JOINT HOUSE RESOURCES STANDING COMMITTEE/ HOUSE SPECIAL COMMITTEE ON OIL AND GAS May 6, 1997 8:40 a.m. RESOURCES MEMBERS PRESENT Representative Scott Ogan, Co-Chairman Representative Bill Hudson, Co-Chairman Representative Fred Dyson Representative Joe Green Representative Irene Nicholia RESOURCES MEMBERS ABSENT Representative Beverly Masek, Vice Chair Representative Ramona Barnes Representative William K. ("Bill") Williams Representative Reggie Joule OIL & GAS MEMBERS PRESENT Representative Mark Hodgins, Chairman (Representative Scott Ogan) Representative Norman Rokeberg Representative Joe Ryan Representative Con Bunde Representative Tom Brice OIL & GAS MEMBERS ABSENT Representative J. Allen Kemplen COMMITTEE CALENDAR CONFIRMATION HEARINGS: Alaska Oil and Gas Conservation Commission Robert N. Christenson - CONFIRMATION ADVANCED PREVIOUS ACTION No previous action to record WITNESS REGISTER ROBERT N. CHRISTENSON, Appointee to Alaska Oil and Gas Conservation Commission 15800 Southpark Loop Anchorage, Alaska 99516 Telephone: (907) 264-8124 POSITION STATEMENT: Testified on appointment to Alaska Oil and Gas Conservation Commission. ACTION NARRATIVE TAPE 97-50, SIDE A Number 0001 CO-CHAIRMAN SCOTT OGAN called the Joint House Resources Standing Committee/House Special Committee on Oil and Gas meeting to order at 8:40 a.m. Present at the call to order were Representatives Ogan, Hudson, Hodgins, Ryan and Bunde. Representatives Green, Rokeberg, Nicholia, Brice and Dyson joined the meeting at 8:43 a.m., 8:46 a.m., 8:51 a.m., 8:52 a.m. and 9:31 a.m., respectively. CONFIRMATION HEARING CO-CHAIRMAN OGAN announced the purpose of the joint meeting was a confirmation hearing on Robert N. Christenson's appointment to the Alaska Oil and Gas Conservation Commission (AOGCC). Alaska Oil and Gas Conservation Commission Number 0128 ROBERT N. CHRISTENSON, Appointee to the Alaska Oil and Gas Conservation Commission, said his most recent job is with VECO Corporation, where he serves as senior vice-president in charge of strategic planning. An Anchorage resident for two years, he is a registered professional engineer in Washington state and Alaska. MR. CHRISTENSON has 40 years' experience in the industrial sector, the last 20 in oil and gas. He began working in Alaska as a project engineer in 1978 "in the Prudhoe Bay field on the ARCO side." He stated, "Since that time, I personally, and later my company, have worked continually either for BP, then Sohio or ARCO and ARCO and Alyeska pipeline." His initial experience in oil and gas in Alaska was in production facilities in Prudhoe Bay. MR. CHRISTENSON stated that petroleum can be interpreted as a broad term. It includes the "basic three parts of the development of a field." First is information required to define the reservoir and find the oil. Second, drillers confirm that field and do the drilling program. Third, there must be surface facilities to produce it, down to a transportation system. "So I have been in that facility side of the work," he said. To illustrate the close working relationship and collaborative effort required in these development projects, he discussed the interim gas lift module his company did for Sohio. Number 0464 MR. CHRISTENSON emphasized the importance of this close working relationship for the future of the North Slope. He said the marginal fields are difficult to produce because of the reduced costs necessary to make them profitable; he cited an example involving Northstar. MR. CHRISTENSON advised that in 1986, he and seven shareholders bought the company they worked for, Hallanger Engineers, and operated it for six years as Christenson Engineering. During that time, they continued to work on the North Slope and elsewhere. The organization grew from 30 people to 300. Asked to participate in the competition for the engineering alliance at British Petroleum, they elected to join with VECO in a joint venture corporation to pursue that alliance. He said, "We were successful, and a year later we were successful in competing for the Alyeska engineering alliance, and now I have that. So for about four years now, we've had both of those alliances here in Alaska." He said they have 350 engineers in Alaska and 1,000 total, from all disciplines. He believes they are Alaska's largest engineering company. Number 0693 MR. CHRISTENSON stated why he believes he can add to the commission. He said, "I have a lot of experience in dealing with the oil companies; I've been dealing with them for 20 years in all facets of their ups and downs. I understand their business. I think that would be helpful. I have used and been a part of multi- disciplinary teams, where it is very important to coordinate and cooperate to go forward. I have never worked for an oil company, so I have no allegiance to any oil company. Other than talking with the Governor twice, when he asked me if I'd accept the appointment and yesterday when he welcomed me to Juneau, my first trip, I have not had any dealings with the Governor. I am not seeking this as a star in my crown to further my career, as I am toward the end of my career. So I feel that I am very much an independent in what my decisions will be, which I think is important for the commission." MR. CHRISTENSON said it would be presumptuous, on this short notice, to comment on what the commission should do; he is not yet familiar with the personnel, although he has met with the chairman. However, he believes there are important things the commission must do to safeguard the resource in Alaska and, at the same time, promote development of the oil. He commented that oil and gas do no good in the ground. He suggested compromise solutions need to be worked out to ensure the state is taken care of, in addition to stimulating the industry to produce the fields. MR. CHRISTENSON stated that he believes the commission should stay current on technology and investigate new technologies. He also believes the commission should have every means possible to independently assess what the oil companies are doing. Number 0933 CHAIRMAN MARK HODGINS noted that a couple of issues, extremely important to Alaska, are coming up. He asked for Mr. Christenson's views on the Trans-Alaska Gas System (TAGS) project and upcoming lease sales. He further asked how these lease sales would interplay with Mr. Christenson's personal philosophy. MR. CHRISTENSON responded that he had not been involved specifically with lease sales to date; therefore, his opinions are based on interaction with the "oil patch." He believes it is important to have lease sales and to stimulate the environment for oil companies to come in and develop the resource. Number 0989 CHAIRMAN HODGINS asked whether Mr. Christenson would, then, be proactive in establishing lease sales and continuing the lease sale process. MR. CHRISTENSON replied, "Absolutely." Number 0998 CHAIRMAN HODGINS asked for Mr. Christenson's thoughts on the TAGS project. MR. CHRISTENSON responded, "There's obviously a lot of gas up there that needs to get to market, and I think that the issue right now is: How do you get the gas to market and get it to market at a competitive price? Because in the long haul, the end result is ... that you must be competitive in the world market in order to do that, though I think that it is important that we look at all economic aspects, because it is a matter of cost and return. And certainly the gas in Alaska is an important commodity on a worldwide basis, and we need to do all we can do to make sure that we can deliver that gas to the market at a competitive price. And that involves not only the technical side, but it obviously involves the tax structure and the royalties and all the other things that need to be done in order to make that a competitive package for the ... world market." Number 1098 REPRESENTATIVE CON BUNDE referred to a recent article in the Anchorage newspaper about liquefaction of gas. He noted the challenge of making Alaska's gas marketable and stated, "And if this opportunity would play out, it would reduce, I think, some of the economic barriers to the sale of our gas." He asked whether Mr. Christenson had read the article and what his thoughts were on what Alaska might do to help advance further study of the liquefaction process. Number 1135 MR. CHRISTENSON said that was why he mentioned his belief that it is important for the commission to stay current on technology, as this is one area that looks highly attractive. Although he had not read the article in detail, he knows about the process somewhat. He stated, "Again, as with anything, these processes all turn out to be: What is the most economic way to do it, and how do you compete with the market prices? Because unless you have a subsidized development, such as the heavy oils and the `syncrudes' and so forth, like they had in Canada, it's not possible to produce competitive product." He suggested making sure the commission is well-versed in the technology. He further suggested if there are opportunities to work with oil companies to stimulate it, that would be appropriate. He endorsed seeking new ways to do things and do them safely. MR. CHRISTENSON explained that in his own programs, safety comes first. "And I have been brought up in the environment where there are no accidents," he stated. "All accidents are preventable, and therefore, you shouldn't have them." He said that applies across the board. Number 1278 CO-CHAIRMAN BILL HUDSON advised that he views this commission as perhaps the most important in Alaska, as it is the watch dog and the advocacy for the people of Alaska. He said one of the most important elements would be maintaining autonomy from the industry. "You have to work with the industry, but you have to be able to rise above them on issues that they may find economic and you may find wasteful or whatever it might be," he said. Co-Chairman Hudson asked, "Will you be working full time with this commission?" MR. CHRISTENSON said yes. CO-CHAIRMAN HUDSON asked whether Mr. Christenson sees any potential conflict with his partners or elements of his company in their responsibilities and his duties on this commission, and whether he could segregate the two. MR. CHRISTENSON replied that he does not have a formula right now for that, as he has a contract with VECO as a result of his acquisition. However, he will accomplish whatever is necessary to ensure there is no conflict of interest. CO-CHAIRMAN HUDSON stated his belief that ensuring there is no conflict is an imperative "because of the peculiar nature of this commission." As he reads it, the AOGCC must maintain a separation even from the Department of Natural Resources (DNR). He noted that the commission works on behalf of the people of Alaska. Number 1436 REPRESENTATIVE NORMAN ROKEBERG said he share's Co-Chairman Hudson's analysis of the importance of this commission. He stated, "In fact, the two technical seats on this commission, to me, are the two most important positions in the entire state government of Alaska when it comes to husbanding our resources and making sure that the oil flow, which is the bulk of all of our state revenues, has been able to continue, and it has been served and husbanded and allocated in a proper manner." He asked Mr. Christenson what methods are used generally in the Kuparuk oil field. MR. CHRISTENSON said he was not current there because he had not done work for ARCO in awhile. He stated, "But I know that we were using, at one point, water-alternating-gas methods for enhanced oil recovery. And that's the only one I'm current on. I know that there's a new project over there now, but I don't know what methods they're using." MR. ROKEBERG asked whether Mr. Christenson knows which of those are more effective or whether it depends on the structures. MR. CHRISTENSON replied that in his experience, it depends a lot on the structure, the gas cap, and where the water is in the field. He said, "And I know that we have discussed many, many different types. So I don't think you can say that there is one that is universally more acceptable than others. It really depends on a lot of things in the reservoir." Number 1553 REPRESENTATIVE ROKEBERG referred to the Tarn discovery, part of the Kuparuk area. He asked whether Mr. Christenson knew about that and asked him to comment on "transportation of the oil and waters for a step-out area there and how effective and how costly that could be to bring your methods to that particular field." MR. CHRISTENSON said they had not really done a lot with ARCO in the last few years; therefore, he could not really speak to the Kuparuk field. He said the closest they had come to that is the Milne Point field, a "submersible pump field." They were talking about miscible injection in that field. He stated, "We put in I think about three or four pads in the Milne Point area since we started, and I'm trying to remember what the costs for those particular gathering stations were; I don't remember offhand." He offered to get that information. Number 1625 REPRESENTATIVE ROKEBERG referred to Milne Point and said there are roughly 26 billion barrels of heavy oil on the North Slope. He briefly discussed the history of Milne Point and asked, "What methods are you aware of that are used in Arctic engineering to lift heavy oil?" MR. CHRISTENSON replied, "We've been involved in the new development of the Schrader Bluff area for British Petroleum." He indicated people from his company had been on the facilities team in that area. He said, "And the methods, as I see the development, were to minimize the drilling costs because they are shallow wells and they are slow producers. So the drilling program is the most essential." He suggested if Representative Rokeberg was "referring to whether it is in situ or steam lines or whatever, like they do in the North," he does not believe that is called for in the Schrader Bluff area. Number 1717 REPRESENTATIVE ROKEBERG asked whether there was flooding going on in the fields or difficulties with enhanced oil recovery (EOR) because of sand. MR. CHRISTENSON said sand is always a problem. He cited an example involving sand erosion and commented, "I don't know if that is the paramount problem or just a problem." Number 1748 REPRESENTATIVE JOE GREEN mentioned he had talked with Mr. Christenson the previous day. Although he believes Mr. Christenson is qualified as far as administrative abilities, personality and so forth, he has serious concerns about his qualifications to address the myriad of questions that will arise dealing with reservoir and downhole equipment, for example. He presented the analogy of a hospital administrator becoming a surgeon. REPRESENTATIVE GREEN cited a string of technical terms and issues that he said are real issues and real problems in Alaska. One major "test" on the commission would be correlative rights and prevention of waste. He said, "And in order to understand whether there could be waste going on, you'll have to exercise your own abilities in cases. You can't rely on the operators. You can't even rely on untrained staff in that regard. And so that is where my problem lies, that do you feel that you would be able to make the call, against perhaps a hostile operator on a call one way or the other, on, for example, dry gas injection into a gas cap overlaying an oil field that has light hydrocarbons in it?" REPRESENTATIVE GREEN said the commission would look to him for that expertise. Although he could hire consultants, he would ultimately make the call. He asked whether Mr. Christenson feels his background would enable him to do so. Number 1912 MR. CHRISTENSON stated his belief that it is important that commission members have, in aggregate, the total scope of technical talent to evaluate such situations. "So I don't differ from your viewpoint in that regard," he stated. MR. CHRISTENSON said in regard to whether he believes he could make decisions given the information, his analogy would be that for 20 years, he had been making decisions that not only affected clients but also himself, personally, in terms of "betting the farm." He feels comfortable in the role of making decisions based on information available from people he selects as being knowledgeable in a particular area. He cited the example of process work, saying he had learned over the years to trust the judgment of the people he hires, but also to sometimes mitigate it. Number 2038 REPRESENTATIVE GREEN acknowledged perhaps his hospital/surgeon analogy was not the best. He mentioned that Mr. Christenson's dossier indicates he ran a company with 1,000 employees; he believes from their conversations that Mr. Christenson had a good idea of what each project entailed. He suggested, however, that such a position requires far more administrative than technical skill. The AOGCC has a relatively small staff, and administrative abilities would have to be replaced by a far more intimate knowledge of what is going on. REPRESENTATIVE GREEN said as Alaska increasingly depends on smaller reservoirs, it is possible there will be one operator or operators with partners, with a common purpose. They will not be at odds as in Prudhoe Bay because of the gas cap and oil rim. When that operator, or the representative of a group of operators, comes to the commission with proposed field rules, those need to be examined with a fine-toothed comb. The first objective of oil companies is to make a profit; all successful companies rely on that, and they will skew their approach to their advantage, which is to be expected. REPRESENTATIVE GREEN asked Mr. Christenson: If companies skew their approach to a production method that may not ultimately be the best for the state or the reservoir, will you have the expertise to take appropriate action? He said in addition to facts presented, there will be much that is neither said nor presented, which Mr. Christenson will either have to demand or find. "And those are the things that I'm concerned about more than your administrative ability, is the ability, the `intuit' that you're going to need to be able to determine what is the best way to establish what are the best field rules to establish," he said. Citing examples, he stated that there are a wide variety of reservoir characteristics; in some cases, he believes only experience can dictate what should be done. He asked for a response. Number 2225 MR. CHRISTENSON said that is pretty wide-open. He expressed surprise at finding that the current major resource and income for the state was overseen by a group so small. "Because it seems to me to be really important that there is an independent assessment of what the resource is and what the best way to produce it is," he stated. "And I don't know if there's sufficient simulations software and that kind of stuff to be even able to do that with the folks that are there. So I guess that's a concern that I share with you." He acknowledged he cannot instantly become a reservoir engineer, for example. However, he would rely on his ability, through consultants or otherwise, for an independent assessment to make the right decisions. Number 2301 CO-CHAIRMAN OGAN asked whether Mr. Christenson was aware of the statutory qualifications for members. MR. CHRISTENSON affirmed that he had read the statute. CO-CHAIRMAN OGAN read from AS 31.05.009, which says in part, "one member shall be a licensed professional engineer with educational and professional background in the field of petroleum engineering". He asked Mr. Christenson to characterize his background in petroleum engineering. MR. CHRISTENSON replied that if the question is whether he is an educated petroleum engineer, he is not; he is a mechanical engineer by education who has worked 20 years in the petroleum field. Number 2343 CO-CHAIRMAN OGAN read from a portion of AS 31.05.030, which provides an extensive list of the commission's powers and duties. TAPE 97-50, SIDE B Number 0006 CO-CHAIRMAN OGAN continued reading from AS 31.05.030. He said he believes one of the most important is AS 31.05.030(g), relating to hazards; he read it in part. He stated that when the legislature set up the commission, they clearly wanted that expertise. He said there has been concern in the legislature that the commission has been operating one commissioner short for nearly a year. He asked whether Mr. Christenson is qualified to make the decisions outlined in the statutes or whether he would have to rely on staff for information to make those decisions. MR. CHRISTENSON replied, "There is no question that I would rely on staff to feed me the information. I truthfully find it hard to believe that there would be a single individual that could sit in a room without any input other than data from the oil companies who would be qualified to make a decision such as the ones that Representative Green had talked about and the ones you read off in the book. It's a complex subject, and ... I certainly would not be one that would say that I could singularly, by myself, make all those decisions." Number 0224 REPRESENTATIVE ROKEBERG asked whether Mr. Christenson was prepared to make the commitment to the state to bring the energy and vitality needed to this small group of people, learning a whole new discipline. MR. CHRISTENSON replied that it has taken an enormous amount of energy and commitment to get to the point where he is. He does not feel compelled to "hang it up" and otherwise would not consider the position. He has always been active. He looks forward to challenge, and this is a very challenging position. He stated, "In sum, I would say the answer to the question is yes, I am." Number 0383 REPRESENTATIVE ROKEBERG expressed concern over a "duopoly" in Alaska with two major operators. He said only three actual petroleum firms now lift hydrocarbons out of Alaskan soil: UNOCAL, BP Exploration (Alaska) Incorporated and ARCO Alaska, Incorporated. Because of operating agreements, there are basically two petroleum companies, which concerns him. He asked for Mr. Christenson's opinion on that. REPRESENTATIVE ROKEBERG further said there are statutory requirements relating to bonding, for example, that require that to drill one hole, there must be as much as $1 million in bonding for potential oil spills; he believes this is an enormous barrier for smaller exploration companies and a huge burden on development of potential resources, particularly in "nonfrontier areas" of the state. He believes the commission has the capability to affect that. He asked Mr. Christenson's opinion on whether new exploration by smaller petroleum firms in Alaska should be encouraged and if so, what he as commissioner would do to foster that. Number 0506 MR. CHRISTENSON responded that the point about the independents is an interesting one. He cited examples of small operators and stated that the onus is really on the major companies to produce and operate cheaper than they have been. If they do not, there are companies "sitting on the fence that are just waiting to get in there and get those leases and make money producing where the larger companies can't." MR. CHRISTENSON stated, "And I think that that deserves a lot of stimulation, because I think those companies, they have proved that other places in the world, they can go and they can produce cheaper than the larger companies. There is some risk in going with the smaller companies, as you point out from the bonding standpoint, but certainly they have the talent. I mean, ARCO and BP are not the only one that has production capability and talent to analyze reservoirs and go in and do their drilling. And I think it is a paramount thing that we do encourage others to come into the field." He cited an example and concluded, "In answer to your question, yes, I would be in favor of doing that. As to how to precisely stimulate the participation by smaller companies, smaller independents, I think I'd have to look at that. I agree that if it takes a $1 million bond, that's a lot of money for some of these folks to come up with, but they're able to go out and raise capital if the potential was there. So I think it's possible." Number 0671 REPRESENTATIVE ROKEBERG asked, "If you had the opportunity to advise Secretary Babbitt about the correlative rights of the potentiality of the Sourdough prospect next to the ANWR prospect, what advice would you give the Secretary of Interior as to the allowance of the state of Alaska's lessees to explore areas by directional drilling into ANWR?" MR. CHRISTENSON said that is a little out of his domain. However, his personal opinion is that if reserves are there, he believes we should develop them, in the Arctic National Wildlife Refuge (ANWR) or a corollary field where directional drilling could be done. He stated, "My advice would be that petroleum in the ground does nobody any good if it's in the ground. And we should be developing it for the good of the country, as well as the good of the state, and should not be keeping it as a calving ground for the caribou necessarily, because the pad sizes and the new technology allow us to do things a lot smaller even now than things were done in Prudhoe. So ... there ought to be an option to do that." Number 0775 REPRESENTATIVE ROKEBERG commented that corollary rights is a major responsibility of the commission, and the individual in this position should be able to make recommendations for that. Number 0808 CO-CHAIRMAN OGAN asked whether there were further questions. He thanked Mr. Christenson and explained that the committee would not make recommendations; those would be made individually on the House floor. ADJOURNMENT CO-CHAIRMAN OGAN adjourned the Joint House Resources Standing Committee/House Special Committee on Oil and Gas meeting at 9:40 a.m.