Legislature(2011 - 2012)
10/21/2011 10:04 AM Senate RES
| Audio | Topic |
|---|---|
| Start | |
| Cook Inlet Production Activities Update | |
| Adjourn |
* first hearing in first committee of referral
+ teleconferenced
= bill was previously heard/scheduled
+ teleconferenced
= bill was previously heard/scheduled
ALASKA STATE LEGISLATURE
SENATE RESOURCES STANDING COMMITTEE
KENAI, AK
October 21, 2011
10:04 a.m.
MEMBERS PRESENT
Senator Thomas Wagoner, Co-Chair
Senator Bill Wielechowski, Vice Chair
Senator Bert Stedman
MEMBERS ABSENT
Senator Joe Paskvan, Co-Chair
Senator Lesil McGuire
Senator Hollis French
Senator Gary Stevens
OTHER LEGISLATORS PRESENT
Senator Cathy Giessel
COMMITTEE CALENDAR
Presentation: Cook Inlet Producers
- HEARD
PREVIOUS COMMITTEE ACTION
No previous action to record.
WITNESS REGISTER
JIM WATT
Alaska Buccaneer Energy Limited
POSITION STATEMENT: Reviewed Buccaneer's exploration activities
in Cook Inlet.
KEITH MEYER
LNG Alaska
POSITION STATEMENT: Outlined LNG Alaska's concept of LNG
activities in Cook Inlet.
DAVID HALL, CEO
Cook Inlet Energy, LLC
POSITION STATEMENT: Reviewed Cook Inlet Energy's activities in
Cook Inlet and commented on state incentives for development
there.
ACTION NARRATIVE
10:04:13 AM
CO-CHAIR THOMAS WAGONER called the Senate Resources Standing
Committee meeting to order at 10:04 a.m. Present at the call to
order were Senators Wielechowski, Stedman and Wagoner.
^Cook Inlet Production Activities Update
COOK INLET PRODUCTION ACTIVITIES UPDATE
10:05:23 AM
CO-CHAIR WAGONER invited Mr. Watt forward to update the
committee on Buccaneer's activities in Cook Inlet.
JIM WATT, Alaska Buccaneer Energy Limited, said Buccaneer
believes there is hydrocarbon potential in the Cook Inlet. That
potential plus the attractive fiscal terms and a strong market
has led Buccaneer to commit to a multi-year drilling program
that includes the acquisition of a jack-up rig for the Cook
Inlet to help provide a solution to supplying Southcentral and
Fairbanks energy demands.
He said Buccaneer is a Australian public company and was founded
on two core principles: minimizing risk and maximizing
opportunity. Elements of minimizing risk include enlisting local
talent and acquiring majority positions in their projects and
managing them. Along with well control, they are most interested
in reinterpreting existing seismic and defining opportunities in
Cook Inlet.
10:07:34 AM
To maximize opportunity Buccaneer is fast-tracking its
developments using the special incentives Alaska has passed as
well as its favorable regulatory environment and strong
commodity market; Alaska is also energy friendly and pro-
development.
MR. WATT said the Cook Inlet Basin is one of the last proven
underexplored basins in the U.S. and it has existing
infrastructure that is underutilized (very important). The
state's current fiscal regime has tremendous economic benefit
for companies and as evidenced by all the new players.
He reported that Kenai Loop 1, the onshore well Buccaneer just
drilled, has a firm gas off-take agreement with Enstar which
they hope to be able to provide by December 2011. He said two
other onshore projects, West Eagle and West Nikolai Creek are
both gas-weighted opportunities. Buccaneer also has two major
positions offshore, one is Southern Cross and the other is
Northwest Cook Inlet; both are units and both are proven in the
sense of well control and existing seismic. So they are very
comfortable in their opportunity there.
MR. WATT said the jack-up rig is unlocking the potential in Cook
Inlet but it's a strategic asset for use in the Chukchi Sea as
well and they expect it to be modified and ready to begin
operating in Cook Inlet in November. Buccaneer is already
operating in the Gulf of Mexico and along the Texas Gulf Coast.
10:10:20 AM
He explained that a map (slide 5) of Cook Inlet's fields
indicates a natural progression in terms of the majors moving
out and the independents moving in. Buccaneer's developments and
other conventional exploration in Cook Inlet were highlighted.
MR. WATT stated that the mix is right now - the local gas
shortage, the underexplored basin as evidenced by the USGS
study, the cash incentive, ACES and the premium natural gas
prices - to attract all the new players that are coming in.
He said Cook Inlet has a long and successful history of
exploration and production. Most of the activity happened back
in the 60s, but when Prudhoe was discovered in the 70s all the
activity went to the North Slope. Then the 80s happened and
along with it a downturn in the industry that didn't really
improve in the 90s. During that time, Cook Inlet had very low
activity and frankly the probability of drilling and finding gas
was higher there than finding oil, so a lot of people simply
didn't drill.
He said USGS estimates recently went from 2 tcf to 19 tcf and
Buccaneer feels that now the basin is underexplored and very
attractive. The last time a jack-up rig was there was in 1994
and next year it will have two jack-up rigs.
10:13:44 AM
He stated that all the giant fields were discovered in the 60s
and that only a couple of fields in the Inlet are in the "sweet
spot," but based on conventional drilling that more will
probably be found in the structural ridges. The stratigraphic
play is coming on through 3D seismic that has been exploited in
other basins but is just really coming to fruition now in the
Cook Inlet.
He said Buccaneer leased, permitted and successfully drilled
their first hole, Kenai Loop 1, in nine months and pipeline
construction began in October with production hopefully starting
in December. The Enstar contract will start with an off-take
rate of 5 mmcf/day and be ramped up to 15 mmcf/day as more wells
are drilled. He related that the terms under ACES favorably
impacted Buccaneer with $9.2 million credits from a total spend
of $22.9 million. Kenai Loop 1 is a little north of the Cannery
Loop Unit operated by Marathon whose figures indicate that
Buccaneer's reserve potential could conservatively be around 30
bcf; butd once they get more definition from their 3D seismic it
could be more.
Their offshore Southern Cross Unit already has "oil-weighted
"wells that were drilled in the 60s; the North Middle Ground
Shoal Field already has 3D seismic and the Netherland Sewell has
reserves of around 12.7 million barrels of oil equivalent
(mmboe), an opportunity they plan to pursue in terms of their
first well next year. Given success, whether gas or oil, it will
likely tie it into the Baker Platform in the south. Both
Southern Cross Unit and Northwest Cook Inlet offshore have a
two-well commitment and those will get drilled next year with
production coming on line in two or three years.
10:18:43 AM
MR. WATT said that West Nicolai field is a defined gas prospect
of about 5,000 acres. It is something they can tie back into the
Nicolai Creek field operated by Aurora less than three miles
away. Apache is shooting the 3D seismic now and Buccaneer will
move forward with that in 2012 or 2013.
10:19:31 AM
Buccaneer's last and largest asset is West Eagle, at about
50,000 acres. It has good existing 2D coverage vintage data that
will get reprocessed and hi-graded. They will probably move
forward with a unit application to the state by April 2012 with
the idea of a well commitment by September 2012. Infrastructure
operated by Armstrong is about six miles away in the North Fork
Unit.
10:20:28 AM
Development schedule
-Kenai Loop - production by the end of 2011 and drilling 2 to 4
more wells depending on interpretation of the 3D seismic
-Southern Cross Offshore Unit - the Endeavor rig drilling 2
wells by next year and production by 2014
-Northwest Cook Inlet - production by 2014
-West Nicolai - production by 2013 and West Eagle by 2012 - both
gas prone
10:22:32 AM
The Jack-up rig acquisition is a joint venture with Ezion
Holdings (Singapore listed); the rig was named Endeavor the
Spirit of Independence. Archer Drilling, an experienced and
proven contractor, will be responsible for operating the rig and
keeping it busy in Cook Inlet and the Chukchi Sea. He elaborated
that Archer operates over 100 rigs globally, has over 7,000
employees and extensive experience in harsh environments, has
in-house engineering capabilities, is familiar with the rig and
has an excellent safety record.
MR. WATT, in closing, said increased drilling in the Cook Inlet
will increase gas reserves and production within the next three
years. It will also fuel enthusiasm for more drilling. But the
LNG plant closing sent a cold chill through their corporate
offices as did talk about the bullet line. Buccaneer is seeking
to increase the role of LNG in various applications to increase
the market and that will be addressed in the next presentation.
He reviewed their founding principles and thanked the committee
members for their attention.
Recess from 10:27 to 10:34 a.m.
10:34:00 AM
KEITH MEYER, LNG Alaska, said he had been in the energy industry
for about 31 years and about 15 of them were involved in LNG in
one way or another. He was chairman of Flex LNG, which developed
floating liquefaction facilities and president of Chenier LNG
that developed North America's largest import terminal on the
Gulf Coast; and he was vice president at CMS Energy that bought
the Panhandle systems, which included the Trunk Line LNG
facility at Lake Charles and international energy infrastructure
businesses.
He said LNG Alaska is an alliance between LNG central (him and
his team) and Buccaneer. Buccaneer is very focused on
developments within Alaska and recognizing the potentially
limiting small market (if they produce what they think they are
going to produce) and that the existing export facility might be
closed, they contacted him to see what could be done to grow the
LNG market in Alaska.
MR. MEYER said after months of assessment he concluded that
something can be done with LNG both within the in-state market
as well as in the export market, and as a result LNG Alaska set
an objective to increase the market reach of Alaska natural gas
and to improve LNG production and delivery infrastructure.
In that regard, one of the things he recognized is that Cook
Inlet gas has a negative perception and has become the scape
goat for justifying many alternative projects. It is used in
resolutions supporting the pipelines from the north and it's
used in studies supporting hydro projects and in statements
regarding imports of LNG. He said it takes producers to develop
the gas and those producers need to see that there is a market
opportunity once they develop it. That increased demand will
translate into increased supply.
10:38:33 AM
Virtually every producer in the Cook Inlet he has talked to,
Buccaneer included, is willing to be supportive of a market
growth initiative and he views LNG Alaska as an enabling
solution that looks at: putting in new modular liquefaction,
using infrastructure investments to expand LNG use within the
state - trucks, rail and barge deliveries, remote storage and
revaporization at select locations and fuel terminals for truck
and marine use - and continuing to expand the potential for LNG
export/import options. The reason for imports would be to
convince the demand side of this equation that the LNG
infrastructure they are investing in would be used and useful
under any scenario. He emphasized that LNG Alaska is an
infrastructure play capable of liquefying natural gas and
transporting it to the in-state markets as well as exporting it
to international markets.
10:40:23 AM
MR. MEYER said the LNG industry has changed since the Kenai
facility was built. It is not mature but it has "grown up" and
has a vibrant future. Twenty-two nations now import LNG as
opposed to one when Kenai was built and double the number 10
years ago. Thirty import re-gas facilities are being planned and
LNG is now being used across the world by many nations that are
now importers of LNG.
10:41:29 AM
He explained that Kenai is now considered a mid-scale facility
at 1.6 million tons per year. The industry has matured to a
point where these mid-scale facilities can be scaled modularly
and expanded as the market dictates. For example, a floating
facility the size of Kenai can be built in a Korean shipyard.
MR. MEYER said another big change is coming and that is LNG for
use as a transportation fuel in the U.S. where it would be used
in heavy trucking (the Port of Long Beach has over 1,000 trucks
dedicated to burning LNG). Norway is probably the best example
of a country that sort of looks like Alaska; it has natural gas
and makes a very concerted effort to introduce it into the
transportation sector becoming much more oil free. Cruise ships
and freighters are installing LNG fuel capability, too, because
it's cleaner and cheaper.
10:43:44 AM
MR. MEYER said the LNG Alaska program is built on three
strategic pillars: the Fairbanks initiative, a coastal and
transportation initiative that looks at moving LNG to the
coastal cities for use as fuel to displace the diesel power in
the transportation sector and the export/import initiative.
10:44:36 AM
SENATOR WIELECHOWSKI asked what a revaporization plant would
cost if it were to go into rural Alaska - say to Bethel.
MR. MEYER replied the revaporization piece of this plan is
actually the cheapest piece. The LNG would be offloaded into a
small storage facility and then it just get rewarmed into
natural gas. The overall delivery infrastructure from Cook Inlet
gas to LNG to transport to Bethel must be cheaper than getting
oil there including getting the communities to switch. However,
doing just Bethel would be tough, he admitted, and several
groups would have to come together and work on a united plan. If
the AMHS, Fairbanks and exports got together, for instance, that
would be competitive.
10:47:06 AM
The core reliable infrastructure was conceived to be fueled with
Cook Inlet production and to also be used as storage for not
only the pipeline supply but LNG imports. He emphasized again if
there is no Cook Inlet production and LNG is imported and put
into the storage tanks the same infrastructure logistics could
be used to deliver gas to Fairbanks, so the people there could
be comfortable knowing their investment is useful under any
scenario.
SENATOR WIELECHOWSKI asked if he is talking to ConocoPhillips
about using their plant or will LNG Alaska build its own LNG
facility.
MR. MEYER replied that the most ideal spot for a facility is the
one owned by ConocoPhillips and they just had a positive
informal discussion with them about it. But if ConocoPhillips
eventually doesn't want to negotiate he is also looking at
alternative sites.
10:49:48 AM
MR. MEYER stressed that Fairbanks and the Railbelt region is an
important market for the LNG Alaska plan. The Railbelt region is
considering multiple alternatives, one of which is a mid-scale
liquefaction facility in the north and trucking LNG down the
Haul Road. But he thinks a mid-scale LNG Alaska facility in the
south could be built and operated at a lower cost; the delivery
cost would be less and more reliable, as well, because of two
alternatives: roads and rail. The only thing that could change
this scenario is "if they are giving away gas in the North."
He said that supporting legislation such as SB 42 establishing
the Railbelt Energy Fund is very helpful; it has been enacted to
help with studies and grants for power projects.
SENATOR WIELECHOWSKI asked if he had done a competitive analysis
of his project compared to an in-state line from Cook Inlet to
Fairbanks.
MR. MEYER answered yes; he has seen the studies, but he has not
done an in-depth analysis of the cost variables of that
pipeline, but his plan is competitive unless the gas is being
given away in the North. If the pipeline is built and the state
allows ratepayers to pay for it - and that capital is already
invested on a variable cost basis - an installed pipeline wins.
Further, if the demand is big enough, again, the pipeline wins.
For instance, right now in China LNG is being trucked to remote
areas until critical mass is reached and then a pipeline will be
put in.
MR. MEYER said he believes that long-term there would be a
pipeline solution here, but it won't happen in the next 10
years; the earliest forecast is 2022 and his facility will work
for that decade-plus. It is synergistic in that it builds the
gas demand so a pipeline is easier to justify. Further, some of
this infrastructure, particularly the transportation
infrastructure, is used and useful regardless of the pipe,
because of the LNG. What LNG then becomes is a peaking
infrastructure and dynamic storage. He explained that it's a lot
of volume in a small space and even with the pipeline there will
still be demand peaks that it can satisfy. Eventually when a
pipeline is built there will be other avenues for the LNG
including export to international markets (especially if gas
starts coming from the North) and he said he was comfortable
that LNG investment is sound under any scenario including a long
distance pipeline.
10:55:39 AM
As fuel for power generation Mr. Meyer said that 7 to 10 coastal
cities have large enough demand to justify the effort of moving
LNG by barge and he was recently told that the City of Bethel
has already sought funds for studying the use of LNG for power.
The Alaska Marine Highway System (AMHS) could also be a
significant user of LNG as fuel for transportation.
10:56:59 AM
Back to coastal power generation, he said Norway is probably the
best case study of what Alaska could do because it has a similar
climate and coastline. It has LNG production but uses small LNG
tankers (1,000 cubic meters) as opposed to the large 88,000
cubic meter ships going to Kenai (the average new build is
around 160,000 cubic meters). Trucks could be loaded from a very
small LNG ship and the fuel could be taken to wherever it was
needed.
10:57:57 AM
LNG is a growing transportation fuel for on-road, off-road and
marine vehicles. On-road users are typically large trucks; off-
road markets have good demand and are typically for use in
mining vehicles. He explained that one of the benefits of a mine
operation is that it stays in a small geographic footprint and
so refueling structures are not needed. Marine applications are
similar and include tugboats, workboats and ferries.
MR. MEYER said workboats are being converted to dual fuel and
ferries in Washington, New York, Argentina, Norway and a number
of other countries are converting to LNG. The AMHS would be an
ideal demand because its large load and scheduled route make
fueling logistics much easier.
10:59:38 AM
Focusing on the AMHS, Mr. Meyer said the fleet is relatively old
and the state has commissioned a study to design fuel efficient
vessels to replace it. Dual fueled diesel/LNG engines have been
in operation for many years and meet the Tier 3 emission
requirements. Therefore, this is a perfect opportunity for the
state to really look at using the dual fuel diesel/LNG vehicle
as the new class of Alaska class ferries.
SENATOR WIELECHOWSKI asked what it would cost to upgrade some of
the ferries and how soon the cost would be recouped.
MR. MEYER replied that he understands the larger Alaska ferries
are being replaced as opposed to being retrofitted and it is
easier to have a dual-fueled "new build" than to convert an old
one. He didn't know how much it would cost to convert a large
freighter, but it would be over $1 million for a tugboat class
vessel and about $40,000 for a truck. He threw out a wild guess
of $3 million to $5 million for the ferry system and said it's
important to do it on new builds because they can be designed
correctly.
11:03:22 AM
He said that LNG Alaska will help create jobs in the energy
sector including Cook Inlet production activities, LNG delivery
operations, LNG vehicle conversions and maintenance facilities
and expanded natural gas distribution facilities. He said it
will also be beneficial in terms of reduced imports of refined
products and a continued or increased opportunity for
international exports.
11:04:04 AM
Unit costs would come down with more uses and estimates
indicated that the transportation fuel for the AMHS and power
generation would cause a significant reduction to $12.50 mmbtu
and with exports it would come down to $10 mmbtu, which equates
to about $.80/gal.
MR. MEYER summarized that LNG Alaska has significant gas
production potential in the Cook Inlet and that creating natural
gas demand and market access will encourage those activities.
Alaska's domestic gas reserves can be used to displace imported
refined products, reduce pollution and reduce the cost of energy
to consumers. Alaska has the necessary legislation and
incentives in place to help accelerate the LNG Alaska program
and LNG Alaska is ready to work with the state to implement a
clean and reliable natural gas expansion program.
11:06:12 AM
SENATOR GIESSEL asked if he is referring to the market for
electric generation or if he is including converting private
homes to natural gas when he talks about Fairbanks usage.
MR. MEYER replied that he is initially referring to the large
chunks of electrical generation with GVEA and Flint Hills,
although he had not had discussions with them yet.
CO-CHAIR WAGONER went back to Senator Wielechowski's question
about the potential for building a pipeline from Southcentral
Alaska to service the Fairbanks market versus his project, not a
bullet line.
MR. MEYER responded that growth of the Fairbanks market could be
the supporting load for a pipeline south, but it would face the
same challenges LNG Alaska faces, which is what if Cook Inlet
production isn't there. He looks at this LNG program as being
the front end of a broader infrastructure solution, which would
involve a pipeline to eventually serve that critical mass.
11:10:15 AM
At ease from 11:10 to 11:19 a.m.
11:19:44 AM
DAVID HALL, CEO, Cook Inlet Energy, LLC, said they are an
Alaskan company that was formed in 2009 when things looked
"pretty grim" in Cook Inlet, but now they see an opportunity. He
said they have spent $13 million in Cook Inlet so far and employ
25 Alaskan residents and use many contractors for their
operations. They own property in the West MacArthur River Unit,
the Osprey Platform, a production facility and nearly 42 miles
of pipeline as well as 20 mg of combined power generation - all
located on the west side of the Cook Inlet. Current production
is around 1,200 boe/day and continues to rise.
He explained that $13 million was spent in 2010 on capital
projects and $10 million has been spent so far in 2011 mainly on
well workovers. In addition, they have spent $20 million on two
rigs for Cook Inlet - not to be confused with the jack-up rig -
Rig 34 and Rig 35. Rig 35 is going to be used on the Osprey
Platform, but it is designed to be used onshore as well. It has
the capability of drilling to 20,000 ft. and is on its way to
Nikiski now.
11:23:28 AM
MR. HALL said Cook Inlet Energy has designed and engineered six
work-overs for the Osprey with an estimated combined gross
capital cost of over $30 million. In addition to that, 13 new
grassroots well candidates have been identified for an estimated
cost of $15 million each. Rig 34 is designed for shallow wells
of 7,000 ft. or less and a great number of shallow gas well
prospects have been identified along the west side of Cook
Inlet.
11:25:08 AM
He said Cook Inlet Energy is an oil and gas producer and is
moving aggressively to grow production of both. Their focus is
Southcentral and the Susitna Basin where they have been doing a
lot of field work.
MR. HALL said they are a small company and are grateful for the
tax credits adding "I mean that from the heart." Without them
the economics would be difficult in many ways. Cook Inlet is an
expensive place to do business and they have fixed costs no
matter how much they produce.
11:26:19 AM
He related that AS 38.05.180 is the royalty relief statute that
was enacted 10 years ago to keep existing oil production on
line. It is an excellent measure, but it needs to be updated to
fit existing realities in Cook Inlet. HB 32 does just that. For
instance, the 180(f)(6) royalty relief applied only to fields
that existed 10 years ago when it was enacted and to maintain
existing gas production in Cook Inlet marginal gas wells should
be granted the same treatment. The 10-year royalty term
established in .180(f)(5) is of particular concern because the
Osprey Platform, for instance, has had a 5 percent royalty since
it began production in December 2002, but it had some major
problems in being economical even at that rate. Current statute
calls for royalty to increase to 12.5 percent in December 2012,
which will really challenge their efforts, especially when they
are talking about tens of millions of dollars to fully develop
the field.
MR. HALL said changes like this could potentially extend the
life of a field or even a shut-in platform, some of which are in
Cook Inlet and are currently queued up for abandonment. HB 32
would remove the 10-year clause and keep volumetric limits in
place at 25 million barrels of oil and 35 tcf of gas so that
large fields would end up paying the 12.5 percent royalty, but
marginal fields would not.
11:29:27 AM
Next Mr. Hall said Cook Inlet Energy recently went through the
permitting process for gas exploration in the Beluga area and
anything that can streamline the permitting process that goes
through the Alaska Department of Fish and Game (ADF&G) because
of the game refuges and critical game habitat areas on the west
side as well as the Department of Natural Resources (DNR). He
suggested allowing summer activities or approval of small roads
and pads with certain mediation standards.
11:31:33 AM
MR. HALL said they understand the gas and energy issues before
the legislature and part of the problem in Southcentral is the
small market where consumers risk shortages if supply does not
keep up and the producers risk not having a market or having the
price crash. Cook Inlet Energy's big challenge is if they deploy
huge capital dollars to bring gas to market today, they still
couldn't they get a contract. So, they are positioning
themselves by participating in the spot market and looking for
contracts going forward.
He asked them to remember that a bullet line would be helpful
for gas markets if it results in more gas moving in and out and
local producers can sell into it. It has to be an open access
configuration.
11:34:15 AM
SENATOR STEDMAN said he has been going over Cook Inlet issues
with Senator Wagoner for six years and it appears that things
are moving forward, but at some point the legislature will
review the incentives and stimulus to see if they are still
applicable. Clearly, it's not beneficial to the state to take
big upfront positions that have nothing on the other side.
Legislators want a balance.
MR. HALL thanked him for the comment and said they understand
that as well. For now the incentives are certainly needed in
Cook Inlet.
CO-CHAIR WAGONER clarified that Cook Inlet Energy as a company
has not had the same opportunity that most operators in Cook
Inlet have had for royalty reduction, but it wasn't put in place
to save companies money as much as it was to save the current
infrastructure there, because if that ever went away the state
wouldn't have the opportunity to do what it is today in a whole
lot of cases. That is part of the balance.
SENATOR STEDMAN wanted to clarify that there is no movement to
change what is in place today and he was talking about review
sometime down the line.
11:37:49 AM
CO-CHAIR WAGONER, finding no further questions, thanked everyone
who participated and adjourned the meeting at 11:37 p.m.
| Document Name | Date/Time | Subjects |
|---|