JOINT HOUSE AND SENATE SPECIAL COMMITTEE ON OIL & GAS January 28, 1993 10:10 a.m. MEMBERS PRESENT Representative Joe Green, Chairman Representative Harley Olberg Representative Gary Davis Representative Jerry Sanders Representative Joe Sitton MEMBERS ABSENT Representative Pete Kott, Vice-Chairman Representative Jerry Mackie OTHER HOUSE MEMBERS PRESENT Representative Kay Brown Representative Cynthia Toohey SENATE MEMBERS PRESENT Senator Loren Leman Senator Bert Sharp COMMITTEE CALENDAR Overview of Division of Oil & Gas Department of Natural Resources WITNESS REGISTER David Johnston, Chairman/Commissioner Alaska Oil and Gas Conservation Commission Department of Natural Resources 3001 Porcupine Drive Anchorage, Alaska 99501-3120 279-1433 POSITION STATEMENT: Gave an overview of the Commission Jim Eason, Director Division of Oil and Gas P.O. Box 107034 Anchorage, Alaska 99510-0734 762-2547 POSITION STATEMENT: Gave an overview of the Division Ken Boyd, Deputy Director Division of Oil and Gas P.O. Box 107034 Anchorage, Alaska 99510-0734 762-2547 POSITION STATEMENT: Provided information about the Division ACTION NARRATIVE Tape 93-2, Side A Number 000 The House Special Committee on Oil & Gas was called to order by Chairman Joe Green at 10:10 a.m. Members present were Representatives Green, Olberg, Davis, Sanders and Sitton. CHAIRMAN GREEN announced the meeting was being held jointly with the Senate and turned the gavel over to Senator Leman. Number 016 SENATOR LOREN LEMAN, CO-CHAIR, announced that because of other conflicts, other Senators were unable to attend, but he expected to be joined by at least one of his colleagues, and that the meeting would be considered a work session. He then returned the gavel to Co-Chair Green. CO-CHAIR GREEN acknowledged the presence of Representative Cynthia Toohey. He then called on the Chairman of the Oil and Gas Conservation Commission, Mr. Dave Johnston to give the first overview. Number 028 DAVID JOHNSTON, CHAIRMAN/COMMISSIONER, ALASKA OIL AND GAS CONSERVATION COMMISSION (the Commission), DEPARTMENT OF NATURAL RESOURCES (DNR), stated the Commission had a very powerful statutory mandate and believed there was inadequate understanding of the role of the Commission in terms of oil and gas development in the state. He encouraged questions and answers because he believed questions and answers were probably a little bit more productive than a song and dance. MR. JOHNSTON stated the Commission was an independent quasi- judicial agency of the state of Alaska that had been given a broad statutory mandate to prevent waste, protect the correlative rights of the business owner, and insure the ultimate recovery feasibly possible was obtained. The Commission also implicated a program for the federal government, called "The Underground Injection Control Program" for class two oil and gas wells, in the state, which was partially funded with federal government funds, he advised. MR. JOHNSTON added the Commission basically served as a forum to adjudicate disputes between industry and state government. He believed there was a lot of confusion about waste, though the average citizen recognized waste on the surface. The catastrophic release of oil and gas would constitute waste, he said, and hoped the Commission's actions would, in fact, prevent such an occurrence by, among other ways, ensuring that drill rigs were properly equipped with prevention equipment, and proper mud consistency to control actual drilling operations. Number 057 MR. JOHNSTON believed a more important aspect of the Commission was the protection of reservoir energy itself. The Commission was looking for development plans from industry that intelligently developed reservoirs in a manner that preserved the energy in order to recover as much of the resource as possible, he said. This argued for an understanding of the reservoir, the geology, geophysics and strategy, elements which dictated aspects of development, drilling, completion, and maintenance of pressure through enhanced recovery operations. These are the things the Commission basically focused on, he stressed. MR. JOHNSTON stated the Commission kept an eye on the activities of industry to ensure their plans for enhanced recovery, water-plug operations, and gas flood operations were done in a manner that made sense, and enhanced the overall recovery of the resource. He added the Commission's work, if done well, benefitted all Alaskans, by ensuring worker safety, and the protection of the environment. MR. JOHNSTON did not believe the state had adequately funded the Commission. He pointed out funding for the Commission in the early 1980s was about $2.5 million dollars with a staff of 27 employees. Since about 1983, funding for the Commission had steadily dropped, which compromised the Commission's ability to carry out its functions. He disclosed the Commission's budget was currently $1.8 million dollars with a staff of 22. He pointed out the state, in establishing the Commission, had established the oil and gas conservation tax to provide a source of revenue for the Commission, but that tax had been going into the general fund. Number 123 MR. JOHNSTON stated currently the tax brought in $2.3 million dollars, and the Commission's budget was $1.8 million dollars, a gap of $500,000 with which the Commission could expand its capability and oversight. He disclosed the Commission had the power to subpoena witnesses, level penalties of up to $5,000 per day for the violation of the order and regulation of statutes of the Commission, but did not have the staff to do those things. MR. JOHNSTON hoped to heighten the legislature's awareness of the underfunding of the Commission and requested support relative to utilizing the conservation tax for what it was originally intended, that being funding the Commission, and submitted that if the legislature was not prepared to do that then the conservation tax should be reexamined and the mill rate possibly lowered. He concluded by noting his frustration about the lack of support given the Commission. Number 158 CO-CHAIR GREEN requested confirmation that the Commission was empowered with the responsibilities as well as the power to actually go on board every time a well was drilled and look at various phases of the drilling. MR. JOHNSTON clarified the Commission had the power, but not the capability to visit every well. However, the Commission did attempt to visit every exploratory well. He disclosed the Commission had five inspectors, an increase by two from the previous year. The Commission also tried to get a reasonable sampling of other development wells being drilled, he added. MR. JOHNSTON pointed out the Commission had a lot more responsibilities than just looking at drill rigs, such as ensuring that waste did not occur by, among other things, the inspection of safety valves. Additionally, the Commission was responsible for the measurement of oil and gas to determine quality and quantity. Lately, the Commission have been definitely focused on that particular aspect, which was one of the highest priorities at this point, he added. MR. JOHNSTON noted one of the Commission's inspectors had a mechanical engineering degree, and this inspector would be the key person on metering. Currently, steps were being taken to ensure he was properly trained, he advised. Number 193 REPRESENTATIVE JOE SITTON inquired about the qualifications of inspectors, their pay levels, and whether or not they had industry ties or backgrounds. MR. JOHNSTON disclosed the Commission looked for people that had been in the field, knew the rigs, knew the operations, had actually worked hands on, gotten their hands dirty and understood what it was to drill an oil and gas well in the state of Alaska. Taken together the Commission's five inspectors had over 95 years combined experience in the oil patch, he said. That level of experience was something he felt very comfortable about building an inspection program around. MR. JOHNSTON advised inspectors were paid at a range 21 and were allowed to float upward as they gained experience. Currently the Commission had inspectors that ranged from 21A to 21J, he added. Number 232 CO-CHAIR GREEN acknowledged the presence of Representatives Brown and Mackie. Number 237 REPRESENTATIVE JERRY SANDERS inquired into the number of Commission staff at its inception. MR. JOHNSTON disclosed in 1983, its peak year, the Commission had a budget of $2.7 million dollars and a staff of 27, which included five inspectors, a cadre of petroleum engineers, petroleum geologists, and support staff. Currently, the Commission's professional staff consisted of three engineers and one geologist, he concluded. Number 245 REPRESENTATIVE SANDERS requested clarification on whether 1983 was the peak year or the year of the Commission's inception. MR. JOHNSTON clarified 1983 was the peak year, and that a gradual reduction began in 1984 or 1985. He said it was clear that the Commission was not spending the entire amount of money that had been earmarked for it. Number 250 REPRESENTATIVE SANDERS had always been under the impression that things like that did not happen in government, and wondered how that happened. MR. JOHNSTON noted the early 1980s was a period of time when the state was flushed with a lot of money and, therefore, a lot of money was being directed at a lot of different agencies, one of which was the Commission. He said there was a lot of money left on the table in terms of contractual work, and the Commission had hundreds of thousands of dollars turned back because there was no need or reason to spend at that level. MR. JOHNSTON was amazed that the Commission was funded at what he deemed to be an inadequate level given its mandate. Number 274 REPRESENTATIVE SANDERS wondered whether this represented a learning curve. MR. JOHNSTON felt there was probably some truth to that. He stated it was necessary to have some money devoted to understanding the development of a huge reservoir like Prudhoe Bay, in late 1970s or early 1980s. From his perspective, the downsizing of industry provided some incentive for ways to cut corners. He submitted the role of the Commission in assuring development occurred in a manner that did not jeopardize the resource and was every bit as compelling today from the standpoint of ensuring things were being done properly. MR. JOHNSTON did not want to see industry cutting back to the point where they compromised their ability to develop reservoirs properly. He felt he should be doing more to ensure inspectors were working as hard as possible to see things were being done properly. He should be doing things in the office, in terms of looking at the management and surveyance aspects of reservoir development, to ensure things were not being done that only benefitted industry, but benefitted the state of Alaska as well, he said. MR. JOHNSTON wanted to build a decent program for the state and show that the Commission was strong, committed to resource development, and was doing those things that it was originally intended to do. Number 314 CO-CHAIR GREEN interjected that this was not a budget hearing, but an overview of the Commission. For the benefit of the members, he added a little insight to the history of the Commission that went back before 1983. He alleged the Commission, in the 1970s, was called the Division of Oil and Gas, and it was a division under the DNR. In about 1978 or so there was legislation passed that created the Conservation Commission much like the Texas Railroad Commission. Soon thereafter what is now the Division of Oil and Gas and at the same time the Division of Mines, under DNR, were under one Division called the Division of Minerals and Energy Management. That became such a large cumbersome thing through various reasons it was split and those two divisions became the landowner, he advised. CO-CHAIR GREEN advised further that in 1983 the Commission was established and given police power. He thought this was a very good sign. Number 353 MR. JOHNSTON emphasized the statutory authorities, and was amazed at the Commission's potential, given the ability to subpoena witnesses and records. He felt that was a powerful tool that ought to be utilized when and where appropriate. Again, he argued for a certain capability to do that. CO-CHAIR GREEN was sympathetic to the Commission's problems, and was certain that when there was separate funding for this specific project it should be addressed very definitely in the budget review. MR. JOHNSTON apologized for his frustrations. Number 365 REPRESENTATIVE KAY BROWN concurred generally with Mr. Johnston about the need for more resources for the Commission. She requested a brief discussion of Mr. Johnston's estimation of the state's knowledge of what effect gas sales would have. She noted the Commission's most pressing issues for the coming year were to investigate the effects of gas sales in Prudhoe Bay, and advised of her knowledge gained during the 17th Legislative Session on the effect of premature gas sales. MR. JOHNSTON surmised the development of gas sales was a priority of the governor. He advised that in November, 1990 or 1991, the Commission held hearings under the expansion of the Prudhoe Bay Municipal Gas Project. Part of that testimony was to bring the state up to date on what had gone on in the development of Prudhoe Bay, which disclosed in part, that premature gas sales created the potential of losing oil recovery. Depending on the dates, offtake rates, and a lot of different factors, estimates of plus or minus 400 million to one billion barrels of oil were potentially at risk, he concluded. Number 403 CO-CHAIR GREEN clarified Mr. Johnston was talking about Prudhoe Bay. MR. JOHNSTON concurred. He commented on the size of Prudhoe Bay, and declared the Commission would like to understand that effect a lot better. Currently, the Commission had no way to independently verify the information it received from industry, but simply looked at it from an engineering perspective, he said, and wondered whether that was proper state oversight. He said further that when you had 400 million to one billion barrels of oil at risk that meant some serious dollars, and that was something that ought to be looked at very seriously. MR. JOHNSTON spoke of the Commission's request earlier this year for $500,000 to audit the production models of the Prudhoe Bay owners: Exxon, BP and Arco. An independent model by the Commission would cost 10 times that, he declared. The Commission wanted to audit the models to see what they were saying and whether they were done properly. Unfortunately, that request was not forthcoming and, the Commission had to establish a gas octane rate, he added. MR. JOHNSTON iterated that with 400 million to one billion barrels of oil possibly at risk, it made sense to "throw a little money at this thing to make sure you got the right answer." Number 444 CO-CHAIR GREEN asked if the prevention of waste was also one of the Commission's mandates. MR. JOHNSTON declared once the proposal got serious and an actual proposition was put forth, the next thing the Commission had to do was establish the gas offtake. He noted a gas offtake rate had been established back when Prudhoe Bay came on, in Conservation Order 145, which he believed was in 1979. He wanted to ensure the offtake rate was proper and if not, it should be changed. Number 459 REPRESENTATIVE HARLEY OLBERG clarified 400 million to one billion barrels of oil would be at risk if natural gas was withdrawn. MR. JOHNSTON replied in the affirmative, but added the key question was to assume. He noted currently gas was being used to maintain pressure at the reservoir, and gas sales would deplete that pressure at a greater rate than if there were no gas sales. This could be mitigated by expanded water floods, he believed, and mentioned the Commission's interest in a plan of attack that would optimize recovery of both resources; not benefit the recovery of just gas or just oil, but look at it as hydrocarbon. Number 480 MR. JOHNSTON stated in that equation the Commission wanted to understand the mechanisms, alternatives, and mitigation techniques on proposed gas sales, and how they would be offset. He cautioned the need for at least an understanding of what was occurring and thought there might be some other ways to go about that with some sophisticated water flooding techniques, flooding behind the gas cap, or other techniques that were not yet understood. He believed gas sales were greater, but should be done in an intelligent manner. Number 497 CO-CHAIR GREEN wondered if it was fair to assume that what would be good from the Commission's standpoint would also be primarily parallel with what the operators would think. He also wondered if the operators would not be concerned about giving up 1.4 million to a billion barrels of oil toward gas sales, given the tremendous difference in value. CO-CHAIR GREEN noted the operators had recently spent about one million dollars for a GHX2 project that recycled gas. He asked if that fell within the Commission's purview. MR. JOHNSTON acknowledged the Commission played a role in the GHX2 project. He was convinced that industry was doing everything possible to properly manage the reservoir. Number 508 CO-CHAIR LEMAN acknowledged the presence of Senator Sharp, a member of the Senate Special Committee on Oil and Gas, and noted they were still in a work session. REPRESENTATIVE BROWN concurred with the observation that the state's interest ran parallel to that of the producers. She understood dozens or hundreds of different scenarios for reservoir development were looked at, of which the Commission might end up seeing maybe one or two. She believed there was real value in having a thorough understanding of all options, and hoped the committee could spend a little more time on this in the future. She felt there were a lot of things to contemplate here in respect to current policies. Number 517 CO-CHAIR GREEN believed there could be a difference even though one might be tracking value versus waste. He asked what happened if the technology or the person that was capable of running a simulation study or whatever or overseeing another, whatever was done as a reservoir engineer, indicated that the tactic the industry might use was not as beneficial to the state as a different tactic. Tape 93-2, Side B Number 000 MR. JOHNSTON said potentially that would be sufficient to call a public hearing. He noted the Commission had developed a very close relationship with industry over the years, and that industry had been very forthcoming with any requested information. He believed industry welcomed another set of eyes to look at this sort of thing, and would come to the table and be generally concerned and probably alter their affairs accordingly. MR. JOHNSTON pointed out the Commission had tremendous statutory power to compel sworn testimony and records to be submitted, and to do those things that the state would have to do to ensure their interest was being protected. He added the Commission would issue a conservation order that would be very clear as to the Commission's intent. Number 030 CO-CHAIR GREEN noted the Commission had access to information from every well that had been drilled and tested, as well as subsurface information. MR. JOHNSTON disputed that statement, but acknowledged the Commission had a tremendous library with all the well log tapes and a lot of written records. He advised the Commission was currently making a backup copy of every tape, and that currently there were over six gigabits of data that the Commission was trying to preserve for future generations. CO-CHAIR GREEN asked if some of the Commission's information was confidential. MR. JOHNSTON replied in the affirmative. He said information on the Cook well was classified. CO-CHAIR GREEN asked if it was a matter of increasing the Commission's staff to be able to stay abreast of how the data was manipulated. Number 047 MR. JOHNSTON preferred to have additional capabilities for some of the issues that were constantly cropping up. He hoped the Commission could have the capability on par with what the state was willing to put into its pre-sale analysis capabilities. SENATOR BERT SHARP inquired whether the Commission in the past had ever found significant errors of judgment as far as field production, and if the Commission had ever ordered or forced, through serious negotiation, an adjustment for a field development or production plan. MR. JOHNSTON talked about the development of Prudhoe Bay and the modeling effort that was done which showed Prudhoe Bay was rate sensitive. Based on that, the Commission had established an offtake rate of 1.5 million barrels a day. Had that rate not been established there might have been production in excess of that which would have meant significant loss of revenues for that field, he stated. The Commission in the early 1980s did something that had proven itself many times over in terms of recovery from Prudhoe Bay, he added. Number 094 MR. JOHNSTON was convinced industry was doing a very good job, but would much rather have a program where he could gather his own conclusions than be reliant totally on what industry was telling him. He recognized budgets needed to be cut, and the need to keep operations efficient. He stated the Commission was willing to step into that role and take on certain things for other agencies to rely on the Commission. CO-CHAIR GREEN appreciated the presentation and presumed if the Committee or the work group from the Senate had any questions they could submit them through him or directly to the Commission. MR. JOHNSTON said he would be honored if anyone contacted him directly to talk further. He hoped to have a commission that the state could be proud of and to that end, requested the committee's support. Number 110 JIM EASON, DIRECTOR, DIVISION OF OIL AND GAS (the Division), DNR, gave an overview of the Division. In his estimation the Division was fairly small, but powerful. He expounded on the types of leases owned by the state, with different royalty provisions, different lengths and effective dates, and different provisions with regard to deductibles from their royalty payment. The Division kept track of whether leases were being honored and in proper form, and received bonuses as well as royalties and rental payments on the state leases. Managing the units was another responsibility of the Division, he added. MR. EASON explained that unitization of interest meant that since fields were larger than a single lease, a number of people picked up leases next to each other then pooled their leases into one lease. After a determination was made of how much each lessee owned, it could then be determined how much each lessee owed. He referred committee members to the unit map in the packets he passed out and discussed some different areas on the map and different drilling points. Number 289 KEN BOYD, DEPUTY DIRECTOR, DIVISION OF OIL AND GAS, DNR, advised that the numbers on the maps had a series of tables that referred to each well. MR. EASON believed the oil and gas leasing program was a very important part of understanding the Division's work. He disclosed the state had offered leases on about 14 million acres of state owned land. He explained that a sale began by announcing the sale and calling for comments; then, over the five year scheduled period and the two years immediately preceding the sale a number of things happened, including a systematic call for specific information, an opportunity for public, state, and other agencies to make comments for consideration by the commissioner for terms of that sale. There were a few exempt sales that did not have to go through this process, he added. CO-CHAIR GREEN asked how the Division went about determining which areas to lease. MR. EASON reiterated a call for comments on the sale was made, a call for recommendations from the public, industry or any interested party. Number 382 REPRESENTATIVE CYNTHIA TOOHEY inquired whether data from the original lease could be used to speed up the process. MR. EASON replied in the affirmative. Number 429 CO-CHAIR GREEN asked whether the hearings created the differences among the lease requirements from one sale to another. MR. EASON clarified they were not hearings, but confidential closed discussions. CO-CHAIR GREEN was under the impression that the Division heard from environmentalists, agencies, and the public, and that some of those requirements in order to allow the lease sales to go forward might cause stipulations on one lease that would not necessarily be on another. Number 493 MR. EASON concurred. He added that over time the Division had developed minimal requirements that brought potential problems to the surface. Those things were consistent with and a requirement of each lease. The Division noted specific problems that people brought up, as well as suggestions for eliminating those problems, he said. MR. EASON talked about methane being a natural, dry gas. He pointed out methane was trapped in coal beds. Number 521 MR. BOYD advised coal bed methane was a large project that the Division hoped would go on for several years. He disclosed the Division was asking for $300,000 to compile data, do research, map and analyze areas with the potential for generating coal bed methane. If successful, the Division would then request additional funds to begin a drilling program, he stated. MR. BOYD added that cystic data was generated by putting sound waves into the ground. He said, "You are basically looking at subsurface and it takes a specialist to take this data, combine it into a map and then analyze the results." Tape 93-3, Side A Number 000 MR. BOYD spoke about gravity and magnet data. He advised the Division would compile this data to use as a marketing tool. MR. EASON added gravity and magnetic data were first paths, and a companion piece to go with a piece of legislation that the administration intended to introduce. "We have large block licensing bill, and this is a companion piece of leasing apparatus that does not replace or supercede our competitive leasing program," he said. MR. EASON believed competitive leasing worked just fine in Cook Inlet and on the North Slope. He noted there had been the opportunity to offer leases in many of the interior basins for years under the competitive leasing provisions, but there simply had been no interest. Over the past two years the Division has looked at alternatives that would draw attention, but the strike against competitive leasing was the fact that the lease size itself was relatively small, which had the potential of forcing people to get a lot of competing interest that did not want to do things at the same time, he said. MR. EASON proposed to make available those areas with undefined oil and gas potential an option, which would allow a proposal to come in for certain areas to be offered and for a process that would involve iterations of picking competitive offers to perform work over a specified period of time in an area, the value of which would be the value of the offering. MR. EASON added there would be no competitive bonus associated with the offering, but people would have the opportunity to compete dollar to dollar on an exploration program. The one that combined their interest, suggested the most efficient, cost effective, and yet the most thorough exploration of that area would have the right then to select certain areas, as well as certain conditions to convert portions or all of that area to a lease after exploration, he concluded. Number 055 CO-CHAIR LEMAN expressed interest in lease sales, but deferred questions since the committee would be dealing with that in the future. SENATOR SHARP asked about the API in the old Kuparuk field. He recalled it being very high. MR. EASON concurred with Senator Sharp's recollection, but could not remember the exact number. He added Point Thompson was very high, over 58 and higher. Seal Island had a fairly high API gravity, and several discoveries from 1984 on have had much higher gravity than that of Prudhoe Bay, he added. SENATOR SHARP asked if the API at Prudhoe Bay and Kuparuk was 26, 27, or 28 average. MR. EASON alleged Prudhoe Bay was about 28 and dropping, and Kuparuk was in the lower 20s. He added Miller Point was even lower. Number 073 CO-CHAIR GREEN explained that the API gravity was a formula based on a specific gravity as well as the specific gravity of water and the specific gravity of the particular hydrocarbon. Through this formula a number is developed: The higher the number the more water; the less viscous, the more vital the oil, he said. MR. EASON added that generally, the higher the level the better the oil was considered to be because it was easier to handle and generally had better refining characteristics. He explained that the owners of the pipeline had instituted among themselves a penalty called the pumpability factor, which said if your oil did not pump as fast and a more drag- reducing agent had to be put in, an additional penalty would be incurred. He believed this was a very legitimate thing to do while there was a constraint on the volume that could be put through there. Number 140 CO-CHAIR GREEN asked if consideration had ever been given to utilizing the same technically trained people used by the Commission and if that would raise the problem of confidentiality. MR. EASON replied in the affirmative. However, in the past he had recommended a better cross of technical staff on both sides. He added there was no problem with confidentiality as long as data from private lands was being reviewed. As a matter of convenience and cost savings the Division and the Commission had the authority to take copies of all surveys done as well as other information from each well as drilled, he added. Number 170 REPRESENTATIVE SANDERS asked if Mr. Eason was personally concerned or confident about Alaska's future. MR. EASON stated that he had recently sold his house, and personally was very concerned about Alaska's future. He believed there was still a lot of oil in Alaska that would be spread out over a large area and small accumulations that would require more and more to invest. He concluded that the North Slope oil was going to really decline and the kind of money that we have been used to having just was not going to be there anymore. Number 222 ADJOURNMENT There being no further testimony, CO-CHAIR GREEN adjourned the meeting.