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AOGCC Gas Sales Review Initial Observations

Alaska Oil and Gas Conservation Commission (AOGCC) Alaska Natural Gas Pipeline Issues Presentation to JOINT HEARING – SENATE RESOURCES COMMITTEE & LEGISLATIVE BUDGET & AUDIT COMMITTEE September 2, 2004. AOGCC Gas Sales Review Initial Observations.

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AOGCC Gas Sales Review Initial Observations

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  1. Alaska Oil and Gas Conservation Commission (AOGCC)Alaska Natural Gas Pipeline IssuesPresentation toJOINT HEARING – SENATE RESOURCES COMMITTEE & LEGISLATIVE BUDGET & AUDIT COMMITTEE September 2, 2004

  2. AOGCC Gas Sales ReviewInitial Observations • Oil-only development- 13+ billion barrels of hydrocarbon liquids* • Current hydrocarbon liquids cumulative production over 11 Billion Barrels* exceeds 1977 reserve estimates • Gas sales will add approximately 3.5 billion barrels of oil equivalent (6,000 cubic feet gas = 1 barrel oil equivalent) after deduction for oil losses, regardless of timing • Gas sales will extend field life * Includes black oil, condensate and NGLs ** Roughly, AOGCC Testimony - Joint Hearing - Senate Resources & Legislative Budget and Audit Committees

  3. AOGCC Gas Sales ReviewInitial Observations (Continued) • The AOGCC has statutory responsibility to regulate reservoir management including timing and offtake rates for conservation purposes • Gas sales will negatively impact total liquid hydrocarbon recovery • Reduction in hydrocarbon liquid production may be 100’s of million of barrels • Greatest impact with earlier sales and higher offtake rates However … • Timing of sales and gas production rate does not appear to significantly affect total hydrocarbon recovery • Tradeoffs between oil and gas recovery • Further evaluation required to validate preliminary findings AOGCC Testimony - Joint Hearing - Senate Resources & Legislative Budget and Audit Committees

  4. Outline of Testimony • Overview of AOGCC’s Role • Statute and Orders - North Slope Gas Sales • Prudhoe Bay Gas Sales Study Review • Summary of Results • Future work needed and recommendations AOGCC Testimony - Joint Hearing - Senate Resources & Legislative Budget and Audit Committees

  5. Where Do the Agencies Fit In? AOGCC- generally regulates sub-surface activities. ADNR, ADEC, and other agencies have regulatory authority over most surface activities. AOGCC Testimony - Joint Hearing - Senate Resources & Legislative Budget and Audit Committees

  6. AOGCC Function • AOGCC established under the Alaska Oil and Gas Conservation Act (AS 31) • Independent, quasi-judicial agency • Alaska Administrative Code, Title 20, Chapter 25 • Authority over all lands in Alaska* • Duties • Prevent physical waste of resource • Ensure greater ultimate recovery • Protect correlative rights • Protect underground sources of drinking water • * including those under US jurisdiction AOGCC Testimony - Joint Hearing - Senate Resources & Legislative Budget and Audit Committees

  7. Powers and Duties of Commission*Related to Major Gas Sales • In order to prevent waste and ensure a greater ultimate recovery of oil and gas: • Investigate to determine whether or not waste exists or is imminent. • Require plans of reservoir development and operation • Regulate the quantity and rate of the production of oil and gas. • * AS 31.05.030. AOGCC Testimony - Joint Hearing - Senate Resources & Legislative Budget and Audit Committees

  8. Waste • In addition to its ordinary meaning, “physical waste”* includes : • The inefficient, excessive, or improper use of, or unnecessary dissipation of reservoir energy; • Operating or producing in a way that reduces the amount of oil or gas recovered under operations conducted in accordance with good oil field engineering practices. • (Gas blowdown is normally delayed to end of productive oil life to maximize oil recovery) • *AS 31.05.170 (14) AOGCC Testimony - Joint Hearing - Senate Resources & Legislative Budget and Audit Committees

  9. Applicable Conservation Orders • Prudhoe Oil Pool - Conservation Order 341D • Rule 9 - Pool Maximum Gas Offtake Rate set at 2.7 billion standard cubic feet per day (BSCFD) • Written in 1977 • Contemplated a 2 BCFD pipeline saleable gas rate • Rule 12 - Prudhoe Bay Miscible Gas Project • Operator to maintain reservoir pressure at minimum of 100 psi above minimum miscibility pressure • Rule 17 – Gas Cap Water Injection to mitigate reservoir pressure decline AOGCC Testimony - Joint Hearing - Senate Resources & Legislative Budget and Audit Committees

  10. Rule 9 – CO 341D • AOGCC approval is required for sales rates in excess of that allowed by Rule 9 • Revisit Rule 9 assumptions before project approval by AOGCC • Offtake rules must be based upon current knowledge and sound reservoir management • With a project of this magnitude it is critical that AOGCC be given adequate time to evaluate AOGCC Testimony - Joint Hearing - Senate Resources & Legislative Budget and Audit Committees

  11. AOGCC Review of Prudhoe Gas Sales Reservoir Studies • AOGCC reviewed results from Prudhoe Owners’ large scale, complex reservoir models August 2002 – May 2003 • AOGCC Consultant- Frank Blaskovich • Report completed in June 2003 Results based upon preliminary work by owners and are rough projections AOGCC Testimony - Joint Hearing - Senate Resources & Legislative Budget and Audit Committees

  12. AOGCC Gas Sales Review Model Sensitivities Sensitivities evaluated included: • Effect of sales rate (2.9 to 4.3 BCFD) • Effect of sales timing (Start-up dates of 2010-2020) • Options to mitigate oil loss • Increased water injection into gas cap • Maintenance of reservoir pressure • CO2 injection into current miscible injectors • Increased EOR reserves and Propane recovery AOGCC Testimony - Joint Hearing - Senate Resources & Legislative Budget and Audit Committees

  13. AOGCC Gas Sales ReviewInitial Observations Gas sales will impact liquid hydrocarbon recovery • Reservoir energy in the system will decline as a natural consequence of gas withdrawal for sales • Reduction in hydrocarbon liquid production may be 100’s of million of barrels • Dependent upon field depletion optimization, mitigation measures to decrease oil losses, and field life extension resulting from gas sales • Increased water injection into gas cap decreased predicted losses (by up to 100 MMSTB) • CO2 injection into miscible injection patterns looks promising • Increased propane recovery, but upgrade of predictive tools needed • Greatest loss of hydrocarbon liquids will occur with earlier sales and higher offtake rates AOGCC Testimony - Joint Hearing - Senate Resources & Legislative Budget and Audit Committees

  14. AOGCC Gas Sales CritiqueInitial Observations (Cont.) • With proper engineering, total hydrocarbon* recovery is relatively insensitive to sales date (2010-2020) and sales rate (2.9-4.3 BCFD) assuming end of field life before 2050. • All gas sales cases show roughly the same added recovery (+/- 3.5 billion barrel oil equivalent) • Tradeoffs between oil and gas recovery * Includes oil, condensate, NGLs and gas AOGCC Testimony - Joint Hearing - Senate Resources & Legislative Budget and Audit Committees

  15. Major Gas SalesAOGCC Goals • Maximize/Optimize total hydrocarbon recovery • AOGCC must be part of process • Participate before decision • Active in setting the producing rate • Must have adequate lead time to complete due • diligence • Ensure good technical review • Help Legislature Make Informed Decisions AOGCC Testimony - Joint Hearing - Senate Resources & Legislative Budget and Audit Committees

  16. Technical Review - Owners Owners plan to continue updating existing reservoir and facilities models • The work done by the PBU owners is a good start • Further work required to • Update predictive tools • Optimize operating strategies to maximize oil recovery • Can liquid losses be effectively mitigated? • Effects on other pools/reservoirs EOR projects Owners have stated that AOGCC will be part of the reservoir evaluation process AOGCC Testimony - Joint Hearing - Senate Resources & Legislative Budget and Audit Committees

  17. Co-operative Effort • AOGCC should be included early in evaluation process • Active participant – influence evaluation and planning • AOGCC will also conduct some independent analysis • Cooperative effort required OR costly State sponsored study AOGCC Testimony - Joint Hearing - Senate Resources & Legislative Budget and Audit Committees

  18. Summary • Oil losses could be several 100 million barrels for early gas sales and high offtake rate However … • Timing of sales and gas production rate does not appear to affect total hydrocarbon recovery to a great extent • Tradeoffs between oil and gas recovery • Further evaluation required to validate preliminary findings • Conservation Impacts • Mitigation Measures • Independent review • Cooperative work with Prudhoe Owners • The AOGCC has responsibility to regulate reservoir management including timing and offtake rates for conservation purposes AOGCC Testimony - Joint Hearing - Senate Resources & Legislative Budget and Audit Committees

  19. Other Pools • Pt. Thomson – AOGCC approval must be obtained prior to gas sales • Early development scenarios for Pt. Thomson presented to AOGCC and other agencies • Emphasized maximizing condensate production • Owners re-evaluating depletion options • Evaluation of liquid recovery required before associated gas sales from satellite oil pools • Future Oil Fields not yet identified AOGCC Testimony - Joint Hearing - Senate Resources & Legislative Budget and Audit Committees

  20. Alaska Oil and Gas Conservation Commission (AOGCC) Contact Information Phone: (907) 297-1433 Fax: (907) 276-7542 www.aogcc.alaska.gov AOGCC Testimony - Joint Hearing - Senate Resources & Legislative Budget and Audit Committees Photo by Daniel T. Seamount III

  21. DNR’s Authority to Regulate Economic and Physical Waste • In order to conserve natural resources of all or part of an oil or gas pool, field, or area, the DNR commissioner may determine and certify a unit plan of development or operation when it is necessary or advisable in the public interest. AS 38.05.180(p). • Under unitization authority, the DNR commissioner may establish, change or revoke drilling, producing, and royalty requirements of leases. The commissioner may also modify from time to time the rate of prospecting and development and the quantity and rate of production within units. AS 38.05.180(p)-(q). • The DNR commissioner will approve a proposed unit agreement for state oil and gas leases if he makes a written finding that the agreement is necessary or advisable to protect the public interest considering the provisions of AS 38.05.180 (p). The finding must justify that the unit will: • promote conservation of all natural resources, including all or part of an oil or gas pool, field, or like area; • promote the prevention of economic and physical waste; and • provide for the protection of all parties of interest, including the state. 11 AAC 83.303

  22. Hypothetical Unit with 4 Pools &4 Participating Areas (PA) DNR manages units and participating areas. AOGCC regulates pools.

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