HB 349-HEARING ESTABLISH DRILLING UNITS/SPACING  1:07:14 PM CHAIR PATKOTAK announced that the first order of business would be HOUSE BILL NO. 349, "An Act relating to the establishment of oil and gas drilling units and patterns." [Before the committee was CSHB 349(CRA).] 1:07:43 PM REPRESENTATIVE RAUSCHER, as prime sponsor, explained that the proposed legislation was written because the way oil is searched for and produced in the Twenty-First Century has changed since the 1950s and 1960s when policymakers were worried that drilling vertical wells too tightly together would leave oil in the ground that could no longer be recovered. Today no one is spending millions of dollars to drill unnecessary wells in Alaska, he said, and advancements in drilling technology now allow wells to be directionally drilled underground, sometimes with multiple lateral wells from a single mother bore or parent well. Holes can be a few thousand feet deep, yet tens of thousands of feet long to recover greater amounts of oil and gas, he advised. REPRESENTATIVE RAUSCHER said Alaska's statutes are outdated because they have not kept up with these advancements in the oil and gas industry. The statutes being amended in [CSHB 349(CRA)], he related, were originally designed to provide oversight by involving another step to provide assurance that perforations in the ground would not be too close, jeopardizing the structural integrity of the field or zone. This extra oversight is no longer necessary, he stated, and it slows down development and costs the state time and money. He said [CSHB 349(CRA)] would eliminate needless regulatory red tape given that drilling and production processes have fundamentally changed since the statute was written. 1:11:02 PM RYAN MCKEE, Staff, Representative George Rauscher, Alaska State Legislature, on behalf of Representative Rauscher, prime sponsor, presented the sectional analysis for HB 349 [the original bill version included in the committee packet, rather than for CSHB 349(CRA), which was the official version before the committee]. The sectional analysis read as follows [original punctuation provided]: Section 1: AS 31.05.100(a)  This section amends section 1-part a, starting on page 1 line 6 and 7. This would remove the hearing requirement before the commission can establish the drilling unit or units for each pool. Section 2: AS 31.05.100(b)  This section amends section 2-part b, starting with page 1 lines 14 and 15. This removes the notice and hearing requirement exceptions to the rules and spacing pattern. Meaning that the need for proof of public notice of a hearing would no longer be needed. The remaining changes on page 2 lines 3,4,5, and 8 is legal language that was needed to update the bill to reflect the changes made above. 1:12:22 PM JEREMY PRICE, Commissioner, Public Member Seat, Alaska Oil and Gas Conservation Commission (AOGCC), Department of Commerce, Community, and Economic Development (DCCED), testified in support of [CSHB 349(CRA)]. He stated that the purpose of the proposed legislation is to reduce administrative barriers. He specified that the AOGCC is tasked under AS 31.05.100(a-b) with holding hearings for any changes to oil and gas pool unit designations, rules, or spacing patterns, even if all relevant properties within a given pool belong to a single owner. He said this requirement for hearings in every instance causes unnecessary delay to pool owners and generates unnecessary cost for the state, as the AOGCC must engage in the protracted process of issuing notice and holding hearings before taking action. He advised that the bill would update the process, reduce unnecessary delays to pool owners, and save the state time and money that would otherwise be spent on superfluous notice and hearing requirements. MR. PRICE explained that when an explorer discovers oil or gas the existing statute requires the AOGCC to hold a hearing on the spacing of wells that will be drilled within the same pool and establish a drilling unit or units for that pool; the default drilling unit size is a governmental quarter section for oil. He stated Section 1 of the bill would amend AS 31.05.100(a) to remove the requirement to hold the hearing and the requirement to establish a drilling unit. This change is necessary, he said, because the current concept of establishing drilling units as boxes on a map within which only one vertical well can be drilled is completely outdated with horizontal drilling. He stated Section 2 of the bill would amend AS 31.05.100(b) to make it discretionary rather than mandatory for AOGCC to issue notice and hold a hearing in each instance when exception is granted to the rules or spacing patterns prescribed to a particular pool. With this change, he said, AOGCC could allow the operator to drill additional wells within the same pool without having to go through 30 days of notice and comment followed by the issuance of a conservation order. From 2016-2020, Mr. Price continued, AOGCC public noticed 47 hearings on non-controversial well spacing exceptions that no member of the public requested nor submitted testimony. MR. PRICE described how the proposed statutory change might impact the AOGCC regulations. He drew attention to materials in the committee packet and stated that the portion of language in 20 AAC 25.055(a)(1-2) regarding the creation of drilling units would no longer be required, and that in 20 AAC 25.055(a)(3-4) the default drilling unit size of governmental section and quarter section would be repealed and the spacing restriction between wells producing from the same pool would also be repealed. However, he continued, the regulation on spacing restriction of wells drilled close to property lines would remain to protect the rights of owners of the resource. 1:16:05 PM JESSIE CHMIELOWSKI, Commissioner, Engineering Seat, Alaska Oil and Gas Conservation Commission (AOGCC), Department of Commerce, Community, and Economic Development (DCCED), provided information about [CSHB 349(CRA)] and a PowerPoint presentation with examples of AOGCC well spacing exceptions. She explained that the bill would modify a statute that has not been changed since it was first adopted in 1955. She said the bill, if approved, would not impact the AOGCC's ability to fulfill its mission and would allow the AOGCC to be more efficient. She pointed out that while the title of the bill refers to drilling units, the proposed language modification has to do with inter- well spacing exceptions - how far one well must be from another in the subsurface within the targeted productive reservoir. MS. CHMIELOWSKI related that in when the statute was written in the 1950s, oil and gas fields were commonly developed with vertical wells and at times operators would drill wells too close together, resulting in waste or reduction of recoverable hydrocarbons. She drew attention to a photo in the committee packet of Spindletop, a first-come-first-served approach. There were no controls on the developments then, she recounted, and too many wells were drilled too close together, causing the reservoir pressure to drop rapidly, resulting in stranded reserves or waste. After the conservation act of the 1930s, Ms. Chmielowski continued, agencies like the AOGCC were formed in states across the U.S. to prevent the waste hydrocarbon resources. One way to prevent waste was to set default drilling units, she said, and in Alaska the default drilling units are one governmental section for gas wells and one governmental quarter section for oil wells. Only one well is allowed per default drilling unit, she specified, unless the AOGCC grants a spacing exception, which requires a hearing. The purpose of establishing default drilling units and requiring the AOGCC to hold hearings for spacing exceptions, she stated, was to prevent waste of the resource or, alternatively, to encourage greater ultimate recovery of the resource. MS. CHMIELOWSKI discussed why allowing wells to be drilled closer than the default spacing encourages greater ultimate recovery. She explained that today's modern technology wells are drilled based on geology and reservoir characteristics, so default drilling units based on governmental sections are out of date. It is common for wells to be planned and drilled closer than the default spacing, she continued. For example, she said, when Prudhoe Bay was started 44 years ago the estimated recoverable reserves were nine billion barrels of oil, but today with advancements in drilling and reservoir management the estimated recoverable reserves are about 14 billion barrels of oil. The updating to current best practices is to the benefit of Alaska, she stated. 1:19:27 PM MS. CHMIELOWSKI turned to four PowerPoint slides [hard copy included in the committee packet] and reviewed two recent examples of inter-well spacing exceptions, one in Cook Inlet and one on the North Slope. She displayed slide 2, "AOGCC Well Spacing Exception Example: BlueCrest," and said BlueCrest Energy operates the Cosmopolitan Unit on the Kenai Peninsula. She explained that the grid pattern across the map delineates the governmental sections and the green lines extending from the onshore pad depict where the wells extend within the subsurface to the oil and gas reservoir under Cook Inlet. She further explained that each green line is a well bore and each dot on each green line depicts where a fishbone lateral comes off the parent mother bore. She moved to slide 1, "AOGCC Well Spacing Exception Example: BlueCrest," and said the diagram depicts the side view of one of the fishbone wells drilled in the Cosmopolitan Unit. The well begins at the right and drills left across into the reservoir, with the total depth of the well depicted at the left, she explained. The drilling rig is then retracted to come back up hole, and then a bunch of laterals are drilled upward, thereby cross sectioning the reservoir from bottom to top. The spacing in between the individual fishbone laterals in a single well is about 800 feet, which results in a need for seven or more spacing exceptions per well because each of the fishbone laterals required an inter-well spacing exception, Ms. Chmielowski advised. BlueCrest tried several ways to develop this field, she added, and found this to be the best way to recover the most reserves. So, she added, modern well designs like this are used to optimize and improve the ultimate recovery. MS. CHMIELOWSKI moved to the second example. She displayed slide 3, "AOGCC Well Spacing Exception Example: ConocoPhillips," and noted the map depicts ConocoPhillips' planned developments in the Rendezvous Oil Pool, which is part of the Greater Mooses Tooth Unit in the National Petroleum Reserve-Alaska (NPR-A) on the North Slope. She drew attention to the governmental sections overlain on the map and the purple line delineating the reservoir boundary and said the orange lines within the boundary are the proposed well developments. She stated that the plan is to drill a bunch of wells in a diagonal pattern from the drill pad, marked MT 7, in the pattern depicted on the map. In this case the wells are being angled diagonally, Ms. Chmielowski explained, because as the company develops these fields it is accounting for the reservoir characteristics like permeability and porosity and positioning the wells to get the best production out of the field. She noted that rock can have different properties in different directions depending on how it was deposited. 1:23:52 PM REPRESENTATIVE FIELDS inquired about the difference between permeability and porosity. MS. CHMIELOWSKI replied that porosity is how many air gaps are in the rock and permeability is how easily something can flow through it. She specified that something could have a lot of porosity in that it has a lot of air spaces, but the air spaces are not connected to each other, which would be permeability. 1:24:20 PM CHAIR PATKOTAK asked whether the orange well plan lines are the extent of the reach of the lateral drilling from the well pad. He further asked how far that reach is. MS. CHMIELOWSKI replied that several thousand feet is deceptive. She displayed slide 4, "AOGCC Well Spacing Exception Example: ConocoPhillips," and said it is where they can reach reasonably well with the rate from that location. The closeup of the wells on slide 4, she stated, shows how all the wells originate at that drill site and come out in different directions, but they all are parallel. She said ConocoPhillips has this parallel well design in several of its fields there are alternating injectors and producers such that the injectors along the length of the lateral push the oil towards the producers, which gets good sweep and recovery. While the rigs could probably drill farther, Ms. Chmielowski added, this is what the company thought was optimal design. She displayed slide 3 and noted that the entire pool is not being developed, only the section considered the sweet spot of the reservoir oil pool is being developed. 1:25:36 PM MS. CHMIELOWSKI resumed her presentation. She pointed out that in these two examples each of the wells crosses multiple governmental sections and there are multiple wells per governmental section. She advised that every well would require spacing exception, which is unnecessary to protect correlative rights or prevent waste. This development, she further advised, will yield a greater recovery than the conventional vertical or slant well development with the default minimum spacing rules. She stated that the technical review of drilling permits by AOGCC engineers and geologists is robust and would not change under [CSHB 349(CRA)]. With the passage of this bill, she added, the AOGCC will continue to fulfill its mission to prevent the waste of Alaska's valuable hydrocarbon resources. 1:26:30 PM MS. CHMIELOWSKI next addressed two topics brought up in [the House Community and Regional Affairs Standing Committee]. The first topic, she related, is that the AOGCC also oversees spacing exceptions dealing with how close a well can be drilled to a lease boundary where the ownership is not the same on both sides. For this, she specified, the AOGCC requires a minimum distance of 1,500 feet for an oil well and 3,000 feet for a gas well; the purpose being to protect correlative rights, which are the rights of an owner of a resource to recover his or her share of that resource. The spacing exception requirement to protect correlative rights is not affected by [CSHB 349(CRA)], she advised, the AOGCC would still be required to notice hearings for any spacing exception of this type. MS. CHMIELOWSKI then addressed the second topic, the question of whether a spacing exception would have prevented the [3/4/22] gas leak from the Alpine CD1 drill site. She said the answer to that question is no, it would not have prevented the gas leak. She stated that inter-well spacing exceptions like the ones discussed in [CSHB 349(CRA)] address how far one well must be from another in the subsurface, and not just anywhere below the surface, but in the targeted productive reservoir. Regarding the CD1 leak, she said the well being drilled targeted a deep reservoir zone, and on its way, it drilled through a sand known as Halo. Many wells have drilled through the Halo sand with no issues, she stated, and because it was not considered a productive hydrocarbon zone, cement was not placed across it during that stage of the well completion. In this case the Halo sand was unexpectedly productive and did start producing gas, she explained. The gas migrated up the well and into the thaw bulb, the area directly below the drill site where heat from production in injection wells thaws out an area of the permafrost. Once the gas migrated into this thaw area, Ms. Chmielowski continued, it came to surface in various locations via the path of least resistance. She advised that the source of the gas has been identified and is in the process of being cemented and isolated. She specified that the CD1 well would not have required a spacing exception for the Halo sand because it was not the targeted productive reservoir. 1:29:35 PM REPRESENTATIVE HOPKINS, relative to keeping 1,500 away from the boundary between different lease owners, asked whether the boundary would be the curvy purple line depicted on the map on slide 3 [or the squared line]. MS. CHMIELOWSKI replied that it would be to the lease boundary, which is the squared-off boundary depicted on the map. She stated that ConocoPhillips acquired leases to match the pool boundary [curvy purple line] but the correlative rights issue applies to the lease boundary, not the pool boundary. She noted that all these wells are offset from both the lease boundary and the pool boundary because the company doesn't want to drill right up to the edge of the pool. REPRESENTATIVE HOPKINS asked whether there would be 1,500 feet between the right-angled lines and the pool boundary plus another 1,500 feet between the pool boundary and the lease boundary. MS. CHMIELOWSKI responded that AOGCC statutes for minimum stand- off relate only to the lease boundary line, which is the squared-off boundary [on slide 3]. In this case, she continued, the operator decided to stay within the pool boundary, which is an additional offset that AOGCC doesn't require. REPRESENTATIVE HOPKINS observed the gridlines on the map and inquired about the mileage dimension of those gridlines. MS. CHMIELOWSKI answered that a governmental section is 640 acres. She stated that these governmental sections are going to be even smaller than what is being seen as outlines on the map. 1:32:38 PM REPRESENTATIVE HANNAN inquired about the frequency of inter-well spacing exemptions on North Slope leases versus Cook Inlet leases. MS. CHMIELOWSKI replied that between BlueCrest Energy and ConocoPhillips, AOGCC most often gets requests for inter-well spacing exceptions in the Cook Inlet. A main reason, she explained, is the North Slope's remote location and high-cost environment, so operators tend to fully plan their developments before starting to drill their wells. For example, she said, all the wells for the ConocoPhillips Rendezvous oil pool were pre-planned and brought to the AOGCC before any drilling was started. The operator comes to the AOGCC for pool rules - the set of guidelines for how best to manage the field - and in a pool rules application the AOGCC always writes a rule that the inter-well spacing requirement is no longer needed within the reservoir. Whereas on the Cook Inlet, Ms. Chmielowski continued, the AOGCC gets a lot more exploration wells, smaller pools, and smaller developments, and operators tend to drill their wells one at a time rather than having a full plan of development from day one. 1:34:54 PM CHAIR PATKOTAK stated he is on board with ensuring there isn't too much bureaucracy in the process, but that he also believes checks and balances must be kept intact to ensure the public is involved. He asked whether those checks and balances would be skirted if [CSHB 349(CRA)] becomes law. MR. PRICE responded that hearings on spacing exceptions are very narrow, very targeted, very technical, and specifically focused on this information. During the years he has been involved, he related, the AOGCC has received very few questions, although on occasion a homeowner has raised concern about noise. However, he continued, noise is completely outside the scope of AOGCC's authority and outside the scope of the hearing, so there is nothing the AOGCC can do about that concern. Those issues, he said, are raised during the extensive public process undergone by the Department of Natural Resources (DNR) long before a permit to drill is submitted to the AOGCC. He assured the committee that the public process would not be skirted by passing the proposed legislation. 1:36:58 PM GRAHAM SMITH, Petroleum Land Manager, Division of Oil and Gas (DOG), Department of Natural Resources (DNR), verified Mr. Price's response. He stated that the public processes within DNR are many and robust, and passage of [CSHB 349(CRA)] would not affect those. He cited Article VIII, Section 10, [Alaska State Constitution], which states, "No disposals or leases of state lands, or interests therein, shall be made without prior public notice and other safeguards of the public interest as may be prescribed by law." He said this goes from the best interest finding prior to a lease sale all the way until termination of the lease of a unit with multiple public processes in the middle. In addition to the constitutional obligation, Mr. Smith continued, DNR does a lot of public notices because there is text for an obligation to conduct public notices at various stages and there is case law which dictates that each phase of development has its own public process. He said DNR does not have an official position on the proposed legislation, but that the bill would not affect any of those processes. 1:38:21 PM CHAIR PATKOTAK asked whether [CSHB 349(CRA)] would affect the permitting authority of any municipality where these well spacing exceptions may be permitted on the North Slope or in Cook Inlet. MR. PRICE answered that there would be no impact from the proposed legislation on that issue. 1:39:09 PM CHAIR PATKOTAK opened public testimony on CSHB 349(CRA), then closed it after ascertaining that no one wished to testify. 1:39:40 PM CHAIR PATKOTAK announced that CSHB 349(CRA) was held over.