Legislature(2001 - 2002)
02/01/2001 10:10 AM House O&G
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* first hearing in first committee of referral
+ teleconferenced
= bill was previously heard/scheduled
+ teleconferenced
= bill was previously heard/scheduled
HB 83 - NATURAL GAS RESOURCES DEVELOPMENT CHAIR OGAN announced that the committee would hear HOUSE BILL NO. 83, "An Act relating to natural gas pipelines, providing a statutory definition for the portion of the constitutional statement of policy on resource development as applicable to the development and transportation of the state's natural gas reserves, amending Acts relating to construction of natural gas pipelines to require conformance to the requirements of the statutory definition, and amending the standards applicable to determining whether a proposed new investment constitutes a qualified project for purposes of the Alaska Stranded Gas Development Act; and providing for an effective date." Number 0186 JOHN WILLIAMS, Mayor, City of Kenai, came forward to testify. He noted that in addition to being mayor for the last 15 years, he has been associated with the oil and gas industry - in construction, operation, and maintenance - most of his life. He also is retired from the University of Alaska, where he taught petroleum technology and process instrumentation for 17 years. Mr. Williams said his testimony would address the direction of the pipeline and how that gas should be used in Alaska for Alaskans, their economy, and their future. He stated: We in Kenai recognize the fact that for a long time we've been the seat of industry for manufacturing of products from natural gas, some 30-odd years now. Presently we can safely say, by industry standards, that we do have a nine-year supply of gas - and I tie that to the contract limitations at the LNG [liquefied natural gas] plant for survivability - and probably more gas, but no one really knows and no one can know until the market requires that gas be produced. MR. WILLIAMS discussed what he called survivability. The corridor between Fairbanks and the Kenai Peninsula has about 70 percent of the total human population of Alaska, with the majority of those people being in and near Anchorage. He commented, "They, of course, deserve the right to the use of that gas for many, many generations to come." No matter where the gas line begins or eventually ends, he said, a spur line has to intersect with systems that lead to the Kenai Peninsula; that is crucial for survivability of the industry, the jobs there, and future manufacturing. Number 0423 MR. WILLIAMS addressed his second point, the manufacturing issue. He characterized oil and gas as one of civilization's greatest building blocks, from which some 21,000 products are manufactured. He believes it behooves Alaska, as a resource state, to do everything possible to turn that raw resource into manufactured and value-added products to ship from Alaska, rather than exporting the raw product to the rest of the world. MR. WILLIAMS noted that "BP" is constructing an experimental plant to develop gas-to-liquids (GTL), which differ from liquefied natural gas (LNG) in that the latter requires a refrigeration process, being held at cold temperatures, special equipment to transport it, and so forth. In contrast, GTL can be transported at ambient temperature and used as building blocks for "everything imaginable." He said although the plant under construction is only an experimental 300-barrel-a-day plant, there is no reason that a big GTL facility couldn't be built there; that liquid could be used to manufacture everything from ethylene glycol to plastics to fabrics. He concluded: The basis of my entire testimony, then, is, "Let's make sure, in one manner or fashion, that the Kenai Peninsula is interconnected to whatever gas line is built, and let's begin a process whereby every bit of gas that we can possibly utilize in the manufacturing industry in the state of Alaska is used in-state." It makes sense. It creates jobs. It creates an economy. It creates value-added, and it really gives Alaska a future economic base that we can build on. ... In my mind, the last great homerun for resource development is our natural gas. We cannot make as much money for the State of Alaska and our people, from any other industry, in such a manner as we can from the natural gas that may, by some estimates, go as high as a hundred trillion cubic feet in reserves. Number 0646 REPRESENTATIVE DYSON recalled hearing some years ago that the aluminum processing industry had looked at Cook Inlet a couple of times because of the low electricity prices and access to deep water; however, [the industry] was turned off by lack of a long-term, secure gas [source]. Recently, he had heard that some high-tech component manufacturers in the computer electronics industry had, in fact, been turning away from places in the western United States because of the uncertainty regarding electric power and so on. He asked Mr. Williams, "What kinds of industries and manufacturing ... have you heard, specifically, might be interested in coming to our country?" MR. WILLIAMS answered that he personally had been involved in some of those (indisc.) manufacturing in that area. Power generation by gas is cheapest second only to hydroelectric power, he noted, and "power generation leads to every other industry imaginable." MR. WILLIAMS discussed three specific industries that he personally had been associated with, had failed to acquire, and had lost because of lack of gas. The first, the Pacific Gas and Lighting LNG plant, could have been supplying LNG to the West Coast several years ago. Second, a group ten years ago was trying to attract a Korean group to build an LNG plant in Kenai; despite readiness to be built, that plant "went away" because there were no guaranteed long-term sources. The third instance involved two separate companies, Midrex being one, that wanted to go into pelletized iron; it would have involved shipping iron ore from South America to Cook Inlet, pelletizing it into high- grade iron ore, and then shipping it to the Orient. Mr. Williams commented, "We lost it because we could not guarantee power; we could not guarantee a reliable long-term source of gas. Those jobs alone would have been worth hundreds of millions of dollars in payroll ...." Number 0861 REPRESENTATIVE DYSON asked what the long-term market is for ammonia, nitrates, and so on that are presently being manufactured here. MR. WILLIAMS answered that the long-term market for ammonia and urea is "fantastic," especially in the developing world in the Orient. China is the largest manufacturer and producer - and importer - of ammonia-based fertilizers in the world. He himself was on a ship that sailed from "our plant to Halongjing (ph)," he recalled, where then-Governor Sheffield was instrumental in developing trade to purchase ammonia urea "from our plant." Mr. Williams noted that Agrium, a Canadian firm that deals worldwide in that product, has recently purchased that facility from the Unocal group; Agrium has said it would like to double the plant's capacity if there are known reserves available. "And they're in for the long haul," he added. MR. WILLIAMS said the first and most successful LNG plant in the United States would double its capacity "if they had the room to do it." The question might be whether there is a market for it. He stated: Let me take you just briefly to a history of the Phillips plant. When we built that plant in 1969 and 1970, they furnished 100 percent of the imported LNG to Japan. Today, they are manufacturing and delivering more than they did then. But if their market share to Japan is only 3 percent, that means that Japan has picked up the other 97 percent from around the rest of the world. So, we could be manufacturing LNG and shipping it to Japan and intercepting part of that market, as well. Number 1003 REPRESENTATIVE DYSON asked whether it is true that Japan, in particular - and maybe some other Asian nations - is increasingly uneasy about the security of its LNG supplies, especially the portion coming from the Middle East, and is looking for more secure supply lines. MR. WILLIAMS referred to World War II and Japan's historical isolation from the rest of the world in its ability to gather resources. With one small oil field, Japan is very limited in its ability to produce its own oil and gas, he noted. One of Japan's greatest lessons from World War II was never to rely solely on one area for resource materials. From that lesson, he believes Japan's economy has developed around a concept of buying from many different areas; LNG is an example. Mr. Williams remarked, "Their concern is instability in government. Our pride is in stability of government." Number 1093 REPRESENTATIVE FATE voiced his understanding that any GTL produced in Alaska would go through the lines to the Lower 48 to be used almost directly as fuel. He asked Mr. Williams to expand on the byproducts that might be available from the GTL. MR. WILLIAMS responded that when developing GTL, solid chain molecules are created, which are in a liquid form. Those can be reformed and recreated into different sizes and types. Ethylene glycol is one he had mentioned because he had talked to "the BP people" about taking their 300 barrels a day from the experimental plant and running it through a smaller process to manufacture glycol, which could meet "our in-state market." Other products that can be manufactured include plastics, fabrics, dishware, detergents, and things of that nature. It is unlimited. "Everywhere you look around you today, we use extruded plastic products of every type," he noted. Number 1193 CHAIR OGAN asked Mr. Williams whether he supports the concept in HB 83 that requires the capacity to "whatever point - either Fairbanks or Delta - for other uses, either LNG to Valdez and an additional line to Kenai." MR. WILLIAMS responded: Yes, absolutely. Both the Alaska Municipal League and several other groups that I also belong to support that concept. First, the pipeline: let's get it down to Fairbanks; let's get it from Fairbanks to wherever it's [going to] go from there - my concept, of course. I know that Mr. Lowenfels' is slightly different, but my concept is from there, let's make sure that one way or the other, there's a branch that gets to the Kenai Peninsula. CHAIR OGAN pointed out that the bill is a rough draft at this point, but that he would appreciate any support Mr. Williams could muster. He noted the presence of Representative Croft and Representative Whitaker, the former chairman of the House Special Committee on Oil and Gas. Number 1312 JEFF LOWENFELS, President, Yukon Pacific Corporation (YPC), came forward to testify. He stated: I, too, wish to bring gas down to Kenai. It's very, very important, not only for the continuation of the LNG facility in Kenai, but also for the other manufacturing opportunities that it presents. And if Yukon Pacific builds a project to Valdez, there will be gas delivered to Southcentral Alaska and Kenai, in particular. With regard to the bill, there are two items that I think are important. And since it's in rough-draft form, let me start with the first item. It doesn't have to do directly with what language you have here, but you use the term "fit, willing, and able." If you take a look at the statute, you'll note that there are two ways to get a right-of-way. One is a direct right-of-way, and the other is a conditional right-of-way. I, unfortunately, have a little bit of a history with regard to the language amendment that created the opportunity to obtain a conditional right- of-way. And that language was inserted into the statute in order to be able to get the right-of-way language that was necessary for Yukon Pacific's TAGS [Trans-Alaska Gas System] to be able to advance the project forward. And so, about ten or maybe even fifteen years ago, Senator Kerttula held some hearings and the statute was amended. At that time, the attorney general's office came to me and indicated that the definition of "fit, willing, and able" had been set forth in a secret attorney general's opinion. And for about 30 seconds, I was able to see the one-page secret attorney general's opinion that apparently defines for the State of Alaska what "fit, willing, and able" really means. So, I think one of the things this committee may want to do is consult with the attorney general's office about that particular opinion. I've never seen it since; I've never been able to locate a copy of it. And it's always concerned me, being a former assistant attorney general, that such a thing would exist. But, as a result of that opinion, ... we had to insert into this language that it ... modified the definition of "fit, willing, and able." Number 1460 MR. LOWENFELS detailed his own background. An attorney by trade who majored in geology as an undergraduate and has a law degree, he came to Alaska and spent six and a half years as an assistant attorney general representing the State of Alaska in various natural resources and environmental areas; responsibility included counsel to the Alaska Oil and Gas Conservation Commission (AOGCC) and the State Pipeline Coordinator's Office, which negotiated on behalf of the state during the formation of the Alaska Natural Gas Transportation Act and the system that resulted from it. He also represented the Alaska Public Utilities Commission; the Alaska Pipeline Commission; the Division of Oil and Gas (DNR); the Alaska Department of Fish and Game; the Department of Environmental Conservation; and "almost every agency on the state side that would have anything to do with a natural gas pipeline." In addition, he had contact with "almost every agency on the federal side that would have anything to do with a natural gas project." Mr. Lowenfels said he therefore has "a little bit of expertise," and when he discusses the issue of "fit, willing, and able," it is fairly significant. Number 1490 MR. LOWENFELS returned attention to the bill. He stated: The statute that we have derives from the Mineral Leasing Act, which is a federal statute. There is a solicitor's opinion with regard to what "fit, willing, and able" means under the federal statute. A court would normally give deference to the federal solicitor's opinion in interpreting the language in our statute. And so, there's a little bit of a conflict, and I think we really need to nail down what "fit, willing, and able" really means. And there's a few AG's [attorney general's] opinions that are not secret in that regard; ... I would be happy to work with the committee ... to bring those forward and to discuss with you the concerns that we have had over the years with regard to that, that resulted in the need for the new legislation. And I think that's something very important. My second point with regard to the bill really pertains to page 2, line 26, [paragraph] 2, where the bill actually discusses a natural gas pipeline ... to North American markets. And, as you could expect, since I do not believe that there will ever be a pipeline that will serve the North American markets, that particular section concerns me, in part because of the way it's been interpreted by the press. My understanding, as I read this bill, is it's a pretty strong opportunity for the State of Alaska to say "a pipeline that goes from Prudhoe Bay to the Mackenzie delta through the Beaufort Sea does not meet criteria in our state constitution." And I understand that that may be, in fact, the prime purpose of this bill, and so, therefore, the bill suggests going south. Unfortunately, the paradigm today is that "south" means "highway project." And I think that's a mistake. And I think it's a mistake to codify a potential wish. And I think there's a way to say this that's slightly different: Any pipeline that goes anywhere needs to be able to serve other markets, or, at least in the design, have built in to the design the ability to serve other markets, whether they're North American markets or Asian markets. It's a minor criticism, I guess, in the overall scheme of things. But, again, what I am seeing in the state of Alaska right now is akin to "gold fever." And everybody is convinced that we're going to have a pipeline down to the lower 48 states. And I'm here to tell you that we're not, in my humble opinion. ... The bill itself, I think, is important. I think it codifies ... the intent of the constitution of the state. And I do think it's very, very important for the legislature to ensure that the administration understands that the "best interests of the state" determination that has to be made, has to be made ... in a constitutional way. And I think this bill aids the administration in making this determination. Number 1816 CHAIR OGAN remarked that he doesn't find anything in the constitution about the executive branch managing the resources of Alaska. On the other hand, it is within the legislature's purview, in Sections 1 and 2 [of Article VIII of the state constitution], and the legislature has authority to delegate, through policy and the statutes, to the administration. MR. LOWENFELS agreed it is delegated to the executive branch by the legislature. CHAIR OGAN mentioned the "quasi hub concept" in the bill. He suggested the need to make sure the pipeline, if it gets to Fairbanks, has the capacity, and that the market drives where it should go. MR. LOWENFELS said he didn't disagree; he thinks it is important for people to understand that from [YPC's] perspective, this is not a bill that endorses a highway project. His presentation would discuss [YPC's] viewpoint in that regard. Number 1932 MR. LOWENFELS informed members that the tenet of [YPC's] proposition is that Alaskans must understand "what rules have been laid down for us to play in the game." He emphasized the need for committee members to read and understand the Alaska Natural Gas Transportation Act passed by Congress in 1976. Associated with that bill, "and part of the law that results from the action taken under that bill," is a decision made by President Jimmy Carter. MR. LOWENFELS explained that at the time, three projects were seeking to serve a Lower 48 market, "which was very heavily regulated, and which had regulated gas prices." Those were the Arctic gas project to take the gas "over the top" from Prudhoe Bay through ANWR [Arctic National Wildlife Refuge] down the Mackenzie delta; an LNG project, which the mayor of Kenai just referenced, to take gas to the Lower 48 in LNG form and bring it to California; and the Northwest Alaska Pipeline project, now called the Alcan project, to take gas down the highway. MR. LOWENFELS pointed out that the law and the presidential decision to reject those other two routes set the rules for the "game" today. The President took away from his administrative agencies the right to choose. At the time, there was a hearing going on before the Federal Power Commission, which is now the Federal Energy Regulatory Commission. The presidential decision was that the only way that natural gas could be transported to the Lower 48 was via the Alcan project. That is the law today. CHAIR OGAN noted that Representative Rokeberg, who chairs the House Judiciary Standing Committee, had joined the meeting. Number 2074 REPRESENTATIVE ERIC CROFT, Alaska State Legislature, asked whether that finding precludes the other two routes. MR. LOWENFELS said he believes it does, without a change by Congress. He noted that a Canadian counterpart must be dealt with, because not only was an Act of Congress passed, but then the United States entered into treaties with Canada with regard to the construction of the project. The Canadian government has a big interest in this. Too much gas coming down from Alaska impacts Canadian producers. The President of the United States, in his decision, limited the amount of gas that could be taken from Alaska to the lower 48 states "to an average daily flow of about 2.5 billion cubic feet of gas a day." Mr. Lowenfels commented: Now, when I listen carefully, I hear the oil companies talking about 4 billion cubic feet of gas a day. I'm not sure what the governor's talking about, whether he's talking about 2.5 billion cubic feet a day or 4 billion cubic feet a day. But the point is, unless ... the federal government changes the law and unless Canada changes its law, Alaska is limited to 2.5 billion cubic feet a day going down the pipeline. Number 2181 MR. LOWENFELS gave a presentation from YPC's perspective. [Because of technical difficulties with the planned visual presentation, he referred members to the Yukon Pacific Corporation packet handed out earlier.] He said: Everybody's talking about the gas pipeline. I'm on page 1. We've heard the oil companies say that they want to commercialize North Slope natural gas now. We're very happy about that. We've heard them say that they want to commercialize North Slope natural gas by 2007; God bless 'em. The gas line is everywhere. Everything you pick up in Alaska has something about the gas pipeline in it - newspapers, magazines, it's everywhere. We're going through what's akin to "gold fever" right now. My proposition, again, is that you must play ... by the rules, and the rules are set by this congressional Act. Number 2232 MR. LOWENFELS referred to page 10 of the handouts. He said there are two places where natural gas can be sold into the marketplace: the Lower 48 states, which has short-term contracts and local gas-to-gas competition; or East Asia, where there are long-term, 20-year contracts, and where LNG is priced based upon world oil prices. In addition, gas can be taken to Mexico in LNG form, used there, or brought back over the border into the lower 48 states, particularly California. He said: Just so that you understand some of the numbers that we're talking about, in the state of Alaska right now we use 250 to 300 million cubic feet of gas a day. The [Alaska Gasline] Port Authority is suggesting a "Y-line" that would use 6 billion cubic feet of gas a day. The highway project, ... as provided by the Alaska Natural Gas Transportation Act of 1976, allows 2.5 billion cubic feet of gas a day. The overland project that the producers have been talking about is 4 billion cubic feet of gas a day. Yukon Pacific [Corporation] is talking about a project that would range from 2 to 3 billion cubic feet of gas a day. And Prudhoe Bay has 21 trillion cubic feet of gas left. Now, when I've given this presentation in the past, people have said, "Gee, I thought there was 38 trillion cubic feet of gas ... on the North Slope." And there is. There's probably more than 38 trillion cubic feet of gas on the North Slope. We use the figure of 36 or 38 trillion cubic feet of proven supplies on the North Slope. But in order to finance a pipeline, it has to be producible supplies, particularly in Alaska. And right now, the only place where gas is being produced is Prudhoe Bay. We used to have 26 trillion cubic feet of gas in Prudhoe Bay. We have used up 5 trillion cubic feet of gas in the production of oil and in fueling the first few pump stations of the pipeline. And now we have 21 trillion cubic feet of gas left, which we can rely on, for which we can do a project. We can talk about Point Thomson, we can talk about ANWR, we can talk about the 100 trillion cubic feet of potential supply that the USGS [United States Geological Survey] says is out there. But the only thing that counts in the gas that's coming out of the ground, and we've only got 21 trillion [cubic] feet of gas coming out of the ground. It's quite a bit of gas. But it's not 38 [trillion] and it's not 100 trillion cubic feet. There are four proposed approaches to transporting the gas that I know of. The first [approaches] are Lower- 48 approaches. We have gas-to-liquids. We have "over the top." We have the Alcan project. We have the East Asian alternative, which is TAGS [Trans-Alaska Gas System]. And we have the possibility not only that Mexico and the West Coast markets could be served by TAGS, but the assurity that Alaska will be served by TAGS, and not just Fairbanks and Southcentral. We've been contacted during the past two years by several companies who wish to take gas in Valdez to Southeastern Alaska; they would barge it down. They would either do ... compressed natural gas or some have actually even talked about the idea of [an] LNG storage facility, which you could bring the LNG down, drop it off, and then it could be barged in LNG form to various locations in ... Southeastern Alaska. Number 2380 REPRESENTATIVE DYSON asked whether, on a minor scale, LNG could similarly be transported seasonally along the Yukon River. MR. LOWENFELS said yes, it could. A company is transporting LNG by truck "from Beluga, basically, up ... into Fairbanks, and dropping off little bits of LNG as it goes." It can also be barged. The cost, however, one has to investigate; he said he understood that a subcommittee was looking at that. REPRESENTATIVE DYSON responded, "That's us." He said what needs to be ascertained is when it becomes competitive with diesel. MR. LOWENFELS said he doesn't have those numbers. He indicated he had already spoken to Vice Chair Fate, then stated: We would be very happy to try to supply names of contractors who've come to us with various ideas and see if we can't ... get some answer to that, because it's obvious that natural gas is the best fuel to use. And if you can get natural gas to ... places up and down the Yukon by barge, we ought to be doing it. Number 2459 MR. LOWENFELS continued with his presentation: There are nine potential players: Yukon Pacific, the Port Authority, the Sponsor Group, BP, Exxon, Phillips, Alaska Resources Corporation, Foothills Pipeline, and Alaska Gas to Liquids. As far as I know, there are no other people who wish to play in this game. Let's just talk briefly about the overland route. As I indicated before - I'm on page 12, incidentally - the Arctic Gas proposal would now be called "over the top." The El Paso Proposal would now be called "YPC," only ... basically to Asia instead of the U.S. And the Alaska Natural Gas Transportation System [ANGTS] is now called the Foothills project, but it used to be called the Northwest project. ... As I indicated before, the choices with regard to an overland route have already been determined by the Congress of the United States. ... And unless you change the Alaska Natural Gas Transportation Act, the only way you can take natural gas from Prudhoe Bay down to the lower 48 states in an overland fashion - and probably even by LNG - is via the Alaska Natural Gas Transportation System, ... the relevant portions of which are owned by Foothills Pipeline, which is a Canadian company. The requirements on the Alaska Natural Gas Transportation System are set forth. They're very specific. The President of the United States didn't have to be specific, but Jimmy Carter was extremely specific in this particular instance. He set every little, teeny thing in play: where the pipeline would go, where the compressor stations would be, what kind of pipe will be used, what pressure, what quantity. So, people can talk all they want about studies, and people can talk all they want about gas policy councils to take a look at how to do things. But until we change that federal law - which I also will assert to you requires a change in a Canadian law, any treaty, at least one, and probably two, between the United States and Canada - we're talking, and that's all we're doing. Number 2595 REPRESENTATIVE JIM WHITAKER, Alaska State Legislature, inquired about the expiration date of the treaty. MR. LOWENFELS affirmed that it has an expiration date but said he didn't know the exact date. He added, "We've got another couple of years, at least." REPRESENTATIVE WHITAKER responded, "I think we have ten, twelve years, if I'm not mistaken. But given that if it does reach its expiration date, then it simply goes away and is no longer bother; is that correct?" MR. LOWENFELS said he didn't know. Number 2614 REPRESENTATIVE DYSON suggested the need to get copies of that [the treaty] for the committee. MR. LOWENFELS indicated YPC could provide copies of the treaty and the law. Noting that he had given this presentation several times in Anchorage, he said there are independent sources for anything he told the committee, for verification. He added: What I used to say to people is, ... there's an attorney general's opinion that interprets what I've just told you about the invalidity of the Alaska Natural Gas Transportation Act and how you have to use it. And, in fact, I believe Wilson Condon was one of the authors of that particular opinion, along with Morrison and Foerster, the outside counsel from Washington, D.C. That opinion is available, and you should read it. But today there's another opinion you should read. It was issued on January 18 by the chairman of FERC, the Federal Energy Regulatory Commission. And that is a very, very interesting opinion. It confirms what I've been telling you. Yes, you could entertain, FERC said, an application to bring gas down from Alaska outside of the Alaska Natural Gas Transportation Act, but the Act itself causes severe problems and raises very serious issues as to whether or not you could act upon that application. And we'll provide you with copies of that opinion. It's a very interesting document. It's very clear. And it was in an answer to a question raised by [U.S.] Senator Frank Murkowski this summer about the impact of the Alaska Natural Gas Transportation Act of 1976 on a pipeline in the year 2000. So, the bottom line is, to take gas down to the lower 48 states overland, ... without using the Alaska Natural Gas Transportation System, without using Foothills Pipeline, you're going to have an extremely, extremely difficult problem. And on this page 15, there's the web site for this opinion that I just referenced from the Federal Energy Regulatory Commission. Again, we have copies; they may, in fact, be in your packet. It's well worth taking a look at, and I think if you take a look at Wilson Condon's opinion, that's sort of the graduate course, if you want to go one step further. [Note: the web site listed was www.ferc.fed.us/news/staffreports.htm] MR. LOWENFELS, in response to a question from Chair Ogan, said he believes Wilson Condon's opinion was written during the 1980s; he would get Chair Ogan a copy of it. MR. WILLIAMS noted that Mr. Condon was the attorney general at that time. Number 2739 MR. LOWENFELS returned to the presentation. He stated: Let's talk just briefly about "over the top." As we were discussing before, I don't believe - and I think many members of this legislature probably don't believe as well - that it meets ... the constitutional requirements of providing maximum benefit to the people of the state of Alaska for use of our resources. ... I've heard many, many stories about the congressional delegation being extremely concerned about an "over the top." I've heard many threats with regard to what would happen if people tried to get an "over the top," both from the congressional delegation as well as from the environmental community. Frankly, I think the easiest way to put it, and perhaps the gentlest way to put it, "over the top" is not Foothills. If you're going to take gas to the lower 48 states, you have to use the Alaska Natural Gas Transportation Act. The President of the United States rejected the "over the top" project. And in order to revive it, you've got to change that Act, and the treaty. ... For reasons which I'll explain later on, I don't think it will happen. CHAIR OGAN said, "The resources and energy committee ... are probably not too supportive." MR. LOWENFELS responded: I would not imagine that any Alaskan would be very supportive of taking gas over the top, for all of the reasons ... which the mayor of Kenai mentioned, which we've talked about; just intuitively, it doesn't make sense. And environmentally, I don't think it makes sense. So I think they've got some very serious problems. Number 2797 MR. LOWENFELS returned to the presentation: At the bottom of page 16 is a map. ... If you look very, very carefully, you'll see in Alberta [Canada] a place called Caroline. And the dotted lines that come down from Prudhoe Bay turn into solid lines at Caroline. And one of the lines runs down to the San Francisco area, and one of the lines runs down to the Chicago area. That's called the "prebuild." Those two lines - one of them is owned by ... Pacific Gas and Transmission, and the other one is owned by Northern Border (ph) - are part of the Alaska Natural Gas Transportation System. And they're full. And that creates an additional problem, which is noted in the opinion written by the chairman of FERC, and which was also noted, I might add, on Friday by one of the executives from BP. ... They're full with Canadian gas. They have been expanded once before. Now, put yourself in the position of a Canadian producer. Along comes Alaska and says, "We're going to put 4 billion cubic feet of gas into that system; you need to pull your [gas] out of that system." It's not going to happen. It shouldn't happen. They've been using this system since the ... early 1980s. There is, I think, very little chance that Alaska gas is going to displace the Canadian gas that's already in that system. It's very significant. And, again, you don't have to believe me. One of the executives from BP, in his speech on Friday, indicated that the real possibility is that we're going to have to build a pipeline, if we're going to take gas down to the lower 48 states, all the way to the market - all the way to Chicago, not to Caroline. So we're not talking about a 2,100-mile pipeline to Caroline; we're talking about a 3[000-] or 4,000-mile pipeline to San Francisco or to Chicago. It changes the cost factors considerably. ... When you use the models which Wilson Condon indicated yesterday would be available to you, you need to take into consideration the distance, because it makes a big difference in the cost of the project and, therefore, in the cost of the gas that you can deliver to the lower 48 states. Number 2899 CHAIR OGAN asked what the capacity of the ["prebuild" section] is. MR. LOWENFELS answered that he doesn't know the exact numbers but can get them. Number 2913 REPRESENTATIVE GUESS asked whether there are projections regarding how much gas will be demanded to go through that. MR. LOWENFELS responded, "Not through that system, because it's full. But what we do have are projections on how much Canadian gas is projected to come into the United States." REPRESENTATIVE GUESS told Mr. Lowenfels she would follow up on that later with him. MR. LOWENFELS said it is an important question. He restated, "What we're talking about is displacing Canadian gas." He said right now, the United States government expects about .1 trillion cubic feet of new natural gas a year to come from Canada to the Lower 48. A flow of 4 billion cubic feet a day from Alaska would displace 14 years of new Canadian gas coming into the United States. Looking at it from the standpoint of the Canadian producers, he said he didn't believe it was going to happen. Number 2970 WAYNE LEWIS, Yukon Pacific Corporation, came forward to answer the question regarding the volumes presently flowing in the "prebuild" section of the ANGST project from Caroline down to Chicago on the eastern leg, and to San Francisco on the western leg. He said he believes it is 2 billion cubic feet a day or so going to the east, and about a billion cubic feet going to San Francisco, for a total of about 3 billion cubic feet a day. [A portion of the last sentence was not on tape but was recorded in the log notes.] TAPE 01-8, SIDE B Number 2975 MR. LOWENFELS mentioned GTL, saying a pilot plant is being built in Kenai. The economics of GTL are uncertain, he reminded members, which is why that is a pilot plant. The proposal is that GTL would be "built up on the North Slope," the rationale being that one can put the liquids created in the process into the existing oil pipeline and wouldn't have to build a new gas line. He told members: We believe that there are some serious problems with that, both from a political perspective as well as an economic perspective. In order to make the gas, you have to use up 35 percent of the gas in the process. Now, if you're doing that up on the North Slope, that's gas we're not getting royalty for. 35 percent of the gas would be used up to make the liquid, and the State of Alaska would get no royalty for that 35 percent. MR. LOWENFELS said his experience as an assistant attorney general for the AOGCC leads him to believe that is economic waste under state law and generally, and that it does not make particular sense. There are other problems with GTL, and he doesn't think GTL is a viable way of taking North Slope natural gas to markets. It is possible that a GTL facility in Kenai or Valdez would make sense to the State of Alaska, however, because at those locations, using that 35 percent of the gas to make the liquid would result in a royalty payment to the state. "Whether that harms the economics of that project, I don't know," he commented." He told members: So, of all the Lower 48 pipeline alternatives, only Alcan, the Foothills project, appears to be viable. The gas-to-liquids economics are uncertain, et cetera. The "over the top" pipeline simply doesn't make any sense. And the Alcan project is backed by existing law here and in Canada. Number 2892 MR. LOWENFELS turned attention to LNG and page 4 of the handouts. He said his own bias, obviously, is TAGS; he has been working on this project, in one form or another, since "Governor Egan and Governor Hickel put it together in 1982." He explained: Our system, obviously, is designed to take the Prudhoe Bay gas down to Valdez, tanker it in LNG form to Asia, to the west coast of America, and perhaps to the west coast of Mexico. ... We would liquefy the gas in Valdez, and we would also have a spur line from Glennallen into Sutton, which would bring the gas into Southcentral and, I believe, relieve a lot of the problems that we are going to face as a result of Southcentral running out of natural gas. ... We are just now doing the commercial-economic work and the modeling to determine how much it would cost a consumer in the Southcentral area to buy natural gas from the North Slope. And I am astonished and pleased that our most recent runs indicate that we could bring the gas into the Anchorage area at the same price that Enstar is now paying for its natural gas. ... That's a very significant factor. We believe a 16-inch pipeline from Glennallen into Sutton can bring North Slope natural gas into Southcentral for the same price that Enstar is currently paying for natural gas today - extremely significant. Now, we'll work on those numbers. And please, you have to understand that we're trying to get the right answers. These numbers may change, but we're feeling very confident. And that's with a very favorable wellhead price to the producers of that gas - a very significant piece of information that I'm imparting to you today. Number 2797 REPRESENTATIVE WHITAKER asked why that is significant. MR. LOWENFELS answered that it is significant for a number of reasons. He stated: First of all, we keep hearing people say, ... "If the price of gas goes up, we'll find more gas in Cook Inlet." Now, I don't happen to believe that's true, and I'm using my geological background for a second. There are lots of large structures in Cook Inlet, and they've all been drilled. If we're going to find natural gas in Cook Inlet, it's going to be in little structures that exist between these larger structures. And many of them have been drilled as well. ... They've drilled 79 ... exploration wells in the past 25 years. I get so upset, as a geologist - nonetheless as an Alaskan - when people tell me, "Oh, yeah, well, when the price of oil goes up, and when the price of gas goes up, there'll be more drilling in the inlet, and we'll find more gas." Well, were these 79 wells just practice wells? I don't think so. So it's very significant because we're able to be able to keep the economics of our lifestyles today. And it's extremely significant for Fairbanks, because we're not talking about $7 and $9 fuel oil; we're talking about Fairbanks actually, for the first time in its history, getting a fuel that's cheaper than the people of Anchorage get their fuel. A very significant change, I believe, for the lifestyle of Fairbanks. In any case, it's very, very significant. And we'll continue to refine those numbers, and they may change. But my feeling is they're only going to change for the better. Number 2718 CHAIR OGAN reported that it was also established on the record, in an overview by the Alaska Oil and Gas Association (AOGA) and the Department of Natural Resources (DNR), that 98 percent of the gas found in Cook Inlet was found in the 1960s. MR. LOWENFELS concurred. He said he believed that the commissioner of DNR wrote a letter in response to a legislative inquiry, and the statistic relating to 79 wells is confirmed by the DNR. CHAIR OGAN said he had seen that letter. He mentioned that Representative Croft had requested it. Number 2691 MR. LOWENFELS agreed. He returned to the presentation: I do want to let you know that ... we've been working very hard, even though we haven't been extremely public for the past couple of years. We have updated our designs for the pipeline and for the LNG facility in Valdez. These were completed in April of 2000. And as a result of that, we went out and got two new cost estimates for the pipeline and one new cost estimate for ... the LNG facility in Valdez. And we now have investment-grade quality estimates for pipeline costs and for pipeline construction for our project. When anybody uses numbers and economic models, these are the numbers that need to be used - and they're listed on the next page. And [it's] very important to understand in the LNG business, worldwide, that ... your project's not competitive if you are unable to meet this rule: For every million metric tons of LNG you plan on producing every year, your basic capital costs need to be about a billion dollars. So, one million tons, one billion dollars. That means, when you look at our charts, phase 1, we would be 9.2 million metric tons a year, at a cost of $7.1 billion. We would intend on expanding this project up to 18.4 million metric tons a year; and at that number, it will cost $10 billion. We're talking about a pipeline cost that is considerably lower than previous estimates. These pipeline costs, again, are investment-grade pipeline costs. We went and actually bid two spreads of the pipeline - two out of the five spreads that we intend on having - right on down to the Chevrolet that the inspectors will be using, driving up and down the haul road. So, we have a very, very comfortable feel with regard to these costs. These are the costs that need to be used when you are comparing our project to overland projects and to other projects which people are proposing. These are the official costs for the Yukon Pacific project. So any costs that we have given you in the past, please throw out. These are now the actual, official costs. Number 2580 MR. LOWENFELS continued: Now, of course, we do have to compete with LNG projects around the world, and that's always been one of the raps: You can't compete with gas that's closer to the marketplace, and there's lots of gas closer to the marketplace that ... doesn't require a long pipeline like your project does. Well, the problem is, a lot of that gas is located in very bad neighborhoods. And as Mayor Williams so eloquently pointed out, the Japanese and the Koreans and the Taiwanese have all learned that you must diversify your resources and your sources of supply for those resources. MR. LOWENFELS pointed out that some competing projects that are "not in particularly good neighborhoods" include an Exxon/Mobil project in Qatar. Furthermore, the Sakhalin project has serious environmental problems, he said; the sponsors of those projects are having problems with that government, which is imposing environmental restrictions for the first time. In addition, there are serious ice problems in those projects, and the projects are isolated and need to be connected to gas supplies. The Natuna project is no longer a viable project because it has so much carbon dioxide, Mr. Lowenfels said. He added: We think our biggest competition is not the Australian project - which we think is going to go - but it is a project called Tangu (ph) in Irian Jaya, a project that happens to be owned by one of the producers on the North Slope; it was purchased by that producer in the sale of ARCO. And we've been told publicly - "we" meaning Alaskans - there are problems marketing Alaskan LNG in Asia, by that particular company. The problem, from our perspective, is their competitive project. Number 2466 And one of the questions that I would hope this committee - and other committees in the legislature - will ask the producers: Where are your competitive projects? Why is there a problem marketing Alaska LNG but not LNG from Irian Jaya? Why [are] there problems developing an LNG project from Alaska, where the gas is already being produced? It's 8.5 billion cubic feet of gas a day, where you don't have to drill any new wells, where you don't have to build a new road, camps, airports. Why is that more difficult to market than a project in Irian Jaya, where there are no ports, no roads, no airports, and no producing wells - no infrastructure in the fields? We don't understand. ... We need to find out why the producers on the North Slope are not as excited about taking gas to the Asian markets as they are about taking gas to the Asian markets from some of these competitive projects. It's not in our best interests to have ... these projects move forward. The only project we should care about is the Alaskan project. ... Number 2389 MR. LOWENFELS continued: There have been statements by certain politicians that the Asian markets do not want Alaskan gas, that [YPC] has been trying to put that gas into the marketplace for 20 years, and they don't want it - if they [wanted] it, they would have bought it. This is not true. I have been to the Asian marketplace over 50 times. I've sat across the desk ... for the 14 buyers of LNG - and there are really only 14 buyers who would buy our LNG. They want to buy Alaskan gas. The Koreans have entered into a letter of intent. The Taiwanese have entered into a letter of intent. The Japanese don't enter into letters of intent. But you're going to have the second-biggest buyer of LNG in the world coming here in two weeks, from Tokyo Gas. And I believe he will tell you that they are very interested in buying gas from Alaska. And I believe he is coming because they are concerned about what they are hearing, from certain politicians in the State of Alaska, that the Asian markets don't want our LNG. Number 2333 REPRESENTATIVE WHITAKER asked who "certain politicians" might be. MR. LOWENFELS replied: Well, I think I've heard the governor say that perhaps our gas is not destined for Asia because the Asians don't want it; in fact, I have heard the governor say that. And I don't believe those reports. CHAIR OGAN said: I did a special order on the floor of the House yesterday about the governor's administrative order [188]. ... He stated in there that many Alaskans believe the only viable project ... is the Alaska Highway project. MR. LOWENFELS replied, "Nobody who reads Jeff Lowenfels' garden column believes that." REPRESENTATIVE WHITAKER asked what in the world the motive would be for a statement of that nature, just speculatively. MR. LOWENFELS said that clearly he didn't want to impugn the governor, and that he didn't know why the statements were made. He then said: Perhaps I can answer the question this way: The counsel general of Japan gave a speech a couple of weeks ago. I think it's in your packet, a report on it. And he said 55 percent or 52 percent of your exports in Alaska go to Japan. And in order to maintain exports to Japan, you need to maintain the relationship you have with Japan. You need to foster that relationship. You need to feed that relationship. When you say you don't want to ship us gas, you're not fostering that relationship. When I read that article, I took it as a threat - a threat well placed, and a well-meaning threat. Japan wants to diversify its natural gas supplies. I am the only person from this state who has spent as much time, and as many times, talking to the markets. They know me personally. And I'm not being facetious when I tell you [that] when I go to these meetings, the first thing we say is, "We're so glad you're here. Before we finish this meeting, we want to know what kind of fertilizer to put on our orchids over here." ... We have a relationship with these people. We understand them. They've been over here, many of them. They've looked at the facility locations. They've been up and down the right-of-way. They've been to the North Slope, and they've put their arm around that 60-inch pipe that's putting ... 8.5 billion cubic feet of gas a day in the ground. And they put their arms around that pipe, and to them, it's better than sex, food, sleep, and sushi, and sake. And it's not just the Japanese; it's the Koreans and it's the Taiwanese. ... They're so excited about the opportunity to buy gas from Alaska, but they look at Alaska as dysfunctional. So, it's a very important situation. ... The mayor pointed out, we have a 31- year history of supplying LNG to Asia; we opened that market, and we've never missed a shipment. Now, in the LNG business, if a ship doesn't come in, you don't turn your lights on. We've never missed a shipment. And they appreciate that. And they appreciate the fact that our country invented the word "stability." We have a competitive project. We've got the stable market. And they have told us - they told the governor - they wish to buy gas from Alaska. So, I don't understand where the comments come from. I don't understand. But they're not correct. Number 2127 CHAIR OGAN noted that Mr. [Shigeru] Muraki, the buyer Mr. Lowenfels was talking about from Tokyo Gas Company, will talk to the committee February 15. He said it would be a great honor to have him here. He also said he would like to go to the market himself, because he keeps hearing conflicting reports. REPRESENTATIVE DYSON asked whether Asian leaders are concerned about the movements of the Chinese in the Strait of Malacca. MR. LOWENFELS responded that the biggest concern is piracy in the South China Sea; to his belief, there is not concern about the movements of the Chinese in the Strait of Malacca in terms of LNG shipments. He then emphasized that [YPC's] markets don't include China. Rather, the markets are Japan, Korea, Taiwan, Southcentral Alaska, Southeastern Alaska, Mexico, and, hopefully, California. But they do not include China; whether China wants YPC's gas or not has no bearing whatsoever on whether YPC moves forward. REPRESENTATIVE DYSON asked whether there are significant supplies of LNG moving through the Strait of Malacca. MR. LOWENFELS answered that there are significant supplies, which come from Qatar. "I have not heard that they are concerned about that particular area," he added. He restated that there is concern about piracy, but it doesn't really impact the LNG business for some reason. He noted that [pirates] steal oil tankers, which "can sit there for two years, no problem." However, an LNG tanker that warms up will cause problems. Number 1951 MR. LOWENFELS reiterated that the market is there, and the governor is simply wrong. He then referred to page 22 of the handouts. He said there are two franchises to take gas from the North Slope: ANGTS and TAGS. He expressed concern that people are talking about new projects, then emphasized that neither the markets nor the legislature will deal with a project until it is permitted. MR. LOWENFELS said nobody should be dealing with "over the top" until it is permitted, either. He expressed concern about looking at permitting a new project, and about the idea that the legislature can somehow "wave a magic wand" and change the federal rules, in particular. Alluding to the current 50-50 party split in the U.S. Senate, Mr. Lowenfels said he doesn't believe that Senators from the gas-producing states of Wyoming and Colorado will be very excited about the idea of Alaskan gas coming down to the Lower 48. Number 1827 MR. LOWENFELS repeated that there are two franchises: ANGTS and TAGS. He said ANGTS has some serious problems. Besides the statutory problems he had indicated, [YPC] also foresees some economic problems. [YPC] had used its "pipeline numbers" and the costs for a (indisc.) facility on the North Slope to determine a cost of service for gas from Alaska to the border of the lower 48 states, "which is the price that we have to meet, the border price." MR. LOWENFELS said [YPC] is pretty well convinced that gas cannot be brought economically to the lower 48 states, at 2.5 billion cubic feet of gas; nor do the economics work at 4 billion cubic feet of gas. He referred to charts in the handouts, particularly the one that reads, "Alcan appears uncompetitive in the long term." He noted that demand in the Lower 48 is depicted in bar form; a red line indicates the import price predicted by the U.S. Department of Energy Information Administration, and then there is a cost-of-service calculation. He explained: The cost-of-service numbers are higher than the import-price number. The economics don't work. If you do the same thing with regard to TAGS, recognizing that we've got a slightly different economic situation, we use world-oil-price numbers, our cost of service is below the world-oil-price numbers. In other words, the world oil prices are what are used - there's a (indisc.) of world oil prices in our formula - to determine the LNG cost. Ours works. We don't believe the "overland" project does work. But there's a more important factor. In the lower 48 states, you've got a supply-and-demand situation. ... When you don't have enough gas, the price goes up. When the price goes up, people explore for gas. They find gas? They put it into the system, the price goes down. Number 1733 MR. LOWENFELS said people are exploring for gas in the Lower 48 and Canada faster than ever before, with more drilling rigs than ever. For example, during the past year a new field has been located off the coast of Nova Scotia; that field is predicted to have 50 trillion cubic feet of natural gas. He added, "They are proposing a 2.5-billion-cubic-foot pipeline to go from this field in Nova Scotia into the New York area by 2005." He referred members to two reports [in packets] from last week's Oil & Gas Journal; he said there is a gigantic basin in the Gulf of Mexico "and they're proposing that there's 25 trillion cubic feet of natural gas in that, and it is being drilled like crazy." MR. LOWENFELS noted that packets also contain a study by Gas Research Institute (GRI), a very respected group that does not believe Alaskan gas will be coming down to the lower 48 states; it "supports these numbers that we've listed here." He said: I think the number they use is something like $2.11, is what the price of gas will go back down to. And I heard a gentleman from Phillips indicate that if you don't have [a] $3.55 price for gas - the lower 48 states - the project doesn't work. And we're quite convinced that there is - let me use the phrase that they use on us - more gas closer to the market that [doesn't] require a long pipeline. The lower-48-states markets have many, many, many discoveries to be made, and they're being made as we talk - not so with regard necessarily to the East Asian markets because, once again, we're talking about a situation where you entered into 20- to 25-year contracts. So, if you enter into that contract and someone makes a new discovery someplace else, it doesn't impact you. In the lower 48 states, if somebody makes another discovery and people can get gas cheaper in Chicago, they'll turn their tap off to Alaska and take that other gas. That's not what happens in Asia. [With a] 25-year contract, you're in for 25 years. Number 1580 CHAIR OGAN suggested Mr. Lowenfels' point is that the discussion is about building a pipeline to a commodity market. MR. LOWENFELS affirmed that. REPRESENTATIVE ROKEBERG asked whether the Alcan [project] costs are around $12.1 billion. MR. LOWENFELS responded, "Those are the numbers that we've picked up out of the various publications." In response to a further question, he indicated he doesn't believe it can be financed in the public market. He restated that it is a commodities market, controlled by the New York Mercantile Exchange and so forth; that is the problem. Number 1450 MR. LOWENFELS offered core questions to ask whenever anybody talks about a gas pipeline. First, when someone says "southern route," what does that mean? Second, why do people predicate the construction of a gas pipeline in Alaska upon first building a pipeline to the Lower 48? He explained: We believe this is backwards. The pipeline will be built to Valdez first. And if the market in the lower 48 states can demonstrate that prices can remain high enough for long enough to finance a system -- not only to finance a system but to ensure that people will continue to buy from that system, because it's one thing to finance a system; it's [another whole] thing to have the people of Chicago get a cheaper source of gas all of a sudden. What happened, because of comments made by the governor and the producers, is that everybody's been lulled into the thought that finally we'll build a pipeline down to the lower 48 states, and, as a result of that, we're going to get gas uses in the state of Alaska. And I think you're looking at it backwards. We're going to build a pipeline in the state of Alaska. We're going to provide a tap to take the gas down to the lower 48 states if they ever need it; we're going to size it to be able to handle those supplies down to the lower 48 states if they need it. We're going to try to fill that capacity up as much as we possibly can - maybe come a point in time where we can't take gas down to the lower 48 states, but the market in Asia exists today. It exists at a high enough price to be able to finance our projects with [a] long-term project. People should be talking about the "Alaskan line"; the "highway line" comes second. Obviously, I'm biased, in addition to which you've got to be extremely careful about the whole Alcan situation. ... We call it "the Alcan of worms," for all of the reasons that we've talked about. But when people talk about a highway project, you need to ask them: Are they talking about the Alaska Natural Gas Transportation Act project, at 2.5 billion cubic feet of gas, which is the only one we're allowed to have? Or are they talking about some other project, at 4 billion cubic feet of gas a day? And when people talk about "over the top," you ought to just tell them to shut up. Number 1290 REPRESENTATIVE ROKEBERG referred to ANGTS and the selection of only one route by former President Carter. He asked, "So how could we build a Valdez TAGS route?" He also asked whether there is a separate permit. MR. LOWENFELS said that is an excellent question. Because of ANGTS, there was a provision that "if you could demonstrate there was no domestic need for the gas - that you had excess gas - that you could get permission from the President of the United States and export that gas to other countries." He stated: That is the provision that we complied with. And we have a presidential finding that allows us to export that gas; I think it's Section 9 or Section 12 - and I'll get you the exact numbers. But we have complied with the Alaska Natural Gas Transportation Act. And everybody else is going to have to comply with that Act, as well. MR. LOWENFELS noted that the criteria being used - which he believes to be the right criteria - include competitive economics as well as jobs and contracts for Alaska. Number 1191 REPRESENTATIVE DYSON asked how much it would cost [YPC] per mile, on average, to build a gas pipeline of the necessary size. MR. LOWENFELS answered that he didn't have the "diameter-per- inch/mile" figures. Annually, the Oil & Gas Journal publishes rules of thumb for that, for use in determining the cost of building a spur line, for example. He agreed to get that information and distribute it to the committee. Number 1149 MR. LOWENFELS continued: Again, going to the criteria - competitive economics - we have competitive economics. Jobs and contracts for Alaskans? As far as I'm concerned, the only project that provides the opportunity for 100 percent of the jobs to go to Alaska is this project, TAGS. The Alcan Highway project will be 33 percent in Alaska, and the rest will be in Canada. And if you think the Canadians are going to let 100 percent of those jobs go to Alaskans, then they're different Canadians than I've been dealing with. As far as contracts for Alaskans, the same thing applies: 100 percent in Alaska versus 33 percent in Alaska. As far as gas to Alaskans, our project can provide gas to more Alaskans than any other project that's being proposed. Three out of four Alaskans are running out of gas in Cook Inlet, and the people of Fairbanks and in Valdez pay the highest utility prices in North America. We can provide to gas to them, as well [as], we believe, to Southeastern Alaska. Number 1086 We do not understand why the governor would put forth a policy council on a gas pipeline project and call it the "Alaska Highway policy council." The criteria that he has set out for all of you to follow, and for all Alaskans to accept, are not met by his project, including, I might add, the fourth criteria, which is return to the State of Alaska. The Purvin & Gertz Report demonstrates - and I know it's confidential, but many of you have it - demonstrates that a project to take gas down to Valdez has a higher wellhead return to the State of Alaska than the Alcan Highway project. Period. So, on all four bases in those criteria, the highway project fails when compared to the LNG project. Now, we have a gas policy council that's called a highway gas policy council. I see a stacked deck. And I don't like it. And I don't think Alaskans like it. And I know the people I talk to in Southcentral Alaska who are running out of gas are very concerned about it. And I hope this legislature is very concerned about it, and ... I think you are, based on the comments that ... I've gotten from people. We're talking about the all-Alaska line. We're talking about the all-purpose project, a project that can serve the Asian markets that are there, a project that can serve the lower-48-states markets that you believe are going to be there, without building a 2,100-mile pipeline system that goes to Canada. If you believe there's a market in the lower 48 states, the way to take that gas there is by LNG tanker, not with a pipeline through Canada. MR. LOWENFELS said what the committee is doing, with review and bills, is extremely important. He added that while he appreciates the opportunity to attend caucus meetings, nothing compares to being able to testify in front of a real committee. He apologized for any confusion he may have caused by giving testimony in front of a caucus and said it would not happen again. He offered to come to Juneau to appear in front of the House Special Committee on Oil and Gas as many times as is necessary. Number 0923 CHAIR OGAN asked about the deadline for gas commercialization. He referred to legislation passed two years ago, the so-called stranded gas bill, which allows negotiating payments in lieu of taxes. Chair Ogan likened trying to build a gas pipeline project to building a house on shifting sand. He said that deadline is coming up at the end of June this year; there is no discussion about that deadline and all the work put into the legislation, which would help "your gas pipeline project." He asked, "Are we dealing with this because maybe they're not planning on doing that? ... Is there kind of a way to draw attention ...?" MR. LOWENFELS said he can only speculate. He added: I think there was a great deal of concern that the Act was limited to LNG. It didn't include GTL. There was a lot of politics involved with it, one way or the other. There's a lot of concern, I think, among the administration, the Department of Revenue. ... The people are looking at this as a tax-relieving bill. And so, I think people are all sort of split and going in different directions on this thing, and ... I think we do need to focus on that. If a project needs some stimulus from the State of Alaska, that's the bill that would give it. And you're absolutely right: It expires. Now, we're not against the idea of giving special help to anybody that wants to move forward, and we're not going to fight putting GTL in or doing whatever needs to be done. But that date was a date that was set in order to put some pressure on companies to do a project, and I don't think it's been effective. Number 0691 CHAIR OGAN agreed. He said he planned to get the so-called working group [before the committee] for a report. He said he wanted some specific information, including how much money the state has spent. He asked about the "gas balancing agreement" on the North Slope. MR. LOWENFELS answered: One of the things that we have to ensure is that the individual producers can sell their gas individually, and by that I mean without having the opportunity of one of the other companies vetoing that opportunity. And my understanding is that the Prudhoe Bay unit agreement does not have associated with it a gas balancing agreement. Gas balancing agreements are used in units to enable individual companies to sell their gas. If I want to sell my gas today, and Representative Whitaker is in the unit and he wants to sell his gas in four or five years, the gas balancing agreement provides the opportunity for me to go ahead and do that. Without a gas balancing agreement, if I want to sell my gas today and he doesn't want to sell his gas until 2004, he has the opportunity to veto my opportunity to sell my share of the gas. And if we don't have a gas balancing agreement at Prudhoe Bay - and I haven't been able to locate one - we need to understand what the dynamics are there. Can, for example - and I don't mean to be picking this name - Phillips Petroleum sell its own gas today unless BP and Exxon also agree? And I don't need to go too much deeper. There are all sorts of reasons why one company ... might not want another company to do something. And that's a very serious impediment if, in fact, ... it's true. And I think we need to get some clarification on that. I tried to get it from ... the state, but there's nothing on file, really. I've looked at the unit agreement; it's very complicated. I cannot find a gas balancing agreement. Number 0530 CHAIR OGAN noted that there would be an overview by the working group on February 8. He said the Department of Natural Resources (DNR) would be included in discussions, as well, in order to get some answers regarding a gas balancing agreement or a lack thereof. MR. LOWENFELS added, "I hope I'm wrong. I hope I'm being an alarmist. But I'm not sure I am." Number 0509 CHAIR OGAN referred to taking LNG to the West Coast. He mentioned talk about the possibility of building something in Mexico. He asked whether it is to pipe gas up or to generate electricity. MR. LOWENFELS answered: There's actually a couple of things that we're investigating. First of all, we're looking for LNG facility locations, siting locations, in the entire West Coast - not just in California or Baja, but also in Oregon and Washington. But I do believe that the Alaska Natural Gas Transportation Act causes some potential problems in that regard. So, we've concentrated on looking at bringing gas into Baja. There are some locations in Baja, Mexico, where they would have perfect receiving facility locations, where there is a pipeline being constructed that could take the gas from Baja and bring it into California. The Alaska Natural Gas Transportation Act does not prohibit that, and NAFTA [North American Free Trade Agreement] makes it relatively easy, oddly enough, to be able to transfer gas across the border ... in that way. There are five power plants being built in Baja ... right now, in order to be able to transport electricity across the border into ... California. And, of course, the reason why people are looking at Baja is ... it's more difficult to site a facility in California than it is anyplace in the world. REPRESENTATIVE DYSON suggested that is because of regulatory problems. MR. LOWENFELS concurred. CHAIR OGAN mentioned using a barge. MR. LOWENFELS commented: We have a proposal from a company to put a barge- mounted LNG receiving facility that could be as far out as 20 miles off the shore of California, to be able to bring the gas in. We wouldn't have any siting problems. But we're looking at that quite seriously, because there's a very real opportunity. Again, if you're going to bring gas to the lower 48 states, the way to do it is LNG form, not via pipeline. Number 0328 CHAIR OGAN asked how much can be attributed to gas shortages in California. MR. LOWENFELS answered: I don't think any of it's a gas shortage problem. I mean, there are shortages, but the shortages ... haven't been created by lack of supply; they've been created by a pricing problem that's been created by the California legislature. They're allowed to buy short term, not long term. The regulated rate versus the wholesale rate, it's a very ... internal problem that California has created for itself, and ... it really doesn't have to do with a shortage situation per se. Number 0255 CHAIR OGAN said his primary question to the producers would be, "Why don't they make the gas available to you so you can build a pipeline and sell to the markets ... that you have?" He asked Mr. Lowenfels what his top question would be to them. MR. LOWENFELS responded: First of all, I think we have to be very, very careful not to lump all of the producers together. So I would ask the good tooth fairy to give me three questions, one to ask each of the companies. We tend in this state to believe that we have an oil industry, and that it's a monolithic group. And it really isn't. Each one of the companies has their own perspective on how to commercialize North Slope natural gas. And they're acting the way they're acting in their own interests, as well as, as a result of whatever the Prudhoe Bay Unit agreement requires them to do. ... Obviously, the first question I would ask British Petroleum [BP] is, "You've indicated that there's a problem marketing LNG in Asia. Do those problems also apply to your Irian Jaya project, or is your Irian Jaya project the problem that Alaska faces in marketing its LNG?" To Phillips Petroleum, I would like to ask them what they plan on doing after 2009 with regard to the LNG facility in Kenai, and how they would propose to provide gas for that facility - and as [an] aside, whether they were aware of the fact that we would like to help them in that regard. ... I think I might ask Exxon a similar question to the one that we would ask BP: "You have competing projects in Sakhalin; you have competing projects in Yemen and elsewhere in the South China Seas; you have a competing project in Qatar. Why should we believe that you have our interests at heart with regard to gas commercialization, when you have these competing projects?" ... I think if I had to ask a question to all three of them together, it perhaps would be that gas balancing question. ... I guess the other question that I would ask them, as a group, is what the absolute, rock- bottom price is for which they would sell their gas at the wellhead. TAPE 01-9, SIDE A Number 0001 REPRESENTATIVE DYSON asked what Mr. Lowenfels estimates the net income to the State of Alaska to be for a gas pipeline and so forth, depending on the wellhead price. He mentioned a figure of $100 million a year. MR. LOWENFELS answered, "We have a higher number. Again, it does depend on the wellhead price, but I think we're talking anywhere from $200 to $400 million dollars a year - more in the $400-million-a-year [range]." MR. LOWENFELS, in response to a question from Chair Ogan regarding what kind of volume that would be, said, "For 13.5, and then moving up to 18 (indisc.)." He added that the Purvin & Gertz Report will state that the wellhead return on an LNG project is higher than the wellhead return to the State of Alaska, for a good reason: there is an LNG facility located in Valdez. It isn't just the return, he said. It's the jobs. Having 500 people working on the LNG facility in Valdez is "a very significant economic driver." And people up and down the right-of-way will be using this gas. He said he cannot overemphasize how important it is "that we're running out of gas in Southcentral Alaska." MR. LOWENFELS pointed out that there will be an update of "that ISER [Institute of Social and Economic Research] report" done by [the Anchorage Economic Development Corporation (AEDC)]. He added, "They're taking a look at the question, as well, because they're having trouble attracting businesses ... to the Anchorage area." Number 0187 MR. LEWIS added to Mr. Lowenfels' comments: One of the great benefits of an LNG project is the fact that it only gets built when you have, in hand, long-term contracts. And so, the pricing regimen is generally predictable, based on the pricing index and within a certain range, for landed LNG over 20 years. The same thing, therefore, is true, essentially, of the wellhead and the state's share, as opposed to the commodity market. MR. LOWENFELS said, "Very predictable. Very straight stream of cash." Number 0254 REPRESENTATIVE JOULE referred to Representative Dyson's mention that some producers had said the return to the state would be about $100 million. MR. LOWENFELS clarified, "For their project." REPRESENTATIVE JOULE, noting that Mr. Lowenfels had just estimated between $200 and $400 million, asked whether that is based on the same amount being produced or a different amount. MR. LOWENFELS emphasized that the answers depend on what gas pipeline is being talked about, including its size and how much gas will be put into it. He further stated: When I say 13.5, that's about 2 billion cubic feet of gas a day, and that's about $200-$250 million a year. ... Incidentally, there are a number of studies, in addition to that Purvin & Gertz study, which ... I will make available if the committee wishes to have it. [There] was a Booze & Allen (ph) study done ... in the 1980s, which used the same criteria the governor used and compared the LNG project to the "over the top" project to the Alcan Highway project. It's fascinating reading. ... And there are several of ... those studies that have been done over the years. I don't think we need to do any new studies to determine how much we're going to be making, as a state, for various projects. ... I can't tell you, Representative Joule, what size project they're talking about. I just don't know. But you have to ask that question, as you did - what size project, how much quantity - every time we have this discussion. ... People in Anchorage read the newspaper, and in 250 words, you can't put in all these nuances. And so, we're going to have to come up with a lexicon and a vocabulary so that all Alaskans understand what we're talking about, that when people say "southern route," they're not necessarily talking about a route down to the lower 48 states. Number 0437 CHAIR OGAN asked what the international market pricing structure is right now. He added, "I understand it's sold on a long-term basis. There seems to be, certainly, a price spike in the Lower 48. Is it affecting at all the price in ... the Pacific Rim?" MR. LOWENFELS answered that there is absolutely no relationship between the price of gas in the Lower 48 - which is based upon competition with other gas that comes into the Lower 48 - and the price of gas "in the Asian markets that we seek to serve." He explained: The Asian markets take a "basket" of crude oils - 12 or 15 different crude oils .... And they take a look at that price, and based off of that price, they have a formula that determines what the LNG price is. Now, LNG contracts, because of their long-term nature, are very friendly in many ways. They have a floor and a ceiling. Your buyer works with you. ... They share the pain as well as the benefits, whether the price of oil is high or low. And during the last 20 years, the price of gas, LNG form, has been relatively consistent. ... It's got spikes, no question, because the price of oil has spiked; when the price of oil was down at $10, the price of LNG went down. But there's floors on these contracts, and they're usually private contracts, so that (indisc.--coughing) what those are. Right now, today, Indonesia is selling gas into Asia for somewhere in the vicinity of $5.50. Oddly enough, it's closer to the market; it's selling into Asia for more than the Alaskan gas is going into Asia - it's about $5. It's very interesting. But that's because the markets work with you to make your projects work. Number 0601 CHAIR OGAN requested confirmation that the formula, roughly, is "gas times six equals oil." MR. LOWENFELS answered that it is the old formula, which can be used as a "back of the envelope" formula. However, now some contracts have variations on that formula, with specific floors and ceilings built in. He said he would have to check with [YPC's] expert, John Horn (ph), who is vice chairman and who actually started the LNG business in Asia, regarding whether Chair Ogan's formula still works as a rough estimate. He added, "You raise a very interesting point. We believe we can deliver this gas to the Asian markets for about $3.50." CHAIR OGAN mentioned tariffs and asked what the overall project costs would be. MR. LOWENFELS answered: Those are not numbers that we release, because they have an impact on what the potential wellhead price would be. But during the negotiations to purchase state royalty gas, they would become very transparent. But I think you could maybe work it backwards, if we think we can deliver gas at the same price that Enstar is buying gas for - without violating my oath of "executiveness" or whatever. Number 0755 DUANE HEYMAN, Executive Director, Commonwealth North, testified via teleconference. He noted that Commonwealth North is a statewide public policy organization. Mr. Heyman stated: I wanted to let you know that we have a very active study group that is analyzing the same thing that you're looking at, the commercialization of the North Slope natural gas, [composed] of about 55 volunteers that are very well informed and very active in ... the area. And we're looking at all aspects of the North Slope gas commercialization. The charge to the committee included emphasis on in- state use of the gas, maximum revenue, and maximum short-term and long-term employment. Other things that we're looking at are ... creating an industry in Alaska, workforce issues, Canadian-American issues, and ... public policies that need to be addressed. ... One aspect that we are considering, and looking at very carefully - but I would emphasize, we do not have a position on this yet - is the stranded gas Act. A couple of aspects that we are looking at and we would urge you to consider - again, we don't have a position on it - ... is the public review and comment period, and the judicial review and comment period. The public review currently allows for the 30 days of comment, and the judicial review, 120 days, and we're trying to take a look at that and determine whether that's something that is adequate. We don't have a position, but you might also take a look at that, as well. In addition, something else that we're going to be taking a look at is what we perceive to be the absence of any detailed criteria whatsoever to guide the commissioner's findings, in case there is negotiation on modifying ... any of the compensation to the state. So, I just wanted to mention those are some of the things we are looking at. We hope to have a complete report done in two or three months, but we may have some interim findings in the different (indisc.) such as the stranded gas Act, and we would hope to be able to offer those findings to you as they become available. Number 0946 CHAIR OGAN responded that the committee would be very interested in those findings. He expressed appreciation for Commonwealth North's interest in devoting time to that, which is a valuable service to the state. He then confirmed with Mr. Lowenfels that he would send the documents discussed earlier to the committee aide for distribution to members. [HB 83 was held over.]
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