Legislature(2025 - 2026)BUTROVICH 205
01/22/2025 03:30 PM Senate RESOURCES
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| Audio | Topic |
|---|---|
| Start | |
| Presentation(s): Cook Inlet Gas from Hex/furie | |
| Presentation(s): Cook Inlet Natural Gas Overview from Hilcorp Energy Company | |
| Adjourn |
* first hearing in first committee of referral
+ teleconferenced
= bill was previously heard/scheduled
+ teleconferenced
= bill was previously heard/scheduled
ALASKA STATE LEGISLATURE
SENATE RESOURCES STANDING COMMITTEE
January 22, 2025
3:30 p.m.
DRAFT
MEMBERS PRESENT
Senator Cathy Giessel, Chair
Senator Bill Wielechowski, Vice Chair
Senator Matt Claman
Senator Forrest Dunbar
Senator Scott Kawasaki
Senator Shelley Hughes
Senator Robert Myers
MEMBERS ABSENT
All members present
OTHER LEGISLATORS PRESENT
Senator Mike Shower
Representative Julie Coulombe
Representative Mia Costello
Representative Justin Ruffridge
COMMITTEE CALENDAR
PRESENTATION(S): COOK INLET GAS FROM HEX/FURIE
- HEARD
PRESENTATION(S): COOK INLET NATURAL GAS OVERVIEW FROM HILCORP
ENERGY COMPANY
- HEARD
PREVIOUS COMMITTEE ACTION
No previous action to record
WITNESS REGISTER
MARK SLAUGHTER, Chief Commercial Officer
HEX/Furie
Anchorage, Alaska
POSITION STATEMENT: Provided the presentation 2024 Cook Inlet
Gas Activities.
LUKE SAUGIER, Senior Vice President
Hilcorp Energy Company
Houston, Texas
POSITION STATEMENT: Provided the presentation Hilcorp Alaska
Overview
ACTION NARRATIVE
3:30:47 PM
CHAIR GIESSEL called the Senate Resources Standing Committee
meeting to order at 3:30 p.m. Present at the call to order were
Senators Hughes, Dunbar, Myers, Claman, Kawasaki, Vice Chair
Wielechowski, and Chair Giessel.
^PRESENTATION(S): COOK INLET GAS from HEX/Furie
PRESENTATION(S): COOK INLET GAS from HEX/Furie
3:31:48 PM
CHAIR GIESSEL announced the presentation, Cook Inlet Gas, Update
on 2024 Activities, by Mark Slaughter of HEX/Furie. She noted
Cook Inlet is facing a pending [natural] gas shortage. HEX/Furie
applied for and received royalty relief through Department of
Natural Resources (DNR) and procured the use of the jack-up
[drilling] rig and have done some drilling.
3:32:55 PM
MARK SLAUGHTER, Chief Commercial Officer, HEX/Furie, Anchorage,
Alaska, introduced himself and gave a summary description of the
HEX and Furie companies.
3:33:36 PM
MR. SLAUGHTER moved to slide 2, titled HEX Cook Inlet's
Operations. He emphasized HEX Cook Inlet is Alaska's only
locally owned and operated independent gas producer.
MR. SLAUGHTER explained the process from drilling to end use:
Julius R Offshore Platform, Offshore Operations
This is where Furie Operating Alaska, [LLC] produces gas
from the Kitchen Lights Unit (KLU).
15-mile Sub-sea Gathering Line
The gas moves from KLU through the sub-sea gathering line.
Nikiski Central Processing Facility
The gas is treated at this onshore processing facility to
bring it to utility grade standards, at which point it enters
the transmission pipeline system.
Gas Sales to Electric Utilities, Gas Utilities, and Refinery in
Southcentral Alaska
These are the customers that receive the processed gas,
including the [Petro] Star or Marathon refineries.
Heating Alaskans' Homes
The refined products are then turned into electricity, heat
or power for homes and businesses.
3:34:42 PM
MR. SLAUGHTER moved to slide 3, a map illustrating HEX/Furie's
operations in Cook Inlet:
[Original punctuation provided.]
• HEX Cook Inlet
• Owner of Furie Operating Alaska, LLC (Furie)
• Furie is the Operator of the Kitchen Lights Unit (KLU)
• Produces ~5 percent of Total Gas in Cook Inlet
(CI)
• Second Largest CI Operator
• ~84,000 acres offshore
• Headquarters in Anchorage
• Furie's Operations Office in Nikiski
3:35:46 PM
MR. SLAUGHTER moved to slide 4:
[Original punctuation included.]
HEX Cook Inlet - Developing Cook Inlet Gas
• DNR may impose conditions to a Plan of
Development to ensure operators are developing
and maximizing resources for the benefit of the
State of Alaska
• 11 AAC. 83.343(b)
• Conditions of KLU 2024 10th Plan of Development
(POD)
• Furie will drill a grassroots or sidetrack
well targeting additional gas resources
during the 2024 POD period
• Furie will provide the Division with a fully
defined plan for the KLU as part of its 2025
POD submission
• Furie Successfully Met POD Conditions in 2024
3:35:51 PM
MR. SLAUGHTER reiterated that HEX/FURIE's leases were with the
State of Alaska and HEX/FURIE worked closely with Department of
Natural Resources (DNR) on plans of development. He said 2024
was HEX/Furie's tenth year of development and the Kitchen Lights
Unit (KLU) had been in production since November 2015. In the
2024 plan, HEX/Furie committed to drilling one well and to
providing DNR with a complete unit plan of development. He
reported HEX/Furie met both conditions of the plan of
development.
3:36:30 PM
MR. SLAUGHTER moved to slide 5 and said the process to bring gas
on doesn't start in the year the gas comes online.
[Original punctuation provided.]
Furie's Process to Bring New Gas Online in 2024
Royalty Modification Process (2023- Ongoing)
Plan of Development (2023-Current)
AIDEA Financing Negotiations (2023-Current)
Customer Contract Negotiations (2023-December 2024)
Permitting to Move Jack-up Rig (2023-2024)
Jack-up Rig Contract Negotiations (2024)
Plan, Develop, & Implement Drilling Program (2024)
New Gas Online
MR. SLAUGHTER emphasized the importance of the royalty
modification process and said the process is not straightforward
[step by step]; rather, the steps occurred in parallel.
MR. SLAUGHTER said HEX/Furie approached DNR in April 2023 about
a royalty modification. Though there was an existing statutory
process they could follow, DNR directed HEX/Furie to look at
modifications to [HEX/Furie's] private ownership or to look at a
legislative process [to obtain royalty modification]. He said
neither of those two processes were successful. HEX/Furie
continued to work with DNR and submitted their complete
application for royalty modification in September 2024. He said
HEX/Furie was still awaiting the final best interest decision
and expected to receive that soon.
3:38:11 PM
MR. SLAUGHTER acknowledged the hard work of Department of
Natural Resources (DNR) commercial section. He said the [royalty
modifications] process is long and difficult and, over the past
30 years, only four applications have been granted. He
acknowledged the effort of the 2024 legislature and the various
hearings about the royalty modifications. Even though they
weren't successful, he opined [the hearings] were a priority and
folks learned a significant amount about the Cook Inlet market.
MR. SLAUGHTER said, though HEX/Furie did not have the final
royalty modification decision, the company made financial
investments and took financial risks to bring gas online. He
expanded on the steps HEX/Furie engaged in to be prepared:
-completing customer contract negotiations so HEX/Furie knew to
whom they would be selling the gas once they brought it online
-working with the U.S. Army Corps of Engineers (USACE), National
Oceanic and Atmospheric Administration (NOAA) and National
Marine Fisheries Service (NMFS) to secure permits to be able to
move the jack-up rig to the platform
-completing contract negotiations with the jack-up rig company
He said it was necessary for these steps to proceed in parallel
and reported that HEX/Furie succeeded.
3:40:14 PM
MR. SLAUGHTER emphasized that to have a long-term development
plan, HEX/Furie had to secure financing. He said 2024's plan was
all self-funded. He noted that HEX Cook Inlet had no debt and no
investors beyond Mr. Hendrix. He said it was clear HEX/Furie is
invested in Alaska and in Cook Inlet.
3:40:45 PM
CHAIR GIESSEL noted that Furie had overriding royalty owners and
asked whether those partners were contributing anything
financially toward the continuing function of HEX/Furie.
3:41:02 PM
MR. SLAUGHTER said they were not. He said there were two parts
to the royalty, which total 25 percent. He said the State of
Alaska held the standard 12.5 percent and the state, over the
years, granted another 12.5 percent to private overriding
royalty interests (ORRIs). He said those parties do not
contribute anything to the ongoing operation.
3:41:35 PM
SENATOR WIELECHOWSKI asked why the private over-riding royalty
interests (ORRIs) were granted.
3:41:44 PM
MR. SLAUGHTER answered that some of them were granted to prior
owners of the unit, granted to themselves. He said an individual
did some geologic work for a prior owner and the prior owner
granted that individual [overriding royalty interest].
3:42:08 PM
SENATOR WIELECHOWSKI asked if it was fair to say that the over-
riding royalty interests have made [HEX/Furie's] development
uneconomic.
MR. SLAUGHTER answered yes.
3:42:17 PM
SENATOR WIELECHOWSKI noted that the state was faced with a
situation where [HEX/Furie] made decisions on over-riding
royalty interests that made the project uneconomic, and the
state was being asked to give up its royalty share to the tune
of millions and millions of dollars to subsidize [HEX/Furie's]
development. He noted the state could hold [HEX/Furie] to the
obligation to produce; and if they don't produce, the state
could take away the leases, resulting in the disappearance of
the overriding [royalty] interest.
3:42:55 PM
MR. SLAUGHTER answered that it was not the new Furie that
granted the royalty shares, but the old, pre-bankruptcy Furie.
He said the ORRIs were created in the early to mid-2000s and he
said he thought the last one was granted in 2010. He said that
was not something created by the current owner, Mr. Hendricks,
but was a legacy of past decisions.
3:43:37 PM
SENATOR WIELECHOWSKI said he was not trying to blame Mr.
Slaughter or Mr. Hendrix personally and he expressed
appreciation for the work Mr. Slaughter had done and was doing.
However, he said, fundamentally, the private sector investments,
ORRIs that someone agreed to, have made the project uneconomic
and the state was being forced to come in and give up a huge
chunk of its royalty interest to make [the project] profitable.
He asked whether the state would receive an ownership share or
if it would get anything additional in exchange for making [the
project] economic. He noted that the state could take away the
leases and re-lease them and there would be no overriding
royalty interests (ORRIs).
3:44:21 PM
MR. SLAUGHTER said Department of Natural Resources (DNR) spent a
year to a year and a half looking through HEX/Furie's financials
and determined the best interest for the state. He agreed it was
unfortunate [HEX/Furie] was unable to convince private interests
to make a reduction and [HEX/Furie] did expend significant
effort and time to pursue [private interest reductions] at the
request of DNR. He said any continued production [by the unit]
to be economically viable and continue to put gas into the
market was determined by DNR to be in the state's best interest.
He said DNR further determined that, if royalty relief was not
granted, the field would be uneconomic and [HEX/Furie] would be
looking at shutting the field down as early as June 2025. He
explained that, without royalty relief, [HEX/Furie] would have
passed their economic threshold and continued investment in the
field, and, according to DNR's best interest finding, [granting
the royalty relief] would extend the field life by 10.5 years
and bring additional 62 billion cubic feet (Bcf) to the market
and $37 million additional revenue in royalties to the state,
even at the reduced royalty rate.
3:45:51 PM
SENATOR WIELECHOWSKI said it seemed like a fairer solution for
the private ORRI interest owners to give up some of their share
because they were not contributing anything while the state
would be giving up roughly eight percent of its royalty share.
He pointed out that the ORRI owners would receive nothing if the
state revoked the leases.
3:46:25 PM
CHAIR GIESSEL affirmed the ORRIs were a complicating issue. She
said if DNR were to pull the leases from HEX/Furie, the company
would be without them. She said the state could put the leases
out for bid again but there would be no guarantee HEX/Furie
would again secure the leases. She noted if the leases were
retracted by the state, it would extinguish the ORRIs and that
would be desirable.
3:46:59 PM
SENATOR DUNBAR asked for what actual amount of royalty relief
interest HEX/Furie applied.
3:47:22 PM
MR. SLAUGHTER said, statutorily, Department of Natural Resources
(DNR) could only reduce the state's interest share [from 12.5
percent] to three percent. He said [HEX/Furie's] application
asked for the minimum [share to the state] of three percent for
a three- or five-year term. The state's interest share was set
to increase as the price [of natural gas] increased. DNR's
preliminary best interest finding linked the interest rate to a
total gross revenue of $712 million and that as HEX/Furie
develops and produces more and earns more, the interest rate
will return to 12.5 percent. He said the best interest
preliminary finding projected the field to run to 2032 or 2033.
3:48:35 PM
SENATOR CLAMAN recalled that HEX/Furie acquired these leases as
the result of getting them out of bankruptcy and that acquiring
the ORRI obligations were also part of the bankruptcy
negotiations. He asked for confirmation or clarification.
3:48:57 PM
MR. SLAUGHTER differentiated old Furie from current ownership.
He explained that the bankruptcy proceedings of old Furie were
complex due to Cook Inlet tax credits. He said there were
significant dollars owed by the state and to preserve that
obligation, everything stayed as it was with the company,
including the commitments for where the tax credits were paid.
3:49:49 PM
SENATOR CLAMAN asked whether the owners of the ORRIs could
approve the removal of the ORRIs [from HEX/Furie's obligations]
without approval by the bankruptcy court.
3:50:08 PM
MR. SLAUGHTER said the state participated in the bankruptcy
court and the bankruptcy proceedings and the leases were part of
the sale as were the ORRIs. He said it was all part of a package
in a take it or leave it effort.
3:50:35 PM
MR. SLAUGHTER said the key points of slides 6 and 7 were that
HEX/Furie paid off its $7.5 million loan [from] AIDEA in 2023.
The loan had been for the purchase of [HEX/Furie]. It was paid
off early and in full without any modifications and HEX/Furie
immediately commenced negotiations with AIDEA for a larger line
of credit. He announced that AIDEA and HEX/Furie finalized the
terms for a $50 million revolving line of credit. He said this
represented secure financing for long-term development of the
[Kitchen Lights] unit versus self-funding the unit development
at a gradual pace and this would allow HEX/Furie to be more
aggressive with development once they have the royalty relief
decision.
3:51:45 PM
CHAIR GIESSEL noted that slide 6 illustrated the milestones
discussed.
3:51:55 PM
MR. SLAUGHTER noted that jack-up rig negotiations started in
person in January of 2024 and were finalized September of 2024.
Because they had been moving through the steps with contractors
and vendors in parallel, they were able to place the rig on the
Julius platform on October 3, 2024. He said' from an operator
planning perspective, it's remarkable that the company would
have signed a rig contract and then have it on location and
ready to start drilling two weeks later.
3:52:48 PM
SENATOR WIELECHOWSKI asked whether HEX/Furie had a jack-up rig
available to drill this summer [2025].
3:52:54 PM
MR. SLAUGHTER said they were under commercial contract
negotiations with a jack-up rig company.
3:53:01 PM
SENATOR WIELECHOWSKI inquired about the availability of a jack-
up rig.
3:53:06 PM
MR. SLAUGHTER said the target to begin using the rig was April
1st, 2025, contingent on securing a contract.
3:53:18 PM
SENATOR WIELECHOWSKI asked what action the legislature could
take to ensure the jack-up rig reaches HEX/Furie so gas drilling
can begin this summer if royalty relief is awarded.
3:53:34 PM
MR. SLAUGHTER answered that it was [dependent on] a commercial
negotiation between HEX/Furie and a contractor.
3:53:47 PM
SENATOR WIELECHOWSKI acknowledged that it was a commercial
agreement but noted impacts to light and heat affect
constituents. He opined the Legislature should discuss how to
ensure a rig is available. He asked if there were problems with
the negotiations and whether the company HEX/Furie was
negotiating with was being reasonable. He asked for the name of
the negotiating company.
3:54:11 PM
MR. SLAUGHTER said there was only one jack-up rig available in
Cook Inlet and that it was owned by Hilcorp Jack-Up Rig, LLC. He
said he was optimistic that HEX/Furie would get the jack-up rig
in time to meet the plan of development for one well in 2025 and
have time to drill a second well in 2025.
3:54:45 PM
MR. SLAUGHTER added HEX/Furie had an obligation under its plan
of development to provide status updates through an established
reporting mechanism to Department of Natural Resources (DNR)
regarding its efforts to contract for the rig.
3:55:13 PM
MR. SLAUGHTER moved to slide 7, Furie is Doing the Work for New
Gas, which illustrates the steps for:
Permitting to Move Jack-up Rig:
• April 2023
• Environmental Consultant Engaged for Incidental
Harrassment Authorization (IHA) Permit
• April - July 2023
• IHA Pre-application Meetings NOAA/NMFS/USACE
• July 19, 2023
• Furie applies for IHA
• September 12th, 2024
• NMFS Issues IHA Valid for 2 years
Customer Contract Negotiations
• Fall 2023 - Spring 2024
• Periodic Meetings
• Spring 2024 - Winter 2024
• Contract Negotiations
• December 2024
• ENSTAR announces Contract at House Resources Hearing
Plan of Development
• January 2024 - October 2024
• Continued reserve evaluation, well design, facility
improvements
Drilling Program
• 2023+
• Geologic and Geophysical Work
• 2023+
• Engineering and Well Design
• Fall 2023 - January 2024
• Long Lead Items Ordered
• February - September 2024
• Contractor/Vendor Procurement and Contracting
• October 2024
• A-I Well Abandoned
• December 16th, 2024
• A-IA Online
MR. SLAUGHTER noted Senator Wielechowski's concern about lights
and heat for constituents. He emphasized HEX/Furie met regularly
with the electric utilities and with ENSTAR and Marathon
regarding gas needs. He said HEX/Furie knows there is a definite
need for more gas and that was why HEX/Furie made every effort
to get gas online in 2024. He explained HEX/Furie entered an
amendment to its existing ENSTAR contract that ENSTAR filed with
the Regulatory Commission of Alaska (RCA), December 31st [2024]
in conjunction with its Homer electric contract and he asserted
that, because HEX/Furie was willing to negotiate its contract
with ENSTAR, Homer had a supply of gas going forward, subject to
RCA approval of that amendment.
3:56:26 PM
MR. SLAUGHTER moved to slide 8 highlighting HEX/Furie's drilling
program. He emphasized the excellent safety record for the side
track well project.
[Original punctuation provided.]
2024 Furie Drilling Program Highlights
• KLU A-1A Sidetrack
• 0 Accidents/Environmental Impacts
• 160 + Personnel worked on the project
MR. SLAUGHTER pointed out the list of companies involved with
the project, ranging from Hilcorp Jack-up Rig to small mom and
pop companies. He noted HEX/Furie spent approximately $12
million to bring one well online.
Companies Supporting Furie's 2024 Drilling Program
Hilcorp Jack-up Rig Grasshopper
Rig Tenders Aviation
Northern Solutions Maritime
CISPRI Helicopters
Fairweather Cook Inlet Tug and
61 North Barge
Aurora Drilling Jacobs
Weaver Brothers Cameron
Five Star Catering Geolog
Pollard Grant Aviation
PESI Tuboscope
Kakivik Alaska E-line
Expro Yellowjacket
PRA Jim Boatwright &
Dukowitz Machine Sons
Shop 5-Star Catering
Peninsula Pumping Baker
Haliburton 3 Bears
Magtec
Slide 8 includes a pie chart illustrating 2024 Sidetrack Cost
Breakdown.
[Graphic representation illustrates five cost
segments, listed/arranged greatest to least]
• Spartan 151 Rig/Dock Services
• Equipment
• Transportation
• Drilling Services
• Engineering/Permitting
Total Cost ~$12 MM
3:57:49 PM
MR. SLAUGHTER moved to slide 9 consisting of a line graph
illustrating Kitchen Lights Unit (KLU) 2024 Gas Production. The
graph begins December 1, 2023, and ends January 1, 2025. He said
there were three key points he intended to convey from this
slide:
-Increased production in advance of the Anchorage cold weather
snap when the wells were running at full capacity, prompted by
ENSTAR.
-Natural decline in production, typical for the KLU gas wells,
from 12,000 [thousand cubic feet] McF [to about 8,000 McF] from
February 2024 through November 2024.
-Big jump in production for November and December 2024 to around
13,500 McF, the result of drilling the side track well and the
discovery of additional unperforated sands.
MR. SLAUGHTER emphasized that the increased production, 50
percent during the peak winter demand, was the result of infield
drilling, or development drilling. He said development drilling
was not exploration drilling and that it was lower risk than
exploration drilling with a higher probability of success.
4:00:22 PM
SENATOR CLAMAN asked about HEX/Furie's perspective on jack-up
rig availability. He asked whether it was commercially feasible
to keep two jack-up rigs busy in Cook Inlet and whether there
was enough drilling to keep two jack-up rigs in use year-round.
4:00:51 PM
MR. SLAUGHTER said HEX/Furie could keep a rig in the Kitchen
Lights Unit (KLU) busy drilling for two or three years.
4:01:11 PM
SENATOR WIELECHOWSKI asked about the cost of bringing a jack-up
rig to Cook Inlet and whether the Alaska Industrial Development
and Export Authority (AIDEA) should consider supporting that
effort.
4:01:44 PM
MR. SLAUGHTER said there had been initial consideration for
AIDEA to purchase a jack-up rig for use in Cook Inlet and they
had done so done for a prior producer. He said the estimated
cost to move a rig from Singapore was under $10 million, and
additional work was needed to identify actual costs to move a
rig [to Cook Inlet]. He noted the original rig in Cook Inlet was
moved there by the old Furie company.
4:02:26 PM
SENATOR WIELECHOWSKI opined that $10 million did not seem like a
huge amount and asked why someone hadn't brought up a jack-up
rig.
4:02:35 PM
MR. SLAUGHTER answered that the drilling season [in Cook Inlet]
is very short. The rig was only available at the end of the
season, until around November 15. He said rig companies expect
payment for the rig even when it is not drilling because it
could be used elsewhere year-round. He noted significant
progress to fix foundational issues over the past four and a
half years. He also pointed out that this is the first well
drilled in the Kitchen Lights Unit (KLU) since 2018 and was
funded under different ownership. He highlighted the high cost
of bringing a rig to Cook Inlet where it is used for only six
months.
4:03:59 PM
SENATOR HUGHES said it was her understanding that, in addition
to the initial $10 million [to move the rig to Cook Inlet], the
[rig] company would also want a guarantee of $200 million to
$300 million worth of work. She asked if it was Mr. Slaughter's
understanding that the [rig] companies expected that guarantee.
4:04:44 PM
MR. SLAUGHTER said he could not comment on a dollar amount. He
said companies generally want the rig under contract with a day
rate which may be reduced when the rig is not drilling. The
[rig] company aims to maximize the value of its rig use for its
own benefit. He said there are rigs available that could be
moved to Alaska.
4:05:28 PM
MR. SLAUGHTER moved to slide 10. He described the three-year
project between the University of Alaska Fairbanks (UAF)'s
Alaska Center for Unmanned Aircraft Systems Integration (ACUASI)
and Furie to develop a drone program to support Furie's
platform. In July 2024, HEX/Furie and ACUASI completed the first
successful beyond visual sight flight between shore and the
offshore production platform. He said it was critical to show
areas where the University could incorporate its programs into
Furie's business. He expected Furie would continue working with
UAF.
[Original punctuation provided.]
2024 Drone Program
• Furie partnered with [University of Alaska Fairbanks]
UAF [Alaska Center for Unmanned Aircraft Systems
Integration] ACUASI in 2021
• First Beyond Visual Line of Sight waiver approved in
the United States for flights to and from an offshore
platform.
• Utilize emerging technology in Alaska to address
operational challenges.
4:06:54 PM
MR. SLAUGHTER moved to slide 11 and said HEX/Furie was waiting
for the best interest finding from Department of Natural
Resources (DNR). He said the [royalty relief] was key to the
ability to move forward. DNR issued the eleventh plan of
development wherein HEX/Furie was committed to drilling one well
and they were preparing for two wells, subject to accessing the
jack-up rig. He noted that there are limited contractors and
vendors available in Cook Inlet and access to vendors and boats
would be key to serving the offshore operation. He said
HEX/Furies was also working to modify the number of wells they
could have on the platform. He said there were six well slots
and four producing wells. If they were able to drill two, they
would have six producing wells. He said they were also working
to double the number of wells from six to twelve.
[Original punctuation provided.]
2025 Outlook - Furie
• DNR Best Interest Finding for Royalty
Modification of KLU Critical
• 2025 11th POD Issued by DNR 1/3/25
• Preparing to drill up to 2 wells at Julius R
Platform
• Infield Development Drilling
• Contractor / Vendor availability
• New Gas to Market Fall 2025
• Modifications to Julius R Platform
• Engineering & Permitting to Increase Well
Count
• Cook Inlet General Permit
• Design & Permit 2026 KLU Drilling Program
4:08:17 PM
MR. SLAUGHTER said HEX/Furie was currently operating under an
individual permit for produced water from Department of
Environmental Conservation (DEC) and were working toward
operating under the general permit, another critical step for
HEX/Furie. He said that will put them on equal footing with
other offshore producers. HEX/Furies hopes to fully develop the
unit by 2026.
4:08:46 PM
MR. SLAUGHTER moved to slide 12 and said there is gas in Cook
Inlet and HEX/Furie is committed to developing it. He said the
challenge is that the market is capped at 75 billion cubic feet
(BcF) and is shrinking. He noted the effort of utilities to
bring liquid natural gas (LNG) in [to Alaska] or to bring gas
off the [North] Slope. He said those possibilities create long-
term uncertainty for HEX/Furie, which affects the economics and
the investments they would consider. He emphasized that Alaskans
would benefit if producers, customers, and the state are all in
alignment and talking to one another. He reiterated that the
limited number of drilling services in Cook Inlet is also a
challenge.
[Original punctuation provided.]
Southcentral Gas Takeaways
• HEX Cook Inlet is Committed to Developing Gas in
Cook Inlet
• Current Market Limited to 70 Bcf & Shrinking
• Long Term Gas Market Uncertainty
• Utilities working to bring in LNG
• North Slope Gas Line
• Alaskans Benefit from Producers, State and
Customers Working in Alignment
• Limited Cook Inlet Drilling Services in Place
4:09:50 PM
SENATOR DUNBAR noted the 75 BcF and shrinking [market] and asked
whether HEX/Furie expected the Donlin [pipeline] to come online.
He said it was his understanding that Donlin was planning to use
Cook Inlet gas to power the mine. He also asked about
HEX/Furie's commitment and attainment of prior plans of
development leading up to the eleventh plan.
4:10:28 PM
MR. SLAUGHTER said Furie was communicating with Donlin and there
are investment decisions and litigation keeping Donlin from
moving forward. He said the market will stagnate or shrink until
Donlin reaches a final investment decision.
MR. SLAUGHTER opined that electrics were moving on the renewable
front, but that nothing (no gas) would be coming online for the
next several years. He said in five to ten years, [Donlin] has
goals that boards have set to reduce their reliance on Cook
Inlet gas, leading to the shrinking market. He said the hope is
that Donlin will come on and deliver 30,000 McF per day to run
the gold mine. He said HEX/Furie encourages that and it will be
good for the state and for Cook Inlet.
4:11:31 PM
MR. SLAUGHTER said HEX/Furie had met its commitments for the
tenth plan of development and are starting the eleventh plan of
development. He said the commitments made in plans of
development had all been met by the current owner of HEX/Furie.
He noted that the production level was compromised when one well
that was shut down to test a safety valve never came back [into
production]. He said past plans of development commitments were
not met by Furie under prior ownership. He noted those failed
commitments were considered a breach of contract and caused
considerable concern for ENSTAR. He reiterated that Furie, under
current ownership, is meeting its commitments to the state.
4:13:11 PM
SENATOR MYERS asked for confirmation that current [HEX/Furie]
ownership bought Kitchen Lights Unit (KLU) out of bankruptcy,
honoring the overriding royalty interests (ORRIs) that existed
prior to the purchase as a condition of the purchase. HEX/Furie
claims the ORRIs make it uneconomical to develop. He asked why
HEX/Furie made the purchase under those conditions.
4:13:56 PM
MR. SLAUGHTER said that would be a question for Mr. Hendrix. He
said there is still gas and if the economic issues of the unit
are fixed, it would still be viable. He said consultants for the
legislature last year advised that meaningful royalty relief
would be in the interest of the state. He said Department of
Natural Resources (DNR) had looked at [HEX/Furie] with full
access to all the confidential information and determined that
royalty modification was in the state's interest. He said
HEX/Furie would still pay 15.5 percent in royalty interests
compared with other units that were paying 13.5 to 14 percent
average in Cook Inlet. He said the royalty relief would bring
HEX/Furie closer to the playing field of other units.
4:15:55 PM
MR. SLAUGHTER moved to slide 13 containing graphics from the
U.S. Energy Information Administration (EIA) illustrating
Rankings: Natural Gas Residential Prices, October 2024. He
acknowledged Cook Inlet gas is very expensive to produce
compared with Henry Hub averages. However, to the consumer, the
residents of Alaska have affordable delivered gas, and he said
this was because Cook Inlet is close to the market and because
ENSTAR provides safe, reliable, and effective service. He noted
that Henry Hub is in Louisiana. He said Alaska utilities do a
good job and make [gas] affordable to the consumer. He pointed
out {Alaskans] use a lot of it because we live in Alaska.
4:18:18 PM
SENATOR WIELECHOWSKI asked, if HEX/Furie gets the royalty relief
and if they can negotiate the use of the jack-up rig, were there
things the legislature could do to expedite the process to get
more gas and ensure constituents that their lights won't be
turned off this winter.
4:18:49 PM
MR. SLAUGHTER said access to vendors that serve offshore, [for
example] support boats, was critical and very limited. Royalty
relief would result in HEX/Furie proceeding with drilling. He
emphasized the importance of making Cook Inlet more competitive.
^PRESENTATION(S): COOK INLET NATURAL GAS OVERVIEW FROM HILCORP
ENERGY COMPANY
PRESENTATION(S): COOK INLET NATURAL GAS OVERVIEW FROM HILCORP
ENERGY COMPANY
4:20:20 PM
CHAIR GIESSEL announced the presentation titled Cook Inlet
Natural Gas Overview by Luke Saugier of Hilcorp Energy Company.
4:21:00 PM
LUKE SAUGIER, Senior Vice President, Hilcorp Energy Company,
Houston, Texas, introduced himself and said he was pleased to to
represent the 1,500 Hilcorp employees in Alaska and to provide
an update on Hilcorp's activities in Cook Inlet over the past 12
months and to share Hilcorp's perspective on the current market.
4:22:05 PM
MR. SAUGIER moved to slide 2 Hilcorp Alaska Overview, a map of
Alaska with magnified detail of Prudhoe Bay and Cook Inlet.
Slide 2 lists the highlights of Hilcorp Alaska:
• ~ 1,500 Employees
• 7 Active Rigs in Cook Inlet Basin
• 6 Active Rigs on North Slope
• 18 Cook Inlet Basin Wells, Drilled in 2023
• 21 Cook Inlet Basin Wells, Drilled in 2024
MR. SAUGIER said Hilcorp came to Alaska in 2012 when most of the
large oil companies began to exit. The rail belt was facing
natural gas shortages, and as Hilcorp acquired the old fields,
they invested to stabilize the natural gas supply for the rail
belt. Hilcorp steadily grew its footprint in the state and in
2025 announced its largest ever budget for the state. He said
Alaska made up nearly 60 percent of Hilcorp [operations]
overall. He said Hilcorp was committed to continuing investments
in the future to satisfy the needs of customers, as well as
Hilcorp employees, who all live and work in south central
[Alaska].
4:23:22 PM
MR. SAUGIER moved to slide 3.
[Original punctuation provided.]
Hilcorp's Continued Commitment to Cook Inlet Natural
Gas
• Hilcorp is committed to the Cook Inlet Basin and
is fully developing its leasehold
• From 2012 to 2024, Hilcorp has produced over
700 Bcf of gas and drilled 174 wells
• Hilcorp has spent well over $1.0 billion in
the Cook Inlet Basin
• Hilcorp is increasing activity in Cook Inlet
Basin
• Drilled 22 wells in 2012, 18 wells in 2023,
and 21 wells in 2024
square4 Plans to drill 15-20 wells per year
going forward
• Producing wells' production initially declines
~30% per year
MR. SAUGIER emphasized that newly drilled wells immediately
begin to decline. Hilcorp owns late-life assets in which
many, many wells have been drilled over years which
contributes to the rate of decline.
• Cook Inlet Basin gas market is unlike any other
in the United States
MR. SAUGIER pointed out that there was no gas import
ability, and no gas export ability.
Utilities and other gas producers must identify new
sources of gas supply for Southcentral Alaska
MR. SAUGIER said Hilcorp's leases cannot meet 100 percent of the
demand for South Central [Alaska].
4:25:44 PM
CHAIR GIESSEL asked how many of the 21 wells drilled in 2024
found gas.
4:25:54 PM
MR. SAUGIER said roughly 13 of the 21 wells found gas. He said
this reflected the diminishing returns observed in older fields.
4:26:25 PM
SENATOR WIELECHOWSKI asked how much of the $1 billion spent by
Hilcorp was eligible for tax credits.
MR. SAUGIER said he did not know and could follow up.
4:26:38 PM
SENATOR KAWASAKI asked how many of the 21 wells drilled in 2024
were drilled with the Spartan 151 jack-up rig.
MR. SAUGIER said his presentation would convey that shortly.
4:27:06 PM
MR. SAUGIER moved to slide 4 and said the Cook Inlet basin has
served as the railbelt's exclusive source of natural gas for
over 60 years.
[Original punctuation provided.]
The Cook Inlet Basin
A Brief Overview
History and Brief Overview
1958: Oil and gas production started in the Cook Inlet
basin after the discovery of the Swanson River field
in 1958.
1959: Unocal and Ohio Oil drilled the wildcat well
Kenai Unit 14-6, discovering large gas accumulations
that make up the Kenai Gas Field.
1962: Two more large gas finds were discovered in the
North Cook Inlet field located offshore and the Beluga
River field on the west side of Cook Inlet.
1969: Operations begin at the Kenai fertilizer plant,
using over 50 Bcf per year of natural gas feedstock.
1969: Kenai LNG export facility at Nikiski commence
operations
• At its peak, the facility exported over 60 Bcf of
gas per year to Asia.
• For more than three decades these two plants
consume more than half of Cook Inlet natural gas
production.
• The remaining consumption is split roughly evenly
between electricity generation, gas utilities,
and use in oil and gas operations.
1970-2000s: Production in Cook Inlet expanded through
the 1970s and ranged around 200 Bcf per year until the
mid2000s, when it begins to decline sharply.
2005-2013: Cook Inlet Gas Production declines from
over 200 Bcf/year in 2005 to less than 100Bcf/year in
2013.
2007: Kenai fertilizer plant closes.
2011-2012: ConocoPhillips announced that after 40
years of operations its Kenai LNG Export facility
would be closed.
2009-2013: Looming natural gas crisis in Southcentral
Alaska.
Slide 4 includes a graph illustrating the volume of production
from Cook Inlet gas fields from 1958 through 2016.
4:29:30 PM
MR. SAUGIER moved to slide 5, news headlines highlighting
concerns about the gas shortage around 2010. This was the
environment Hilcorp entered in 2012 and it began investing
immediately to revitalize and stabilize the gas supply.
• Anchorage Prepares for Possible Shortage of Natural Gas, The
New York Times, March 23, 2009
• "Gas shortage could leave Anchorage in the dark", Anchorage
Daily News, September 30, 2009
• Hometown, Alaska: Anchorage's Natural Gas Crisis, Alaska
Public Media, December 9, 2009
• "Looming Cook Inlet gas shortages may be crippling", Anchorage
Daily News, October 7, 2012
• "Southcentral Alaska utility warns of possible natural gas
supply shortage", Anchorage Daily News, October 11, 2012
MR. SAUGIER returned to slide 4 and pointed out the small bump
in production, largely the result of additional investment and
activity by Hilcorp.
4:30:15 PM
MR. SAUGIER moved to slide 6.
[Original punctuation provided.]
Southcentral Natural Gas Shortage
April 2022: Hilcorp notifies utilities that is will no
longer be able to provide new firm contracts beyond
existing contracts through 2033.
February 2024: Hilcorp met before a joint hearing of
the House and Senate Resources Committee "The gas
under Hilcorp's leases cannot meet 100% of the Alaska
demand."
• Hilcorp invests hundreds of millions of
dollars in Cook Inlet; successfully drilling
21 wells in 2024.
Today: Despite significant investments and an
aggressive drilling program by Hilcorp, the outlook
remains the same.
There is not sufficient gas under Hilcorp leases to
meet the current demands of Southcentral Alaska
Utilities and other gas producers must identify new
sources of gas supply for Southcentral Alaska
4:31:33 PM
SENATOR WIELECHOWSKI asked to return to slide 4. He said Alaska
has used 9 trillion cubic feet [of natural gas] in 50 years and
referred to a U.S. Geological Service (USGS) survey that
reported there were 19 trillion cubic feet or approximately a
100-year supply remaining. He asked whether Mr. Saugier agreed
with the survey and how much gas Hilcorp thought it had.
4:32:12 PM
MR. SAUGIER said USGS surveys generally describe potential
reserves, and the survey was probably looking at the entire Cook
Inlet basin, 2.8 million acres of state leases that could be
developed. That includes all the existing discovered resources,
for example, HEX/Furie, Bluecrest and Hilcorp. He stated he
could not say the survey was wrong but questioned whether it was
realistic. He said he did know Hilcorp's gas potential and, as a
private company, Hilcorp would not disclose the exact volume of
its reserves in public. He said he would speak to the volume of
Hilcorp's contracts and that would be a good proxy for the
amount of gas its fields could produce since Hilcorp desires to
contract all its gas.
4:33:11 PM
SENATOR WIELECHOWSKI understood Hilcorp was a private company
and asked for understanding about the legislature's position. He
said there were constituents that nearly ran out of gas last
year in twenty-below-zero weather. It would be helpful for the
legislature to understand how much gas there is. He noted the
debate about whether the area will need to import gas and
whether companies are sitting on gas. He said it is difficult to
make policy decisions when the state owns the gas and leases it
to [the production companies] but the policy makers are unable
to learn how much gas is there. He asked how much gas Hilcorp
had.
4:34:12 PM
MR. SAUGIER said Hilcorp was subject to a wide array of
regulations and that it does transparently disclose numbers like
the amount of gas it has, its financials and other information
to the appropriate state agencies. It would not disclose that
information in a public hearing. He acknowledged the need for
reconciliation around the reports that there is a lot of gas and
Hilcorp saying there is not enough gas. He said both are true.
4:34:50 PM
MR. SAUGIER moved to slide 7, Wells Drilled in Cook Inlet Basin,
Onshore and Offshore, 2005 to Present, a bar graph illustrating
the number of wells drilled each year by producers in Cook Inlet
and comparing wells drilled by Hilcorp to those drilled by other
entities.
MR. SAUGIER pointed out that ten to fifteen wells were drilled
most years from 2005 to 2011 in Cook Inlet and Hilcorp
maintained that pace as the primary active developer until 2020
when it aggressively ramped up development to keep up with the
needs. In 2024 Hilcorp drilled 21 wells. He applauded
HEX/Furie's success with the two wells it drilled in 2024 and
emphasized its need for success. He said HEX/Furie wants to
drill two more wells in 2025 and Hilcorp was negotiating with
them for the use of the jack-up drilling rig.
4:36:11 PM
SENATOR WIELECHOWSKI asked of the 174 wells [Hilcorp has drilled
in Cook Inlet], how many were exploratory and how many were
development.
4:36:21 PM
MR. SAUGIER said he could not answer exactly, but that ten
percent exploratory was a good rule of thumb. He offered to
follow up with exact numbers.
4:36:37 PM
SENATOR WIELECHOWSKI noted concern that there were development
wells, but not enough exploration for new gas. He noted again
the USGS survey which reported a 100-year supply of gas in Cook
Inlet and the need for more exploration. He asked whether
Hilcorp had any leases they were not currently exploring.
4:37:03 PM
MR. SAUGIER said he had a slide illustrating the location of
Hilcorp's drilled leases.
4:37:12 PM
MR. SAUGIER moved to slide 8 and said Hilcorp, as a gas company
and not a drilling company, does not desire to own drilling
rigs. Hilcorp used the Spartan 151 for about three years. He
said it was a good tool and the only tool that could do some of
the drilling, including on their most important drilling
platform. He said the owner of the rig told Hilcorp in 2024 they
would be taking the rig to India, and it would no longer be
available in Cook Inlet. Initially Hilcorp looked for a
different rig [to purchase] and learned there are only three or
four in good working condition capable of drilling in Cook Inlet
conditions. The cost estimate to bring a rig to Cook Inlet was
about $30 million, including transportation and modifications
for the subarctic environment. He noted further financial and
practical challenges to bringing a new rig to Cook Inlet and
explained Hilcorp's decision to purchase the Spartan 151 and
keep it in Cook Inlet.
[Original punctuation provided.]
New Investments: Hilcorp Spartan 151
The Spartan 151
The rig is the right tool for the Cook Inlet
• Hilcorp is familiar with the rig.
• Leg size meets water depth needs
• This rig is well maintained
• Hilcorp has invested in improvements
Alternatives are scarce
• Limited supply of smaller class, well maintained
jack up rigs
• Only 3-4 rigs globally are estimated to meet
these conditions
• Jones Act compliance further reduces options
Rig Purchase Rational
1. Alaska needs a jack-up rig
Necessary for the full development of Cook Inlet
Assets
2. Spartan 151 is the right tool
Rig meets operational needs of Cook Inlet
3. No realistic alternatives exist
$30+ million cost to bring rigs from Outside
4. Proven performance record
Rig has drilled for Hilcorp Alaska and Furie
Hilcorp is making investments for the good of Cook
Inlet Basin gas production.
4:39:40 PM
SENATOR MYERS asked whether renting the rig to HEX/Furie would
impact Hilcorp's 2025 plan to drill 21 wells.
4:40:06 PM
MR. SAUGIER answered that it would not. He said the rig would be
used during the entire ice-free season, about April 15th through
November 15th. He noted the rig would not be allowed in Cook
Inlet outside the ice-free season. He said, if HEX/Furie does
not need the rig, Hilcorp will use it to drill additional wells
on their leases, however he said he expected the wells HEX/Furie
would drill will be more productive than the wells Hilcorp would
drill.
4:40:54 PM
SENATOR WIELECHOWSKI noted that the ability of HEX/Furie to use
the jack-up rig was a huge potential barrier. He acknowledged
that the companies preferred for the state to stay out of
negotiations between the companies. He pointed out there would
probably not be more gas for Hilcorp, but a lot of gas for
HEX/Furie and for the people of Alaska. He said legislators have
no idea what Hilcorp was asking, possibly an obscene amount [for
HEX/Furie to use Hilcorp's jack-up rig]. He questioned how the
state could ensure Hilcorp was not gouging HEX/Furie. He said
the people who would suffer were the people of Alaska who depend
on the supply of gas. He asked how a fair process could be
ensured without heavy-handed government interference.
4:42:07 PM
MR. SAUGIER noted that it was important to Hilcorp to make the
jack-up rig available to anyone else that wants to use it on the
exact same terms that Hilcorp charges itself internally. He said
there is a per day price to cover maintenance and repairs of the
rig that Hilcorp charges itself and any other company that uses
the rig.
4:42:43 PM
SENATOR WIELECHOWSKI asked whether it would be possible to use
the rig somewhere else in Alaska in the off-season.
4:42:55 PM
MR. SAUGIER said he wished there was [some place], but he wasn't
aware of any.
4:43:04 PM
SENATOR CLAMAN asked whether Alaska Industrial Development and
Export Authority (AIDEA) might buy and bring a second rig to the
Cook Inlet basin. He further asked whether Hilcorp was
interested in drilling more than its current plan for the next
three years if AIDEA or another entity brought a second jack-up
rig to Alaska.
4:43:29 PM
MR. SAUGIER said they would use the company-owned rig. He said
it was important to keep that rig as busy as possible to pay it
off and recover the money put into it. He noted Hilcorp had one
very important producing platform, where it would spend its time
drilling and that platform would not accommodate two rigs.
4:43:53 PM
SENATOR CLAMAN asked whether a second rig would allow Hilcorp to
get more gas out of the leases they own.
4:44:10 PM
MR. SAUGIER asked for clarification of the question.
4:44:16 PM
SENATOR CLAMAN noted that some of the gas is not economically
recoverable. He asked whether a second rig would make it more
accessible and to produce and deliver to customers in
southcentral Alaska.
4:44:42 PM
MR. SAUGIER said unfortunately not. He said all Hilcorp gas
resource is located underneath its platforms. He said there were
several specific gas platforms and the other platforms that have
gas resource under them have drilling rigs on them. He said
those platforms unfortunately have far less gas than the gas
resource under the North Cook Inlet platform, which is where
Hilcorp does most of its drilling. He said drilling on the other
platforms was unsuccessful.
4:45:17 PM
SENATOR DUNBAR asked what would happen if the jack-up rig broke.
4:45:51 PM
MR. SAUGIER said it would be a real problem for Hilcorp and for
Southcentral Alaska. He said, if that happened Hilcorp would not
buy another rig, but would contract to bring another rig to Cook
Inlet. He said it would probably take one drilling season to
find a rig and bring it to Alaska. He said the condition of the
rig is critical because often rigs are not maintained when they
aren't being used.
4:46:57 PM
SENATOR KAWASAKI noted the Cook Inlet Recovery Act Amendment and
AIDEA's $30 million investment. He asked how many of the 21
wells drilled [in 2024] were exploratory.
4:47:37 PM
MR. SAUGIER moved to slide 12.
[Original punctuation provided.]
2024 Cook Inlet Drilling Program
Highlights
• Investing hundreds of millions of dollars per year
in Cook Inlet
• Drilled 21 new wells in Cook Inlet in 2024
• 5 Offshore:
• Steelhead (1)
• Tyonek (4)
MR. SAUGIER said Hilcorp used the jack-up rig for the Steelhead
[Hilcorp platform] drilling, which was unsuccessful, and four wells
on the [Furie] Tyonek platform.
• 16 Onshore
• Kenai Gas Field (4)
• Cannery Loop (2)
• Exploration (2)
• Beluga River (4)
• Pretty Creek (1)
• Beaver Creek (2)
4:48:14 PM
MR. SAUGIER said of the onshore drilling, two, or
approximately ten percent, were true exploratory wells and
unsuccessful. He said Hilcorp also acquired seismic data to
image the subsurface as part of their ongoing exploration
activities.
• Acquired Spartan 151 Jack-Up Rig in May 2024
critical equipment to keep in Alaska.
• Utilized by Furie/ Hex to successfully drill a
new well in Cook Inlet in 2024.
2025 Cook Inlet Drilling Program
Hilcorp is planning an aggressive drilling schedule in
Cook Inlet in search of natural gas.
• 21 planned wells in 2025
• Utilizing 7 rigs
• 4 drill rigs and 3 workover rigs
4:49:01 PM
MR. SAUGIER said Hilcorp would be spending tens of millions of
dollars to gather seismic data and building new roads and new
drilling pads as part of exploration. He emphasized the need to
plan years ahead, acquire permits for roads, and then build them
for access to areas to drill for new fields.
4:49:43 PM
SENATOR KAWASAKI asked how many of the total Cook Inlet rigs
owned by Hilcorp were currently being utilized for production or
exploration and in total.
4:50:00 PM
MR. SAUGIER said there were two onshore mobile drilling rigs,
two fixed offshore drilling rigs that are on specific platforms
and one jack-up rig. He said all five of them are in good
working condition and have been used within the last three
years. He said Hilcorp uses both onshore rigs every year, the
jack-up rig every year and typically use either the steelhead
rig or the platform rig each year.
4:50:46 PM
SENATOR KAWASAKI asked whether any of the rigs were present but
not being used for exploration or development and what would
happen with those rigs.
4:51:06 PM
MR. SAUGIER said there was one other rig Hilcorp used in the
past, but was not currently using, stacked near the Kenai gas
field. He said it could be used and according to the Hilcorp
drilling team, would first need about $20 million of work for
new power generation. He said Hilcorp could use the rig for
onshore or offshore drilling, but it's very expensive to move
because it is so large. It also has a large footprint, so it
would require additional cleared space in the Kenai Wildlife
Refuge, which is difficult.
4:51:50 PM
SENATOR WIELECHOWSKI recalled Hilcorp's testimony last year that
royalty relief was not something that would benefit Hilcorp or
lead to drilling more wells. He asked whether that was still
Hilcorp's position.
4:52:03 PM
MR. SAUGIER affirmed Hilcorp would not advocate for or against
royalty relief. He said it would not change Hilcorp's aggressive
development schedule. He said Hilcorp was planning as much as
could be accomplished given the resources available in Cook
Inlet.
4:52:30 PM
MR. SAUGIER returned to slide 9, a graph illustrating
diminishing returns in oil fields beginning in 2021 through June
2024. He said Hilcorp tracked the results of every project it
does and has done so for several years. He said each dot on the
graph represented the results of a specific project and those
projects could be testing a new zone in an existing well or
drilling a new well. He said the graph clearly shows the
declining results of Hilcorp's efforts over time.
4:53:21 PM
MR. SAUGIER moved to slide 10, a bar graph illustrating Cook
Inlet Gas Production for each year from 2016 through 2024. He
noted that Southcentral Alaska uses 65-70 billion cubic feet
(BcF) of natural gas per year. The graph shows public data for
all gas producers in Alaska. It shows that Hilcorp's production
for those years has remained consistent at about 50 BcF per year
and other producers have consistently declined. He said he was
optimistic that Furie's production would increase. He said it
was not surprising that other producers experienced a decline
because there had been no new wells drilled on their leases. He
concluded that the concern was that there is a gap between the
amount of oil on the market and the amount of gas used in Cook
Inlet, beginning in 2021. He said we are using more gas than we
are producing and that is unsustainable. He said Hilcorp and the
utilities have drawn down their storage levels every year and
that can't continue indefinitely.
4:55:09 PM
SENATOR MYERS asked how much of the Hilcorp production was due
to new acquisitions, corporate or territory, as opposed to
assets and territory acquired in 2012.
4:55:40 PM
MR. SAUGIER explained that the graph on slide 10 starts in 2016
when the last acquisition occurred. The graph shows the results
of organic activity.
4:55:54 PM
MR. SAUGIER moved to slide 11, Demand vs Supply, a graphic
illustration of Hilcorp's Natural Gas Contracts. He noted the
gap between the demand and the production level and said some
customers may not get all they want.
4:56:28 PM
MR. SAUGIER moved to slide 13, Undeveloped Gas Resources in Cook
Inlet, bar graphs illustrating the asset owners in Cook Inlet
and the contracted volumes of gas for each. It also includes a
Cook Inlet Resource map indicating the Kitchen Lights Unit (KLU)
with 1,250 BcF and Cosmopolitan with 234 BcF.
MR. SAUGIER said slide 13 illustrated that Hilcorp does not have
enough gas to meet all Alaska's needs from its leases and other
producers say there is plenty of gas. Both are true. He
explained that the Hilcorp leases are very old fields on which a
lot of wells had been drilled. Hilcorp continues to be very
active and has contracted to produce roughly 323 BcF through
2033, almost ten years into the future, a reasonable proxy for
gas reserves available from Hilcorp's fields.
MR. SAUGIER noted the Cosmopolitan discovery of 234 BcF in a
single gas field and that there was about 1250 BcF in the
Kitchen Lights Unit (KLU), which he said was publicly released
information. He noted this was roughly four times as much as the
remaining resource under Hilcorp leases.
4:58:32 PM
SENATOR DUNBAR asked whether this was comparing apples to
oranges. He noted the 1250 BcF under KLU was theoretical,
perhaps proven reserves, but not contracted and possibly not
economically recoverable, whereas the 323 BcF [contracted by
Hilcorp] was economically recoverable gas.
4:58:52 PM
MR. SAUGIER acknowledged that it was difficult to find like to
like comparisons in the public domain. He said the point he was
trying to make was that there is a lot of gas underneath the KLU
field if the field can be developed. He could not comment on how
economical it would be to recover and he was not disagreeing
with Furie's position that they need royalty relief.
4:59:31 PM
MR. SAUGIER moved to slide 14, a satellite image showing the
Historic Cook Inlet Basin well development. He explained that
the black dots on the image represent drilled wells and pointed
out that the Hilcorp leases were almost all black and that
hundreds if not thousands of wells had been drilled there. He
said Hilcorp drilled 175 of those wells, but that the fields
have been in production since the early 1960s. He said 9
trillion cubic feet had been extracted from these fields.
5:00:57 PM
MR. SAUGIER moved to slide 15, a satellite image showing the
southern section of Cook Inlet. He said this was where most of
Hilcorp's exploration activity took place. He noted the wells
that had been drilled said that, though Hilcorp may only be
interested in a small piece, it was required to lease large
blocks of acreage. He said this was where Hilcorp would have to
build roads and pads for exploration. He said obtaining federal
permits to drill was difficult, but Hilcorp was working on it.
He said the southern section of Cook Inlet is where Hilcorp
would drill wells, but he did not know whether drilling efforts
would be successful.
5:02:10 PM
MR. SAUGIER moved to slide 16, a graph showing Cook Inlet gas
pricing. The graph starts in 2013 and shows the Hilcorp consent
decree price cap compared with the Hilcorp actual average
contract price, and the inflation adjusted gas price. He noted
the consent decree expired in 2024 and said Hilcorp always
complied with the terms of the consent decree. He said they
spent over a billion dollars to bring gas to market. He pointed
out that all Hilcorp's gas volumes are sold under long term
fixed price contracts, and they don't have the ability to change
the price.
5:03:16 PM
MR. SAUGIER moved to slide 17, Cook Inlet Gas Storage
Facilities. The slide contains a table and a map describing four
storage facilities: Pretty Creek, KGSF, CINGSA and Pool 6. He
said there was a request from utility customers to make the Pool
6 storage facility available to them on a commercial basis. He
said House Bill 50 passed in 2024, allowing for such agreements
and Hilcorp filed an application with the Regulatory Commission
of Alaska (RCA) in late December, but withdrew it to include
additional information. He said Hilcorp intended to refile
shortly to make third party gas storage available to its
customers.
5:04:12 PM
SENATOR WIELECHOWSKI asked for a description of the changes to
gas storage statutes and the impact for better or for worse.
5:04:24 PM
MR. SAUGIER noted that he was an engineer, and this was more a
legal question. He believed it had to do with confidentiality.
5:04:44 PM
CHAIR GIESSEL added that [under the new legislation] the
Regulatory Commission of Alaska (RCA) had oversight in terms of
the regulation of prices. She noted RCA advocates for the
consumer.
5:04:52 PM
MR. SAUGIER added that [Pool 6] would be a regulated facility.
5:05:02 PM
SENATOR WIELECHOWSKI asked whether that statute was likely to
lead to more gas storage at a reasonable rate for consumers.
5:05:10 PM
MR. SAUGIER said, with high confidence, that it would. He said
it was the RCA's job to be sure the price was reasonable.
5:05:21 PM
CHAIR GIESSEL asked how much gas Pool 6 could store.
5:05:30 PM
MR. SAUGIER said Pool 6 is a very large, depleted gas reservoir.
It has stored gas for many years and could store over 100 BcF.
As more gas is stored, the pressure increases. He said Hilcorp
had about 15 wells used to withdraw gas at very high rates. He
said Hilcorp had received requests from the utilities to install
additional compression, which would allow them to withdraw gas
at higher rates. He said Hilcorp was willing to do that as a
second phase of gas storage.
5:06:16 PM
CHAIR GIESSEL noted that this was significantly greater storage
capacity than the Cook Inlet Natural Gas Storage Alaska (CINGSA)
facility.
5:06:23 PM
MR. SAUGIER agreed and noted that CINGSA is a different storage
facility. He said Hilcorp was not trying to compete or claim to
be better, however [Pool 6] is able to store much more gas.
5:06:50 PM
MR. SAUGIER moved to slide 18, Alaska Team Working Cook Inlet
Gas. He said there are 265 Hilcorp employees working every day
to maximize gas production. He said the employees live in
Anchorage or the Kenai Peninsula and they all use the natural
gas and power that comes from Hilcorp production.
5:07:30 PM
SENATOR MYERS referred to slide 12 and asked for a comparison of
Hilcorp's exploration to development ratio in Alaska with the
ratio in Texas, New Mexico, and other places Hilcorp operates.
5:08:14 PM
MR. SAUGIER said he wasn't sure. He said Hilcorp tries to put
about ten percent of its budget and activity in the Kenai
Peninsula towards exploration, but he said he wasn't sure what
the amount was at a corporate level.
5:08:32 PM
SENATOR MYERS asked what [Hilcorp's effort toward exploration]
was on the Noth Slope.
5:08:43 PM
MR. SAUGIER said he was tempted to say zero on the slope. He
explained the focus on the slope was entirely development. There
are very large, identified resources on the slope that require a
lot of investment and a lot of activity to bring to market, but
they are already identified and don't require exploration.
5:09:10 PM
CHAIR GIESSEL thanked the presenters and acknowledged Senator
Shower, Representative Coulombe, Representative Costello, and
Representative Ruffridge in attendance.
5:09:45 PM
There being no further business to come before the committee,
Chair Giessel adjourned the Senate Resources Standing Committee
meeting at 5:09 p.m.
| Document Name | Date/Time | Subjects |
|---|---|---|
| 1.22.25 HEXFurie Senate Resources Cook Inlet Update.pdf |
SRES 1/22/2025 3:30:00 PM |
|
| 1.22.25 Hilcorp Senate Resources Cook Inlet Update.pdf |
SRES 1/22/2025 3:30:00 PM |