Alaska Oil and Gas Conservation Commission AOGCC Alaska Natural Gas Pipeline Issues Presentation to JOINT HEA

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. Sep. 2, 2004 AOGCC Testimony - Joint Hearing - Senate Resources & Legislative Budget and Audit Committees 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, Start with very general high altitude summary slide. Results of preliminary reservoir model run by the owners indicates that 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 if assume end of field life at 2050. Start with very general high altitude summary slide. Results of preliminary reservoir model run by the owners indicates that 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 if assume end of field life at 2050.

3. Sep. 2, 2004 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 Bad news � impact on HC liquid recovery. Big potential for waste Good news � timing and rate does not appear to affect total hc recovery if assume end of field life at 2050. disclamer If the preliminary findings are substantiated by a final more complete analysis, the project would be approvable by the AOGCCBad news � impact on HC liquid recovery. Big potential for waste Good news � timing and rate does not appear to affect total hc recovery if assume end of field life at 2050. disclamer If the preliminary findings are substantiated by a final more complete analysis, the project would be approvable by the AOGCC

4. Sep. 2, 2004 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 Prudhoe Bay Gas Sales Study Review- aogcc�s review of a preliminary reservoir study done by the PBU owners. Future work and recommendations- more work needs to be performed before final AOGCC approval Prudhoe Bay Gas Sales Study Review- aogcc�s review of a preliminary reservoir study done by the PBU owners. Future work and recommendations- more work needs to be performed before final AOGCC approval

5. Sep. 2, 2004 AOGCC Testimony - Joint Hearing - Senate Resources & Legislative Budget and Audit Committees 5 Where Do the Agencies Fit In? AOGCC�s Role Is Regulatory. DNR is mixed bag between regulatory and proprietary. Mark Myers will discuss DNR�s role.AOGCC�s Role Is Regulatory. DNR is mixed bag between regulatory and proprietary. Mark Myers will discuss DNR�s role.

6. Sep. 2, 2004 AOGCC Testimony - Joint Hearing - Senate Resources & Legislative Budget and Audit Committees 6 AOGCC Function PREVENT PHYSICAL WASTE OF THE RESOURCE Technical evaluation of proposals for major gas sales, enhanced oil recovery, and gas cap liquids recovery. Evaluate drilling programs to ensure proper well design, construction and well control equipment. Inspect wells and drilling projects to verify compliance with approved regulations, procedures and safety requirements for drilling and production practices. ENSURE GREATER ULTIMATE RECOVERY Analyze production data, including reservoir pressure, gas-oil ratios, water cut, etc., to ensure these variables fall within the accepted parameters necessary to provide for greater ultimate recovery. Review and approve development proposals, including plans for enhanced oil recovery operations. � INDEPENDENTLY ASSESS OIL AND GAS DEVELOPMENT Independently audit/verify that oil and gas exploration & development proposals are in compliance with the purposes and intent of Title 31. PROTECT CORRELATIVE RIGHTS Provide all owners of oil and gas rights the opportunity to recover their fair share of the resource through well spacing provisions, permit review, and pooling authority. ADJUDICATE DISPUTES BETWEEN OWNERS Provide a public forum to resolve disputes between owners. PROTECT ALASKA'S UNDERGROUND SOURCES OF DRINKING WATER Provide engineering and geological review of all activities that affect potential sources of drinking water. � PREVENT PHYSICAL WASTE OF THE RESOURCE Technical evaluation of proposals for major gas sales, enhanced oil recovery, and gas cap liquids recovery. Evaluate drilling programs to ensure proper well design, construction and well control equipment. Inspect wells and drilling projects to verify compliance with approved regulations, procedures and safety requirements for drilling and production practices. ENSURE GREATER ULTIMATE RECOVERY Analyze production data, including reservoir pressure, gas-oil ratios, water cut, etc., to ensure these variables fall within the accepted parameters necessary to provide for greater ultimate recovery. Review and approve development proposals, including plans for enhanced oil recovery operations. � INDEPENDENTLY ASSESS OIL AND GAS DEVELOPMENT Independently audit/verify that oil and gas exploration & development proposals are in compliance with the purposes and intent of Title 31. PROTECT CORRELATIVE RIGHTS Provide all owners of oil and gas rights the opportunity to recover their fair share of the resource through well spacing provisions, permit review, and pooling authority. ADJUDICATE DISPUTES BETWEEN OWNERS Provide a public forum to resolve disputes between owners. PROTECT ALASKA'S UNDERGROUND SOURCES OF DRINKING WATER Provide engineering and geological review of all activities that affect potential sources of drinking water. �

7. Sep. 2, 2004 AOGCC Testimony - Joint Hearing - Senate Resources & Legislative Budget and Audit Committees 7 Powers and Duties of Commission*Related to Major Gas Sales Boils down to two out of the four main dutiesBoils down to two out of the four main duties

8. Sep. 2, 2004 AOGCC Testimony - Joint Hearing - Senate Resources & Legislative Budget and Audit Committees 8 Waste

9. Sep. 2, 2004 AOGCC Testimony - Joint Hearing - Senate Resources & Legislative Budget and Audit Committees 9 Applicable Conservation Orders minimum miscibility pressure- reservoir pressure needed to keep EOR gas in solution Read rule 17minimum miscibility pressure- reservoir pressure needed to keep EOR gas in solution Read rule 17

10. Sep. 2, 2004 AOGCC Testimony - Joint Hearing - Senate Resources & Legislative Budget and Audit Committees 10 Rule 9 � CO 341D What rule nine implies is that AOGCC approval is required for sales rates in excess of that allowed by Rule 9 We should Revisit Rule 9 assumptions before project approval by AOGCC. Original approval in 1977 not based on current science or information. AOGCC approval of maximum allowable gas offtake should be obtained prior to major capital expenditures. AOGCC is considering hearing to limit the gas offtake to existing sales (NGLs and local gas sales).What rule nine implies is that AOGCC approval is required for sales rates in excess of that allowed by Rule 9 We should Revisit Rule 9 assumptions before project approval by AOGCC. Original approval in 1977 not based on current science or information. AOGCC approval of maximum allowable gas offtake should be obtained prior to major capital expenditures. AOGCC is considering hearing to limit the gas offtake to existing sales (NGLs and local gas sales).

11. Sep. 2, 2004 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

12. Sep. 2, 2004 AOGCC Testimony - Joint Hearing - Senate Resources & Legislative Budget and Audit Committees 12 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 12% of the gas is CO2. Is very good EOR fluid in many fields outside. Also sequestration issues.12% of the gas is CO2. Is very good EOR fluid in many fields outside. Also sequestration issues.

13. Sep. 2, 2004 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 The conventional way to produce an oil field is to produce the oil first and then the gas when the oil is nearly completely produced. Because of the size of PBU and planned mitigation measures, it appears that overall hc recovery will not be negatively impacted. Mitigation measures may allow early recovery of gas. CO2 injection into miscible injection patterns looks promising- Increased propane recovery, but upgrade of predictive tools needed Note: 500 MMSTB with 2010 S/U at 4.3 BSCFD and looking to 2030 date only. Actually, field life under sales scenario longer. With 2050 field life for sales cases and same start and rate (2010, 4.3) loss is 350. At 2050 field life, 2012 S/U and 2.9 BCFD, losses go down to 200 MMSTB. The conventional way to produce an oil field is to produce the oil first and then the gas when the oil is nearly completely produced. Because of the size of PBU and planned mitigation measures, it appears that overall hc recovery will not be negatively impacted. Mitigation measures may allow early recovery of gas. CO2 injection into miscible injection patterns looks promising- Increased propane recovery, but upgrade of predictive tools needed Note: 500 MMSTB with 2010 S/U at 4.3 BSCFD and looking to 2030 date only. Actually, field life under sales scenario longer. With 2050 field life for sales cases and same start and rate (2010, 4.3) loss is 350. At 2050 field life, 2012 S/U and 2.9 BCFD, losses go down to 200 MMSTB.

14. Sep. 2, 2004 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

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16. Sep. 2, 2004 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

17. Sep. 2, 2004 AOGCC Testimony - Joint Hearing - Senate Resources & Legislative Budget and Audit Committees 17 We must be included in evaluation process early (3.5 Billion BOE- big $ Dollar Project) Active � influence evaluation and planning Need timely application Ensure conservation issues addressed Evaluate all depletion scenarios Pursue cost effective mitigation options AOGCC will conduct independent review Validate owner work ($500,000 budgeted) Contractor assisted (3-5 year contract) Cooperative effort required Do the right thing Due Diligence Save time and effort (go alone over $2,000,000 and years effort) Builds confidence on both sides We must be included in evaluation process early (3.5 Billion BOE- big $ Dollar Project) Active � influence evaluation and planning Need timely application Ensure conservation issues addressed Evaluate all depletion scenarios Pursue cost effective mitigation options AOGCC will conduct independent review Validate owner work ($500,000 budgeted) Contractor assisted (3-5 year contract) Cooperative effort required Do the right thing Due Diligence Save time and effort (go alone over $2,000,000 and years effort) Builds confidence on both sides

18. Sep. 2, 2004 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 The AOGCC has statutory authority to set maximum offtake rates from Alaska reservoirs for conservation purposes Field depletion plan approval required prior to start of major gas sales Maximum offtake MUST be set prior to project sanction Gas sales will increase the overall recovery of hydrocarbons from the Prudhoe Bay Oil Pool Liquid hydrocarbon recovery will be decreased Loss increases with earlier sales date and higher norm Total hydrocarbon recovery insensitive to sales timing and sales rate Further study is needed No major conservation �show stoppers� to gas sales seen Further evaluation required Continue to work with working interest owners Take proactive and cooperative approach The AOGCC has statutory authority to set maximum offtake rates from Alaska reservoirs for conservation purposes Field depletion plan approval required prior to start of major gas sales Maximum offtake MUST be set prior to project sanction Gas sales will increase the overall recovery of hydrocarbons from the Prudhoe Bay Oil Pool Liquid hydrocarbon recovery will be decreased Loss increases with earlier sales date and higher norm Total hydrocarbon recovery insensitive to sales timing and sales rate Further study is needed No major conservation �show stoppers� to gas sales seen Further evaluation required Continue to work with working interest owners Take proactive and cooperative approach

19. Sep. 2, 2004 AOGCC Testimony - Joint Hearing - Senate Resources & Legislative Budget and Audit Committees 19 Other Pools Future fields may be oil and gas, gas and condensate, or gas only. Each of these types will require AOGCC oversight and probably managed differently. Although AOGCC & DNR look at similar issues, AOGCC is independent and considers DNR equal to any party when it comes before AOGCC.Future fields may be oil and gas, gas and condensate, or gas only. Each of these types will require AOGCC oversight and probably managed differently. Although AOGCC & DNR look at similar issues, AOGCC is independent and considers DNR equal to any party when it comes before AOGCC.

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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)