Legislature(2009 - 2010)BUTROVICH 205
02/09/2009 03:30 PM Senate RESOURCES
| Audio | Topic |
|---|---|
| Start | |
| Alaska Gas Exploration Potential in the Cook Inlet. | |
| Adjourn |
* first hearing in first committee of referral
+ teleconferenced
= bill was previously heard/scheduled
+ teleconferenced
= bill was previously heard/scheduled
| + | TELECONFERENCED | ||
ALASKA STATE LEGISLATURE
SENATE RESOURCES STANDING COMMITTEE
February 9, 2009
3:32 p.m.
MEMBERS PRESENT
Senator Lesil McGuire, Co-Chair
Senator Bill Wielechowski, Co-Chair
Senator Charlie Huggins, Vice Chair
Senator Hollis French
Senator Bert Stedman
Senator Gary Stevens
MEMBERS ABSENT
Senator Thomas Wagoner
OTHER LEGISLATORS PRESENT
Senator Joe Thomas
COMMITTEE CALENDAR
Overview: Alaska Gas Exploration Potential in the Cook Inlet by
Bob Swenson, State Geologist, Division of Geological and
Geophysical Surveys
PREVIOUS COMMITTEE ACTION
No previous action to consider
WITNESS REGISTER
BOB SWENSON, State Geologist and Director
Division of Geological and Geophysical Surveys (DGGS) Department
of Natural Resources (DNR)
POSITION STATEMENT: Presented overview of Cook Inlet gas
exploration.
KEVIN BANKS, Director
Division of Oil and Gas
Department of Natural Resources (DNR)
POSITION STATEMENT: Commented on Cook Inlet gas exploration.
ACTION NARRATIVE
3:32:30 PM
CO-CHAIR BILL WIELECHOWSKI called the Senate Resources Standing
Committee meeting to order at 3:32 p.m. Present at the call to
order were Senators Huggins, Stevens, Stedman, McGuire, French
and Wielechowski.
3:33:42 PM
^Alaska Gas Exploration Potential in the Cook Inlet.
CO-CHAIR WIELECHOWSKI announced the overview of Cook Inlet gas
supplies and exploration development activities.
BOB SWENSON, State Geologist and Director, Division of
Geological and Geophysical Surveys (DGGS), Department of Natural
Resources (DNR), began by commenting on the Mt. Redoubt
eruption. He said the USGS, the University and DGGS are part of
the Alaska Volcano Observatory and some of the fluid movement
recently maxed out the tremor part of their instruments. For the
first time they were able to see the tremors at Mt. Spurr 100
kilometers away. There hasn't been an eruption yet, but they are
still seeing well above background levels.
He said he came to talk to the committee today about gas
exploration potential in the Cook Inlet, a complex basin. The
U.S. Geological Survey (USGS) has come up with a series of
probabilistic numbers for what the technically recoverable
resources in the state could be. Cook Inlet Outer Continental
Shelf (OCS) has a range of 0.7 - 2.5 tcf of gas with a mean of
1.4 tcf. The USGS has not done a proper analysis of the Cook
Inlet, but they are in the process of doing that right now.
MR. SWENSON remarked on exploration statistics: 85 percent of
gas was discovered early in the exploration cycle while drilling
for oil (that's the case for most of the state's gas). Until
recent times there hasn't been a lot of exploration specifically
for gas. The plays in Cook Inlet are all structural traps; the
stratigraphic traps have essentially been untapped. Nearly 1 in
10 fields is greater than 2 tcf, which is very unusual for a
basin. The four largest fields have 86 percent of the reserves,
another unusual statistic in a basin. Finally, the field
distribution lacks the 300-1300 bcf range. One would expect to
see the full gamut of field sizes from the very small all the
way up to the very large size; but the fields that are
relatively mid-size in range are missing. Most basins have this
normal logarithmic distribution to them and he believes those
would be part of the technically recoverable reserves in the
basin.
3:39:10 PM
CO-CHAIR WIELECHOWSKI asked if the mean should be 3.73 tcf
referring to the chart on page 2 that said 373 tcf.
MR. SWENSON answered yes.
CO-CHAIR WIELECHOWSKI said that was different than the mean on
the front page of their handout that says 1.4 tcf. What is that
difference?
3:39:52 PM
MR. SWENSON answered that 1.4 tcf is just for the technically
recoverable reserves in the OCS acreage. The 3.73 tcf are the
reserves that could be found in the basin - very different
numbers.
CO-CHAIR WIELECHOWSKI asked him to explain the difference
between "technically recoverable reserves" and "total reserves."
MR. SWENSON said he should be saying "technically recoverable
resource." "Reserves" means that you have actually discovered
and delineated them - you have technical proof that you actually
have that gas behind pipe and it is producible. When USGS talks
about "technically recoverable resource" in a basin, they look
at all the fields that are in existence in a basin, they look at
the geology and tie in the petroleum systems - and make a
probabilistic estimate of what the amount of technically
recoverable resource is likely to be there.
CO-CHAIR WIELECHOWSKI asked if Cook Inlet has 3.73 tcf of
resource remaining, what Southcentral's lifespan is at current
usage.
MR. SWENSON clarified that the current reserves are 1.3 tcf. The
total resource of 3.73 tcf is what was available in 2004 of the
8.5 tcf of original resource discovered in 1972. Because it has
continued being produced since 2004, it's at about 1.314 tcf
now.
CO-CHAIR WIELECHOWSKI asked how many years supply that was at
current usage.
MR. SWENSON replied about 16 years.
3:43:23 PM
KEVIN BANKS, Director, Division of Oil and Gas, Department of
Natural Resources (DNR), added that the Cook Inlet uses about
130 bcf/yr. and including some projection for what LNG supplies
would require that is about a 10-year supply. All the existing
gas fields would have to be drained for that supply.
3:44:21 PM
CO-CHAIR WIELECHOWSKI recalled that the average reserve in a
basin across North America is about eight years.
3:44:52 PM
MR. SWENSON responded that he wasn't familiar with that number.
Each basin is probably going to have a significantly different
reserve base depending on its geometry and dominant petroleum
system. For instance, right now the North Slope basin has about
35 tcf and if you take into account all of the "technically
recoverable resource," it's about 200 tcf. "And so, that's a
huge basin with a lot of net reserves and possible resource in
it." Cook Inlet originally had 8 tcf and what is suggested is
that there could be 2-17 tcf in total resource when the basin is
fully explored and done.
3:45:16 PM
SENATOR FRENCH asked when the USGS would finish its new survey.
MR. SWENSON said he didn't have an exact date, but within two
years.
SENATOR FRENCH asked if it always takes this long.
MR. SWENSON replied that it's most important to get the right
information to do a reasonable job.
3:47:12 PM
SENATOR FRENCH asked how much data he is generating on his own
and how much is from industry.
MR. SWENSON answered every piece of information that has been
generated on the basin from industry is well logs and seismic,
and he has a fairly comprehensive database. His division is
tying the subsurface information in with the surface data to get
a distribution of the rocks (facies) that will suggest what the
potential for stratigraphic traps is.
3:48:16 PM
Some of the "take home points" are that there has been minimal
focused exploration for natural gas in the Cook Inlet until
recent years, that oil and gas exploration is inherently risky
with a low chance of economic success with a long lead time, and
that Cook Inlet has specifically difficult data acquisition
because of the thick sequence of non-marine sediments with coals
and low velocity surface.
MR. SWENSON said additionally, the best chance of success is
achieved when numerous geologic concepts are tested, which
requires access to the entire sedimentary basin and numerous
exploration wells. For market certainty, he said that modern
high resolution geological data and non-volatile pricing are key
to meeting the economic risk threshold for doing an exploration
program. And in the Cook Inlet most of the "easy" gas has
already been found and delineated. Is there more gas to be
found? Yes. It will be found in existing fields and in new
exploration play types. What are the hurdles? One of the big
ones is land access over the entire basin; others are expensive
data gathering of new seismic information both onshore and
offshore, drilling costs and a complicated and relatively
limited market when compared to Lower 48 or global markets.
MR. SWENSON walked them through the geology depicted in slides
4-6 including the Aleutian Trench and the ring of volcanoes. He
said only two other basins on earth have the same amount of
reserves with the specific tectonic setting Cook Inlet has.
3:52:29 PM
SENATOR STEVENS asked if the Shelikof Straits is unlikely to
have oil and gas - so fishermen can feel safer - and for him to
explain the difference between the Mesozoic and Tertiary basins.
MR. SWENSON replied that the northern part of the Cook Inlet
Basin has the Tertiary stratigraphy, the non-marine strata. The
important point about this is that all of the gas that is
produced in the basin has been sourced within the coals. They
have two totally different petroleum systems in the basin.
Number one, all the oil that is produced is out of these
formations, but it must migrate out of the Mesozoic into the
upper formations; and then it's trapped within the lower tonic
formations. That is what all the fields in the Cook Inlet are
drilling into. The gas, however, is biogenic gas, not associated
with this oil. It is both generated and accumulated in the
Tertiary section.
SENATOR STEVENS asked if he was saying that the Shelikof Strait
was unlikely to have oil and gas.
MR. SWENSON replied yes. He said that in the northern Cook
Inlet, the tertiary section where the gas is located is not
present in the Shelikof Straits area. However, he said, the
Mesozoic in the Shelikof Strait area is very thick, and seeps
are on the southern part of the Alaska Peninsula, but the
reservoir rocks that house that resource are not present in the
Shelikof Straits area.
3:55:52 PM
He explained oil and gas trapping mechanisms and flat spots in
slides 7-8. These structures are what explorers in the 1970s
were looking for. What has been drilled in the basin to date
essentially are all structural traps; that's where all the
reserves are. This means that you have a reservoir rock that has
porosity and permeability with a cap rock overlying and
containing it - keeping it from migrating any further towards
the surface. Structural traps also coincide with the faults and
the basin has gas accumulations in them. They have not seen
stratigraphic traps in the basin to date. This is where
reservoir quality rock has been truncated by an erosional event
and then a cap rock is deposited over that that stops migrating
gas and oil from reaching the surface.
3:58:38 PM
Tight sands is another area of possible exploration for gas in
the basin (slide 9). He explained that you can have a lot of
resource here, but it takes a lot of time to produce it into a
well bore without "some artificial fracing."
CO-CHAIR WIELECHOWSKI asked how they can tell what the pool is
when by drilling into it and how is the gas gotten out.
4:00:19 PM
MR. SWENSON answered while drilling, a series of remote sensing
tools is used to check resistivity and a number of different
parameters. Often they hit mud, coal and then some more mud,
then sandstone. If the porosity in that sandstone still exists
and it contains gas, it will come up with the mud. At the
surface they have a "sniffer" that can identify gas. Having a
"gas show" doesn't mean a field or a pool; it just means that
you have run into some type of hard hydrocarbon that can be
tested. Once that is drilled, they will go back in with much
more sophisticated measuring devices (like CMR type well logs).
The different fluids in the rock will have different responses
in the logs. If the drillers see something, then they set casing
on it and cement it all in. They then perforate the reservoir to
open it to surface pressure. Under normal conditions the gas is
under great pressure - maybe 1500 psi at 3,000 ft. Control
systems at the surface test what comes out and that's called a
"well test." If you have very tight rock, it won't give you
anything at the surface and you may have to go in later and do
"a frac job" to artificially frac the well. The final test is
always a well test, but a lot of remote sensing leads up to
that, because the test is an incredibly expensive process.
4:02:52 PM
CO-CHAIR WIELECHOWSKI asked if other things are extracted with
the gas and that have to be separated out.
4:03:03 PM
MR. SWENSON answered yes, but one of the wonderful things about
Cook Inlet gas is that it's very, very dry; so you can actually
use it coming out of the well bore. Pressure on the well bore is
kept just a little lower than the pressure that is in the
formation so it flows into the well bore, to the surface and
into the surface equipment.
4:03:39 PM
Slide 10 showed when all the large fields in the Cook Inlet were
found in the 1960s. That's also when Prudhoe Bay was found and
when a lot of companies shifted their exploration effort up
there.
4:04:47 PM
He showed maps of what was going on across the basin from a
visual standpoint in 2006-2008. He said anyone you talk to would
say there is some potential for exploration gas in this basin;
how much and how much it will cost is another question.
4:06:04 PM
MR. SWENSON said access is the big question and from an
exploration standpoint slide 11 showed the distribution of gas
and oil fields, federal acreage, CIRI lands, Mental Health
lands, University lands, Beluga Habitat and leased acreage, some
of them overlapped.
4:07:53 PM
SENATOR STEVENS asked if the CIRI lands that overlay federal
land is off limits.
MR. SWENSON answered no; some of that acreage is getting leased
to the industry.
4:08:48 PM
He said his division is facilitating exploration in the basin by
trying to understand the stratigraphic potential and
distribution of facies and reservoir quality rock across the
entire basin by preparing a four-year study that is in its third
year. The program goals are basically to look at specific
reservoir quality in a stratigraphic sense to help them
understand what potential there is in the basin and to work with
the USGS so it can provide realistic estimates for resources
that good decisions can be made upon.
4:10:57 PM
SENATOR HUGGINS asked him to restate the potential of the Capps
Glacier Fault in the vicinity of the Beluga Coal fields.
MR. SWENSON pointed to a region just north of Capps Glacier
where the gas potential is essentially zero, he said, but the
reason they are looking at it is because that is where the
entire sequence is exposed. This same rock is being deposited
out in the basin and this information will be extrapolated into
the basin and give them a much better handle on the distribution
of reservoir facies out there. The coal fields are there because
of that exposure to the surface.
SENATOR HUGGINS said he assumed there is not much potential
going up Chakachamna towards the potential hydro-site even
though there has been a lot of exploration.
MR. SWENSON agreed; but added that the further west side of the
basin has an incredible amount of "deformations," which
indicates potential, and a number of companies are active in
this area. But closer to the basin edge, especially by Mt.
Spurr, the amount of resource potential becomes very small.
4:13:47 PM
CO-CHAIR WIELECHOWSKI asked how this basin compares in terms of
oil and gas reserves to other basins around the world.
4:13:52 PM
MR. SWENSON replied that is hard to answer. The Cook Inlet basin
is small by comparison to all the other North American basins.
The North Slope and the entire Canadian Front Range that goes
all the way through Canada and down to the south, with Williston
Basin, another intra-cratonic type basin that is also relatively
small, could be compared to the California basins along the San
Andreas fault system. They are small, but fairly hydro-carbon
prolific. In 10 years of exploration 8 tcf of gas was found. But
overall it is very much smaller than most of the big basins in
the U.S.
CO-CHAIR WIELECHOWSKI asked about oil potential in the Cook
Inlet.
MR. SWENSON replied their studies now are focused on gas, but
all the exploration to date has been on the large easily
identifiable structures for oil. Oils can be trapped in
stratigraphic traps, as well, but most likely it will be in the
Mesozoic section and the lowest part of the Tertiary section,
unlike the natural gas system.
SENATOR HUGGINS said he has heard that once a well is dormant
that it is self-degrading, and could he explain that.
MR. SWENSON replied slide 9 explains that issue specifically. He
explained that it showed thin sections of reservoir rock; the
blue color indicated where the gas or fluid would reside. If gas
is in the pore spaces, the rock remains relatively dry. That is
when gas specifically is produced into the well bore by reducing
pressure to get it up. However, the indicated water, a "down dip
away," moves along with the gas. If holes are drilled very near
the edges of the field, that water would replace the gas in the
pore spaces. Once that happens, given the fact that a lot of
clays are in the pore spaces, the water starts to break the
reservoir down and it can actually plug it up sometimes referred
to as "shut-in." When it's just gas, nothing will happen to
those clays. So, you produce as fast and as long as you can
there. Another thing is that water moves much slower through the
rock than gas; and if you stop, it allows time for the water to
catch up. So, it's best to produce gas as continuously and as
fast and as is safely possible.
4:17:51 PM
CO-CHAIR WIELECHOWSKI announced an at ease.
4:18:33 PM
CO-CHAIR WIELECHOWSKI called the meeting back to order at 4:18.
KEVIN BANKS, Director, Division of Oil and Gas, Department of
Natural Resources (DNR), said the reserve estimate of 1.3 tcf
represents gas that lies within the existing units and fields
where gas has been discovered and produced for some time.
"Resources" refers to possibly discovered, but not yet produced
or fully delineated, potential gas that could be added with more
exploration activity. The Chair had asked how long 1.3 tcf of
gas reserves would last, and his estimate is 10 or 11 years at
current rates of production and demand in the Cook Inlet. But if
new exploration occurs, there would be 3.7 tcf of resources that
"you might be hunting for, which represents a much longer
potential supply."
4:20:13 PM
CO-CHAIR WIELECHOWSKI asked what percentage of Alaskan gas that
is being exported to Japan.
MR. BANKS said he assumed we were exporting about 48 bcf/yr. of
gas, and that represents 36-40 percent of the total.
CO-CHAIR WIELECHOWSKI said if we back that out of our 10-year
life cycle, we could have possibly another six years.
MR. BANKS agreed, but he reminded him that both numbers suggest
that these gas fields can be drained to practically zero.
4:20:46 PM
He said in 2008 they were administering 410 oil and gas leases,
many of which are producing, some not producing; others are
exploration targets for several companies. The last Cook Inlet
areawide sale was held in the spring when 18 tracts were sold
and those can be added to the number of tracts that are under
lease. There are 25 oil and gas units and fields in 36
participating areas - areas that have been delineated
sufficiently so that the allocation of production can be made
between the various owners within the units where production can
occur efficiently and economically through single-surface
facilities.
4:23:21 PM
MR. BANKS said the division has had discussions on clarifying
what can be regarded as exploration and what as development in
the Cook Inlet. In 2008 there were three seismic programs, which
could be called strictly exploration; new reserves were being
looked for - even inside existing units, with the notion that
after seismic is conducted, drilling occurs. The results of that
drilling, if successful, will add to reserves. Development
activities within existing units may add incrementally to
reserves, but those activities are largely to make sure that the
producability and deliverability of gas from the existing units
can be maintained.
4:24:27 PM
SENATOR FRENCH asked if he said 15 gas wells were drilled.
MR. BANKS replied they are a combination, but primarily they are
gas wells being drilled in existing gas fields for the purposes
of maintaining deliverability and potentially adding some to the
annual production.
SENATOR HUGGINS asked if that was bringing on any new potential
or just exploiting the known potential there.
MR. BANKS said his point is that most of the 15 wells drilled
under this development category were to add to the production of
a unit, but perhaps only marginally adding to some reserves. He
explained there are many discontinuous sands within a potential
reservoir that are being drilled in these units. Occasionally in
drilling known sands, there are lenses of gas reserves that are
not in communication with existing wells and hitting those can
potentially add a small amount of gas.
4:26:58 PM
He said that ConocoPhillips drilled in the Beluga River; Chevron
has been active in the Deep Creek Unit and is one of the
investors in the Cook Inlet, as is Marathon that has drilled
wells into the Kasilof and Kenai Units. Aurora Gas is working
Nikolai and has proposals coming up for this coming year. One of
the newest lessees, Armstrong, is delineating a very old gas
field to see if they can bring what was once ignored as a
potential gas producing unit back to market.
CO-CHAIR WIELECHOWSKI asked what the requirements are under the
leases for drilling and exploration. Is there a timeline?
MR. BANKS answered most of the leases being offered are for 5-7
years depending on where they are located. If a lessee wants to
keep a lease beyond the primary term, they may do so either by
forming a unit around it and demonstrating progress towards
production, if production hasn't already occurred, or in the
lease operations demonstrate that drilling operations have
occurred and are sustained. Those are the minimum requirements
for holding a lease. Once lease operations are approved, or a
unit is approved, there has to be some progress towards
development and production. Many of the items listed on the two
slides of north Cook Inlet, the Ninilchik Unit, and Kenai, are
already producing.
4:29:45 PM
CO-CHAIR WIELECHOWSKI asked what percentage of wells are being
explored or produced of the 410 leases.
MR. BANKS answered that he would get that information.
CO-CHAIR WIELECHOWSKI asked if his department aggressively
pursues where the leases are being explored and ultimately
produced.
4:31:26 PM
MR. BANKS replied yes; some of their lessees think they are
being too aggressive. Last December two units, the Corsair and
the Kitchens units listed on slide 6 are coming to the end of
their term. The Corsair Unit commitments had been made for
bringing in a jack up rig and begin drilling there by this June.
For failure to bring in, in the department's opinion, a contract
for a heavy lift vessel to bring the jack up rig into the Cook
Inlet, they were put in default. Similarly for the Kitchen Unit
where the oldest leases are nine years old. At the end of their
seven-year term the leases were unitized with a commitment the
drilling would begin by the end of 2008. Having failed to do
that, they were put in default, too. Those together with leases
owned by Renaissance in an area called Northern Lights are now
part of a "discussion" with the state that has proposed that the
lessees group together in each of these units to form a single
operation, as units should be.
He explained that units are designed to encourage development by
affirming the joint operating arrangements that are required of
the various lessees. They have been asked, as a way to minimize
surface impacts in the normal unitization process, to come back
with a single-unit with the appropriate geological and
geophysical evidence of hydrocarbon potential, the contracts for
a heavy-lift vessel, a jack up rig to be brought up the Cook
Inlet on that vessel, and commitments to drill by this summer.
He is awaiting a reply from the lessees. This is the kind of
stick and carrot approach they sometimes use for exploration
incentives. "Sometimes you just finally have to say it's time to
get busy." Because the alternative for the state is to offer the
leases to someone else who may have a different view about how
they can be developed.
4:33:30 PM
SENATOR HUGGINS asked, given the extraordinary economic times,
what sort of rationale and action he saw going forward, because
it appears to him that the state could end up repossessing lots
of leases. The expectation for activity on those has diminished
to some degree.
MR. BANKS replied that in this instance, last week he met with
the Kitchen Unit owners who are quite excited and finding
investors. The challenge for the department is to decide whether
or not staying with the current resident will lead to quicker
development than pulling the plug and trying someone different.
What the department has done for many of the units, particularly
in the Cook Inlet, is to develop interim milestones. For
instance, instead of a well by some date certain, include
bringing evidence that there is progress to get that well
drilled - a contract with a drilling rig company or other
commitments that demonstrate progress.
4:36:00 PM
MR. BANKS said that slide 6 demonstrated 2008 has seen a lot of
activity. In some cases, not wells being drilled, but various
pilot projects, and permits for wells that may not be drilled
immediately, but with tracked progress. He suspected that he
will see a lot less activity in the Cook Inlet in 2009, because
Cook Inlet represents a fairly marginal development prospect for
a lot of producers, particularly for those who are looking at
worldwide opportunities.
4:37:15 PM
He hoped to find in 2009, since the division will be working on
gas storage expansion plans, more exploration and development.
Last week he met with some folks who were looking at Swanson
River and the West McCarther area. They refer to themselves as
externally financed, but if they can find investors, he may see
some more applications for exploration. Development may occur in
order to meet existing commitments for supply requirements by
the utilities. "Beyond that, 2009 might be a tough year for us
on the Cook Inlet."
He pointed out that coordination with the federal government is
essential now that we start thinking about ways to access more
federal lands.
4:38:42 PM
Slide 8 showed that ConocoPhillips drilled three additional
wells from the Tyonek platform and they are assessing the
success of those wells.
MR. BANKS said the state has just issued its final best interest
finding for Cook Inlet, something of a milestone. The areawide
lease-sale schedule is in its tenth year and he recalled that
the legislature made it possible for him to go into a 10-year
cycle supported by a single best interest finding that is
supplemented as things change from time to time each year. This
means they have been able to offer all of the land in the Cook
Inlet that's available for lease every year in the spring on a
schedule that is predictable and works well for lessees when
they are making plans acquiring a land position there.
4:39:03 PM
The challenges going forward are going to be environmental. He
didn't know if there would be litigation on the final best
interest finding, but they have issues related to the listing of
Beluga whales and other resource conflicts. He hoped the state's
leases had appropriate mitigation measures in them to take care
of that.
MR. BANKS also mentioned that the legislature made it possible
for them to be able to offer leases in a phased approach so that
the decision to lease is different than the decision to explore
or develop. When they move to the exploration or development
phase they can do a much more concentrated review of the
potential environmental impacts.
He again mentioned in coordinating with the federal government,
he wanted to see access to federal lands where the state thinks
there is oil and gas potential. He would like to make sure the
Minerals Management Service (MMS) is willing to offer their
lands for lease as the state will potentially jointly manage the
Beluga River and Cosmopolitan units with it.
4:41:27 PM
SENATOR HUGGINS asked if Cosmopolitan belongs to Pioneer and if
they had suspended activity.
MR. BANKS answered that is correct; they have postponed the
second Hanson well. They drilled an extended-reach well last
spring and their focus seems to be to finish up their work at
their Oooguruk field on the North Slope. "I think Pioneer is
experiencing challenges throughout North America in the work
that they are doing, even in the Lower 48."
SENATOR HUGGINS recalled that they were going to drill 30 wells
and they've pared that back to two.
MR. BANKS replied that in his opinion, the wells they are
drilling are still at a delineation phase and are still in a
process of getting a handle on how they can produce this field.
SENATOR HUGGINS asked how much the average cost of drilling a
well in Cook Inlet is.
4:44:14 PM
MR. BANKS replied that obviously there is a lot difference
places in Cook Inlet to drill. If you're near infrastructure
and/or a road it would be one thing, but most exploration plays
aren't so conveniently located. He guessed onshore spending $10
million or more; offshore could be as much as $25-30 million.
MR. BANKS continued on to slide 11 and described gas storage
saying at the moment there are three storage facilities under
development in the Cook Inlet. Two of those are on state lands
at Pretty Creek and in the Kenai gas field. Pretty Creek is
about 0.7 bcf capacity and is operated by Chevron. The Kenai gas
field is about 6 bcf of capacity and it is run by Marathon. The
Swanson River is on federal land in the Moose Range and it has 1
bcf of capacity. All three of them combined can probably deliver
as much as 30-33 mmcf into the market on any given day. That
compares to an average daily supply of about 260 mmcf, but
clearly when these storage facilities are producing, it creates
"quite a peak" during months where the total gas sales are much
higher.
He said they are looking at a fourth storage facility and will
be working with a potential lessee in the winter 2010.
4:45:29 PM
SENATOR HUGGINS said he heard that three parties got together in
a "gas purchasing coop,"
MR. BANKS said he would have to talk to Mr. Heinze about that.
SENATOR HUGGINS asked if capacity is what a purchasing coop
would be looking into.
MR. BANKS explained that the three existing storage facilities
are an alternative to drilling more wells in an existing field
in order to achieve deliverability into the marketplace.
Companies like Marathon and Chevron look into their own
properties and acquiring leases from the state in order to
manage a facility where they are more than likely going to put
their own gas into storage and deliver gas out of that storage
during the peak months.
Another alternative is a fourth storage facility that will be
operated by a lessee, but for the benefit of third-parties.
Someone like Enstar could acquire gas from anybody that is
supplying it during the summer months and put it in the storage
and draw it out during the winter months.
SENATOR HUGGINS asked if he had been involved in any
conversations on purchasing cooperative kinds of things.
MR. BANKS answered no.
4:48:12 PM
MR. BANKS said the reason to store natural gas is that the gas
demand shifts dramatically in order to supply space heating.
When it is cold and dark the use of gas for heating is very
dramatic (slide 12). This means that in order to deliver gas at
a peak period of time, either you have to store the gas or drill
more wells. For a long time, it was just a matter of drawing
from the existing wells because the resource was pretty vast,
but as the fields have been drained, in order to provide
deliverability in the winter time, more and more straws have
been drilled into the bubble. That means those straws are not
used during the summer time when there isn't the same kind of
demand. When the well is left idle for any length of time, the
risk is run of damaging the reservoir and shutting off the
movement of gas through the reservoir to the well.
4:50:13 PM
Another issue goes to the question of what an investor or new
explorer is looking at in this marketplace. He said the red line
on slide 13 shows the typical productivity of a well drilled
into a reservoir. It has a pretty quick response and then a
logarithmic decline in production. Anybody drilling for gas in
the Lower 48 is hoping for this kind of production profile,
because it means they can monetize their investment very quickly
by selling as much gas as they can in the early years of its
life. The market in Cook Inlet is constrained by its size - just
the electrical and space heat utilities and about 48 bcf/day
going into the LNG plant - "That's it for the marketplace."
4:51:57 PM
SENATOR FRENCH hypothesized about a new entrant into the Cook
Inlet marketplace. Why would their analysis be any different
than the analysis of the existing producers?
They are finding investors that are considering the gas play in
the eastern side of the Inlet. The question is whether they can
step in, find gas in time and be able to meet or have a supply
of gas that the utilities will be willing to buy. If a lot of
gas is found (for instance 100 bcf), that is where industrial
demand and export is an important part of the market mix.
Whoever would find it would be in a better position to supply
gas to the LNG plant.
SENATOR FRENCH said he didn't see how the thinking of an
independent producer looking at entering the Cook Inlet basin
would be different than the thinking of the producers that are
already in place. What would motivate Chevron, Marathon,
ConocoPhillips to invest $50 million next year in an exploration
program if that yielded a big gas find that they, in essence,
couldn't sell, given the size of the market?
MR. BANKS agreed. The major players do examine these kinds of
economics as well, and in the recent past resident producers
have been willing to invest to the extent that they can supply
commitments that they make.
SENATOR FRENCH said he didn't see any reason for the producers
to search for any more gas than they can reasonably expect to
sell in four or five years.
4:56:39 PM
MR. BANKS said that is correct. The idea is to make sure the
market isn't any further constrained.
4:57:31 PM
SENATOR STEDMAN referred to chart 13 and said the red line looks
more like an oil producing cycle and the blue line a little bit
more like gas. How would a gas producer needing long term
contracts be able to peak his like the red curve, he asked.
"It's just seems kind of counterintuitive."
MR. BANKS replied that the red line kind of represents what gas
production would look like in a market that is unconstrained -
like gas wells drilled in the Lower 48 that are near
infrastructure to deliver gas. The idea is the same - that you
can produce at peak for a few years and then as the pressure
drops in the reservoir and the well becomes less producible you
see that kind of profile in production. Presumably the cash flow
would look like that, too.
4:59:10 PM
SENATOR STEDMAN said that Agrium is in a low cost producing
environment needing inexpensive gas to compete in the
international market place for its fertilizer. If Cook Inlet gas
was marketed to Henry Hub, in future exploration, how would an
operation like Agrium function paying the going rate? Would that
have to be lowered to keep them in business?
4:59:56 PM
MR. BANKS replied that Agrium had a challenge in 2006 to keep
the plant going, because its sales were low. As commodity prices
rose around the country, those market conditions changed, but
they had already decided to not continue operating the plant.
Had Agrium been able to bridge through that high priced gas/low
price commodity sales crisis, it might have found itself with a
gas supply problem.
5:01:14 PM
SENATOR FRENCH asked if the current tax policies with Cook Inlet
gas sufficiently incentivize exploration.
MR. BANKS cited the favorable ACES tax credits that go along
with developing gas there. The tax rate for instate use of gas
is cheaper and many of the fields enjoy royalty relief from a
long ways back. The current producers talk about refinements as
any producer would, but the new explorers, unless they can show
continuous expenditure of funds, if they are successful, they
get to enjoy the full benefit of those exploration investment
credits. If they strike out, then they are not able to acquire
their full benefit. When they are doing their economics and
comparing a success and failure leg, the failure leg looks a
little bit more expensive than it might otherwise be. Newcomers
like the tax system for gas in the Cook Inlet.
5:02:52 PM
CO-CHAIR MCGUIRE asked what a gasline looks like from Cook Inlet
going north versus a gasline from the Nenana Basin going south.
MR. BANKS replied that going north the demand for gas in the
Interior is not all that great. So the economies of scale are
going to be a challenge for a northbound supply if Fairbanks is
the only market. Heading south, the economies of scale are only
challenged by how productive Nenana basin is if gas is found and
can be developed there. Clearly the target market for success in
the Nenana is Fairbanks, itself. If Nenana has more gas than
Fairbanks needs, heading south is attractive because Anchorage
is a bigger market. They will face the same kinds of challenges
that any explorer in the Cook Inlet would face, but it's not
nearly as constrained as an Interior market.
MR. BANKS said he is a little bit of a contrarian in some
respects. It's not inconceivable that gas supplies could move
from the Cook Inlet north into a main export line going from the
North Slope to Alberta or something like that. It all just
depends on the price and the success of the explorers in the
Cook Inlet.
5:05:32 PM
CO-CHAIR MCGUIRE asked what other opportunities might exist for
stabilizing the market for Cook Inlet gas.
MR. BANKS replied that storage is the most obvious place to
look. There are more than four potential storage areas. Some of
the big fields that are exhausted like the Kenai gas field's 6
bcf of storage is "a pretty big balloon to fill up with gas."
It's like filling a car tire with a bicycle pump. "You have to
put a lot of gas into it before you can pull very much out of
it."
5:06:58 PM
SENATOR HUGGINS said his position would be to expand the LNG
plant and a pro-rata piece would go instate by virtue of that.
That appears to be the most feasible thing assuming export
permit. Why not that course of action?
MR. BANKS agreed with him - that at 48 bcf/yr. there is room to
grow if there is a market to supply it. Those are issues that
need to be overcome. At the moment the owners of the LNG plant
agreed with the state to submit a request for proposals (RFPs)
to buy gas for the LNG plant; if gas is to be supplied to the
LNG plant, it most likely would be during the summer months to
create that leveling that Senator McGuire was talking about.
It's there already and doesn't need to be developed. All that is
needed is a contractual relationship.
5:08:45 PM
CO-CHAIR WIELECHOWSKI thanked everyone for their comments and
adjourned the meeting at 5:09.
| Document Name | Date/Time | Subjects |
|---|---|---|
| Banks Presentation - 02-02-09.pdf |
SRES 2/9/2009 3:30:00 PM |
|
| Bob_Swenson Presentation 02-09-09.pdf |
SRES 2/9/2009 3:30:00 PM |