Legislature(2011 - 2012)Anch LIO Conf Rm

08/16/2011 09:00 AM Senate RESOURCES


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Audio Topic
09:02:28 AM Start
09:02:34 AM Presentation: Agia Update
11:17:00 AM Alaska Oil and Gas Conservation Commission Update
01:34:07 PM Presentation on Cook Inlet Activity Update and Dnr Natural Gas Studies by Paul Decker, Petroleum Geologist & Resource Evaluation Manager and Jeff Dykstra, Commercial Analyst
03:21:49 PM Presentation on Usgs Assessment of Cook Inlet Natural Gas Reserves by Brenda Pierce, Program Coordinator, Energy Resources Program
04:15:17 PM Adjourn
* first hearing in first committee of referral
+ teleconferenced
= bill was previously heard/scheduled
9:00 am - Noon:
AGIA by Tony Palmer, TransCanada
1:30 pm - 4:30 pm:
USGS - Assessment of Cook Inlet Natural Gas
Reserves by Brenda Pierce
DNR - Cook Inlet Natural Gas Production
Cost Study
DNR - Cook Inlet Exploration/Production Activity
-- Testimony <Invitation Only> --
                    ALASKA STATE LEGISLATURE                                                                                  
              SENATE RESOURCES STANDING COMMITTEE                                                                             
                        August 16, 2011                                                                                         
                           9:02 a.m.                                                                                            
                                                                                                                                
MEMBERS PRESENT                                                                                                               
                                                                                                                                
Senator Joe Paskvan, Co-Chair                                                                                                   
Senator Thomas Wagoner, Co-Chair                                                                                                
Senator Bill Wielechowski, Vice Chair                                                                                           
Senator Bert Stedman                                                                                                            
Senator Lesil McGuire                                                                                                           
Senator Hollis French                                                                                                           
Senator Gary Stevens                                                                                                            
                                                                                                                                
MEMBERS ABSENT                                                                                                                
                                                                                                                                
All members present                                                                                                             
                                                                                                                                
OTHER LEGISLATORS PRESENT                                                                                                     
                                                                                                                                
Senator Charlie Huggins                                                                                                         
Senator Fred Dyson                                                                                                              
Representative Paul Seaton                                                                                                      
Representative Les Gara                                                                                                         
Representative Wes Keller                                                                                                       
Representative Mike Hawker                                                                                                      
Representative Chris Tuck - via teleconference                                                                                  
Representative David Guttenberg - via teleconference                                                                            
                                                                                                                                
COMMITTEE CALENDAR                                                                                                            
                                                                                                                                
Presentations on Cook Inlet oil and gas                                                                                       
TransCanada's AGIA Update                                                                                                       
Alaska Oil and Gas Conservation Commission Update                                                                               
Department of Natural Resources Update                                                                                          
USGS Update                                                                                                                     
                                                                                                                                
     - HEARD                                                                                                                    
                                                                                                                                
PREVIOUS COMMITTEE ACTION                                                                                                     
                                                                                                                                
No previous action to consider                                                                                                  
                                                                                                                                
WITNESS REGISTER                                                                                                              
                                                                                                                                
TONY PALMER, Vice President                                                                                                     
Major Projects Development                                                                                                      
TransCanada Pipeline Corporation                                                                                                
POSITION  STATEMENT:  Provided  update  on  the  Alaska  Pipeline                                                             
Project (APP).                                                                                                                  
                                                                                                                                
CATHY FOERSTER, Commissioner                                                                                                    
Alaska Oil and Gas Conservation Commission (AOGCC)                                                                              
POSITION STATEMENT: Commented on the  AOGCC's role in the state's                                                             
gas production  and answered questions  about production  of Cook                                                               
Inlet oil and gas.                                                                                                              
                                                                                                                                
PAUL DECKER, Manager                                                                                                            
Resource Evaluation Section                                                                                                     
Division of Oil and Gas                                                                                                         
Department of Natural Resources (DNR)                                                                                           
Anchorage, AK                                                                                                                   
POSITION  STATEMENT:   Commented  on  Cook  Inlet   gas  and  oil                                                             
production from the state's perspective.                                                                                        
                                                                                                                                
JEFF DYKSTRA, Commercial Analyst                                                                                                
Division of Oil and Gas                                                                                                         
Department of Natural Resources (DNR)                                                                                           
Anchorage, AK                                                                                                                   
POSITION  STATEMENT:  Commented  on commercial  aspects  of  Cook                                                             
Inlet oil and gas production.                                                                                                   
                                                                                                                                
BRENDA PIERCE, Manager                                                                                                          
Energy Resources Program                                                                                                        
United States Geological survey (USGS)                                                                                          
Department of Interior                                                                                                          
POSITION  STATEMENT:   Commented  on  USGS   resource  evaluation                                                             
methodologies and on Cook Inlet resource estimates.                                                                             
                                                                                                                                
ACTION NARRATIVE                                                                                                              
                                                                                                                                
9:02:28 AM                                                                                                                    
CO-CHAIR  JOE  PASKVAN  called   the  Senate  Resources  Standing                                                             
Committee meeting  to order at 9:02  a.m. Present at the  call to                                                               
order were  Senators Dyson,  Stedman, Stevens,  Co-chair Wagoner,                                                               
and Co-chair Paskvan.                                                                                                           
                                                                                                                                
^Presentation: AGIA Update                                                                                                      
                          AGIA UPDATE                                                                                       
                                                                                                                                
9:02:34 AM                                                                                                                    
CO-CHAIR PASKVAN announced  the first order of  business would be                                                               
to hear  an update  on the Alaska  Gasline Inducement  Act (AGIA)                                                               
from TransCanada Corporation, AGIA licensee.                                                                                    
                                                                                                                                
9:03:49 AM                                                                                                                    
TONY   PALMER,  Vice   President,  Major   Projects  Development,                                                               
TransCanada  Pipeline   Corporation,  said  that  he   wanted  to                                                               
highlight  the requirements  needed to  make the  Alaska Pipeline                                                               
Project (APP) a success. As  the sponsors of the APP, TransCanada                                                               
is  responsible  for  maintaining the  technical  and  regulatory                                                               
schedule   and  for   negotiating   commercial  agreements   with                                                               
shippers. The state  also has a significant role  as the licensor                                                               
through the Alaska  Gas Inducement Act (AGIA) to  resolve the Pt.                                                               
Thomson and  gas fiscals and  in its role  in support of  AGIA by                                                               
appropriating for reimbursement.                                                                                                
                                                                                                                                
The producers and shippers also play  a key role because they are                                                               
ultimately potential customers; their  role would be to negotiate                                                               
commercial  agreements  with TransCanada  and  to  work with  the                                                               
state to resolve  the Pt. Thomson issue. The  U.S. government has                                                               
significant  roles as  well because  no project  succeeds without                                                               
having  regulatory   approvals:  Mr.  Persily  as   the  Pipeline                                                               
Coordinator and  the Federal Energy Regulatory  Commission (FERC)                                                               
have significant roles in facilitating project permitting.                                                                      
                                                                                                                                
MR.  PALMER said  there is  also the  issue of  the federal  loan                                                               
guarantee, which  could be a large  plus to this project.  On the                                                               
Canadian  side,  the Northern  Pipeline  Agency  (NPA) must  also                                                               
facilitate  project  permitting.  Despite all  those  roles,  the                                                               
project  is still  subject, as  any major  infrastructure project                                                               
is, to external factors. That's the nature of this business.                                                                    
                                                                                                                                
9:06:38 AM                                                                                                                    
Gas  supply and  demand  in North  America  changes globally,  he                                                               
said,  and gas  price forecasts  are different  today than  three                                                               
years  ago.  The  parties  that   matter  now  are  TransCanada's                                                               
potential shippers and their view of  gas prices in the long run,                                                               
because they are  the ones making the  financial commitments. The                                                               
LNG export  market is  changing, as well.  Three years  ago folks                                                               
thought  there would  be  significant imports  of  LNG into  this                                                               
continent  and  now  those  are  very  modest  and  a  number  of                                                               
potential projects are  being put forward by players  in the Gulf                                                               
Coast and  Western Canada to  export LNG off this  continent into                                                               
other markets.                                                                                                                  
                                                                                                                                
9:07:37 AM                                                                                                                    
SENATOR FRENCH joined the committee.                                                                                            
                                                                                                                                
MR.  PALMER  said  that  financial and  debt  markets  have  also                                                               
changed significantly with  the late 2008 meltdowns  and the more                                                               
recent  changes affecting  both national  and global  markets. It                                                               
has affected  the debt capacity  of major  financial institutions                                                               
in  this  country  as  well as  global  institutions  making  the                                                               
federal loan guarantee  part of this program  even more important                                                               
-  because   the  financial  capacity   of  banks  is   what  has                                                               
traditionally funded these  types of projects. In  the next three                                                               
years more changes will be seen.  This project will be in service                                                               
by the  end of this  decade and will operate  for 20 to  50 years                                                               
after that.                                                                                                                     
                                                                                                                                
9:10:03 AM                                                                                                                    
CO-CHAIR  WAGONER   asked  what  would  happen   to  the  federal                                                               
guarantee if this project became a  line to tidewater with a spur                                                               
into  Cook  Inlet and  how  that  would  relate to  the  original                                                               
project.                                                                                                                        
                                                                                                                                
MR.  PALMER  answered  that  the  original  $18  billion  federal                                                               
guarantee, originally passed  in 2004, was for both  the U.S. and                                                               
Canadian portions  of the line.  It wouldn't apply for  an export                                                               
project  outside of  U.S. markets,  and  Congress has  considered                                                               
upping  the guarantee  to $30  billion; but  no regulations  have                                                               
been put in  place. This is like a banker  not providing terms on                                                               
a  mortgage, and  many details  still  need to  be resolved.  The                                                               
federal  loan guarantee  could be  a very  large positive  if LNG                                                               
went only to U.S. markets.                                                                                                      
                                                                                                                                
9:12:58 AM                                                                                                                    
SENATOR  STEVENS asked  Mr. Palmer  to  give a  brief summary  of                                                               
current and future LNG supply and demand in North America.                                                                      
                                                                                                                                
MR. PALMER  replied that he is  not an expert in  that field, but                                                               
he had  some views. For  two decades  U.S. production was  in the                                                               
neighborhood of  50 bcf per day;  the range of production  in the                                                               
Lower 48 was the same. With  the shale gas revolution in the last                                                               
several years, that has shot  up dramatically and is projected to                                                               
hit 60 bcf  per day. Thinking in terms of  those numbers, that is                                                               
a couple  of Alaskan  projects, a  very significant  explosion of                                                               
supply in the Lower 48. As  a result there has been some fall-off                                                               
in   conventional   gas.   Because    gas   prices   are   lower,                                                               
unconventional gas, in  many cases, struggles to  compete on full                                                               
cycle  economics  at $4  gas.  They  can  compete on  half  cycle                                                               
economics where the  gas has been found and can  be produced, but                                                               
to go find  and develop conventional gas at $4  in many basins is                                                               
highly challenged. This is a  very significant change in Lower 48                                                               
production over the last several years.                                                                                         
                                                                                                                                
9:15:27 AM                                                                                                                    
On the  demand side, Mr. Palmer  said, a response is  starting to                                                               
be seen.  Low gas prices  cause higher demand generally,  but the                                                               
response  is slow  and residential  consumers don't  change their                                                               
consumption much  whether gas  prices are  at $4  or $8.  "We all                                                               
need to heat our homes..." he said.                                                                                             
                                                                                                                                
Commercial usage is much the  same. On the power generation side,                                                               
demand  is increasing  as a  result of  low gas  prices, but  the                                                               
established base of power production from  coal, much of it 10 to                                                               
20 years  old, is not  going to  be readily replaced.  When those                                                               
plants do come to the end  of their economic life, the owners and                                                               
regulators will  have to decide  whether or not they  are renewed                                                               
or  get  replaced with  a  new  coal or  gas  plant.  Here is  an                                                               
opportunity for  gas if  it stays  at low prices  on a  long term                                                               
basis.                                                                                                                          
                                                                                                                                
9:16:49 AM                                                                                                                    
Nuclear  power   has  some  ups   and  downs.  The   U.S.  hasn't                                                               
commissioned  any new  nuclear plants  for two  or more  decades.                                                               
TransCanada is  refurbishing one now  in Ontario and  that should                                                               
be in service next  year, but that is one of  the few examples on                                                               
this continent. The Fukushima Daiichi  disaster may have deferred                                                               
nuclear again, but that is still in question.                                                                                   
                                                                                                                                
MR. PALMER said how long gas will  remain in the $4 range is also                                                               
an  open  question.  At  that   price,  some  basins  are  highly                                                               
economic, particularly if they  have significant liquids. Liquids                                                               
are comparable to oil in value  and they are getting somewhere in                                                               
the $80  to $100 per barrel  range. Compare that with  gas prices                                                               
at $4  and you have a  ratio between oil  and gas that is  in the                                                               
20:1 range and  it has traditionally been a lot  lower than that.                                                               
For decades it  was in the 8 to 12  range. Today, liquid-rich gas                                                               
fields  are  being developed  quickly,  a  number of  them  shale                                                               
fields; dry gas  fields are less economic. It is  hard to predict                                                               
if $4 gas  will be sustainable, and at this  point he didn't know                                                               
what large producers think, but what they do think matters.                                                                     
                                                                                                                                
9:19:36 AM                                                                                                                    
SENATOR WIELECHOWSKI  asked how  Lower 48  shale gas  will affect                                                               
this project and what the status of his Valdez evaluation was.                                                                  
                                                                                                                                
MR. PALMER  reiterated that public  gas price forecasts  are much                                                               
lower today than they were  three years ago. Economic forecasters                                                               
are influenced  by current circumstances and  their forecasts are                                                               
one  of  the external  things  customers  will have  to  consider                                                               
before committing to this project.  Gas supply is projected to be                                                               
higher in North America than it was three of four years ago.                                                                    
                                                                                                                                
The same  impact hasn't  been seen on  the global  side, although                                                               
changes are happening.  No one knows if the  shale gas revolution                                                               
will come  to China. Currently,  Asian gas prices continue  to be                                                               
priced off  oil and that,  today, yields  a very high  LNG price.                                                               
Some LNG buyers  are coming to North America  seeking to purchase                                                               
potentially  North American  natural  gas just  as  they seek  to                                                               
purchase from Qatar, Australia, and  so on. Some of those parties                                                               
have advised that they are  seeking to get North American prices.                                                               
If successful in doing that they  will break the linkage to oil -                                                               
but that is still an open question also.                                                                                        
                                                                                                                                
MR. PALMER summarized  that the shale gas  revolution hasn't made                                                               
this  project  less  economic  to   date.  TransCanada  is  still                                                               
negotiating  with potential  customers  who  haven't walked  away                                                               
from the  table. TransCanada has  two alternatives: one,  to move                                                               
gas to Alberta and the other  to move it to Valdez, but customers                                                               
haven't been  obtained for either.  The FERC regulations  on this                                                               
project  require them  to take  late bids,  so they  are open  to                                                               
receive  them. He  reminded members  that TransCanada  has always                                                               
had a component  for in-state gas on this project  and if a large                                                               
line  is  put in  service  that  will  provide  low cost  gas  to                                                               
Alaskans just because of the economies of scale.                                                                                
                                                                                                                                
9:24:57 AM                                                                                                                    
CO-CHAIR  PASKVAN  asked  what  would happen  to  the  market  in                                                               
general and  in particular to the  AGIA process if the  shale gas                                                               
revolution would come to China.                                                                                                 
                                                                                                                                
MR. PALMER replied  that is a highly speculative  topic. The cost                                                               
of developing it  is uncertain and more  will be known in  2 to 5                                                               
years. If  China has the same  results North America has  had, it                                                               
would be very  significant. China has a shortage  of natural gas;                                                               
they  import from  proximate countries  via pipeline  as well  as                                                               
LNG, and  they are expected  to have  a hugely growing  market. A                                                               
domestic source  at low  prices will  have a  huge impact  on how                                                               
they purchase gas  and the price at which they  purchase gas from                                                               
offshore. At the  moment, they are principally  purchasing gas on                                                               
a  "Japanese Crude  Cocktail"  at a  crude  oil-linked price.  If                                                               
there  is no  change  and  China continues  to  have growth  that                                                               
leaves  an  opportunity  for  producers   or  other  shippers  to                                                               
nominate Valdez and sign a contract  to move gas there. But if on                                                               
the other  hand, gas prices are  very low in China  that makes it                                                               
much  more  challenging   for  Alaska  gas  to   compete  in  the                                                               
marketplace,  because  there is  no  other  dedicated market  for                                                               
Alaska gas  other than the  domestic market within the  state. If                                                               
the gas goes  to Alberta on the  way to the Lower  48, Alaska gas                                                               
will compete with  Lower 48 and Canadian supplies.  If Alaska gas                                                               
goes to Asia,  it will compete with Australian  gas, Sakhalin gas                                                               
and Qatar gas and potentially Lower 48 and western Canadian gas.                                                                
                                                                                                                                
He said there are four  announced LNG export projects potentially                                                               
from Kitimat [British Columbia] and  three years ago there was an                                                               
import project,  but none of  these projects has  established all                                                               
the necessary connections to go  forward. Chenier out of the Gulf                                                               
Coast  is  looking at  projects  to  turn re-gas  terminals  into                                                               
liquefaction  terminals  and  exporting gas  basically  from  the                                                               
NYNEX Hub.                                                                                                                      
                                                                                                                                
9:27:24 AM                                                                                                                    
SENATOR DYSON said the credibility  of TransCanada's project took                                                               
a big jump up in his view  when ExxonMobil joined it. He has been                                                               
told that  ExxonMobil is more  experienced on the  financial side                                                               
and that  they are  not all that  impressed with  today's prices,                                                               
but rather look at  the ones 10 or 15 years out.  Is that true in                                                               
general of major producers?                                                                                                     
                                                                                                                                
MR.   PALMER  replied   that  one   division  of   ExxonMobil  is                                                               
TransCanada's partner in the pipeline  project and there exists a                                                               
distinct firewall  between it and  the ExxonMobil  Production and                                                               
Marketing division,  which TransCanada wants as  a customer along                                                               
with the other producers. Those  parties that are in every market                                                               
and generally in every supply basin  in the world succeed, in his                                                               
view, by taking  a very long view of markets  - and their success                                                               
over the last half-century has been remarkable.                                                                                 
                                                                                                                                
SENATOR STEDMAN asked who their customers are.                                                                                  
                                                                                                                                
MR.  PALMER  replied   that  he  can't  say   because  of  strict                                                               
confidentially  provisions.   He  said   this  project   has  had                                                               
remarkable transparency and that  TransCanada revealed its entire                                                               
commercial proposal  before competitors had to  "put their marker                                                               
down." That is unique in the industry.                                                                                          
                                                                                                                                
He  explained  that the  reason  for  confidentiality is  because                                                               
until  recently TransCanada's  potential customers  are the  same                                                               
companies  that were  in  competition for  the  same project  and                                                               
secondly,  because   their  potential  customers,  if   they  are                                                               
producers, have  potential confidential information  with regards                                                               
to  where  their gas  will  be  received  or delivered  into  the                                                               
pipeline,  which  can  affect  the   value  of  land  leases  and                                                               
competitive markets at both ends of the pipe.                                                                                   
                                                                                                                                
SENATOR  STEDMAN asked,  for the  public's information,  if their                                                               
potential customers  are the companies  that own the  North Slope                                                               
leases: ExxonMobil, BP, ConocoPhillips and Chevron.                                                                             
                                                                                                                                
MR. PALMER responded  that he didn't mean to  be evasive; clearly                                                               
the companies he  listed are potential customers  on any project,                                                               
including theirs, but  no contracts had been  established yet and                                                               
while he didn't think it likely,  because the project is so large                                                               
and long  term there  could be  intermediaries like  marketers as                                                               
well.                                                                                                                           
                                                                                                                                
9:35:49 AM                                                                                                                    
CO-CHAIR PASKVAN asked if he  heard anything about the ability to                                                               
off-take gas from the North Slope.                                                                                              
                                                                                                                                
MR. PALMER  asked if his  question was  in regards to  the Alaska                                                               
Oil and Gas Conservation Commission (AOGCC) requirement.                                                                        
                                                                                                                                
CO-CHAIR PASKVAN replied yes.                                                                                                   
                                                                                                                                
MR. PALMER replied  that in the past the AOGCC  has indicated the                                                               
ability to  produce 2.3  or 2.7  bcf/day off  of the  Prudhoe Bay                                                               
field. A  larger volume  would need an  application by  the lease                                                               
holders affirmed by the AOGCC if they  were in favor of it and he                                                               
didn't know what the Pt. Thomson volume would be.                                                                               
                                                                                                                                
9:37:12 AM                                                                                                                    
SENATOR MCGUIRE joined the committee.                                                                                           
                                                                                                                                
SENATOR  WIELECHOWSKI said  he supported  this  project, but  the                                                               
state has to  decide about how to proceed and  it is increasingly                                                               
difficult  to  make decisions  without  information  on where  it                                                               
stands.  When TransCanada  had  a direct  competitor  they had  a                                                               
compelling reason to  not disclose information, but  now they are                                                               
also beyond  the timeline,  so he wanted  to know  if legislators                                                               
could  sign confidentiality  agreements with  TransCanada to  get                                                               
that information.                                                                                                               
                                                                                                                                
MR. PALMER  replied that today he  would tell him where  they are                                                               
on   the  commercial   side,  within   the   boundaries  of   the                                                               
confidentiality  agreement  and while  not  putting  anyone in  a                                                               
compromising  position, and  about the  technical and  regulatory                                                               
work that has been done - as required by the AGIA statute.                                                                      
                                                                                                                                
9:41:23 AM                                                                                                                    
SENATOR DYSON  remarked that  a couple  of years  ago experienced                                                               
industry people told him there will  not be a long term supply of                                                               
unconventional  gas  in  North   America  for  two  reasons:  the                                                               
startling  decline  rates  generally   on  those  plays  and  the                                                               
environmental push-back  that is already happening  and asked Mr.                                                               
Palmer  his sense  of what  will happen  with unconventional  gas                                                               
production in North America.                                                                                                    
                                                                                                                                
MR. PALMER replied that was an  open question. At the moment most                                                               
of  the news  about  shale  gas and  unconventional  gas is  very                                                               
positive. The  production increases  have been remarkable  and at                                                               
very  low cost.  As  more development  occurs in  non-traditional                                                               
areas  for  natural gas  local  folks  are  starting to  want  to                                                               
understand that development a little  bit better. It's clear that                                                               
shale gas is very  real in the short term and  likely in the long                                                               
run.                                                                                                                            
                                                                                                                                
He  continued  that  three  years   ago  the  Alaska  legislature                                                               
approved  a  license,  but  it  didn't  come  into  effect  until                                                               
December  2008 and  said  that  TransCanada had  met  all of  its                                                               
regulatory  and  technical  targets  over  that  timeframe.  They                                                               
commenced  work  before  the  license  was  granted  to  maintain                                                               
schedule and two years ago ExxonMobil aligned with them.                                                                        
                                                                                                                                
He has  been saying for seven  years now that this  project needs                                                               
five critical players to make it  a success: the State of Alaska,                                                               
ExxonMobil,  Conoco, BP,  and TransCanada.  At  present three  of                                                               
those  are  together:  the  State   of  Alaska,  TransCanada  and                                                               
ExxonMobil.  A team  of  110 individuals  works  on this  project                                                               
full-time in  addition to contract  employees; 170 people  are in                                                               
the field  this summer in  Alaska and  Canada and more  than that                                                               
last summer. This project is  moving forward on the technical and                                                               
regulatory side completely on schedule, he said.                                                                                
                                                                                                                                
At  FERC's request,  a  pre-filing application  was  made in  May                                                               
2009.  TransCanada   has  updated   and  optimized   the  project                                                               
technical and  cost basis for  the open season and  published it,                                                               
making it public  three months before their  major competitor had                                                               
to put their marker in the ground.                                                                                              
                                                                                                                                
9:46:14 AM                                                                                                                    
MR. PALMER  stated that  parties have  said TransCanada  needs to                                                               
engage  with communities  along  the right-of-way  and they  have                                                               
held  56  community meetings  in  Alaska  to  date. He  said  the                                                               
environmental  and field  work TransCanada  has completed  in the                                                               
last  three years  is expensive,  but it  will continue,  because                                                               
their AGIA  license obligates them to  make a FERC filing  in the                                                               
fall of  2012 regardless  of the outcome  of the  commercial open                                                               
season.  Forty Alaskan  businesses and  500 Alaskan  workers have                                                               
worked on  the project and they  are on track to  submit the FERC                                                               
permit  application on  time.  TransCanada  filed draft  resource                                                               
reports  1 and  10 in  April 2011  and FERC  recently issued  its                                                               
notice  of intent  to prepare  an Environmental  Impact Statement                                                               
(EIS) in  August 2011; they  are on track  to file all  the draft                                                               
resource  reports with  FERC  by year-end,  a  "massive job."  He                                                               
related that regulatory work is  also progressing in Canada under                                                               
the Northern Pipeline Act.                                                                                                      
                                                                                                                                
In order  for the  project to  succeed, he  repeated, TransCanada                                                               
needs  two  things:  customers  and  legislative  and  regulatory                                                               
approval. For any project to succeed, they must have both.                                                                      
                                                                                                                                
SENATOR MCGUIRE  asked the  status of  TransCanada's negotiations                                                               
with First Nations  along the route and if any  are still holding                                                               
out.                                                                                                                            
                                                                                                                                
MR. PALMER  answered that TransCanada has  a right-of-way through                                                               
the Yukon and  has held it since 1983, but  they continue to have                                                               
negotiations  with  both  First  Nations in  Yukon  and  northern                                                               
British   Columbia  (B.C.)   and  have   executive  participation                                                               
agreements  with several  of them  while continuing  to negotiate                                                               
with others. They  are "well down the path," but  there are still                                                               
miles to go.                                                                                                                    
                                                                                                                                
SENATOR MCGUIRE  asked how  many years  of negotiations  are left                                                               
and how many  miles of pipeline are affected  in those rights-of-                                                               
way.                                                                                                                            
                                                                                                                                
9:50:11 AM                                                                                                                    
MR.  PALMER replied  approximately 1,000  miles for  the Canadian                                                               
portion of the pipeline: Yukon  is approximately half of that and                                                               
northern  B.C.,  "traditional  pipeline country,"  is  the  other                                                               
half. The original  Northern Pipeline Act gave  the First Nations                                                               
specific benefits,  but TransCanada  is negotiating to  give them                                                               
more.  Other stakeholders  are negotiating,  too. At  the moment,                                                               
First  Nations  issues  are  not a  roadblock  for  the  Canadian                                                               
portion.                                                                                                                        
                                                                                                                                
CO-CHAIR  WAGONER asked  when companies  can book  their reserves                                                               
and  if it  would be  just ExxonMobil  since they  are already  a                                                               
partner  in this  project. Would  other  people be  able to  book                                                               
reserves without being part of the project?                                                                                     
                                                                                                                                
MR. PALMER replied that he didn't know that answer.                                                                             
                                                                                                                                
9:53:10 AM                                                                                                                    
MR. PALMER  summarized that AGIA's commercial  commitments to the                                                               
state  have  been  more  than   met  in  the  last  three  years.                                                               
TransCanada  has  aligned  with  ExxonMobil and  invited  BP  and                                                               
ConocoPhillips or any  other major player to join  them, and they                                                               
are open to partnership discussions, as well.                                                                                   
                                                                                                                                
He  said they  recognized that  global gas  markets are  becoming                                                               
more   competitive    not   just    on   this    continent,   but                                                               
internationally,  and  therefore   significantly  enhanced  their                                                               
commercial offerings by  $500 million per year in  tolls over 25-                                                               
years, a reduction of $12.5  billion at 4.5 bcf/day. Yesterday he                                                               
heard Mr.  Fauske say he  could not  find any players  that would                                                               
take  any of  the development  cost risk  on the  in-state bullet                                                               
line, but TransCanada  has already shared risk with  the State of                                                               
Alaska to the  tune of $288 million to the  end of second quarter                                                               
2011   and  has   received  $94   million  from   the  state   in                                                               
reimbursements.                                                                                                                 
                                                                                                                                
He said also  when the license was  granted, TransCanada expected                                                               
its floating  rate of return (ROR)  would be 14 percent  and that                                                               
was  reduced to  12 percent  in their  open season,  the ballpark                                                               
figure Mr. Fauske said commercial  parties would need in order to                                                               
invest in  the in-state gas  line. Third, the license  approved a                                                               
60/40  debt/equity  structure  for  expansion  and  70/30  during                                                               
construction.  In the  open season  TransCanada  changed that  to                                                               
70/30  during  construction  and  75/25  during  in-service.  Mr.                                                               
Fauske said parties would require 30 percent equity.                                                                            
                                                                                                                                
Last, the  license had an  approved recovery of capital  over the                                                               
initial contract  term of 20 or  25 years, so they  would recover                                                               
100 percent of their initially  invested capital over the life of                                                               
those  initial  contracts  through  depreciation.  In  fact,  Mr.                                                               
Fauske indicated that's exactly what  third parties would need to                                                               
invest  in  the  in-state  gas line.  TransCanada,  in  its  open                                                               
season,  proposed  to recover  only  80  percent of  its  initial                                                               
capital over the term of the initial contracts.                                                                                 
                                                                                                                                
MR. PALMER summarized  that all of those  components increase the                                                               
risk to  the pipeline sponsors, TransCanada  and ExxonMobil, that                                                               
have invested  their capital in  the development costs,  taken on                                                               
more risk  on the  equity side,  taken on more  risk in  terms of                                                               
recovery of  their capital - and  they are doing so  for a return                                                               
of 12 percent. They have done  all that to make this project more                                                               
competitive.                                                                                                                    
                                                                                                                                
9:59:10 AM                                                                                                                    
SENATOR WIELECHOWSKI  asked how  much TransCanada  and ExxonMobil                                                               
plan to spend  until the issuance of a FERC  license and how much                                                               
do they anticipate the additional state reimbursements will be.                                                                 
                                                                                                                                
MR.  PALMER   answered  if  they  are   unsuccessful  in  getting                                                               
customers  and  are  still  moving   forward  strictly  with  the                                                               
certificate and still struggling to  get customers on a long term                                                               
basis, they have indicated spending  in the order of $700 million                                                               
to get  to the  certificate by  2014. During  the course  of that                                                               
process, the state  would have fully reimbursed  the $500 million                                                               
and  the two  sponsors  will have  expended  the residual  couple                                                               
hundred million. If they do  get customers, they would accelerate                                                               
the  spending, because  at  that  point they  would  not only  be                                                               
seeking to get a certificate, but  to actually be in service by a                                                               
certain date.                                                                                                                   
                                                                                                                                
10:01:42 AM                                                                                                                   
SENATOR STEDMAN said  Mr. Palmer talked about  flexibility in the                                                               
negotiations he had with potential  customers to make their post-                                                               
project more  competitive, but TransCanada has  no customers. How                                                               
are  legislators to  interpret that  against other  projects like                                                               
the in-state gas line?                                                                                                          
                                                                                                                                
MR. PALMER replied that the  proposed toll based on capital costs                                                               
in  their  open  season  to  Valdez was  $2.45  to  $3.15;  their                                                               
proposed  toll to  Alberta was  $2.80 to  $3.50. TransCanada  has                                                               
"negotiated hard" with customers post  open season for a year and                                                               
TransCanada and  ExxonMobil have  made even  further concessions,                                                               
and they are  prepared to make even further  concessions on other                                                               
components of  commercial terms "to  try and get over  the finish                                                               
line."                                                                                                                          
                                                                                                                                
He said the  commercial side is behind schedule, but  the pace of                                                               
commercial  progress is  dependent  on  diverse external  factors                                                               
that they  do not  control like  having collaboration  with other                                                               
parties. This  is one  of the largest  commercial projects  to be                                                               
built  in the  world  - two  to  three times  the  size of  other                                                               
private gas projects in the world  and with a 10 year development                                                               
timeframe. Commercial  negotiations are highly  complex. Progress                                                               
has been  made on  Pt. Thomson  gas, which  is necessary  to make                                                               
this project viable  to the North American market.  But a smaller                                                               
volume to Valdez might change that.                                                                                             
                                                                                                                                
10:09:29 AM                                                                                                                   
CO-CHAIR PASKVAN  asked for  his thoughts  on the  Denali project                                                               
folding and rumors of TransCanada's project folding soon, too.                                                                  
                                                                                                                                
MR.  PALMER answered  that  the sponsors  of  the other  project,                                                               
ConocoPhillips and  BP, also had  a firewall  between sponsorship                                                               
of Denali  and their shipping  components. There are two  ways to                                                               
look  at the  Denali demise.  From a  glass half  empty point  of                                                               
view,  the sponsors  were unsuccessful  in getting  customers and                                                               
decided they no  longer wanted to pursue the project.  He said 18                                                               
months ago TransCanada put out  its commercial offerings in their                                                               
open season;  it was public.  Three months later Denali  came out                                                               
with a  remarkably similar proposal.  The fact that  Denali could                                                               
only  match TransCanada's  proposal  suggests that  the bid  made                                                               
three  months earlier  was very  competitive. Why  did Denali  go                                                               
away? TransCanada has  always thought they have  had an advantage                                                               
in  Canada and  that  they have  the skill  set  to advance  this                                                               
project,  and  with  ExxonMobil   on  board  that  was  improved.                                                               
TransCanada has  always welcomed BP, ConocoPhillips  or any other                                                               
major player  to join their project.  So, if you're a  glass half                                                               
full kind  of person, you could  say it was necessary  for one of                                                               
these major projects  to end. No one ever  contemplated that both                                                               
projects were going to be completed.                                                                                            
                                                                                                                                
10:13:29 AM                                                                                                                   
SENATOR  WIELECHOWSKI said  AGIA  guarantees fiscal  terms for  a                                                               
decade so  much so that  if the gas  pipeline would be  turned on                                                               
today  the  State  of  Alaska would  probably  lose  billions  of                                                               
dollars because  the price of  oil and  gas is coupled  and asked                                                               
what other fiscal terms are needed.                                                                                             
                                                                                                                                
MR. PALMER  answered that he  was not  the party to  answer that;                                                               
that is between the state and the producers.                                                                                    
                                                                                                                                
10:15:10 AM                                                                                                                   
SENATOR  FRENCH asked  of the  three issues  he has  talked about                                                               
being out of  their control, which one is the  biggest holding up                                                               
the project.                                                                                                                    
                                                                                                                                
MR.  PALMER replied  it's not  just  what is  happening in  North                                                               
America,  but what  is happening  in global  markets as  well. At                                                               
present, until  the state and  the producers have  resolved their                                                               
issues,  it's very  challenging  to get  customers. Those  issues                                                               
could be resolved and there could  still be no project if the gas                                                               
price is  not right. At the  point those issues are  resolved, it                                                               
has  to be  determined if  the project  is economic  or not.  The                                                               
first two  are necessary conditions  and they  may or may  not be                                                               
sufficient. As  issues are  resolved the  next decisions  must be                                                               
evaluated based on current economics.                                                                                           
                                                                                                                                
10:19:36 AM                                                                                                                   
SENATOR WIELECHOWSKI said  the lease terms signed by  the oil and                                                               
gas companies require  them to produce or  develop their resource                                                               
gas  when  it's reasonably  profitable  and  asked if  the  terms                                                               
TransCanada is providing makes gas  production by those companies                                                               
reasonably profitable.                                                                                                          
                                                                                                                                
MR. PALMER  replied that he  is confident that they  have offered                                                               
highly  competitive pipeline  tariff terms  and they  continue to                                                               
negotiate  to make  it even  more  competitive. And  in order  to                                                               
answer Senator  Wielechowski's question you  need to have  a view                                                               
as to  what gas prices are  going to be in  whatever market these                                                               
folks intend to  deliver into and you  need to have a  view as to                                                               
what  their  take will  be  and  the state  take  will  be -  all                                                               
questions that he couldn't answer.                                                                                              
                                                                                                                                
10:21:09 AM                                                                                                                   
REPRESENTATIVE OLSON  asked if TransCanada  would still  be doing                                                               
this project  without the state's  $500 million  subsidy, because                                                               
that is  the main  difference between them  and the  project that                                                               
folded.                                                                                                                         
                                                                                                                                
MR. PALMER  replied when TransCanada  received the  license, they                                                               
knew their  substantial obligations  to the  state but  that they                                                               
also received certain benefits.  Those obligations have been met,                                                               
but  it's not  a one-sided  arrangement. At  present, TransCanada                                                               
has invested $194  million in this project: they  were obliged to                                                               
have a maximum  of 30 percent equity, relatively low  in the U.S.                                                               
pipeline  industry;  they  were  obliged to  continue  with  this                                                               
project  regardless of  the outcome  of  the open  season and  in                                                               
order to  meet the schedule they  had to do work  during the open                                                               
season and  before it  in order to  maintain schedule;  they also                                                               
took on  tariff and terms that  were distinctly laid out  for any                                                               
party  that wished  to  bid.  In return  they  received the  $500                                                               
million state  contribution. So,  when people say  TransCanada is                                                               
somehow  continuing  with this  project  strictly  because it  is                                                               
receiving a  "subsidy" from the  State of Alaska, it's  more like                                                               
the  state  is continuing  to  meet  its obligations  along  with                                                               
TransCanada.                                                                                                                    
                                                                                                                                
REPRESENTATIVE OLSON asked at what  point TransCanada would reach                                                               
a decision on proceeding.                                                                                                       
                                                                                                                                
MR. PALMER  replied if there  is no  optimism that the  state and                                                               
the producers will resolve their  issues - and yesterday he heard                                                               
a  great deal  of optimism  about Pt.  Thomson from  Commissioner                                                               
Sullivan  -  nothing  will  be  resolved.  And  TransCanada  will                                                               
clearly have a decision point.  If there continues to be optimism                                                               
that  they will  be resolved  in  a timely  fashion, then  "we're                                                               
going to let the game play out...."                                                                                             
                                                                                                                                
10:26:48 AM                                                                                                                   
MR. PALMER said TransCanada continues  to meet its obligations to                                                               
the State of Alaska under the  license and they believe the state                                                               
is meeting  its obligations to TransCanada.  Their regulatory and                                                               
technical  timelines  are  on   schedule,  but  their  commercial                                                               
timeline is behind  schedule, primarily because of  issues out of                                                               
their control. They  are pleased with developments  mainly at Pt.                                                               
Thomson. TransCanada wants to work  through AGIA and get over the                                                               
finish line,  but they need  to see breakthroughs from  the state                                                               
and customers.                                                                                                                  
                                                                                                                                
10:29:45 AM                                                                                                                   
SENATOR WIELECHOWSKI said one of  the reasons for this meeting is                                                               
because the  state is  at a  crossroads and  has to  decide about                                                               
moving ahead on  the big pipeline or the in-state  line. He asked                                                               
if he had a chance to look at  the Fauske report and if he agreed                                                               
that the tariffs  are reasonable. Is $2 a good  price for gas off                                                               
the North Slope?                                                                                                                
                                                                                                                                
MR. PALMER replied  that he had read the report,  but he had done                                                               
no evaluation  as to  whether their  capital costs  are accurate;                                                               
the producers will  have to determine if the price  is right. Mr.                                                               
Fauske's  project  is a  $7.5  billion  project; TransCanada  has                                                               
completed the  first part of  the Keystone oil line  from Alberta                                                               
to Lotoka and Cushing for  $6 billion, a massive undertaking, and                                                               
is waiting  for approval to do  the second phase of  that project                                                               
at a cost of $7 billion.                                                                                                        
                                                                                                                                
Any  major project  needs some  things in  common like  customers                                                               
that can commit their gas to  a project. And customers are saying                                                               
they  need a  long-standing fiscal  arrangement between  them and                                                               
the state.  TransCanada needs  long-term customer  contracts with                                                               
credit worthy  partners enough to pay  a 20 or 25  year contract.                                                               
That is  probably what Mr.  Fauske is looking for.  Both projects                                                               
need to  get permits  and customers  for the  full volume  of the                                                               
project. Then  you get  into the debt/equity  ratios that  he has                                                               
already described.                                                                                                              
                                                                                                                                
10:34:21 AM                                                                                                                   
SENATOR DYSON said part of  the selling point for TransCanada was                                                               
the spare  capacity in their  Alberta pipeline and asked  if that                                                               
had changed or if it would change in the future.                                                                                
                                                                                                                                
MR. PALMER  replied it has changed  in that they have  more spare                                                               
capacity now.  The shale gas revolution  and increased production                                                               
in  the Lower  48 has  resulted  in lower  production in  western                                                               
Canada.  Approximately  15  bcf/day of  capacity  leaves  western                                                               
Canada for  the market  in eastern  Canada and  the Lower  48 and                                                               
that 15 bcf/day is not full today  by a long shot. They hoped the                                                               
shale  gas development  in northeast  B.C. will  refill the  pipe                                                               
over the course of the next decade.                                                                                             
                                                                                                                                
10:36:24 AM                                                                                                                   
REPRESENTATIVE  SEATON   said  they   are  pleased  to   see  the                                                               
resolution of Pt. Thomson possibly  on the table. During stranded                                                               
gas  development  legislators  got  a  window  into  the  Prudhoe                                                               
Bay/Kuparuk  joint operating  agreement, in  which, uniquely,  if                                                               
one of  the companies  decides not  to invest  or conduct  a sale                                                               
that would  actually veto  the project.  He asked  if one  of the                                                               
companies decides not  to participate in this  project would that                                                               
veto  it  for  the other  two  or  the  entire  unit. Is  that  a                                                               
negotiating point  or an  impediment for  getting gas  sales from                                                               
individual producers?                                                                                                           
                                                                                                                                
MR. PALMER replied that he wasn't privy to that information.                                                                    
                                                                                                                                
10:38:54 AM                                                                                                                   
SENATOR WIELECHOWSKI  remarked that  if a  total of  $288 million                                                               
has  been spent  and  the  state has  reimbursed  $94 million  to                                                               
TransCanada  and Mr.  Palmer  said they  would  spend $7  million                                                               
more, then there  is $412 million left to be  spent and the state                                                               
is on the hook for up to  $406 million. He said when AGIA passed,                                                               
no  one talked  about  shale gas  and as  a  policy maker  making                                                               
decisions  whether or  not to  continue investing  he needs  more                                                               
information.  He   wanted  to  know  if   TransCanada's  internal                                                               
calculations show  that this project  is still profitable  and if                                                               
the producers are throwing up unreasonable stumbling blocks.                                                                    
                                                                                                                                
MR.  PALMER  responded that  he  appreciated  that the  state  is                                                               
investing its dollars  with TransCanada and that  they have major                                                               
policy  decisions  to  make,  but   what  he  is  asking  for  is                                                               
completely outside the bounds of  pipeline processes across North                                                               
America. He  is asking him  for highly  confidential information,                                                               
circumstances  between   customers  and  the  pipeline   on  this                                                               
project,  to   be  put   into  the   hands  of   60  legislators.                                                               
Negotiations are still ongoing and  may still take turns. He said                                                               
he would consider what he asked, but it is highly unusual.                                                                      
                                                                                                                                
SENATOR WIELECHOWSKI  said he thought  this was a  highly unusual                                                               
project  because no  other state  in  the country  is putting  up                                                               
hundreds of  millions of dollars  and as  a partner still  has no                                                               
access to that  information and stated, "I think we  have a right                                                               
to have that  information." He offered to  sign a confidentiality                                                               
agreement  saying  it  had  been   done  in  the  past  and  that                                                               
legislators   have  been   very   careful   when  they   received                                                               
information like that.                                                                                                          
                                                                                                                                
MR. PALMER replied  that they have been able  to share additional                                                               
information  with the  administration  under the  confidentiality                                                               
provisions  of AGIA,  but what  Senator  Wielechowski wants  goes                                                               
beyond the statute.                                                                                                             
                                                                                                                                
10:42:49 AM                                                                                                                   
SENATOR STEDMAN said it sounds  like TransCanada needs to come up                                                               
with another $20 million to go  forward and the state has to come                                                               
up with another  $200 million, so an  appropriation request would                                                               
be needed this  winter. At any rate, the $500  million is a "sunk                                                               
cost" the state makes one year  at a time regardless of which way                                                               
the project goes.                                                                                                               
                                                                                                                                
10:44:32 AM                                                                                                                   
CO-CHAIR WAGONER asked  if he had been faced with  these types of                                                               
external problems on other projects.                                                                                            
                                                                                                                                
MR.  PALMER replied  yes; significant  external issues  have been                                                               
out  of their  control  with Keystone:  one is  if  they will  be                                                               
granted  a  permit.  The  review  process  for  that  project  is                                                               
significantly beyond  what it was  for the original  Keystone and                                                               
other pipeline projects. Yes, they  have faced significantly more                                                               
opposition to  what they thought  was a  straightforward pipeline                                                               
project  and  have  ended  up  investing  more  money  than  they                                                               
expected, but they  remain confident they will get  to the finish                                                               
line.  He said  the customers  for  that project  are not  public                                                               
information; neither  are the tolls. Contracts  with this project                                                               
have  remarkable   transparency  because  of  the   statutes  the                                                               
legislature  has set  up and  FERC requirements;  TransCanada has                                                               
had business with  other governments that also  come with certain                                                               
obligations and  rights. It  has faced  other projects  that have                                                               
items outside  the project  that can  delay and  potentially stop                                                               
it.                                                                                                                             
                                                                                                                                
10:47:43 AM                                                                                                                   
SENATOR  MCGUIRE  said  she  understood  if  this  project  isn't                                                               
successful that  the state  retains the license  and the  data as                                                               
part of  the $500 million  it has  contributed and asked  what he                                                               
believes  TransCanada's future  rights are  to the  data and  the                                                               
license itself and  what their role will be in  the future in the                                                               
event of a failed plan this go-around.                                                                                          
                                                                                                                                
MR. PALMER  replied that he didn't  have the statute in  front of                                                               
him,  but the  abandonment provision  says if  the administration                                                               
decided the project  was uneconomic (both parties  have the right                                                               
to claim that) and TransCanada  agrees, at that point the project                                                               
is over  and the  state has  the option,  not the  obligation, to                                                               
purchase  the asset  for their  out of  pocket dollars  (the non-                                                               
reimbursed  qualified  expenses).  Without  an  agreement,  there                                                               
would be  arbitration and the  state would have no  obligation to                                                               
buy TransCanada's assets. Another  circumstance is if the project                                                               
isn't abandoned  but they just never  get to the finish  line. He                                                               
recalled  there  were  some  obligations   and  rights  for  both                                                               
parties, but couldn't recall exactly what they were.                                                                            
                                                                                                                                
SENATOR MCGUIRE  said she  recalled that  the state  retained the                                                               
license, but  she just understood him  to say that the  state has                                                               
the option to purchase it.                                                                                                      
                                                                                                                                
MR. PALMER answered that it's clearly  set out in statute, but he                                                               
didn't have it in front of him.                                                                                                 
                                                                                                                                
SENATOR  MCGUIRE  asked in  the  final  scenario  if he  had  any                                                               
opinion or  recollection about  whether or  not the  500 mmcf/day                                                               
goes away with FERC certification.                                                                                              
                                                                                                                                
MR.  PALMER  replied that  the  rationale  for the  500  mmcf/day                                                               
limitation  is  that TransCanada  needs  just  about all  of  the                                                               
proven gas to  make its project economic. In fact  at 4.5 bcf/day                                                               
TransCanada needs more than the  existing proven gas and since it                                                               
was taking  on obligations to  the state,  they had to  know they                                                               
had access to most or all of the gas.                                                                                           
                                                                                                                                
10:55:01 AM                                                                                                                   
REPRESENTATIVE  SEATON said  Commissioner  Sullivan talked  about                                                               
synchronizing open seasons yesterday and  it seemed like the only                                                               
way to do  that was to discuss  fiscal terms and asked  if was he                                                               
was  concerned  that  the administration  might  finalize  fiscal                                                               
terms by the 2013 date.                                                                                                         
                                                                                                                                
MR.   PALMER  replied   that  he   listened   carefully  to   the                                                               
commissioner   yesterday  and   felt  that   it  clearly   is  in                                                               
TransCanada's interest  to see resolution  between the  state and                                                               
producers as  soon as  possible, but  when it  happens is  not in                                                               
their control. He  said TransCanada has an  obligation to solicit                                                               
the market  again in 2012  and an  obligation under FERC  to take                                                               
late bids.  He wasn't sure  what context was intended  in talking                                                               
about synchronizing open seasons.                                                                                               
                                                                                                                                
10:57:16 AM                                                                                                                   
SENATOR  FRENCH   said  Mr.  Palmer  could   probably  sense  the                                                               
frustration here  today that they  are not further down  the road                                                               
on this  project, but he  is "a glass  half full person"  and has                                                               
heard it suggested by one of  Alaska's delegation on the floor of                                                               
the House  that we somehow  missed the  boat on the  gas pipeline                                                               
and the window is closed. He  sees it differently; he's glad they                                                               
didn't go  with the pipeline 20  years ago and that  they are not                                                               
selling gas into  a $4 market. That  gas is still in  the bank on                                                               
the North  Slope. He appreciated  the enormous effort  Mr. Palmer                                                               
and his company has put into getting this far.                                                                                  
                                                                                                                                
10:58:46 AM                                                                                                                   
CO-CHAIR  PASKVAN,  seeing  no  further  questions,  thanked  Mr.                                                               
Palmer for appearing today.                                                                                                     
                                                                                                                                
Recess from 10:58 to 11:17 a.m.                                                                                                 
                                                                                                                                
^ALASKA OIL AND GAS CONSERVATION COMMISSION UPDATE                                                                              
        ALASKA OIL AND GAS CONSERVATION COMMISSION UPATE                                                                    
                                                                                                                                
11:17:00 AM                                                                                                                   
CO-CHAIR PASKVAN called  the meeting back to order  and asked Ms.                                                               
Foerster to come forward.                                                                                                       
                                                                                                                                
CATHY  FOERSTER, Commissioner,  Alaska Oil  and Gas  Conservation                                                               
Commission (AOGCC), said she is  the engineering commissioner and                                                               
explained  that   the  commission   is  charged  by   the  Alaska                                                               
Constitution with  ensuring that  operators get  greater ultimate                                                               
recovery of Alaska's hydrocarbon  resource, that their operations                                                               
do  not  cause   waste  of  that  resource,   that  when  they're                                                               
developing   and  producing   that  resource   they  keep   fresh                                                               
groundwater  from harm,  that the  development is  in such  a way                                                               
that correlative  rights are protected and  that operations under                                                               
their  statutory control  are safe  (blowout prevention  and well                                                               
safety systems, specifically).                                                                                                  
                                                                                                                                
She said  their role in  selling gas from  the North Slope  is in                                                               
ensuring that when those gas  sales occur that the oil associated                                                               
with  that   gas  is  not   put  at   risk  of  being   lost  and                                                               
unrecoverable.                                                                                                                  
                                                                                                                                
SENATOR STEDMAN asked her to explain how gas is related to oil.                                                                 
                                                                                                                                
MS.  FOERSTER explained  that hydrocarbons  can  exist either  as                                                               
natural gas reservoirs  by themselves or as  reservoirs that have                                                               
a  combination of  oil and  gas.  The reservoirs  that have  been                                                               
discovered on the  North Slope that contain the  natural gas they                                                               
are  talking about  are both  associated  with oil.  The two  big                                                               
reservoirs  are at  Prudhoe  Bay that  has about  24  tcf of  gas                                                               
associated  with the  2  bbl/oil left  in the  ground  yet to  be                                                               
recovered (11  bbl have  come out already)  and Pt.  Thomson that                                                               
still  has 2  bbl/oil  left  to recover.  She  said  that gas  is                                                               
necessary  for  getting  oil  out of  the  ground  providing  the                                                               
pressure necessary  to make  the oil  move up  a couple  of miles                                                               
through  these  wells  to  the   surface  among  other  reservoir                                                               
phenomenon associated with producing oil.                                                                                       
                                                                                                                                
So,  when the  AOGCC looks  at how  operators are  managing, they                                                               
make sure that both  the oil and the gas are  being taken care of                                                               
as well  as possible. For  instance, if  they were to  just start                                                               
taking gas  out of Prudhoe Bay  the remaining 2 bbl/oil  would be                                                               
put  at  risk of  not  being  produced at  all.  To  put that  in                                                               
perspective Thunder Horse, the largest  offshore discovery in the                                                               
Gulf of Mexico  in the last 10  years, is 1 bbl/oil.  So she said                                                               
"our poor, old, limp, tired  Prudhoe Bay reservoir is still twice                                                               
as big as the biggest discovery  in the Gulf of Mexico." It can't                                                               
be  abandoned.  Pt.  Thomson  has 9  tcf/gas  and  has  somewhere                                                               
between .5 and 2 billion barrels  associated with it as well. The                                                               
oil  is  more valuable  and  it  needs the  gas  in  order to  be                                                               
recovered.                                                                                                                      
                                                                                                                                
11:23:28 AM                                                                                                                   
SENATOR STEDMAN remarked that putting in  a gasline in the 80s or                                                               
90s or even 10 years ago would have been a disaster.                                                                            
                                                                                                                                
MS. FOERSTER said she generally agreed.                                                                                         
                                                                                                                                
SENATOR WIELECHOWSKI  paraphrased concerns  she expressed  at the                                                               
end of  last session about  turning on the pipeline  and shipping                                                               
gas and how  that would impact the ability  to recover additional                                                               
oil.                                                                                                                            
                                                                                                                                
MS. FOERSTER  responded that  she typically  says the  longer you                                                               
wait the lower  the volume of gas you produce  and the more steps                                                               
that the operators have taken to  get as much oil accelerated out                                                               
of the ground as possible.                                                                                                      
                                                                                                                                
SENATOR WIELECHOWSKI asked  how dramatically a big  pipeline or a                                                               
bullet line in 10 years would  impact oil production on the North                                                               
Slope.                                                                                                                          
                                                                                                                                
MS.  FOERSTER replied  if it  comes on  10 years  from now,  it's                                                               
going to depend on  how big the line is, how much  of the oil has                                                               
been  produced and  what mitigating  steps the  operator has  put                                                               
into place  to prevent the loss  of the gas. She  has always said                                                               
that  gas is  not only  useful  for getting  the oil  out of  the                                                               
ground  from the  reservoirs it's  in, but  it gets  exported for                                                               
enhanced oil recovery (EOR) use in  other fields and that gas has                                                               
potential to  be very useful  in the  huge heavy oil  and viscous                                                               
oil resource only beginning to be tapped up there.                                                                              
                                                                                                                                
She stated that  the U. S. Geological Survey (USGS)  says 100 tcf                                                               
of gas  hasn't been found up  there yet, and the  reason it's not                                                               
being  looked for  is because  it can't  be sold.  If we  were to                                                               
build a gas  pipeline, who is to  say how much of  that gas would                                                               
be found?  So, do  we worry  about the gas  being needed  for the                                                               
oil? Yes.  Is there hope that  we start selling the  gas; that we                                                               
find more gas  and we quit worrying about it?  Yes; and forecasts                                                               
will be wrong.                                                                                                                  
                                                                                                                                
11:27:46 AM                                                                                                                   
CO-CHAIR PASKVAN  asked her  to explain how  gas is  important to                                                               
the development of viscous oil resources.                                                                                       
                                                                                                                                
MS.  FOERSTER  explained  the  primary  way  that  gas  would  be                                                               
valuable  to  the heavy  resource  development  would be  through                                                               
decreasing its  viscosity; introducing gas into  those reservoirs                                                               
in a variety of different ways  makes oil more movable. She asked                                                               
them to imagine  sand mixed together in a box  with peanut butter                                                               
and how easy  it would be to extract that  peanut butter from the                                                               
sand  and if  you  could magically  change  that peanut  butter's                                                               
viscosity to  where it flows like  water so more could  be gotten                                                               
out.  Using steam  and heat  are other  methods that  need to  be                                                               
tried; she didn't  know which ones would be  successful, but they                                                               
all require fuel and natural gas  is the fuel to make those other                                                               
things happen.                                                                                                                  
                                                                                                                                
11:29:51 AM                                                                                                                   
SENATOR STEDMAN asked how the  AOGCC deals with valuation for oil                                                               
estimates.                                                                                                                      
                                                                                                                                
MS. FOERSTER replied  that the AOGCC just has to  worry about the                                                               
science and  not which is  worth more. Their  job is to  get them                                                               
both out  and it's easy  to get gas out  no matter what  is being                                                               
done to the  oil, but the opposite  is not true. Oil  is the more                                                               
valuable  of the  two resources,  but the  science says  it's the                                                               
harder one to protect.                                                                                                          
                                                                                                                                
SENATOR DYSON said  it was represented yesterday  that the bullet                                                               
line hadn't gotten  a commitment from the major  producers on the                                                               
North Slope  to sell it  gas, but they  are required to  make gas                                                               
available.  Yet he  remembers conversations  with  the AOGCC  and                                                               
folks who  understand the reservoir  that it's probably  seven or                                                               
eight  years before  gas could  be taken  off without  losing oil                                                               
production.                                                                                                                     
                                                                                                                                
MS. FOERSTER responded  that it will be several  years before the                                                               
AOGCC  will feel  comfortable that  gas off-take  from the  North                                                               
Slope is  a prudent move.  No matter  when it happens  there will                                                               
likely be  oil losses unless all  the oil is gone.  Then there is                                                               
the balance  between how  late you  can wait  to extract  the gas                                                               
before  the infrastructure  on  the North  Slope  is starting  to                                                               
"peter out."   She said operators are forecasting  that they will                                                               
be selling  that oil until 2050,  so she personally was  not in a                                                               
hurry to  get the  gas out of  the ground. But  based on  what is                                                               
publicly  available  about  what   the  operators  are  doing  to                                                               
accelerate production  - they're drilling lots  of horizontal and                                                               
multilateral wells -  and what they are doing  to mitigate losses                                                               
-  they're putting  in  pilots  for testing  like  gas cap  water                                                               
injection -  in the  seven or  eight-year timeframe,  she thought                                                               
the  state would  be comfortable  with  the losses  that will  be                                                               
incurred if there is a gas  sale. At that time the AOGCC wouldn't                                                               
be the bad guy.                                                                                                                 
                                                                                                                                
SENATOR  DYSON  asked under  the  existing  legal regime  if  the                                                               
producers are required to release gas.                                                                                          
                                                                                                                                
MS. FOERSTER replied she didn't  know what producers are required                                                               
to do in  their DNR leases, but  they could be in  a real dilemma                                                               
if they  are required to sell  gas when the AOGCC  told them they                                                               
couldn't because it  would be causing too much waste  of the oil.                                                               
If that's what  their lease says, the AOGCC  could probably trump                                                               
the DNR, but the legislature could overrule the AOGCC.                                                                          
                                                                                                                                
11:34:51 AM                                                                                                                   
SENATOR  STEVENS asked  her to  reflect  on the  administration's                                                               
goal of 1 million barrels a day and what is best for Alaskans.                                                                  
                                                                                                                                
MS. FOERSTER  replied that anything  they can do to  increase the                                                               
throughput in  the TransAlaska Pipeline  System (TAPS) is  a good                                                               
thing.  It's a  lofty  goal  that is  challenging  and heavy  oil                                                               
resource development  using natural gas is  integral to achieving                                                               
that goal.                                                                                                                      
                                                                                                                                
SENATOR  WIELECHOWSKI said  in 10  years if  the gas  pipeline is                                                               
built  and if  the oil/gas  ratio  is the  same (20  or 25:1)  it                                                               
doesn't seem  like there would  be a  whole lot of  incentive for                                                               
the oil companies to put gas  in the pipeline when they can still                                                               
use it  to extract  a much  more valuable  resource and  asked to                                                               
what  extent  that is  playing  into  oil company  resistance  to                                                               
commit gas to the pipeline.                                                                                                     
                                                                                                                                
MS. FOERSTER  replied that  she had three  answers: one  was that                                                               
her experience  is what is good  for the oil companies  (that are                                                               
really working to maximize production)  is good for the state and                                                               
two; they are in the  business of making money. Stockholders want                                                               
that. And three, if  the gas is still being used  to get more oil                                                               
out of  the ground she thought  everyone in the state  would want                                                               
them to do that.                                                                                                                
                                                                                                                                
SENATOR  WIELECHOWSKI  asked  if   they  are  being  unreasonable                                                               
thinking  they should  North  Slope  gas can  be  committed to  a                                                               
pipeline in the next decade in light of oil/gas ratios.                                                                         
                                                                                                                                
MS.  FOERSTER   replied  that   she  didn't   think  it   at  all                                                               
unreasonable for the  legislature to be asking  the oil companies                                                               
to explain  why they are doing  what they are doing  and why they                                                               
are not doing  something else and to urge them  to do things that                                                               
appear to be in the best interest  of the State of Alaska and let                                                               
them  explain why  it's not  if they  don't see  eye to  eye with                                                               
them. It's  also the legislature's responsibility  to listen very                                                               
carefully and very open mindedly to  their answers and be open to                                                               
the possibility that  maybe they were wrong and as  well as maybe                                                               
they were right.                                                                                                                
                                                                                                                                
11:38:50 AM                                                                                                                   
CO-CHAIR PASKVAN  said he heard  earlier that AOGCC  approved 2.5                                                               
bcf  to be  taken out  of  the reservoir  and asked  if that  was                                                               
accurate when that  would commence and what her  thoughts were on                                                               
a 4.5  bcf extraction. And last,  they are here today  as part of                                                               
the 0.5  bcf in-state gas  line and  how would that  would affect                                                               
the 4.5 bcf needed for the big line.                                                                                            
                                                                                                                                
MS. FOERSTER replied  that the 2.7 bcf off-take was  put in place                                                               
in the 70s. In  2006/7 after she had come to  the AOGCC, that got                                                               
reviewed.  They conducted  a  study  in which  BP  and the  other                                                               
Prudhoe  Bay operators  generously shared  confidential data.  At                                                               
the hearing they  decided that there was no reason  to change the                                                               
2.7 bcf - and  that by the time anyone could  build a pipeline it                                                               
would either be good  or there would be plenty of  time to see it                                                               
coming that they could change it if needed.                                                                                     
                                                                                                                                
She said the AOGCC  was asked for an opinion on  the 0.5 bcf line                                                               
and used  a similar  rationale for  saying that  that small  of a                                                               
volume would probably be okay five or six years from now.                                                                       
                                                                                                                                
MS. FOERSTER said a 4.5 bcf  line depends on when it happens, how                                                               
much of the oil has been  extracted and what mitigating steps the                                                               
operators put in place to prevent  loss of the gas. But the AOGCC                                                               
could hold an emergency hearing and  put a stay on production and                                                               
sales into that line until they  came to a conclusion which today                                                               
would be no, you can't sell the gas.                                                                                            
                                                                                                                                
11:42:58 AM                                                                                                                   
REPRESENTATIVE GARA asked if the legislature  would still have to                                                               
authorize a  4.5 bcf  line in  2020 or  afterwards and  would the                                                               
AOGCC say yes at that time.                                                                                                     
                                                                                                                                
MS. FOERSTER replied that  is hard to say. By 2020,  a 4 bcf line                                                               
might be good  for the state. That's nine years  from now and she                                                               
asked if they could even  tell her what Alaska's operating budget                                                               
will be then?  No. She related that the  operator is accelerating                                                               
and putting in mitigation.                                                                                                      
                                                                                                                                
REPRESENTATIVE GARA  stated that  the governor  says more  oil is                                                               
needed in the  pipeline and asked what she  thought was realistic                                                               
to get  out of the  pipeline leaving aside offshore  drilling for                                                               
now.                                                                                                                            
                                                                                                                                
MS. FOERSTER  replied that offshore is  going to be the  key. She                                                               
thought 1 million  barrels was a very aggressive  goal. She hoped                                                               
it would  happen even  though she  wouldn't bet  on it.  She said                                                               
leaders are needed who will set goals.                                                                                          
                                                                                                                                
SENATOR DYSON  asked if she thought  500 mmcf could be  taken off                                                               
in five or six years.                                                                                                           
                                                                                                                                
MS.  FOERSTER replied  that  she  didn't think  that  would be  a                                                               
problem, but there will be losses; it's a balance.                                                                              
                                                                                                                                
SENATOR DYSON asked  how realistic it is that rich  gas plays are                                                               
in the area.                                                                                                                    
                                                                                                                                
MS. FOERSTER  answered that discovering  at least 150 tcf  on the                                                               
North Slope is very realistic.  Every oil province she has worked                                                               
in has  had gas  associated with  it and  every province  she has                                                               
worked in is  where people have looked for the  oil because it is                                                               
much more valuable than the gas.  Until they had a market for the                                                               
gas, they  flared it until  they were told they  couldn't because                                                               
it's  wasteful.   When  people  have  drilled   wells  that  have                                                               
encountered  something  that doesn't  look  like  oil, they  have                                                               
called it a dry hole and moved on.                                                                                              
                                                                                                                                
SENATOR DYSON said people talk about how magic CO  is for lifting                                                               
                                                 2                                                                              
heavy oil and that is a by-product of gas conditioning.                                                                         
                                                                                                                                
MS. FOERSTER commented  if there is a market for  gas it's likely                                                               
that people  will find  more. It  could be  used for  pressure or                                                               
sale.  CO  production is  association  with the  gas produced  at                                                               
         2                                                                                                                      
Prudhoe and  it will be  the same  at Pt. Thomson.  She explained                                                               
that when  you sell gas into  a gas pipeline you  have to extract                                                               
the things like  CO  and HS  that are corrosive to  the metals in                                                               
                   22                                                                                                           
the pipeline. So CO  will be extracted from the gas and something                                                               
                   2                                                                                                            
will  have   to  be   done  with   it  because   it  is   not  an                                                               
environmentally friendly  byproduct and just  letting it go  is a                                                               
thing  of the  past. It  will have  to be  sequestered. The  best                                                               
place to put  it would be in  the ground where it  could help get                                                               
more oil out. CO  is known as an enhanced oil recovery substance.                                                               
                2                                                                                                               
These synergies  will happen,  but to what  extent and  where are                                                               
yet to be determined.                                                                                                           
                                                                                                                                
CO-CHAIR PASKVAN  asked if natural  gas pressure is  important to                                                               
development of shale oil since Alaska  may be entering into a new                                                               
phase.                                                                                                                          
                                                                                                                                
11:51:31 AM                                                                                                                   
MS.  FOERSTER replied  that  shale oil  is  a slightly  different                                                               
animal. The  reservoir is a harder  rock and it won't  have a gas                                                               
cap or  an oil rim.  There is pressure  and that is  essential to                                                               
the ability to lift the oil  out of the ground. Other issues will                                                               
be  equally  important  or more  like  establishing  permeability                                                               
channels (through  the hydraulic  fracing process) to  allow that                                                               
resource to  get out of the  rocks. If you have  heavy fluid that                                                               
has to make it up out of the  ground a mile or two it has to have                                                               
something pushing and that's going to be pressure.                                                                              
                                                                                                                                
REPRESENTATIVE SEATON  asked if  the potential settlement  on Pt.                                                               
Thomson would override AOGCC criteria for hydrocarbon recovery.                                                                 
                                                                                                                                
MS. FOERSTER  replied that  she hadn't  seen the  settlement, but                                                               
couldn't imagine ExxonMobil signing  a contract agreeing to break                                                               
Alaska law  to get  their leases back.  She reminded  people that                                                               
the  Pt.  Thomson reservoir,  although  it's  been called  a  gas                                                               
reservoir by  the state  of Alaska's definition  of what  makes a                                                               
gas  reservoir, it's  not.  It's an  oil  reservoir, because  the                                                               
gas/oil  ratio makes  it fall  within  the definition  of an  oil                                                               
reservoir.    So, Pt.  Thomson  would  be  another one  of  those                                                               
reservoirs that  the operator would  have to get  permission from                                                               
the AOGCC to produce the gas,  because producing the gas puts the                                                               
oil at risk.   Pt. Thomson is a little  different than Prudhoe in                                                               
that it's  not a standard oil  reservoir where the gas  cap keeps                                                               
the pressure up. At Pt. Thomson  the worry is that the gas exists                                                               
in the  reservoir in a dense  fluid phase; not really  liquid and                                                               
not  really gas.  So,  it's not  adhering to  the  rocks. But  if                                                               
pressure is  dropped in  this "retrograde  condensate reservoir,"                                                               
then liquids (like  liquid hydrocarbons) would drop  out. As they                                                               
drop out,  they adhere to  the rock like  a sponge and  right now                                                               
they don't have a way to  squeeze that sponge. As the Pt. Thomson                                                               
fluids go  from that dense fluid  phase into a liquid  phase they                                                               
will adhere to  a sponge which is  the rock and a lot  of it will                                                               
never be recoverable again.                                                                                                     
                                                                                                                                
11:55:56 AM                                                                                                                   
SENATOR  WIELECHOWSKI  said  he   expected  to  see  Pt.  Thomson                                                               
settlement terms  soon and  asked what  specific rules  the AOGCC                                                               
would apply to its development.                                                                                                 
                                                                                                                                
MS. FOERSTER replied  "the monkey is on Exxon's back  to prove to                                                               
us  what the  best  way to  produce the  reservoir  is." If  it's                                                               
economically viable  to produce the liquids,  the commission will                                                               
make them do that. She added  that the other place the liquids (a                                                               
150 ft. thick heavy oil rim) exist  in Pt. Thomson is at the base                                                               
of the big gas condensate reservoir  and that is a concern to the                                                               
AOGCC  as well.  So, Exxon  has to  demonstrate two  things: they                                                               
have to put  in a small cycling project and  demonstrate how that                                                               
project will perform.  Exxon is in the process of  doing this. If                                                               
they can get enough liquid  recovery associated with that cycling                                                               
project to  justify the cost of  expanding it, they will  want to                                                               
do that and the AOGCC will make them do it.                                                                                     
                                                                                                                                
If the  liquid recovery  from cycling  is only  marginally better                                                               
than  the  liquid  recovery  from  blow  down  and  that  can  be                                                               
demonstrated,  then Exxon  can't be  forced to  spend money  that                                                               
they  won't recover.  At that  point  the AOGCC  would back  off.                                                               
Right now  no one knows the  answers, but Exxon has  great models                                                               
and  smart people  and they  are working  on their  small cycling                                                               
project.                                                                                                                        
                                                                                                                                
11:59:34 AM                                                                                                                   
CO-CHAIR PASKVAN, noting the time,  thanked everyone and recessed                                                               
the meeting at 11:59 AM.                                                                                                        
^Presentation on Cook  Inlet Activity Update and  DNR Natural Gas                                                               
Studies   by  Paul   Decker,  Petroleum   Geologist  &   Resource                                                               
Evaluation Manager and Jeff Dykstra, Commercial Analyst                                                                         
                                                                                                                                
               DNR COOK INLET OIL AND GAS UPDATE                                                                            
1:34:07 PM                                                                                                                    
CO-CHAIR   PASKVAN  welcomed   everyone   back   and  said   this                                                               
afternoon's session would be an update on Cook Inlet.                                                                           
                                                                                                                                
PAUL DECKER,  Manager, Resource  Evaluation Section,  Division of                                                               
Oil and Gas, Department of Natural  Resources (DNR), said he is a                                                               
petroleum geologist and  in response to some  questions, that the                                                               
division is  not equipped to  evaluate undiscovered  resources in                                                               
Cook Inlet.  Their primary focus  is on regulatory  oversight and                                                               
providing  the geological  and engineering  geophysical expertise                                                               
to make good regulatory decisions  about where to lease lands and                                                               
once  those  leases are  issued  about  how  to manage  them  for                                                               
production of the  resource. They make no attempt  to conduct the                                                               
kind of probabilistic assessments that the USGS does.                                                                           
                                                                                                                                
He launched into  an activity update for Cook Inlet:  in June the                                                               
division  conducted its  annual Cook  Inlet area-wide  lease sale                                                               
and had  a good turnout. One  hundred and nine tracts  were sold,                                                               
over 575,000  acres out of a  total of 112 valid  bids. The total                                                               
of all the high bids came in  at about $11.2 million. This was by                                                               
far the best lease sale in the Cook Inlet in over a decade.                                                                     
                                                                                                                                
MR. DECKER  said some of  the key  points to remember  about this                                                               
sale is  for the first time,  at least in his  recollection, they                                                               
created a  Part B  sale and held  it as an  exempt sale  in which                                                               
statute  authorizes them  to  differ from  the  sort of  standard                                                               
leasing practices.  In this case,  specifically because  there is                                                               
known oil at the Cosmopolitan  or Hanson accumulation not too far                                                               
from Anchor Point,  they decided to bundle the  three open leases                                                               
together  so that  any  bidder would  have to  buy  not just  one                                                               
lease, but all three.                                                                                                           
                                                                                                                                
1:38:00 PM                                                                                                                    
He said a couple of other  tracts are still owned by Pioneer, the                                                               
operator of the  former unit. That means the new  owner will need                                                               
to come to  terms with the previous operator of  the other leases                                                               
and make a deal.                                                                                                                
                                                                                                                                
He   said   the   department  also   raised   the   minimum   bid                                                               
substantially, raised the rentals  and shortened the primary term                                                               
of the leases to five years.  The work commitment requires a plan                                                               
of exploration within six months and  a well down to the oil zone                                                               
by the  end of the fourth  year. All of these  special provisions                                                               
on those three tracts were geared  at the same thing - to getting                                                               
whatever company  would be interested  in buying those  tracts to                                                               
"get off the  dime" and bring that  accumulation into production.                                                               
Apache was the bidder that showed  by far the largest interest in                                                               
the sale picking up almost all of  it (95 of the tracts for about                                                               
$9 million).                                                                                                                    
                                                                                                                                
MR. DECKER said the Escopeta  Oil and Gas Spartan 151 jack-up-rig                                                               
that is the one that arrived in  Kachemak Bay over a week ago has                                                               
its legs down and is rigging up for operation as he speaks.                                                                     
                                                                                                                                
Another  really  important consideration  in  Cook  Inlet is  the                                                               
status of  gas storage. Three  gas storage facilities  are online                                                               
currently; together  they have about  9 bcf of  designed capacity                                                               
and when  fully charged up with  gas can produce gas  at a design                                                               
rate of about 87 mmcf/day. The  idea is to help temper the swings                                                               
on the coldest weeks of the year and to produce out of storage.                                                                 
                                                                                                                                
1:41:03 PM                                                                                                                    
CO-CHAIR WAGONER  asked the highest rate  that ConocoPhillips has                                                               
had to short  their plant in order to meet  peaking demand in the                                                               
winter time.                                                                                                                    
                                                                                                                                
MR. DECKER replied that he would get those numbers for him.                                                                     
                                                                                                                                
SENATOR FRENCH  asked if those  storage facilities are  public or                                                               
private.                                                                                                                        
                                                                                                                                
MR. DECKER replied  that he understands the  three online storage                                                               
facilities are  owned by single parties.  Of the two more  in the                                                               
works, the CINGSA/SEMCO  facility is going to be  the biggest and                                                               
will add  about 11 bcf of  designed capacity and 150  mmcf/day of                                                               
flow rate. It will to be open to third parties.                                                                                 
                                                                                                                                
SENATOR DYSON asked if the  enthusiasm over Cook Inlet leases was                                                               
the result of more oil potential or more gas potential.                                                                         
                                                                                                                                
MR.  DECKER replied  that his  understanding from  Apache's press                                                               
releases is  that oil  plays are being  targeted and,  of course,                                                               
drilling for  oil in  Cook Inlet  is almost  certain to  find by-                                                               
catch gas.                                                                                                                      
                                                                                                                                
SENATOR  DYSON asked  if at  least a  small expanding  market for                                                               
Cook Inlet gas will make exploration more attractive.                                                                           
                                                                                                                                
MR. DECKER  answered that  he expected  other companies  would be                                                               
looking hard at what the  more aggressive companies are doing and                                                               
that where one company goes others will follow.                                                                                 
                                                                                                                                
SENATOR DYSON asked  if the increasing gas market  and higher gas                                                               
prices make this market more attractive.                                                                                        
                                                                                                                                
MR. DECKER replied the expanding  gas market and particularly the                                                               
presence  of new  gas storage  projects  will make  a very  large                                                               
difference for  operators, because they  can get a payout  on gas                                                               
production all  year round not only  on the coldest parts  of the                                                               
earth and  they won't have  to shut in  wells to nearly  the same                                                               
extent.                                                                                                                         
                                                                                                                                
1:44:20 PM                                                                                                                    
MR. DECKER said the three storage  facilities on the map are: the                                                               
Marathon Kenai facility  that has a flow rate of  6 bcf/day and 6                                                               
mmcf/day of  design capacity, and  HilCorp at both  Swanson River                                                               
and  Pretty  Creek;  and  the  Aurora  Nicolai  Creek  Field  has                                                               
approached DNR  about a  gas storage facility,  but has  not made                                                               
great  strides   in  accomplishing  it.   The  big  one   is  the                                                               
CINGSA/SEMCO project at  the Cannery Loop, which  would more than                                                               
double existing capacity in the basin.                                                                                          
                                                                                                                                
He said  Apache now holds  over 800,000  acres and he  added that                                                               
they will  start a 3-D  seismic program on  the west side  of the                                                               
Forelands  this year.  They  just completed  a  test 2-D  seismic                                                               
acquisition program that leads them  to believe they will be able                                                               
to gather some  superior 3-D data with  new technology. Hopefully                                                               
they will start a well in 2012.                                                                                                 
                                                                                                                                
1:46:30 PM                                                                                                                    
CO-CHAIR  PASKVAN   asked  his   thoughts  on  the   impacts  the                                                               
additional 11 bcf/day  of storage capacity will  have on drilling                                                               
for gas.                                                                                                                        
                                                                                                                                
MR.  DECKER  replied that  it  would  give the  operators  market                                                               
assurance. As an example, Buccaneer  has drilled a well (Kenai 1)                                                               
very close to  the Cannery Loop called CINGSA  Storage. That well                                                               
has helped  them identify some  reserves and just  yesterday they                                                               
said they had reached an  agreement with Enstar for production of                                                               
that gas directly into the CINGSA facility.                                                                                     
                                                                                                                                
SENATOR  WIELECHOWSKI asked  if importing  500 mmcf/day  from the                                                               
North  Slope into  South  Central  would have  an  impact on  the                                                               
exploration in Cook Inlet.                                                                                                      
                                                                                                                                
MR. DECKER  replied that he  isn't an  expert, but he  thought it                                                               
would be positive.                                                                                                              
                                                                                                                                
SENATOR DYSON asked  if he had any information  on how productive                                                               
the formations (inholdings) under the Moose Range look.                                                                         
                                                                                                                                
MR. DECKER  replied that  he thought it  be wonderful  to explore                                                               
that area  from a geologic  perspective, but he hadn't  seen data                                                               
about  it first  hand. It's  clear that  limitation to  access to                                                               
lands  in the  basin is  one of  the key  hurdles to  overcome in                                                               
meeting the state's energy demands.                                                                                             
                                                                                                                                
SENATOR DYSON asked if his map  shows the total size of the Moose                                                               
Range.                                                                                                                          
                                                                                                                                
MR. DECKER  replied no; they do  see the federal and  state units                                                               
where  leases  are  held  by production,  but  those  aren't  the                                                               
private inholdings.                                                                                                             
                                                                                                                                
SENATOR DYSON asked if companies  can only drill straight down in                                                               
the inholdings.                                                                                                                 
                                                                                                                                
MR. DECKER answered that is his understanding.                                                                                  
                                                                                                                                
1:51:08 PM                                                                                                                    
REPRESENTATIVE GARA asked if  he thought  just the  discussion of                                                               
it happening might  deter exploration in Cook Inlet  and how long                                                               
before they get a good grip  on what is producible and whether or                                                               
not there is enough gas to ship to Anchorage.                                                                                   
                                                                                                                                
MR.  DECKER answered  that he  didn't  want to  speculate on  the                                                               
psychology of  the explorers,  but companies'  philosophies about                                                               
how  prospective an  area is  or how  critical it  is to  them to                                                               
pursue an  exploration program in  a given area will  change from                                                               
year to year, week to week and  month to month. It's a very fluid                                                               
market  and  most  investors  are  used to  the  concept  of  the                                                               
unknowns out there.                                                                                                             
                                                                                                                                
1:53:08 PM                                                                                                                    
REPRESENTATIVE GARA  asked  how long  before they  have a  decent                                                               
picture of how much producible gas  Cook Inlet has and whether or                                                               
not there is enough to satisfy Fairbanks demand with a pipeline.                                                                
                                                                                                                                
MR.  DECKER   answered  that  he  could   show  the  department's                                                               
assessments  of  reserves in  known  fields,  but Brenda  Pierce,                                                               
USGS, would  talk later about  the undiscovered resource  and its                                                               
potential.                                                                                                                      
                                                                                                                                
He said  that Hilcorp  is the privately  traded company  that has                                                               
purchased the Union Oil Subsidiary of  Chevron and has taken on a                                                               
lot of  different properties  including some  of the  gas storage                                                               
facilities. He  hoped they would  continue Union's  progress with                                                               
the  pipeline to  bring the  Nikolaevsk Unit  into production  in                                                               
2013. Escopeta  has a rig in  the basin for the  first time since                                                               
1994. Buccaneer's  Kenai Loop 1  has identified 26  separate gas-                                                               
bearing zones  in the  Beluga and  upper Tyonek  formations. They                                                               
are claiming 31.5  bcf of proven reserves that they  expect to be                                                               
able to market - possibly  directly to Enstar. Buccaneer has also                                                               
announced  plans for  another well,  the  Kenai Loop  2, and  has                                                               
plans to bring a second jack-up rig into the basin next year.                                                                   
                                                                                                                                
Nordaq Energy  drilled Shadura  1 well just  west of  the Swanson                                                               
River  and  hasn't  released  results,  but  has  said  they  are                                                               
preparing   permits   for   facilities.  This   sounds   somewhat                                                               
optimistic. Anchor  Point Energy  is Armstrong and  their working                                                               
interest owners working at the  North Fork project; they recently                                                               
drilled  and completed  two wells,  recompleted  another one  and                                                               
brought  the North  Fork gas  accumulation  onto production  last                                                               
April. It is being produced now  through a 7.4 mile pipeline over                                                               
to Anchor Point.                                                                                                                
                                                                                                                                
MR. DECKER said Cook Inlet Energy  is mostly on the west side and                                                               
has restarted four of their oil  wells in the west McCarthy River                                                               
Unit and two in the Redoubt  Unit. Their plans include bringing a                                                               
custom  rig  to the  Osprey  Platform  to  drill more  wells  and                                                               
getting three  onshore exploration  wells permitted at  the Sting                                                               
Ray Prospect.                                                                                                                   
                                                                                                                                
Further  north in  the basin,  CIRI is  drilling some  shall core                                                               
holes to understand the capability  up there for underground coal                                                               
gasification.                                                                                                                   
                                                                                                                                
1:57:02 PM                                                                                                                    
Linc Energy Alaska (LEA) drilled one  well not far from Big Lake.                                                               
Initially  they   had  encouraging  press  releases,   but  later                                                               
determined it wasn't commercial. They  also have plans to drill a                                                               
well in  the Trading Bay  area on the west  side and have  a long                                                               
term interest in underground coal  gasification in Cook Inlet, as                                                               
well.  They have  also just  gotten  active on  the North  Slope.                                                               
Which project  goes first  is to  be seen; gas  storage is  a key                                                               
piece in the basin.                                                                                                             
                                                                                                                                
1:58:01 PM                                                                                                                    
MR. DECKER  stressed that the department  conducted two different                                                               
studies; the  first completed at the  end of 2009 and  the second                                                               
in  2011.  The  2009  study was  an  integrated  engineering  and                                                               
geological analysis  to determine how  much gas remains  in known                                                               
fields  using   the  department's  figures;  it   didn't  include                                                               
undiscovered gas resources, which is covered by the USGS.                                                                       
                                                                                                                                
SENATOR WIELECHOWSKI asked  him where the 19 tcf  gas number came                                                               
from.                                                                                                                           
                                                                                                                                
MR.  DECKER  replied  that  Brenda   would  answer  the  detailed                                                               
questions  about the  USGS  methodology, but  the  basic idea  of                                                               
resource assessments  is a probabilistic distribution  from a low                                                               
side case to  a high side case.   The reality is  they don't know                                                               
exactly where  the resource lies  and 19  tcf is simply  the mean                                                               
expected case.                                                                                                                  
                                                                                                                                
CO-CHAIR  PASKVAN asked  in working  with the  USGS numbers,  how                                                               
much  are  they  off  compared   to  oil  and  gas  probabilistic                                                               
interpretation.                                                                                                                 
                                                                                                                                
MR. DECKER replied that it  is impossible to quantify what hasn't                                                               
been  seen.  The DNR  takes  the  opportunity to  understand  the                                                               
geological  basis for  the USGS  assessments and  collaborates by                                                               
giving them  input - but  USGS comes  up with the  assessment for                                                               
unit numbers by itself.                                                                                                         
                                                                                                                                
CO-CHAIR PASKVAN  said he was  trying to figure out  what numbers                                                               
to rely on.                                                                                                                     
                                                                                                                                
MR. DECKER  advised that it's  important to recall that  how much                                                               
of that resource will ever come  to market is very unclear. Their                                                               
task  is to  develop a  wide range  of estimates  of what  may be                                                               
present in the  basin that would be  technically recoverable. But                                                               
how much  of that  will become discovered  resource and  how much                                                               
will   become  commercial   resource  are   two  very   different                                                               
questions.                                                                                                                      
                                                                                                                                
2:03:14 PM                                                                                                                    
SENATOR WIELECHOWSKI  said they have  to decide in the  next year                                                               
or so on whether  to rely on the amount of gas  in Cook Inlet and                                                               
build a  bullet line  to Fairbanks  or to bring  in gas  from the                                                               
North Slope and asked if he had any advice.                                                                                     
                                                                                                                                
MR. DECKER replied that he had no silver bullet words of wisdom.                                                                
                                                                                                                                
CO-CHAIR PASKVAN  asked if he  believed that USGS estimate  of 19                                                               
tcf is a reasonable number knowing there is variability.                                                                        
                                                                                                                                
MR. DECKER  replied that he thought  it was a good  estimate, but                                                               
he didn't want  anyone to believe that all of  that gas will ever                                                               
come to market.                                                                                                                 
                                                                                                                                
He went  to the  2011 study  that asked  what sort  of investment                                                               
would needed to get at those  resources and reserves and how much                                                               
money  would be  attractive enough  for investors  to do  so. So,                                                               
they  assumed a  90 bcf/yr.  to 2025  (different than  historical                                                               
amounts because  of the LNG  facility and Agrium  closings). They                                                               
generated  dozens  of  development   scenarios  that  consist  of                                                               
drilling  wells, adding  compression and  doing rig  workovers if                                                               
necessary to specifically  target the zones and  fields where the                                                               
2009 study  identified certain volumes  of gas. Then they  used a                                                               
Monte  Carlo probabilistic  simulation technique  (establishing a                                                               
range of  uncertainty and then  sampling from  all possibilities)                                                               
and derived what seems like the  most likely outcome to model the                                                               
commerciality  and  production  outcomes.  He  described  various                                                               
charts related to the scenarios (slides 8-13).                                                                                  
                                                                                                                                
He  said Cook  Inlet has  biogenic  (bacterial) gas  and that  is                                                               
being  produced  from  the shallower  horizons  mainly  from  the                                                               
Sterling,  the   Beluga  and  the   upper  part  of   the  Tyonek                                                               
formations. The Sterling  has been a "gang  buster" reservoir and                                                               
tends to  produce high  rates, but it  is nearing  depletion now.                                                               
Recent focus has  been on the development of  the less productive                                                               
zones in  the Beluga and the  upper Tyonek. The oil  in the basin                                                               
has  migrated  up  mainly  from  the lower  part  of  the  Tyonek                                                               
formation, the  Hemlock and the  West Foreland - those  deeper in                                                               
the column, older rocks.                                                                                                        
                                                                                                                                
A contour map  showed the base of  the tertiary reservoir-bearing                                                               
section in the  Cook Inlet Basin prepared by the  DNR staff using                                                               
seismic data  for which they  have been given a  generous license                                                               
from  the   CGGVeritas.  Engineers   prepared  a   decline  curve                                                               
volumetric and separate material  balance reserve volumetrics for                                                               
all 28 of the existing producing  fields in the Cook Inlet Basin.                                                               
At  the  same time,  the  geologists  and geophysicists  prepared                                                               
reserve estimates for four of the  largest five gas fields in the                                                               
basin. The four they chose  were important because they are quite                                                               
significant in  size and they  also have sufficient data  to make                                                               
this kind  of analysis: the  Beluga, the North Cook,  the Trading                                                               
Bay  Grayling  Gas Sands  and  the  Ninilchik. The  answers  were                                                               
compared and slide 13 showed  green dots that are undeveloped gas                                                               
leads  that the  presence of  gas can  be inferred  from previous                                                               
wells that were really looking for oil.                                                                                         
                                                                                                                                
2:13:17 PM                                                                                                                    
MR. DECKER said the  idea is to look at all the  wells in all the                                                               
fields in  all the zones  and add up  the thicknesses in  the two                                                               
categories  of pretty  certain pay  and potential  pay and  track                                                               
them;  then make  contour  maps for  each zone  and  each of  the                                                               
fields. From those  maps the bulk volume of the  reservoir can be                                                               
calculated. Knowing the bulk volume  of the reservoir and knowing                                                               
several other variables such as  the saturation, the porosity and                                                               
the net thickness compared to  the gross thickness, a calculation                                                               
can  be run  to  determine  how much  original  gas  was in  that                                                               
reservoir. The  final step  is subtracting out  the gas  that has                                                               
been  produced  to   date  from  the  original   amount  in  each                                                               
reservoir. That  leaves them with  the reserves remaining  in the                                                               
field figure.                                                                                                                   
                                                                                                                                
Slide  16 is  the  summary slide  coming out  of  the 2009  study                                                               
consisting  of  decline  curve   analysis  and  material  balance                                                               
analysis (reserves in  contact with existing well  bores that can                                                               
be  recovered with  minimal  investment),  the green  (relatively                                                               
certain  pay) and  the yellow  (potential pay).  The grey  refers                                                               
back to  exploration leads where  previous wells  have identified                                                               
from gas shows that might  be worth following up. Forecasting the                                                               
volumes assumed about  a 15 percent decline per  year. This study                                                               
told  them  that  the  90  bcf  demand  could  be  met  with  the                                                               
relatively high  confidence resources and reserves  through about                                                               
2018/19 assuming  that gas storage  is available and  that people                                                               
make the investment. So, the state  still has a few more years of                                                               
breathing room if the producers continue to invest.                                                                             
                                                                                                                                
Slide  17 is  a  slight tweak  because a  few  months after  they                                                               
published the  2009 study, Marathon and  ConocoPhillips indicated                                                               
they would very likely be  applying to renew their export license                                                               
for the  next few  years and that  changed their  demand forecast                                                               
for a couple of  years out. The effect of that  may be to shorten                                                               
the production life span from the reserves by up to a year.                                                                     
                                                                                                                                
He  said  slide 18  summarizes  the  geological, geophysical  and                                                               
engineering  analysis  and   identified  substantial  volumes  of                                                               
producible gas  that could be  tapped in Cook Inlet.  The volumes                                                               
of  gas  were  defined  in   different  "tranches"  by  different                                                               
techniques and  the corresponding different levels  of certainty.                                                               
The big  "if" is if  the investment  is made in  redeveloping the                                                               
older  fields with  infield  drilling and  other  kinds of  field                                                               
redevelopments.  Those gas  volumes in  existing fields  might be                                                               
enough to meet  demand at least on a yearly  annual basis through                                                               
2018 or so.                                                                                                                     
                                                                                                                                
2:18:13 PM                                                                                                                    
MR.  DECKER said  the reason  they feel  redevelopment activities                                                               
are  a good  bet  is  because the  Kenai  gas  field (Beluga  and                                                               
Tyonek), for instance,  shows three things. He  explained that up                                                               
through  1994 fewer  than 10  wells were  producing at  any given                                                               
time. Gas production peaked in  1979 (slide 19) and water started                                                               
being produced  in the 1980s  which is when the  decline started.                                                               
In  1994/5  additional  wells were  drilled  and  water  handling                                                               
facilities  were  added. But  importantly,  the  gas rate  really                                                               
increased  dramatically by  some 30  mmcf/day, which  offset that                                                               
decline so far that  they were able to add 90  bcf of reserves to                                                               
the  field. This  is  their  "local poster  child"  for why  they                                                               
believe redevelopment  efforts are  very worthwhile in  the older                                                               
Cook Inlet fields.                                                                                                              
                                                                                                                                
The 2011 study  summarized how much investment it  would take and                                                               
what sort  of scenario would  be required to  go out and  get the                                                               
gas  identified  in the  previous  study.  So, the  division  put                                                               
together   a   study   team  (petroleum   geologists,   petroleum                                                               
geophysicist,  petroleum  engineers,  commercial  analyst  and  a                                                               
petroleum economist) and brought  in consultants (Ryder Scott) to                                                               
do reservoir  engineering and  modeling, decline  forecasting and                                                               
development scenarios  and Solsten  XP to do  drilling operations                                                               
and facilities  design requirements  and costs.  They also  had a                                                               
peer review  group both  internal and  outside. Before  the study                                                               
was released  it went through  several iterations of  peer review                                                               
with  the staff  of the  Alaska Gasline  Development Corporation,                                                               
Enstar,  Davies  Consultants,  and  PetroTechnical  Resources  of                                                               
Alaska.                                                                                                                         
                                                                                                                                
MR. DECKER  said the 2011 study  developed conceptual development                                                               
scenarios (slides 21  and 22) including: how many  wells it would                                                               
take in  what zones, where  they would  be placed, how  much they                                                               
would cost, how much compression  should be added to a particular                                                               
facility that  would allow that  fuel to  be produced at  a lower                                                               
pressure and  still get  gas into the  pipelines, et  cetera. The                                                               
next part  was handing off  the assumptions to the  economic side                                                               
of the study  to estimate the risks and  probabilities of success                                                               
for various scenarios achieving their  intended goals and to come                                                               
up with other existing constraints.                                                                                             
                                                                                                                                
2:23:33 PM                                                                                                                    
To determine  what investments and  revenue would be  required to                                                               
generate specific  rates of return  from identified  gas reserves                                                               
to  meet demand  of  90 bcf  through 2025  the  analysis was  run                                                               
through a Monte Carlo simulation.  Adding compression, they felt,                                                               
could add  288 bcf  and drilling  new wells  to tap  the untapped                                                               
parts of the fields where  existing wells just aren't draining it                                                               
could  add  another  600  bcf.   Taking  a  harder  look  at  the                                                               
development leads  revealed an expected  case of around  250 bcf;                                                               
for  a  total of  1.8  tcf  that "might  be  out  there in  these                                                               
existing  fields."  He  stressed  this  does  not  include  range                                                               
exploration  or unconventional  gas  resources such  as coal  bed                                                               
methane,  but  what  is  just within  the  existing  fields.  And                                                               
because they  were doing the  Monte Carlo  statistical technique,                                                               
each of  their forecasts was  built with a  high side case  and a                                                               
low side case (just like the resources assessments).                                                                            
                                                                                                                                
2:25:40 PM                                                                                                                    
JEFF  DYKSTRA,  Commercial  Analyst,  Division of  Oil  and  Gas,                                                               
Department  of Natural  Resources (DNR),  followed up  saying his                                                               
division  built on  the  information that  Mr.  Decker just  went                                                               
through.  All the  caveats  he  mentioned are  the  same for  the                                                               
commercial group  (starting with  slide 25). He  said they  had a                                                               
broader  team of  more than  just the  experts that  reviewed the                                                               
results as they stepped through the analysis.                                                                                   
                                                                                                                                
The economic flowchart was broken  up into two classes; the first                                                               
class  looked  at  baseline  production  wells  (wells  that  are                                                               
currently  producing  without  additional investment)  and  range                                                               
estimates were  made as to  how those  are going to  decline. The                                                               
second was  categories of wells that  need additional investment;                                                               
those were  broke up  into 38 different  projects, some  of which                                                               
were single  wells and  some multiple. A  project was  defined as                                                               
something that normally could be  done in one drilling season; 26                                                               
projects were  in existing  fields and  pools and  didn't require                                                               
extensive  infrastructure  and  12 projects  were  in  identified                                                               
leads  and might  require additional  facilities and  one or  two                                                               
drilling seasons.                                                                                                               
                                                                                                                                
MR. DYKSTRA  said the sources of  data were DNR, Ryder  Scott and                                                               
Solsten XP Consultants.                                                                                                         
                                                                                                                                
2:28:19 PM                                                                                                                    
SENATOR WIELECHOWSKI  asked if  they're assuming  1.8 tcf  is the                                                               
total  of all  the extractions  and if  it assumed  the new  USGS                                                               
numbers.                                                                                                                        
                                                                                                                                
MR. DECKER  replied no; the  idea here  is that these  numbers do                                                               
not include undiscovered resource  whatsoever. These numbers work                                                               
with  the known  fields and  those few  development leads  in the                                                               
gray  category  that  previous   drilling  has  already  sort  of                                                               
identified as candidates for follow up work.                                                                                    
                                                                                                                                
SENATOR WIELECHOWSKI  asked if the 1.8  tcf is part of  the total                                                               
19 tcf.                                                                                                                         
                                                                                                                                
MR. DECKER replied that it would be in addition to.                                                                             
                                                                                                                                
SENATOR  WIELECHOWSKI asked  if it  would  be possible  to do  an                                                               
analysis like this  regarding the 19 tcf  of undeveloped reserves                                                               
over the next couple of months.                                                                                                 
                                                                                                                                
MR. DECKER  replied that would  use a very  different methodology                                                               
that he  couldn't really define  it right  now, but he  noted the                                                               
suggestion.                                                                                                                     
                                                                                                                                
MR. DYKSTRA  said slide 28  indicated reasonable rates  of return                                                               
assuming  the  existence  of proper  storage.  He  explained  the                                                               
"Expected Monetary  Value" chart  for particular rates  of return                                                               
and that  most of the projects  are in the less  than $10 million                                                               
range and about 25 percent are above.                                                                                           
                                                                                                                                
2:34:52 PM                                                                                                                    
SENATOR WIELECHOWSKI asked  if at $4/mcf a company  is making far                                                               
in excess of the 20 percent internal rate of return.                                                                            
                                                                                                                                
MR.  DYKSTRA replied  given  the assumptions  of  the study  that                                                               
would  be  a  correct  interpretation, but  that  cost  does  not                                                               
include the cost of storage  or transportation. The assumption of                                                               
storage is the biggest factor to evaluate.                                                                                      
                                                                                                                                
SENATOR WIELECHOWSKI asked what cost of storage.                                                                                
                                                                                                                                
MR. DYKSTRA replied  he meant the storage that  must be available                                                               
so the wells could be immediately produced.                                                                                     
                                                                                                                                
CO-CHAIR  PASKVAN  asked if  he  was  talking  about the  11  bcf                                                               
storage facility he mentioned earlier.                                                                                          
                                                                                                                                
MR. DYKSTRA answered yes.                                                                                                       
                                                                                                                                
SENATOR FRENCH asked  Mr. Dykstra if he knew  of some uncertainty                                                               
about completion of  the facility that he hadn't  heard about; he                                                               
thought it was "on a very, very solid track for completion."                                                                    
                                                                                                                                
MR.  DYKSTRA replied  that  they  believe there  is  a very  high                                                               
probability the facility will be built.                                                                                         
                                                                                                                                
SENATOR FRENCH asked  what the presence of  that storage facility                                                               
would do to those numbers.                                                                                                      
                                                                                                                                
MR. DYKSTRA replied his numbers  assume that storage is available                                                               
now.                                                                                                                            
                                                                                                                                
2:37:03 PM                                                                                                                    
CO-CHAIR PASKVAN asked him to explain slide 27 again.                                                                           
                                                                                                                                
MR. DYKSTRA replied  that the IRR10, IRR15 and  IRR20 [figures on                                                               
the chart] solves the revenue  requirements expressed as a dollar                                                               
per thousand cubic  feet that would require  an expected monetary                                                               
value of the euro discounted at those particular rates.                                                                         
                                                                                                                                
CO-CHAIR PASKVAN  laughed and  asked if he  was saying  less than                                                               
$3/mcf of investment was needed  to produce enough volume to sell                                                               
at current prices (slide 28).                                                                                                   
                                                                                                                                
MR. DYKSTRA answered that would be  the cost of the next mcf that                                                               
would be required to meet that  90 bcf/year demand. It's only one                                                               
financial metric  and a lot  of times producers look  at multiple                                                               
metrics. If  this is the only  metric looked at people  should be                                                               
investing like  crazy. The  other metric he  used suggests  it is                                                               
not as  favorable as  this one  suggests. Both  metrics (expected                                                               
revenue  requirements and  expected  monetary value)  have to  be                                                               
satisfied in order for producers to invest.                                                                                     
                                                                                                                                
2:39:42 PM                                                                                                                    
SENATOR  FRENCH   said  the  committee   needed  a   little  more                                                               
explanation of  how the two  slides [27  and 28] go  together and                                                               
asked what the 0 - 4, 4 -  8, and 8 - 12 on the lower axis [slide                                                               
28] represented - the total return or the total investment?                                                                     
                                                                                                                                
MR. DYKSTRA replied  that would be the total  return expressed in                                                               
a net  present value  or expected monetary  value (EMV)  at those                                                               
particular  discount  rates.  [The  0  - 4,  4  -  8,  et  cetera                                                               
indicates  millions  of dollars.]  The  other  axis is  how  many                                                               
projects fit into that particular value range.                                                                                  
                                                                                                                                
SENATOR FRENCH said  for the first pair of bars  12 projects will                                                               
return a 15 percent EMV.                                                                                                        
                                                                                                                                
MR. DYKSTRA  corrected that  12 projects  would have  an expected                                                               
monetary value of between $0 and  $4 million with a discount rate                                                               
of 15 percent.                                                                                                                  
                                                                                                                                
SENATOR FRENCH remarked  that most projects will  return a fairly                                                               
small total monetary value.                                                                                                     
                                                                                                                                
MR. DYKSTRA answered yes.                                                                                                       
                                                                                                                                
REPRESENTATIVE SEATON asked if the first  0 - 4 means there is an                                                               
additional eight projects that would  be producing at 10 percent.                                                               
It looks  like a greater  number of  projects get produced  at 15                                                               
percent.                                                                                                                        
                                                                                                                                
MR. DYKSTRA clarified that the  chart shows the same projects and                                                               
it's showing the  projects with a positive EMV.  It's showing two                                                               
different  discount  rates, one  at  15  percent  and one  at  10                                                               
percent.                                                                                                                        
                                                                                                                                
CO-CHAIR PASKVAN stated that slide  25 identifies 38 projects and                                                               
asked if this was the distribution of those projects.                                                                           
                                                                                                                                
MR. DYKSTRA  replied it  is the distribution  of the  38 projects                                                               
that showed  a positive  net present value;  they all  don't show                                                               
positive at  that particular  value. The  negative ones  were not                                                               
plotted. In  other words, some  definitely require more  than the                                                               
$5.77  to have  a positive  net present  value at  those discount                                                               
rates.                                                                                                                          
                                                                                                                                
CO-CHAIR PASKVAN asked  at $5.77 and assuming a  selling value of                                                               
$6.25 if more projects become recoverable.                                                                                      
                                                                                                                                
MR. DYKSTRA  answered yes.  He said they  did some  projects both                                                               
onshore  and offshore.  Capital  costs for  an offshore  gas-only                                                               
with no oil  takes a substantial amount of revenue  to offset the                                                               
required large capital costs. The  analysis of those truncated at                                                               
$15/mcf showing at those rates projects were not economic.                                                                      
                                                                                                                                
CO-CHAIR  PASKVAN asked  if  he  used the  $5.77  because he  was                                                               
trying to  project whether  resources will  be available  to meet                                                               
that demand at current energy cost structures.                                                                                  
                                                                                                                                
MR. DYKSTRA  replied the  assumption here as  they looked  at the                                                               
supply curve  is there  will be  continued investments.  So, they                                                               
were trying to  see if there will be  significant investment, and                                                               
some metrics suggest that there will be.                                                                                        
                                                                                                                                
2:45:19 PM                                                                                                                    
MR. DYKSTRA  said slide  29 illustrated  the supply  curve coming                                                               
out of  the Monte  Carlo simulation. For  each of  those projects                                                               
they estimated low  cases, high cases and what  the expected case                                                               
was; then used Monte Carlo  techniques to simulate 5,000 possible                                                               
ways that  information could manifest  itself in the  future. The                                                               
90 bcf/yr.  supply target starts a  decline in 2018 and  they did                                                               
not  see any  point in  extrapolating the  "uncertainty band"  of                                                               
data  out to  zero. His  interpretation of  slide 29  is that  he                                                               
could  say with  90 percent  confidence  that the  blue curve  or                                                               
better would  be the  future given the  assumptions of  the study                                                               
and that there  is a 15 percent  chance of a decline  in the 2020                                                               
timeframe.                                                                                                                      
                                                                                                                                
SENATOR   WIELECHOWSKI   went  back   a   slide   and  said   his                                                               
understanding  of EMV  is you  have  to assign  a probability  of                                                               
occurrence of a  risk and then a monetary value  to the impact of                                                               
the risk and asked what the  risk is, what the probability of the                                                               
risk is and what the monetary value is.                                                                                         
                                                                                                                                
MR. DYKSTRA  answered that  the risk  is largely  made up  of the                                                               
probability of  failure that you would  drill and not be  able to                                                               
monetize anything.                                                                                                              
                                                                                                                                
SENATOR  WIELECHOWSKI  asked  what the  expected  probability  of                                                               
failure is for infield and exploratory activities.                                                                              
                                                                                                                                
MR. DYKSTRA  answered the  study used  a range  of 5  percent for                                                               
certain failure and 90 percent for most uncertain.                                                                              
                                                                                                                                
2:48:48 PM                                                                                                                    
CO-CHAIR PASKVAN said slide 28 was  based on $5.77 and asked what                                                               
the supply curve would look like if it changed.                                                                                 
                                                                                                                                
MR.  DYKSTRA replied  that they  didn't run  that case,  but they                                                               
could do it.                                                                                                                    
                                                                                                                                
SENATOR WIELECHOWSKI referring to slide  27 said the in-state gas                                                               
line is  scheduled to come  on line around  2019 with a  price of                                                               
$9.63 and  at a  20 percent  IRR gas is  $7 and  he asked  if the                                                               
distribution costs would be more then.                                                                                          
                                                                                                                                
MR. DYKSTRA  answered that  this would be  the expected  case and                                                               
was  based   on  a  revenue   requirements  model  that   is  not                                                               
necessarily a proxy for the market.                                                                                             
                                                                                                                                
SENATOR WIELECHOWSKI said it looks like  at 10 percent ROR gas is                                                               
$5 gas, but  at 20 percent ROR  gas is $7. So, it  looks like you                                                               
would get  lower cost gas  if this were  correct and you  were to                                                               
bring gas from Cook Inlet today. Is that correct?                                                                               
                                                                                                                                
MR. DYKSTRA  replied that he was  looking at only one  metric and                                                               
there  is danger  in  that.  That is  why  they  look at  various                                                               
metrics. It's unclear whether producers  are driven only by rates                                                               
of return and they most likely are not.                                                                                         
                                                                                                                                
SENATOR WIELECHOWSKI asked if the  other metric would be expected                                                               
monetary value.                                                                                                                 
                                                                                                                                
MR.  DYSTRA  replied  that  is  one,  but  he  would  assume  the                                                               
producers are looking at a lot  of different things and he didn't                                                               
know their business process.                                                                                                    
                                                                                                                                
2:52:09 PM                                                                                                                    
CO-CHAIR PASKVAN asked if the $5.77  is the cost at the well with                                                               
tariff and local distribution charges in addition to it.                                                                        
                                                                                                                                
MR. DYKSTRA replied that it does  not include the tariffs, but he                                                               
wanted to verify that.                                                                                                          
                                                                                                                                
REPRESENTATIVE GARA  said  if the  in-state  line  is built  that                                                               
obligates people  to 20 years of  $11 or $17 gas  and there could                                                               
be  cheaper  gas  sitting  in Cook  Inlet.  Will  explorers  keep                                                               
exploring in Cook Inlet because they  know that they can beat the                                                               
price of the in-state gasline?                                                                                                  
                                                                                                                                
MR. DYKSTRA  responded that was  in the realm of  speculation and                                                               
this study was based on what Cook Inlet can do by itself.                                                                       
                                                                                                                                
REPRESENTATIVE GARA  said the  last thing they  want to do  is to                                                               
leave $7 gas in the ground, sign  on to a $30 deal for 50 percent                                                               
more  expensive  gas and  then  have  to tell  constituents  they                                                               
didn't have the information. How do they get the information?                                                                   
                                                                                                                                
MR. DYKSTRA replied this particular  study shows depending on how                                                               
they want  to define  their risk preference  that the  state will                                                               
need  either  additional   gas  or  to  have   some  success  via                                                               
exploration. The question  will be when to bring that  gas in and                                                               
he didn't  think that answer  was needed  quite yet if  the study                                                               
suggests  looking at  what investment  took place  every year  or                                                               
couple of years and redo the numbers.                                                                                           
                                                                                                                                
2:56:21 PM                                                                                                                    
REPRESENTATIVE SEATON said  this chart is capped  at $15/mcf, but                                                               
they aren't  anywhere near  that. Through  2021 they  are talking                                                               
about a  maximum price of  gas at less than  $12 at a  20 percent                                                               
IRR. Is that right?                                                                                                             
                                                                                                                                
MR. DYKSTRA answered  this chart is expected value  and there are                                                               
two dimensions in play, one is  price and the other is supply. In                                                               
2021 some cases in the study run  out of gas. If you look at that                                                               
particular  scenario,  you  would  have  been  at  that  $15  cap                                                               
whenever it ran out of  gas, but this particular graph aggregates                                                               
those 5,000 results into one number.                                                                                            
                                                                                                                                
CO-CHAIR PASKVAN asked  if he had discounted the  USGS numbers to                                                               
zero, because he was only addressing the known reserves.                                                                        
                                                                                                                                
MR. DYKSTRA  replied yes, and  added that exploration  can change                                                               
their results as can unconventional and some other things.                                                                      
                                                                                                                                
CO-CHAIR  WAGONER commented  that  this didn't  even include  the                                                               
latest find by Buccaneer that was put into the known reserves.                                                                  
                                                                                                                                
MR. DYKSTRA replied that was correct.                                                                                           
                                                                                                                                
REPRESENTATIVE  SEATON  asked if  slide  28  in which  the  lower                                                               
investment projects  have been used  up earlier relates  to slide                                                               
27 where  projects incrementally go  up over time and  prices get                                                               
higher in the outer years.                                                                                                      
                                                                                                                                
MR. DYKSTRA answered yes; the modeling  is done in stages so that                                                               
the most economical projects get done first.                                                                                    
                                                                                                                                
2:59:38 PM                                                                                                                    
MR. DYKSTRA  wrapped up saying  that they have probably  all come                                                               
to the  same conclusion in  that given sufficient  investment the                                                               
results show there will be sufficient  gas supply to 2018 and the                                                               
second point is that natural gas  storage will play a key role in                                                               
that.                                                                                                                           
                                                                                                                                
CO-CHAIR WAGONER  asked if  DNR's plan  is to  continually update                                                               
this study on  a two-year basis so they can  see what exploration                                                               
has been and how many proven reserves have gone into the system.                                                                
                                                                                                                                
MR. DECKER responded that he  had not heard discussion within DNR                                                               
that  this was  going to  be an  ongoing study.  If it  is to  be                                                               
useful information, perhaps something  it could be freshened with                                                               
new information.                                                                                                                
                                                                                                                                
CO-CHAIR WAGONER said he wanted to  make that request right now -                                                               
at least on a two-year basis if not a one year.                                                                                 
                                                                                                                                
CO-CHAIR  PASKVAN   added  that  the  two   co-chairs  of  Senate                                                               
Resources  agree   with  that  as   certainly  everyone   on  the                                                               
committee.                                                                                                                      
                                                                                                                                
SENATOR DYSON  underscored Representative Gara's point  that they                                                               
need the  best estimates  they can  get on  what this  basin will                                                               
produce  in  order to  have  a  base on  which  to  make big  and                                                               
important decisions.                                                                                                            
                                                                                                                                
REPRESENTATIVE GARA  asked since  there is enough gas  until 2018                                                               
or   2020  that   given  existing   fields  and   new  successful                                                               
exploration it could go beyond 2020.                                                                                            
                                                                                                                                
MR. DYKSTRA replied that is correct.                                                                                            
                                                                                                                                
SENATOR  WIELECHOWSKI said  this is  critical information  and he                                                               
looked forward to  other presentations as they  move forward. One                                                               
of the  things he  has heard  is that producers  of a  lease will                                                               
tend  to not  produce or  at  least discover  reserves more  than                                                               
eight years longer than the demand  will account for and asked if                                                               
that is normal and a good timeframe to use.                                                                                     
                                                                                                                                
MR. DECKER replied  that a long lead time is  needed in Alaska as                                                               
compared to  other jurisdictions,  and the  North Slope  needs 10                                                               
years of lead time.                                                                                                             
                                                                                                                                
3:05:05 PM                                                                                                                    
CO-CHAIR WAGONER  said the 10-year  timeframe is not  generic for                                                               
all wells drilled in Alaska and  could maybe be used on the North                                                               
Slope  from  discovery until  infrastructure  is  built out.  But                                                               
Buccaneer  just got  a  lease and  permits, put  in  the pad  and                                                               
drilled the  well and  will be  in production by  the end  of the                                                               
year. That  is an  11 or  12 month timeframe!  It depends  on the                                                               
logistics, the  location and  the availability  of infrastructure                                                               
to put the product into.                                                                                                        
                                                                                                                                
MR.  DECKER  agreed and  said  he  was thinking  specifically  of                                                               
remote large projects on the North Slope.                                                                                       
                                                                                                                                
3:07:12 PM                                                                                                                    
Recess from 3:07 to 3:21 p.m.                                                                                                   
                                                                                                                                
^Presentation  on  USGS  Assessment  of Cook  Inlet  Natural  Gas                                                               
Reserves by Brenda Pierce,  Program Coordinator, Energy Resources                                                               
Program                                                                                                                         
       USGS ASSESSMENT OF COOK INLET NATURAL GAS RESERVES                                                                   
                                                                                                                                
3:21:49 PM                                                                                                                    
CO-CHAIR  PASKVAN  welcomed  Brenda  Pierce to  the  meeting  and                                                               
thanks her  for coming all the  way from the East  Coast. He said                                                               
the 19 tcf in Cook Inlet has peaked a lot of interest in Alaska.                                                                
                                                                                                                                
BRENDA PIERCE,  Manager, Energy Resources Program,  United States                                                               
Geological  survey  (USGS),  Department  of  Interior,  said  the                                                               
department appreciates their interest in  USGS work and she would                                                               
do her best to answer their various questions.                                                                                  
                                                                                                                                
MS.  PIERCE said  she would  first give  them a  summary of  USGS                                                               
results,  how they  did what  they  did and  where the  resources                                                               
might be found. She said the  USGS gives a range rather than just                                                               
a mean;  it looks at  the undiscovered resources that  have great                                                               
uncertainty  and are  in  addition to  the  known reserves.  Even                                                               
though   those  are   undiscovered   they   can  be   technically                                                               
recoverable with today's technology  and industry practices which                                                               
the USGS  goes to  great lengths  to determine  using proprietary                                                               
databases and looking at other  development in the area. In areas                                                               
that have  no production and  truly frontier areas, they  look at                                                               
areas that might be analogous that are being produced.                                                                          
                                                                                                                                
For the Cook  Inlet, Ms. Pierce said, they looked  at the onshore                                                               
and state waters and not  the outer continental shelf (OCS). They                                                               
found  the  mean, the  95  percent  probability (F)   and  the  5                                                               
                                                  95                                                                            
percent probability (F).   Emphasizing again  how uncertain these                                                               
                      05                                                                                                        
numbers  are because  the resource  is  "undiscovered," she  said                                                               
that Cook  Inlet has about  600 million barrels of  potential oil                                                               
at the mean,  but it ranges from at least  100 million barrels to                                                               
more than  1 billion barrels.  For gas, they  found a mean  of 19                                                               
tcf. There is a 95 percent probability  that at least 5 tcf or as                                                               
much as 40 tcf of gas is there to be discovered.                                                                                
                                                                                                                                
3:27:48 PM                                                                                                                    
MS.  PIERCE explained  for  perspective the  mean  amount of  the                                                               
undiscovered gas  in Cook Inlet  is 19 tcf  and almost 8  tcf has                                                               
been produced in the Cook Inlet  to date. U.S. gas consumption in                                                               
2009 was  about 21 tcf.  Proved gas  reserves on the  North Slope                                                               
are about 35 tcf.                                                                                                               
                                                                                                                                
Using  the   same  type  of   comparison,  the  mean   amount  of                                                               
undiscovered but  technically recoverable  oil in the  Cook Inlet                                                               
is  600 million  barrels. In  2010 cumulative  oil production  in                                                               
Cook  Inlet  was  a  little  over 1  billion  barrels.  U.S.  oil                                                               
consumption in 2010 was about 7 million barrels.                                                                                
                                                                                                                                
Slide 6  illustrated the four  areas that are  producing reserves                                                               
now which  they didn't  assess as well  as areas  of undiscovered                                                               
but  technically  recoverable oil.  That  doesn't  mean they  are                                                               
economically  recoverable.  She also  pointed  out  that not  all                                                               
areas are accessible  for development and that  it's important to                                                               
know what  might or  might not  be possible  and they  think they                                                               
have a good understanding of the area's potential.                                                                              
                                                                                                                                
3:29:54 PM                                                                                                                    
SENATOR FRENCH asked how much  of what is technically recoverable                                                               
is also an area that is  not closed to development by refuges and                                                               
critical habitat.                                                                                                               
                                                                                                                                
MS.  PIERCE replied  when USGS  assesses a  basin or  a province,                                                               
they break it down into assessment  units. Some of them cover the                                                               
whole  area and  some  are  much smaller.  They  can allocate  to                                                               
certain areas, but she didn't have those numbers today.                                                                         
                                                                                                                                
SENATOR WIELECHOWSKI asked how often she is right.                                                                              
                                                                                                                                
MS.  PIERCE replied  that their  estimates are  very viable,  but                                                               
sometimes they  are wrong.  One of  the uncertainties  is whether                                                               
the  resource is  oil or  gas; another  is whether  they are  dry                                                               
holes or not.  Industry is wrong all the time  as well, but often                                                               
they are  both right and  sometimes discoveries are  made exactly                                                               
where  USGS predicted  them.  She couldn't  give  him a  specific                                                               
answer  because some  resources are  technically recoverable  but                                                               
not always  economically recoverable,  and they hadn't  done that                                                               
kind of  analysis. And what  a company  will or will  not develop                                                               
doesn't always depend upon just  what is technically recoverable.                                                               
There are access  issues and what a company wants  to do with its                                                               
portfolio  and  the  economics  of  the  situation.  Her  numbers                                                               
provide  a best  estimate at  a given  time based  upon available                                                               
geology and  science and those  numbers change  sometimes because                                                               
of new information.                                                                                                             
                                                                                                                                
3:32:26 PM                                                                                                                    
MS. PIERCE  said because USGS  does undiscovered  resources, it's                                                               
very important to  get the best geology available  to build their                                                               
geologic models and try to  put the uncertainty in a quantitative                                                               
mode. They  work very closely  with geologists from the  DNR, the                                                               
Division  of Geological  and Geophysical  Surveys (DGGS)  and the                                                               
Division of Oil and Gas (DOG)  to develop very robust geology and                                                               
estimate the  number of sizes  and fields they think  the geology                                                               
of the area can accommodate. That  is what is run through a Monte                                                               
Carlo simulation.                                                                                                               
                                                                                                                                
She said  the USGS has  spent the  last several years  building a                                                               
new geologic  map of the Cook  Inlet region and have  new seismic                                                               
reprocessing,  interpretations  and  new  gravity  and  magnetics                                                               
modeling.  The rock  has to  be understood  in order  to know  if                                                               
organic  materials are  there to  begin with  and that  they have                                                               
been heated  enough to form the  oil/gas and that the  timing was                                                               
right  that conventional  resources  migrate  through the  system                                                               
into  a trap.  All of  these  pieces need  to be  present in  the                                                               
geological  models  in the  right  sequence  and with  the  right                                                               
parameters  for  the oil  and  gas  to  form  to have  even  been                                                               
preserved.                                                                                                                      
                                                                                                                                
Each part  of the  geologic model  is risked and  then it  is run                                                               
through  the  Monte  Carlo simulation  to  get  the  quantitative                                                               
numbers.                                                                                                                        
                                                                                                                                
3:35:22 PM                                                                                                                    
CO-CHAIR PASKVAN  asked if it's  fair to assume  that information                                                               
about  an  area  with  decades  of  production  like  Cook  Inlet                                                               
increases the probability of accuracy.                                                                                          
                                                                                                                                
MS.  PIERCE replied  that was  a  fair statement.  USGS spends  a                                                               
considerable  amount of  time developing  these resources  with a                                                               
lot  of  help  from  others,  but  they  run  the  final  numbers                                                               
themselves.                                                                                                                     
                                                                                                                                
3:36:53 PM                                                                                                                    
SENATOR STEDMAN  asked to spend a  little bit of time  on slide 9                                                               
"Geologic setting: Cook Inlet is a forearc basin."                                                                              
                                                                                                                                
MS.  PIERCE said  it is  a fairly  complicated and  unusual area;                                                               
it's the  only forearc basin  in North  American to have  oil and                                                               
gas in  it. The  Pacific Plate is  moving northwest  along Alaska                                                               
being subducted  under the Aleutian  Plate (Megathrust)  and that                                                               
is causing a lot of the  volcanos and seismic activity. You don't                                                               
normally have oil and gas resource  even expected in this type of                                                               
area. She went to slide 10  and said the Aleutian Range and Kenai                                                               
Chugach Mountains  are not  going to be  prospective for  oil and                                                               
gas at all. A  lot of that is controlled by  what is happening in                                                               
the larger geologic picture.                                                                                                    
                                                                                                                                
She said  that Cook Inlet oil  has 33 discovered fields  with oil                                                               
and gas production; 8 are mostly  oil and 25 are mostly gas. Even                                                               
so, large parts of the basin are undrilled or sparsely drilled.                                                                 
                                                                                                                                
3:39:26 PM                                                                                                                    
SENATOR WIELECHOWSKI asked if  she anticipates any unconventional                                                               
or shale gas or oil in this reservoir.                                                                                          
                                                                                                                                
MS.  PIERCE replied  there  is unconventional,  but  a couple  of                                                               
their geologists  thought the sequences  were too "clayey"  to be                                                               
prospective for  shale gas.  However it has  tight gas  and other                                                               
kinds  of  unconventionals.  She said  because  conventional  and                                                               
unconventional are  assessed differently  different methodologies                                                               
are used.  She said they built  a new geological map  out of this                                                               
assessment  and inserted  what is  known  about the  oil and  gas                                                               
using that as  a starting place. She said the  basin is very deep                                                               
and  very thick,  which is  why it  is so  prospective. The  non-                                                               
marine strata  are fairly young from  0 to 66 million  years ago.                                                               
Older strata are marine sedimentary  rocks and they are underlain                                                               
by very  thick volcanic rocks  which are not prospective  for oil                                                               
and gas. The brown, orange and  tan areas have the coal beds that                                                               
are sourcing the biogenic gas  (gas from microbial activity). The                                                               
greens indicate deeper  rocks that have the  thermogenic gas that                                                               
comes  from   cracking  up  the   hydrocarbons  and   the  higher                                                               
temperatures  that  has helped  it  migrate  up the  faults  into                                                               
conventional reservoirs.                                                                                                        
                                                                                                                                
MS. PIERCE  explained that those  units of rock that  have common                                                               
geologic traits but are unique  from others are called assessment                                                               
units  (AU). Cook  Inlet has  four assessment  units (slide  14):                                                               
Cook Inlet coalbed gas, tertiary sandstone oil and gas, Tuxedni-                                                                
Naknek  continuous  gas,  and Mesozoic  sandstone  oil  and  gas.                                                               
Stratographically   they  are   overlying  each   other  in   the                                                               
subsurface.                                                                                                                     
                                                                                                                                
3:43:32 PM                                                                                                                    
MS.  PIERCE   explained  that  the  conventionals   are  discrete                                                               
accumulations  that   are  water-bounded;  they  are   either  in                                                               
structural or  stratigraphic traps.  They can be  oil or  gas and                                                               
are  relatively  easy  to  find   and  develop  compared  to  the                                                               
unconventionals.  Unconventionals are  called continuous  because                                                               
they  include shale  gas or  tight gas,  and then  there are  the                                                               
truly unconventional like hydrates or  oil shale. They are called                                                               
continuous  because geologically  they're  continuous across  the                                                               
basin -  so they are  coalbed gas, tight gas,  basin-centered gas                                                               
and shale gas.                                                                                                                  
                                                                                                                                
She explained  the difference between stratigraphic  traps versus                                                               
structural traps because  it is important to know  in Cook Inlet.                                                               
Production  has all  come  from structural  traps  and none  from                                                               
stratigraphic traps  and there may still  be significant resource                                                               
potential in the untapped stratigraphic traps.                                                                                  
                                                                                                                                
The Tertiary Sandstone Oil and Gas  AU was more detailed on slide                                                               
16 and  she noted they looked  at the Middle Jurassic  shale near                                                               
the Red  Glacier. The map had  points for oil and  gas fields and                                                               
wells and indicted significant well  penetration. She pointed out                                                               
the  reservoir rocks  on  slide 17   saying  one  of the  biggest                                                               
differences  between conventional  and  unconventional is  source                                                               
rock  and the  reservoir rock.  Conventional has  been formed  at                                                               
depth when  organic material gets  heated and forms oil  and gas;                                                               
it  rises  up  through  the strata  and  becomes  reservoired  in                                                               
impermeable  areas.  The  biggest  difference  between  that  and                                                               
unconventional tight  and shale  gas is that  those are  still in                                                               
their source rock; they have  not moved. And because they haven't                                                               
moved they  are more difficult  to produce. You have  to fracture                                                               
them or do  something else. That is why until  recently they have                                                               
really not been economic to produce.                                                                                            
                                                                                                                                
She explained  that the Tertiary  Sandstone AU is  a conventional                                                               
reservoir assessment  and has about  1,200 well  penetrations and                                                               
about 30 known accumulations. Over  1 billion barrels of oil have                                                               
been produced along  with almost 8 tcf of gas.  The source of the                                                               
oil  and the  thermogenic  gas is  in the  marine  shales in  the                                                               
Middle  Jurassic  shale group,  but  the  gas listed  earlier  is                                                               
mostly microbial  (biogenic) forced from  the coals. So  there is                                                               
significant resource  potential there. The reservoirs  are mostly                                                               
tertiary  fluvial sandstones  and  all the  discovered traps  are                                                               
structural.  Stratigraphic traps  are  still out  there and  most                                                               
likely  to be  found. The  undiscovered traps  are probably  both                                                               
structural  and stratigraphic,  but significantly  stratigraphic.                                                               
They  think  this   area  is  underexplored  and   has  the  most                                                               
potential. The  source of gas  is marine  shale and that  is also                                                               
underexplored and has the most potential.                                                                                       
                                                                                                                                
3:49:16 PM                                                                                                                    
MS.  PIERCE  said it's  important  to  understand that  the  thin                                                               
discontinuous sands  show the potential  with Cook  Inlet geology                                                               
and a  very important  consideration there is  that a  well could                                                               
completely miss  the sand that  has oil and  gas in it.  Slide 20                                                               
showed  seismic   lines,  potentially   untested  oil   and  gas,                                                               
potentially  undrilled  structures  and  potential  stratigraphic                                                               
traps that are untested. Cook Inlet has a lot of potential.                                                                     
                                                                                                                                
Slide 21 was of land ownership that  helps get at what may or may                                                               
not be available for both exploration and production.                                                                           
                                                                                                                                
SENATOR   FRENCH  asked   if  her   estimate  assumes   that  the                                                               
undiscovered  oil and  gas is  uniformly  distributed across  the                                                               
area within the yellow boundary.                                                                                                
                                                                                                                                
MS. PIERCE answered  that they don't assume that  the resource is                                                               
uniformly distributed,  because the geology is  not uniform. They                                                               
say that the resource is within  this area. They don't assess the                                                               
parcels  because  that  goes  beyond   what  the  available  data                                                               
provides.                                                                                                                       
                                                                                                                                
SENATOR FRENCH  said this  area seemed  to be  the source  of the                                                               
greatest amount of undiscovered oil and gas.                                                                                    
                                                                                                                                
MS. PIERCE  agreed; more than 300  million barrels of oil  and 12                                                               
tcf of gas.                                                                                                                     
                                                                                                                                
SENATOR FRENCH asked  how many penetrations it would  take to get                                                               
to an "explored" basin level.                                                                                                   
                                                                                                                                
MS. PIERCE  replied that she didn't  have a pat answer.  It would                                                               
take sitting  down and looking at  the seismic and what  is known                                                               
and mapping out what they think is happening.                                                                                   
                                                                                                                                
SENATOR  FRENCH asked  if  she  had just  a  ballpark figure.  He                                                               
wanted a  feel for how  unexplored it is.  "Do we have  to double                                                               
the number of wells before we get there?"                                                                                       
                                                                                                                                
MS. PIERCE repeated that there just  isn't a good answer to that.                                                               
It's not so a  much a number; it's an area  that doesn't have any                                                               
data.                                                                                                                           
                                                                                                                                
3:52:42 PM                                                                                                                    
CO-CHAIR PASKVAN said  another issue is how long  into the future                                                               
the reserves are  created and, "Why spend the money  for 30 years                                                               
if you only need to spend the money for 8 to 10 or 12 years?"                                                                   
                                                                                                                                
MS.  PIERCE responded  that companies  keep the  reserves on  the                                                               
books  fairly constant  and replenish  what  they have  produced.                                                               
That information  is kept "on the  back burner at all  times." It                                                               
depends on  what you need  and the timeframe  you need it  in and                                                               
today's economic analysis may change tomorrow.                                                                                  
                                                                                                                                
3:54:22 PM                                                                                                                    
SENATOR WIELECHOWSKI  said Cook  Inlet is  a stranded  gas market                                                               
and asked if she would expect  to find companies booking 30 or 40                                                               
years of reserves when they have no market for it.                                                                              
                                                                                                                                
MS. PIERCE  answered that she  is a geologist; companies  do very                                                               
different things and it's hard to judge.                                                                                        
                                                                                                                                
She   explained  that   the  Mesozoic   Sandstone   AU  is   also                                                               
conventional and  has more  than 100  well penetrations,  but few                                                               
reach the top  of the Talkeetna formation.  So, the stratigraphic                                                               
potential  is below  where  most of  the  well penetrations  have                                                               
reached.  M-28  AU  has  one  oil  accumulation  with  cumulative                                                               
production  of 300,000  barrels.  She said  there  are oil  seeps                                                               
onshore in this  area and that indicates that there  is other oil                                                               
potential. The source of the oil  and thermogenic gas is from the                                                               
Middle Jurassic  Tuxedni group,  which has  migrated up  from the                                                               
depths.  They also  think there  are  potential and  undiscovered                                                               
traps probably both structural and stratigraphic.                                                                               
                                                                                                                                
3:56:46 PM                                                                                                                    
SENATOR WIELECHOWSKI  asked how deep Mesozoic  is versus Tertiary                                                               
and how  deep jack-up rigs  get versus  what typical rigs  get in                                                               
Cook Inlet.                                                                                                                     
                                                                                                                                
MS. PIERCE  replied the Tertiary  is about 25,000 ft.  thick; the                                                               
Jurassic and Cretaceous is another 30,000 ft. thick.                                                                            
                                                                                                                                
REPRESENTATIVE SEATON asked her  to define the difference between                                                               
structural and stratigraphic.                                                                                                   
                                                                                                                                
MS. PIERCE  replied that stratigraphic  and structural  traps are                                                               
both conventional resources.  So, if you had  organic material at                                                               
depth that  has been  heated to  sufficient temperatures  to form                                                               
oil and/or gas, and because oil and  gas is buoyant and if it can                                                               
move out  of the source rock,  it will and travel  up through the                                                               
system until  it hits  an impermeable layer  where it  forms into                                                               
the  pores  as  either  structural or  stratigraphic  traps.  The                                                               
structural trap is where the rocks  have been flexed; so it has a                                                               
structure  within like  an anticline  that  has moved  up in  the                                                               
system and hit an impermeable layer,  like a shale or a clay, and                                                               
fills  the pore  spaces (in  a  sandstone, for  instance) in  the                                                               
structural  trap. A  stratigraphic trap,  on the  other hand,  is                                                               
something  where a  fault with  two different  rock types  placed                                                               
upon  each  other  that  has formed  an  impermeable  layer.  The                                                               
structural  traps are  the  ones that  have  been discovered  and                                                               
produced in the Cook Inlet;  none of the stratigraphic traps have                                                               
been explored.                                                                                                                  
                                                                                                                                
SENATOR WIELECHOWSKI  asked if one  particular kind  of formation                                                               
tends to hold more oil and gas.                                                                                                 
                                                                                                                                
MS. PIERCE replied the Tertiary Sandstone.                                                                                      
                                                                                                                                
SENATOR WIELECHOWSKI  asked if the  structural ones tend  to hold                                                               
more oil and gas versus the ones that haven't been explored.                                                                    
                                                                                                                                
MS. PIERCE  replied that  there has been  no production  from the                                                               
stratigraphic traps. All  the gas and oil in Cook  Inlet has been                                                               
produced from the structural traps.                                                                                             
                                                                                                                                
SENATOR  WIELECHOWSKI asked  traditionally  do the  stratigraphic                                                               
traps have more oil or gas.                                                                                                     
                                                                                                                                
4:01:10 PM                                                                                                                    
MS.  PIERCE replied  that  it depends  on where  you  are in  the                                                               
geology of  a specific area  and she  didn't know about  the Cook                                                               
Inlet  because   none  of   them  are   produced.  Tuxedni-Naknek                                                               
Continuous  Gas   has  no  known  accumulations.   It's  entirely                                                               
unexplored with no known well penetrations.                                                                                     
                                                                                                                                
She recapped that the Mesozoic  layer is mostly unexplored and is                                                               
a  slightly  small  area geographically.  The  results  from  the                                                               
Mesozoic Sandstone  oil and gas AU  show a mean of  more than 200                                                               
million barrels of oil and about 1.5 tcf of undiscovered gas.                                                                   
                                                                                                                                
REPRESENTATIVE SEATON  asked if this  indicates that M-28  AU and                                                               
four wells down in the lower left are the only penetrations.                                                                    
                                                                                                                                
MS. PIERCE  answered the  M-28 AU  is the  one that  has produced                                                               
oil, but  it is pretty unexplored.  The Tuxedni-Naknek continuous                                                               
gas structural  unit is  a very small  deep. It  is hypothetical,                                                               
but  bears   looking  at  for   the  future.  It  has   no  known                                                               
accumulations, but  it is  thermogenic gas and  there may  be low                                                               
permeability sandstones  at that  depth that  can be  produced as                                                               
evidenced elsewhere.                                                                                                            
                                                                                                                                
The very large  Cook Inlet Coalbed AU is  also unconventional and                                                               
has no  discovered commercial accumulations,  but about  25 wells                                                               
have been drilled in search of  coalbed gas by Wasilla. These are                                                               
microbial   gas  sources.   Because  there   are  no   commercial                                                               
accumulations, they used  the Powder River basin  as an analogue;                                                               
it has very thick coals and  is highly commercial. An area deeper                                                               
that  6,000 ft.  was  excluded, but  has technically  recoverable                                                               
potential. It  is mostly  unexplored, but  they allocated  it 4.6                                                               
tcf of gas.                                                                                                                     
                                                                                                                                
In a nutshell, Ms. Pierce  said they have recently completed this                                                               
assessment   of   volumes   of   undiscovered   but   technically                                                               
recoverable  resource for  both conventional  and continuous  gas                                                               
accumulations  for the  onshore state  waters. The  geology based                                                               
assessment  is a  probabilistic  quantitative based  on USGS  and                                                               
State  of Alaska  DGGS and  DOG  data; it  indicates 600  million                                                               
barrels of oil and 19 tcf of gas.                                                                                               
                                                                                                                                
4:04:19 PM                                                                                                                    
SENATOR WIELECHOWSKI asked for a  more detailed analysis of where                                                               
a find is.                                                                                                                      
                                                                                                                                
MS.  PIERCE replied  that their  results estimate  for an  entire                                                               
region.  They can  allocate certain  parcels of  land, but  their                                                               
data simply  don't support  saying there  is X  tcf or  X billion                                                               
barrels  in  a  small  parcel.  These  are  not  assessments  but                                                               
allocations based  upon their expert  judgment of the  geology of                                                               
the area from the assessment.                                                                                                   
                                                                                                                                
SENATOR WIELECHOWSKI said  there must be some  raw data somewhere                                                               
that would show traps.                                                                                                          
                                                                                                                                
MS. PIERCE  replied where they  have seismic data they  have more                                                               
detailed information, but  a lot of areas don't  have the seismic                                                               
data.                                                                                                                           
                                                                                                                                
SENATOR WIELECHOWSKI asked  if their data is public and  if it is                                                               
shared with the State DNR or the companies.                                                                                     
                                                                                                                                
MS.  PIERCE replied  it's a  combination.  Companies often  share                                                               
proprietary  data with  them,  but they  don't  share that  data;                                                               
rather  they share  the results  of their  assessment. USGS  also                                                               
buys  proprietary databases  of production  both in  the U.S.  as                                                               
well as  globally. They look at  what is being produced  in areas                                                               
with  similar geology  and  do field  work  themselves. They  put                                                               
together  geologic models  to say  if there  is organic  material                                                               
even  in  the area  and  if  so,  was  it robust  enough  organic                                                               
material and  what kind is it  - and then build  a burial history                                                               
curve for each basin while guessing  if it got hot enough to form                                                               
oil and gas and if the timing was right.                                                                                        
                                                                                                                                
4:07:52 PM                                                                                                                    
SENATOR  STEDMAN said  there is  oil development  off of  coastal                                                               
B.C. and  that Alaska has a  lot of coastline running  up to Cook                                                               
Inlet and asked if she knew of any oil in between.                                                                              
                                                                                                                                
MS.  PIERCE replied  that  is  a good  question,  but she  hadn't                                                               
looked at that.                                                                                                                 
                                                                                                                                
CO-CHAIR  WAGONER  asked what  she  meant.  There has  been  some                                                               
drilling in the Gulf of Alaska.                                                                                                 
                                                                                                                                
MS. PIERCE replied that USGS hadn't assessed it.                                                                                
                                                                                                                                
CO-CHAIR WAGONER asked  if it been assessed by USGS  prior to the                                                               
drilling off of Yakutat.                                                                                                        
                                                                                                                                
MS. PIERCE replied that she would have to go back and look.                                                                     
                                                                                                                                
4:09:34 PM                                                                                                                    
CO-CHAIR PASKVAN  asked where the  concept of  economic viability                                                               
comes in.                                                                                                                       
                                                                                                                                
MS. PIERCE replied that is somebody's next study.                                                                               
                                                                                                                                
CO-CHAIR PASKVAN  asked if one  combines her  5 tcf with  the 1.8                                                               
tcf of  known reserves, would  that mean a 95  percent likelihood                                                               
of  6.8 tcf.  He was  comparing  that number  to the  7.8 tcf  of                                                               
production that has already occurred  and was trying to determine                                                               
magnitudes  of probabilities  for the  next 50  years. Is  that a                                                               
reasonable way to look at that?                                                                                                 
                                                                                                                                
MS. PIERCE replied  yes and that they have  95 percent confidence                                                               
that 5 tcf is there. There is real potential.                                                                                   
                                                                                                                                
4:12:29 PM                                                                                                                    
SENATOR WIELECHOWSKI asked if the 5 tcf  is on top of the 1.8 tcf                                                               
of known reserves.                                                                                                              
                                                                                                                                
MS. PIERCE  replied yes.  The USGS does  not include  reserves in                                                               
its estimates, but they do assess potential reserves.                                                                           
                                                                                                                                
CO-CHAIR WAGONER  said until  someone goes  out there  and proves                                                               
it's an economical reserve, they can't count on anything.                                                                       
                                                                                                                                
MS. PIERCE replied "absolutely correct."                                                                                        
                                                                                                                                
SENATOR WIELECHOWSKI asked if an oil company could get detailed                                                                 
information from USGS on where they believe those traps and                                                                     
structural formation are.                                                                                                       
                                                                                                                                
MS. PIERCE answered it depends on where the data came from and                                                                  
who it belongs to and what their agreement is.                                                                                  
                                                                                                                                
4:15:17 PM                                                                                                                    
CO-CHAIR PASKVAN thanked her for traveling to Juneau and giving                                                                 
the presentation. Finding no further business to come before the                                                                
committee, he adjourned the meeting at 4:15 PM.                                                                                 
                                                                                                                                

Document Name Date/Time Subjects
SRES_CI Activ Update DNR Gas Studies[1].pdf SRES 8/16/2011 9:00:00 AM
Cook Inlet 16 August 2011 AK Senate Energy Comm Briefing.pdf SRES 8/16/2011 9:00:00 AM
TransCanada_SRESCommitteeAug 16 2011FINAL.pdf SRES 8/16/2011 9:00:00 AM