Legislature(1995 - 1996)
09/12/1995 10:00 AM Senate RES
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* first hearing in first committee of referral
+ teleconferenced
= bill was previously heard/scheduled
+ teleconferenced
= bill was previously heard/scheduled
SENATE RESOURCES COMMITTEE
September 12, 1995
10:00 a.m.
Anchorage, AK
MEMBERS PRESENT
Senator Loren Leman, Chairman
Senator Drue Pearce, Vice Chairman
Senator Steve Frank
Senator Rick Halford
Senator Georgianna Lincoln (Participated via teleconference
from Rampart)
MEMBERS ABSENT
Senator Robin Taylor
Senator Lyman Hoffman
ALSO IN ATTENDANCE
Representative Norman Rokeberg, Chairman, House Special
Committee on Oil & Gas
COMMITTEE CALENDAR
-- ALASKA OIL AND GAS CONSERVATION COMMISSION BRIEFING ON
CONSERVATION ORDER NO. 360 AND SUBSEQUENT ACTION BY AOGCC
-- DEPARTMENT OF NATURAL RESOURCES BRIEFING ON HEARINGS FOR
OPTIMIZATION OF NATURAL GAS LIQUIDS BLENDING AND UTILIZATION OF
MISCIBLE INJECTANT WITHIN THE PRUDHOE BAY UNIT AND SUBSEQUENT
ACTION BY DNR
-- OVERVIEW OF FINAL WORK SESSION REPORT TO RESOURCES COMMITTEE
-- AREAWIDE BEST INTEREST FINDING
-- RESOURCE PERMITTING
WITNESS REGISTER
David Johnston, Chairman
Alaska Oil & Gas Conservation Commission
3001 Porcupine Drive
Anchorage, AK 99501-3120
Ken Boyd, Director
Division of Oil & Gas
Department of Natural Resources
3601 C St., Suite 1380
Anchorage, AK 99503-5948
Annette Kreitzer, Staff to Senate Resources
Committee
State Capitol
Juneau, AK 99801-1182
David Sutter, Land Manager
ARCO Alaska
700 G St.
Anchorage, AK 99501
Steve Porter, Director
Exploration Permits Compliance
ARCO Alaska
700 G St.
Anchorage, AK 99501
Brad Penn
Marathon Oil Co.
3201 C St.
Anchorage, AK 99501
Diane Mayer, Director
Division of Governmental Coordination
Office of Management & Budget
Box 110030
Juneau, AK 99811-0030
Al Bohn, Manager, Air Quality Permitting
Air Quality Management Section
Department of Environmental Conservation
410 Willoughby Ave., Suite 105
Juneau, AK 99801
Commissioner Frank Rue
Department of Fish & Game
P.O. Box 25526
Juneau, AK 99802-5526
ACTION NARRATIVE
TAPE 95-61, SIDE A
Number 001
CHAIRMAN LEMAN called the Senate Resources Committee meeting to
order in the Anchorage Legislative Information Office conference
room at 10:00 a.m.
In his opening remarks, SENATOR LEMAN said the current Resources
Committee, as well as the previous Resources Committee under the
chairmanship of Senator Mike Miller, has been working to identify
those impediments to the continued development of oil and gas. He
noted the committee has introduced legislation that it will
continue working on and hold hearings on, however, the purpose of
the meeting is not specifically addressed to that legislation,
although he believes there are peripheral issues that relate to
them. He then invited David Johnston to make his presentation to
the committee.
Number 050
DAVID JOHNSTON, Chairman, Alaska Oil and Gas Conservation
Commission, expressed his appreciation for the opportunity to
testify before the committee on Conservation Order No. 360 and the
commission's hearings earlier in the year concerning NGL blending
and MI utilization in the Prudhoe Bay reservoir.
Mr. Johnston explained that natural gas liquids (NGLs) and miscible
injectant (MI) are both produced from natural gas. NGLs are
saleable and at Prudhoe Bay are blended with the crude oil for
transportation to market. On the other hand, MI is injected back
into the reservoir to recover additional oil as part of an enhanced
oil recovery project. NGLs blended with the oil stream are
principally butane and heavier components often referred to as
pentane plus. NGL components converted to MI are primarily ethane,
propane and butane. The common component, therefore, is largely
butane.
He said the dispute between Atlantic Richfield Company (ARCO) and
British Petroleum Exploration Alaska (BPXA), in large part, centers
on the best use of butane. In other words, should it be used to
make more MI for enhanced oil recovery operations, or to make more
NGLs for sale in the marketplace.
Another point that is important to understand to appreciate the
dispute is the Prudhoe Bay equity that exists. When the Prudhoe
Bay unit was formed in 1977, two participating areas were approved:
one for the oil rim and one for the gas cap. Each PA has a
different equity distribution. For example, BPXA owns
approximately 51 percent of the oil rim, but only approximately 14
percent of the gas cap. ARCO, on the other hand, owns
approximately 22 percent of the oil rim, but approximately 42-1/2
percent of the gas cap. Exxon has about the same situation as
ARCO. The other minor working interest owners own significantly
less of both, but, generally, they tend to own more oil than they
do gas. For example, Texaco, who was a participant in these
hearings, owns approximately .5 percent of the oil, but absolutely
no gas from the gas cap.
The dispute arose when Alyeska, earlier this year, approved an
increase in the volume of NGLs allowed for blending. It
implemented new vapor pressure control criteria that would allow an
estimated additional 10 to 20,000 barrels per day of NGLs to be
blended with the Prudhoe Bay crude oil.
The commission first became aware of Alyeska's pending decision in
late December 1994. They immediately wrote the operators, both
ARCO and BPXA, to inquire what affect increased NGL blending would
have on ultimate recovery from Prudhoe Bay. The two operators
offered quite divergent views. ARCO stated that increased blending
would add approximately 90 million barrels of additional recovery,
principally in the form of NGLs. BPXA stated that increased
blending would reduce the amount of MI available for enhanced oil
recovery, which could be used to recover an additional 100 to 200
million barrels of oil. Because of these differences, the
commission decided to hold a hearing to further investigate NGL
thru-put, MI utilization and ultimate recovery from Prudhoe Bay.
The hearing was scheduled for May.
In February 1995, Alyeska approved the new blending limits. On
February 9, ARCO increased NGL output to meet the new criteria.
BPXA responded by restricting the volume of NGLs blended with
Prudhoe Bay crude at Skid 50. The result was an impasse with NGL
blending remaining unchanged and both companies petitioning the
commission for intervention.
The commission's public hearing began on May 16 and ran through
June 1, 1995. They reconvened the hearing on June 20 & 21 to allow
rebuttal testimony. Post hearing briefs were required by June 30.
The commission rendered its decision, Conservation Order No. 360,
on August 9, 1995. Hearing participants included ARCO, BPXA,
Exxon, Phillips, Shell, Mobile, Texaco, Chevron, Amarada Hess,
Marathon, Yukon Pacific, DNR and the Department of Revenue.
Mr. Johnston directed attention to some of the conclusions reached
in Conservation Order No. 360 which are:
No. 6. Competition exists between the production of blended
NGLs and MIs, but facility upgrade options are available to reduce
or eliminate this competition.
No. 8. The working interest owners disagree about how their
property and contractual arrangements protect the correlative
rights of both the oil rim owner and the gas cap owners to produce
their just and equitable share of oil and gas without waste. This
is possible because of the separate and disparate equity interest
between the oil rim PA and the gas cap PA within the Prudhoe Bay
reservoir.
No. 9. It appears that all persons' correlative rights will
best be protected by complete integration of interests in the
reservoir under AS 31.05.110.
No. 12. ARCO and BPXA agree that current production practices
are producing physical waste from the Prudhoe Bay reservoir but
disagree why. Current property and contractual arrangements
governing operation and development of the Prudhoe Bay reservoir
are inadequate to prevent and may promote physical waste.
No. 16. At least in the short term, the quantity and rate of
production of oil and gas most likely to prevent waste and ensure
greater ultimate recovery is to blend for sale the maximum
allowable volume of NGLs.
No. 18. Sufficient evidence has been heard regarding the
effects of property and contractual arrangements on Prudhoe Bay
development and operation to convince the commission that the next
phase of these proceedings should be more focused on the general
investigation previously anticipated. It appears that more
complete unitization and integration of interest in the Prudhoe Bay
oil pool will be necessary to prevent waste, ensure greater
ultimate recovery of oil and gas, and protect the correlative
rights. Consequently, in the absence of voluntary efforts, further
hearings in this matter will be directed toward developing a plan
of compulsory unitization.
No. 19. Competition between the gas cap and oil rim has
compromised conservation principles and the development and
operation of the Prudhoe Bay oil pool. If the competitive effects
of disparate equity interests are eliminated, the working interest
owners should be able to recommend a cooperative and uniform plan
of operation and development to prevent waste and ensure a greater
ultimate recovery of oil and gas within the Prudhoe oil pool.
Mr. Johnston reviewed two of the rules of Conservation Order No.
360 which are:
Rule 1: Requires the operators to immediately begin producing
the maximum volume of NGLs that can be tendered to Taps from the
Prudhoe Bay reservoir. This rule expires in one year.
Rule 2: Establishes another hearing date which is currently
scheduled for October 24 to begin developing a plan for compulsory
unitization of the Prudhoe Bay reservoir. The hearing may be
postponed if the owners are voluntarily working to integrate the
separate and competing equities of the gas cap and oil rim.
Mr. Johnston informed the committee that there are two applications
for rehearing of Conservation Order No. 360 pending before the
commission. One has been filed by BPXA and the other by Exxon.
Concluding his direct testimony, Mr. Johnston introduced
Commissioner Russ Douglas, and then stated he would take questions
from the committee.
Number 170
SENATOR HALFORD inquired as to the present status of requiring
operators to produce the maximum volume of NGLs into the line. MR.
JOHNSTON responded that they have received word that the operators
are abiding by the order and NGLs being sent down the pipeline have
increased. He thought it was in the 70,000 plus range.
Number 184
SENATOR FRANK asked how they monitor this so that they know the
operators are complying with the order. MR. JOHNSTON replied that
they have inspectors out in the field to verify, but at this
particular point, they are relying on the operators to monitor
themselves. He noted that ARCO is the operator of the central gas
facility where the NGLs are produced and they are in control of
that process. BPXA is in control where the NGLs are blended with
the Prudhoe Bay crude oil.
Number 192
SENATOR LINCOLN said she noted from the testimony that there could
be a possible increase of 20,000 additional barrels of NGLs a day,
and she asked if there was any kind of time frame for determining
when that will peak out. MR. JOHNSTON replied that the question
was not an easy one to answer because the amount of NGLs that can
be produced and blended is also a factor of the amount of oil that
is being produced on a daily basis. The order directs the
operators to increase the blending rate, so, presumably, if there
was a cutback in oil rate, the percentage of NGLs would still be
increased over what would have taken place prior to this order. He
also pointed out that increasing NGLs is a process that takes a
little bit of time to unfold.
Number 220
SENATOR FRANK asked if the effort is to get the companies to
voluntarily agree to a unitization of the entire Prudhoe Bay field.
MR. JOHNSTON answered that they would like to see the separate and
disparate equity interests that exist between the gas cap and the
oil rim no longer exist. Instead, they would like to see that
there be a common driver within the reservoir so that there is not
a built-in incentive to produce gas or to produce oil. This is
based upon the assumption that the current practices they are
seeing right now, which is causing competition between the
production of NGLs versus the production of oil via the enhanced
oil recovery process of injecting MI back into the reservoir, is
causing not the most optimum development plan being put forth by
the operators. Testimony at the hearings was that waste was
occurring, that ultimate recovery was being affected.
Number 275
SENATOR FRANK asked if the commission's role was to protect the
state's royalty interest or the state's general interest, and if
there is any conflict there. MR. JOHNSTON replied that the
commission is there to protect the reservoir, to ensure that that
reservoir is properly developed. In that process, they do try to
protect the correlative rights of BP, ARCO and the state of Alaska.
He noted that nothing in the AOGCC's statutes really points to
considering economics, but it does talk about good oil field
engineering practices. So, even though the statute does not talk
directly to economics, he thinks it is strongly implied.
Number 295
SENATOR FRANK inquired as to the current number of units in Prudhoe
Bay. MR. JOHNSTON responded that DNR and the Alaska Oil & Gas
Conservation Commission have different concepts of "units." The
property at Prudhoe Bay has been unitized where multiple leases
have been combined together and are managing as if they were two
properties: the gas cap and oil revenue. The commission would
like to see these individual leases brought together and managed as
if one property, where there is a common equity that exists between
the gas cap and the oil rim.
SENATOR FRANK asked if the best way to accomplish the unitization
was to allow the companies to voluntarily negotiate that rather
than imposing something that may not be as good as a negotiated
agreement. MR. JOHNSTON replied that in his opinion, voluntary
efforts are the best way to go. He said the plan at Prudhoe Bay
worked very well for many years, but today they are beginning to
see the conflict that is developing between the gas cap and oil
rim.
Number 340
SENATOR LEMAN asked if the two were combined, wouldn't the series
of percentages be an ever changing thing, and if there wasn't some
way to come up with a methodology that would provide equity. MR.
JOHNSTON answered that he believes there is, and he observed that
this has been seen in other fields in Alaska such as Point
McIntyre, which has a gas cap and is unitized under one equity.
There are not separate equities for the gas cap and for the oil
rim.
Number 365
SENATOR HALFORD asked if there are other jurisdictions that have a
similar leasing system to what exists at Prudhoe Bay: unitization
that is not complete. MR. JOHNSTON said the participants in the
hearing were asked if they could refer to any other field in the
U.S. where a dual equity like this existed, and they could not
refer to another example of a reservoir that had this split.
SENATOR HALFORD asked if the statutory framework actually allows
for what exists at Prudhoe Bay. MR. JOHNSTON answered that in
looking at the statute, a reservoir can be developed without
unitization; the properties do not have to be integrated. The only
time that you have to integrate is if you start violating
conservation principles. He further explained that the commission
does not feel that Prudhoe Bay has been fully unitized, although
there has been an attempt. The property rights have been
integrated as it pertains to the gas, and they have unitized as it
pertains to the oil, but, essentially, two properties have been
created.
Number 435
SENATOR PEARCE commented that in 1992 she sponsored a bill in which
the only change made was that the chairman of the commission cannot
succeed himself or herself, but as a part of that, there were long
and involved discussions over whether or not the commission should
be allowed to regulate, not only for conservation purposes, but
also for economic purposes. The problem with the statute is that
the commission is given jurisdiction and authority to carry out the
purposes of the chapter, but there is never a purposes section in
a chapter. A policy decision was made in 1992 by the legislature
and the administration not to add economics to the powers and
duties of the commission. She said that since they chose not to
put it in the statute that it is silent and there is not a common
thread of economic recovery throughout the statute. MR. JOHNSTON
agreed that there are not specific references to economics in the
statute, although they are sensitive to those cites and they look
at it as to what constitutes good oil field engineering practices.
SENATOR PEARCE responded that that was good common sense, not
economic sense, but what she is talking about is that they are not
there to maximize the state's take from an oil field by deciding
that they are going to lower the take now to raise it later, or
vice versa.
Number 510
SENATOR HALFORD observed that from the whole history of this
commission, economics has always been a thread that has been there;
it doesn't have to be stated directly. He questioned what is
being conserved if there is no economics.
Number 545
SENATOR LEMAN asked Mr. Johnston if he had any comments on the
jurisdiction argument, other than just to acknowledge that it
exists. MR. JOHNSTON said there have been some questions of
jurisdiction, and on those questions the commission has already
ruled that clearly they do have jurisdiction in this regard. They
have jurisdiction over voluntary units on state lands, federal
lands, etc.
SENATOR LEMAN inquired if it was possible that there is overlapping
jurisdiction with DNR. MR. JOHNSTON responded that if DNR renders
a decision that is in direct conflict with the commission's, it may
be a decision that only the courts can render, or it may be that
the legislature may want to clarify its intent. He pointed out
there is some overlapping language in the two statutes.
Number 645
SENATOR HALFORD asked if the commission has the independent
authority to hire counsel and MR. JOHNSTON clarified that the
statute says the Department of Law will provide full-time legal
counsel to them, but that they have the right to contract. SENATOR
HALFORD pointed out that it could be the ultimate question if there
is conflict between DNR and the commission and the attorney general
represents both of them.
Number 610
SENATOR LEMAN thanked Mr. Johnston for his participation in the
hearing and then invited Ken Boyd to make his presentation.
KEN BOYD, Director, Division of Oil & Gas, Department of Natural
Resources, stated that DNR's hearing is ongoing so there is a fair
constraint on what he can say.
Mr. Boyd said DNR held hearings in August, and on October 3 there
will be closing oral statements by the participants, as well as an
opportunity for the public to comment, with the written public
comment period closing on October 13. After that, the commission
will render its decision.
TAPE 95-61, SIDE B
Number 001
Mr. Boyd commented that with all of the testimony in these
hearings, he has to believe that somebody believes that there is an
authority question here, having spent this much time, money and
effort on it. He said the authority question is one that
Commissioner Shively would like to see addressed in a separate
hearing and would like to address personally. SENATOR LEMAN said
when the timing is appropriate, the committee would be interested
in airing the authority question and having Commissioner Shively's
input.
Number 020
SENATOR FRANK asked if DNR's hearings were addressing the same
issues as AOGCC. MR. BOYD responded that some of their issues are
undoubtedly the same, and they have built on the commission's
hearing and went off in a different direction, incorporating some
of the same things. He also clarified that unitization is not part
of their current hearing, instead it focuses more on the side of
the NGLs and MI. However, when the commission does have a hearing
on unitization, DNR may become involved or have a separate hearing.
Number 050
SENATOR LEMAN voiced his concern that there appears to be a
duplication of effort which means a duplication of a lot of money
and time for those who are participating. He asked if it really
makes sense to have a duplication of effort and if there is a need
to streamline. MR. BOYD agreed that there was some duplication and
when dealing with this kind of issue there is some repetition. DNR
did incorporate the AOGCC testimony into their hearing.
Number 065
SENATOR PEARCE asked if Mr. Boyd would do a walk through from a
lease sale, exploration, and announcement of a discovery, and then
what happens in what order. MR. BOYD explained there is a lease
sale and they occur in 3 mile by 3 mile blocks, with a number of
companies bidding on all these tracts. When the bidding is done,
there is a number of leases and the companies get together with the
state and make a decision that it would be in the best interest of
everybody to unitize it. In other words, to take the interest and
decide what's under all these leases. Then as to positions of
lease ownership, to divide this up into a unit that has a position
of ownership. Instead of spending individual resources and
developing each individual well, it makes sense to pool the
resources, drill common wells and share the difference based on
ownership. Those decisions are made through unit agreements and
negotiation. The department has discussions with the unit owners
as to what the production from each of the individual pieces of the
unit will be.
Number 125
SENATOR PEARCE asked if when the companies bring to DNR a
unitization agreement to produce a particular pool, does DNR have
the ability to say that a company, such as BP, should own 35
percent instead of 40 percent. MR. BOYD responded it is more to
the ownership of how much oil is under the particular tract, not so
much who owns what. He also acknowledged that there can't be
production until there is a signed unitization agreement. There
also must be an operating agreement signed by the operator and DNR.
Number 155
SENATOR LEMAN thanked Mr. Boyd for appearing before the committee
and stated the next item on the agenda would be an overview of work
sessions that have been held during the interim on various issues
of interest to the committee.
ANNETTE KREITZER, staff to the Senate Resources Committee, gave
brief background information on the gathering of information
contained in the Best Interest Finding and Permitting Report. She
stressed that the report is her interpretation of the anecdotal
comments of those who were interviewed and those who attended the
work sessions. The purpose of the report is to bring the
permitting issue and the areawide best interest finding issue to
the committee's attention. She noted that there are two slightly
different viewpoints at this time, and there may be more as the
issue of a best interest finding is discussed further.
Ms. Kreitzer pointed out that several bills passed recently by the
legislature, such as SB 238 and SB 308, began to deal with the oil
and gas lease sale process, the hearings that go on, the coastal
zone process. However, there is some concern that the hearing
process adopted in SB 238 has been lengthening the permitting
process with no real gain or real value added to the process.
There may not be the value in the addition of that hearing process
because the companies are having to address the same facts over and
over, and that is a factor of having the same land up for lease
over and over again, and she believes that is why this best
interest finding idea has come to the forefront.
In checking with Jack Chenoweth, legislative counsel, he stated
there were no prohibitions, but he said it depends on what the
final idea would like if it were to come before the committee for
consideration.
Ms. Kreitzer also noted that Jim Eason, a consultant to the
Resources Committee last session, mentioned a bifurcated best
interest finding process as another option to consider.
Number 260
SENATOR PEARCE requested that Frank Rue comment on a reference made
in the report to a question posed by Fish and Game to DNR relating
to isostatic rebound as a source of geologic instability, which was
a concern contained in the preliminary findings for the Yakataga
sale.
FRANK RUE, Commissioner, Department of Fish & Game, testifying via
the teleconference network from Juneau, responded that it was not
the most significant concern they had. In the situation of the
Bering Glacier retreating at approximately 100 feet a day and where
there is very active glaciation, isostatic rebound is a factor in
earthquakes in other parts of the world. The question was easily
dispensed with by DNR who said the rate of rebound is very slow.
DNR has got information on how rapidly the land is rebounding, and
they were able to deal with the question very simply, he said.
Whether it is a good example of the kind of question they should
raise or not, he thinks it is worth looking at. He added that DNR
dealt with the question and it did not become a major point of
contention.
Number 300
ANNETTE KREITZER, in clarifying the reference made to the isostatic
rebound question in the report, said that is not one big thing that
is a problem in the permitting process or best interest finding
process, it is a lot of small things. She said it may not be a
typical question that Department of Fish and Game employees ask,
but it adds to the costs of all these processes that the companies
have to go through.
Continuing with the report and the best interest finding process,
Ms. Kreitzer said she noted there was some discussion about whether
a five-year oil and gas lease sale at this point in the state's
history is too long a period of time. She corrected a
mischaracterization in the report - at least one small company who
faxed her said that they still feel that five years is too long.
Addressing the permitting issue, Ms. Kreitzer said there was
discussion during the work sessions on how important permitting is
in factors of decisions about investing in Alaska. There are
questions about the ability of government departments to be
efficient in permitting matters. Instead of phoning or faxing for
additional information, letters are sent to permittees resulting in
additional time delays.
There is also concern that there needs to be good interaction
between state and federal governments in the issuance of permits.
Memorandums of Understanding to facilitate interaction between
state and federal agencies did exist at one time and they may need
to be updated.
There is concern that a lot more days are being added on to the
permitting process because of the stopping the clock to answer
questions asked in letters.
There is concern that there isn't comment from agencies until the
last day for review.
There was consensus that the Alaska Coastal Management program
works pretty well because of its consensus nature. It was felt
that it was helpful that it forces the other agencies to follow a
deadline.
There was consensus that inexperienced staff, plus reorganization
at DEC may be hampering the Air Quality Permitting program.
There was some concern that the Coastal Zone standards could either
be tightened or that some of those activities could be added to the
"B" List to expedite the permitting.
The final issue of concern was shared costs. Departments, because
of budgetary concerns, will enter into agreements with companies to
expedite permits. Ms. Kreitzer said she tagged it onto the report
as something that is happening and may be something the committee
would want to look at further.
Number 470
SENATOR LEMAN stated the committee would move on to the next item
on the agenda which was areawide best interest findings.
DAVID SUTTER, Land Manager, ARCO Alaska, informed the committee
that the presentation he was making before the committee was almost
identical to the presentation he made to Oil & Gas Policy Council
approximately four weeks ago.
Mr. Sutter said one of the problems with exploration and with the
leasing program is that there hasn't been a lease sale in almost
two years. Secondly, the lease sales that are scheduled are broken
up with one scheduled for this year and the next one not for
another two years. This means waiting until two sales occur before
being able to lease a prospect.
Also, there is the economic factor, and they would not want to go
out and spend the kind of money it takes to drill on the North
Slope if they knew they were going to eventually own only half of
the prospect. He said it would be better for the company to just
wait and get the entire prospect leased up before they invest money
to drill. As a result, the company goes and leases in other parts
of the world.
Mr. Sutter outlined the following recommendations made to the Oil
& Gas Policy Council which include: identifying core areas in the
state of Alaska that are already established as far as oil and gas
producing areas; DNR conduct an areawide best interest finding for
these areas initially; update the best interest finding at least
every five years; the core areas would be offered for lease on an
annual basis; and delete the acreage in the core areas that had
objections.
TAPE 95-62, SIDE A
Number 015
SENATOR FRANK commented that he would be interested, at some future
time, for the committee to have a briefing on what the state has
under lease, how many leases are under production or part of a unit
under production, and the status of all the leases. He said he's
under the impression that there are many, many leases that aren't
being produced, etc., and he wonders why. MR. SUTTER responded
that one of the concessions ARCO has talked about is that the lease
terms could be shortened by going to an areawide lease sale. That
would force the oil companies to get out there and drill or do
something before the primary term expires.
SENATOR FRANK asked if the bonus bid issue was a good idea versus
some other system that doesn't require that kind of up-front
expenditure. MR. SUTTER answered that he would not change the
current system, which is the sealed bonus bid, because he thinks it
is the best one going in trying to maximize revenues for the state
of Alaska. He suggested shortening the lease term before worrying
about changing the bonus system.
Number 050
SENATOR LEMAN said it was the committee's express interest two
years ago to get more exploration going sooner rather than later,
and to identify things that could be done and begin a discussion on
that.
Mr. SUTTER reiterated that the recommendation to shorten the lease
term is conditioned upon having an areawide lease sale. He
cautioned that just shortening the term, but staying with the
current program is going to scare even more people out of the
state.
Number 070
SENATOR FRANK asked what the sense was in DNR having leases within
a prospect held at two different times. MR. SUTTER responded that
a lot of it is the way the industry has nominated it, a lot of it
is based on what becomes available at the time it's offered. Also,
a lot of it has do with just the manpower DNR needs to be able to
do the best interest finding for that lease, as well as being able
to clear the title on it. He also pointed out that it is the
industry's responsibility in dealing with DNR to convey what they
are interested in and let them know what level of interest they
have. He acknowledged that in the past they probably haven't been
very good at doing that.
Number 175
MR. SUTTER also spoke to two leases that were issued in Kuparuk:
one issued prior to the field discovery and one that was issued
about four years. He noted there were 10 pages of stipulations
added to one lease four years ago, and he believes the place for
the stipulations is in regulations so that they apply to all
leases, not just individual tracts. SENATOR PEARCE questioned how
that kind of system could work, as well as making it conform with
coastal zone management. She said it would require constantly
changing the regs to come up with whatever the latest request is.
SENATOR HALFORD agreed that there are probably too many
stipulations, but he said in an ideal world they are probably a lot
fairer than added regulations after the fact which change the
rules.
SENATOR LEMAN questioned how long it would take to go through the
regulation process in a nonemergency situation. KEN BOYD responded
that it would take anywhere from six to eight months or longer.
SENATOR PEARCE asked how DNR gets comments from the oil companies
on stipulations that are part of a lease sale plan. KEN BOYD
responded that it is a continuing operation of talk and
conversation, but, formally, it is through the finding process
where they are developing what mitigating measures are going to be
included in the lease sale and there is the opportunity to comment.
Number 245
In his final comments MR. SUTTER said the recommendation from ARCO
is that not only is an areawide best interest finding needed, but
it should go one step further with areawide leasing. He said his
recommendation is to not only give DNR the flexibility to do their
job, but to give them the appropriations to do so.
Number 275
SENATOR HALFORD agreed that DNR should have flexibility to do their
job, but he pointed out there are two kinds of flexibility. One
flexibility that some people are concerned with is the flexibility
for different interpretations after the fact. He thinks the kind
of things that do the most good in terms of change are things that
are applied universally to all of the competitors, that encourage
the competitors to fight it out to see who wins, not the things
that are done after the fact for one or the other competitor.
Concluding, MR. SUTTER stressed that DNR is short on staffing and
an areawide leasing program is going to tax their staff
considerably.
Number 340
KEN BOYD noted that Commissioner Shively is interested in getting
the lands leased as fast as possible, but still with the
responsibility that we have for that ownership and to mitigate
properly. The thing that slows leasing down is the finding, and
the passage of SB 308 lengthened the process by requiring a
preliminary finding. He added that DNR believes that at least
areawide findings are something that can probably work.
In response to Senator Frank's request earlier in the meeting that
the committee be briefed on the status of current leases, upcoming
lease sales, etc., KEN BOYD outlined the following:
Sale 80: This is the Shaviovik sale. The finding came out
one week ago, and the sale will be held on December 5.
Sale 79: It was scheduled to held in October, however,
Commissioner Shively has not yet decided when he wants to issue
that finding and when to hold that sale.
Sale 85 A: It is a reoffering sale in the Cook Inlet
scheduled for November 29. It will go to a preliminary finding
early next year. The public will have 60 days to comment on the
finding once it is created. A number of acres have been added back
in the Caribou Hills area at the request of SIRI and Union Texas
Petroleum. However, there is still opposition because the local
people are concerned about damage to their aquifer from oil and gas
development, and there are discussions going on in the area to
resolve that issue.
Mr. Boyd also noted a large North Slope sale is scheduled for 1997.
Number 565
SENATOR PEARCE asked for a clarification on a complaint from
persons in Cordova to the Coastal Policy Council relating to Sale
79. DIANE MAYER, Director, Division of Governmental Coordination,
acknowledged that several citizens petitioned the council regarding
DNR's consistency determination for Lease Sale 79 and the council
determined that those appeals didn't have standing under the law.
One individual took that decision to court to see if the council
erred in making that decision, and that is in court right now.
TAPE 95-62, SIDE B
Number 045
SENATOR PEARCE asked Mr. Boyd if the status of that suit has had
any bearing on Commissioner Shiveley's indecision so far on Lease
Sale 79. KEN BOYD responded that he didn't think so, but they have
been tracking it as to whether it stops any part of the process,
and so far, it has not.
Number 055
SENATOR LEMAN stated the final item on the agenda was a
presentation by Steve Porter of ARCO and Brad Penn of Marathon Oil
on resource permitting.
STEVE PORTER, Director, Exploration Permits Compliance, ARCO
Alaska, said the goal of oil and gas development in Alaska is to
identify those areas that the company wants to lease, that the
public wants to lease, that the representative government wants to
lease to create a lease sale process that is efficient, protects
the public, protects the environment, and encourages the oil and
gas industry through incentives. The oil and gas industry is not
concerned with the standards that are placed before it in terms of
compliance with those standards. It is not the standards that seem
to be the problem, but, rather, the methodology on how the
standards are applied to a specific application.
He noted that the energy facility standards in statute give the
state and the industry very specific support for how to go about
developing a field. However, he pointed out that sometimes the
process gets slowed down through the state's process, and sometimes
there are situations where the owners can't agree on facility
relationships. Sometimes the industry will be in conflict and when
they can't resolve the conflict, they may move forward with a
situation that is not in their best interest or in the state's best
interest just because they can't resolve the conflict.
Addressing exploration and process issues, Mr. Porter said from a
coastal zone consistency standpoint and from an operations
standpoint, the very first thing a company must do is to inform the
public and the agencies what their plan is and to receive feedback
from that. The public hearing process is a method of feedback and
the identification of concerns, but the one thing that the process
fails to do is that it is not a consensus building process; it is
an advocacy type of a process. He suggested there has to be a
different methodology for moving forward; there has to be some type
of consensus building process. Once all of the feedback and all
the analysis is received, at that point, a company makes a sound
decision and they either move forward or don't.
Speaking to the Coastal Policy Council and the Alaska Coastal
Management program, Mr. Porter said it is a good program, but it is
a complex process that creates enough uncertainty in the oil
industry that it makes companies reticent to come to Alaska to
spend their money. He suggested the industry would like to see a
less complex process with certainty in that process.
Number 210
SENATOR PEARCE said the federal act is the underlying act in the
coastal zone process, and she asked if some state within the United
States has done a better job in building this process. MR. PORTER
responded that coastal zone management is having difficulty dealing
with problems, so the question is if there is a better way to deal
with conflict. Florida has created a mediator type of process
where the two sides identify a mediator and the mediator sits down
with the parties and helps them try to come to a consensus. If the
parties can't come to a consensus, the mediator becomes the
arbitrator of the decision. However, the Florida law does not
become effective until October, so there is no experience with the
process.
Number 265
MR. PORTER said he has had concerns with the Coastal Policy Council
because there has been a time where there has been a
misunderstanding and mistrust of exactly what the Coastal Policy
Council is supposed to do. He said if they waste thousands of
dollars reviewing, analyzing and making a decision on every single
petition that comes to them, and then, if every single petition
still goes to court, they didn't help anything. The Coastal Policy
Council became a waste of time; it became one more loop in the
process without adding any value.
He pointed out that the Coastal Zone Management Act is up for
reauthorization this year, and he suggested there is the
opportunity to try all kinds of things to see what works and, in
essence, lead the nation in coastal management issues.
SENATOR LEMAN commented that if the Coastal Zone Management Act is
up for reauthorization, this is the time for the state and the
industry to be involved and make some changes. MR. PORTER said he
spends a lot of his time basically filing permits, and, if the
complexity of the process could be minimized, they might have more
time for the other. He said the federal law provides enough
latitude to do a lot at the state level, and they haven't
identified anything specific in the federal law that needs to be
changed, so he thinks the focus should be on the state program.
Number 350
MR. PORTER then outlined the various permits required for their
Bufflehead Project: there is an AOGCC permit to drill, a BLM
permit to drill; an oil spill plan that cost $20,000 to prepare; an
environmental assessment for a permit for the right-of-way which
cost $20,000 to prepare; the permit issued by the U.S. Fish and
Wildlife Service which cost $5,000; the coastal resource clearance
cost a couple of thousand dollars; and the air quality control
permit which cost $3,500.
Mr. Porter pointed out that the air quality control permit is about
16 hours worth of work for the agency that is taking about 40 hours
to complete, and the oil and gas industry is being billed on an
hourly basis. He said he thinks there are better ways to create an
efficient operation that encourages efficiency and addresses some
of the struggles the industry has with the overhead. He noted
there has been talk of going to a fee basis, and he suggested going
to a contractor basis also where the agency would choose a list of
contractors that are reviewers for permits, and to let the oil
industry choose the contractor. That brings the quality of the
contracts up, it brings the quality of the work up and it brings
the costs down.
Number 500
SENATOR LEMAN, in speaking to the air quality program, said the
Legislative Budget & Audit Committee has said it is premature to be
auditing a program that is just getting started, but he will be
discussing the issue with Commissioner Burton to make sure that DEC
is not inappropriately charging or is being inconsistent in those
charges.
MR. PORTER pointed out that costs for the permitting process itself
are probably in excess of $100,000 per well.
As a recommendation on a way the process can change, MR. PORTER
suggested developing a single plan of operations that actually has
all the information for all the permits and is in chronological
order and makes sense. Instead of producing 15 permits that all
duplicate themselves on a lot of the information, he suggested
having a plan of operations, but also keep all the regulations in
place, keep all the environmental concerns in place and keep all
the reviewers in place in terms of the agencies.
SENATOR LEMAN agreed that those are the types of things that need
to be looked at in finding a way to make the process easier for the
reviewers and easier for the people applying for the permits.
Returning to the Bufflehead project, MR. PORTER said it started in
May 1994, and it is anticipated that they will start drilling the
well this week. He attributed a lot of the problem in taking that
length of time in getting to this point on the federal agencies,
not the state agencies. He suggested getting the federal agencies
to interact with the state's process and to get them to buy off on
our time lines up front in order to give the industry some
certainty about how to get the permits completed. He added that on
the whole, the state agencies are more responsive and understanding
to the industry's needs.
TAPE 95-63, SIDE A
Number 005
Concluding his presentation, MR. PORTER also suggested that one of
the things that should be examined and should be encouraged is
putting the permitting process on the Internet because a lot of the
concern that comes from their remote districts is the 10 to 15-day
turnaround time and this would help speed up the process.
Number 065
BRAD PENN, representing Marathon Oil Co. in Anchorage, noted he is
also chairman of AOGA's Land, Exploration & Operations Committee,
and he stated AOGA is supportive of the areawide best interest
finding. The specifics of lease terms and whether it's an entire
areawide offering or specific areas have not yet been addressed by
the committee.
In addressing the permitting process, Mr. Penn said he thinks the
process is good in intent to have DGC be the coordinating agency to
go out and collect comments. However, he believes the problem is
that their authority is just in regulation and not in statute.
There is a 50- to 55-day time frame for projects for coastal zone
consistency review, but the abuses of the system come when an
agency will ask a valid question and the clock is stopped. He
suggested that if DGC is going to be the coordinating agency,
besides giving them tough people to enforce the regulation, give
them some teeth in what they are enforcing as far as coordinating
a response under the coastal zone consistency determination.
Mr. Penn also spoke to performance standards. He said no matter
whether you drill a well in the Kenai gas field or Clam Gulch or
Beaver Creek, there is a certain set of standards that are similar
for that well. He suggested one thing that might work is to move
the approval of an exploratory well on to what is called the "B
list," the general concurrence that that activity would be approved
if they met these performance standards, and the only time it would
be necessary to ask for another permit would be if they were going
to exceed those standards for one reason or another.
Number 145
SENATOR LEMAN said he thought there was a general permit to which
you attach certain specifics. MR. PENN said what he was suggesting
was that list be expanded to include something like exploratory
wells, because right now just getting the minor things on the list
has been a battle.
Number 180
DIANE MAYER, Director, Division of Governmental Coordination, said
she thought the presentations by the previous speakers of what's
happening had been fairly accurate, and some of the suggestions
they brought forward have merit.
Ms. Mayer said the coastal program has a progression to it in that
it does have a lot of complexity. The consistency process which
was put into the program had the real single objective of trying to
bring the agencies together with their permit authorities to look
at a proposal at the same time. They established for Alaska, at
least in coastal areas, a project-based review, which was a real
leap forward to solve a lot of the problems of redundancy.
In assessing the program, along with that design and now its
implementation, there has been a lot of expectation with different
parties about what they thought it was or how it should work.
Also, some of the practices and processes put in place, while they
were really innovative and made a big leap forward in their time,
have become more formalized and actually part of the bureaucracy.
There have been shifts largely because of the petition process and
the appeal mechanism. She said they are looking at the program
overall and doing an assessment of what is working, what isn't
working, what needs to be updated, etc.
Speaking to suggestions that have been made during the meeting, Ms.
Mayer said she is completely open to suggestions and is willing to
take a hard look the program and how it might be streamlined and
made more effective.
Ms. Mayer also pointed out that the whole program was initially
authorized under the Federal Coastal Zone Management Act, and a lot
of the problems they are struggling with are just legal or
regulatory things in the state law, and they can do a lot by really
fixing their program. She added that the feds essentially give the
state an enormous amount of power and a considerable amount of
money. For instance, right now, with a federal grant, DGC has a
person onboard to basically work out and bring up to date their MOU
package and make sure that their relationship and understanding
with federal agencies is clear.
Number 290
AL BOHN, Manager, Air Quality Permitting, Department of
Environmental Conservation, said that division has undergone a
reorganization and there are now two layers of management that are
gone in the permitting process, so the whole process has become
more streamlined.
Addressing Mr. Porter's concern that an air quality permit for the
Bufflehead project, which he said should have taken the agency 16
hours instead of the 40 hours they were billed for, Mr. Bohn said
he is now reviewing all timesheets, and, if this had crossed his
desk, he would have investigated it much further, but he also
pointed out that Mr. Porter had the opportunity to dispute some or
all of the charges, so there was some recourse for him if he felt
these charges were out of line.
Mr. Bohn said he is aware of Mr. Penn's concern with the Kenai gas
wells, and he offered to work with Mr. Penn on some other
strategies to avoid another occurrence of any kind of a problem
that he has.
Since reorganization of the air quality division, Mr. Bohn said
they have tightened up their procedures and streamlined them to a
great effect. He has experienced staff averaging 7.2 years of
industry experience. Their core group of nine people is currently
servicing 238 permittees, and looking toward the implementation of
the new permit program sometime in November after EPA approval,
these same nine people will be servicing somewhere between 450 and
600 permittees. He said they have to establish streamlined
procedures, and they will become more of an assembly line rather
than a piece work shop that they were in the past, which will allow
some economies in processing these applications in a timely
fashion.
Number 375
SENATOR LEMAN asked if there is a system in place now so that they
can say with confidence that the charges for an air quality permit
are going to be reasonable. MR. BOHN responded that it is not a
documented system; each review is done on a case-by-case basis.
With the numbers that were used when developing the original permit
fees for the current operating permit program, the number of hours
that they estimated for retainer purposes generally work out pretty
close to the time it should actually take, give or take certain
spins on things. He also acknowledged that he sets tough deadlines
on issuing permits.
Number 440
Responding to an inquiry from Senator Frank, MR. BOHN explained
that there are nine people in the permitting group since the
reorganization. In addition to the air quality permit group, there
is also a compliance and develop group under the air quality
maintenance section.
SENATOR FRANK noted that at the time the air quality standards went
into effect, the department requested approximately 43 new people,
which the legislature resisted, and he asked how many were
approved. MR. BOHN said there are currently 32 employees in the
division.
Number 500
FRANK RUE, Commissioner, Department of Fish & Game, stated he
appreciates the efforts of both Mr. Porter and Mr. Penn to point
out some of the positive things that can be done and things that
can be avoided. Some of the ideas that have been floated during
the meeting are things that they have been working on and will
continue working on. He agreed that issues with the Coastal Policy
Council need to be worked out, but he added that it is really an
issue of the public and district having a voice in the process that
agencies are already in. He also expressed his interest in
discussing specific issues with either Mr. Penn or Mr. Porter
because he does not want to be treating industries differently than
he would the public.
Number 565
In his closing comments before adjourning the meeting, SENATOR
LEMAN thanked the participants and encouraged them to share
highlights of the meeting with their colleagues, and he stressed
that the committee is serious about wanting to make some of these
changes that will make government friendlier, more efficient and
will get things done at less cost. He then adjourned the meeting
at approximately 2:00 p.m.
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