Legislature(2023 - 2024)ADAMS 519
02/07/2024 03:30 PM House RESOURCES
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| Audio | Topic |
|---|---|
| Start | |
| Presentation: Cook Inlet Gas by Hilcorp | |
| Presentation: Cook Inlet Gas by Hex/furie | |
| Presentation: Cook Inlet Gas by Bluecrest Energy | |
| Presentation: Cook Inlet Gas by Enstar | |
| Adjourn |
* first hearing in first committee of referral
+ teleconferenced
= bill was previously heard/scheduled
+ teleconferenced
= bill was previously heard/scheduled
ALASKA STATE LEGISLATURE
JOINT MEETING
SENATE RESOURCES STANDING COMMITTEE
HOUSE RESOURCES STANDING COMMITTEE
February 7, 2024
3:30 p.m.
MEMBERS PRESENT
SENATE RESOURCES
Senator Click Bishop, Co-Chair
Senator Cathy Giessel, Co-Chair
Senator Bill Wielechowski, Vice Chair
Senator Scott Kawasaki
Senator Forrest Dunbar
Senator Matt Claman
HOUSE RESOURCES
Representative Tom McKay, Chair
Representative George Rauscher, Vice Chair
Representative Thomas Baker
Representative Kevin McCabe
Representative Dan Saddler
Representative Stanley Wright
Representative Jennie Armstrong
Representative Donna Mears
Representative Maxine Dibert
MEMBERS ABSENT
SENATE RESOURCES
Senator Kaufman
HOUSE RESOURCES
All members present
COMMITTEE CALENDAR
PRESENTATION: COOK INLET GAS BY HILCORP
- HEARD
PRESENTATION: COOK INLET GAS BY HEX/FURIE
- HEARD
PRESENTATION: COOK INLET GAS BY BLUECREST ENERGY
- HEARD
PRESENTATION: COOK INLET GAS BY ENSTAR
- HEARD
PREVIOUS COMMITTEE ACTION
No previous action to record
WITNESS REGISTER
LUKE SAUGIER, Senior Vice President
Hilcorp Alaska, LLC
Anchorage, Alaska
POSITION STATEMENT: Presented an update on Cook Inlet Gas.
MARK SLAUGHTER, Chief Commercial Officer
Furie Operating Alaska and HEX Cook Inlet., LLC
Anchorage, Alaska
POSITION STATEMENT: Presented an update on Cook Inlet Gas.
BENJY JOHNSON, President and CEO
BlueCrest Energy, Inc.
Fort Worth, Texas
POSITION STATEMENT: Presented an update on Cook Inlet Gas.
JOHN SIMS, President
ENSTAR Natural Gas Company
Anchorage, Alaska
POSITION STATEMENT: Presented an update on Cook Inlet Gas.
ACTION NARRATIVE
3:30:20 PM
CO-CHAIR CATHY GIESSEL called the joint meeting of the Senate
and House Resources Standing Committees to order at 3:30 p.m.
Present at the call to order were Senators Wielechowski, Bishop,
Kawasaki, Dunbar, Claman, Co-Chair Giessel, and Representatives
Rauscher, Baker, Kevin McCabe, Saddler, Wright, Armstrong,
Mears, Dibert, and Chair McKay.
^Presentation: Cook Inlet Gas by Hilcorp
PRESENTATION: COOK INLET GAS BY HILCORP
3:32:00 PM
CHAIR GIESSEL announced the consideration of a presentation on
Cook Inlet Gas by Hilcorp.
3:32:51 PM
LUKE SAUGIER, Senior Vice President, Hilcorp Alaska, LLC,
Anchorage, Alaska, presented an update on Cook Inlet Gas.
3:35:29 PM
MR. SAUGIER moved to slide 3 and spoke to Hilcorp production:
[Original punctuation provided.]
Cook Inlet Basin Gas
• Hilcorp is committed to the Cook Inlet Basin
• Hilcorp is fully developing its leasehold
? Hilcorp has produced over 700 Bcf of gas since
entering Alaska
? Hilcorp has spent well over $1.0 billion in the
Cook Inlet Basin
? Hilcorp is increasing activity in Cook Inlet
Basin
? Drilled 153 wells since 2011 and plans to drill
15-20 wells per year going forward
• Producing wells' production initially declines
~30% per year
• Cook Inlet Basin gas market is unlike any other
in the United States
• Gas under Hilcorp's leasehold cannot meet all of
the region's gas demand
Utilities and other gas producers must identify new
sources of gas supply for South Central Alaska
3:36:55 PM
MR. SAUGIER moved to slide 4 and explained the bar chart that
demonstrates the number of wells drilled every year in Cook
Inlet Basin since 2005. He said Hilcorp has drilled the vast
majority of wells since 2012 and is the only company that
drilled any wells since 2019. He suggested that this is a
problem for Alaska. While Hilcorp is drilling many to maintain
production at the highest level possible, other producers
contribute less to the overall gas supply. ENSTAR recently
showed a graph that depicted an imbalance in supply. He said
Hilcorp is optimistic it will drill 20 wells in 2024 and expects
other producers to continue development.
3:38:38 PM
MR. SAUGIER moved to slide 5 and spoke to a bar chart that
depicts Hilcorp gas contracts and reserves. He explained that it
demonstrates supply and demand. Southcentral Alaska uses about
70 billion cubic feet (Bcf) per year, which is typical. The
green bars represent gas supplied to market while the red line
indicates total demand. Historically, Hilcorp has supplied about
50 Bcf per year to the market. It shows a projection of all firm
contracts anticipated for the future. The company has an
obligation to deliver that much gas to customers through 2033.
Over time, the amount goes down due to gas being limited to U.S.
Securities and Exchange Commission (SEC) approved reserves.
Hilcorp is required to have a third-party auditor send a letter
confirming the company has the gas it claims and meets SEC
standards. The solid green line is the best forecast for what
gas production will meet over this period, which closely matches
contractual obligations. Despite any yearly versatility, it is
balanced over time. The dash line represents how much gas
Hilcorp could deliver if it stopped drilling, which he believes
is in nobody's best interest. The company at times cannot
operate in some places due to ice in Cook Inlet, so certain
areas are inaccessible. Drilling support services are fairly
limited and Hilcorp relies on most of its own drilling rigs. The
drilling activity level has been relatively low over the past
several years. Permitting is also challenging and more difficult
to obtain for Cook Inlet than for the North Slope because of
limitations placed by federal agencies. Much of the onshore land
in Alaska is owned by the Bureau of Land Management (BLM) and
permitting is onerous. Offshore drilling also requires companies
to navigate around mammals and wildlife and it takes years to
get permits lined up.
3:43:54 PM
MR. SAUGIER moved to slide 6 and spoke to Cook Inlet gas storage
facilities. He noted that Anchorage experienced frigid
temperatures last weekend. Cook Inlet Natural Gas Storage
experienced operational challenges with two of 25 wells and lost
deliverability for two of them, so it was unable to deliver
enough gas to meet market demand. Utility companies worked
together and collaborated to find a solution. The companies
determined that either diesel would need to be burned to
maintain the city's electricity supply or Hilcorp could deliver
more than its contractual obligations at its standard price.
MR. SAUGIER said gas storage facilities are old gas reservoirs
that have been repurposed to inject gas in the summertime and
draw it out in the winter. Hilcorp operates three of the four
gas storage facilities in Southcentral Alaska. He noted that
Pool Six is particularly large. It is used to store gas at the
5-20 Bcf range, but has the potential to hold a larger quantity.
Hilcorp has invested in reliability and redundancy, which
includes additional compression, maintenance of the wells, and
ensuring there are more wells than are needed to account for
potential problems. Three separate storage systems are
maintained to put gas in the line in different places depending
on market needs. Hilcorp has managed this method for a long time
and has a lot of experience. He stated that Hilcorp would like
to be part of the solution for storage and has plenty to offer
to the market.
3:48:09 PM
REPRESENTATIVE MCCABE asked how much West Susitna access would
help the company drill and work during the wintertime.
3:48:33 PM
MR. SAUGIER replied that access would be helpful. There are
likely other potential gas fields on the west side of Cook Inlet
and road access would allow year-round access.
3:49:20 PM
SENATOR KAWASAKI asked if the total storage shown on slide 6 is
currently available.
3:49:34 PM
MR. SAUGIER replied no. He said Pool Six could store more than
100 Bcf; the other wells are smaller.
3:49:57 PM
SENATOR KAWASAKI asked for the percentage of storage that is
currently available.
3:50:10 PM
MR. SAUGIER replied he is unsure how much gas is currently in
storage. He stated that a problem arose as a result of the
inability to pull the gas out quickly enough.
3:50:43 PM
SENATOR KAWASAKI asked whether gas is still exported or
exclusively used within the Cook Inlet region.
3:50:50 PM
MR. SAUGIER replied that Hilcorp does not export gas. The last
time gas was exported was around 2015.
3:51:07 PM
CO-CHAIR MCKAY asked for the cost per well if Hilcorp is
drilling 15-20 wells per year.
3:51:30 PM
MR. SAUGIER replied that it varies depending on the location of
drilling and mentioned that offshore wells are very expensive.
Hilcorp spent over $20 million on drilling an offshore well last
year.
3:51:47 PM
CO-CHAIR MCKAY noted that it would cost $300 million to drill 15
wells offshore and asked if any partners assist Hilcorp with
expenditures.
3:52:06 PM
MR. SAUGIER replied that the company has a partner in Beluga
River. He said it is correct to say Hilcorp spends hundreds of
millions per year.
3:52:16 PM
CO-CHAIR MCKAY opined that it is unusual in the oil industry to
not have partners that assist with project costs to help spread
the risk, especially when considering a one-million-dollar
project. He asked if the second jackup rig is still in Alaska.
3:52:48 PM
MR. SAUGIER replied that he does not believe it is still in
Alaska.
CO-CHAIR MCKAY said there is one jackup rig under contract in
Cook Inlet. Bringing a second jackup rig to Cook Inlet would be
an expensive ordeal and therefore a company would want to drill
a full season of about 20 wells. However, unlike oil, gas is not
exported; excess supply means the company doesn't recover its
investment. Bringing in a second jackup rig is not a great
solution.
3:54:50 PM
MR. SAUGIER agreed that it would be expensive and said it would
take three to five years to transport one jackup.
3:55:24 PM
SENATOR WIELECHOWSKI quoted the following statement released by
the Federal Trade Commission (FTC):
"The proposed transaction raises competitive concerns for the
Commission because Marathon, Hilcorp, and ConocoPhilips today
account for over 90 percent of the natural gas produced in Cook
Inlet. As a result, this acquisition might lessen the
negotiation strength of utility and industrial customers. He
conveyed that in response to the FTC investigation, Hilcorp
entered a consent decree where Hilcorp agreed to utilize
commercially reasonable efforts to increase the production and
development of natural gas from Hilcorp's Cook Inlet Basin
properties. He asked if the consent decree is still in effect.
3:56:44 PM
MR. SAUGIER replied that he is unsure whether it is still in
effect.
3:56:45 PM
SENATOR WIELECHOWSKI sought confirmation that Mr. Saugier does
not know if Hilcorp is still under a consent decree to produce
gas in Cook Inlet.
3:56:52 PM
MR. SAUGIER replied that he is uncertain if there is a known end
date.
3:56:56 PM
SENATOR WIELECHOWSKI said the money Hilcorp spent is pursuant to
legal obligations under the lease terms and the consent decree.
3:57:07 PM
MR. SAUGIER stated that Hilcorp invested heavily.
SENATOR WIELECHOWSKI asked how much profit Hilcorp made in
Alaska over the last year.
3:57:11 PM
MR. SAUGIER replied that Hilcorp is proud of its investment in
Cook Inlet. The company invests hundreds of millions of dollars
every year, and has always abided by the terms of the consent
decree.
SENATOR WIELECHOWSKI asked how much profit Hilcorp made last
year.
3:57:24 PM
MR. SAUGIER responded that Hilcorp is a private company and does
not disclose its profit information.
SENATOR WIELECHOWSKI asked what Hilcorp's rate of return was in
Alaska last year.
3:57:32 PM
MR. SAUGIER said the objective of the program for 2024 is to
invest almost $1.5 billion in the fields on the North Slope. It
would invest hundreds of millions of dollars in Cook Inlet to
supply the gas that the industry has committed to.
3:58:03 PM
SENATOR WIELECHOWSKI asked again about the rate of return.
3:58:09 PM
MR. SAUGIER replied that the company does not disclose financial
information.
3:58:14 PM
SENATOR WIELECHOWSKI asked if Hilcorp has ever applied for
royalty relief from any of its fields in Cook Inlet to make them
more economical.
3:58:24 PM
MR. SAUGIER stated his belief that some of its oil producing
platforms are eligible for royalty relief. Department of Natural
Resources (DNR) has a program in place for marginal fields to
receive royalty relief.
3:58:40 PM
SENATOR WIELECHOWSKI asked if that includes any of its gas
platforms.
3:58:43 PM
MR. SAUGIER replied he does not believe so.
3:58:49 PM
SENATOR WIELECHOWSKI conveyed that United States Geological
Survey (USGS) said there is likely 19 trillion cubic feet of gas
in Cook Inlet that is technically recoverable. He asked how much
gas is technically recoverable on Hilcorp's Cook Inlet lease
hold properties.
3:59:02 PM
MR. SAUGIER referred to the slide on gas contracts and reserves
and said firm contractual commitments the company has made to
supply gas to customers generally reflect its view of
recoverable gas from its leases.
3:59:23 PM
SENATOR WIELECHOWSKI asked if the bar graph shows the maximum
technically recoverable gas in Cook Inlet.
3:59:33 PM
MR. SAUGIER noted that the term 'technically recoverable' is
different than the term 'proved reserves.' He said Hilcorp can
only sell proved reserves so technically recoverable gas is not
calculated.
3:59:59 PM
SENATOR WIELECHOWSKI asked if these are all the proven reserves
Hilcorp has and whether they have been filed with the SEC.
4:00:07 PM
MR. SAUGIER replied that third party auditors are utilized to
review reserve bookings, which are used to contract with
utilities. Hilcorp hopes to carry as large a reserve volume as
possible that enhances the business and allows it to contract
with utilities. The company has seen a relatively stagnant
number of proved reserves despite a continually high level of
activity in investment.
4:00:55 PM
REPRESENTATIVE MEARS asked for other highlights from Hilcorp's
development plan with DNR.
4:01:10 PM
MR. SAUGIER replied that Hilcorp plans to drill wells at the
Southern Kenai Peninsula Cottonfield, Whiskey Gulch prospect,
and the Swanson River field. He said in the Wildlife Refuge, the
company plans to drill at Beluga River, four wells at the North
Cook Inlet field, a few in Kenai gas field, and hopes to drill
from the Steelhead platform depending on the state of the ice.
4:01:52 PM
REPRESENTATIVE MEARS asked if there are any other plans for the
business that will be built out next year.
4:02:02 PM
MR. SAUGIER sought clarification of the question.
4:02:08 PM
REPRESENTATIVE MEARS restated the question and asked if drilling
is the only plan for development next year.
4:02:18 PM
MR. SAUGIER replied that he is uncertain. He said the company
usually includes work-over activities, compressor instillations,
however most of the investment is focused on drilling.
4:02:38 PM
REPRESENTATIVE MEARS pointed out that the amount of investment
is impressive, but it doesn't mean much when profit is
undetermined.
4:03:05 PM
SENATOR DUNBAR asked for a general sense of how much more gas
would be produced if royalty relief proposals are passed.
4:03:53 PM
MR. SAUGIER replied he could not provide a definitive answer.
4:04:12 PM
SENATOR DUNBAR asked for a rough estimate.
4:04:28 PM
MR. SAUGIER responded that he could not provide a number.
^Presentation: Cook Inlet Gas by HEX/Furie
PRESENTATION: COOK INLET GAS BY HEX/FURIE
4:04:49 PM
CO-CHAIR MCKAY announced the consideration of a presentation on
Cook Inlet Gas by Furie Operating Alaska and HEX Cook Inlet.,
LLC.
4:05:23 PM
MARK SLAUGHTER, Chief Commercial Officer, HEX/Furie Operating
Alaska LLC, Anchorage, Alaska, provided an overview of Furie
Operating Alaska and HEX Cook Inlet, LLC. He introduced himself
and said he has been in the Alaska oil and gas industry since
1997 and with Cook Inlet since 2002. He said he spent ten years
working for ENSTAR before moving to Cook Inlet Energy, then
began working with Furie in 2015.
4:06:26 PM
MR. SLAUGHTER moved to slide 3 and spoke to the HEX corporate
structure:
[Original punctuation provided.]
HEX Corporate Structure
• HEX L.L.C. 100% Alaskan Owned
• HEX Cook Inlet LLC acquired subsidiaries Cornucopia,
Corsair, Furie, and 90% of the KLU on July 1st, 2020
• Newest gas producer in Cook Inlet
• Furie is the operating company that runs the offshore
platform, gathering line and onshore gas processing
facility
• Gas Sales to Electric Utilities, Gas Utilities, and
Refinery in Southcentral Alaska
MR. SLAUGHTER added that HEX only produces natural gas and runs
clean pipeline inspection gauges (PIG) through the pipeline on a
weekly basis. He said it also conducts side scan sonar surveys
to identify any scouring. Once the gas reaches shore, it is
processed and provided as utility-grade gas to corporate
customers.
4:07:47 PM
MR. SLAUGHTER moved to slides 4 and 5 and spoke to the
infrastructure of the Kitchen Lights Unit (KLU) as well as other
HEX and Cook Inlet leases. He said the Kitchen Lights Unit is
operated by Furie and is the largest unit within Cook Inlet. It
is roughly 84 thousand acres and there is an additional 13
thousand acres that do not include unitized leases. HEX has
bought leases from the state over the past three years to
diversify its gas production portfolio.
4:08:37 PM
MR. SLAUGHTER moved to slide 5 and spoke to the history of KLU:
[Original punctuation provided.]
HISTORY OF Kitchen Lights Unit (KLU)
1999 - 2009
Escopeta acquires leases State of Alaska Renaissance
Alaska, Pacific Energy Resources
• Kitchen Lights Unit approved by State of Alaska
2010 - 2014
Spartan 151 Jackup rig arrives in Cook Inlet
• 5 Exploration wells Drilled in KLU
2015 - 2017
Julius R Platform set,
• Gas Sales to HEA and other utilities
2018 - 2019 Energy Capital Partners Assumes Control of
Furie
• Hydrates block gathering line ceasing gas
production
• Chapter 11 Re-organization
2020 - 2024
HEX acquires Furie & KLU
• Stable gas production and sales to Southcentral
utilities and refinery
• Permitted and installed water handling equipment
for Sterling production
• HEX & Furie acquired Cook Inlet Leases in 2021,
2022, and 2023 lease sales
• Acquired used gas production equipment for ~10-15
MMcfd facilities x3
• State of Alaska pays final Cook Inlet Tax Credits
to pre-HEX lenders
• $10 MM invested in workover operations in 2023
with hydraulic workover unit
• October 2023 HEX pays off AIDEA loan in full and
ahead of schedule
• Purchases Seismic Data from State of Alaska
MR. SLAUGHTER added that the unit itself went into production in
2015 before firm gas sales to Homer Electric commenced in 2016.
He said the field ran off one gas well, which held the entire
supply for Homer Electric.
4:11:11 PM
MR. SLAUGHTER moved to slide 6 and stated that HEX/Furie is the
only Alaska-based oil and gas company. He said it is important
to support Alaskans.
4:11:25 PM
MR. SLAUGHTER moved to slide 7 and spoke to a graph that depicts
Furie employment data. He said he has been with the company
prior to its acquisition four years ago.
4:12:22 PM
MR. SLAUGHTER moved to slide 8 and spoke to Kitchen Lights Unit
production data for four wells:
[Original punctuation provided.]
Kitchen Lights Unit Production
Four Production Wells on Julius R Platform (JRP)
• Suboptimal completions in the KLU A-1, A-4 wells
result in lower production rates, more down time
o Illustrated by yellow and purple areas on
chart
o Significant downtime and lower rates related
to solids production
• Sand control completions in KLU A2A, KLU 3 result
in better initial and long-term performance
o Illustrated by red and orange areas on chart
MR. SLAUGHTER said the graph demonstrates a large gap as a
result of the pipeline freezing by the formation of hydrates. He
noted that the purple areas show a production spike following
company acquisition, new management, and new ownership. In
December of 2023, ENSTAR approached HEX/Furie and asked whether
it could increase production, so it was then increased 20
percent despite potential risks. He noted that two of four wells
that do not utilize sand control produce a much lower volume of
gas, but are less costly.
4:13:58 PM
MR. SLAUGHTER moved to slide 9 and spoke to proposed KLU Beluga
Drilling plan opportunities:
[Original punctuation provided.]
Proposed KLU Beluga Drilling Plan Opportunities
• Significant running room identified
• Initial wells focused on staying high on
structure, close to existing production and
within sand fairway.
• Well completion design determines sustained
production rate
o "Simple" completion with no sand control can
potentially deliver 5MMscfd
o "Complex" completion with full sand control
can potentially deliver upwards of 10MMscfd
• Next well proposed: A-4ST prospect
• Future high-graded prospects (Program following
A-4ST contingent upon financing)
MR. SLAUGHTER stated that complex, costly wells could deliver
ten million cubic feet per day. He noted that the company is
currently producing 12 million cubic feet per day. The A-4ST
well is not producing gas at the anticipated rate and will need
to be side-tracked. There is a three-mile radius from the
existing platform that could be drilled with a jackup rig, but
there is a limited window to get a rig into the area. There is
only one rig in Cook Inlet, but it is currently under a contract
with Hilcorp.
4:15:48 PM
MR. SLAUGHTER moved to slide 10 and spoke to the proposed 2024
KLU Program:
[Original punctuation provided.]
2024 KLU Proposed Program
• Subject to
o Royalty Relief
o Enterprise 151 Rig Availability
o Other Drilling and Completion Equipment and
Services Availability
o Permits State & Federal
o Financing
o Long Term Markets for Natural Gas
• KLU A-4A Sidetrack
o Simple vs Complex Completion
o 5MMcfd vs 10+ MMcfd rates
o $10MM vs $25MM
• New Gas to Market
o ~30 Days to Drill
o ~30 Days to Complete
o ~60 Days to Bring New Gas Online
square4 Deadline for to decide on simple vs
complex completion this month $3.0M+
expenditure
MR. SLAUGHTER stated that royalty relief could be addressed by
the legislature to enable drilling this year. He said HEX/Furie
has the ability to self-finance this year, but the long-term
rate is in question. The 'New Gas to Market' section indicates
what could be accomplished with a jackup rig. He stated that now
is the time to determine the financing path forward.
4:17:56 PM
MR. SLAUGHTER briefly moved to slide 11 and spoke to the North
Kenai Onshore opportunity:
[Original punctuation provided.]
North Kenai Onshore Opportunity
Highlights
• Oil and Gas opportunity with undrilled four-way
closures
• Conventional Oil Targets
• Biogenic Gas Play Potential
• Adjacent to existing public roads and regulated
natural gas transmission pipeline
• 15 24 months to first gas
o subject to permits & financing
MR. SLAUGHTER said the North Kenai onshore opportunity
could not go online faster than 15-24 months, but is
included to diversify the company's portfolio.
4:18:24 PM
MR. SLAUGHTER moved to slide 12 and spoke to current KLU
challenges:
[Original punctuation provided.]
Current KLU Challenges
• State of Alaska Approved Burden on KLU
o 12.5% Overriding Royalty Interest
o 12.5% State of Alaska Royalty Interest
o ~10% Carried Working Interest Owners New
Joint Operating Agreement July 2020
Total Burden approaching 35% on Capital
• Long Term Market Threats to Cook Inlet Natural
Gas
o Liquified Natural Gas (LNG) Imports
o Market Replacement by Renewables
o North Slope Gas
4:19:40 PM
MR. SLAUGHTER moved to slide 13 and spoke to a bar chart that
depicts a forecast for KLU from 2024 through 2028. He said
production could more than double with a drilling program and by
reworking existing wells. However, the economic foundation of
the company must be fixed.
4:20:22 PM
MR. SLAUGHTER moved to slide 14 and spoke to a bar chart that
depicts the total royalty burden of the KLU. The green bar
represents the standard 12.5 percent royalty that the
legislature can adjust. He stated HEX/Furie went through DNR's
process of asking for royalty relief last year because royalties
were at 25 percent. DNR denied the request and offers HEX/Furie
made for overriding royalty interests were also rejected. The
former commissioner of DNR and the Alaska State Supreme Court
consider 20 percent royalty to be an extreme burden. He opined
that an adjustment by the legislature so the royalty burden was
between 12.5 to 15 percent would allow KLU to move forward,
otherwise it would have to sit on the asset. He noted that HEX
leases on North Kenai have no overriding royalties.
4:22:15 PM
MR. SLAUGHTER moved to slide 15 and spoke to HEX/Furie's
repeatable pathway to new gas opportunities.
[Original punctuation provided.]
HEX & Furie's Repeatable Pathway to New Gas
Furie is positioned to bring new gas in 2024
• Existing Production Platform
o currently producing 12MMcfd
• Capacity in Gathering Line
• Existing Processing Facility & Interconnect
Pending Hinderances
• Economic Burdens
o Drives pace of new gas
• State & Federal Permits i.e. IHA Permit
• Working on Rig Contract & Availability
• Equipment & Service Availability
MR. SLAUGHTER said it is important for the company to stay
viable and continue to work to produce gas. He suggested that
the state has the infrastructure and there is no need to import
gas from Canada or Mexico. Royalty relief is what must be
addressed to make the investment and have the ability to bring
additional gas to Cook Inlet.
4:24:19 PM
REPRESENTATIVE MEARS inquired about the barriers for production.
She asked if there are any state permits that are obstructing
development.
4:24:41 PM
MR. SLAUGHTER replied that the process for permitting to
transport a jackup rig is ongoing.
4:25:27 PM
REPRESENTATIVE MEARS asked whether long-term market threats
dampen potential future production and have curved investments.
4:25:47 PM
MR. SLAUGHTER responded that it is important to understand what
the market is to make investment decisions.
4:26:19 PM
REPRESENTATIVE SADDLER asked how much royalty relief would
impact production.
4:26:50 PM
MR. SLAUGHTER replied that a 12.5 to 15 percent reduction would
allow HEX/Furie to compete with other producers.
4:27:12 PM
REPRESENTATIVE SADDLER asked for an explanation of the
additional burden of the carried working interest.
4:27:25 PM
MR. SLAUGHTER replied that the from the bankruptcy, the joint
operating agreement gave them ten percent ownership of KLU.
However, they do not contribute to the costs of capital
expenditures. HEX/Furie has been working with DNR but it is a
foundational hinderance to KLU.
4:28:56 PM
REPRESENTATIVE MCCABE asked if there are any current
reservations for jackup rigs so work can begin this summer.
4:29:13 PM
MR. SLAUGHTER replied that a commercial arrangement has to be
negotiated.
4:29:44 PM
SENATOR WIELECHOWSKI asked if the company is eligible for
royalty relief under existing law.
4:29:50 PM
MR. SLAUGHTER replied an application was submitted, but DNR
suggested consulting with the overriding royalty interest group.
^Presentation: Cook Inlet Gas by BlueCrest Energy
PRESENTATION: COOK INLET GAS BY BLUECREST ENERGY
4:30:48 PM
CO-CHAIR GIESSEL announced the consideration of a presentation
on Cook Inlet Gas by BlueCrest Energy.
4:31:00 PM
BENJY JOHNSON, President and CEO, BlueCrest Energy, Inc., Fort
Worth, Texas, presented an update on Cook Inlet Gas. He said
there is huge potential that requires funding and spoke to slide
1:
[Original punctuation provided.]
Railbelt Energy Supply/Demand Challenge
The gas is in the ground, waiting to be produced
Cosmopolitan Tyonek Gas Supply:
• Already discovered, tested and Proved
o Structure shape and size is well defined
square4 3D seismic and >25 drilled penetrations
o Productive volume and productivity confirmed
square4 Logs, cores, rock and gas samples from
multiple wells in the gas sands
square4 Flow tests indicate productivity levels
square4 Independent engineering analysis:
Proved 235 BCF + Probable 65 BCF
o Preliminary permitting, engineering and
design now mostly complete
o Conventional offshore production platform
development
o Construction schedule: gas could be online
by Q1/Q2 2027
o Known Cosmopolitan volumes could supply up
to 25 percent of total market
o Development is ready to begin - pending
investment funding
4:33:27 PM
MR. JOHNSON moved to slide 2 and spoke to the history of the
Cook Inlet Basin:
[Original punctuation provided.]
Alaska's Cook Inlet Basin
• Large northern original fields discovered/developed
in 1950's through 1980's (1.4 billion bbl, 9 tcf to-
date)
• Ninilchik (close to Cosmopolitan) online in 2000
o Currently largest producer (277 bcf to
date)
• Cosmopolitan oil production began in 2016
• Cosmopolitan Tyonek gas can be online in 2027
Energy Balance
• Through natural decline and without new sources,
existing Cook Inlet gas production will eventually
fall below needs:
o Infill development possibilities (within
existing fields)
• Typically smaller new volumes
o Alaska Gas Line future uncertain Importation of
gas (LNG) is expensive
o Renewable sources cannot provide sufficient
volumes of low-cost energy
• Undiscovered new gas fields will require years:
o Explore and Find
o Then bring to production
• Proved substantial Cosmopolitan gas could be online
in time to meet supply needs
MR. JOHNSON said BlueCrest believes there is potential in Cook
Inlet, but exploration and identification of reserves takes many
years so funding is necessary.
4:34:50 PM
MR. JOHNSON moved to slide 3 and spoke to a graphic that depicts
the development vision for the Cosmopolitan Unit:
[Original punctuation provided.]
Cosmopolitan Unit Development Concept:
Separate Gas Field and Oil Field
Future Offshore:
Tyonek gas sands are too shallow to be reached by
onshore wells. Dry gas producing wells drilled into
gas reservoirs and water injection wells into oil
reservoirs to improve oil recovery. No offshore oil
production. Water Injection wells
Additional Tyonek Gas Reserves: 235 BCF Proved-
Undeveloped ("PUD") Plus large "Probable" and
"Possible" (Ryder Scott engineering firm 2015-2021)
Ongoing Oil:
"Proved" - Partially Developed. "Extended-Reach" oil
wells drilled safely from onshore produce the deeper
offshore oil with no danger of an offshore oil spill.
Green oil zones are drilled onshore. These wells drill
oil and some gas comes up but no danger of oil spill.
Oil well has fish bones. Gas zones overly oil zones,
technology does not allow to do this. There is no
liquid hydrocarbons associated with the gas. Otherwise
can pump water and inject this from the platform.
4:36:47 PM
MR. JOHNSON moved to slide 4 and spoke to the structure of gas
and oil sands. He said each of the wells penetrates sand. Two
vertical wells were drilled in 1967 and one was drilled in 2013.
Some gas was found in one well that was drilled in 1967, but
samples determined that gas is present in the other gas sands.
4:38:18 PM
MR. JOHNSON moved to slide 6 and showcased a snapshot of one of
the oil zones. He said the image is three-dimensional and shows
what the structure looks like.
4:38:45 PM
MR. JOHNSON moved to slide 7 and spoke to proven gas zones:
[Original punctuation provided.]
Cosmopolitan Tyonek Gas is Proved but Undeveloped
• Multiple wells have been drilled through the gas
sands
• Multiple flow tests of the gas zones confirm high
productivity Size and shape of the "trap"
structure is clearly documented
o 3-D seismic data, hazard and walkaway
seismic surveys, more than 25 vertical well
penetrations above/below/through the gas
zones
• Gas zones are similar to nearby Ninilchik field
(15 miles north)
o Ninilchik is currently the largest Cook
Inlet gas producer and has already produced
more than 277 BCF
4:39:12 PM
MR. JOHNSON moved to slide 8 and summarized the Cosmopolitan gas
field:
[Original punctuation provided.]
Cosmopolitan Gas Field Summary:
• Reservoir shape, size, and productivity now well-
defined
• Gas production will require a small offshore
platform
o Dry gas only no liquid hydrocarbons: (no
chance of oil spill) Subsea pipeline: 3
miles to existing onshore facility
square4 Recent sea floor surveys confirm safe
pipeline route
square4 Onshore facility is already connected
into Enstar gas pipeline system
o Platform/facilities design and cost
projections
square4 Preliminary design completed
square4 Final construction design pending
funding
o Platform gas wells standard Cook Inlet
drilling/completions
o Time to first-gas: approximately 30-40
months from funding
• Production Design Volume
o Current total Railbelt average daily demand
is ~200 MMSCFD
o Cosmopolitan production design capacity is
~50 MMSCFD
• Critical path: Investor participation in new Cook
Inlet project
MR. JOHNSON said a lot of time and money has been spent over the
past few years on the design and identifying cost projections.
He stated that the daily demand for Railbelt was 268 million
standard cubic feet per day (MMSCFD) as of last week, which
demonstrates high demand.
4:41:15 PM
REPRESENTATIVE RAUSCHER asked what the state could do to help
develop the field and get gas to the market.
4:41:28 PM
MR. JOHNSON replied that funding is needed. He said some
investors are willing to put in hundreds of millions of dollars
to get it done. Changes to the law have caused some uncertainty
for investors. While royalty relief improves the economics, it
is not a dealbreaker. The state could also guarantee a state- or
development-based loan.
4:43:06 PM
REPRESENTATIVE RAUSCHER asked for the total cost of the
investment.
4:43:11 PM
MR. JOHNSON replied that the total investment cost for gas and
preliminary oil is about $400 million, but the state would not
necessarily need to cover the full amount.
4:43:53 PM
REPRESENTAIVE ARMSTRONG asked if the Alaska Industrial
Development and Export Authority (AIDEA) could potentially
provide funding.
4:44:05 PM
MR. JOHNSON replied that he is unsure what the state could do.
He said AIDEA has loaned money to BlueCrest for a drilling rig,
but he is uncertain whether AIDEA could meet the high cost
demand.
4:44:30 PM
REPRESENTATIVE ARMSTRONG asked if BlueCrest had inquired with
AIDEA.
MR. JOHNSON replied that BlueCrest has not asked but is still
working with AIDEA on the drilling rig loan.
4:44:45 PM
REPRESENTATIVE SADDLER asked about the financial impact of
former Governor Walker's veto of the oil and gas tax credit.
4:45:03 PM
MR. JOHNSON replied that it was the primary obstacle. The
company subsequently cannot find investors to take the risk.
4:45:26 PM
REPRESENTATIVE SADDLER asked BlueCrest to elaborate on the
impact of instability.
4:45:34 PM
MR. JOHNSON replied that investors must feel confident in their
investment and return.
4:46:14 PM
REPRESENTAIVE MEARS thanked him for being open about the
investment situation. She said some support from the state
through royalty relief makes a difference. She asked if
investment would allow the company to expand into gas
development.
4:46:46 PM
MR. JOHNSON replied that the development plan is for oil
reservoirs and does not include the gas project. However,
BlueCrest is working diligently to find investors so the company
can begin the project.
4:47:15 PM
REPRESENTATIVE MEARS asked how many gas wells BlueCrest could
drill once funding is received.
4:47:23 PM
MR. JOHNSON replied that drilling could not begin until late
into 2026. The plan is to put a rig on the platform and drill
thereafter. One well can access several reservoirs.
4:48:02 PM
CO-CHAIR GIESSEL asked if a permit was obtained for the
platform.
4:48:04 PM
MR. JOHNSON replied that prep work is done, but a permit
application is not submitted until drilling factors are certain.
4:48:18 PM
CO-CHAIR GIESSEL asked for the projected time to acquire the
permit.
4:48:22 PM
MR. JOHNSON replied that the total time is about 12 months, but
much of it is administrative.
4:48:48 PM
SENATOR CLAMAN asked if it is correct that without an investor,
the process could not start.
4:49:09 PM
MR. JOHNSON replied that is correct. He said BlueCrest is ready
to begin the gas project and has spent tens of millions of
dollars on the engineering components.
4:49:46 PM
CO-CHAIR MCKAY noted that all three oil companies are privately
owned so they risk millions of dollars of their own money to
drill and produce oil and gas in Alaska. He said profit margins
on oil are different than profit margins on gas, which are much
tighter.
^Presentation: Cook Inlet Gas by ENSTAR
PRESENTATION: COOK INLET GAS BY ENSTAR
4:50:29 PM
CO-CHAIR MCCKAY announced the consideration of a presentation on
Cook Inlet Gas by ENSTAR.
4:50:43 PM
JOHN SIMS, President, ENSTAR Natural Gas Company, Anchorage,
Alaska, presented an update on Cook Inlet Gas. He acknowledged
the efforts of Hilcorp and others to get the state through the
recent freezing weather. Maintaining critical pipeline pressures
in the transmission systems is the aim.
4:53:21 PM
MR. SIMS moved to slide 2 and provided a brief history of
ENSTAR:
[Original punctuation provided.]
About ENSTAR
• Established in 1959
• 230 employees
• 152,000 customers
• 25 communities served
• 3,560 miles of pipeline
MR. SIMS added that several jobs were brought back from Michigan
to Anchorage.
4:54:12 PM
MR. SIMS moved to slide 3 and spoke to Cook Inlet Gas Natural
Storage Alaska (CINGSA):
[Original punctuation provided.]
About CINGSA
• Constructed in 2012 in response to significant
concerns about Cook Inlet gas supply About CINGSA
• 11 Bcf storage capacity
• 150 Mmcf max injection/withdrawal
• 3 Firm Customers
• 3 Interruptible Customers
• Provides deliverability for more than 40 percent
of ENSTAR demand on a cold day.
MR. SIMS said the 11 Bcf storage capacity cost $160 million
dollars and is fully regulated by the Regulatory Commission
of Alaska (RCA), which is a partnership between the Alaska
Gas Transmission Company and Cook Inlet Region, Inc.
(CIRI).
4:55:06 PM
MR. SIMS moved to slide 4 and spoke to the Utility Working
Group:
[Original punctuation provided.]
Utility Working Group
• Hilcorp/Utilities Annual Update meeting
April 12, 2022
Stated they would not extend existing contracts
• Creation of the Utility Working Group
April 15, 2022
o ENSTAR, Chugach, MEA, GVEA, HEA, IGU
Later included AEA, DNR
Hired Berkeley Research Group (BRG) November
10, 2022
MR. SIMS added that the latest annual update meeting determined
that Hilcorp was not interested in extending existing contracts
at the same level as what they were in the past.
4:56:00 PM
MR. SIMS moved to slide 5 and explained the bar chart that
demonstrates combined utilities' annual demand. He explained the
legend colors and said the green represents what DNR classified
as the lower risk uncontracted demand. These were demands that
were not met by existing contracts that DNR expected to be
supplied by Cook Inlet reserves.
4:57:13 PM
MR. SIMS moved to slide 6 that lists gas supply opportunities
under the phase 1 assessment. He noted that these are not ranked
in a specific order and provided examples.
4:57:47 PM
MR. SIMS moved to slide 7 and described the project team for
phase 2. He said several professional consultants evaluated the
projects to determine what makes the most sense to bring in a
majority of gas.
4:58:33 PM
MR. SIMS moved to slide 8 and spoke to the summary findings for
schedules under phase 2:
[Original punctuation provided.]
Summary Findings for Schedules Phase II
• None of the Options meet the LNG demands for the
4-year milestone (first gas 4Q2027)
• Greatest time unknowns are related to FERC and US
Corp of Engineers permitting durations, time to
modify or construct in-water piers
• Risks are high for FSRU Options due to tides and
winter effects at Cook Inlet
• Long-lead procurement items must be started and
commercial agreements concluded before permits
are issued
MR. SIMS said most utility contracts expire with Hilcorp in 2027
and 2028. He noted that studies, contractors, and consultants
informed CINGSA that none of the other corporations could meet
the timeframe to bring in imported LNG until 2030.
5:00:17 PM
MR. SIMS moved to slide 9 and briefly explained timeline
concerns:
[Original punctuation provided.]
2010 vs. 2024
• In 2010, Cook Inlet utilities faced similar concerns
under different circumstances.
• CINGSA is proof that legislative support for energy
security matters.
• Today, quick, bold action is required to serve this
region in the short and long-term.
• Additional storage is required under any scenario and
should be regulated for price transparency.
5:01:15 PM
MR. SIMS moved to slide 10 and 11 and spoke to the charts that
depict Cook Inlet and combined utilities' demand. He said in
2023, only one entity was successful in drilling. He said
Hilcorp is not open to extending existing contracts, so more
activity is needed in 2024 to meet gaps in 2025. As time goes
on, the challenge comes as temperatures warm.
5:03:09 PM
MR. SIMS moved to slide 12 and spoke to gas supply contract
terms. He said the all-requirements contract has not been
available since 2003. Consequently, there are higher
deliverability expectations from markets.
5:04:31 PM
MR. SIMS moved to slide 13 and highlighted the utility duty to
serve:
[Original punctuation provided.]
Utility Duty to Serve
• This duty is not shared by producers, IPPs, or
anyone else in this state. It is our obligation
alone.
Sec. 42.05.291. Standards of service and
facilities.
(a) Each public utility shall furnish and
maintain adequate, efficient, and safe service
and facilities. This service shall be reasonably
continuous and without unreasonable interruption
or delay.
MR. SIMS said the industry must consider the importation of LNG
to comply with market expectations. He noted that there are no
other industries that have the same duty to serve. He expressed
confidence in Cook Inlet, but acknowledged current challenges.
5:05:47 PM
MR. SIMS moved to slide 14 and explained the next steps forward:
[Original punctuation provided.]
What now?
• Timely actions is required to avoid a gap in
supply.
Short-term: Need strong support for Cook Inlet
exploration and production activities.
Long-term: Decisive action on a large natural
gas supply project.
• Ultimately, customers - Alaska residents and
businesses - are on the hook for cost impacts.
• Working to minimize impact, but longer we wait,
the fewer options available and at higher rates.
MR. SIMS said encouraging tax credits or identifying solutions
is crucial to ensure gas availability in the state.
5:06:39 PM
MR. SIMS moved to slides 15 and 16 and shared actions the state
could take:
[Original punctuation provided.]
Additional storage is key
• Under every scenario, additional natural gas
storage is required:
Added Cook Inlet deliverability
Support new projects coming online
• In November, CINGSA filed with the RCA to expand
its facility to provide additional service
5:07:17 PM
MR. SIMS moved to slide 17 and elaborated on the chart that
depicts the home energy rebate program and normalized average
annual residential customer usage.
5:07:52 PM
MR. SIMS moved to slide 17 and briefly highlighted the two
bullet points on Cook Inlet Energy:
[Original punctuation provided.]
Cook Inlet Energy: An Alaska Issue
• Energy costs in Rural Alaska.
• Local businesses support communities beyond
Anchorage with cargo, goods, and services.
5:08:02 PM
MR. SIMS moved to slide 18 and summarized key considerations. He
said he commented to the Regulatory Commission of Alaska that
the renewables are unhelpful amidst peak demand. During peak
days, wind energy was an unreliable source of energy for Alberta
Energy. If the market provided an unsubsidized energy solution,
it would be more expensive. Royalty relief could not coexist
with an interruptible contract and is not what the state should
seek.
[Original punctuation provided.]
Key Considerations
• There is no unsubsidized energy solution that
will reduce the cost of power or space heating
in the next 10 years.
• Any incentive or tax relief must be linked to
firm contracts for Cook Inlet utilities.
• The second worst thing for Alaska is to import
LNG. The worst thing is to do nothing
5:10:24 PM
SENATOR WIELECHOWSKI stated that on April 3, 2020, CINGSA and
the CEOs of Matanuska Electric Assocation (MEA) and Golden
Valley Electric sent a letter to the Governor stating that
Hilcorp controls 80 percent and noted that the least expensive
way to resolve this was to ensure production would occur under
existing leases. He noted that the letter also claimed that
Hilcorp was subject to its lease obligations and the consent
decree, and inquired about the response that was received.
5:11:13 PM
MR. SIMS replied that every tool in the toolbox needs to be
evaluated to ensure no other entities take advantage of the
state and ensure leaseholders fulfil obligations. He said the
consent decree had a price range that was supposed to provide
security for consumers in the state. Hilcorp stayed below the
price range the entire time despite having the ability to
increase it. There are not many entities that are willing to
invest hundreds of millions of dollars. He opined that royalty
relief is worthwhile to prevent having to import LNG and
increase the cost of energy for every Alaskan. It is important
to consider ways to save money for consumers.
5:13:48 PM
SENATOR CLAMAN asked him to expand on gas storage as a solution
and wondered how the state could assist.
5:14:03 PM
MR. SIMS replied that energy storage is important. He said when
looking at year-round production markets in the lower 48 states,
injection storage acts as a secondary option to having no
buyers. It also opens up market potential. There is a very small
market for Cook Inlet gas, so investment is helpful.
5:15:05 PM
SENATOR KAWASAKI asked how much storage space exists for
CINGSA's existing framework.
5:15:20 PM
MR. SIMS responded that CINGSA had an open season and has 11 Bcf
of available capacity. He said each one of the utilities claims
a certain amount of that capacity, so there is no availability
for new customers. Proprietary storage is utilized to meet the
needs of existing contractual obligations. If CINGSA was open to
third-party storage, unsold gas could be injected for later use.
5:16:25 PM
SENATOR KAWASAKI asked under what circumstances a company would
want to bury gas if they already have firm commitments.
5:16:54 PM
MR. SIMS replied that he is uncertain.
5:17:00 PM
REPRESENTAIVE MCCABE asked why coal hasn't been considered given
that there is currently 590 years worth of coal in Healy. Yet,
when there was an emergency situation, coal was not considered.
5:17:39 PM
MR. SIMS expressed his company's duty to serve its customers. He
said Golden Valley Electric was a part of that emergency
conversation and it was known how much energy they could have
sent had it been needed. The state should consider a diversified
portfolio for power generation to avoid frequent binds.
5:18:48 PM
REPRESENTAIVE MCCABE commented that it is possible to produce
clean energy using coal and it is the solution to fixing the
energy problem in the short term. He opined that it would take
ten years to establish a floating supply ship. He suggested that
repairs to the Healy 2 would take only three years and gas could
be stored until a delivery system was completed.
5:19:56 PM
REPRESENTAIVE MEARS stated that there are options for businesses
and residents to make changes including infrastructure and
energy usage. She acknowledged that there is federal money and
other opportunities that are available.
5:20:51 PM
SENATOR BISHOP stated the legislature has heard from the gas
industry for six years. He said there are 60 years worth of
energy reports but action has not been taken, so the legislature
must do something this session.
5:21:35 PM
SENATOR WIELECHOWSKI noted that the state has a 100-year supply
of gas at its doorstep. He commented that one company controls
80 percent of that reserve and wondered how much more it would
cost consumers in Alaska if LNG is imported.
5:22:15 PM
MR. SIMS replied that LNG is unavailable for import until 2030.
He opined that residents will leave the state and the state will
have difficulty paying for its heating bills. Energy is a major
economic issue in Alaska and should be addressed this session.
The current outlook and forecast are not good. The LNG option
that would begin in 2030 is costly, so there are significant
economic challenges.
5:24:32 PM
REPRESENTAIVE ARMSTRONG stated her perspective that the chance
to capitalize on the value chain, like the mining industry, is
lost if families cannot heat their homes. She expressed her
obligation to identify a solution and expressed disappointment
to be in this position.
5:25:28 PM
MR. SIMS replied that it is important to understand this as a
staged issue. He asked the committee to focus on the long-term
plan.
5:26:27 PM
CO-CHAIR MCKAY opined that this is not a time to panic, become
emotional or irrational, and stated his belief that the state
has the capability to solve the problem.
5:27:22 PM
There being no further business to come before the committee,
Co-Chair Giessel adjourned the Joint Resources Committee meeting
at 5:27 p.m.
| Document Name | Date/Time | Subjects |
|---|---|---|
| 2024 02 07 Cook Inlet Gas Update_Hilcorp Presentation.pdf |
HRES 2/7/2024 3:30:00 PM |
|
| 2024 02 07 Cook Inlet Gas_HEX Furie Presentation.pdf |
HRES 2/7/2024 3:30:00 PM |
|
| 2024 02 07 Cook Inlet Gas_BlueCrest Presentation.pdf |
HRES 2/7/2024 3:30:00 PM |
|
| 2024 02 07 Cook Inlet Gas_ENSTAR Presentation.pdf |
HRES 2/7/2024 3:30:00 PM |