Legislature(2005 - 2006)BUTROVICH 205
01/31/2005 03:30 PM Senate RESOURCES
| Audio | Topic |
|---|---|
| Start | |
| Overview: by Mark Myers, Director, Division of Oil and Gas, Department of Natural Resources (dnr) | |
| Adjourn |
* first hearing in first committee of referral
+ teleconferenced
= bill was previously heard/scheduled
+ teleconferenced
= bill was previously heard/scheduled
| = | SB 69 | ||
ALASKA STATE LEGISLATURE
SENATE RESOURCES STANDING COMMITTEE
January 31, 2005
3:37 p.m.
MEMBERS PRESENT
Senator Thomas Wagoner, Chair
Senator Bert Stedman
Senator Kim Elton
Senator Ben Stevens
MEMBERS ABSENT
Senator Ralph Seekins, Vice Chair
Senator Fred Dyson
Senator Gretchen Guess
COMMITTEE CALENDAR
OVERVIEW: State Gas and Oil by Mark Myers, Director, Division of
Oil and Gas, Department of Natural Resources (DNR)
SENATE BILL NO. 69
"An Act making special appropriations to promote the opening of
the Arctic National Wildlife Refuge for oil and gas exploration
and development; and providing for an effective date."
SCHEDULED BUT NOT HEARD
^OVERVIEW: Department of Natural Resources (DNR), Department of
Oil and Gas, by Mark Myers, Director
ACTION NARRATIVE
CHAIR THOMAS WAGONER called the Senate Resources Standing
Committee meeting to order at 3:37:23 PM. Present were Senators
Elton, Stedman and Chair Wagoner. Senator Ben Stevens arrived at
3:43.
3:39:00 PM
^OVERVIEW: by Mark Myers, Director, Division of Oil and Gas,
Department of Natural Resources (DNR)
MR. MYERS presented a power point presentation called, "Alaska
Oil and Gas Activities." The following are some highlights.
He explained that the state gets money from its land in two ways
- as a resource owner through leases and from its powers of
sovereign taxation. The department gets its funds from three
different sources - leasing land, rentals from the land and
royalty money when production occurs on it. Seventy-five percent
of the state's royalty money goes into the General Fund, 25
percent into the Permanent Fund and .5 percent goes into the
School Fund. He said the state received about $1.4 billion in
royalties and $1 billion in taxes this year. The taxes came from
being a property owner, corporate income tax and severance tax.
About 87 percent of state's general unrestricted fund comes from
royalty taxes.
3:43:40 PM
MR. MYERS said that the state's two large fields are
dramatically declining, but more small productive fields have
begun producing to offset that decline. Bringing in new parties
to explore the Basin is critical to bringing on new undiscovered
fields within the declining picture.
3:46:37 PM
High gas prices are the reason revenues are up for the fiscal
year, not declining oil and gas volumes.
3:49:12 PM
MR. MYERS said that in the last 10 years, 27 percent of North
Slope production came from new production. He said that a lot of
units were formed in Cook Inlet in the last few years, which has
resulted in increased exploration activities and more successes
with smaller accumulations of gas. There has also been increased
exploration by new players in response to higher gas prices, but
the big question is if there are sufficient exploration and
discoveries to offset the decline.
3:51:27 PM
He stated that internal state use of gas is highly variable;
more is used in the winter than in the summer. There must be a
surplus and some way to store it. In the past, producers always
had a surplus in their shut-in wells that were reopened in the
winter, but there is barely enough gas to meet needs now and it
gets worse every year. Reservoirs can be used for storage, but
reinjection will add to costs. The Cook Inlet Drilling Summary
for 2004 indicates that it has a nine-year supply, but it is
losing ground.
3:52:52 PM
MR. MYERS said the state is in discussions with three major
producers, TransCanada and Midamerican Holding Corporation. Both
are progressing, but at various paces. The state made two offers
in the producer negotiations. Its initial offer was rejected.
Discussions on the second offer with a different structure are
ongoing. Trying to make the state a partner in a pipeline
project is complex.
Both parties are affected by who controls the rights to build
the pipeline to Canada. There are two possibilities. One is the
Northern Pipeline Act, the treaty rights that Transcanada holds
through their purchase of Foothills. The second is a new built
project through the National Energy Board. It's been reported
that the Governor will decide which approach is reasonable and
allowable and Mr. Myers said he thought that would have an
impact on who actually has the rights in Canada to build this
line.
3:54:40 PM
On the Alaska side, TransCanada has requested a right-of-way
from the State of Alaska and that is being looked at now. It's
also possible for the state to grant them a non-conditional
right-of-way. The state has not had a similar request from the
producers for right-of-way.
3:55:20 PM
CHAIR WAGONER asked for more details on the right-of-way.
MR. MYERS responded that TransCanada already has a conditional
right-of-way from the federal government in Alaska, but it does
not have a state right-of-way. It applied for and requested a
non-conditional right-of-way. In that process, the DNR
Commissioner reviews the application and puts it out for public
comment, which has occurred. He now has to make a final
decision. DNR strongly believes that a non-conditional right-of-
way is not an exclusive right-of-way and another right-of-way
could be applied for along the same route.
3:56:52 PM
CHAIR WAGONER asked if that would preclude Alaska Natural Gas
Development Authority (ANGDA) from receiving its right-of-way
(in addition to TransCanada's).
MR. MYERS replied that Yukon Pacific actually holds a
conditional right-of-way permit for an LNG project. ANGDA could
have a right-of-way, as well. From DNR's perspective, they are
not mutually exclusive.
3:57:10 PM
SENATOR ELTON asked if a non-conditional right-of-way would
allow either TransCanada or the producers to use that right-of-
way.
MR. MYERS replied that that particular right-of-way would be
TransCanada's in this case. The producers could apply for a
separate right-of-way and be granted a separate one - in the
DNR's view.
3:58:36 PM
SENATOR BEN STEVENS asked if they could have the same corridor.
MR. MYERS replied that it could not conflict with TransCanada's
rights along that right-of-way, but the producers could apply
for a separate right-of-way along the same route. It's not
exclusive, but their rights can't be conflicting. This is DNR's
view, not the Department of Law's.
3:58:58 PM
SENATOR ELTON asked if he is suggesting that the state could be
establishing a property right that TransCanada could sell to the
producers.
MR. MYERS answered that the real question is can the state grant
only one highway right-of-way and DNR's view is that it can
grant multiple highway rights-of-way. There is nothing in the
lease language that is de facto exclusive. The counter argument
has been that a conditional right-of-way grants no exclusivity
and, therefore, a non-conditional must be exclusive. But that's
not logical. He said the Joint Pipeline Office is working on
this issue.
3:59:41 PM
MR. MYERS stated that he is working to get data from the Port
Authority to accurately model an economical highway route
project, but the department has not done the same level of
analysis on LNG projects.
4:02:14 PM
SENATOR BEN STEVENS asked where the money is coming from for the
state to do the modeling on the Port Authority. He also asked if
there was any effort by the Port Authority to reimburse the
state for its analysis.
4:02:59 PM
MR. MYERS replied that there are two components to his answer.
The Stranded Gas Act assumes that the state will make
significant concessions to the parties in terms of property tax
relief, royalty evaluation methodologies or any other of a list
of items contained in the Act. The Port Authority has not asked
for any concessions, but it has only asked the state to
understand the project at this point. In that sense, there was
no reason for the Port Authority to be under the Stranded Gas
Act and they believe the project stands on its own. To
understand whether that's true and to weight the benefits of
that versus the benefits of getting reimbursed for its expenses,
but ultimately making concessions in the project, DNR felt it
was necessary to model it using existing staff and travel time.
He needs to acquire as much data as possible from them directly
and to do that, he needs some form of confidentiality. For this
he used an MOU.
4:04:21 PM
In addition, he asked the Legislature for $1.5 million last year
that is not reimbursable to help develop the model, but the
division will far exceed that before the full analysis is done.
If he finds holes in the Port Authority's data, he will need
significantly more money.
4:06:03 PM
He reported that discussions are ongoing with the Federal Energy
Regulatory Commission (FERC), both in Anchorage and in
Washington, D.C., to be adequate for the new pipeline. "No
matter who builds the pipeline, the regulatory structure is
incredibly important to protect Alaska's own internal
interests."
4:08:57 PM
The average estimate of undiscovered conventional gas currently
exceeds 236 TCF, approximately seven times the amount of known
gas reserves on the North Slope. In addition, there are huge
amounts of non-conventional gas, particularly natural gas
hydrates - 100 TCF of known gas hydrates, alone, in Milne,
Prudhoe Bay and Kuparek - all of which is recoverable. Coalbed
methane is also present in large amounts. Every exploration well
has found gas, a very good indication, and a lot of it underlies
existing infrastructure.
4:13:12 PM
The Legislative Budget and Audit Committee has a joint proposal
with the Administration to continue the Methane Hydrate Research
Act for another five years with a cost of $70 million. It would
focus on testing the hydrate resources to see if the reservoir
models are accurate in predicting rates. Progress is being made
in the Interior basins and the USGS has increased its estimates.
4:15:31 PM
CHAIR WAGONER asked if anyone has shown interest in exploring in
the Gulf of Alaska.
MR. MYERS replied no, but that is an area of potential. There is
a lack of source data, because no one has looked hard for gas
potential. To promote new investment he has tried to get new
players through opening up new areas of land. There is a need
for new exploration data and data integration from the new
companies as well as the majors. The department is using a
Department of Energy grant to work with the Oil and Gas
Conservation Commission to get all the well-walking done and to
get it on the web so one can simply download it. He mentioned
that permitting needs to be streamlined. The state needs success
stories so companies can see what is really happening up here.
4:20:15 PM
MR. MYERS stated that maximizing the use of existing
infrastructure and facilities is a critical aspect on the North
Slope. New infrastructure is needed in terms of staging areas,
roads and new drilling sites - to name a few. New equipment and
equipment storage is also needed on the Slope and lighter-weight
rigs. A lot of good ideas come from new companies. Innovative
technologies are being proposed and they should be considered in
Alaska.
4:22:08 PM
The Nenana Basin exploration license area has good quality
partners, Usibelli Energy and Doyon Corporation, who have come
in to try to develop it. The Basin has a good amount of
commercial gas and coal for the Fairbanks market and good long-
term potential. The Copper River Basin has first its new well in
20 years, although it is not on state land.
MR. MYERS related that the division also converted its shallow
gas-leasing program to exploration licensing as a result of HB
531 passing last year. The Kenai Peninsula has had a sale and he
thought it was one of the most underrated basins in North
America. It is gas-prone, but has oil in it also. Opposition
from the fishing industry and environmental organizations has
slowed exploration there.
4:25:07 PM
He reported that he had reopened the settlement with Exxon and
expects a substantial amount of money would be recovered; he is
currently looking at going to arbitration. It is case where
there is a difference in the royalty valuation term. Exxon
believes that their tanker costs ought to be higher and the
state believes the destination value that it receives is
significantly higher than the current market value. The division
has also entered a protest over the recent raising of the TAPS
tariff.
4:26:21 PM
MR. MYERS recapped that a couple of years ago the Legislature
gave audit authority back to DNR and DOR. The numbers on the
audits have gone up slightly, but more important is that they
are much more timely on getting them done and, therefore,
getting caught up with their backlog. In the future, recovered
monies should go down because the audits will cover fewer and
fewer years.
4:26:50 PM
On the coalbed methane issue, the Legislature put a lot of
protections for surface water and private property owners in HB
531 last year that is simply not there in other states. One
significant protection requires the operator, prior to any
production, to designate and implement a water well testing
program to provide baseline data on water quality for AOGCC
approval. Those are statewide protections regardless of land
title. The Mat-Su Valley now has enforceable world-class coalbed
methane standards.
4:29:29 PM
HB 531 also required the DNR commissioner to establish set backs
and noise mitigation measures for compression stations, which is
the largest potential nuisance in coalbed methane operations.
The surface impacts standards are exemplary - in terms of noise,
visual light shield, solid waste, erosion control permanent
erosion and timber harvesting - and production will not be
allowed to occur in densely pop areas. The issues are specific
and easy to understand.
4:31:08 PM
CHAIR WAGONER thanked Mr. Myers for his presentation. He noted
there was no quorum at this time so he would hold SB 69. He
adjourned the meeting at 4:31:37 PM.
NOTE: The meeting was recorded. A copy of the recording may be
obtained by contacting the Senate Records Office at State
Capitol, Room 3, Juneau, Alaska 99801 or calling (907) 465-2870.
After adjournment of the second session of the Twenty-Fourth
Alaska State Legislature this information may be obtained by
contacting the Legislative Reference Library at (907) 465-3808.
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