HOUSE SPECIAL COMMITTEE ON OIL AND GAS February 14, 1995 9:08 a.m. MEMBERS PRESENT Representative Norman Rokeberg, Chairman Representative Scott Ogan, Vice Chair Representative Bill Williams Representative David Finkelstein MEMBERS ABSENT Representative Gary Davis Representative Bettye Davis Representative Tom Brice COMMITTEE CALENDAR Overview - Division of Oil and Gas, Department of Natural Resources WITNESS REGISTER KEN BOYD, Acting Director Division of Oil and Gas Department of Natural Resources P.O. Box 107034 Anchorage, AK 99510-0734 Telephone: (907) 762-2547 ACTION NARRATIVE Tape 95-5, Side A Number 000 CHAIRMAN NORMAN ROKEBERG called the meeting to order at 10:08 a.m. Committee members present were Representatives, Rokeberg, Ogan, Williams, and Finkelstein. Chairman Rokeberg declared there was a quorum and the committee would hear an overview from Ken Boyd, Acting Director, Division of Oil & Gas, Department of Natural Resources. Number 017 KEN BOYD, Acting Director, Division of Oil and Gas, Department of Natural Resources, stated that as of yesterday, he was the Acting Director. He noted several pieces of paper would be handed out to the committee members, one, a rather long series of slides which would be shown on the overhead projector during the presentation. Also, he said he would show a documentary of recent discoveries and proposed exploration drilling. Some of the slides that would be shown are slides of the North Slope and Cook Inlet which will show discovery wells, and recent activity in both areas. He stated he would cover the formations, depths and production of the regions. Another handout given to the committee members was a printed brochure that was used several years ago as lobbying material for the Arctic National Wildlife Refuge (ANWR) which he would review, time permitting. MR. BOYD stated that he would like to walk the committee through the oil and gas business. More specifically, the business of the Division of Oil and Gas. He stated that the discussion would include money, exploration and how exploration works, as well as units and unitization. He went on to say he would describe some units and production figures that we have in Alaska relating to existing units. In addition to these subjects, Mr. Boyd stated that the overview would also contain. New projects that are occurring on the North Slope, and in Cook Inlet. Mr. Boyd said that he would discuss oil pricing, the Lease Sale Program, and he would review incentive programs, which were passed during the last legislative session, dealing with exploration licensing and exploration incentive credits. Mr. Boyd began his presentation by referring to a document titled: "Where Our Money Comes From." He stated that the state's money mostly comes from petroleum revenues in one form or another, and the percentages listed change from year to year. He then said the numbers at the bottom of the page represented Fiscal Year (FY) 94, in four separate categories: Bonuses, rents, royalties, and taxes. MR. BOYD stated that bonuses were a fairly low number in Fiscal Year (FY) '94, yet was a large number in FY '93 which was over $65 million. He went on to say, Bonus money was money the state received from its lease sales. He said, generally speaking, lease sales hold a fixed royalty at 12.5 percent plus a variable bonus. This is a sealed bid. The company will submit a bid for each lease, and the highest bid wins the lease. These moneys are deposited into the general fund, permanent fund, and school fund. MR. BOYD continued by stating that every field in Alaska has a rent that begins at $1 per acre for the first year, and goes up at a rate of 50 cents per year until the rent for that particular lease reaches $3 per acre. The rent for that lease will remain at $3 per acre until the termination of the lease. Continuing on, MR. BOYD stated the state's share of royalties is fairly consistent at 12.5 percent. MR. BOYD then spoke on taxes stating that the Division of Oil and Gas does not do taxes even though it is a major source of revenue for the state. Number 109 CHAIRMAN ROKEBERG asked Mr. Boyd if that is all taxes, both ad valorem and severance taxes. Number 110 MR. BOYD stated that the answer was "Yes." Number 115 MR. BOYD referred to his next document entitled: "Most Oil Comes Off of State Land," and said it showed the breakdown of the land ownership in the state. He went on to say, the state owned approximately 28 percent of the land, the federal government owned 60 percent, and 12 percent of the land was in private hands, much of which is represented by Native corporations. He stated it was important to note virtually all of the oil that comes from Alaska comes off of state owned land. Number 128 CHAIRMAN ROKEBERG asked about land patenting in Alaska, and whether most of the sub-surface rights were retained by the state, and what the problems were with public and Native land. Number 133 MR. BOYD responded by stating the state owns the rights to the sub-surface in most cases. To answer the question about the situation regarding Native lands, Mr. Boyd stated, in the case of the Caldwell Delta, the state had an agreement with the Arctic Slope Regional Corporation (ASRC) in which the state shared the sub-surface in varying percentages on certain leases. He then stated he was not sure he could answer the question with regards to the Native lands. CHAIRMAN ROKEBERG then asked about the sub-surface "estate." MR. BOYD responded by stating, the sub-surface of regional and village corporation lands are held by the regional corporations in most cases. CHAIRMAN ROKEBERG then asked if these were the only private lands that have been conveyed after a certain date and sub-surface estates were held in reserve for the state. Mr. Boyd answered by stating this was the case in the vast majority of cases. CHAIRMAN ROKEBERG then asked if this was the exception for Native land. MR. BOYD responded by stating there were some old lands where there is private ownership of the sub-surface, but he remarked these situations were very rare. Number 150 MR. BOYD then referred to the next document entitled: "Where Our Money Goes". He stated 50 percent has gone to the permanent fund since 1979. Prior to that it was 25 percent, and 49.5 percent goes to the general fund which is available to finance various projects and state spending, and finally .5 percent is dedicated to the school fund. Number 165 MR. BOYD then referred to a slide that displayed entitled: "North Slope Historical and Projected Oil Production." As the members reviewed the slide they were informed by Mr. Boyd that oil production is on a steady decline. Number 181 MR. BOYD then referred to a slide which represented the various basins in Alaska. He stated that this was a simplified picture of what Alaska looks like geologically. Mr. Boyd stated Alaska was essentially made up of fifty little fragments. He stated these fragments have moved, over time, into what we now recognize as the geological features of the state. He then stated, for example, the upper North Slope of Alaska was probably formed in Northern Canada, and then rotated into place whereas the interior of Alaska is made of lots of small fragments. Number 195 MR. BOYD mentioned he owned a cabin near Honolulu Creek on the Parks Highway, and stated that from this cabin he could see a rock formation consisting of mountains that are very red with a black base. This substance, he stated, is called devonian ophilite(ph), which is a piece of oceanic crust. This piece of terrain is 20 miles long and 10 miles wide, and full of gold, zinc, and other exotic minerals. This formation is unique to Alaska, he said, rocks like these are only known to come from China, and nobody has figured out how they got here. He then mentioned some areas of Anchorage, Talkeetna mountains, and the Chugach mountains are thought to have formed south of the Equator near Peru and have rafted into place over time. Number 215 MR. BOYD went on, saying, the basins shown on these documents are well known, but not well explored. The primary areas of exploration are in Prudhoe Bay, the North Slope area, and Cook Inlet. He then said that there are other basins that may not be familiar, such as, the Yukon-Kandik, Middle Tanana, Minchumina, Holoatna, and Copper River, and others that are very poorly known and very poorly explored. Mr. Boyd stated that these areas are also very expensive to explore. Over the last few years, a program was developed called Exploration Licensing, as an adjunct to a lease sale program which, it is hoped, will encourage companies to move into the interior of Alaska and increase exploration there. Number 230 CHAIRMAN ROKEBERG asked Mr. Boyd to editorialize as he read the last graph which states there are 17 billion barrels of oil estimated that have yet to be discovered. Number 235 MR. BOYD responded the numbers were very speculative as to how much oil was actually awaiting discovery. These speculative numbers are based upon looking at the seismic data provided. He then stated some of the basins in the Interior will not have any oil in them at all. Mr. Boyd then stated the conventional wisdom of the geology of the interior of Alaska is that it's gas prone. He then stated we will not know for sure until the wells are explored. MR. BOYD then displayed another slide to illustrate his point that these areas need to be explored, and to inform the members about the different geological features the companies will encounter when drilling. The slide was entitled: "Trapping Mechanisms." He referred to an area on the slide, illustrated in white, called "Economic Basement." This is the layer of the earth below which you will no longer find deposits of oil. What we are finding in the Interior is that there is a situation in what is called the "thrust fault," where a company would drill into the basement on the upper sheet of the trust fault, and then refuse to drill any farther, when in fact the whole section may be obscured by the section above it. Mr. Boyd stated there are some areas like this in Eastern Alaska, namely the Yukon-Kandik Basin. MR. BOYD then remarked about one of the projects they are working on using money they received from the legislature two years ago. That is, taking the gravity and magnetic data, which is used in the very early stages of exploration, and combine all of the data into a series of maps that will soon be published. Mr. Boyd stated they hope these maps will show these relationships. He then stated that gravity and magnetic data show only "gross relationships." MR. BOYD then remarked the odd thing about gravity and magnetic data, which together are called "potential fuel data" because they measure changes in the earth's potential field, both magnetic and gravitational is they have an infinite number of solutions. Mr. Boyd stated this creates the situation where they can only build models based on reasonable expectations. However, having looked at some of the data, Mr. Boyd stated he believed there are some interesting possibilities, but they are only just possibilities. He then stated we will not know if there is oil in these areas until we can drill. Number 291 MR. BOYD continued with his explanation of the four Trapping Methods, pointing out to the committee the current slide shows the four basic types of Trapping Methods for oil and gas. He added, in the real world, any one trap is probably a combination of all four. The simplest of the four, and the most common, is known as an Anticline. Simply put, this type consists of rocks which have been squeezed together. He said that originally they were laid flat, then over time squeezed into what may be described as an upside down bowl. Mr. Boyd then stated because oil is a light substance, it accumulates in the anticline. In addition he stated the Golar Field in Saudi Arabia, which is the largest field in the world, is an anticline. MR. BOYD moved on to the next type which is fairly common called a "normal fault." He stated in this type of field, the rocks are again subject to a great deal of pressure when they are squeezed together. Mr. Boyd continued stating, when the stress on the rocks is released, they tend to slip downward and the oil and gas is then trapped in the fault line. This is a different type of tectonic forces regime, instead of a force of tension there is a compressive force. These two types are the most common found in Alaska. Number 325 MR. BOYD then moved on to the fourth type of traps, the "stratigraphic trap." This kind of trap is the hardest to find and distinguish, and we are beginning to find, on the North Slope there may be more of these than any other type. He then said that stratigraphic exploration in Alaska is somewhat in its infancy. One of the reasons the oil companies have been able to find these stratigraphic traps is due to the advances in technology, in particular, Three Dimensional Seismic. Stratigraphic traps in Alaska include Sunfish, and Sourdough. MR. BOYD then began to explain how the oil companies determine if there is oil at a particular location. He showed the members of the committee a schematic of the earth's crust taken at sea. This schematic was a picture of a marine seismic survey. Mr. Boyd assisted the members of the committee in locating the relevant portions of the schematic, then began to interpret its meaning. He stated, to obtain a schematic such as this would require a vessel to pull a long cable, possibly three miles long. This cable would contain several hundred hydrophones, (pressure transducers) or air guns. When the sound wave of these air guns goes into the earth, and bounces off the rock layers, the rebound then sends the sound wave back up to the surface where it is recorded by the vessel and translated into millions of pieces of information about the sub-surface. This works much the same way scientists measure earthquakes. When the information is translated, it produces a picture of the sub-surface. MR. BOYD then showed the members of the committee a picture which was recorded in this fashion and explained the relevant section of the schematic so the members could follow the rest of the presentation. Number 375 MR. BOYD explained to the members of the committee the numbers on the side of the schematic indicated the amount of time it took for the sound wave to travel through the rock layer. He then indicated that scientists use this information to interpret the geology of the sub-surface. Mr. Boyd continued, stating the geophysical observer will use several of these schematics to make a three dimensional map of the sub-surface. Number 443 MR. BOYD continued his review of the seismic data by stating the three dimensional data, while more accurate, is also much more expensive. He added, Alaska is now beginning to become involved in using three dimensional data. This is beneficial due to the fact that three dimensional data provides a much more accurate method of locating stratigraphic traps. Number 480 CHAIRMAN ROKEBERG asked Mr. Boyd if the money for this system was appropriated by the legislature, if so, how much. Number 485 MR. BOYD answered Chairman Rokeberg by stating, they did in fact receive a capital appropriation. He added, they found a system they liked at a trade show about one year ago. Number 490 CHAIRMAN ROKEBERG asked Mr. Boyd if he knew the amount of the appropriation. Mr. Boyd responded by stating the cost of the system was included in a large appropriation, that was used to obtain data from state and private lands as well. He then said, some of the money was used to buy seismic data and some will be used to buy the three dimensional system. He then added 90 percent of the seismic data is recorded using three dimensional systems. Number 503 CHAIRMAN ROKEBERG asked if they have already purchased some of the necessary hardware, if so, who did they buy it from. Number 510 MR. BOYD stated they already have the hardware, and they are now waiting for the software. He added he could not remember the name of the vendor, however, the equipment was IBM based. Number 515 CHAIRMAN ROKEBERG asked if the system was currently on line. Number 517 MR. BOYD answered they were close to being on line. Mr. Boyd then continued with his presentation by stating the new stratigraphic data can help to find new pockets of oil near existing fields. Mr. Boyd then moved on by introducing the committee members to a new slide which contained figures about the primary producing fields in Alaska. The figures showed the production numbers for these fields. He began to read the numbers stating through 1993, Prudhoe has produced 8 billion barrels of oil and contains 3.6 billion barrels in reserve. He continued stating, the number of recoverable barrels should go up due to some new advances in technology. MR. BOYD then remarked on the massive size of the Prudhoe Bay oil field in comparison with the other fields on the North Slope. He also mentioned Pt. McEntyre has been a surprising field producing 130,000 barrels per day when it was projected to produce only 90,000 barrels per day. In addition he stated that many of the smaller fields are now on line and producing. MR. BOYD then informed the members about some of the new advances in drilling have made these fields as productive as they are. Mr. Boyd informed the committee members about the benefits of directional drilling. He mentioned the Niakuk field at which British Petroleum (BP) planned to build a causeway so they could get to the oil. Instead they have decided to extract the oil using directional drilling. This is accomplished by using a healed point on the drill so the drill can move in several directions. Thanks to this technique, they figure that they can recover 95 percent of the oil in that field. Number 556 MR. BOYD began to speak of the future, and fields which are not yet on line. For instance the West Sak field. He stated this field is very heavy, shallow, and cold. The estimated recoverable reserves in this field are listed as 147 million barrels of oil. Mr. Boyd then stated the amount of oil actually at West Sak is nearly 20 billion barrels. However, this oil is nearly impossible to recover with present technology. MR. BOYD then commented on the Kuvlum field stating, although there is oil at this location, there is not enough to be commercial as a stand alone project. This is not to say, however, this field will never be commercial. He then commented on the Cascade, and Sourdough fields. Number 587 REPRESENTATIVE BILL WILLIAMS asked Mr. Boyd if he could explain to the members of the committee what he meant by a "cold field." Number 590 MR. BOYD responded by stating this characterization was a reference to the temperature of the earth. As you descend farther into the earth's crust, the temperature rises. Therefore, if a field is characterized as a cold field, it is safe to assume it's a relatively shallow field. Number 591 CHAIRMAN ROKEBERG asked if the state had any estimates on the Badami field. Number 596 MR. Boyd answered the range of numbers is between 100 million barrels and 150 million barrels. They are fairly confident about the 100 million barrel estimate. Number 600 CHAIRMAN ROKEBERG asked if this oil was recoverable. Number 601 MR. BOYD answered, "Yes," the estimate was recoverable. Number 607 CHAIRMAN ROKEBERG then asked if the barrels per day estimates were pumped from the test well. Number 610 MR. BOYD stated that was correct and the numbers of barrels per well shows how good the well is, or how good the rocks are. The really important number is the oil reserves. Mr. Boyd continued you could have a very small reserve figure with a very good well. Number 624 MR. BOYD then began a discussion of units, and unitization. All of the oil produced in Alaska comes out of units. He then showed the members a diagram of the units on the North Slope. He stated units are combinations of leases, the leases were purchased at a lease sale. He then stated this method is more environmentally sound and economical due to the fact that the companies owning leases on a particular unit would be able to operate out of fewer facilities. By producing through common facilities, the oil companies will reduce their footprint on the landscape, and reduce their individual cost of exploration, construction, and production. MR. BOYD stated there are a number of unit applications now in the Division. Probably the most commonly known is the Badami Unit. CHAIRMAN ROKEBERG asked Mr. Boyd to point out the location of the Badami Unit on the map. Mr. Boyd did so, and explained the Badami region is only a prospective unit. Number 650 MR. BOYD then stated he would now begin a difficult subject, the price of oil, and the way the price is calculated. He mentioned the overview was given by Chuck Logsdon the previous week, and stated this was really Mr. Logsdon's field, but he would try to explain the process adequately. He then stated he would give the members a very general overview on the process used to price Alaska's oil. To begin MR. BOYD stated that in the United States there are many places where the oil is priced at the wellhead. This is not the case for Alaska. The oil produced here is transported through a pipeline then loaded onto tanker ships for transport to its final destination. Therefore, in order to get the royalty value of oil, you must net the price back to the wellhead. MR. BOYD then called the members attention to another slide. Mr. Boyd then began to explain in detail the slide. Starting on the West coast there was a series of royalty settlements which went on between ARCO, BP, and EXXON. These were settled an 1991 and 1992. As a result of this, there was a settlement for the past where we determined that the companies owed us a total of $700 million between the three companies. More importantly, it set a value for determining oil prices in the future. Mr. Boyd stated this was different for each company; in basic terms, consists of a base value in the basket of seven types of crude oil from around the world. MR. BOYD said in their various proportions, these seven types of crude oil are meant to approximate the characteristics of North Slope crude oil. There are various multiplying effects, and quality bank effects among other things which then determine a base price on the West Coast. He then said, from this price they subtracted transportation costs, for the West Coast they typically run from $1 to $1.50 per barrel, and on the Gulf Coast $4.25 to $5.50. You subtract that number off whatever number you have determined as your royalty calculation. This will give you a base number from which to work. The next step in the process is the tax tariffs. Currently the number, which also changes every year, is $3.61. The field costs are also calculated into this equation; field costs are the costs of cleaning and dehydrating the oil in the field. The 83 cent cost represented on the chart is the number currently used at the Prudhoe Bay field. Mr. Boyd stated he believed the cost for the Kuparuk field is 42 cents. When you net the price back to the wellhead before you calculate your royalty, if you start out at $16 per barrel, you will wind up with $10 or $11 per barrel, and that is the number on which our royalty is calculated. Number 697 CHAIRMAN ROKEBERG stated there had been a request for a brief recess. At 10:55 a.m. Chairman Rokeberg called a five minute recess. TAPE 95-5, SIDE B Number 700 CHAIRMAN ROKEBERG reconvened the committee meeting at 11:00 a.m.. He asked Mr. Boyd to continue his presentation. Number 707 MR. BOYD began this portion of his presentation by informing the members of the committee about some recent activity on the North Slope, and in Cook Inlet. He referred to another handout which would describe this activity entitled: "Summary of Recent Discoveries and Proposed New Exploration Drilling." He stated he wanted to point out a couple of discoveries mentioned in the report. CHAIRMAN ROKEBERG asked what the date of the slide was. Mr. Boyd answered the slide was recently taken. Chairman Rokeberg then asked if there were any plans to drill in the Kuvlum region. Mr. Boyd then said there were no plans to drill at this time, and that these were just announced discoveries. Number 760 MR. BOYD then began discussing prospects in the Badami Region. He stated there are two wells at Badami which have been certified as being capable of production. Other recent discoveries include BP's Cascade well south of the Milne Point unit. One of the most interesting areas according to Mr. Boyd is the Colville Delta region. He stated there has been a lot of activity there in the last few years, there has been a substantial amount of drilling done by ARCO. He stated there are two wells there now, the Alpine well is drilling now and the second will be drilling in a few weeks. He then stated if the season lasts long enough, they will try to drill a third well. Mr. Boyd then stated that there has been a lot of searching in this area for stratigraphic pockets of oil. MR. BOYD then showed the members a new slide which displayed the regions of Cook Inlet. Number 801 CHAIRMAN ROKEBERG asked if it was true the southerly wells, Amethyst, and Big Ben were already drilled, yet not very successful. Number 803 MR. BOYD stated the chairman was correct. Mr. Boyd then explained some of the geology of the Brooks Range. He stated the Brooks Range was an excellent example of a thrust fault. He continued by stating, there is compression in the thrust faults, and it is this compression that leads to the eventual formation of oil pockets in the ground. He then stated, conventional wisdom says that the Brooks Range is gas prone, and exploration opportunities for gas in the Brooks Range looks wide open. MR. BOYD then returned to briefing the members about the situation in Cook Inlet. He stated there was not a lot of good news to report. This is mostly due to the Sunfish well. The companies have been in this area for nearly 20 years, and ARCO thought they had found a new formation. Initial results in drilling looked promising, however, after a three dimensional seismic survey was completed, the project was abandoned by ARCO. There are some companies that have maintained their ownership however. He then stated ARCO will be drilling next spring in a joint venture with CIRI. Number 850 CHAIRMAN ROKEBERG asked if this would be a gas well. Number 851 MR. BOYD stated he did not know due to the fact that it was on Native land. Mr. Boyd then mentioned there was a request put into the legislature about two sessions ago to acquire some money so they could drill a well in the Wasilla area to test for "coalbed methane". He stated coalbed methane is a substance that occurs in coal itself. He went on to say coalbed methane is widely produced in the United States in places like the Black Warrior Basin, and that it is a real resource. Mr. Boyd continued by stating there is a lot of coal in the lower Susitna valley, in fact, Alaska has half of the coal in the United States. They asked the legislature for enough money to drill two wells, and they received enough to drill one well. In addition, they saved some of that money by using a drill owned by the United States Geological Survey. He then stated they drilled a well outside of Wasilla. He said the well was a "continuous core" well, which means they were constantly pulling material out of the well. They shipped the coal to the University of Alaska Fairbanks where there is an excellent facility for analyzing the material. MR. BOYD stated the results of the tests show there is a very high potential to produce coalbed methane. Mr. Boyd added, one well doesn't prove anything other than there is good quality coal in that one well. What is needed is a program to test other wells in the area. Mr. Boyd then commented he had heard Community and Regional Affairs was looking at coalbed methane as a resource for villages in the Interior. He then remarked that this would be a long term project needing lots of planning, yet the well has produced a lot of enthusiasm. Number 910 REPRESENTATIVE SCOTT OGAN asked about the extent of coalbeds in the area. Number 919 MR. BOYD stated the coal is mapped over a very wide area. He was not able to answer the question in terms of acreage, but he stated that he would send a copy of the report which will show the extent of the coal bed. Mr. Boyd also mentioned the map is fairly accurate. Number 934 REPRESENTATIVE OGAN then requested some information specifically on coalbed methane as well. Mr. Boyd agreed to send the information. Number 940 CHAIRMAN ROKEBERG asked Mr. Boyd about access of the lands to private investors or developers. Number 945 MR. BOYD stated the chairman's question was an excellent one. He then stated this subject has been a problem in the past. The main question is, who owns the gas. In other terms, does the owner of the coal estate own the gas, or does the gas belong to the oil companies? He then said that he did not know the answer to that question but, different states have produced different rulings on this issue. Mr. Boyd then explained they are working with the Alaska Oil and Gas Conservation Commission (AOGCC)to develop some statutes which will help to determine what the ownership of this resource will be. He stated there is another question, that is, what kind of well is a coalbed methane well? If it is an on shore well for oil and gas, then it requires a $1 million bond. Mr. Boyd stated this is not really an oil and gas well, it is really a core hole, which is a well that takes a core of coal to retrieve any gas that may be in the coal. Mr. Boyd stated, if this is the case then it governed by an entirely different set of statutes. MR. BOYD restated they have met with the AOGCC to determine what type of well this is. He then remarked there are no statutes currently covering this type of well. Mr. Boyd then apologized that he could not answer the question because the state can not answer the question for itself. Number 982 CHAIRMAN ROKEBERG then asked if there were existing leases in the coal estates in terms of the sub-surface that have already conveyed title for some of the lands. Number 985 MR. BOYD stated he was not familiar with that. He stated there has been leasing in the area, for oil and gas, which could be used for coalbed methane exploration. But the uncertainty as to ownership must be cleared up first. ARCO drilled a well a couple of years ago called the BLT (Big Lake Test) and found some conventional gas, but there were bad flow rates in the well. Number 004 MR. BOYD moved on with the presentation by discussing the new Oil and Gas Leasing Program. He stated the concentration was on the North Slope, and in Cook Inlet. In 1995, there are three sales scheduled. The first of the three is in the Yakataga area near the Gulf of Alaska. The comment period for the preliminary finding on this area has been completed, and are now working on the final finding for this area. This is an historic sale due to the fact that it is the first finding that has come out under the provisions of SB 308 enacted last session giving the director guidance as to how he should make decisions. MR. BOYD said the second sale is a Cook Inlet reoffering sale. This was put on the schedule only recently. This sale covers is scheduled for October. Mr. Boyd then explained to the members what a reoffering sale was. He stated a reoffering sale consists of basically leftover land, or previously leased lands. MR. BOYD explained the third is a North Slope sale in the Shaviovik region adjacent to ANWR. Mr. Boyd pointed out the area on the map. He then stated that this is an area of interest. He pointed out there are fewer sales taking place, but they are larger sales thaN in the past. MR. BOYD introduced another slide which displayed the five year schedule for lease sales in a time format. He stated they are always gathering information for future sales. They are gathering comments dealing with areas that should be leased, from not only the oil and gas industry, but also from the public. Mr. Boyd then served notice to the committee members that this schedule is subject to change. MR. BOYD then said that the Lease Sale Program has been very successful, and is the backbone of the state's income. However, they have offered areas in the interior of Alaska, yet there is not much interest in exploration and development there. Mr. Boyd stated the reason for this is the leases are limited to 5,760 acres. This may work on the North Slope and Cook Inlet where there are well known oil provinces and the competition is high, in the interior of Alaska, however, where there are tiny blocks of ownership nothing will ever get done. MR. BOYD then stated we must look at the way other oil producing countries get rid of their land. He stated that this was done through licensing. The bottom line here is, last session the legislature passed the oil and gas exploration licensing bill. This is a program focused on the interior of Alaska. In this program, the North Slope and Cook Inlet are strictly off limits. The real feature of the program is that it allows large amounts of land to be put into the explorer's hands, anywhere from 10,000 acres to 500,000 acres with a limit of two million acres to be held under license. Mr. Boyd stated this was a program which allows a person or company to go to a place like the Copper River Basin and pick up a couple of hundred thousand acres, and have the exclusive right to explore. MR. BOYD then stated the state does receive something out of this deal. In return for the exclusive right to explore, the state will receive a commitment from the company or person for a certain dollar amount of exploration on that land. Currently, when a conventional lease is given, there is no obligation for the company to do anything. The way that a company holds onto a conventional lease is by drilling a well that is capable of production. Mr. Boyd continued by stating at this time, they are writing the regulations for this program. Number 120 MR. BOYD then spoke about the Exploration Incentive Credits (EIC) Program that was passed by the legislature. Under current statutes, there is now the ability to offer incentive credits on leased state land. The way this program works is before a lease sale, the commissioner is given a briefing on the area to be leased. The briefing consists of the seismic data, the geological information, and they discuss the terms that should accompany the lease. Mr. Boyd stated the terms quite often consist of a 12.5 percent royalty with a variable bonus. There are areas, however, that are remote enough to warrant exploration incentive credits. MR. BOYD stated this program is at the discretion of the commissioner. Exploration incentive credits is a number of dollars, per foot, of a well drilled, up to a certain percentage of allowable cost, which is often 20 to 25 percent. The other variable which is put on exploration incentive credits is that it has to be done in a certain amount of time. The terms of the leases on the slope were generally ten years. With the exploration incentive credits the state may give the company $100, per foot, and 20 percent of the well cost with the stipulation that this must be done in the first five years. MR BOYD then stated this new program is different, it is an extension of the original program in the sense that it allows for exploration incentive credits on unleased state land and private land. It must also be noted there is a $30 million cap on this program over a period of ten years, and a limit of $5 million per project. He then stated the regulations need to be finished and the program will be near completion. Number 165 CHAIRMAN ROKEBERG asked Mr. Boyd about the time it has taken to write the regulations. Number 170 MR. BOYD stated there were two programs; he mentioned the Exploration Incentive Credit Program for leased state land is nearly 12 years old, while this program was passed by the legislature and signed by the Governor last session. Chairman Rokeberg asked Mr. Boyd to differentiate between the two. MR. BOYD responded the current statute is only available on leased land, the new program is only available on unleased and private land. This program is separate and distinct from the existing program. CHAIRMAN ROKEBERG then asked if there was a term they were using to differentiate between the two programs. MR. BOYD answered by stating there was no term other than the "new EIC Program". Number 185 REPRESENTATIVE OGAN asked if the Incentive Credit Program and the Oil and Gas Exploration License Program are in House regulations or statutes created by the legislature. Number 192 MR. BOYD answered by stating there were laws enacted by the legislature. He also stated they were drafting regulations to meet the requirements of the laws. He added, the regulations are really just road maps to the this law. Number 197 REPRESENTATIVE OGAN asked how long ago these programs were introduced. Number 200 MR. BOYD stated the concept of these programs was introduced about three years ago. They were passed at the end of the last session. Number 206 CHAIRMAN ROKEBERG then inquired as to the names of the two pieces of legislation that passed. Number 209 MR. BOYD stated the exploration licensing bill was HB 199, and the incentive credit bill was SB 151. MR. BOYD then began to explain some plans for the future in regards to ANWR. He refereed to "Reduced Impacts & Enhanced Environmental Protection," and said this material explains why the footprint would be much smaller in ANWR than it is in Prudhoe or Kaparuk. It starts out showing directional drilling and how it has evolved over time. The literature then explains how the drill sites have gotten smaller as well as the service areas and gravel pads that are no longer needed. This is accomplished by grinding up the material that is expelled by the well, and then re-injected back into the well. This has helped to shrink the size of the pads and it doesn't leave any material behind. Number 250 CHAIRMAN ROKEBERG asked if this was accomplished at the well, or at another facility. Number 251 MR. BOYD responded the process is sometimes completed at the well. There is a portable unit for grinding the debris. More often the debris is trucked to a mill where it is ground. Number 263 CHAIRMAN ROKEBERG asked about the well which has been drilled within the boundaries of ANWR, and also requested information about a "tight hole". Number 265 MR. BOYD stated the well was drilled by BP-Chevron, and is probably one of the tightest holes in the world. The companies drilled under complete secrecy, and the well is still held confidential by BP and Chevron. The well was drilled on private land in the region which allowed the companies to drill within the boundaries of ANWR. Number 275 CHAIRMAN ROKEBERG asked why there has not been any further development. Number 276 MR. BOYD responded by stating it is difficult to move the oil. He then stated the state did win the right to see the well through a Supreme Court ruling. Number 294 CHAIRMAN ROKEBERG then asked if the Kaktovik/Inupiat Corporation (KIC) well was abandoned. Number 300 MR. BOYD answered the well was abandoned. At this time, Mr. Boyd stated he was through with the presentation, and would answer any questions. Number 305 CHAIRMAN ROKEBERG asked about the requirements for tight hole wells. Number 306 MR. BOYD stated they have one month from the time the well is abandoned to provide the data. From that time, the well is held confidential for two years. At the end of that time, the well data becomes available except and unless the company can prove or show it is within three miles of unleased state land or that there is some specific geological condition that the company can receive extended confidentiality for. MR. BOYD then stated under the new Exploration Incentive Credit Program they have removed the ability to hold wells on extended confidentiality. That is, if you take a state credit, you must release the well in two years. These statutes and regulations are from the Department of Natural Resources under Title 38, and under AOGCC regulations. Number 320 CHAIRMAN ROKEBERG asked if the KIC well had a different set of circumstances because it was not on state land. Number 322 MR. BOYD stated Chairman Rokeberg was correct, and there were differences because the well was drilled on Native land. He then stated he is the only person from the division to see the well. This was due to the Supreme Court decision. Number 335 CHAIRMAN ROKEBERG asked if this was the State Supreme Court or the Federal Supreme Court. Number 337 MR. BOYD stated it was a Federal Supreme Court case. Number 338 CHAIRMAN ROKEBERG thanked Mr. Boyd for his presentation. He then asked if there were any other questions from the committee members. Hearing none, Chairman Rokeberg declared the committee stands adjourned at 11:45 a.m.