moved on to slide 24
entitled "Timber Resources" and acknowledged that communities
have been closed because of access difficulties, particularly
for federal resources. With the help of the legislature, DNR
started to address some of these issues. For example, last year
the governor had an initiative to double the size of the
Southeast State Forest and consider ways in which to create new
jobs. Referring to slide 25, Commissioner Sullivan complimented
Alaska's firefighters who kept the fires in the state at bay and
even helped fight fires in Texas.
2:31:59 PM
COMMISSIONER SULLIVAN then directed attention to slide 26 and
opined that in 2011 the state made some progress in cooperating
with the federal government on resource development issues. He
highlighted that Alaska finally obtained what DNR believes to be
the correct answer to the CD-5 development, although it took two
years and a lot of additional work. Commissioner Sullivan told
the committee that DNR is doubling its efforts as the federal
government is necessary in terms of responsible resource
development. He noted that issues remain with the environmental
impact statement (EIS) for Point Thomson.
2:33:47 PM
COMMISSIONER SULLIVAN moved to his review of year 2011, which he
characterized as a good year. He opined that when the resource
development sector of the economy does well, it helps other
sectors. Still, there are some very significant issues that
need to be addressed. As mentioned in the governor's "State of
the State" speech, the most significant issue to address is the
TAPS throughput. However, he mentioned that he was surprised
that some are debating whether the aforementioned is even an
urgent issue. From DNR and the administration's perspective,
the TAPS throughput is definitely an urgent issue and resulted
in a large part of last year working toward getting more oil
into the pipeline system.
2:35:08 PM
REPRESENTATIVE HERRON related that he told the governor he
didn't like the status-quo, but that HB 110 goes too far.
Therefore, he questioned where the [compromise] lies.
COMMISSIONER SULLIVAN stressed that the administration is
focused on the amount of TAPS throughput, rather than the tax
reform that some have said is a $2 billion give-away. The
rationale is that if production is increased, then the tax
reform won't be a give-away because increased investment at the
high oil prices will be an increase to state coffers. He
related his understanding that the modeling of the $2 billion
give-away doesn't include any increased production, which is the
goal of the tax reform.
2:37:38 PM
COMMISSIONER SULLIVAN then remarked that one of the
disappointments of the last session was that when there was
opposition to HB 110, no one offered anything else.
Furthermore, he said he has never heard the governor refer to HB
110 as a "take it or leave it" proposition. The
governor/administration has been focused on meaningful tax
reform; that is numbers that will result in meaningful
investment. To reach 1 million barrels of oil a day in 10 years
will probably take tens of billions of additional dollars in
investment and the state is not getting near that now. However,
oil exploration and production is booming all over the U.S., yet
Alaska, the location with probably the largest hydrocarbon
system, is still declining. The administration attributes the
aforementioned to the state's cost structure, particularly since
there are inherent costs on the North Slope that are
unavoidable.
2:39:58 PM
COMMISSIONER SULLIVAN, continuing his presentation, turned to
the governor's focus on commercializing Alaska's very large
resources of North Slope natural gas. Over the past year, the
governor has asked the companies to align and consider a
liquefied natural gas (LNG) perspective. As part of the
administration's strategy, the commissioner noted that he has
discussed with potential markets what Alaska has to offer in
terms of Alaska's comparative advantages with natural gas, as
outlined on slide 30. He then directed attention to the map on
slide 31, which relates the strategic proximity of Alaska LNG to
Asia. He moved on to slide 32 which relates the key principles
for any project and the governor's roadmap to a gasline.
2:42:15 PM
REPRESENTATIVE KAWASAKI recalled a discussion with Dr. Pedro Van
Meurs this past November regarding commercializing natural gas
in large quantities. The discussion was disappointing when he
heard that commercializing natural gas might be severely
economically challenged due to competition from various
countries to gain a foothold in eastern natural gas markets.
COMMISSIONER SULLIVAN remarked that there are a lot of experts
who opine on various issues. Although commercializing Alaska's
natural gas isn't easy, Alaska does offer advantages including a
stable investment and political climate and geo-strategic
portfolio diversification. Countries consider the
aforementioned. Furthermore, Alaska has been a reliable
supplier of LNG to Asia for over 40 years. He mentioned that in
discussions with potential countries, they have illustrated they
are aware of Alaska's North Slope gas.
2:45:05 PM
REPRESENTATIVE HERRON said he thinks the governor's roadmap to a
gasline surprised people. He inquired as to similarities
between the governor's roadmap to a gasline and the
commissioner's work on pipelines in the Central Asian Caspian
Sea. He assumed those were under aggressive schedules as well.
COMMISSIONER SULLIVAN said the key takeaway he has tried to
bring to his work [with DNR] is the importance of trying to
align interests and work in partnerships, which isn't always
easy.
2:47:51 PM
COMMISSIONER SULLIVAN, returning to his presentation, directed
attention to slide 33. He then emphasized that every day DNR
tries to balance responsible resource development with
protecting the environment and other important interests in the
state. The state, he opined, has a good track record in
achieving the aforementioned. In conclusion, Commissioner
Sullivan acknowledged that there are challenges and
opportunities and that the key to it all will be to align
interests and establish partnerships.
^OVERVIEW(S): Shale Oil Task Force Update
OVERVIEW(S): Shale Oil Task Force Update
2:49:59 PM
CO-CHAIR FEIGE announced that the next order of business would a
[Shale Oil Task Force] update.
2:50:24 PM
WILLIAM C. BARRON, Director, Division of Oil & Gas (DOG),
Department of Natural Resources, first clarified that he is not
representing Great Bear Petroleum LLC, but he felt it important
to provide a briefing on the company's activities [slide 2]. He
said Great Bear is progressing its program fairly well, securing
all of the primary governmental permits - state, local, and
federal. Furthermore, it is in the process of identifying and
securing a drilling rig and once a rig is secured the company
will progress permits through the Alaska Oil and Gas
Conservation Commission (AOGCC) and Alyeska Pipeline Service
Company for a waiver of easement over to the pipeline area. He
understood that Great Bear has submitted most of the needed
material to AOGCC and has been in dialogue with Alyeska
Pipeline. Alyeska Pipeline has already issued a letter
requesting more technical specificity about the equipment that
will be coming into that area. Great Bear is now targeting site
preparation for March and April [2012] and will begin drilling
activity after that. The company had originally discussed
winter activities with the division and AOGCC, but that was
pushed back primarily due to trying to identify an appropriate
rig.
2:52:44 PM
CO-CHAIR SEATON recollected that in its 11/1/11 testimony before
the committee Great Bear said it had partnered with Halliburton
and at its own expense Halliburton was proceeding on the
drilling of another series of wells within that lease structure.
He inquired whether Halliburton has applied for permits for that
separate shale exploration proof-of-concept stage.
MR. BARRON replied that "no applications or permits have been
supplied or submitted by Halliburton."
2:53:25 PM
MR. BARRON resumed his presentation, explaining that the Shale
Oil Task Force [slide 3] is a group of representatives from many
state agencies and is under Commissioner Sullivan [Department of
Natural Resources]. He relayed that Commissioner Sullivan said
it is known that Alaska is going to have some shale development
and the issues associated with some of those developments in the
Lower 48 are understood, and it is incumbent upon the state to
be pro-active in this regard. The Division of Oil & Gas was
directed to take the lead role and the task force groups -
Alaska Department of Fish & Game, Department of Environmental
Conservation, Department of Transportation & Public Facilities,
Alaska Oil and Gas Conservation Commission, and others - are
working to get their collective arms around all the issues
associated with shale. The task force has looked at all of the
existing permits that are required for drilling and facilities,
and the state's statutes and regulations should be more than
adequate to satisfy the drilling and development of shale
operations because it is not much different than drilling a
conventional well.
2:54:31 PM
MR. BARRON related that AOGCC is reviewing its statutes and
regulations relative to hydraulic fracturing. He offered his
belief that there will be no major changes in the AOGCC's
process because over 25 percent of Alaska's existing wells have
already been hydraulically fractured. The Shale Oil Task Force
will continue looking at permitting efficiencies relative to the
overall conceived development plan. There will be a lot of
permits and activity so the task force is looking at ways to
package, bundle, or group permits relative to a location; for
example, a pad-type design in cases where there is one pad with
several wells. The task force is engaging its federal
counterparts and understands that at this juncture the U.S.
Corps of Engineers will be the lead federal agency and will work
with the U.S. Coast Guard, U.S. Fish & Wildlife Service, and the
National Marine Fisheries Service.
2:56:05 PM
MR. BARRON said he asked the task force to particularly drill
down on general infrastructure. Infrastructure will be key and
because sharing that infrastructure will be an advantage to both
the state and the operating companies, the task force is
encouraging that activity. Gravel and water sources, water
disposal, and water re-use play into a major shale operation
that is heavily dependent on hydraulic fracturing, which is 90-
some percent water driven. The task force, having gotten its
hands around the permitting side, has now shifted to the "nuts
and bolts" discussion.
2:57:09 PM
MR. BARRON discussed a task force proposal which the governor
has included in his Fiscal Year 2013 (FY 13) budget for $1.1
million. Of that, $1 million is associated with environmental
baseline work and was submitted through the Division of Oil &
Gas. This was done in concert and dialogue with members of the
task force and the division will continue to diligently engage
all of those representatives. The intent is to find what areas,
concerns, or data that representatives in that group believe
necessary to adequately establish baseline environmental work
for the shale area, which has primarily been leased by Great
Bear and Royale. The purpose here is that many times federal
agencies will take the word of a state agency over the word of
an independent company. "Our" objective is to help those
companies establish what that baseline is and use that
information progressively for the state. The $100,000 is
associated with the Division of Geological & Geophysical Surveys
(DGGS) and Bob Swenson's group in terms of overall geologic
assessment of North Slope shale oil potential.
2:58:39 PM
REPRESENTATIVE KAWASAKI inquired whether the issue of fracturing
fluid chemicals allegedly contaminating water supplies will be
part of the environmental data and AOGCC study prior to passage
of a permitting process.
MR. BARRON replied that many of the chemicals used in fracturing
are household chemicals that can be found under the kitchen
sink. The baseline studies that [the division] would propose
would look at groundwater and the geological framework of where
aquifers are located and how best to protect them. He said he
did not imagine that AOGCC would be working too hard to identify
those chemicals but may be working on regulations requiring the
reporting of what those chemicals are. Fracfocus.org is an
organization that has been doing this quite well and is becoming
quite the repository for that information. Many companies are
pro-actively adding their list of agents into that database so
people can see what they are.
3:00:28 PM
REPRESENTATIVE KAWASAKI pointed out that household chemicals
kept under the sink are locked up so the baby cannot get to
them. He said he wants to make sure that chemicals are dealt
with before the permitting process (indisc.).
MR. BARRON allowed that it is a good concern and said that a lot
of work is being done on some of the issues in the Lower 48
associated with groundwater, or allegedly associated with
groundwater contamination. To his knowledge, most of those
issues have been associated with very, very old wells and not
the new wells being drilled and fractured. Today's technology
for well design and construction, even in the past 30 years, is
much more robust than was done in the 1920s and 1940s. States
where issues are being heard, such as PA, NY, and OH, have
thousands of wells that were drilled in the 1900s and whose
locations are unknown, so some of this contamination may or may
not be associated with fracturing, but may be associated with
old wells that are now beginning to fail because of the way they
were constructed; a lot of work still needs to be done in that
regard.
3:01:59 PM
CO-CHAIR SEATON noted that many of Alaska's regulations or
statutes relate to units, yet the understanding is that once
proof of concept is done in these substrates every well will be
a development well and not an exploratory well. Since this
seems to be different from "our" framework, he would like to
know how that is progressing. Regarding hydraulic fracturing
and groundwater contamination, he said he does not think Alaska
has quite the same issues as other places because the permafrost
goes down a couple thousand feet. However, the permafrost will
be penetrated with a well that will be pumping hot oil. He
asked whether the division or AOGCC is addressing thawing of the
permafrost around the well and what could happen if a seal in
the well broke.
3:03:54 PM
MR. BARRON, regarding well construction in the Arctic, responded
that [shale] wells would not be constructed any differently than
the existing 2,000-plus wells that penetrated the same
permafrost and that have been pumping hot oil and water for the
last 30-plus years. The designs required by AOGCC already more
than adequately protect the permafrost area, he said, so he does
not know that this would be a new concern given that this has
been a concern since the original discovery at Prudhoe Bay.
MR. BARRON, regarding units, explained that that is a conundrum
still being work on because of how to protect the state's
interest relative to leases and acreage and the entire concept
for having a unit. Typically, a unit is formed for the
protection of the owners and of the proper development and
optimization of that resource. In a shale development, in
theory and in practice, each well is its own unit and that is
what the division is working through, not necessarily whether
that is appropriate because right now the division believes it
is appropriate. The question is whether there is an issue
associated with the leasing and the term of that lease relative
to a company trying to secure a great amount of lease acreage
with a term on it and at the same time trying to do advance
drilling and timeliness of trying to develop those acres in the
primary lease term. In a unit, however, the company gets extra
time and the unit is held as long as there is production. So it
is a timing issue relative to the appropriateness of leases and
the units thereof and holding of that acreage - and that is what
is being discussed.
3:06:03 PM
REPRESENTATIVE HERRON, in regard to permitting efficiencies and
bundling, asked whether that is reinventing the wheel or is
following other models elsewhere.
MR. BARRON replied that the [task force] is trying to look at
various models, bundling being one example. It must be ensured
that whatever the model, it is appropriate for the area itself.
The model that would be used next to a highway may be different
than the one used in a much more environmentally sensitive area;
[the task force] wants to be flexible, but appropriate. In
further response, Mr. Barron confirmed that the wheel would not
be reinvented; rather, models that the [task force] is already
aware of would be emulated.
3:08:14 PM
ADJOURNMENT
There being no further business before the committee, the House
Resources Standing Committee meeting was adjourned at 3:08 p.m.
| Document Name | Date/Time | Subjects |
|---|---|---|
| HRES DNR - Comm. Sullivan 1.20.12.pdf |
HRES 1/20/2012 1:00:00 PM |
|
| HRES DNR - Shale Oil Task Force Update 1.20.12.pdf |
HRES 1/20/2012 1:00:00 PM |
|
| HRES -1.20.12 Comm. Sullivan Editorial.pdf |
HRES 1/20/2012 1:00:00 PM |