Legislature(2023 - 2024)SENATE FINANCE 532

01/18/2023 09:00 AM Senate FINANCE

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09:00:24 AM Start
09:03:34 AM Production Forecast – Department of Natural Resources
10:27:13 AM Adjourn
* first hearing in first committee of referral
+ teleconferenced
= bill was previously heard/scheduled
-- Teleconference --
Production Forecast - Department of Natural
                 SENATE FINANCE COMMITTEE                                                                                       
                     January 18, 2023                                                                                           
                         9:00 a.m.                                                                                              
9:00:24 AM                                                                                                                    
CALL TO ORDER                                                                                                                 
Co-Chair  Stedman   called  the  Senate   Finance  Committee                                                                    
meeting to order at 9:00 a.m.                                                                                                   
MEMBERS PRESENT                                                                                                               
Senator Lyman Hoffman, Co-Chair                                                                                                 
Senator Donny Olson, Co-Chair                                                                                                   
Senator Bert Stedman, Co-Chair                                                                                                  
Senator Click Bishop                                                                                                            
Senator Jesse Kiehl                                                                                                             
Senator Kelly Merrick                                                                                                           
Senator David Wilson                                                                                                            
MEMBERS ABSENT                                                                                                                
ALSO PRESENT                                                                                                                  
John  Boyle, Commissioner  Designee,  Department of  Natural                                                                    
Resources; Travis  Peltier, Petroleum Engineer,  Division of                                                                    
Oil  and   Gas,  Department  of  Natural   Resources;  Derek                                                                    
Nottingham, Director,  Division of  Oil and  Gas, Department                                                                    
of Natural Resources.                                                                                                           
PRODUCTION FORECAST  DEPARTMENT OF NATURAL RESOURCES                                                                            
Co-Chair  Stedman  introduced   the  committee  members  and                                                                    
discussed roles. He commented on  the level of experience of                                                                    
the  members. He  discussed committee  process and  informed                                                                    
that  the committee  would consider  overviews for  the next                                                                    
several days to  set the stage for upcoming  meetings as the                                                                    
committee  worked through  the revenue  and expenditures  of                                                                    
the state.                                                                                                                      
Co-Chair Stedman introduced  Senate Finance Committee staff.                                                                    
He explained that staff would sit behind the members.                                                                           
9:03:34 AM                                                                                                                    
Co-Chair Stedman  introduced his  staff, including  Mr. Pete                                                                    
Ecklund,  the  operating  budget  coordinator.  Mr.  Ecklund                                                                    
would also lead the  weekly operating budget staff meetings.                                                                    
He  introduced   additional  staff.  He  commented   on  the                                                                    
experience of the staff.                                                                                                        
Senator Hoffman introduced his staff.                                                                                           
Senator Olson introduced his staff.                                                                                             
Co-Chair Bishop introduced his staff.                                                                                           
9:07:00 AM                                                                                                                    
Senator Wilson introduced his staff.                                                                                            
Senator Merrick introduced her staff.                                                                                           
Senator Kiehl introduced his staff.                                                                                             
Co-Chair Stedman  introduced the  committee staff  and staff                                                                    
from the Legislative Information Office.                                                                                        
9:09:26 AM                                                                                                                    
Co-Chair  Stedman  discussed committee  process,  schedules,                                                                    
and decorum.  He conveyed  that there  might be  morning and                                                                    
afternoon   meetings   on   occasion.  He   emphasized   the                                                                    
importance of  a good and  fair exchange of  information and                                                                    
commented on  the magnitude of  information received  by the                                                                    
members. He asserted that all  members would have equal time                                                                    
to  express   concerns  and  ask  questions.   He  discussed                                                                    
presenters  providing  information  to  the  committee  when                                                                    
questions were not answered during meetings.                                                                                    
Co-Chair Stedman  continued that the co-chairs  would prefer                                                                    
no eating in  the room. He discussed the  use of technology.                                                                    
He   emphasized  treating   presenters   with  respect.   He                                                                    
discussed protocol  for presenters  and the  general public.                                                                    
He noted that  further information on decorum  would be sent                                                                    
to members. He expressed the desire to run timely meetings.                                                                     
^PRODUCTION FORECAST  DEPARTMENT OF NATURAL RESOURCES                                                                         
9:13:51 AM                                                                                                                    
Co-Chair Stedman  relayed that the committee  would consider                                                                    
a  production  forecast  from   the  Department  of  Natural                                                                    
Resources  (DNR). He  noted  that the  commissioner-designee                                                                    
would introduce  himself and  his staff.  He noted  that the                                                                    
standard presentation  process was  to take  questions after                                                                    
each slide. He  asked the presenter to  offer information on                                                                    
his background.                                                                                                                 
9:15:20 AM                                                                                                                    
JOHN  BOYLE, COMMISSIONER  DESIGNEE,  DEPARTMENT OF  NATURAL                                                                    
RESOURCES,  discussed his  background.  He had  worked as  a                                                                    
clerk for  a number  of judges in  Fairbanks and  had worked                                                                    
with the  North Slope Borough  as an assistant  attorney and                                                                    
as chief  advisor to the  mayor as  well as director  of the                                                                    
boroughs   government  affairs  department.  He  had  gained                                                                    
insight into  the oil  industry while  working in  the North                                                                    
Slope Region. He had worked  for three years as the Director                                                                    
of Government  Affairs at  BP Alaska.  He had  most recently                                                                    
worked with a  new entrant to the state.  The experience had                                                                    
provided  information about  the challenges  of bringing  an                                                                    
oilfield into development.                                                                                                      
Commissioner Boyle  commented that  his work  experience had                                                                    
shaped his  perspective on resources.  He used  the metaphor                                                                    
of  a firehose  to describe  his learning  curve at  DNR. He                                                                    
commented on  the quality of  professionals working  at DNR.                                                                    
He  explained that  the staff  took pride  in compiling  the                                                                    
information  in  the  report  in an  effort  to  assist  the                                                                    
legislature to better understand  the outlook for the coming                                                                    
years in order to make budgeting decisions for the state.                                                                       
9:19:19 AM                                                                                                                    
Commissioner  Boyle  wanted  to   offer  highlights  of  the                                                                    
presentation. He commented that  generally production on the                                                                    
North Slope  was stable. He considered  deeper legacy fields                                                                    
that were near  to 50 years old and required  more energy to                                                                    
keep a steady production level.  He thought the legacy field                                                                    
progress  was a  commentary on  the major  accomplishment of                                                                    
producers. He noted that DNR  had forecast a steady trend of                                                                    
production  that  increased   towards  new  development.  He                                                                    
thought  the legislators  should  have  confidence that  the                                                                    
state  had a  resource base  that  looked to  be steady  and                                                                    
would   bridge  into   the  future   when  there   could  be                                                                    
opportunity to monetize other state resources.                                                                                  
Commissioner Boyle  introduced his team and  discussed their                                                                    
experience in the field of oil and gas.                                                                                         
9:22:26 AM                                                                                                                    
TRAVIS  PELTIER, PETROLEUM  ENGINEER,  DIVISION  OF OIL  AND                                                                    
GAS,   DEPARTMENT   OF   NATURAL  RESOURCES,   discussed   a                                                                    
presentation entitled "FALL  2022 PRODUCTION FORECAST(copy                                                                      
on  file).  He  commented   that  the  department  had  been                                                                    
performing the production forecast  analysis since 2016. The                                                                    
goal of  the presentation  was to  share the  oil production                                                                    
results  of  FY  22  and  share the  oil  forecast  for  the                                                                    
following   ten   years.   The  discussion   would   include                                                                    
information on  methodology and background,  as well  as how                                                                    
the forecast was generated.                                                                                                     
Mr. Peltier discussed his background.  He had graduated with                                                                    
a  mechanical  engineering  degree from  the  University  of                                                                    
Alaska  Fairbanks  (UAF) in  2006.  He  had worked  with  BP                                                                    
Alaska, working  predominantly in Prudhoe Bay.  He had spent                                                                    
time  away from  the  industry  and in  2021  he obtained  a                                                                    
position with  the Division of  Oil and  Gas at DNR.  He was                                                                    
recently  given  the  opportunity  to  lead  the  production                                                                    
forecast.  He had  spent the  majority  of his  life in  the                                                                    
Mr. Peltier looked at slide 2, "AGENDA":                                                                                        
     • Introduction                                                                                                             
     • Background:                                                                                                              
          • FY 2022 in Review                                                                                                   
          • DNR Production Forecasting Approach                                                                                 
     • Fall 2022 Forecast Results                                                                                               
     • Summary                                                                                                                  
9:25:06 AM                                                                                                                    
Mr.  Peltier  showed  slide  3,  "FY  2022  IN  REVIEW."  He                                                                    
commented  that the  following three  slides would  focus on                                                                    
the North Slope and Cook Inlet.                                                                                                 
Mr.  Peltier referenced  slide 4,  "FY  2022 SUMMARY:  NORTH                                                                    
     Highlights (FY 2022 vs FY 2021)                                                                                            
     •All production areas are generally expected to see a                                                                      
     year-on-year decline                                                                                                       
     •Compared to FY 2021, in FY 2022 North Slope                                                                               
     production decreased by ~2% (~9,570 bopd)                                                                                  
          •Alpine:  Natural  decline from  flush  production                                                                    
          after   extended  shut-ins   from  2020.   Limited                                                                    
          development drilling in FY 2022                                                                                       
          •Kuparuk and  Kuparuk Satellites:  Natural decline                                                                    
          due  to cessation  of NGL  imports and  associated                                                                    
          EOR,  as the  OPL  was converted  to  fuel gas  in                                                                    
          early FY 2022                                                                                                         
          •Offshore: Natural reservoir decline                                                                                  
          •NPRA: GMT2 pad brought online, performing well                                                                       
          •PBU  Satellites:  10%  production growth  due  to                                                                    
          consistent drilling efforts                                                                                           
          •Point Thomson:  8% growth from  improved facility                                                                    
Mr. Peltier  wanted to  highlight how FY  22 compared  to FY                                                                    
21.  He noted  that the  information was  based on  data and                                                                    
involved no  forecasting. He noted  that instead  of showing                                                                    
fields separately,  DNR wanted  to address  production areas                                                                    
to  be  consistent with  the  Department  of Revenue  (DOR).                                                                    
Additionally, the  numbers were consistent with  the numbers                                                                    
in the Revenue Sources Book (RSB).                                                                                              
Co-Chair Stedman cautioned against using acronyms.                                                                              
Mr.  Peltier  explained  that  the   RSB  was  the  official                                                                    
forecast  for revenue  and oil  production. He  continued to                                                                    
address  slide 4.  He reported  that DNR  expected to  see a                                                                    
year-on-year  decline   across  all  production   areas.  He                                                                    
expounded that  oil fields naturally declined  over time. He                                                                    
shared that  North Slope  production in  FY 22  decreased by                                                                    
approximately 2  percent or approximately 9,570  barrels per                                                                    
day from FY  21. He reminded that the  forecast followed the                                                                    
fiscal year rather than the calendar year.                                                                                      
Mr.  Peltier pointed  to the  top chart  on slide  4 showing                                                                    
North Slope daily  production. The Y axis  showed the fiscal                                                                    
year annual average  daily oil production in  barrels of oil                                                                    
per day  and the X  axis showed the  fiscal year from  FY 16                                                                    
through FY  22. He relayed  the peak oil production  rate in                                                                    
FY 17 was  just over 526,000 barrels of oil  per day and had                                                                    
declined until about FY 20,  which was expected with natural                                                                    
decline. He added  that FY 20 was the start  of the COVID-19                                                                    
pandemic  and  several  oil  fields  had  been  shut-in  for                                                                    
economic reasons resulting in  an artificially high decline.                                                                    
The issue resolved in FY  21 when oil prices rebounded after                                                                    
COVID era  lows. The normal  decline rate resumed in  FY 22.                                                                    
He  reported  that  FY  22   gross  North  Slope  production                                                                    
averaged about 476,490 barrels of oil per day.                                                                                  
9:28:42 AM                                                                                                                    
Mr.  Peltier addressed  individual  production area  changes                                                                    
from FY  21 to  FY 22  in the  lower chart  on slide  4. The                                                                    
chart began  at a  zero line. He  cited flat  production for                                                                    
Prudhoe Bay  and satellites to increasing  production, which                                                                    
had  to  do with  operators   continued  development of  the                                                                    
Prudhoe Bay field.  He reminded that in 2019,  BP Alaska had                                                                    
decided  to  sell  the  asset  to  Hilcorp,  which  was  the                                                                    
predominant  operator in  the  fields.  There was  continued                                                                    
drilling  in  places  such  as Milne  Point,  which  was  by                                                                    
definition  part of  the Prudhoe  Bay Unit  (PDU) satellites                                                                    
for  the  RSB.  He  noted that  GPMA  had  normal  reservoir                                                                    
decline year over year and  was also a satellite for Prudhoe                                                                    
Mr. Peltier  highlighted a decrease  in Kuparuk  and Kuparuk                                                                    
satellites of  around 10,000 barrels  per day from FY  21 to                                                                    
FY 22.  He elaborated there  was natural decline due  to the                                                                    
cessation of  natural gas liquid  (NGL) imports,  which were                                                                    
used  for enhanced  oil recovery  (EOR)  within the  Kuparuk                                                                    
reservoir unit. The  NGL imports and EOR  had ceased because                                                                    
of the  need to convert  the Oliktok pipeline  (running from                                                                    
PDU  to the  Kuparuk River  Unit) to  fuel gas  in order  to                                                                    
maintain the  base production from  the Kuparuk  River Unit.                                                                    
The next production area was  Endicott, which showed a small                                                                    
decline attributed to natural reservoir decline.                                                                                
Mr. Peltier  addressed the Alpine  area, which  included the                                                                    
Colville River  area, and noted  the area was  closed during                                                                    
the  pandemic era  and  brought back  online  during FY  21.                                                                    
There was  a relatively large production  increase after the                                                                    
short  period, followed  by a  reservoir decline  in FY  22.                                                                    
There was  limited drilling for  FY 22 compared  to previous                                                                    
years, which  led to a  relatively large  production decline                                                                    
out of the Alpine area. He  mentioned there were a number of                                                                    
offshore  fields, and  there was  nothing of  note to  point                                                                    
out.  He  mentioned  there were  increases  in  the  Natural                                                                    
Petroleum Reserve-Alaska (NPRA),  which included the Greater                                                                    
Mooses   Tooth Unit.  He recalled  there was  a project  the                                                                    
previous year to bring a new  pad online (GMT2) at the unit.                                                                    
The  unit was  doing well  and  was one  of the  predominant                                                                    
reasons for the production increase in the NPRA area.                                                                           
Mr. Peltier  addressed the Point  Thomson unit shown  on the                                                                    
graph  on  slide  4.  He   highlighted  that  the  unit  was                                                                    
predominantly driven  by its initial production  system that                                                                    
started in  April of  2016, and  was a  new facility  to the                                                                    
slope.  There  had  been  many  production  issues  for  the                                                                    
initial years of operation. He  informed that ExxonMobil was                                                                    
the operator two  years previously and had  resolved many of                                                                    
the issues  to increase production before  Hilcorp took over                                                                    
and  had continued  the  positive trend.  He  cited a  total                                                                    
North Slope decrease of about 9,570 barrels.                                                                                    
9:33:17 AM                                                                                                                    
Co-Chair Stedman recalled that  several years previously the                                                                    
production  facilities  were  all  running  at  the  maximum                                                                    
handling gas or  water and thought Alpine had  been the only                                                                    
field with  extra capacity. He  asked for the status  of the                                                                    
facilities and the  handling of gas and water.  He asked for                                                                    
Mr.  Peltier  to  address  the topic  and  location  of  the                                                                    
Mr.  Peltier asked  if Co-Chair  Stedman  was curious  about                                                                    
Alpine  specifically or  about all  facilities on  the North                                                                    
Co-Chair Stedman stated  that he was asking  a broad general                                                                    
question,  and offered  that  Mr. Peltier  get  back to  the                                                                    
committee  with the  information. He  noted that  a facility                                                                    
could only process  so much water or gas,  which limited the                                                                    
amount  of production  that was  possible. He  queried about                                                                    
the background of the issue and the current status.                                                                             
Mr. Peltier  affirmed that Co-Chair Stedman  was correct and                                                                    
offered to  send the  more detailed  information at  a later                                                                    
time. He explained that in  Prudhoe Bay, the majority of the                                                                    
time  the aging  assets would  be limited  by water-handling                                                                    
capacity.  He discussed  the process  of separating  the gas                                                                    
and water from  oil that came out of the  ground in order to                                                                    
get  saleable oil.  He qualified  that  in many  facilities,                                                                    
there  was a  water handling  limitation or  a gas  handling                                                                    
limitation,  which would  limit through-put.  He noted  that                                                                    
Point  Thomson  was  a  good example  that  the  ability  to                                                                    
produce  additional  condensate  came with  the  gas  limit.                                                                    
Prudhoe  Bay  had various  facilities,  some  of which  were                                                                    
water-limited,  some of  which  were  gas-limited, and  some                                                                    
were both.                                                                                                                      
9:35:33 AM                                                                                                                    
Co-Chair  Stedman  acknowledged  the  limiting  factors.  He                                                                    
suggested  that DNR's  presentation  could  try and  address                                                                    
processing facilities and potential increases.                                                                                  
Co-Chair Kiehl  asked for  more detail on  the chart  on the                                                                    
bottom right  of slide 4.  He thought the  narration matched                                                                    
the color  of the  bars, but  he wanted  more detail  on the                                                                    
increase or decrease in production shown.                                                                                       
Mr. Peltier noted that the  increases were shown in blue and                                                                    
reviewed the  relative increases and decreases  shown on the                                                                    
Co-Chair  Stedman  thought  the   negative  amount  was  the                                                                    
difference  between FY  21  and  FY 22  shown  on the  chart                                                                    
Senator  Olson  asked  about  GMT2,  which  was  thought  to                                                                    
produce about 7,000 barrels per  day. He asked if production                                                                    
was on track.                                                                                                                   
Mr. Peltier  reminded that  the data was  cut off  from June                                                                    
30,  2022.   He  affirmed  that   GMT2  was   performing  to                                                                    
Senator  Olson asked  about the  expectation for  the coming                                                                    
years and if the production would increase or decrease.                                                                         
Mr. Peltier  relayed that there  was very  little production                                                                    
history for  the GMT2, so  the department used  the previous                                                                    
years    data  of   consistently  forecast   production.  He                                                                    
explained that the  next ten years of the  forecast would be                                                                    
consistent with previous years.                                                                                                 
9:38:40 AM                                                                                                                    
Mr. Peltier  turned to  slide 5, "FY  2022 AS  FORECASTED BY                                                                    
DNR IN FALL 2021: HOW DID WE DO?":                                                                                              
     •Actual FY 2022 production came in within DNR's                                                                            
     forecasted range                                                                                                           
     •DNR mean forecast was ~2% higher than actual FY 2022                                                                      
     •Factors to watch for that are currently shaping the                                                                       
     forecast horizon                                                                                                           
          •Strong  ESG  influences   continue  to  challenge                                                                    
          capital  allocation   decisions  in   the  Arctic,                                                                    
          especially  for  early-stage  oil  projects  under                                                                    
          •Industry interest continues in Nanushuk leases                                                                       
          and projects on State and Federal lands                                                                               
Mr. Peltier referenced the bar  graph on slide. He explained                                                                    
that  the  striped,  blue  bars  showed  the  high  and  low                                                                    
forecast from the RSB. He  commented that the range from the                                                                    
previous year was about 524,000  barrels per day on the high                                                                    
to  just under  450,000  barrels  per day  on  the low.  The                                                                    
official  forecast  for the  previous  year  was just  under                                                                    
487,000 barrels of  oil per day, but  actual production came                                                                    
in at  476,490 barrels  of oil  per day.  He noted  that the                                                                    
department  also  received   confidential  information  from                                                                    
operators  that  was  aggregated.  For  the  previous  year,                                                                    
operators  forecast that  the Alaska  North Slope  (ANS) oil                                                                    
made just under 500,000 barrels per day.                                                                                        
Co-Chair  Bishop asked  for the  department to  provide more                                                                    
information  defining the  acronyms  on the  slide, such  as                                                                    
Environmental Social Governance (ESG).                                                                                          
9:41:36 AM                                                                                                                    
Mr.  Peltier  considered slide  6,  "FY  2022 SUMMARY:  COOK                                                                    
     Highlights (FY 2022 vs FY 2021)                                                                                            
     •All fields are generally expected to see a year-on-                                                                       
     year decline                                                                                                               
     •Compared to FY 2021, in FY 2022 Cook Inlet production                                                                     
     decreased by ~11% (~1200 bopd)                                                                                             
       il from the Cook Inlet basin critical to the supply                                                                      
     of in-state refineries                                                                                                     
          •Middle Ground Shoal: Field taken offline due to                                                                      
          fuel gas pipeline leak discovered in April 2021.                                                                      
          Production is currently suspended.                                                                                    
          •Beaver Creek increase due to rate-adding well                                                                        
          •Redoubt Shoal and West McArthur River fields                                                                         
          brought back online in September and October 2021                                                                     
          respectively after being offline since May 2020.                                                                      
Mr. Peltier addressed the top  bar graph on the slide, which                                                                    
showed  a  decline  in  production  after  the  highest  oil                                                                    
production year  for Cook  Inlet in FY  16. The  most recent                                                                    
production  level in  FY 22  was 9,400  barrels per  day. He                                                                    
summarized that  the majority  of the  fields in  Cook Inlet                                                                    
saw natural  declines, there were large  decreases and large                                                                    
increases listed  on the slide. He  discussed the production                                                                    
decrease in Middle  Ground Shoal and relayed  that the field                                                                    
was  taken  offline   due  to  a  fuel   gas  pipeline  leak                                                                    
discovered in  2021. He  pointed out  an increase  in Beaver                                                                    
Creek due to well-work.                                                                                                         
Co-Chair Stedman asked  Mr. Peltier to touch on  gas in Cook                                                                    
Inlet, and assumed the charts showed only oil.                                                                                  
Mr.  Peltier  affirmed  that  the  charts  only  showed  oil                                                                    
Co-Chair  Stedman   suggested  that  the   department  start                                                                    
considering a  presentation about the Cook  Inlet gas field.                                                                    
He informed  that the committee would  be having forthcoming                                                                    
discussions around  energy and reminded  that gas was  a big                                                                    
source  of energy  for heating.  He suggested  including the                                                                    
history and trajectory of gas production.                                                                                       
9:45:12 AM                                                                                                                    
DEREK  NOTTINGHAM,  DIRECTOR,  DIVISION   OF  OIL  AND  GAS,                                                                    
DEPARTMENT OF  NATURAL RESOURCES,  shared that  DNR Division                                                                    
of Oil and Gas had  recently completed a production forecast                                                                    
for  the  Cook  Inlet  gas,  and would  share  it  with  the                                                                    
Co-Chair Stedman relayed that he  would work with the chairs                                                                    
from  the House  and Senate  Resources Committee  on how  to                                                                    
handle the information.                                                                                                         
9:45:50 AM                                                                                                                    
Mr. Peltier displayed slide 7,  "STATUS UPDATE OF KEY FUTURE                                                                    
PROJECTS: NORTH  SLOPE," which showed  a table  of projects.                                                                    
The  slide  addressed  some of  the  groundwork  for  future                                                                    
production on the  North Slope. He noted that  there were 17                                                                    
projects,  while  the  table   highlighted  5  projects.  He                                                                    
thought the committee had most  likely heard about the Pikka                                                                    
and  Willow projects  in  the news,  which  were new  fields                                                                    
brough online on  the North Slope. The  other three projects                                                                    
constituted  either  new  pads   or  pad  expansions  within                                                                    
existing units on the North Slope.                                                                                              
Mr.  Peltier  reminded  of   discussion  the  previous  year                                                                    
regarding  the  Pikka  project, and  whether  it  would  get                                                                    
approved for  final investment  decision (FID).  The project                                                                    
FID came through  in August 2022, and project  first oil was                                                                    
anticipated in  2026. He cited  a peak design  capacity rate                                                                    
of 80,000  barrels per day,  which had been  publicly shared                                                                    
by operators.                                                                                                                   
Co-Chair Stedman  asked for a  reminder as to who  owned the                                                                    
subsurface rights  of the  different projects,  which should                                                                    
have a significant impact on  revenue. He noted that all oil                                                                    
production  increases  helped  with the  throughput  of  the                                                                    
Trans-Alaska  Pipeline  System (TAPS)  as  well  as with  an                                                                    
impact on the treasury.                                                                                                         
Mr.  Peltier relayed  that the  Pikka project  was on  state                                                                    
land and  listed other  projects on  state land.  The Willow                                                                    
project was on federal land.                                                                                                    
Co-Chair Stedman asked  Mr. Peltier to briefly  touch on why                                                                    
there were tax differences between the projects.                                                                                
Mr. Peltier deferred the question to Mr. Nottingham.                                                                            
Co-Chair Stedman  mentioned severance tax and  royalties. He                                                                    
commented that the state received  royalties on federal land                                                                    
but there was no state tax per se.                                                                                              
Mr.  Nottingham  relayed  that  on  state  land,  the  state                                                                    
royalty ranged  between 12.5 percent  to 16.67  percent. The                                                                    
percentage was  applied to  the overall  value or  volume of                                                                    
the barrels produced off the  land and would be revenue into                                                                    
the state from  royalties. He explained that  the royalty on                                                                    
federal land went to the  federal government, with a portion                                                                    
going to local communities.                                                                                                     
Co-Chair Stedman  relayed that  the committee  would revisit                                                                    
the  topic  with  more  detail  at a  later  time  when  the                                                                    
committee  considered  the  revenue forecast.  He  made  the                                                                    
point that  all barrels of  oil were  not equal in  terms of                                                                    
paying the states bills.                                                                                                        
Senator Olson thought Mr. Nottingham  was trying to say that                                                                    
the impact  aid that came  to some communities on  the North                                                                    
Slope  was  the  way  that the  state  benefitted  from  the                                                                    
federal royalties it did not receive.                                                                                           
Mr. Nottingham agreed with Co-Chair Olson's assessment.                                                                         
Co-Chair Stedman reiterated that  there would be more detail                                                                    
on  the subject  when the  committee considered  the revenue                                                                    
9:50:24 AM                                                                                                                    
Mr.  Peltier  addressed the  Willow  project  listed on  the                                                                    
table on slide 7. He  recalled that the project was remanded                                                                    
by the Alaska District Court  with a record of decision, and                                                                    
at the time construction was  expected to start in 2023 with                                                                    
first oil in 2025 or 2026.  In the year since, the Bureau of                                                                    
Land Management (BLM)  was awaiting a record  of decision on                                                                    
the supplemental  environmental impact statement  (EIS) that                                                                    
was released  in July 2022.  ConocoPhilips, the  operator of                                                                    
the  Willow project,  could not  make its  FID prior  to the                                                                    
record of  decision being made.  The first oil  was expected                                                                    
to be  six years after FID  if the project was  approved and                                                                    
moved  forward.  The  publicly  stated  estimates  from  the                                                                    
supplemental EIS  indicated 180,000 barrels per  day at peak                                                                    
two years after first oil.                                                                                                      
Mr. Peltier addressed the CRU  Narwhal CD8 project listed on                                                                    
slide 7.  He noted  that there  was discussion  the previous                                                                    
year  about a  Narwhal  project. He  cited  that there  were                                                                    
project  uncertainties. He  noted  that the  vision for  the                                                                    
project was quite  large. He discussed the  most recent plan                                                                    
of development  submitted by ConocoPhilips,  with production                                                                    
possibly  commencing  as  early   as  2028.  Production  was                                                                    
dependent  upon  alignment  with  stakeholders,  permitting,                                                                    
internal studies,  and ultimate  project approval.  He cited                                                                    
that the  department estimated that about  3,200 barrels per                                                                    
day could come from the project, which was on state lands.                                                                      
Mr. Peltier spoke  to the MPU Raven Pad  project. He relayed                                                                    
that Hilcorp had formally applied  for approval to construct                                                                    
a new  drilling construction pad  in November 2022.  The pad                                                                    
would be very  analogous to a recently  developed pad called                                                                    
Moose  Pad  from  2018.  The  department  estimated  roughly                                                                    
10,000 barrels  per day  on state land  could come  from the                                                                    
project. He  discussed the KRU Nuna-Tork  project, which was                                                                    
operated by ConocoPhilips. The most  recent plan indicated a                                                                    
plan  to drill  additional  injector and  producer wells  to                                                                    
apprise  of  future  developments.   The  project  had  much                                                                    
uncertainty but  could turn out  to be a large  producer for                                                                    
the North Slope on state lands.                                                                                                 
Senator Kiehl commented  that the state had  often looked at                                                                    
peak  production design  for a  potential field,  while peak                                                                    
production did not  last particularly long. He  asked how to                                                                    
look  at  the  numbers   when  considering  the  longer-term                                                                    
production of the  wells in relation to  the peak production                                                                    
Mr.  Peltier  commented that  the  numbers  shown were  peak                                                                    
rates  and  used  the  Willow  project  as  an  example.  He                                                                    
explained  that  one would  see  a  peak  rate shared  in  a                                                                    
supplemental  EIS   document  two  years  after   first  oil                                                                    
production then declining. He noted  that most of the fields                                                                    
on the  North Slope  were supported  with water  flooding or                                                                    
other  enhanced   oil  recovery  activities.   He  mentioned                                                                    
cumulative volume. He suggested  taking the peak number, and                                                                    
then computing a  decline rate of 10 percent  to 15 percent,                                                                    
knowing  that operators  would be  working  to minimize  the                                                                    
9:56:08 AM                                                                                                                    
Mr. Peltier  highlighted slide 8, "DNR  FALL 2022 PRODUCTION                                                                    
FORECASTING APPROACH                                                                                                            
     Recap: Minor changes in methodology from last year's                                                                       
     forecast. Changes are:                                                                                                     
     1) To more explicitly capture drilling activity into                                                                       
     Under Development and Under Evaluation, and                                                                                
     2) To have DOR and DNR forecasts be the same in the                                                                        
     first 5 months of the forecast period due to treatment                                                                     
     of actual production. [Fall 2022 Forecast]                                                                                 
Mr. Peltier  relayed that the presentation  would transition                                                                    
to  the production  forecasting approach.  He reminded  that                                                                    
DNR had  been performing the  analysis since 2016  and tried                                                                    
to  be as  consistent  as possible.  He  remarked on  recent                                                                    
improvements,  including  project definition.  He  explained                                                                    
that  the   currently  producing   category  had  no  future                                                                    
drilling  included. He  noted that  the definitions  for the                                                                    
production categories  were listed in  the RSB and  were now                                                                    
more accurate.                                                                                                                  
Co-Chair Stedman  asked Mr. Peltier to  remind the committee                                                                    
about   how  the   department   received  information   from                                                                    
producers  in the  fields dealing  with expectations  in the                                                                    
future on  a calendar  basis. He thought  producers reported                                                                    
to the department  twice a year. He thought there  was a lot                                                                    
of communication between the two groups.                                                                                        
Mr.  Peltier noted  that the  next slide  would address  Co-                                                                    
Chair Stedman's question.                                                                                                       
Mr.  Peltier advanced  to slide  9,  "DNR FORECAST  PROCESS:                                                                    
PROJECTS/POOLS INCLUDED IN FORECAST                                                                                             
     •DOG performed ground-up Decline Curve forecasts for                                                                       
     all producing pools (Public)                                                                                               
          •Forecast of Current Production uses AOGCC                                                                            
          publicly available data                                                                                               
          •~37 pools (ANS and CI), producing as of                                                                              
     •DOG engaged with operators through DOR-arranged in-                                                                       
     person and written interviews                                                                                              
     •17 projects under development/under evaluation were                                                                       
     considered/researched/reviewed (Confidential)                                                                              
          •Forecast for these projects use confidential                                                                         
          information from operators                                                                                            
          •Future production from these projects were                                                                           
          adjusted and risked for scope of contribution,                                                                        
          chance of occurrence and start date                                                                                   
     •Minor modifications in forecast approach between Fall                                                                     
     2021 and Fall 2022 forecasts                                                                                               
          1. To more explicitly capture drilling activity                                                                       
          into Under Development and Under Evaluation, and                                                                      
          2. To have DOR and DNR forecasts be the same in                                                                       
          the first 5 months of the forecast period due to                                                                      
          treatment of actual production                                                                                        
Mr. Peltier  explained that the  slide was meant  to discuss                                                                    
the  projects and  the Division  of  Oil and  Gas and  DORs                                                                     
engagement with  operators. He addressed  Co-Chair Stedmans                                                                     
question and  relayed that the department  had conversations                                                                    
with  operators   throughout  the  year.  Within   the  fall                                                                    
production  forecast  timeframe  there  were  many  in-depth                                                                    
conversations  with  operators  that were  confidential  and                                                                    
helped  build  the  forecasts. The  meetings  were  both  in                                                                    
person and  via written  responses. There  was an  update in                                                                    
the spring wherein the department  would meet with operators                                                                    
and  ask  for  updates  to prior  inflation  that  could  be                                                                    
material  to  forecasting  efforts. He  mentioned  plans  of                                                                    
development,  which had  an aspect  of confidentiality,  and                                                                    
were submitted every one to two years.                                                                                          
10:01:20 AM                                                                                                                   
Mr. Peltier  addressed slide 10, "CATEGORIES  OF PRODUCTION:                                                                    
ONGOING/CURRENT VS FUTURE PRODUCTION                                                                                            
     Ongoing/Current production                                                                                                 
     •Current Production (CP)                                                                                                   
          •Features and considerations:                                                                                         
               •Well and facility uptime                                                                                        
               •Operator    spending   to    maintain   base                                                                    
               •Reservoir management                                                                                            
     Future production                                                                                                          
     •Projects Under Development (UD) and Under Evaluation                                                                      
          •Rate contribution:                                                                                                   
               •Uncertainty in future well performance                                                                          
               •Uncertainty in project scope                                                                                    
          •Project occurrence and timing:                                                                                       
               •Uncertainty in timing (incl. outright                                                                           
              project cancellation/deferral)                                                                                    
               •Commerciality risk (economic, regulatory                                                                        
Mr.   Peltier  discussed   the  production   categories.  He                                                                    
referenced 17 major projects  and discussed infill drilling.                                                                    
Within   existing  units,   there  was   continued  drilling                                                                    
activity   (with  additional   capital  expenditures     and                                                                    
investment) where  new wells were put  into existing fields.                                                                    
The  contributions  from the  new  wells  came under   under                                                                    
development  and   under evaluation  categories,  which were                                                                    
within the next  12 months and 12 months to  the 120th month                                                                    
respectively.  He commented  on  the  uncertainty of  future                                                                    
well  performance and  project  scope,  which were  factored                                                                    
into high and low parts of the forecast.                                                                                        
Mr.  Peltier  mentioned Pikka  and  Willow,  which were  not                                                                    
currently producing  and did not have  infill opportunities.                                                                    
He  discussed project  startup and  timing,  and noted  that                                                                    
there   was  additional   risking  included   in  production                                                                    
profiles  regarding when  the projects  would  start up.  He                                                                    
mentioned commerciality  risk, as the economic  hurdles that                                                                    
might need to be overcome for a project to progress.                                                                            
Senator Hoffman  referenced Mr. Peltier's comments  about an                                                                    
upcoming slide addressing capital  expenditures. He asked if                                                                    
Mr.  Peltier would  also address  increases  or decrease  of                                                                    
capital expenditures  in the past,  and projections  for the                                                                    
future. He  thought the information  was a  single indicator                                                                    
as  to  what  policymakers  would look  for  in  projections                                                                    
regarding future development on the North Slope.                                                                                
Mr.  Peltier  relayed that  DNR  would  not be  sharing  any                                                                    
capital expenditure  information in the slide,  but would be                                                                    
sharing  information  on  expected  production  from  future                                                                    
capital investment.                                                                                                             
Senator  Hoffman  requested  that Mr.  Peltier  provide  his                                                                    
office with capital expenditure  information, which had been                                                                    
a major discussion  for the previous decade.  He thought the                                                                    
information was  critical to what  the public  policy makers                                                                    
could expect on what was happening on the North Slope.                                                                          
Co-Chair Stedman asked  for Mr. Peltier to send  the data to                                                                    
the co-chair's  offices to distribute  and asked for  him to                                                                    
include   delineation  of   deductible  and   non-deductible                                                                    
expenses.  He   asked  for  any  information   about  future                                                                    
predictions of capital expenditures.                                                                                            
10:06:22 AM                                                                                                                   
Mr.   Peltier  advanced   to  slide   11,  "MAJOR   PROJECTS                                                                    
[UNDEREVALUATION/DEVELOPMENT]   CONSIDERED   IN  FALL   2022                                                                    
   Generalized characteristics                                                                                                  
      Projects that were not online as at end ofFY2022                                                                       
        (data cut-off date of 6/2022)                                                                                           
      Higher risk factors than currently producing fields                                                                    
      Known discoveries with identifiable operators                                                                          
      Require major investments                                                                                              
   North Slope Major Projects List (West to East)                                                                               
      Smith Bay                                                                                                              
      CRU Narwhal CD8                                                                                                        
      Horseshoe Stirrup                                                                                                      
      Pikka Unit                                                                                                             
      MPU Raven Pad                                                                                                          
      Theta West                                                                                                             
      Liberty Unit                                                                                                           
      PTU Expansion                                                                                                          
      Sourdough Project                                                                                                      
Mr.  Peltier commented  that the  risk  associated with  the                                                                    
projects  listed was  higher  than  the currently  producing                                                                    
fields,  such as  Prudhoe Bay.  The fields  listed were  all                                                                    
known  discoveries with  identifiable  operators, which  all                                                                    
required major investments over  the following ten years. He                                                                    
reviewed projects from west to east  on the map on slide 11.                                                                    
He began  with the Smith  Bay development shown in  top left                                                                    
corner  of the  map.  He  pointed to  the  Willow and  Umiat                                                                    
projects and  noted a  red square on  the map  indicated the                                                                    
developments were located on federal  lands. The CRU Narwhal                                                                    
CD8 project  was to the  east of the Willow  development. He                                                                    
listed  the remaining  projects and  their locations  on the                                                                    
map  including  Pikka, Quokka/Mitquq,  Mustang,  Nuna-Torok,                                                                    
Ugnu  (located across  PDU, KRU,  and MPU),  MPU Raven  Pad,                                                                    
Theta  West, Talitha,  Alkaid, Liberty,  PTU expansion,  and                                                                    
Sourdough project.                                                                                                              
Senator Olson considered the Smith  Bay project and asked if                                                                    
Mr. Peltier had an update on the development.                                                                                   
Mr.  Peltier  thought  much  of  the  information  could  be                                                                    
confidential and offered  to get back to  the committee with                                                                    
what information could and could not be shared.                                                                                 
Mr.  Nottingham  generally  stated  that  the  operator  was                                                                    
actively  looking at  options to  explore and  delineate the                                                                    
reservoir further.                                                                                                              
Co-Chair Stedman  asked the  department to  get back  to the                                                                    
committee  with  the  information that  was  accessible.  He                                                                    
suggested that  the committee could discuss  the matter with                                                                    
the  operator,  who  may  be  inclined  to  provide  further                                                                    
10:10:22 AM                                                                                                                   
Co-Chair Bishop asked if the  information was only embargoed                                                                    
for 10 years.                                                                                                                   
Mr. Nottingham  offered to  get back  to the  committee with                                                                    
the answer to Senator Bishop's question.                                                                                        
Senator Kiehl  referenced higher risk projects  mentioned by                                                                    
Mr.  Peltier.  He  asked  how  the risks  were  put  in  the                                                                    
forecast.  He   looked  at  projects  that   were  far  from                                                                    
infrastructure and mentioned the  Liberty project, which was                                                                    
supposed to be coming soon twenty years previously.                                                                             
Mr.  Peltier  agreed  that  all   the  projects  listed  had                                                                    
uncertainty or  risk. There were  a few of  major components                                                                    
to  the risk,  including the  chance of  the project  coming                                                                    
online, the start date of  the project, and whether it would                                                                    
achieve  the   expected  return  rate.  He   explained  that                                                                    
multiple people  with information on various  aspects of the                                                                    
projects  would   collaborate  to  discuss  the   pieces  of                                                                    
uncertainty  related to  projects. He  compared the  Liberty                                                                    
and  Raven projects  and the  types of  risk considered.  He                                                                    
emphasized  the importance  of aggregating  risk information                                                                    
for all the projects. The  same process was used to evaluate                                                                    
all the projects before aggregating the results.                                                                                
Senator  Kiehl did  not have  a  sense of  exactly what  the                                                                    
process was.                                                                                                                    
Mr.  Peltier  noted  that  the  group  that  aggregated  the                                                                    
information  included engineers,  geo-scientists, permitting                                                                    
individuals,  and  commercial  analysist.  The  process  was                                                                    
democratic and included about 24 individuals.                                                                                   
10:13:59 AM                                                                                                                   
Mr. Peltier showed slide 12,  "FALL 2022 PRODUCTION FORECAST                                                                    
Mr.  Peltier discussed  slide 13,  "FALL  2022: NORTH  SLOPE                                                                    
ANNUALIZED FORECAST                                                                                                             
    Short Term:                                                                                                              
        o DNR forecasts FY2023 annualized average daily                                                                         
          statewide production at 501 MBOPD, and North                                                                          
          Slope production at 492 MBOPD, with a range of                                                                        
          448 MBOPD and 535 MBOPD                                                                                               
    Long term:                                                                                                               
        o Long term forecast reliability is gauged by                                                                           
          general  ballpark   comparison  between   DNR  and                                                                    
          operators'  aggregate forecasts.  Operators' long-                                                                    
          term   outlook  falls   within  DNR's   long  term                                                                    
          forecast range                                                                                                        
        o Specific   differences   are   expected   and   do                                                                    
          highlight DNR's ground-up uncertainty analysis on                                                                     
          all included projects                                                                                                 
    Outlook on production assumes that operators' plans                                                                      
     and other project drivers stay unchanged                                                                                   
Mr. Peltier  addressed the chart  on slide 13,  which showed                                                                    
the  fall  2022 North  Slope  Forecast,  with an  axis  with                                                                    
fiscal year annual average daily  oil production. There were                                                                    
four  components  including  the  high  forecast  case,  low                                                                    
forecast  case,  and  the two  middle  cases.  The  official                                                                    
forecast   case  from   the   RSB  and   summation  of   the                                                                    
confidential   operator  forecast   showed  the   aggregated                                                                    
picture  for the  following  ten years.  He  noted that  the                                                                    
total official forecast included  future projects, which did                                                                    
not include the  information from operators. For  FY 23, the                                                                    
DNR  forecast   showed  an   annualized  average   of  daily                                                                    
production  of 501,000  barrels of  oil per  day, which  was                                                                    
492,000 barrels from  the North Slope per  day. He discussed                                                                    
low-end and high-end numbers.                                                                                                   
Mr.  Peltier explained  that  MBOPD  signified thousands  of                                                                    
barrels per day, while MM signified millions.                                                                                   
Co-Chair Stedman  reminded that one decade  previously there                                                                    
had been  oil forecast  predictions that showed  a parabolic                                                                    
curve  with  a  flat  tail  that would  go  on  for  several                                                                    
decades.  He  thought  the forecast  had  assumed  that  the                                                                    
industry  in the  state would  work  to extend  the life  of                                                                    
fields  rather  than  let  the  natural  decay  happen.  The                                                                    
forecast  from a  decade previously  had been  very near  to                                                                    
what  happened in  reality. He  commented that  it would  be                                                                    
nice to  get Willow and  a few other larger  projects moving                                                                    
Mr.  Peltier   addressed  the  last   bullet  on   slide  13                                                                    
pertaining to  the production forecast. He  noted that there                                                                    
were certain  assumptions that  had to be  made in  order to                                                                    
make  the   production  forecast  be  valid,   although  the                                                                    
assumptions  could  change.  He expanded  that  the  process                                                                    
started with  data ending from  June 30, 2022.  He mentioned                                                                    
the spring  forecast update that would  include any observed                                                                    
changes.  He  noted  that  the  forecasts  did  assume  that                                                                    
operators   plans  and   other  drivers  remained  unchanged                                                                    
during the forecast period.                                                                                                     
10:19:24 AM                                                                                                                   
Mr.  Peltier  reviewed  slide   14,   ALASKA  STATEWIDE  OIL                                                                    
PRODUCTION   FORECAST      FALL  2022   EXPECTED  CASE   and                                                                    
CATEGORIES  OF  PRODUCTION,"  which showed  two  charts.  He                                                                    
highlighted that the  chart on the left of  the slide showed                                                                    
the fiscal  year average daily  oil production  ranging from                                                                    
zero  to 700,000  barrels of  oil per  day. The  blue showed                                                                    
current  producing fields  declining over  time, the  orange                                                                    
showed future development  drilling within producing fields,                                                                    
and  the gray  section reflected  a combination  of in-field                                                                    
drilling  and  the  17   major  projects  under  exploration                                                                    
(growing over time through FY 32).                                                                                              
Mr.  Peltier addressed  the right-hand  chart  on slide  14,                                                                    
which reflected  projects under  exploration only.  He cited                                                                    
production  growth ramping  up  until the  late 2020s,   and                                                                    
then another  small peak at  the end of the  forecast period                                                                    
in  2032. The  trajectory had  to do  with how  DNR did  its                                                                    
uncertainty analysis  on future  projects. He  discussed the                                                                    
risking process and how the  forecast handled increases over                                                                    
Co-Chair    Stedman    commented   on    changing    federal                                                                    
administrations  and asked  how risking  analysis was  dealt                                                                    
with  when going  from one  administration to  the next.  He                                                                    
commented that the previous  administration had been helpful                                                                    
to  the state  by  moving the  resource extraction  industry                                                                    
forward   versus  what   appeared   to   be  a    less-than-                                                                    
enthusiastic current administration.                                                                                            
Mr. Peltier relayed that the  matter was addressed in to two                                                                    
components   of  risking.   He  mentioned   the  two   major                                                                    
components of uncertainty for  projects including the chance                                                                    
of occurrence and  the project start date.  He mentioned the                                                                    
Willow project.  He noted that the  production profiles were                                                                    
spread out over time based on what the group decided.                                                                           
Co-Chair Stedman  thought the risking was  balanced out each                                                                    
year with consideration of current conditions.                                                                                  
Mr. Peltier answered affirmatively.                                                                                             
10:23:54 AM                                                                                                                   
Mr.  Peltier  referenced  slide 15,  "FALL  2022  PRODUCTION                                                                    
FORECAST - SUMMARY                                                                                                              
      DNR Forecast continues to use the best information                                                                     
        available to DNR/DOR, to generate production outlook                                                                    
        for oil  fields within  the state,  with a  focus on                                                                    
        generating accurate  near-term, and  realistic long-                                                                    
        term, forecasts.                                                                                                        
      Fall 2022 Forecast is a static view on production;                                                                     
        DNR's outlook is updated annually (Fall and Spring)                                                                     
        to incorporate latest operator plans and the State's                                                                    
        official updated price outlook.                                                                                         
      DNR's Fall 2022 outlook shows mean annual production                                                                   
        of approximately 500 MBOPD across much of the                                                                           
        outlook period, based on the current snap-shot of                                                                       
        operators' plans.                                                                                                       
      Production from projects under evaluation reflects                                                                     
        uncertainty in  operators' plans  towards return  to                                                                    
        pre-pandemic  activity   levels,  specific   project                                                                    
        uncertainties, as well  as project scope  and timing                                                                    
Mr.  Peltier  thanked the  committee.  He  commented on  the                                                                    
effort expended  to put together  each year. He  thanked the                                                                    
forecasting team and those available online for questions.                                                                      
Co-Chair Stedman  thanked Mr. Peltier and  the support staff                                                                    
and   acknowledged  the   preparation   necessary  for   the                                                                    
presentation.  He   discussed  the  upcoming   schedule.  He                                                                    
commented that the  price of oil was much  more sensitive to                                                                    
the  states   revenue  than   the  production  variable.  He                                                                    
commented   that   the    following   week   would   include                                                                    
presentations on the budget.                                                                                                    
10:27:13 AM                                                                                                                   
The meeting was adjourned at 10:27 a.m.                                                                                         

Document Name Date/Time Subjects
2023 01 18 SFIN DNR Fall 2022 Production Forecast Presentation v3.1.pdf SFIN 1/18/2023 9:00:00 AM