Legislature(2013 - 2014)BARNES 124
01/21/2013 01:00 PM House RESOURCES
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| Overview(s): Department of Natural Resources | |
| Adjourn |
* first hearing in first committee of referral
+ teleconferenced
= bill was previously heard/scheduled
+ teleconferenced
= bill was previously heard/scheduled
ALASKA STATE LEGISLATURE
HOUSE RESOURCES STANDING COMMITTEE
January 21, 2013
1:02 p.m.
MEMBERS PRESENT
Representative Eric Feige, Co-Chair
Representative Dan Saddler, Co-Chair
Representative Mike Hawker
Representative Kurt Olson
Representative Paul Seaton
Representative Peggy Wilson
Representative Geran Tarr
Representative Chris Tuck
MEMBERS ABSENT
Representative Craig Johnson
OTHER LEGISLATORS PRESENT
Representative Andrew Josephson
COMMITTEE CALENDAR
OVERVIEW(S): DEPARTMENT OF NATURAL RESOURCES
- HEARD
PREVIOUS COMMITTEE ACTION
No previous action to record
WITNESS REGISTER
DAN SULLIVAN, Commissioner
Department of Natural Resources (DNR)
Anchorage, Alaska
POSITION STATEMENT: Provided an overview of the Department of
Natural Resources.
JEAN DAVIS, Director
Division of Support Services
Department of Natural Resources (DNR)
Juneau, Alaska
POSITION STATEMENT: Answered questions during the overview of
the Department of Natural Resources.
JOE BALASH, Deputy Commissioner
Office of the Commissioner
Department of Natural Resources (DNR)
Anchorage, Alaska
POSITION STATEMENT: Answered questions during the overview of
the Department of Natural Resources.
ED FOGELS, Deputy Commissioner
Office of the Commissioner
Department of Natural Resources (DNR)
Anchorage, Alaska
POSITION STATEMENT: Answered questions during the overview of
the Department of Natural Resources.
ACTION NARRATIVE
1:02:21 PM
CO-CHAIR ERIC FEIGE called the House Resources Standing
Committee meeting to order at 1:02 p.m. Representatives Olson,
Seaton, Tarr, Tuck, Hawker, Saddler, and Feige were present at
the call to order. Representative P. Wilson arrived as the
meeting was in progress. Representative Josephson was also
present.
^OVERVIEW(S): Department of Natural Resources
OVERVIEW(S): Department of Natural Resources
1:02:49 PM
CO-CHAIR FEIGE announced that the only order of business would
be an overview of the Department of Natural Resources.
1:03:56 PM
DAN SULLIVAN, Commissioner, Department of Natural Resources
(DNR), said his presentation would include introduction of DNR
staff, an update on accomplishments of the divisions over the
year 2012, and talking about the 2013 legislative session and
beyond [slide 2]. He related that DNR's sense of optimism will
be evident in the presentation. While Alaska has challenges,
DNR's optimism is based on the state's abundant resources and
financial ability to address the challenges. He then
highlighted Alaska's size, pointing out that Alaska is bigger
than most countries and bigger than the state of Texas [slide
4]. He said land ownership is a huge issue, and it is important
for the state to maximize its opportunity by working in
partnership with federal and Native land owners.
1:09:34 PM
COMMISSIONER SULLIVAN stressed it is critical for legislators
and others in the state to realize just how huge the state's oil
and gas numbers are and that only the surface has been scratched
[slide 5]. While the conventional oil and gas estimates are
enormous, it is also important to realize the huge potential of
unconventional resources, such as shale oil and hundreds of
trillions of cubic feet of shale gas and gas hydrates, due to
new technology. He pointed out that compared to most large
basins, Alaska is relatively unexplored which bodes well for
opportunity; for comparison, Wyoming's basin has 19,000
exploration wells and Texas has 250,000 [exploration wells]
while the North Slope only has about 500. He added that recent
U.S. Geological Survey estimates of Cook Inlet are also quite
significant. Furthermore, if Alaska was its own country, it
would rank in the top 10 in the world for important minerals,
based on estimates of [coal, copper, lead, gold, zinc, and
silver in the state] [slide 6].
1:12:00 PM
COMMISSIONER SULLIVAN then introduced the following division
directors of DNR [slides 7-12]: Franci Havemeister, Division of
Agriculture; Chris Maisch, Division of Forestry; Bob Swenson,
Division of Geological & Geophysical Surveys; Brent Goodrum,
Division of Mining, Land and Water; Bill Barron, Division of Oil
& Gas; Ben Ellis, Division of Parks & Outdoor Recreation; Jean
Davis, Division of Support Services; Eric Hatleberg, Gas
Pipeline Project Office; Mike Thompson, State Pipeline
Coordinator office; and Tom Crafford, Office of Project
Management & Permitting.
COMMISSIONER SULLIVAN, regarding the Division of Agriculture,
said the department has been highlighting the Alaska Grown
program in an effort to get more demand-driven agricultural
production from Alaska's own citizens [slide 7]. Regarding the
Division of Forestry, he noted that its actions can be seen
through the management of state forests and the firefighting
that the division also provides [slide 7]. Regarding the
Division of Geological & Geophysical Surveys (DGGS), he opined
that DGGS is the top state geological survey team in the country
and pointed out that it is in its second year of implementing
the statewide strategic and critical minerals assessment [slide
8].
1:14:47 PM
COMMISSIONER SULLIVAN, regarding the Division of Mining, Land
and Water, stated this division is in many ways the heart and
soul of DNR [slide 9]. He praised the division for making
enormous progress on the permitting backlog and making the
state's permitting systems more efficient, timely, and certain.
Regarding the Division of Oil & Gas, he said the division is
critical to Alaska's operation and did great work conducting two
more successful oil and gas lease sales [slide 9]. Regarding
the Division of Parks & Outdoor Recreation, he noted that Mr.
Ellis has done a great job educating each legislator about the
state parks in each legislator's district [slide 10]. He
pointed out that Alaska has, by far, the largest state park
system in the U.S., with one park - Wood-Tikchik - being twice
the size of Rhode Island. Regarding the Division of Support
Services, he said Ms. Davis has done a fantastic job of managing
DNR's finances [slide 10].
1:17:24 PM
CO-CHAIR FEIGE, noting the reference to "eRecording" on slide
10, asked what it is.
JEAN DAVIS, Director, Division of Support Services, Department
of Natural Resources (DNR), replied that the State Recorder's
Office, a part of the Division of Support Services, has launched
"eRecording," which will allow title companies, banks, lawyers,
and anyone else to record documents electronically. In further
response, she confirmed that this saves people a trip downtown.
She added that a test program has been implemented in the
Anchorage recording district, a couple of Anchorage's outlying
districts, and Seward to see how it works.
1:18:30 PM
COMMISSIONER SULLIVAN, resuming his presentation, noted that in
addition to divisions, DNR has [three] key offices. The Gas
Pipeline Project Office oversees the work of licensees with
regard to the Alaska Pipeline Project (APP); this office has
cooperated and worked well with the Alaska Gasline Development
Corporation (AGDC) over the past year. The State Pipeline
Coordinator's Office has put in a lot of work and coordination
with the federal government to issue the right-of-way lease for
the Point Thomson Export Pipeline. The Office of Project
Management & Permitting (OPMP) is an example for both state and
federal governments in regard to permitting. For large projects
the permittees come to the state and OPMP coordinates all the
permitting with state agencies; the state agencies are required
to be part of that. Because this office is so effective the
federal government has participated in the OPMP meetings even
though that participation is not required, a testament to the
leadership of director Tom Crafford.
1:21:27 PM
REPRESENTATIVE TARR inquired as to whether a report is available
from the [2012] Alaska Strategic and Critical Minerals Summit.
COMMISSIONER SULLIVAN responded that there is no formal written
report for this second annual meeting, but the summit is
something DNR is very proud of and will be making an annual
event in Fairbanks.
1:22:36 PM
REPRESENTATIVE TUCK inquired as to whether the AGDC project is
still moving forward given the alignment that has occurred
between the North Slope producers and the Alaska Pipeline
Project.
COMMISSIONER SULLIVAN answered that while a lot of work needs to
be done, significant progress was made over the past year. He
said he will talk more about this later in his presentation.
1:23:28 PM
COMMISSIONER SULLIVAN reviewed key issues that the Department of
Natural Resources is working on [slide 13]. He said the most
critical near-term economic issue facing the state is [arresting
the decline] of throughput in the Trans-Alaska Pipeline System
(TAPS) [slide 14]. Throughput continues to decline despite
there clearly being the geology and oil and gas on the North
Slope to sustain the state in TAPS for decades if this potential
is unlocked. Referencing discussions in the legislature over
the past few years about "giveaway," he offered his view that
the ultimate giveaway is the state continuing to lose production
each year. For example, last year's decline was 40,000 barrels
a day, a 6 percent decline, which equates to about 14.5 million
barrels that were here last year but will not be this year.
That money is not circulating around the state or going to state
coffers, it is gone and that is a giveaway [from] future
generations. The focus needs to be on stopping this and turning
it around.
1:25:44 PM
COMMISSIONER SULLIVAN stated that DNR's efforts over the last
two years have been focused on the state's comprehensive four-
part strategy to turn around the TAPS throughput decline [slide
15]. The governor has laid out a goal of 1 million barrels/day
within 10 years. He allowed this goal is ambitious, but pointed
out that North Dakota went from 100,000 barrels to approximately
500,000 barrels in about 5 years, Texas has turned around, North
Sea places have turned around, Alberta has turned around, and so
can Alaska. The most important element of Alaska's four-part
strategy is making the state more competitive with regard to the
capital it is competing for, and the cornerstone of that effort
is the governor's tax reform proposal. The department has also
been focused on the permitting element of this strategy, as well
as the element of facilitating and incentivizing the next phase
of North Slope development, such as smaller pools of
conventional, more infield drilling, Outer Continental Shelf
(OCS) opportunities in federal lands, and unconventional
opportunities. Interest is starting to be seen, he reported.
The fourth element is promoting Alaska's resources by talking to
potential investors and targeting certain investors that would
make great companies to come to Alaska. Positive aspects of
this are starting to be seen, but the surface is only just being
scratched.
1:28:28 PM
COMMISSIONER SULLIVAN reported that the last two lease sales,
one on the North Slope and one on Cook Inlet, were very strong
[slides 16-18]. This winter will be another busy exploration
season. The department is excited about the diversity of plays,
such as huge OCS plays, smaller pool plays, conventional and
unconventional oil plays. Also exciting is the diversity of
players, everything from some of the biggest oil companies in
the world to mid-size and smaller companies. He reiterated that
while these plays are positive, it is just the surface that is
being scratched as far as the state's overall potential.
Billions and billions more in investments on the North Slope are
needed to turn around the TAPS throughput decline. Although
there are challenges in Cook Inlet, he said a renaissance is
currently occurring there in terms of rigs, exploration,
companies, spending, and important developments such as storage
[slide 19]. He added that a lot of what the legislature did in
2010 is really helping in this area, plus DNR has been out
pitching the Cook Inlet tax and investment incentives to
companies. While the Cook Inlet basin is not yet turned around,
a lot of activity is now occurring in what was once thought to
be a dead basin. Top companies that focus on mature basins are
now spending a lot of money in Cook Inlet and DNR will continue
its focus on that.
1:31:12 PM
CO-CHAIR SADDLER inquired about a potential pipeline that would
be in an undersea trench from the west side of Cook Inlet to the
Kenai River.
COMMISSIONER SULLIVAN deferred to Mr. Balash.
JOE BALASH, Deputy Commissioner, Office of the Commissioner,
Department of Natural Resources (DNR), clarified that the
potential pipeline is an oil line, not a gas line. He related
that Cook Inlet Energy, LLC, has applied to DNR for a right-of-
way to move oil from the west side of Cook Inlet to the east
side where the refinery is located for Tesoro, as well as some
additional opportunities for export and deliveries. In further
response, he explained that at this time it is an application,
and thus it will go through the department's robust process of
public notice and opportunities for comment and review by
multiple agencies.
1:32:43 PM
CO-CHAIR FEIGE understood that Cook Inlet Energy runs the Osprey
platform, the southwestern-most platform in Cook Inlet. He
asked how the company is currently getting oil off its platform.
MR. BALASH offered his understanding that a pipeline runs from
Osprey onshore on the west side. From that point, along with
some other of the company's production that is onshore, the oil
moves through the pipeline system down to the Drift River
Terminal that multiple operators use for loading and moving oil
either to market or to the east side. In further response, he
confirmed that the [proposed] pipeline is brand new pipe from
one side of the inlet to another, not the re-conditioning or re-
sleeving of an existing pipe.
1:33:38 PM
REPRESENTATIVE P. WILSON asked whether Savant [Alaska] is a Cook
Inlet operator.
MR. BALASH replied that Savant [Alaska] is the operator of the
Badami Field on the North Slope, which is the field furthest
east from Prudhoe Bay before reaching Point Thomson.
1:34:15 PM
REPRESENTATIVE TUCK recalled talk during the 2012 Special
Session about the possibility of determining the decline curve
and incentivizing for any production going down TAPS above that.
He said the 6 percent decline mentioned in today's presentation
seems really high compared to the 3.2 and 4.2 percent that were
mentioned last year. He asked whether the decline curve is
automatically reducing just from the nature of the fields or is
more of a decline happening in the last five years.
MR. BALASH responded that the decline curve for the North Slope
is an aggregation of multiple curves from all of the fields
producing there. Some are declining more than others. The
variation is a reflection of the level of investment that is
occurring. While the current tax regime has had some braking
effect on investment, a significant dollar amount is still being
invested in additional and ongoing activity on the slope. He
said the real question is what that decline curve would be
without investment and assured members that it would be much,
much more than 6 percent. Regarding specifics of total North
Slope production, he said DNR has figures that can be detailed
per individual fields that can be provided to members.
1:36:26 PM
REPRESENTATIVE TUCK offered his belief that the numbers in DNR's
2011 report were the averages and that the forecast was for
flattening out to 3.2 percent per year on average through 2030.
Therefore, he reiterated, the 6 percent seems like a big jump
compared to what was reported before. He said the report also
states that over the last 10 years the production decline rate
was 4.2 percent per year on average. He inquired as to whether
the 6 percent per year is based on the state's current tax
structure.
MR. BALASH answered that the basis for the production forecast
are numbers generated by the Department of Revenue. That
department works with each individual taxpayer on a confidential
basis to understand what the taxpayer's expectations are for the
next decade. The numbers in the production forecast are a
reflection of those estimates by the producing companies with a
certain degree of discounting/risk factoring for what would
otherwise be called new production. The state is pretty good at
identifying the level of decline that will occur in the existing
fields from currently producing areas. Where the state's
predictions have been historically off by a lot is in estimating
new production more than four to six years out, and that is
where DOR and DNR are working to get a more realistic view of
what production is going to be for the next decade. He allowed
that the state's error rate historically has been big. For
example, returning to the Fiscal Year 2007 (FY 07) forecast for
the current fiscal year, production should be about 685,000
barrels per day, which is off by 130,000. Steps are being taken
to correct the problems in the old way of making projections so
that policymakers will have reasonable information to make
reasonable decisions.
1:39:28 PM
CO-CHAIR FEIGE recalled that the discrepancy between predictions
and the result came as a major concern to the committee, and was
a topic of debate on a previous bill. Although DOR has
reportedly revamped its system, he asked whether the new
forecasting methods have been tested and if assurance can be
offered that the new method provides better accuracy.
MR. BALASH offered his understanding that testing was done in a
double-blind manner. One method was conducted using statistics
for estimation and analysis to compare with historical data.
The second method was based on technical information provided by
reservoir engineers to form projections and for risking out the
likelihood of new production coming in. He reported that when
those two methods were brought together there was a considerable
overlap in the forecast for the ensuing decade. Confidence
levels were bolstered by the outcome of the testing, as the
blind spots that might cause projections to be off appeared to
be absent. Feedback of the methodology has been positive;
however, there are some naysayers who consider the outcome of
the testing as overly optimistic.
1:41:47 PM
REPRESENTATIVE TUCK inquired as to whether the past history of
the Prudhoe Bay field, for example, indicates that the decline
curve is starting to flatten out or steepen.
MR. BALASH responded that the slope of the curve, depending on
how it is measured, can vary wildly from month to month, quarter
to quarter and year to year. Seasonal variances are inherent in
the productive efficiency of the facilities, causing big swings
from summer to winter data. For comparing on a year-to-year
basis, he opined that the annual barrels produced data is the
best method to employ as it eliminates the possibility of
certain factors coming into play, such as seasonal differentials
and maintenance periods. The degree to which that decline is
accelerating or decelerating does not seem to have a hard and
fast rule; it is a function of the activity in the field.
1:43:39 PM
REPRESENTATIVE SEATON asked about current shale exploration and
development.
COMMISSIONER SULLIVAN first returned to Representative Tuck's
last question and offered to have the department team meet with
committee members to review the current methodology. He said it
is a more responsible means for projection purposes, especially
considering the inaccuracy of the past method. Ultimately, he
continued, interest for debate should focus on the slope of the
rise or increasing curve rather than how low it can go.
COMMISSIONER SULLIVAN, then addressed Representative Seaton's
question, saying that the department plans to stay in front of
the shale development. Consideration has been taken to ensure
that policy and regulations are in place to encourage shale
development, and it has been the topic at conferences. Great
Bear is the main leaseholder in the area, but marketing to
private investment groups and banks to pitch the opportunities
in Alaska is ongoing. For further specifics on shale activity
he deferred to Mr. Balash.
1:46:30 PM
MR. BALASH added that Great Bear was able to take advantage of
the seasonal exploration season on the North Slope and obtained
a rig for summer use. Their play is located close to existing
infrastructure, which allowed for drilling without use of an ice
pad or ice road. Two wells were drilled and core samples
obtained for laboratory analysis. However, neither location was
able to achieve a flow test; critically important to
understanding the productive capacity of the rocks for initial
production, as well as the decline rate. Initial production and
decline rate data are necessary for understanding whether a
shale play on the North Slope can work. Costs for development
in Alaska are much higher than in other locales. However, he
opined that the tests will reveal the rocks in Alaska to be
superior to those in other areas.
1:48:05 PM
REPRESENTATIVE SEATON surmised that shale development flow
testing requires accompanying hydraulic fracturing. He asked
about the timing involved, when considering a potential flow
test, and suggested that one hold-up may be the necessity for
road access, pads, and gravel structures. He asked what is
transpiring in the way of planning or legislative requests to
bring about the necessary policies and road development to
support shale exploration.
MR. BALASH replied that the specific plans that Great Bear and
its partners have been working around include shortening the
amount of time in which it takes them to answer the question,
"can this work ... profitably?" The plan of operations will be
reviewed when it comes into the division. However, nothing has
come in recently to provide specific timing for the projected
horizontal wells exploration.
1:50:34 PM
REPRESENTATIVE SEATON asked about the road and access needs and
how that development is envisioned to take place in Alaska, if
the aforementioned shale exploration proves viable.
MR. BALASH said that he hopes to speak with the Senate Resources
Standing Committee regarding funding in the FY 14 budget to meet
financial requirements necessary to do additional work in/with
the Division of Oil and Gas, along with the Division of Mining,
Land and Water, for areawide planning in order to minimize a
"traffic jam in the permitting pipe."
COMMISSIONER SULLIVAN interjected that Representative Seaton is
identifying some important issues in terms of year around access
and permitting to make Alaska competitive. From the geological
perspective, the state is bullish, he opined. The question is
whether the state can compete with the costs. Great Bear is an
example of one company that may realize benefits and the
department is working to get the word out to inform people that
Alaska may be the only place in the country where an explorer
seeking shale can also bump into significant pools of
conventional [oil].
1:53:59 PM
REPRESENTATIVE TARR recalled that the Alaska Oil and Gas
Conservation Commission (AOGCC) has issued fracking regulations
and asked whether there is a relationship between these two
topics.
MR. BALASH confirmed that in November [2012] the AOGCC published
regulations regarding fracking in an effort to be in front of
some of the issues that have confronted other states. However,
he pointed out that the North Slope has had fracking operations
for over 40 years. The commission is engaged in a public
process, and the comment deadline has been extended. The AOGCC
is an independent agency, he noted.
1:55:07 PM
MR. BALASH, returning to Representative Seaton's question, noted
that in regard to the primacy of wetlands, any development of
new fields is going to require 404 permits from the U.S. Army
Corps of Engineers. The state is working to obtain purview over
some of these permits.
CO-CHAIR FEIGE suggested such an action could save the federal
government some money.
REPRESENTATIVE OLSON pointed out that the list of new players on
slide 19 does not include Escopeta/Fury.
MR. BALASH explained that, shortly after the Cook Inlet
stampede, Buccaneer became Escopeda/Fury and the absence of its
name is strictly an oversight.
1:58:03 PM
COMMISSIONER SULLIVAN complimented Mr. Barron and his team for
leveraging the state's ability to bring about drilling activity
through lease negotiations and unit applications.
COMMISSIONER SULLIVAN, addressing Representative Tuck's earlier
question, pointed out that a year ago the producers weren't
aligned with regard to a gas project [slide 21]. In fact, the
producers were not even talking. Exxon and TransCanada had yet
to look toward Asia where [the department] thought the real
market was and ConocoPhillips and BP had recently folded Denali.
However, on a positive note, the five benchmarks outlined in the
governor's roadmap to the gasline were met. Although there is
still a long way to go, it is hard to deny the progress, he
opined. He characterized alignment as an important aspect of
projects. Although he acknowledged that it is certainly
possible to have a gas line without alignment, alignment is
important. After a meeting with the CEOs from Exxon,
ConocoPhillips, and BP in the first quarter of last year, there
was alignment and focus on an LNG project. As mentioned in the
letter presented on slide 22, the Point Thomson dispute was
resolved. He then directed attention to the map of Point
Thomson [slide 23], and highlighted that the infrastructure on
the North Slope ends at the eastern end of the North Slope at
Badami. This is despite the knowledge that the eastern end of
the North Slope, Point Thomson and surrounding areas, is an area
with a very prolific amount of hydrocarbons. Commissioner
Sullivan opined that this area is a strategic development and
investment for the state for a number of reasons, including
opening up the eastern North Slope to hydrocarbon production.
As part of the settlement, Exxon is building a 70,000 barrel per
day common carrier pipeline. Therefore, small companies
exploring in that part of the North Slope that find liquids can
access that pipeline, whereas previously it would have required
a very large company to develop the infrastructure to get those
liquids into TAPS. He opined that such a common carrier
pipeline will strategically open up that part of the North Slope
for oil development, in particular. Point Thomson is a multi-
billion dollar project and more importantly, significant
elements of the Point Thomson infrastructure can be used for gas
commercialization [slide 24]. Having pre-investment to gas
while companies are spending multiple billions on this project
will be important in terms of forwarding the gas project as
well. Commissioner Sullivan emphasized that the other reason
the Point Thomson project is such a strategic investment is
jobs. The initial phase of development is estimated to create
600-700 jobs and possibly peak beyond 2,000 jobs. He offered to
brief the committee in more detail regarding the various
subcontractors that are now working. With regard to the
settlement, since the last legislative session the Point Thomson
project went through the following three phases of development
in which the department and others were explaining and defending
the settlement, permitting, and getting to work. In fact,
construction began this winter season. He then directed
attention to an excerpt of an article from the Financial Times
of London regarding the progress made in the first quarter
[slide 26].
2:06:09 PM
COMMISSIONER SULLIVAN, referring to the letters from the
producers and TransCanada, highlighted that the third quarter
benchmarks laid out by the governor in his "State of the State"
address were met [slide 27]. In fact, the announcement of the
third quarter progress stirred significant press, including
articles in the Wall Street Journal and The Globe and Mail
[slide 28]. The Globe and Mail article highlights that Western
Canada, which Alaska views as one of the biggest competitors
with regard to a large-scale LNG project, is noticing and
perhaps a bit nervous. Alaska has to recognize how much it has
to compete, he said.
2:06:56 PM
COMMISSIONER SULLIVAN specified that the letters from the
producers discussed an integrated team [approach] in which about
200 people are working and tens of millions of dollars is being
spent [slide 29]. He acknowledged that there is much skepticism
in the state, some of which may be warranted given the 40-year
history of trying to commercialize North Slope gas. However,
after receiving briefings from the companies there is little
doubt in the work these companies are doing. As the flow chart
on slide 29 relates, Exxon is in the lead, BP is working the
upstream issues, TransCanada and Exxon are working in the
midstream, and ConocoPhillips is working the downstream issues.
He reminded the committee that the governor, in his State of the
State address, requested hardening the numbers within a month.
The governor wants more detailed numbers than the ranges
specified on slide 30. Even [with the existing numbers], it is
apparent that this would be one of the largest LNG projects in
the world. Combined with the state's massive North Slope
resources, "we think that that's pretty ... important," he said.
He then addressed the timeline/work plan provided by the
companies [slide 31]. He informed the committee that he has
told the companies that although the timeline/work plan looks
good, he has told the companies they need to work to accelerate
the timeline. The governor did so as well in his State of the
State address. He acknowledged that the alignment is critical,
but the project needs to continue to move forward. Commissioner
Sullivan encouraged the committee members, in their meeting with
the companies, to request that the timeline be accelerated. He
then turned to the work and consolidation efforts the governor
has envisioned with AGDC. Over the course of the last few
years, the Alaska Pipeline Project (APP) has made progress with
alignment in regard to upstream producers. The upstream
producers are the leaseholders and [the upstream] is the
location of the gas supply and where the technical work lays.
Although the work with the AGDC has made progress over the last
years, its work has primarily been with regulatory, right-of-
way, and environmental impact study (EIS) areas. The
aforementioned illustrates the necessary parallel work that is
occurring. The governor, he related, is reviewing ways in which
to integrate those efforts. Although there has been progress in
terms of the governor's 2012 benchmarks, the governor has
expressed the need to accelerate the momentum. He then recalled
the Meet Alaska/Alliance Conference during which a top
ConocoPhillips official mentioned a sanction date sometime in
2015. The sanction date should be focused on because that is
when the decision to move forward is made. As the process moves
through the different stage gates, there is more spending and
more people working on it, which he opined is necessary to
continue to accelerate [the process].
2:11:34 PM
COMMISSIONER SULLIVAN expressed hope that the committee feels a
sense of optimism from this discussion[slide 32]. Over the past
year, the department has sought out different markets and
potential buyers to discuss the comparative advantages of Alaska
gas to other countries. Clearly, there is demand for gas in
Asia, but it is anyone's guess as to how long that window will
be open. He expressed the importance of relating how focused
the state is and that there are two efforts. Slides 32-40
relate the comparative advantages the department discussed with
various entities. The comparative advantages, include: a huge
resource base, which means practically zero resource risk; co-
location with existing infrastructure, which results in a
limited environmental impact; and a strong record of
reliability, which he attributed to ConocoPhillips' work.
Although many do not know, Alaska is the only place in North
America that has been exporting LNG to Japan for 40 years [slide
34]. With regard to reliability, he highlighted that Alaska
does not use its gas supplies for political purposes as Russia
does. He then directed attention to the comparative advantages
due to geographic proximity and political/legal stability [slide
35]. He pointed out cost estimates price Alaska gas
competitively with almost any other project in the world [slide
36]. Furthermore, Alaska already has world class businesses and
great support services working in Alaska [slide 37]. In noting
the comparative advantages related to export licenses and
regulatory progress, he pointed out that Western Canada projects
have not resolved its First Nation and Native land claim issues,
which are large issues that could take a long time to resolve
[slide 38]. However, such issues have been resolved in Alaska.
Although Alaska's previous receipt of export permission from the
federal government is somewhat controversial with regard to
export licenses from the Lower 48, he opined that Alaska is well
positioned on additional permitting and export licenses relative
to other projects. In fact, the Presidential Finding of January
12, 1988, found that exporting large quantities of Alaska gas
would not have a negative impact on prices in the U.S. He then
highlighted the upstream investment opportunities [slide 40].
2:15:32 PM
COMMISSIONER SULLIVAN directed attention to Alaska's advantages
over other potential competitors [slides 41-42]. "Certainly,
from the perspective here, we think we're back on the map," he
related. In fact, [the department] was invited to present at
the LNG Producer Consumer Conference that included all the
ministers from all the main producing countries, companies,
buyers, sellers, and government agencies. At the outset, the
senior Japanese officials who introduced the conference
highlighted the Qatar delegation as Qatar is the number one
supplier of LNG in the world and assisted Japan during the
Fukushima disaster when gas was needed quickly because the
nuclear facilities were shut down. The only other delegation
highlighted at the outset was the Alaska delegation. Alaska was
lauded for being Japan's longest standing supplier as it was a
pioneer in exporting LNG to Asia. The Japanese officials said
they looked forward to new levels of cooperation and commercial
arrangements between Alaska and Japan. Although the
aforementioned demonstrates Alaska is "back on the map," Alaska
must realize it is competing in an area where there will be
steep competition.
2:18:01 PM
REPRESENTATIVE TUCK inquired as to the process required to
obtain a long-term export license for natural gas.
COMMISSIONER SULLIVAN explained that the export license would
come from the U.S. Department of Energy (DOE). Currently, the
ConocoPhillips plant in Cook Inlet has a DOE export license. He
then turned to the controversy in the Lower 48 regarding how
much and to what degree exports of gas should be allowed from
the Lower 48 shale plays. This is a big issue because in areas
such as Ohio and Pennsylvania the huge increase in production
has ignited a manufacturing Renaissance such that steel
factories are coming on line and chemical factories are now
returning to the U.S. because of the availability of large
amounts of gas at low costs. Yet, there is concern that
exporting too much will result in an increase in prices and a
decrease in volumes. Over the course of the past year, the
department has been meeting with federal agencies to explain
that Alaska should not be included in the Lower 48 debate
regarding export licenses because if Alaska were to have a large
scale LNG project, volumes to Alaskans will increase and prices
to Alaskans, its military, and perhaps to Hawaiians would
decrease. Therefore, Commissioner Sullivan opined that the
regulatory risk in terms of obtaining an export license is much
less than it would be for the Lower 48 and that has been
highlighted with key members of Congress and potential
customers.
2:21:34 PM
REPRESENTATIVE TUCK related his understanding that obtaining an
export lease and the inability to obtain long-term leases have
been hurdles to selling gas to Japan.
MR. BALASH responded that the nature of the LNG trade and
business is fundamentally different than that in the North
American marketplace. The LNG business is all about contracts
and the contracts are different than those associated with an
over-land pipeline. In the North America context, the main
concern was with shipping contracts that is firm transportation
(FT) agreements between a shipper and a pipeline. However, in a
LNG case one must make sure there are arrangements in place all
the way from the well bore to the burner tip of the market
destination. Mr. Balash said that Representative Tuck had hit
on something important, the ability to off long-term contracts
and firm contracts that are not interrupted. For example, in
the winter of 2010-2011, ConocoPhillips announced that it was
going to close the Nikiski plant, which was due to the market
dynamic. The market dynamic was such that short-term spot-type
cargos were selling at a price significantly lower than those
under long-term contracts. However, in the wake of Fukushima
the spot price in Asian markets, Japan in particular, rose and
made the business of moving gas on spot pricing more attractive
than in the past. In fact, it was attractive enough to keep the
[Nikiski] plant operating. In the long term, those prices are
not likely to remain higher than long-term contracts. Alaska,
with excess of 30 trillion cubic feet (tcf) of reserves in the
ground in the North Slope, has a volume of gas that can be used
to assure buyers of a very long and firm commitment of supply,
which is a tremendous advantage over numerous competitors. In
response to Co-Chair Feige, Mr. Balash confirmed that Alaska can
guarantee that supply without short changing Alaskans.
2:25:09 PM
REPRESENTATIVE SEATON inquired as to whether DNR has been
exploring the production of low-sulfur diesel from Alaska gas
for sale and include the shipping.
COMMISSIONER SULLIVAN, referring to the governor's principles,
clarified that the idea is large volumes for export as well as
significant volumes to Alaskans and to Alaskans first and then
export. He then recalled the initial design, concept, and work
plan in which the state off-take would be 300-350 thousand cubic
feet (mcf) per day on this project while the current state
demand is about 250 [mcf]. From DNR's perspective, Alaskans
receiving gas from Alaska is important for use as well as other
value-added industry opportunities. In specific response to
Representative Seaton, Commissioner Sullivan said that he did
not go into that level of detail in terms of potential other
uses or value-added within the state. With regard to gas
commercialization, he said he forgot to mention that one of the
positive outcomes of the aforementioned outreach is that
interested parties are presenting in Alaska. For instance, the
chairman, chief executive officer of Korea Gas, and its LNG
purchasing team were in Juneau about a month ago. Very fruitful
discussions were held, he said. Furthermore, a Japanese
consortium, REI, has opened offices in Anchorage. Of course,
the aforementioned is being encouraged. Over the past year, DNR
has tried to align stakeholder interest as that lack of
alignment seems to have created problems when trying to
commercialize the gas. However, if that alignment cannot be
achieved, there is the ability to move forward with or without
partners. Again, Commissioner Sullivan opined although good
strides have been made, there is a fair amount left to do. The
hope is that meeting the governor's benchmarks within the next
month will result in progress.
2:30:10 PM
REPRESENTATIVE TUCK, noting that there have not been many
reports from TransCanada over the past couple of years, asked
whether TransCanada is part of the negotiations and contracts
with the discussions with Japan.
COMMISSIONER SULLIVAN informed the committee that TransCanada
held a solicitation of interest, which was required by the
state. In terms of the specific marketing in Asia, that's
typically performed by the producers on a private sector
project. He further informed the committee that the state is
talking to potential buyers and governments urging them to
diversify their supply sources and consider buying Alaska gas.
2:32:08 PM
REPRESENTATIVE TARR inquired as to the length of time that
should be considered for the licenses in order to obtain the
best value for the state.
MR. BALASH began by pointing out that the contracts that is the
purchase and sale agreements between buyers and sellers of LNG
vary. Alaska offers the opportunity for very long-term
contracts. He highlighted that contracts are now seen as a bit
of a precursor to authorizations for export licenses that are
issued by the U.S. Department of Energy (DOE). Recently, the
DOE has taken a harder look at whether an applicant has gas,
contracts, or both before granting an export license. He noted
that one cannot sell LNG to very many places without an export
license, and therefore there are some steps being taken from a
regulatory perspective that the state needs to be mindful of and
careful of in order to ensure the state does not get stuck in a
bureaucratic process as this project moves forward.
2:34:16 PM
REPRESENTATIVE TUCK asked what the governor would like to see in
the concept he wants by February 15.
COMMISSIONER SULLIVAN informed the committee that the companies
go through a process called concept selection, during which they
do the engineering and review all the details of the project
[slide 31]. The companies then proceed through the stage-gated
process to the Pre-Front End Engineering and Design and continue
forward. As the slide illustrates, as the process moves forward
the spend level on the private sector side increases
dramatically. The aforementioned is preferable as the more the
private sector spends, the more likely [the project] will take
hold. Commissioner Sullivan related that there is frustration
that the concept selection work has not been finalized. The
governor wants to have numbers, not ranges, on a specific
project. Therefore, in the State of the State address the
governor laid out some fairly specific details on the capacity
of the plan, the size pipe, the size of the volumes, and the
location of the gas treatment plant. Once that information is
available, then the project can move into the next phase with
the commercial agreement in order to ensure that a summer season
is not lost. He acknowledged that the aforementioned is coming
up rapidly, but the deadlines help in terms of being an "action
forcing event."
2:37:21 PM
CO-CHAIR FEIGE asked if making public the concept includes the
location of the terminal.
COMMISSIONER SULLIVAN answered that given the sensitivities of
that the governor did not include that in his State of the State
address, but the hope is that it will available soon.
2:38:12 PM
REPRESENTATIVE P. WILSON asked if it is known whether the LNG
plant will be located on the North Slope and [staff] will be
transported to work or elsewhere. She expressed interest in the
cost of transportation. She further asked if that's what is
being worked on now.
COMMISSIONER SULLIVAN replied yes, the key issue is the gas
treatment facility. He acknowledged that Representative P.
Wilson is correct in that the location of the plant could reduce
costs in terms of where workers are located, but it would also
be transporting large amounts of H2S through the state and off-
take points would need a way to clean the gas. Therefore, there
are pros and cons.
2:39:39 PM
COMMISSIONER SULLIVAN, returning to his presentation [slide 43],
stated that there has been a lot of progress with strategic and
critical minerals in the mining sector. A little over a year
ago, the governor laid out the strategy the state has
undertaken, with strong legislative support. The legislature
funded a little under $3 million for a statewide assessment. He
highlighted that other elements [with regard to mining] are not
dissimilar to the strategy on oil, whether it is permitting or
marketing the state. In the past year, there has been continued
economic value in terms of the producing mines in Alaska of
which there are only seven large-scale mines [slide 44]. As the
slide relates, the mines are producing significant value in
terms of Alaska's total exports. It is also important to know
that mines are a huge job engine, in terms of construction as
well as the operation. From a visit to Fort Knox mine a couple
of years ago, he recalled that there was an average of 700
workers with an average wage of $100,000. Such operations have
enormous impacts not only for jobs but also for economic and
social wellbeing, which is important to keep in mind. He then
pointed out that it is the second year in a row that about one-
third of the total U.S. exploration investment occurred in
Alaska [slide 45]. The aforementioned is the result of 30
exploration projects, not just the Pebble Mine that spent over
$1 million in 2011. The issue is that the Pebble Mine has not
yet moved into the permitting phase with DNR or the federal
government. However, since the legislature last met, Donlin
Creek Gold Mine has moved into the permitting phase.
2:43:24 PM
COMMISSIONER SULLIVAN then highlighted that the second annual
"Alaska Strategic & Critical Minerals Summit" was held in
Fairbanks on November 30, 2012 [slides 46-47]. During the first
summit, the governor laid out the statewide strategy to a huge
turnout of folks and the process received very favorable
national press coverage. The 2012 summit was more about putting
together partners, whether they are investors, companies, or
private industry [slide 47]. In fact, a representative from the
Japan Oil, Gas and Metals National Corporation (JOGMEC), this is
similar to the Alaska Industrial Development and Export
Authority (AIDEA) except that it has a $45 billion balance
sheet, attended and spoke at the summit. The summit, he opined,
drew a lot of attendees and it will continue to be held. He
further opined that it is just scratching the surface. He then
directed attention to the agenda from the November 30, 2012,
summit from which there was a very positive outcome [slide 48].
2:45:06 PM
REPRESENTATIVE P. WILSON recalled that she went to the first
summit and she was very impressed. Therefore, she expressed her
regret at being unable to attend the second summit.
COMMISSIONER SULLIVAN said the credit goes to Mr. Swenson,
Elizabeth Blooming, the university, and many others as well as
the great presenters.
2:45:56 PM
REPRESENTATIVE SEATON inquired as to the anticipated impact of
the international treaty on the prohibition on mining mercury or
use of it in industrial mining in terms of Donlin Creek. He
further inquired as to whether alternative methods for recovery
had been developed.
COMMISSIONER SULLIVAN said he didn't know the answer.
ED FOGELS, Deputy Commissioner, Office of the Commissioner,
Department of Natural Resources (DNR), said that he is not very
familiar with that treaty. However, he offered his
understanding that Donlin Creek will not be using mercury in its
processing, although there will be issues of mercury in the ore
that will have to be addressed in the permitting process, the
EIS, and federal and state regulations. He further offered to
review the treaty and inform the committee if there are any
other ramifications.
REPRESENTATIVE SEATON related his understanding that Donlin
Creek was going to use a cyanide process.
MR. FOGELS clarified that to his knowledge Donlin Creek will not
be using cyanide either but rather will roast its ore, which
oxidizes it, and will use various other procedures to obtain the
gold.
2:47:50 PM
COMMISSIONER SULLIVAN remarked that the state has had issues
with regard to making the state's permitting system more timely,
efficient, and certain [slide 49]. He acknowledged that DNR has
had issues as the committee is likely familiar with the 2,500
backlogged permits. However, he emphasized that good progress
has been made in terms of reducing almost 40 percent of the
backlog while continuing to receive new permits and revamping
the system. Brent Goodrum, Director, Division of Mining, Land
and Water, and his team have done a good job and are aiming to
have no backlog within three years. He reminded the committee
that last legislative session, the department made some
statutory changes that helped with regard to permitting issues
and recently the governor introduced a number of other areas he
believes are important to address. Although the idea is not to
cut corners on environmental protection because the department
takes great pride in how well the state has responsibly
developed its resources, it should not take 20 years to permit a
mine, he said.
2:49:56 PM
CO-CHAIR FEIGE recalled that a couple of years ago, the
legislature appropriated to the Division of Mining, Land & Water
extra funding and positions to address the backlog. He inquired
as to when the department anticipates that it will complete the
backlog and be caught up.
COMMISSIONER SULLIVAN responded that the goal was to have it
done in three years from when [the cleanup of the backlog]
started, which means the division has about a-year-and-a-half
left. He expressed the department's appreciation for the
legislature's strong bipartisan support through the additional
funding to hire additional staff and fill vacant positions in
the division [slide 50]. All the staff allocated through that
funding has been hired and are being trained and there is an
impact.
2:51:10 PM
REPRESENTATIVE P. WILSON asked then whether the division would
be able to handle what's coming after the backlog is done.
COMMISSIONER SULLIVAN replied yes.
CO-CHAIR FEIGE questioned whether there will be any surplus.
COMMISSIONER SULLIVAN remarked that the department has been
frustrated with the federal government regarding a number of
permitting issues that overlap. Point Thomson is a great
example. Although Point Thomson is on state land, the
permitting delays were caused by the federal government, but
cost the state. He reminded the committee that the state had an
agreement with Exxon to have Point Thomson producing two years
from this winter, but that had to be pushed back due to the lost
season. He informed the committee that the department has been
working closely with the U.S. Army Corps of Engineers and has
offered to provide them help when they need it. Cook Inlet is a
good example, he stated, because many times the problem with
permitting is not the state slowing things down, but rather the
federal government. Commissioner Sullivan said that the
department is working hard to maintain the relationship with the
U.S. Army Corps of Engineers as it is sometimes difficult to get
the U.S. Army Corps of Engineers moving expeditiously.
MR. FOGELS added that if all goes as planned the backlog will be
knocked off in a year-and-a-half. The division has a lot of
excess capacity, which the division plans to use to reduce the
processing time further. The aforementioned might be achieved
by using the OPMP model.
MR. FOGELS then corrected his earlier response to Representative
Seaton by specifying that Donlin Creek does use cyanide in its
process.
2:53:56 PM
COMMISSIONER SULLIVAN, in response to Representative P. Wilson,
specified that Colonel LaStoke (ph) is the [U.S. Army Corps of
Engineers] district engineer for Alaska. He noted that he was
very helpful with the Point Thomson permitting.
2:54:28 PM
REPRESENTATIVE OLSON, returning to the backlog, inquired as to
how the platform abandonments are coming along. Will those be
completed by the end of session, he asked.
MR. BALASH responded that drafting and reviews are underway.
Although a team is working on the platform abandonments, he
opined that he is reluctant to commit to a date certain.
REPRESENTATIVE OLSON recalled that it has been about five years.
2:55:04 PM
COMMISSIONER SULLIVAN, returning to his presentation, directed
attention to some of the other efforts the department is
focusing on to create efficiencies [slide 52]. This focus goes
beyond the department as it is a statewide effort to create
efficiencies with permitting.
COMMISSIONER SULLIVAN pointed out that wherever [the department]
has discussed how the state has been promoting opportunity and
targeting potential companies to enter Alaska, it has also
highlighted related the importance of meeting the state's very
high environmental standards and the need for companies entering
Alaska to uphold that [slides 53-54]. The department also
highlights that the state has been a laboratory for innovation
in different areas of resource development. Many of the
innovations through the country and world that shrink the
footprint of exploration while increasing the ability and area
underneath the ground to access hydrocarbons have been developed
in Alaska [slide 55]. As an example, one only has to compare
the footprint size of Prudhoe Bay versus that of Alpine or
Liberty; the surface to underground surface developed is
dramatic.
2:57:25 PM
COMMISSIONER SULLIVAN then turned to the 2013 legislative
session and beyond and said that the department believes oil tax
reforms are critical to the state's efforts [slide 57]. Per the
International Energy Agency, the U.S. is ranked to be the number
one oil and gas producer in the world by 2020. He characterized
the aforementioned as amazing. Commissioner Sullivan stressed
that Alaska needs to be part of that effort, not an anchor on
that effort. The department has worked hard to implement its
comprehensive strategy, but tax reform remains key to achieving
it. Companies continually point out that although Alaska has a
tremendous resource base, its costs are too high, which inhibits
investment. He then highlighted the core principles of tax
reform listed on slide 57 and the governor and department's
belief that the status quo is unfair to Alaskans and
unacceptable. He refuted the "declinist view" and expressed
hope for an optimistic view.
2:58:56 PM
COMMISSIONER SULLIVAN moved on to gas commercialization, which
is one of the governor's new benchmarks in 2013 [slide 58]. The
broader message is the need to stop fighting over the gas line
and start fighting for it. He, again, highlighted the efforts
with regard to permitting reform and promoting the state. He
noted that he had provided the committee [a December 2012
special report entitled "Alaska, Envisioning a Bright New Era"
produced by Star Communications for distribution with the] Oil &
Gas Journal, which 30,000 CEOs receive. In conclusion,
Commissioner Sullivan opined that although there is a lot of
work to be done, there is a lot of cause for optimism in moving
the state forward.
3:00:21 PM
CO-CHAIR SADDLER referred to Article VIII of the Alaska State
Constitution, which addresses the maximum use of resources
consistent with public benefit. He inquired as to how the time
element factors into the determination of whether the department
is managing the resources for the public benefit.
COMMISSIONER SULLIVAN said the department views maximum benefit
as a broad declaration of policy that includes both short- and
long-term thinking, which he likened to the view of the current
oil tax debate. Whether it is economic opportunity driven by
resource development, access to the state's lands, or
conservation, DNR thinks the idea of public interest stated in
the constitution is important. However, it also relates to
using the state's resources, whether for enjoyment or for the
benefit of communities, in a broader sense. Again, the Red Dog
Mine is a great example of using the state's resources for jobs
as well as social programs. He acknowledged the controversy
last year when DNR tried to define its mission more along the
lines of the constitutional mandate in a broad sense that covers
a number of generations.
3:03:16 PM
REPRESENTATIVE SEATON, referring to slide 55, related his
understanding that the Liberty drill site has been sold.
COMMISSIONER SULLIVAN said [the inclusion of the Liberty drill
site] was a mistake and DNR can get back to the committee on the
matter.
3:03:46 PM
CO-CHAIR FEIGE recalled that two years ago one of the main
issues brought to him was the attention the commissioner's
office was paying to agriculture. He then commended the
commissioner and his staff for its attention to agriculture over
the past two years while also addressing oil and gas issues.
COMMISSIONER SULLIVAN thanked Mr. Fogels and Ms. Havemeister for
their great work in this regard. The agriculture committee has
been contributing to the state's economy as well as the food
security of Alaskans. He urged Alaskans to purchase Alaska-
grown products in grocery stores and restaurants as it benefits
everyone.
3:06:01 PM
ADJOURNMENT
There being no further business before the committee, the House
Resources Standing Committee meeting was adjourned at 3:06 p.m.
| Document Name | Date/Time | Subjects |
|---|---|---|
| Sullivan_DNR Update_House Resources_1-21-13.pdf |
HRES 1/21/2013 1:00:00 PM |