HJR 12 - LEASES IN NATL PETROLEUM RESERVE Number 291 CHAIRMAN HODGINS announced the committee would address HJR 12, "Urging the Secretary of the Interior to conduct competitive oil and gas lease sales within the National Petroleum Reserve in Alaska." CHAIRMAN HODGINS called a recess to await the arrival of the sponsor of HJR 12 at 10:05 a.m. The meeting was called back to order at 10:07 p.m. Chairman Hodgins noted Representative Bunde had joined the meeting. Number 430 REPRESENTATIVE JOE GREEN, sponsor of HJR 12, came before the committee to explain the resolution. He indicated there is information in the committee file pertaining to the issue. He stated, "The NPRA (National Petroleum Reserve Alaska) as it's called now since the mid 80s was prior, so that there won't be any confusion, NPR 4 which at that time was established as a Naval Petroleum Reserve Number 4, by Warren G. Harding, 1923. The others are in California and Wyoming and they were established originally as a place to find oil that would supply our naval forces. And so from early inception, dating clear back to the 1800s with oil seeps located up near the top if you look at Barrow and then go over where it says Dease Inlet. Simpson Lagoon is an area there that actually shows a name Sinclair. Well, it's about in that area and there is in your packet a xerox copy." REPRESENTATIVE GREEN informed the committee members there have been natural seeps in the NPRA. Because of that, there was some interest exhibited early on. There was a United States Geological Survey (USGS) made indicating the potential that the source rock and types of reservoirs, etc., were available and that was part of the greater study that covered the entire North Slope. What came from that was the discovery of Prudhoe Bay in 1968. Representative Green explained that prior to that, there had been two or three (indisc.) curves of interest in NPRA. He referred to a 1901 study by Mr. Brooks, published in 1903, which indicated that this was a geological providence capable containing hydrocarbons. The USGS published another issue in 1909. He referred to Mr. Leffingwell and said that name is a cherished name in Alaska because of all the geological work he did which had to do with the North Slope and the NPRA. REPRESENTATIVE GREEN said in the early 1920s, there was renewed interest in the petroleum reserve. There was a flurry of excitement for about three years. Some discoveries were made, but nothing of commercial venture. Then there was kind of a hiatus. We had abundant oil reserves produced in the Lower 48 and it didn't appear that would be a necessity as there was plenty of oil for the Navy as well as the rest of the nation. In 1943, during World War II, there was a renewed interest because of its strategic location as well as the fact that some of the supplies of petroleum were interrupted by the war effort. Number 728 REPRESENTATIVE GREEN explained that after World War II, there was continued interest and over the next seven years there were 45 shallow wells drilled. There was discovery in three different areas of oil as well as three separate areas from that of gas, none of which appeared to be commercial. He said interest waned. There was another renewed interest with the discovery of Prudhoe Bay. Husky Oil Company was commandeered to continue looking. He continued to explain maps the committee members had in their committee file. He said there is a dirth (sp.) along the Eastern boarder of the petroleum reserve which is the Colville River. That is where the renewed interest currently is because of the Alpine discovery from Arco and the development program they had discussed publicly. The potential exists for that discovery or another discovery because the best place to find oil is near an oil field. There is a discovery there that will be developed and there will certainly be, in all likelihood, more oil right across the boundary from the delta which is the Colville River. Number 845 REPRESENTATIVE GREEN said there is no requirement for any environmental studies. There is nothing that has to be done from a federal government standpoint. The reserve is available for leasing, it's just that there hasn't been an expressed interest in it or if the interest has been expressed, the federal government has not seen fit to renew leasing there. He explained the resolution would send some support to our federal legislative triad that we would like to see a renewed interest and perhaps allow for leasing at least along the eastern boarder of the petroleum reserve, but there are other areas as well. He said the same problem occurs in the Arctic National Wildlife Refuge (ANWR) that if there is leasing from that period to the time of development it would take considerable time. This would be a little less because the infrastructure would be preceded in effect by the development of Alpine. He said things could happen a little faster. He stated this is not a replacement for ANWR, it is in addition to ANWR. REPRESENTATIVE GREEN said by agreement, the oil would be shared 50/50 with the federal government. That is a preexisting agreement to development NPRA as opposed to ANWR where there is still controversy whether it would be a 90/10. Number 1032 REPRESENTATIVE NORMAN ROKEBERG indicated he had the opportunity to work with Husky Oil when they had a contract with the Navy. He asked Representative Green if he recalls the time period of the Husky contract and noted they drilled about 15 wells. REPRESENTATIVE GREEN responded that would have been in the late 1970s, early 1980s. REPRESENTATIVE ROKEBERG asked if some of the wells were stratigraphic wells which were intended not to strike oil. REPRESENTATIVE GREEN explained quite often, the program has been to drill an information well or a cost well. It is an off structure attempt to find out the geology, but not necessarily to discover anything of a hydrocarbon nature preparatory to leasing. Representative Green said that it just says, "Alright, you've done your seismic work and this is a truth - ground truth, in the strat column, that you can then apply whatever you want to do - whatever your particular company may want to do as far speed of reflections delineating any kind of structural traps." Representative Green noted that some of the wells that Husky Oil drilled were not actually intentionally looking for oil, they were looking for geological information. REPRESENTATIVE ROKEBERG asked if some of the earlier wells were shallow. REPRESENTATIVE GREEN indicated they were very shallow. REPRESENTATIVE ROKEBERG asked if it would be a fair statement to say, "They really weren't wells in the sense that we would be (indisc.) and exploring for today." REPRESENTATIVE GREEN said that is true. He noted there had been earlier non-commercial wells drilled in the Colville Delta. It was only later when they drilled deeper that they found the Alpine discovery. That is not an uncommon phenomena both in Alaska and in the Lower 48 that the early development was too shallow to actually find the mother load. Number 1154 REPRESENTATIVE ROKEBERG referred to page 3, line 4, "to take immediate action to conduct competitive lease sales within the National Petroleum Reserve in Alaska..." and said he took note in the Governor's State of the State speech that he had talked to the President and he felt that we would hopefully be able to open up the NPR by working very hard within 18 months to get a leasing program going. Representative Rokeberg stated he had thought the petroleum reserve was already open for leasing. REPRESENTATIVE GREEN indicated Representative Rokeberg is right and to him, that is sub profuse. He said he believes that speaks to the fact that the Administration does not share the urgency that most of Alaskans do. It is available for leasing and there isn't a reason for an 18 month delay. He stated that they may want to determine which areas they would want to lease and that would probably take maybe a couple of months. Number 1274 REPRESENTATIVE CON BUNDE questioned what the time line would be if there is a lease and if they find commercially viable structures that includes oil. He noted he heard in the ANWR debate that the date they granted the lease to when the first revenues go into the general fund would be about ten years. REPRESENTATIVE GREEN stated it is his opinion that the time line could be cut in half and depending on the aggressiveness of their desire, it could be less. He noted several of the issues that would confront us in opening ANWR have already been done here. The area has already been drilled as there are over 80 wells. There would be infrastructure, especially of they were to lease and discover adjacent to Alpine. That development will probably be on stream, under the current schedule, sometime around the turn of the century. If so, there would be an umbilical cord for development in the NPRA area to tie into that near the village of Nuiqsut. As the pipeline, as it is currently envisioned, would come from the development area, the two drill sights, south and then cut across and join a Kuparuk drill sight on the west side of that development. The ability to drill, find the oil and then transport it to a pipeline is significantly ahead of what would have to happen from the east side. He noted there would have to be a pipeline corridor established which would delay to a number of months or years. Number 1399 REPRESENTATIVE BUNDE referred to Representative Green saying that an environmental impact statement would not be required, but there would be construction of a additional umbilical pipeline. He said he is sure there would be significant environmental oversight as that is attempted to be put in place. REPRESENTATIVE GREEN said he would be a little remise if he lead the committee to believe there absolutely wouldn't be an environmental impact statement involved. He said it is quite doubtful that it would be necessary, more in the line of an assessment than an evaluation. The time line, instead of three to five years might be one to two years. He said he thinks that is what Arco fells about the Alpine development in that there wouldn't be the need for a full environmental impact statement, but more of an environmental statement. Representative Green noted that as you move towards some of the bays, it would take a full environmental impact statement. Number 1473 REPRESENTATIVE BUNDE referred to the 50/50 deal with the federal government and said the oil would be transported by the trans Alaska pipeline system (TAPS). He asked if this offers any obstacles - the fact that this is a change in percentage instead of the 90/10. REPRESENTATIVE GREEN indicated he wouldn't think so because that agreement has been struck. This is just another issue where the state of Alaska is honoring a prior agreement. Representative Green said it is the federal government who is impacting prior agreements. Number 1523 REPRESENTATIVE OGAN asked what the advantages are to keeping oil flowing through the pipeline in regards to how it affects the royalty that the state receives. REPRESENTATIVE GREEN said there is a minimum volume for a pipeline that is 48 inches in diameter can efficiently transmit. If it gets down to numbers in the neighborhood of 200,000 to 300,000 barrels a day, your flow rate is so low that you can't efficiently continue to operate. He noted we are currently well above that, but there is a point at which production starts to decline from a field and Prudhoe is on that skid at about 10 percent to 12 percent per year. When you talk about a 900,000 barrel a day filed, that is almost an oil field a year decline. Representative Green referred to the Alpine development which would be about 60,000 barrels a day and said that does not off-set the decline from Prudhoe Bay. It helps, but it doesn't off-set it. He said the more of the small pods that we can get on, the longer we can continue to produce those areas that actually return the state more money. REPRESENTATIVE OGAN asked if it not true that the state's royalty share is based after transportation costs. The more oil we have going through, the more royalty we get per barrel because of transportation costs. REPRESENTATIVE GREEN explained the amount of royalty is established by contractual agreement, so when the barrel is produced there is that subject to royalty. He said, "Now, what I think you may be referring to is that there is a reduction since we take our oil in value rather than in kind - we don't actually take ownership of the oil in more cases. There have been some contracts to where we have, but right now we're taking our oil in value - so much dollars. Well, there is a transportation and a cleaning dehi (sp.) cost that is subtracted before we get our money. So we still get our full one-eighth or whatever one-fifth at Milne Point, whatever the agreement has been, but the value that we get then is diminished by certain costs." Number 1706 CHAIRMAN HODGINS noted that when the pipeline shuts down, it has to be removed. It is important to continue finding sources of oil to keep the pipeline going. Number 1717 REPRESENTATIVE TOM BRICE asked why there is currently renewed interest in the NPR. REPRESENTATIVE GREEN explained the major interest is that there has been a commercial discovery right next to it. In the past, that wasn't true. The Kuparuk River development ended, so there wasn't anything that would necessarily indicate that there was anything of value in the NPR area across the river. With this discovery in the delta, it really spurs interest saying that there is a good likelihood that either the existing Alpine field or an adjacent field might be found. He said, "Since now you've got the infrastructure, what would have maybe required a 60,000 to 100,000 barrel a day discovery, a field of magnitude to be able to produce that now may be a 30,000 barrel discovery over there would be economic because it has such a short pipeline to go." REPRESENTATIVE BRICE asked if it is based upon the Alpine discoveries. REPRESENTATIVE GREEN answered in the affirmative. He noted there have been two or three different time periods where there has been an interest and this is probably about the fourth one. Number 1791 REPRESENTATIVE ALLEN KEMPLEN asked if the President and the Governor have already agreed to a leasing program. REPRESENTATIVE GREEN answered in the affirmative saying that is what we have been told and there is no reason to doubt that. He said the thing that was brought up in earlier discussion is that maybe within 18 months we can do something or perhaps this is a good idea. He stated those kind of "dodge the bullet type words" bother him. It seems that the job expands to the time allotted and if we automatically say it's going to take 18 months and that then gets extended, it could be two or three years under the agreement that has been reached between the Governor and President. Representative Green said his position is that we need to keep the fires turned up and see if that time frame can be shortened. He asked why would it take 18 months. Number 1869 REPRESENTATIVE JOE RYAN said he understands that the pools of oil don't recognize any particular manmade boundaries. He said he also understands the oil industry has good abilities to drill diagonally as well as other methods. He asked if it wouldn't be feasible to do some claim jumping and drill from our area down into the pool on a slant and realize some benefits from that sort of exploration. REPRESENTATIVE GREEN responded it would be possible. He discussed the history of the East Texas Field where several years ago there was a rash of well plugging going on. He said there are "no nos" about going across lease lines with a directional well as you would actually be in trespass. He noted one of the Conservation Commission's major functions is the policemen of the oil industry. They have a duty to protect correlative rights - the boundaries of their leases as well as prevention of waste from the reservoir itself, the wasting of hydrocarbon. Number 1974 CHAIRMAN HODGINS indicated there were no further witnesses to testify on HJR 12. REPRESENTATIVE ROKEBERG indicated he will be requesting to be added as a cosponsor of HJR 12. Number 2025 REPRESENTATIVE ROKEBERG made a motion to move HJR 12 out of committee with individual recommendations and with the attached zero fiscal note. Hearing no objection, HJR 12 moved out of the House Special Committee on Oil and Gas.