Legislature(2011 - 2012)HOUSE FINANCE 519

03/18/2011 08:00 AM FINANCE

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Audio Topic
08:05:07 AM Start
08:06:21 AM HB110
09:55:56 AM Adjourn
* first hearing in first committee of referral
+ teleconferenced
= bill was previously heard/scheduled
Heard & Held
Admiral Tom Barrett, CEO, Alyeska Pipeline Co.
+ Bills Previously Heard/Scheduled TELECONFERENCED
HOUSE BILL NO. 110                                                                                                            
     "An  Act relating  to the  interest rate  applicable to                                                                    
     certain amounts due for fees,  taxes, and payments made                                                                    
     and property  delivered to  the Department  of Revenue;                                                                    
     relating  to  the  oil and  gas  production  tax  rate;                                                                    
     relating to  monthly installment payments  of estimated                                                                    
     oil and  gas production  tax; relating  to oil  and gas                                                                    
     production  tax   credits  for   certain  expenditures,                                                                    
     including  qualified capital  credits for  exploration,                                                                    
     development,   and   production;    relating   to   the                                                                    
     limitation  on assessment  of  oil  and gas  production                                                                    
     taxes;  relating to  the determination  of oil  and gas                                                                    
     production  tax values;  making conforming  amendments;                                                                    
     and providing for an effective date."                                                                                      
8:06:21 AM                                                                                                                    
Co-Chair Stoltze informed the  committee that there would be                                                                    
a presentation  on the Trans  Alaska Pipeline  System (TAPS)                                                                    
and issues related to HB 110.                                                                                                   
TOM  BARRETT, PRESIDENT,  ALYESKA PIPELINE  SERVICE COMPANY,                                                                    
provided  a  brief  overview of  his  experience,  including                                                                    
directing   Coast  Guard   operations  and   Deputy  Federal                                                                    
Coordinator  for  the   Alaska  Natural  Gas  Transportation                                                                    
Project.  He  was  a  former   regulator,  headed  the  U.S.                                                                    
Pipeline and  Hazardous Material Safety  Administration, and                                                                    
was   Deputy   Secretary   of   the   U.S.   Department   of                                                                    
Mr. Barrett  provided a PowerPoint  presentation, "Declining                                                                    
Throughput  on  the  Trans Alaska  Pipeline  System,  Alaska                                                                    
House Finance Committee, March 18,  2011" (copy on file). He                                                                    
added that he had been  working for Alyeska since January 1,                                                                    
2011, and was the first president  that did not come from an                                                                    
owner company.                                                                                                                  
Mr. Barrett  pointed out that the  employees and contractors                                                                    
that  operated   and  maintained  TAPS  moved   hundreds  of                                                                    
thousands  of  barrels each  day  from  the North  Slope  to                                                                    
Valdez,  and were  committed to  safety  and protecting  the                                                                    
Mr.  Barrett asserted  that the  challenges related  to TAPS                                                                    
were  very  real  and  present;  he  believed  that  without                                                                    
increased  throughput   in  the  line,  the   challenges  of                                                                    
operating  the  line safely  would  increase  over time.  He                                                                    
pointed out  that the  challenges had  been made  very clear                                                                    
during  the recent,  unscheduled  shut-down  in January.  He                                                                    
believed the event should be  a "wake-up call" for Alaskans.                                                                    
He described the experience of  the shut-down as arising out                                                                    
of  a  "perfect  storm"  with serious  risks.  He  felt  the                                                                    
situation  had been  contained  because  of the  dedication,                                                                    
talent,  and commitment  of Alyeska  employees, contractors,                                                                    
owners, and the administration.                                                                                                 
Mr. Barrett  highlighted that one  reason the  situation was                                                                    
urgent was  that it would  take at  least five years  to get                                                                    
more  oil   in  the  line,  even   if  production  increased                                                                    
dramatically right  away. He  added that  it would  take ten                                                                    
years to get  oil into TAPS for  a big field. He  spoke as a                                                                    
pipeline operator  and asserted  that the system  was behind                                                                    
and  that  challenges  were increasing  daily.  Since  1989,                                                                    
there had  been a  steady incline in  crude oil  coming from                                                                    
the North Slope at the rate of  5 to 6 percent each year. He                                                                    
did not  see anything that  would reverse the  situation any                                                                    
time soon.                                                                                                                      
Mr. Barrett  informed the committee that  current throughput                                                                    
was  about 640,000  barrels per  day. He  believed that  the                                                                    
company was  in new territory  every day. When  TAPS opened,                                                                    
throughput  was  about  700,000 barrels  per  day;  it  then                                                                    
increased to  2.1 million barrels  and declined  steadily to                                                                    
the  current rate.  He was  concerned about  the steady  and                                                                    
consistent decline.                                                                                                             
Mr.  Barrett  directed attention  to  a  graph on  Slide  4,                                                                    
"Throughput   history…January    Average   Throughput."   He                                                                    
emphasized that  when throughput fell below  500,000 barrels                                                                    
per day,  there were  consequences like settlement  of water                                                                    
(leading to  ice), increased  wax fallout,  and the  risk of                                                                    
frost  heaves. He  underlined that  the risk  would increase                                                                    
even if the oil was flowing.                                                                                                    
8:13:29 AM                                                                                                                    
Mr. Barrett  noted that at  one time the  Energy Information                                                                    
Administration (EIA)  had said that Alyeska  delivered about                                                                    
25  percent  of the  country's  domestic  crude supply.  The                                                                    
number was down  to about 12.4 percent  for 2010. Production                                                                    
of oil  in the  United States went  up, while  production in                                                                    
Alaska went down.                                                                                                               
Mr. Barrett  pointed out that  a $10 million study  had been                                                                    
launched  in 2007  to consider  how declining  flow affected                                                                    
TAPS  and  what measures  could  be  taken to  mitigate  the                                                                    
situation.  He  pointed  out  that  the  temperatures  being                                                                    
experienced were well below what  was considered likely when                                                                    
the  pipeline  was designed.  In  the  original design,  the                                                                    
ideal flow  rate was about  1.5 million barrels per  day. He                                                                    
reported that  he had been up  at Pump Station 4  talking to                                                                    
employees;  they  were  ready,  willing, and  able  to  move                                                                    
production flow up to about one million barrels per day.                                                                        
Mr. Barrett  noted that the  study included  examining water                                                                    
accumulation under  low-velocity conditions, looking  at the                                                                    
potential  for increased  corrosion due  to declining  flow,                                                                    
assessing  the potential  for ice  formation in  the winter,                                                                    
examining increased  wax deposits in the  pipeline and crude                                                                    
tanks in  front of  pigs (pipeline inspection  gauges, which                                                                    
were  regularly moved  through  the line  to  keep the  line                                                                    
clean  and corrosion-free),  and  evaluating potential  geo-                                                                    
technical  impacts such  as frost  heaves.  He detailed  the                                                                    
effects  of  frost heaves  on  underground  segments of  the                                                                    
line; frost heaves were aggravated  by declining flow in the                                                                    
line.  Other items  studied were  impacts of  operating pigs                                                                    
due to  the wax and ice,  particularly at low points  in the                                                                    
Mr. Barrett  reiterated that the  decline in  throughput was                                                                    
steady; in  2007, the Department of  Revenue (DOR) estimated                                                                    
that the  flow in  2011 would be  about 676,000  barrels per                                                                    
day, but  the actual flow  had been consistently  behind the                                                                    
8:16:08 AM                                                                                                                    
Mr. Barrett emphasized that the  most serious low-flow issue                                                                    
facing  the  state  was  the   temperature  of  oil  in  the                                                                    
pipeline. Temperature  decay in the  line was a  function of                                                                    
flow-rate, velocity,  and time.  The temperature of  the oil                                                                    
continued to drop as the throughput continued to decline.                                                                       
Mr.    Barrett   indicated    Slide   3    ("January   Crude                                                                    
Temperatures"),  a line  graph  depicting  the decline  rate                                                                    
with the temperature profile and  decay at 800,000, 630,000,                                                                    
and  400,000 barrels  per day.  He noted  that the  spike in                                                                    
graph represented  the North Pole refinery,  since some heat                                                                    
was  recovered  through  recirculation there.  He  explained                                                                    
that  oil came  into the  line at  about 108  degrees (there                                                                    
were  standards  relative  to the  temperature  of  the  oil                                                                    
entering the line) and declined steadily.                                                                                       
Mr. Barrett discussed the recent  shut-down, which he called                                                                    
the  "January  event."  He detailed  that  during  a  winter                                                                    
shutdown,  the  temperature would  start  at  a lower  point                                                                    
(such as  60 degrees)  and the decay  from that  point would                                                                    
drop the  temperature and  result in  ice formation  and wax                                                                    
problems. There would  be less time to get the  line back up                                                                    
before  there were  serious consequences.  He  pointed to  a                                                                    
potential   scenario  with   blocked   valves  and   damaged                                                                    
sensitive  equipment resulting  in  a  shut-down that  could                                                                    
last  for months.  The  consequence would  be  less time  to                                                                    
manage any kind of shut-down.                                                                                                   
Co-Chair  Stoltze  queried  the  dynamic  of  re-starting  a                                                                    
natural gas system.                                                                                                             
Mr. Barrett replied that the  situation could potentially be                                                                    
the same, and  could be worse. He pointed out  that with the                                                                    
January shut-down,  there had been  about a  two-week supply                                                                    
of fuel  in the Interior;  if Alyeska  had not been  able to                                                                    
get  the line  up and  running within  those two  weeks, the                                                                    
region would  have been  out of jet  fuel and  heating fuel,                                                                    
and  production would  have been  affected.  When TAPS  shut                                                                    
down, producers were  asked to scale back  operations and to                                                                    
shut in wells; at some point  some of the wells would not be                                                                    
recoverable. He  emphasized that  the consequences  would be                                                                    
Mr. Barrett  continued that  the longer  the line  was down,                                                                    
the  tougher it  was  to bring  it back  up  safely. In  the                                                                    
January event, they knew it  would take around eight or nine                                                                    
days  for repairs  and  to put  in a  by-pass  line at  Pump                                                                    
Station  1; any  interruption  at all  (such  as weather  or                                                                    
delay getting equipment or parts)  would have meant a pig in                                                                    
the line  would have  been pushing ice  and wax  towards the                                                                    
pump.  Once a  mainline pump  went  down, it  would be  very                                                                    
difficult to fabricate and install a new one.                                                                                   
8:20:29 AM                                                                                                                    
Vice-chair Fairclough referred  to earlier questions related                                                                    
to  temperatures. She  asked why  a decision  was not  being                                                                    
made  to  add the  ability  to  heat  the oil  at  different                                                                    
stages, and what that would cost.                                                                                               
Mr. Barrett  replied that Alyeska  was ready to add  heat to                                                                    
the  line; a  lot  had been  done to  add  heat in  January,                                                                    
including  recirculation from  the North  Pole refinery.  In                                                                    
the January  event, Pump Station  7 was added and  BTUs were                                                                    
added  everywhere   possible.  He   added  that   the  study                                                                    
mentioned had identified other potential  ways to apply heat                                                                    
to the  line and manage temperature  decay, including adding                                                                    
crude-oil  heaters,  heat  tape, or  insulation  on  certain                                                                    
segments  of  the pipe.  The  company  was considering  what                                                                    
measures  would  be  prudent   and  economically  viable  to                                                                    
implement over the years.                                                                                                       
Mr. Barrett reminded the committee  that the falloff in flow                                                                    
because  of declining  production  was steady  and had  come                                                                    
faster than previously predicted.                                                                                               
PAT  MCDEVITT,  SENIOR  PROJECT  MANAGER,  ALYESKA  PIPELINE                                                                    
SERVICE COMPANY,  added that ways  of heating the  line were                                                                    
being  considered,  such  as crude-oil  heaters,  recovering                                                                    
heat  from  turbine  waste  gas,  and  recycling  capability                                                                    
because of new equipment.                                                                                                       
8:23:07 AM                                                                                                                    
Representative Doogan  asked why  Alyeska had  not addressed                                                                    
the problems sooner, when it  knew there were issues such as                                                                    
the  temperature problem  because of  low flow  as early  as                                                                    
Mr. Barrett answered that the  study was started in 2007 and                                                                    
had  been driven  by a  recognition that  the problem  would                                                                    
increase.  He reported  that Alyeska  had always  taken into                                                                    
account that there  would be a need to address  the issue of                                                                    
re-starting the line  in cold weather. He  believed that the                                                                    
issue was in reality much  more complex; temperature was not                                                                    
the only driver,  and it was not only an  issue during shut-                                                                    
downs.  There   had  been  increasing  awareness   that  the                                                                    
consequences of low-flow would also  create serious risk for                                                                    
the line.                                                                                                                       
Representative  Doogan  agreed  that  hindsight  was  always                                                                    
clearer;  he   still  believed  the  company   was  late  to                                                                    
recognize the issue.                                                                                                            
Mr. Barrett noted  that he had watched Alyeska  for a number                                                                    
of  years as  a federal  regulator. He  opined that  it made                                                                    
sense  to begin  where they  were. His  beginning point  had                                                                    
been  what he  had learned  from the  January event.  He was                                                                    
proud  of Alyeska  employees, who  had  restored service  in                                                                    
seven  days   without  hurting  a   single  worker   or  the                                                                    
environment;  those  were  not  simple  accomplishments.  He                                                                    
stated  that the  company's commitment  was to  work through                                                                    
the issues as rapidly and as intelligently as possible.                                                                         
Mr. Barrett added  that one of his concerns  as the operator                                                                    
was  the huge  implications related  to temperature.  During                                                                    
the January  event, they  tried to add  BTUs, but  even that                                                                    
had  consequences; taking  temperatures up  and down  on the                                                                    
line had  implications for the  quality of the crude  oil in                                                                    
the  line. He  emphasized  that the  situation was  complex;                                                                    
there  were  other risks  in  addition  to temperature.  For                                                                    
example, the  cleaning program to  prevent corrosion  in the                                                                    
main  line  was  very aggressive,  and  exceeded  regulatory                                                                    
standards.  Instrumented  pigs  were run  through  the  line                                                                    
every  three years  (the standard  was  five). However,  the                                                                    
current technology on instrumented  pigs was not designed to                                                                    
be  successful  at  one  mile  per  hour.  The  company  was                                                                    
beginning  to understand  that the  risk of  corrosion would                                                                    
8:28:16 AM                                                                                                                    
Mr.   Barrett   noted   that  the   company   had   a   very                                                                    
sophisticated,  state-of-the-art  leak-detection  system  on                                                                    
the main line  that operated very well. He  pointed out that                                                                    
no regulator  in the  world would allow  the operation  of a                                                                    
48-inch line with the amount  of oil going through without a                                                                    
very  solid leak-detection  system  in  place. However,  the                                                                    
system would  not work  in low-flow  areas, which  meant the                                                                    
system had  to be  replaced, upgraded,  or improved,  and at                                                                    
enormous expense.                                                                                                               
Mr.  Barrett emphasized  that there  were complex  technical                                                                    
and economic factors at play.  The 48-inch line was big, and                                                                    
was designed to  run at 1.5 million barrels per  day, but it                                                                    
was  running at  640,000 barrels  per day.  He provided  the                                                                    
example of  a car designed  to run at maximum  efficiency at                                                                    
50 to 60 miles per hour;  there would be carbon build-up and                                                                    
other problems if it was driven constantly at 20 mph.                                                                           
Representative  Wilson  queried   the  financial  impact  of                                                                    
having to reheat the oil on the North Slope refineries.                                                                         
Mr. Barrett  responded that  he did  not know  the financial                                                                    
impact. He noted  that Alyeska had great  support during the                                                                    
shut-down from the  refinery, administration, employees, and                                                                    
contractors.  He thought  the same  kind of  cooperation was                                                                    
needed day-to-day.                                                                                                              
8:31:42 AM                                                                                                                    
Mr. Barrett  underlined the complexity of  the situation. He                                                                    
pointed  out that  once North  Slope wells  were shut  in, a                                                                    
substance  similar  to  anti-freeze  was  added  to  prevent                                                                    
freezing. However,  the result was anti-freeze  in the crude                                                                    
stream, which was  good for a well, but bad  for a refinery.                                                                    
Testing had  to be increased  to determine what  exactly was                                                                    
in  the line  at re-start,  because what  was coming  in had                                                                    
different component standards than  usual, and the oil still                                                                    
had  to  meet  standards.   He  referred  to  Betsy  Haines,                                                                    
Alyeska's Oil  Movements Director,  who had  been aggressive                                                                    
in  making sure  that nothing  was done  that would  have an                                                                    
inadvertent  collateral consequence,  such  as damaging  the                                                                    
Representative  Wilson  asked  what   would  happen  to  the                                                                    
pipeline if  the refinery could  not operate to heat  up the                                                                    
Mr. Barrett replied  that the pipeline would have  to find a                                                                    
way  to  add heat  in  another  manner,  such as  crude  oil                                                                    
heaters or  insulators. He noted that  the worst temperature                                                                    
decay started well before North  Pole. He thought the bigger                                                                    
consequence was losing the refinery and what it produced.                                                                       
Representative  Hawker  noted  that  he had  worked  on  the                                                                    
development  of one  of  the North  Pole  complexes and  was                                                                    
familiar  with  the  process.  He  had  not  understood  the                                                                    
potential for risk  to the community the  refinery served in                                                                    
the  event of  a  prolonged shutdown.  He  thought that  the                                                                    
community had  developed a dependency  that had  not existed                                                                    
before the refinery was there.  He asked whether Alyeska was                                                                    
involved in  contingency planning  to protect  the community                                                                    
if  there  was  a  disastrous  disruption  of  flow  in  the                                                                    
pipeline. He wondered whether  the communities were actively                                                                    
involved  in contingency  planning, or  if that  was outside                                                                    
the purview of the company.                                                                                                     
8:35:10 AM                                                                                                                    
Mr. Barrett responded that Alyeska  did not directly control                                                                    
or influence  contingency planning.  He was  concerned about                                                                    
managing  the risk  of  having a  major  piece of  necessary                                                                    
equipment (such as  the pigs) create a  problem. He reported                                                                    
that   Alyeska  was   in  active   communication  with   the                                                                    
administration and  the governor's office, from  which there                                                                    
was  strong support;  Commissioners Sullivan  [Department of                                                                    
Natural Resources]  and Hartig [Department  of Environmental                                                                    
Conservation]  had   been  closely  involved.   Alyeska  had                                                                    
resources that would be available  in a community emergency,                                                                    
but  the actual  response would  be done  through the  State                                                                    
Emergency Management Office.                                                                                                    
Mr.  Barrett assured  the committee  that he  had been  very                                                                    
concerned about life-safety  consequences resulting from the                                                                    
refinery  going down,  because of  his  experience with  the                                                                    
Coast  Guard.   He  believed  there  would   be  life-safety                                                                    
concerns  on the  North Slope,  as there  were thousands  of                                                                    
people there  that would  have to be  gotten out.  He stated                                                                    
that   the  company   took  pride   in  outreach   to  local                                                                    
communities   around   the    state;   employees   supported                                                                    
elementary school programs and other community projects.                                                                        
Representative  Hawker wanted  to further  discuss community                                                                    
risk. He referred to a  previous presentation with an Alaska                                                                    
North  Slope  (ANS)  production forecast  by  DOR  [3/16/11,                                                                    
HFIN]. He believed  that the situation with  TAPS had become                                                                    
increasingly  problematic.   He  feared  that   the  500,000                                                                    
barrels per day level could  be reached in 2013. He believed                                                                    
the horizon  was short and  the issue very urgent.  He asked                                                                    
whether the  community was adequately prepared.  He wondered                                                                    
whether the legislature should emphasize the risk.                                                                              
8:39:48 AM                                                                                                                    
Mr.  Barrett  stated  that  he   was  uncomfortable  with  a                                                                    
throughput level of 640,000 barrels  per day and thought the                                                                    
recent shut-down  was a "wake-up  call." He referred  to the                                                                    
recent earthquake  in Japan;  similar experiences  closer to                                                                    
Alaska could  create problems. He  agreed the  situation was                                                                    
urgent. He  urged the legislature  to consider  the possible                                                                    
consequences  of inaction.  He emphasized  his pride  of the                                                                    
employees at  Pump Station 1.  He was  not going to  allow a                                                                    
rushed restart  that hurt someone, but  the employees sensed                                                                    
the importance  of getting the  line back up.  He encouraged                                                                    
the legislature to have the same sense of urgency.                                                                              
Mr. Barrett asserted  that the company had to  do better. He                                                                    
maintained  that  the  standard was  flawless  and  reliable                                                                    
8:43:13 AM                                                                                                                    
Co-Chair Stoltze referred to a worker that he knew.                                                                             
Representative  Guttenberg  appreciated  the  work  done  by                                                                    
Alyeska, especially  during the  crisis. He noted  that when                                                                    
the pipeline was at its  peak, drag-reduction additives were                                                                    
put in to  make it flow better; now on  other end, there was                                                                    
a  whole other  set of  issues. He  asked whether  corrosive                                                                    
inhibitors were currently being put into the line.                                                                              
Mr.   Barrett  replied   that  Alyeska   had  an   extensive                                                                    
corrosion-management     program,    including     injecting                                                                    
inhibitors in the line, though  not the main line. He stated                                                                    
that  Alyeska  was  very aggressive,  and  had  learned  the                                                                    
lesson  and  increased  the  strength   of  biocide  in  the                                                                    
inhibitor profile.  On the mainline, scraper  pigs were used                                                                    
rather  than the  corrosion injections,  and the  inspection                                                                    
tool was used  to identify areas with  corrosion that needed                                                                    
to be repaired.                                                                                                                 
Mr.  McDevitt   added  that  currently,  corrosion   on  the                                                                    
mainline pipe  had been external;  internally, the  pipe was                                                                    
in  very good  condition.  Inhibitors would  most likely  be                                                                    
used in  the mainline when  water drop-out started  to occur                                                                    
around throughput levels of 500,000 barrels per day.                                                                            
Representative  Guttenberg noted  that  Alyeska had  started                                                                    
reconfiguration   a  few   years  prior,   including  moving                                                                    
employees  to  Anchorage.  He believed  the  move  had  been                                                                    
controversial.  He asked  whether  people  were being  moved                                                                    
back to where they needed to  be rather than being kept at a                                                                    
central office.                                                                                                                 
8:46:33 AM                                                                                                                    
Mr.  Barrett  replied  that  a   lot  of  the  employees  in                                                                    
Anchorage  had  been  helpful   during  last  incident;  the                                                                    
engineering, planning,  and design work needed  to bring the                                                                    
system back  up was done  primarily in Anchorage,  while the                                                                    
physical work (such as fabrication  and welding) was done in                                                                    
the field.  He felt that  having the personnel  in Anchorage                                                                    
was  an  advantage.  He  pointed   out  that  the  integrity                                                                    
management (IM)  program was  back up  to full  staffing. He                                                                    
reported that  he had witnessed  the ability to of  the team                                                                    
to leverage talent.                                                                                                             
Representative Guttenberg asked  whether the situation would                                                                    
have been the  same if the problem had been  at Pump Station                                                                    
7 or like the incident at Pump Station 9.                                                                                       
Mr. Barrett responded that the  incidents were different. In                                                                    
any  of the  scenarios, there  was an  enormous overhead  of                                                                    
front-end design, planning, and  engineering. There was also                                                                    
the physical work  of getting people where  they were needed                                                                    
to  do the  work. He  related  that there  were many  people                                                                    
involved in  the incident and close  coordination was needed                                                                    
with  other  state  authorities,  such  as  the  police  and                                                                    
security. In January, people had  been mobilized up and down                                                                    
the line. There were personnel at  Pump Station 1, a pig was                                                                    
recovered  at Pump  Station 8,  and  there was  cold-restart                                                                    
equipment  staged  everywhere.  He  opined  that  they  were                                                                    
organized correctly to handle  a large-scale crisis with the                                                                    
IM team located in Anchorage.                                                                                                   
Representative  Gara referred  to frequent  discussion about                                                                    
how the oil production projections  had been off, but he did                                                                    
not  recall an  expectation of  project shutdowns.  He asked                                                                    
how  much oil  was  lost in  the shutdown  and  in the  2006                                                                    
Mr. Barrett replied that he did  not know about the event in                                                                    
2006.  In the  more recent  event, the  actual oil  loss was                                                                    
about 317 barrels  (the amount recovered from  the leak site                                                                    
at  Pump Station  1).  The flow  rate was  at  zero and  was                                                                    
brought up  gradually to 640.  He did  not know much  of the                                                                    
loss would be recovered over time.                                                                                              
8:51:32 AM                                                                                                                    
Mr. Barrett  stated that  he was  very concerned  that there                                                                    
could have been a  three-to-five-month shutdown, with no oil                                                                    
going through and no revenue,  if the situation had not been                                                                    
managed  almost   perfectly;  however,  he  had   been  more                                                                    
concerned with the operational piece.  He did not know about                                                                    
the recoverability after a shutdown.                                                                                            
Representative Gara asked how  many annual barrels were lost                                                                    
in the current  year because of the  shutdown, regardless of                                                                    
whether they were recovered in the future.                                                                                      
Mr. Barrett did not know,  but offered to get information to                                                                    
the committee based on the  average throughput. He cautioned                                                                    
that  the situation  was  complex.  Day-to-day, the  average                                                                    
throughput was 640,000 barrels per  day; it would be hard to                                                                    
guess the  flow that  had been missed  over the  specific 11                                                                    
days of  the event. However,  the average could be  found in                                                                    
order to get an approximation of the loss.                                                                                      
Representative Gara  referred to  reports in the  media that                                                                    
Alyeska was asking  for a tariff increase. He  noted that as                                                                    
tariffs  increased, the  state's  and  the company's  shares                                                                    
decreased. He wondered whether the  state had challenged the                                                                    
tariff increase.                                                                                                                
Mr.  Barrett  stated  that  he  could  not  comment  on  the                                                                    
particular case  as it was  potentially a  litigation issue.                                                                    
He did  say that as  Alyeska's costs increased,  the tariffs                                                                    
increased,  and  the  amount  of  the  cost  to  the  owners                                                                    
increased; the amount of money  to the state would decrease.                                                                    
Managing all  the issues  cost Alyeska  more per  barrel. He                                                                    
asserted that the company had  to manage the line safely and                                                                    
that costs  had to  increase to meet  whatever needed  to be                                                                    
done;  if  the   amount  of  oil  going   through  the  line                                                                    
decreased,  the relative  cost per  barrel would  rise, with                                                                    
all the attendant consequences.                                                                                                 
8:54:44 AM                                                                                                                    
Representative Gara  recalled a  chart showing that  most of                                                                    
the largest spills  related to the pipeline  had occurred in                                                                    
the  past six  years. He  queried plans  to mitigate  future                                                                    
spills and shut-downs.                                                                                                          
Mr.  Barrett wanted  Alyeska to  have the  highest standard,                                                                    
which  he defined  as "flawless  operations." He  pointed to                                                                    
time working at the  Department of Transportation and Public                                                                    
Facilities  with aviation  and the  relatively low  accident                                                                    
rate. He thought everything possible needed to be done.                                                                         
Mr.  Barrett discussed  initiatives to  prevent a  repeat of                                                                    
the recent incident. He noted  that the engineering division                                                                    
was conducting a walk-down survey  of every similar piece of                                                                    
pipe on the line to assess  the risk. He emphasized that the                                                                    
main line  had a  very aggressive  pigging program.  He felt                                                                    
there  was no  perfect situation.  He made  an analogy  with                                                                    
football  and   quoted  a  coach:  "We're   going  to  chase                                                                    
perfection,  knowing full  well  we will  not  catch it;  in                                                                    
chasing it, we will catch excellence."                                                                                          
Mr.  Barrett reported  Alyeska had  been having  discussions                                                                    
with its employees about how  to get to flawless operations,                                                                    
with "zero-zero-zero"  and nobody hurt, no  oil spilled, and                                                                    
no  unscheduled  shut-downs. He  noted  that  there were  43                                                                    
regulators; he believed  the employees knew a  lot about the                                                                    
system.  He   had  asked  a   group  of   employees  whether                                                                    
everything possible  was being done  to prevent a  repeat of                                                                    
the incident. He pointed out  that there were people who had                                                                    
worked  on the  line  for  20 or  30  years;  they knew  the                                                                    
systems as well as the risks.                                                                                                   
8:58:47 AM                                                                                                                    
Mr. Barrett believed people in  the company would be able to                                                                    
raise any issues about safety.  He stated that Alyeska would                                                                    
do anything it could and  that the company would prepare for                                                                    
the future as  well as it could to mitigate  risk, given the                                                                    
declining throughput.  He hoped  to have an  active, engaged                                                                    
culture of  achievement, excellence, and  reliability within                                                                    
the company.                                                                                                                    
Representative  Gara  queried  the  minimum  throughput  for                                                                    
Mr.  Barrett responded  that there  was  no specific  answer                                                                    
because of  the complexity  of managing throughput  at lower                                                                    
volumes. He  emphasized that there were  technical limits in                                                                    
the current  configuration of the current,  aging system. In                                                                    
addition,  there were  economic  limit factors.  He did  not                                                                    
know  what the  outer limits  were. He  did not  want to  be                                                                    
naïve about the consequences regarding lower flow rates.                                                                        
9:02:21 AM                                                                                                                    
Co-Chair  Stoltze referred  to  statistics  presented at  an                                                                    
earlier hearing.                                                                                                                
Mr.  Barrett  replied that  the  pipeline  was designed  and                                                                    
optimized to run  at 1.5 million barrels per  day; he wanted                                                                    
to have from  800,000 to 1 million barrels per  day with the                                                                    
current line.  He emphasized that  the large (48  inch) line                                                                    
was not designed to handle 500,000 barrels per day.                                                                             
Co-Chair Stoltze queried the cost  of delivering each barrel                                                                    
of oil  at a rate of  1 million barrels per  day compared to                                                                    
500,000 barrels per day.                                                                                                        
Mr. Barrett  stated that the  cost of delivering  was higher                                                                    
as there was a minimum level of infrastructure needed.                                                                          
Representative Costello  asked about  Alyeska's relationship                                                                    
working with the  state and federal governments  in a crisis                                                                    
situation.  She noted  the state's  dependence on  air cargo                                                                    
for fuel  and other  commodities. She asked  whether Alyeska                                                                    
would work  with the state to  address a crisis in  which no                                                                    
aviation fuel was available.                                                                                                    
Mr. Barrett  responded that  the company  was in  very close                                                                    
contact  with the  state and  federal  governments and  that                                                                    
they  regularly exercised  response scenarios  that involved                                                                    
the  pipeline.  He  added  that  Alyeska  was  not  directly                                                                    
involved  in  how  the  state  would  manage  the  described                                                                    
scenario. He explained  that a couple of  weeks prior, there                                                                    
had  been  unusually bad  weather  conditions  on the  North                                                                    
Slope;  the  company  had  helped  by  providing  power  and                                                                    
clearing  an airport.  The company  had extensive  emergency                                                                    
response plans  for oil spills;  the plans were tested  on a                                                                    
regular basis.                                                                                                                  
Vice-chair Fairclough  asked about  the North  Pole refinery                                                                    
and the temperature changes. She  wondered whether there was                                                                    
a   contractual  relationship   between   Alyeska  and   the                                                                    
Mr.  Barrett   replied  in   the  affirmative;   there  were                                                                    
connection requirements and standards  regarding the type of                                                                    
crude that could  be delivered. He added  that the standards                                                                    
were in effect everywhere there was a connection.                                                                               
Vice-chair Fairclough discussed  a temperature increase that                                                                    
was expected to  take place at a certain point  in the line.                                                                    
She wondered whether there was an agreement in contract.                                                                        
Mr. Barrett  responded that there would  be discussions; the                                                                    
temperature  of the  oil both  in and  out of  the line  was                                                                    
important and was reflected in  the agreement. He added that                                                                    
Alyeska worked  closely with the refinery  during the recent                                                                    
Vice-chair Fairclough asked whether  there would be response                                                                    
time required  in contract if  the refinery were  in trouble                                                                    
and was forced to close.                                                                                                        
Mr.  Barrett  repeated  that relationships  were  close  and                                                                    
communications  were  good.  He  noted that  in  the  recent                                                                    
event, he  had spoken with  the governor; one of  the issues                                                                    
raised was the two-week window for fuel.                                                                                        
9:10:48 AM                                                                                                                    
Mr. Barrett  emphasized how difficult  the situation  was to                                                                    
manage  because of  extensive distances  and high  costs. He                                                                    
explained that  the cost was  enormous, and those  costs may                                                                    
not be sustainable in some communities.                                                                                         
Vice-chair Fairclough  discussed lost production.  She asked                                                                    
about the number of barrels that were left the line.                                                                            
Mr. Barrett responded 317 barrels.                                                                                              
Vice-chair Fairclough  wondered whether any wells  were shut                                                                    
in or shut down because of the incident.                                                                                        
Mr. Barrett  replied that a  lot of  the wells were  shut in                                                                    
and he  did not know whether  they were all brought  back on                                                                    
Vice-chair   Fairclough   referred   to  how   the   federal                                                                    
government  through  the   Environmental  Protection  Agency                                                                    
(EPA)  had wanted  to shut  down the  pipeline. She  queried                                                                    
EPA's role in the crisis and  who had been there to champion                                                                    
Alaska's efforts.                                                                                                               
Mr. Barrett noted that there had  been a lot of help through                                                                    
the  congressional  delegation  and  the  administration  in                                                                    
Washington, D.C. He pointed  out that Commissioners Sullivan                                                                    
and Hartig had  worked with the EPA to keep  it from getting                                                                    
"too crazy."  He believed  there had  been a  question about                                                                    
jurisdiction in the  case. His goal was to  get the pipeline                                                                    
running, so  he decided not  to argue  about it in  order to                                                                    
reach his objective.                                                                                                            
Mr.  Barrett illustrated  the situation  by sharing  a story                                                                    
about  a  meeting  with  the  incident  management  team  in                                                                    
Fairbanks. He and Commissioner Sullivan  had received a very                                                                    
solid  brief  in  Fairbanks regarding  all  aspects  of  the                                                                    
incident before the  restart. At the end of  the meeting, an                                                                    
EPA  representative noted  that they  were really  gambling.                                                                    
Mr.  Barrett  had  responded  that he  did  not  gamble;  he                                                                    
emphasized the  risk of  the consequences  to Alaska  if the                                                                    
line  was not  rapidly and  safely up  and running.  The EPA                                                                    
representative had "backpedaled" on the issue.                                                                                  
Mr.  Barrett  stated that  he  was  acutely sensitive  about                                                                    
protecting Alaska's  environment. He  felt there was  a lack                                                                    
of understanding  of the importance  of getting the  line up                                                                    
safely,  using  the  interim   restart.  He  questioned  the                                                                    
sensitivity of the EPA.                                                                                                         
9:16:50 AM                                                                                                                    
Mr. Barrett added  that to be fair, he had  expected a worse                                                                    
response  from  the  EPA.  He questioned  the  need  of  the                                                                    
representative  to be  in the  state. He  thought they  were                                                                    
Mr. Barrett  reported that he  had had reports  from Alyeska                                                                    
employees  working at  Pump Station  1  that the  regulators                                                                    
were getting in  their way. There were  safety concerns with                                                                    
someone  looking  over the  shoulders  of  workers who  were                                                                    
trying to  manage a well at  20 degrees below zero.  He felt                                                                    
the regulators were making the employees anxious.                                                                               
Vice-chair Fairclough believed Alaska  had done a tremendous                                                                    
job protecting the environment.  She referred to meetings in                                                                    
Washington, D.C., with the U.S.  Department of Interior. She                                                                    
maintained that  Alaska was unique  and felt the  process of                                                                    
trying to education  EPA and the Department  of the Interior                                                                    
was a long  one. She noted frustrations at  people coming in                                                                    
from  outside the  state when  professionals were  trying to                                                                    
balance  a national  security need  for energy  and Alaska's                                                                    
security  needs.  She  appreciated the  strong  response  by                                                                    
Commissioner Sullivan.                                                                                                          
9:20:39 AM                                                                                                                    
Mr.  Barrett  addressed the  cumulative  effect  of all  the                                                                    
federal  rules,  including  the  permitting  process,  which                                                                    
could  take  five to  ten  years  to  get  oil on  line.  He                                                                    
asserted that  Alaska was different,  and had its  own rules                                                                    
about managing  a restart in  the Interior. He  referenced a                                                                    
contingency  plan  called  "Cold  Restart"  that  was  never                                                                    
exercised during the incident;  it involved moving equipment                                                                    
in  place up  and down  the line,  including moving  300-ton                                                                    
cranes  in  the dark  on  icy  roads.  He pointed  out  that                                                                    
Alyeska  was  being  told  under  EPA  rules  to  bring  the                                                                    
equipment  back, even  though it  was not  going to  be used                                                                    
except in an extreme  response scenario; the equipment could                                                                    
not be  left on site without  permits, as it would  become a                                                                    
"permanent installation."  The company  was told  they would                                                                    
have to  get a permit to  leave the equipment in  place. The                                                                    
cost  of making  equipment changes  to  get a  permit for  a                                                                    
contingency they hoped  to never use would be  very high. He                                                                    
had  asked the  EPA whether  they  could get  a waiver;  the                                                                    
answer was  that no waivers  were allowed. He  asserted that                                                                    
the  person had  never  been  to the  places  in Alaska  and                                                                    
experienced the extreme conditions.                                                                                             
Mr. Barrett did not think  the rules made operational sense.                                                                    
The  rules  were  designed  for  other  places,  perhaps  in                                                                    
response  to someone  cheating on  the rules;  he questioned                                                                    
why everyone should be punished.                                                                                                
9:25:11 AM                                                                                                                    
Mr. Barrett  asserted that Alaska  was an Arctic  state with                                                                    
particular consequences.                                                                                                        
Vice-chair  Fairclough   noted  that  only  20   percent  of                                                                    
Americans surveyed  knew the U.S.  had an  Arctic coastline,                                                                    
but 80 percent of Alaskans knew.                                                                                                
Vice-chair Fairclough turned to  the issue of maintenance on                                                                    
the line.  She asked the  reason for not replacing  the pipe                                                                    
with a smaller pipe from  Valdez backwards if that was where                                                                    
there were more corrosion issues.                                                                                               
Mr. Barrett  replied that the  decision would rest  with the                                                                    
owners. He  offered that  once any segment  of the  line was                                                                    
downsized to 24 inches, the  line would no longer be capable                                                                    
of handling a lot  of oil if a big oil  field were opened or                                                                    
another  way  were  found  to transport  heavy  oil  out  of                                                                    
Prudhoe Bay. He  opined that he would not  design the system                                                                    
the  same  way again;  perhaps  the  line  would not  go  to                                                                    
Valdez.  He  thought  the consequences  for  the  future  of                                                                    
making  decisions such  as those  related to  downsizing the                                                                    
line would  be enormous.  He believed  limiting the  size of                                                                    
the  pipe  would  limit  options.  He  believed  moving  oil                                                                    
through a large line was the safest way to move oil.                                                                            
9:28:48 AM                                                                                                                    
Representative  Neuman  wanted  to  focus  on  the  risk  of                                                                    
consequences  to the  state  and the  cost  of delivery  per                                                                    
barrel.  He referred  to the  presentation  chart. Oil  came                                                                    
into  the  pipe at  180  degrees  but dropped  significantly                                                                    
because of the low volume in  the pipe. There was a need for                                                                    
the temperature to  be increased at the  North Pole refinery                                                                    
in order  to keep  the 800-mile long  pipe above  38 degrees                                                                    
(48  degrees south  of Fairbanks).  He understood  that when                                                                    
oil was  above $70 per  barrel, the cost of  operating Flint                                                                    
Hills Refinery went up. He  believed the consequences to the                                                                    
state  of losing  North  Pole refinery  could  be huge,  and                                                                    
could   mean   losing   fuel   services   to   Ted   Stevens                                                                    
International Airport  ($1 billion  per year). On  the other                                                                    
hand, the  cost in  tariffs of keeping  the oil  warm enough                                                                    
was also  enormous. He requested  comment on  the importance                                                                    
of the heating facility.                                                                                                        
Mr. Barrett  agreed that without  the refinery,  there would                                                                    
have  to be  another  solution to  maintain the  appropriate                                                                    
temperature. He believed there  would be enormous challenges                                                                    
to  heat  the  line,  whether  through  crude  oil  heaters,                                                                    
insulation,  or  additional   recirculation  at  other  pump                                                                    
Mr. McDevitt agreed that North  Pole refinery added about 15                                                                    
million   BTUs  per   hour;  if   the   refinery  were   not                                                                    
functioning,  temperatures   would  drop  in   the  southern                                                                    
9:32:45 AM                                                                                                                    
Representative Neuman  pointed out that the  direct costs of                                                                    
tariffs  for keeping  oil at  the required  temperature were                                                                    
Mr.  Barrett  agreed  that  the  per-barrel  cost  of  doing                                                                    
business was increasing as production decreased.                                                                                
Representative  Neuman highly  recommended the  Alyeska TAPS                                                                    
low-flow oil plan summary, which  he thought was informative                                                                    
regarding the process,  cost, and risk-management potentials                                                                    
of adding the heat at the pump stations.                                                                                        
Representative  Neuman questioned  the ability  of continued                                                                    
operation, given  the information. He pointed  out that when                                                                    
the line was full, it moved a lot slower and cooled down.                                                                       
Representative Guttenberg  commended efforts to meet  a high                                                                    
standard through  listening to employees and  coming up with                                                                    
operation and safety excellence. He  pointed out that in the                                                                    
final analysis,  however, Alyeska was  not the one  with the                                                                    
money and  that the  owners (Exxon, BP,  ConocoPhillips, and                                                                    
others) had  different agendas. Part  of the  discussion was                                                                    
whether the  owners considered Alyeska a  transport mode for                                                                    
their product, or  a profit center. He  questioned the level                                                                    
of funding needed to maintain and operate the pipeline.                                                                         
Mr.   Barrett   replied   that   Alyeska   was   considering                                                                    
reshuffling priorities  to address issues raised  during the                                                                    
January event.  He had not  seen leveling on funding  to run                                                                    
the  pipeline safely;  the thought  the  challenge from  the                                                                    
owners  was  related  to  the cost  of  running  such  large                                                                    
infrastructure  with  a  steadily declining  flow.  At  some                                                                    
point,  major investments  would  be  required. He  expected                                                                    
reluctance  by the  oil companies  to making  investments to                                                                    
keep the line viable for another 30 to 40 years.                                                                                
9:37:49 AM                                                                                                                    
Mr. Barrett  added that one  of the issues  being considered                                                                    
related  to physical  limits. For  example, additional  work                                                                    
would be needed in the  upcoming work season at Pump Station                                                                    
1, based on the January event.  He pointed to limits to what                                                                    
could be done  because of the footprint size  of the station                                                                    
and the  fact that the line  would be operating for  most of                                                                    
the time.  He emphasized the  difficulty of doing  work when                                                                    
oil  was still  moving  through the  line.  He reminded  the                                                                    
committee that  the seasonal work  window was very  short in                                                                    
the Arctic.                                                                                                                     
Mr.  Barrett  stated  confidence  about  getting  the  money                                                                    
needed to keep  the line maintained and  operated safely. He                                                                    
reported  that he  was getting  positive signals.  He opined                                                                    
that there  was a limit to  how much and how  fast something                                                                    
could be  done, given the  footprint size and  seasonal work                                                                    
windows. He did not think  that spending another $20 million                                                                    
to  $50  million would  necessarily  solve  the problem.  He                                                                    
mentioned that  the 300  people working  on site  in January                                                                    
was close  to the limit  of how  many people could  be there                                                                    
Representative Guttenberg  recalled experience in  the field                                                                    
related to  keeping the  "men in the  white hardhats  as far                                                                    
away as possible" so that  the people working could do their                                                                    
Mr. Barrett agreed.                                                                                                             
Representative Doogan  reminded the committee that  the task                                                                    
before the committee was to  evaluate whether the governor's                                                                    
proposal to  put money  into oil  companies would  result in                                                                    
more oil  in the pipeline.  He did  not think the  amount of                                                                    
oil  in the  pipeline could  be  brought up  to 1.5  million                                                                    
barrels per  day, or nearly  doubled. He queried  the effect                                                                    
of incremental increases in the pipeline's operation.                                                                           
Mr.  Barrett  responded  that   anything  that  stemmed  the                                                                    
decline of oil  in the pipe was positive,  but he questioned                                                                    
whether an  amount that was  not enough would  be sufficient                                                                    
to reverse a 6 percent  decline. He pointed out that Alyeska                                                                    
was  a common-carrier  pipeline,  regulated  by the  Federal                                                                    
Energy Regulatory Commission (FERC),  and required by law to                                                                    
take oil  from any  source, whether  the pipeline  owners or                                                                    
independent  producers, as  long as  connection requirements                                                                    
were met. He was concerned  about reversing the slope of the                                                                    
decline enough.                                                                                                                 
9:43:00 AM                                                                                                                    
Representative Gara  commented that communications  from the                                                                    
Finance Committees to federal  agencies sometimes helped. He                                                                    
asked  that  Alyeska  give   pertinent  information  to  the                                                                    
committee so that letters could  be written to the agencies.                                                                    
In addition, he  noted that there were  connections with the                                                                    
congressional delegation that could be used.                                                                                    
Representative Gara  believed that when  Alyeska retrofitted                                                                    
the  pipeline to  carry smaller  volumes of  oil, there  had                                                                    
been a  goal of being able  to operate the pipeline  down to                                                                    
250,000 barrels per day. He asked whether that was true.                                                                        
Mr.  Barrett responded  that he  was  not aware  of all  the                                                                    
planning assumptions  from the  past period. He  warned that                                                                    
repetition of an event like  the one in January would become                                                                    
increasingly  more  difficult  manage. He  did  not  believe                                                                    
there was a magic number  (of minimum barrels per day), only                                                                    
that the risk became higher  and response more costly as the                                                                    
throughput decreased.                                                                                                           
9:46:22 AM                                                                                                                    
Mr.  Barrett  concluded that  more  oil  was needed  in  the                                                                    
pipeline.   He  urged   the  committee   to  recognize   the                                                                    
consequences and  importance of getting the  throughput back                                                                    
up. He stated  that TAPS needed political  help from sources                                                                    
in Washington, D.C., as well as Alaska.                                                                                         
Mr. Barrett  relayed a  story illustrating  the consequences                                                                    
of inaction. He offered a mental  model that he had used and                                                                    
applied in  the Coast Guard:  a ship in distress  going down                                                                    
in  the Bering  Sea. The  desired response  was to  move all                                                                    
possible  assets aggressively  and as  quickly as  possible,                                                                    
because the  consequences might  be worse  in the  future if                                                                    
not addressed  while there was  a window of  opportunity. He                                                                    
argued that  if it  turned out  that too  much was  done too                                                                    
soon, the assets could be easily called back.                                                                                   
Mr. Barrett reiterated the details  of how assets were moved                                                                    
in the  January event; he  had been called  Saturday morning                                                                    
initially, and by early Sunday  it had become clear that the                                                                    
risks of  waiting until  the bypass  was installed  was very                                                                    
high,  with enormous  potential  consequences. Options  were                                                                    
narrowed  and a  specific  set of  actions  were taken,  but                                                                    
initially,  all potentially  useful  assets  had been  moved                                                                    
Mr.  Barrett emphasized  that the  consequences of  inaction                                                                    
were not good. He suggested policy  that would push a lot of                                                                    
resource at  the current problem  and see if the  result was                                                                    
positive.   He   repeated   concerns  and   underlined   the                                                                    
commitment  of   Alyeska  to   operate  according   to  high                                                                    
9:51:57 AM                                                                                                                    
Co-Chair  Stoltze reviewed  expectations regarding  upcoming                                                                    
Representative  Gara  noted   that  he  wanted  Commissioner                                                                    
Bryan  Butcher  to  come  before  the  committee  to  answer                                                                    
questions  that had  been  asked. He  queried  the bill  and                                                                    
amendment process in committee.                                                                                                 
Co-Chair Stoltze stated  that the bill would  be passed when                                                                    
it was ready.                                                                                                                   
Representative  Doogan  pointed  out   there  was  always  a                                                                    
possibility that the committee would not report a bill out.                                                                     
Co-Chair Stoltze agreed that it would take six votes to                                                                         
move the legislation out of committee.                                                                                          
9:55:56 AM                                                                                                                    

Document Name Date/Time Subjects
HB110 Alyeska HFIN 031811 PDF.pdf HFIN 3/18/2011 8:00:00 AM
HB 110
HB110 Barrett Testimony HFIN031811.doc HFIN 3/18/2011 8:00:00 AM
HB 110