Large and small independent oil and gas companies and former State of Alaska officials responded Nov. 21 to a call from the House Special Committee on Oil and Gas. The committee wanted to know what the Legislature could do to encourage independent activity in the state.
What can the Legislature do to spur more activity from independents in Alaska and to have a more robust oil and gas industry? asked committee chair Rep. Vic Kohring, R-Wasilla.
There was considerable discussion about incentives — a current exploration incentive expires in 2007 — and about access to facilities and the lack of infrastructure, but permitting difficulties and the number of permits required are clearly a focus for smaller companies.
Anadarko: access a big issue
Mark Hanley, Anadarko’s public affairs manager in Alaska, told the committee that he thinks in general the system is working, with a lot of new companies in the state in the last five years. Stable taxes, reasonable regulations and access to infrastructure and acreage are all needed, he said, and noted a lot of progress has been made on regulatory issues. He said exploration incentives the Legislature passed have influenced drilling, but the planning cycle is long, from two to five years and the current exploration incentives run out in July 2007.
Access to infrastructure has been an issue for a long time, Hanley said. Anadarko is challenging tariffs on the trans-Alaska pipeline at the Federal Energy Regulatory Commission. For a gas line, Anadarko advocates fair access to the line and Hanley said he thinks a gas line with fair terms will really accelerate exploration in the state.
There are unique circumstances in Alaska, he said, but the “snowball” of activity in the state is “getting bigger and bigger and will be hard to stop.”
Asked by Rep. Norm Rokeberg, R-Anchorage, how long it would take Anadarko to evaluate tax changes that are part of a gas pipeline package, Hanley said 60 to 90 days would be the company’s preference. He said FERC allowed 90 days for evaluation of an open season.
What would Hanley recommend for a gas pipeline contract? Rokeberg asked. “Fair access at a reasonable price,” Hanley said.
Rokeberg asked if FERC wouldn’t protect access, and Hanley said not all facilities are regulated by FERC, and noted ongoing issues with access to existing facilities on the North Slope.
Pioneer: challenges formidable
Ken Sheffield, president of Pioneer Natural Resources Alaska, told the committee that for independents like Pioneer “the challenges to building a business in Alaska can be formidable.” Remaining North Slope resources are smaller, lower quality, viscous reserves or are in remote areas like the National Petroleum Reserve-Alaska, the Foothills or offshore, or are gas, which lacks a market. The North Slope has among the highest costs in the world and it takes five to 10 years from acquiring a lease to selling oil.
Uncertainty is the largest challenge independents face on the North Slope: Unknowns include future oil prices, fiscal policy, regulation and access to infrastructure, as well as exploration uncertainty.
Sheffield said the exploration incentives the Legislature approved in 2003 have encouraged Pioneer to invest, and he said Pioneer believes the state should extend the credits beyond the 2007 expiration.
Infrastructure access and commercial terms are unknowns for exploration closer to facilities, Sheffield said, telling the committee that Pioneer is negotiating for access to Kuparuk facilities.
Ehm: the real independents
Arlen Ehm, who has been a geological consultant for 29 years and involved in Alaska exploration since he sat a well on Cook Inlet’s first offshore platform in the 1960s, said he believes the committee needs to look at the needs of small companies: Large independents like Anadarko, Pioneer, Kerr-McGee and Marathon can solve a lot of problems “by throwing money” at them, a luxury small companies do not enjoy, he said.
“Independents, by and large, are the ones that fill in the gaps after the majors have given up on a particular area,” Ehm said, and told the committee that if the state wishes to continue to generate revenue from areas the majors have left, “it will be the independents that take up that challenge.”
Most Lower 48 independents he talks to about Alaska aren’t interested, he said. Their concerns include: high entry costs; high operating costs; high risk; permitting problems; excessive bureaucracy; excessive environmental constraints; long lead time; remote exploration targets; seasonal operational restrictions; lack of infrastructure; and seasonal access.
Many of those issues the state can’t address, Ehm said, but it can address permitting problems — and companies looking at Alaska have all heard “horror stories about the permitting process.”
The experiences Ehm related to the committee included lack of assistance from the Division of Oil and Gas on surface access issues, overlapping restrictions from multiple agencies and a typo in regulations which kept a rig idle on location for 20 days, a problem the Department of Law acknowledged but refused to address. In another case, where an additional agency had to sign off on a permit already signed off on by other agencies — something which Ehm said could have been accomplished in a matter of hours — he was told by the agency representative, “I have a maximum number of days to issue this and I am going to use them all.”
When asked by Rokeberg to bring difficulties with bureaucrats to the Legislature, Ehm said he didn’t want to leapfrog regulators by going to the Legislature: It’s the regulations that are at fault, he said.
And in a report prepared for the governor, Ehm said “inadequacies, bottlenecks or inefficiencies” pointed out are not intended “to single out individuals. By and large the individuals involved are performing their assigned functions.”
Ehm: panel needed to address problems
Ehm said he has asked for an ad hoc panel of industry, agency and public members to evaluate the consistency of permitting regulations, agencies and personnel. He said he received a round of applause for the proposal at an industry meeting, but the panel has never been assembled.
He described the permit reform that has taken place as “woefully inadequate.”
Gov. Murkowski asked Ehm for a report on problems he encountered recently in permitting wells.
In a 10-page report Ehm said he recommended appointment of a group to catalogue regulations, develop a unified integrated information gathering system covering all agencies, create a system in a computer-accessible form for application filing online and create review boards for reviewing and rewriting regulations.
“This has not been done,” he said.
The report to the governor identified 15 forms for one onshore gas well in Cook Inlet. No two forms were alike. One could be downloaded but then had to be filled in by hand or typewriter — then, he said, the agency wanted it back in digitized form.
Ehm said that when Ken Boyd was director of the Division of Oil and Gas Boyd recommended templates for permitting in different areas, where only differences from the standard needed to be permitted. Ehm said the only objection he heard came from permitting agencies, and told the committee “the number of such agencies has increased almost exponentially while the number of wells being drilled has stayed the same.”
Aurora: market, royalty issues
Access to existing pipelines and the need for new infrastructure topped the list David Boelens, vice president of Alaska operations for Aurora Gas and Aurora Power Resources, presented to the committee.
On the pipeline issue Boelens said pipeline access is critical to Cook Inlet gas development. While progress has been made on some pipelines, there are still issues to be resolved, he said. The lack of infrastructure is also a problem. There are no bridges to the west side of Cook Inlet, so a lot of equipment has to be barged over.
Aurora also faces a royalty and tax valuation issue which Boelens called the “prevailing value trap.” The Legislature fixed this problem for Agrium, he said, but Aurora is required to make royalty payments based on the highest rates paid in Cook Inlet, and those highest rates are contract prices based on Henry Hub, not on what Aurora is paid for its gas.
Rokeberg asked for confirmation on this point: You pay royalties and taxes on a value other than your specific contract?
Boelens said yes, but noted that the new state lease form says the state “may establish minimum values for the purpose of computing royalties.”
Permitting is complex, he said, relating that one-quarter of the cost of a power line Aurora installed was for permitting.
Then there is marketing the gas. Because of long-term utility contracts in Cook Inlet, there isn’t a ready market for new gas, Boelens said. Because Aurora markets gas, as well as producing it, it has more ability to deal with this lack of market than other companies.
Although Aurora has spent $38.66 million over the 2000-05 period drilling eight new wells (including two dry holes), five sidetracks/workovers and three non-rig interventions, none of its work qualified for incentives.
Asked by Rokeberg what would be of most use, Boelens said rural bridges and roads.
Myers: Facilities access
Mark Myers, director of the Division of Oil and Gas until his resignation in October, said he thinks the state “has a real opportunity to get a diversified producer base.” A level playing field is essential he said, and the state needs to play a role because it is difficult for companies to deal with complex commercial issues because the companies are very competitive and are always involved in negotiations. The government needs to be the “honest cop on the beat,” Myers said.
Facility access is an issue it is difficult for the companies to talk about, he said. It has been an issue in both the Gulf of Mexico and the North Sea, and both of those areas have dealt with it. Myers said he thinks facility access “will require action by the Legislature.” It’s a constant concern with new companies coming in, he said.
Myers also said the state needs to be very careful when it makes fiscal changes because those will affect independents differently than large companies.
There are also state ownership issues: It’s a significant issue if the state is a competitor with companies it wants to attract, he said. Infrastructure in remote basins in Alaska is needed, he said: When infrastructure moved west with Alpine, that became the focus for satellite development. Point Thomson would provide infrastructure to the east, he said, but the Department of Natural Resources has “foregone the opportunity” to have a well drilled there this winter by allowing the unit owners to defer their drilling commitment.
Asked by Rokeberg about the Point Thomson work commitment, Myers said that over the past five to seven years the department has required drilling and production commitments as a condition of units — which allow leases to be held beyond their primary term. The Point Thomson requirement for a well has been stayed. A negotiated commitment loses value “if there’s a political way to undue it,” he said. Myers called for fair, consistent management of commitments. Independents, he said, drill or relinquish and once the state interferes with negotiated commitments, there is no way for the state to enforce them.
Boyd: areawide permitting
Ken Boyd, who preceded Myers as director of the Division of Oil and Gas, noted the success of areawide lease sales in providing access to lands. Ten years ago, he told the committee, access to land was an issue because the leasing program was based on nominations and companies could only acquire prospects in bits and pieces — with no surety of when adjacent pieces would be offered.
Areawide leasing was passed by the Legislature 60 to nothing, Boyd said, and the bill worked.
Permitting, he said, “is where leasing was 10 years ago. Why don’t we have areawide permitting?”
There are five areawide lease sales: North Slope, Beaufort Sea, Foothills, Cook Inlet and the Alaska Peninsula. Best interest findings are done that are good for 10 years, with annual requests for significant changes, which can then be mitigated.
“Why can’t we do the same with permitting?” he asked, starting with the core idea that we understand and permit by exception. Onshore exploration wells are basically the same, he said: with areawide permitting you would permit or mitigate the differences, not start from scratch with every well.
