Legislature(2001 - 2002)
04/04/2001 01:05 PM House RES
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* first hearing in first committee of referral
+ teleconferenced
= bill was previously heard/scheduled
+ teleconferenced
= bill was previously heard/scheduled
HCR 8-NORTH SLOPE NATURAL GAS PIPELINE ROUTING Number 1877 CO-CHAIR MASEK announced that the next order of business would be HOUSE CONCURRENT RESOLUTION NO. 8, Expressing the legislature's opposition to the proposed "northern" or "over- the-top" route for a natural gas pipeline to transport North Slope natural gas reserves to the domestic North American market, and expressing the legislature's support of commercialization of North Slope natural gas for the maximum benefit of the people of the state. [There was a motion to adopt CSHCR 8(O&G) for discussion purposes, but it was already before the committee.] Number 1825 REPRESENTATIVE JIM WHITAKER, Alaska State Legislature, sponsor, told members that HCR 8 is a special-interest resolution for the people of Alaska. Furthermore, the resolution does not compete with SB 164, but stands alone as a resolution that states clearly that "the legislature opposes a so-called over-the-top routing for a natural gas pipeline," and that the legislature will do all that is within its power to encourage natural gas commercialization "in a manner consistent with our maximum benefit constitutional mandate." REPRESENTATIVE WHITAKER gave a PowerPoint presentation, which he explained was the result of consideration, over several years, of the subject of natural gas and what it means to the State of Alaska. [A written copy of the presentation is included in the committee packet.] REPRESENTATIVE WHITAKER showed the first PowerPoint "slide," titled "Natural Gas in Alaska: What does It Mean to the People of the State?" He told the committee that natural gas means $680 million to $4.2 billion to the state per year; significantly lower energy costs for all Alaskans; and major direct and indirect employment opportunities for all Alaskans, "if we demand that our resource be developed in our best interest." REPRESENTATIVE WHITAKER referred to charts provided by BP [Exploration (Alaska) Inc.]. He said between 1985 and 1998 the use of natural gas for home heating had increased substantially, to 70 percent. Even though heating use has decreased from electrical generation, other uses have significantly increased; therefore, use of natural gas has dramatically increased for generating electricity. Gas and oil [uses] are increasing, while coal [use] is declining, but gas is at the top of the "new energy mix." REPRESENTATIVE WHITAKER indicated on a chart that natural gas is "clean and green," and he compared the differential between waste products associated with coal versus gas. Natural gas is also significantly less of an air pollutant, compared to oil and coal. He added, "the demand for natural gas is soaring." REPRESENTATIVE WHITAKER referred to a chart titled "Supply & Demand For North America" that depicts a "demand curve" for natural gas in North America, conservatively projected by the Energy Information Administration. Representative Whitaker indicated a special additional supply expected from Mexico and the Rocky Mountain area, as well as the Mackenzie delta supply and gas from an Alaskan pipeline project. Based upon the best information available today, he concluded that the demand [for natural gas] exceeds the supply. REPRESENTATIVE WHITAKER highlighted another chart entitled "Supply & Demand For The Pacific Rim," showing "contracted supply volume" and "contracted supply extension." He mentioned an Alaskan LNG [liquefied natural gas] project scheduled to go online in 2007 and a Sakhalin LNG project scheduled to go online [by approximately 2004]. Representative Whitaker stated that given a low demand, supply exceeds demand; given a medium demand, "it's very tight"; and given a high demand, demand exceeds supply. He said he was not nearly as comfortable with this chart as the previous one; however, he stated his confidence that "we'll raise supply to this level." Number 1378 REPRESENTATIVE CHENAULT asked Representative Whitaker if the number "70" on the chart stood for metric tons or billion cubic feet. REPRESENTATIVE WHITAKER confirmed that it was in metric tons. He returned to the PowerPoint and introduced the next category entitled "The World Market Dynamic Reality: Supply Will Restrict Demand For The Foreseeable Future," which means that prices will remain significantly higher than they have been in the past. He said, "Given that Alaska's North Slope has the largest undeveloped reserve of natural gas in North America, we Alaskans, and particularly we legislators, need to ask ourselves, 'how do we take advantage of that situation?'" Representative Whitaker said the simple answer to that question is that we [Alaskans] take our gas to market. REPRESENTATIVE WHITAKER outlined routing options shown on individual maps: the "over-the-top" route, which he described as undesirable; the [governor's preferred] "highway" route; the TAGS [Trans-Alaska Gas System] route, touted by Jeff Lowenfels [of Yukon Pacific Corporation]; and the "hub" approach. REPRESENTATIVE WHITAKER referred to a projection showing the state constitution, Article VIII, Section 2, which reads, "The legislature shall provide for the utilization, development, and conservation of all natural resources belonging to the State, including land and waters, for the maximum benefit of its people." He said that the constitution makes it clear what the responsibility of the legislature is. REPRESENTATIVE WHITAKER outlined his ideas for attaining the maximum benefit and best interest of Alaska. He emphasized the need for maximum market exposure, saying an overland route alone would exclude markets throughout the world, specifically Asia and probably the U.S. West Coast. By connecting to multiple markets, "we stabilize market opportunities for this very ... valuable commodity resource." He noted that the "over-the-top" and "Foothills/highway" routes exclude Asia, and the TAGS route excludes mid-America; therefore, he stated that the hub approach provides maximum market exposure. REPRESENTATIVE WHITAKER next discussed how to obtain maximum dollars to the state. He specified two options for financing: public and private. Public financing, he explained, will exempt the financing component from federal taxes, "which significantly improves the economics of an Alaskan gas project and increases the return to the state." Additionally, Representative Whitaker estimated that the return on financing a project this size should be "8-12 percent of capital costs per year, for 30 years," which would be a significant return to the state. REPRESENTATIVE WHITAKER turned to the issue of public versus private ownership. He told the committee that under public ownership, besides being exempt from all federal income taxes, a state-owned pipeline would give a greater netback to the state. Furthermore, the state would not pay a tariff for royalty gas. In comparison, under private ownership the returns on a project would be much less to the state because of taxes paid to the federal government and a tariff paid on royalty gas to "big oil." Representative Whitaker clarified that he is not an enemy of "big oil," stating that he lived in Alaska before [those companies] were here and that his options for prosperity and for opportunity were significantly less than they are today. He continued: What's the difference between public and private ownership? We've made an assumption. That assumption is a six bcf [billion cubic feet] per day project. ... Given that, and given a rather conservative gas price at $2.59 per million Btu(s), which is roughly equivalent to 1,000 cubic feet, in mid-America -- this is the Purvin & Gertz model. We didn't change it; we used all their assumptions. What we did insert was a six bcf project, [with] four ... bcf per day going to mid-America [and] two bcf per day as an "LNG" option. REPRESENTATIVE WHITAKER said assuming a price of $2.59 per million Btu(s), the state would receive $1.3 billion under public ownership and only $680 million under private ownership. He indicated that the charts also gave assumptions of gas prices at $4.50 and $8.00. Currently the price is $5.34. Representative Whitaker noted that the return to the state would be a fair one. He added, "This is a huge commodity resource, the power of which should never be minimized." Number 0765 REPRESENTATIVE STEVENS asked Representative Whitaker to explain what he meant by "tariff." REPRESENTATIVE WHITAKER replied that the tariff is a charge assessed to those who use the facility. In response to follow- up questions, he explained: The owners of the current TAPS [Trans-Alaska Pipeline System] are those [who] assess the tariff. And that is charged to themselves, as well as other users, including the state. As the current owners of the existing TAPS line have the right and the opportunity to charge a tariff - which is essentially a return on investment - so too would the state ... have a right and an opportunity to charge a transportation tariff [on a state-owned gas pipeline]. REPRESENTATIVE WHITAKER returned to his discussion, detailing "maximum in-state usage opportunities" that increase in relation to two factors: the number of population centers the pipeline crosses, and the number of miles of pipe in the state. He indicated the "over-the-top" route does not include those two factors; the "highway" route is "close"; the TAGS route is "closer"; and the hub route works the best. Number 0585 REPRESENTATIVE WHITAKER addressed the next PowerPoint idea: "Maximum Competition For Gas Production," which he emphasized was a key criterion. He stated: Given that a competitor cannot have equal access to a gas pipeline, given that that competitor is not receiving the benefit of a tariff that an owner would, that competitor is at a competitive disadvantage. And we find that to be true with the current TAPS line. We should not allow that to happen again. There was a time when we were producing, on the North Slope, 2.1 million barrels of oil [per day]. Today we have three producers and they produce 1.1 million barrels per day. A number of factors relate to that; certainly depletion is one of those factors. But I am nearly emphatic in my statement that a significant part is played in the production decline on the North Slope that relates directly to the number of competitors doing business on the North Slope. REPRESENTATIVE WHITAKER emphasized that [Alaska] should strive to have the maximum number of competitors for gas on the North Slope, which it cannot do unless there is a publicly owned pipeline, which ensures that no producer will be precluded from having equal access at an equal cost. Number 0447 REPRESENTATIVE WHITAKER turned attention to "Maximum Job Opportunities For Alaskans," calling it a "no-brainer" that it is the state's job to ensure that both short-term and long-term jobs associated with the gas pipeline project are provided to Alaskans. REPRESENTATIVE WHITAKER concluded his PowerPoint presentation by summarizing the reasons that the hub approach, publicly financed and owned, yet privately operated, would be the best choice and would serve the best interests of all Alaskans. He told the committee that there is substantial basis to what had been discussed: sound economics, and a sound understanding of the market. He added, "It is very clear that Alaska's natural gas resource is substantially larger than we might have thought at first glance." REPRESENTATIVE WHITAKER emphasized that the resolution makes two statements: First, there should be no "over-the-top" routing. And second, the legislature should acknowledge its responsibility to ensure that this resource goes to market "in a manner consistent with the best interest of the people of the state of Alaska." Number 0144 CO-CHAIR MASEK asked whether Representative Whitaker had plans to distribute the resolution to any groups in particular. REPRESENTATIVE WHITAKER answered that he hadn't thought of a distribution list, but would certainly entertain any thoughts the committee might have in regard to that, in the form of a committee substitute. TAPE 01-30, SIDE A Number 0053 REPRESENTATIVE WHITAKER, in response to a question by Representative Stevens, said in "our" model an assumption was made that the cost of a pipeline project would be financed by the permanent fund. He said it is beyond him why "we" would borrow money when we have a substantial amount to begin with; he doesn't think [the state] could make a better investment, both for infrastructure or on investment return. The return from the permanent fund this past year was "less than sterling," which is to be expected during a market downturn, he commented. REPRESENTATIVE WHITAKER explained that this is a long-term investment, guaranteeing a return somewhere in the neighborhood of 8 to 12 percent, which outperforms the permanent fund historically. The risk is that the market would "go away," but Representative Whitaker said he didn't think that would happen. He reiterated that the assumption is that the permanent fund would finance the project. Number 0211 MICHAEL J. HURLEY, Government Relations, North American Natural Gas Pipeline Group, came forward to testify as follows: As you are aware, the three companies participating in the group (BP, Exxon/Mobil, and Phillips) have been working diligently to develop an economically viable project to commercialize North Slope natural gas by pipeline through Canada to the Lower 48 market. And in doing that, it is incumbent on us to fully consider the options that could help us accomplish that goal. Indeed, the Federal Energy Regulatory Commission [FERC], before it will issue a certificate of public convenience and necessity, requires us to analyze alternative pipeline route options as part of the application process. This project has the potential to be the largest energy project in North America, and will require capital investments in the billions of dollars. These investment decisions cannot be taken lightly, and must be made with the confidence that can only be gained by a thorough evaluation of the alternatives, and an understanding of their relative strengths, weaknesses, risks, and rewards. Such an approach is fundamental to good business decision-making. Our efforts have been focused on creating and understanding opportunities, not prematurely discarding them. This resolution seems to suggest we do the latter. We believe that legislative action which recommends shutting down options before they are fully understood limits dialog and interferes with the fundamental dynamics of a free-market economy. It cannot be forgotten that any Alaskan gas project, whether it's LNG, GTL [gas-to-liquids] or pipeline technology, must be able to deliver products to the market at a competitive cost in order to succeed. There are many other competing sources of supply, and buyers will be going elsewhere if a project fails to deliver in this regard. If either Alaska project advances, the benefits to the state and its citizens and businesses will be substantial, and will make a significant contribution to Alaska's economic future. Finally, the work we are undertaking this year will yield information that we believe will be necessary for reasoned decision making. We have been listening to the views and concerns of the Alaska legislature and Alaska's citizens, and we will be evaluating alternatives on the basis of seven criteria: overall project economics, Alaskan access to gas, jobs for Alaskans, revenues to the state, safety, environmental protection, and project timing. MR. HURLEY said [his group] doesn't feel that it has enough information to make a "route" decision based on those criteria, which is the reason for its aggressive work program. The interest of commercializing North Slope gas is best served by creating, not eliminating, choices. [The group] expects there will be many opportunities in the future for legislative guidance and action. Number 0565 REPRESENTATIVE SCALZI asked if [the group has put] a value on what benefits Alaska might utilize in terms of production of gas in the state and the [sustainability of the] workforce when assessing choices. MR. HURLEY said that is part of the seven criteria; [the group] understands that those are interests to the citizens and the legislature of the state. [The group] understands what those things mean to the parties involved, and [they] are taken into account. For any kind of analysis one does on a project of this magnitude, there is always a balance of benefits. MR. HURLEY noted that those balances need to be made in an open discussion between industry and the stakeholders in the project. This will include the State of Alaska, Canada, some of the Lower 48 states that the pipeline will pass through, as well as the relevant federal [agencies]. All will have a stake in how this decision ultimately gets made; [the group] wants to try to recognize the interests of all parties involved. Number 0730 REPRESENTATIVE SCALZI asked if an environmental impact statement (EIS) is going to be done to quantify a dollar value to these things, or whether there will just be the "generic tradeoff" language. MR. HURLEY explained that [the group] fully expects that an EIS will be done during this process, as well as other socioeconomic studies that are required as part of the Federal Energy Regulatory Commission (FERC) application process. He said that is part of the program [the group] is working on during this year, which needs to be concluded before the applications go in. Number 0783 REPRESENTATIVE FATE referred to FERC's issuance of a certificate. He asked if the discussion on this point referred to the northern or "over-the-top route," or to a route that FERC had already issued certificates on, the southern route down the pipeline. MR. HURLEY responded that the "over-the-top" route would need a new certificate. It is [the group's] expectation that the southern route may end up getting a new certificate, too, but [the group] doesn't know that. Right now, there is a lot that FERC is unsure of, according to some of FERC's recent documents. What [the group] is doing right now is to push forward as if these are going to be "two green options," because [the group] doesn't want to wait for that to be resolved before starting work. MR. HURLEY said in either case, whether using existing certificates or new ones, he believes a lot of the work that will be done by the group during the year will be necessary. A lot of the new environmental work and socioeconomic will need to be done; those kinds of things aren't under an existing certificate. Number 0926 REPRESENTATIVE FATE referred to the seven criteria used for evaluation. He questioned the one that says, "Alaskans' access to gas" and asked if the intent was for local markets. MR. HURLEY responded affirmatively. He said "we" understand the need and interest in having gas for local consumption in the state. REPRESENTATIVE FATE said he didn't see anywhere where [the group] had taken into account the political awareness or the Alaska constitutional mandate, which was seen on the PowerPoint presentation. He asked if it would be among the points that [the group] uses as criteria. MR. HURLEY replied that he wouldn't put it that way, but many things inherent in the constitutional mandate are things [the group] is looking at in the seven points. The constitutional mandate is a mandate to the legislature; [the group] recognizes the things [the legislature] is interested in, and is taking those into account within the seven points. Number 1065 REPRESENTATIVE McGUIRE said she sees in Mr. Hurley's testimony that FERC requires an analysis of multiple options before issuing a certificate. She asked, "Are you making the assumption that anything in this resolution that the legislature passes ... would preclude you from still analyzing those other options." MR. HURLEY replied no. He explained that a resolution is a statement of preference, and said the legislature absolutely has a right to have a preference. [The North American Natural Gas Pipeline Group] would suggest [to the legislature] that it may be premature to have a preference in that there is a lot of information currently being developed. He noted that [the group] is spending $75 million this year developing information about the alternatives, which will provide more information in order to make a better decision. Number 1189 REPRESENTATIVE STEVENS asked Mr. Hurley if he disagrees with any of the figures that Representative Whitaker used in his presentation. MR. HURLEY responded that he [would disagree]. However, he is not prepared to talk about the facts and figures in detail. He stated that he is suggesting that there is additional information that will be appropriate for [the legislature] to think about before making a decision on a preference. REPRESENTATIVE STEVENS remarked that he assumes Mr. Hurley is not objecting to the figures that were used. MR. HURLEY replied that he does disagree with some of them and has some questions; one example is with respect to the tariff number that was asked about earlier. His understanding of tariffs, having done them for some of the North Slope pipeline, is that they are primarily made up of two components: cost and rate of return. He noted that he has not had chance to look at Representative Whitaker's numbers; therefore, he doesn't know what they represent. REPRESENTATIVE KERTTULA commented that she didn't understand how the tariffs worked either. Number 1399 CO-CHAIR MASEK made a motion to adopt a conceptual amendment, at the bottom of the resolution, adding, "copies to be sent to President Bush, Secretary of Interior Gail Norton, the Governor, U.S. Congress, and other major development companies." Number 1500 REPRESENTATIVE FATE made a motion to move CSHCR 8(O&G), as amended, out of committee with individual recommendations and attached fiscal note. There being no objection, CSHCR 8(RES) moved from the House Resources Standing Committee.
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