Legislature(2007 - 2008)SENATE FINANCE 532
07/22/2008 01:00 PM Senate SENATE SPECIAL COMMITTEE ON ENERGY
| Audio | Topic |
|---|---|
| Start | |
| SB3001|| HB3001 | |
| Adjourn |
* first hearing in first committee of referral
+ teleconferenced
= bill was previously heard/scheduled
+ teleconferenced
= bill was previously heard/scheduled
| += | SB3001 | TELECONFERENCED | |
| + | HB3001 | TELECONFERENCED | |
SB 3001-APPROVING AGIA LICENSE
CHAIR HUGGINS brought SB 3001 before the committee. [This
contains discussion of HB 3001(efd)fld) that is pending
referral.]
BILL WALKER, Walker/Levek, Alaska Gasline Port Authority,
Anchorage, thanked the committee for the opportunity to respond
to issues that had been raised about the Port Authority (PA)
liquefied natural gas (LNG) project. He said the presentation
would focus on two issues, the export license and project
economics.
CRAIG RICHARDS, Walker/Levek, Attorney, Alaska Gasline Port
Authority, Anchorage, began the presentation on page 3 of the
document titled "Alaska Gasline Port Authority, Presentation to
Alaska State Senate, July 22, 2008, Juneau, Alaska." He said
there were two federal laws relevant to the export of North
Slope gas. The first was the Alaska Natural Gas Transportation
Act (ANGTA) of 1977. He explained ANGTA required a presidential
finding determining price, quality, or quantity of gas to U.S.
consumers would not be diminished before exporting North Slope
gas to any country other than Canada or Mexico. He said
Department of Energy (DOE) assumed the same findings in their
analyses as well.
MR. RICHARDS said the second relevant law was in the Natural Gas
Act (NGA), which applied to all gas exports. He said the NGA
specified the DOE would conduct a public interest analysis
before gas was exported. However, he added, for exports to
countries where a free trade agreement existed, such as Mexico
and Canada, export was automatically granted. He said Alaska was
the only place that had sought approval to export gas, the Kenai
facility and Yukon Pacific Corporation (YPC), and a fairly large
body of law relating to DOE's view on exporting gas existed
because of YPC. He added DOE referred to import regulations for
guidance on exporting because "a decent size" body of law
existed. He said the Kenai facility had been authorized since
1969, with seven or eight export license renewals or expansions
in the last forty years.
1:17:46 PM
CHAIR HUGGINS asked if it was feasible to partner with the Kenai
facility and use the license as the umbrella for two different
locations.
MR. RICHARDS said DOE's expansion analysis was not materially
different, so it probably was feasible but would go through the
same analysis as a new license application.
1:18:23 PM
SENATOR WIELECHOWSKI asked for a copy of the 12-page legal
analysis.
MR. RICHARDS said he would provide a copy.
SENATOR ELTON asked for a more detailed explanation of the 1990
DOE authorization to YPC. He asked if the YPC commitment was
transferrable or if a second decision would be required.
MR. RICHARDS replied a second decision would be required. He
said when the license was issued to YPC, DOE wanted to make sure
the export would not affect the American consumer. He added a
precondition to export was that YPC had to file all the gas sale
and transportation contracts with DOE for review.
SENATOR ELTON asked if gas could be shipped to foreign markets
without a reauthorization by the DOE.
MR. RICHARDS answered the second step was DOE approval of gas
sale contracts rather than a reauthorization.
SENATOR WAGONER said he given a copy of the export license
during a meeting he had with DOE and was told an updated
environmental impact statement would be necessary for the
project. Additionally, he said, Senator Stevens doubted Congress
would allow North Slope gas exports out of the continental
United States.
MR. WALKER thought Senator Wagoner's information was accurate.
He reiterated there were two requirements for shipping; giving
notice of the first shipment and submitting the contracts and
purchase agreements. He said they look forward to meeting with
the administration and federal delegation once their project is
ready.
MR. RICHARDS said they were confident DOE would authorize
shipments because their analysis had not materially changed
since 1989. He added there was no way to know what Congress may
change in the future and it would have to be addressed at the
time.
SENATOR WIELECHOWSKI asked if Congress could legally prevent
Alaska from exporting gas to Asia.
MR. RICHARDS answered yes. He said Congress gave the President
unilateral authority in 2005 to prevent the export of any type
of energy source such as coal, natural gas, oil, etc. A list of
export prohibitions was available on the DOE website, he added.
SENATOR WIELECHOWSKI asked if Congress could choose a country to
receive exports.
MR. RICHARDS said he was not an expert on that area of the law,
but as far as he knew, yes.
SENATOR WIELECHOWSKI asked if there were due process or
constitutional arguments for that kind of decision.
MR. RICHARDS replied he was not aware of any, but had not
researched that particular question.
SENATOR WAGONER said Congress already prohibited exportation of
crude oil and the only place he knew it was permitted was out of
Cook Inlet.
1:28:09 PM
SENATOR DYSON said he agreed with Senator Stevens' assessment
that exports to the Pacific Rim would not be approved, at least
in the short term. He believed that would be a huge hurdle to
get across.
1:30:14 PM
MR. WALKER said there was an initial prohibition on oil exports
out of Valdez that was lifted shortly after Mr. Hickle became
governor. He reminded the body that the TAPS pipeline required
an Act of Congress, and certain conditions were necessary for
approval. He felt the gas line could be distinguished from the
oil line and it would not be necessary to seek an Act of
Congress.
CHAIR HUGGINS asked for an overview of how the Port Authority
operated with other companies.
MR. WALKER said the PA began in 1999 and began work on a Y-line
with Bechtel Corporation in 2000. He said they worked with
Sempra who had the only LNG receiving terminal on the West
Coast, and were currently negotiating with Mitsubishi
Corporation.
1:34:02 PM
MR. RICHARDS said deregulation of oil exports that began in the
late 1970's currently drove DOE analysis and decision making.
Referring to page 4, he said DOE wanted to minimize federal
involvement and allow market forces to define energy markets.
SENATOR ELTON said TransCanada (TC) was committed to building a
line to Valdez if owners of the gas were willing to commit it.
He assumed that commitment would be predicated on market factors
such as Asian markets, how long contracts might be, and prices.
He asked if those kinds of market forces were compelling to the
PA.
Mr. WALKER said they were encouraged by what they heard from TC
concerning open seasons, but still trying to "increase our
comfort level" on the issue. He said they believe the market
forces are such that a shipment of gas to Valdez for a LNG
project would be successful.
1:38:36 PM
SENATOR ELTON said it might be easier for the PA to work under
the AGIA umbrella but nothing prohibited them from arranging
financing for a separate project.
MR. WALKER agreed. His concern was the PA would not be able to
put together a project and receive the kinds of advantages,
benefits, and incentives that were available under AGIA and a
relationship with the State of Alaska.
MR. RICHARDS added the exclusivity provisions of AGIA prevented
the state from cutting a deal that made another project viable
if there were particular tax inducements or other things the
project sponsor wanted.
MR. RICHARDS described the DOE public interest analysis outlined
on page 5 of the report.
1:40:23 PM
CHAIR HUGGINS announced Senators Ellis, Therriault, Dyson, and
Representative Harris were present.
SENATOR THOMAS said he was concerned about what DOE or Congress
might do if a dramatic change occurred sometime during the
course of the license period.
MR. RICHARDS said in the past DOE had never inserted re-open
clauses in export licenses, but probably could do that if they
wanted to. He added, the President had the power at any time to
stop exports.
SENATOR THOMAS said if that were the case it would mean there
was a market in the U.S. that was not being met. He said the
flow of gas would not stop, just be directed to a different
place.
Mr. RICHARDS agreed. He said he could not imagine exports being
prohibited unless there was some sort of national crisis.
1:43:21 PM
SENATOR WIELECHOWSKI asked if the Canadian government had
similar authority to prohibit the import or export of gas.
MR. RICHARDS said he did not know but he thought the U.S. had a
free trade agreement with Canada.
CHAIR HUGGINS said work was continuing on arranging meetings
with Canadian representatives to answer those kinds of
questions.
MR. RICHARDS continued explaining the DOE public interest
analysis shown on page 5 of the report. He said DOE had
addressed many of the public interest issues discussed that day
for the YPC and Kenai licenses.
MR. RICHARDS continued on to page 6 of the report. He said DOE
took a very broad view of potential domestic supply. He said in
1989, TC argued for DOE to limit their view of domestic reserves
available. Instead, DOE said they expected the historical trail
of new discoveries being found to continue, and included an
allowance for nonconventional gas sources, such as tight sand,
shale, coal seams, and enhanced recovery gas. In 1989, he said,
DOE found there was enough domestic gas and imports weren't
necessary so export of gas from Alaska was not an issue. He
thought today it was unclear where DOE would land.
SENATOR ELTON asked how much gas was imported now compared to
1989.
MR. RICHARDS said he did not know.
MR. WALKER said they did not have import figures. Instead they
had focused on new gas finds being developed. He said according
to forecasts there will not be a gas shortage in the Lower-48 in
the near to distant future and DOE would take that into
consideration.
1:48:11 PM
MR. RICHARDS continued to page 7 of the report. He said the
second question DOE would ask was if an alternative source of
supply was available if there was not sufficient domestic supply
to meet projected demand over the term of the license. He said
DOE thought it was unduly simplistic to conclude that export
necessarily meant less gas would be available to the Lower-48.
He also believed that even if that were the case, alternative
supplies were available.
SENATOR WAGONER asked what the current LNG receiving capability
was in the U.S.
RADOSLAV SHIPKOFF, Director, Greengate LLC, Washington, D.C.,
said recently the ability of the U.S. to receive LNG had
expanded. He said that was primarily because prices in the
Lower-48 which was well supplied with gas, had not been as
attractive as prices in Asia and Europe.
SENATOR WAGONER asked what the excess receiving capacity was.
MR. SHIPKOFF said he did not know the exact number, but thought
most of the capacity was not being utilized.
MR. RICHARDS said he had seen information on the FERC website
and thought the number was 22 bcf.
CHAIR HUGGINS said he thought FERC would likely agree with the
information presented.
1:52:33 PM
MR. RICHARDS said they felt strongly that even if DOE determined
not enough domestic supply was available to meet demand over the
projected term of the license they would find there was an
alternative supply available.
MR. RICHARDS discussed some miscellaneous issues that would be
considered. He said environmental issues would not really affect
an export license and Alaska's interests weighed in favor of
granting a license.
MR. RICHARDS moved on to page 8 of the report. He said the
overwhelming emphasis was on free trade in energy and
consequently they had no reason to believe free markets would
not be allowed to work.
MR. RICHARDS also mentioned the DOE considers the impact of
balance of payments and trade deficits to various countries from
export. In the past, he said, national leaders felt exporting
Alaska's gas helped offset some trade imbalances.
1:54:33 PM
MR. RICHARDS continued to page 9 of the report and discussed the
impact Alaska's gas sales would have on U.S. prices. In the YPC
decision, DOE looked at whether or not exporting Alaska's gas
would lower prices to U.S. consumers. They concluded, he said,
the studies of Alaska North Slope (ANS) gas availability and
economic comparisons between projects were irrelevant. He said
DOE did look at whether there was an alternative supply
available that could be delivered at expected prices, and if so
then ANS gas would not have an impact on Lower-48 prices. He
added that by 2030 non-conventional gas will supply
approximately half of all U.S. gas and Alaska's gas was not "the
tail that wags the dog" on energy prices in the Lower-48.
MR. RICHARDS went on to page 10 of the report. He said in DOE's
opinion the market would decide what project eventually was
developed and where the gas would go. He said any development
of North Slope gas was a positive thing because it would
encourage assessment of the North Slope potential. He added DOE
viewed opening up the basin via a LNG project as a positive
thing regardless if it went before or after a Canadian project.
MR. RICHARDS concluded with page 11 of the report and said the
PA believed the YPC license would be honored after the
preconditions were met.
1:58:28 PM
SENATOR DYSON asked if Sempra was back on board with the PA and
if that was tied to their receiving plant in Northern Mexico.
MR. WALKER said that was a possibility though the plant was not
tied to their participation. Since Sempra had the only receiving
terminal he did not think it was a stretch to conclude there
could be a relationship between Alaska gas and that terminal.
SENATOR DYSON asked if gas shipped to an LNG receiving station
in Northern Mexico that then ships to the California system was
still regulated by the Jones Act.
MR. WALKER answered yes and they had considered that by teaming
with BGT, who owned eight U.S. built Jones Act compliant ships.
2:00:26 PM
MR. SHIPKOFF said based on today's markets, 100% of North Slope
liquefied gas would go contractually to East Asian markets
because the price was the most attractive. He added it was
possible some portion of that gas could be delivered to the West
Coast via the Costa Azul terminal because of swapping.
SENATOR THOMAS asked what was meant by non-conventional gas.
MR. RICHARDS said it was a DOE term.
MR. SHIPKOFF said shale gas, coal, methane, were considered non-
conventional gases.
SENATOR THOMAS clarified that synthetic gasoline or gas from
coal gasification type projects did not fall under the
definition of non-conventional.
MR. SHIPKOFF said it was not primarily used in that context.
SENATOR THOMAS asked if the problems that prevented the PA from
submitting their proposal under the AGIA timeframe had been
addressed.
MR. WALKER answered yes.
SENATOR THOMAS asked if the project was the same as originally
proposed with the exception of the addition of Mitsubishi as a
partner.
MR. WALKER answered yes with the addition of Mitsubishi and
Sempra.
2:03:41 PM
SENATOR WAGONER said Conoco Phillips' current contract for
Nikiski LNG was tied to the cost of a barrel of oil. He asked if
that was traditional with the Asian markets and what the long
term contracts with them might be.
MR. SHIPKOFF said the short answer was yes the Asian market
prices for LNG were directly tied contractually to oil prices.
CHAIR HUGGINS announced the arrival of Senator Green.
2:04:49 PM
CHAIR HUGGINS called a brief recess.
2:20:48 PM
CHAIR HUGGINS called the meeting back to order.
2:20:58 PM
MR. WALKER recalled the battle for statehood when Alaska was
granted 303 million acres from the federal government and told
to take care of itself, with the restriction that mineral rights
to the land could not be sold. He said that was what they were
trying to do with natural gas.
CHAIR HUGGINS said he agreed with Mr. Walker's interpretation.
2:23:47 PM
MR. SHIPKOFF continued with the presentation addressing
economics of the LNG projects. He said the PA believed the LNG
project provided the most attractive option from an economic
standpoint to monetize North Slope gas. The administration, he
said, reached the opposite conclusion, that a pipeline to Canada
was the most attractive option.
CHAIR HUGGINS reminded committee members that a "commitment to
evaluate LNG project options as part of the AGIA evaluation
process" came up in January. He said LNG was a feasible project
concept and many Alaskans supported it.
SENATOR WIELECHOWSKI asked if the PA had any reason to doubt
TransCanada's commitment to build an Alaska gas line if the
demand existed.
MR. WALKER said there was very little in the application that
supported that pledge. Though he appreciated the statements made
by Mr. Palmer he was uneasy with the level of commitment and
AGIA process.
2:28:04 PM
MR. SHIPKOFF said the committee had received an analysis from
Econ One Research, Inc., which showed a range of different
results under a range of different assumptions. He wanted to
discuss factors which caused the analysis to differ and what was
behind the discrepancies in the different conclusions. Referring
to page 13 of the report Mr. Shipkoff said assumptions were key
in drawing any conclusions from an economic analysis and
determined the outcome.
MR. SHIPKOFF said netback pricing was a function of the price
achievable in the target market, and the cost of transporting
the gas from its production point to that market. He said if
different assumptions were used for pricing and for the cost of
getting the gas to the market, clearly different conclusions
would be reached as to the relative attractiveness of two
separate monetization options.
MR. SHIPKOFF said the principle elements that determined the
cost of transporting the gas to the markets were capital costs
of the project economics. He said they had different assumptions
about what prices would be achieved between the two options; the
Asian LNG market in the PA case and the Alberta gas markets in
the pipeline case.
MR. SHIPKOFF reviewed the proposed PA project shown on page 14
of the report. Their project proposed a delivery of 2.7 bcf to
the LNG plant in Valdez not 4.3 bcf which was provided in
another analysis. He did not believe 4.3 bcf was a viable
initial option, but it might be possible for future expansion.
MR. SHIPKOFF said page 15 of their report showed a comparison of
assumptions used by the PA and the administration. He said the
discrepancy between capital costs was the key factor causing
different results.
2:32:25 PM
CHAIR HUGGINS asked if the PA and the administration discussed
their differences during the AGIA process.
MR WALKER answered no. He said the PA proposed that Mr. Shipkoff
and the Bechtel analysis be included in the process but they
were not allowed to do so. He added the PA requested a copy of
the model used by the administration but it was not provided.
CHAIR HUGGINS clarified that the PA did not get a copy of the
administration's model when it was requested.
MR. WALKER answered no they did not.
MR. SHIPKOFF added that in his experience whenever there were
significant disagreements the best way to make sure all parties
were on the same page was to have the engineers on both sides
talk to each other. He said it was unfortunate it did not
happen in this case.
MR. SHIPKOFF continued to page 16 of the report, addressing the
difference in methodologies employed to estimate the costs of
the LNG plant used in the PA analysis and the administration's
analysis. He said the Bechtel estimate was developed as a bottom
up estimate, and was updated in 2007 after three months of
extensive review from nearly ten years of previous work.
2:34:46 PM
SENATOR THOMAS referring to page 14 of the report, asked if they
assumed the gas conditioning plant (GCP) would be built by
others which was why it was not included in the costs on page
15.
MR. SHIPKOFF said that was correct.
SENATOR THOMAS asked if the estimate was about $5 billion
dollars.
MR. SHIPKOFF said he believed the Bechtel estimate for the GCP
was around $3.5 billion. However, he said, when they compared
netback results for the two projects the PC assumed the
administration's cost estimate for the GCP because it was
higher.
SENATOR THOMAS said some people believed a conditioning plant
may not necessarily be needed and existing facilities at Prudhoe
may be capable of being hooked up to a line without as much
conditioning taking place.
MR. SHIPKOFF said CO2 would definitely need to be extracted on
the North Slope. He said he did not know the technical
capability of existing facilities and it was something the
engineers would need to address. He said there will be a
discussion about how to optimize the technical design in a way
that maximizes any synergies that might exist from existing
infrastructure, but in the absence of such information a
conservative assumption was made that no existing infrastructure
would be used. In reality, he said, there would be ways to
integrate the project with existing infrastructure.
2:37:52 PM
CHAIR HUGGINS clarified that a GCP was not included in either
proposal.
MR. SHIPKOFF said that was correct. His understanding was TC
also assumed a conditioning plant would be outside the scope of
their proposal.
CHAIR HUGGINS said TC claimed they would build a plant if no one
else agreed to.
2:38:27 PM
SENATOR WAGONER said he did not know of any project where
companies were not responsible for sending pipeline ready gas.
He said if producers were going to sell their gas it had to be
treated before they delivered it to the pipeline.
CHAIR HUGGINS said there were some people that might disagree.
SENATOR WAGONER said the industry standard was to deliver gas
with the CO2 and impurities removed. He thought it was a waste
of time to continue to discuss gas treatment plants.
2:39:52 PM
MR. SHIPKOFF continued with the information presented on page 16
of the report. He said his understanding was the administration
took a "top down" approach to develop LNG plant capital cost
estimates and used data from LNG projects from around the world.
He said this approach had limitations because cross project
comparisons can be very difficult. He pointed out LNG plants
were not all the same (page 17) and there were many differences
associated with the location, the scope, the feed gas
composition, and other unique project specific factors that had
to be taken into account.
MR. SHIPKOFF, referring to page 18 of the report, said feed gas
pressure was a unique feature of this project. He said Bechtel
engineers believe savings of 30% of the cost of the LNG plant
could occur from such high pressure feed gas. He added ambient
conditions and location specific factors play a significant role
in the project.
MR. SHIKOFF said even if location and project specific factors
were taken into account there still would be significant
variation from project to project. He said another factor
affecting capital costs was there were not enough qualified
engineering firms to do all the work being requested.
MR. SHIPKOFF was not suggesting the approach used by the
administration's technical consultants was incorrect, but the
limitations should be recognized. He said mixing two different
methodologies when analyzing the pipeline and LNG project
introduced an element of inconsistency into the comparison and
therefore compromised its validity.
CHAIR HUGGINS asked Mr. Shipkoff what his confidence level was
in the administration's analysis.
MR. SHIPKOFF said he did not know because he had not seen the
underlying database used to derive a capital cost estimate. He
said he was sure the administration's consultants were highly
qualified people, but they had limitations imposed on them.
CHAIR HUGGINS asked if they were given the limitation to exclude
a "bottom up" approach.
MR. SHIPKOFF said the limitation arose from the decision to
exclude the PA's application and therefore none of the PA
materials were used in their analysis.
2:47:07 PM
SENATOR WAGONER asked what the capital cost assumption was in
the PA application.
MR. SHIPKOFF referred back to page 15, and said the total
without escalation costs such as insurance, project and
development, etc., was $8 billion. He said the total with
escalation depended on the timing of the project, and for
purposes of the analysis they assumed a 4% cost escalation to be
consistent with the administration's assumption.
SENATOR WAGONER asked if the $2 dollar plus tariff to get the
gas from the North Slope to the plant put them at a disadvantage
in the marketplace.
MR. SHIPKOFF said it would be very unusual for all projects to
have the same market delivery costs. He said the question was
could a project deliver its product to the market below the
price which it could attract in that market.
2:50:24 PM
SENATOR WIELECHOWSKI asked what Mr. Shipkoff expected the LNG
tariff to be.
MR. SHIPKOFF estimated about $5.10 but wanted to answer the
question accurately rather than off the top of his head.
2:51:37 PM
SENATOR WIELECHOWSKI said that was a huge discrepancy from the
administration's estimate. He asked what accounted for the
discrepancy.
MR. SHIPKOFF said the key element was the LNG plant. He added
that you had to be careful when comparing numbers because you
may be talking about the same cost but in different terms. He
said it was important to compare the same things. He said he was
reassured about the validity of their analysis when it was
compared to the information presented by Econ One.
2:53:57 PM
CHAIR HUGGINS said he thought Alaskans were very supportive of
the PA concept.
MR. SHIPKOFF continued on to page 20 of the report, addressing
prices in the Asian and North American LNG markets. He said
Asian market prices were typically set on a bilateral basis
under long term sales and purchase agreements which could run
twenty to twenty-five years and pricing provisions for each
contract reflected the market supply and demand dynamics at the
time of the contracts' execution. He explained contracts were
executed at different points in time so there was no single
price of LNG but a weighted average of all the market prices for
various contracts. He said this contrasted with the North
American market where price discovery was transparent and driven
by a spot market at regional trading hubs such as Henry Hub or
ACO.
MR. SHIPKOFF said page 21 of the report, a graph previously
presented by Gas Strategies, was very useful. He said since 2004
there had been a very steep increase in the prices LNG projects
were able to negotiate with Asian buyers because of a perceived
shortage. In other words, he said, on a btu basis, gas was more
expensive than oil which was not the case historically.
CHAIR HUGGINS asked for clarification that on a btu basis gas
was more expensive than oil.
MR. SHIPKOFF said under a recent purchase agreement, for prices
below $100 dollars, the formula resulted in a price per mbtu
which was higher than the oil price in btu terms, so gas was
above parity with oil.
CHAIR HUGGINS said some economic theorists believed oil prices
had peaked for 2008. He asked where Mr. Shipkoff would see gas
going if oil went down to $100 dollars.
MR. SHIPKOFF asked if he was referring to U.S. prices.
CHAIR HUGGINS said to assume Henry Hub.
MR. SHIPKOFF said in the U.S. market there was not a direct link
between oil and gas prices and they generally moved together
because some of their uses could be substituted. He said
recently observed oil to gas price ratios in the North American
market had been substantially higher than in the past.
CHAIR HUGGINS asked what the model would be for the Pacific Rim.
MR. SHIPKOFF said there the linkage was direct, contractual, and
formulaic. He said a contract negotiated a long time ago when
the market was more buyer friendly yielded a lower price, but at
$100 dollar oil, the price was around $17 dollars per mbtu.
3:01:24 PM
SENATOR THOMAS asked if contracts change based on price
fluctuations.
MR. SHIPKOFF said typically LNG sales and purchase agreements
did not adjust daily, but frequently on a three month trailing
average basis. He said as oil prices moved, there was a direct
correlation with the contractual sales price.
3:02:16 PM
SENATOR ELTON asked what the length of a "long term" contract
was.
MR. SHIPKOFF said contracts tended to be twenty to twenty-five
years. He said there had been speculation in the market that
contract terms would be reduced to shorter than twenty years,
but in the current environment he found it difficult to see how
any buyer would be able to negotiate anything less than twenty
years.
SENATOR ELTON asked if there were provisions for re-openers on
the part of either party.
MR. SHIPKOFF answered yes; typically there were price re-opener
provisions which could be formulated differently on different
contracts. He said sometimes there were bands of pricing for oil
which was what the parties at the time felt was the reasonable
expectation for long term prices. Formula changes occurred that
benefitted the buyer or the seller depending on which way the
price fluctuated. Another scenario was a re-opener could be
triggered contractually if a certain band was exceeded, forcing
the parties to negotiate an alternative arrangement.
SENATOR ELTON asked if his assumption was correct that a lot of
bands had been broken in contracts that had been signed prior to
January 2008.
MR. SHIPKOFF answered yes; many old contracts had exceeded their
bands a long time ago.
SENATOR ELTON asked if buyers or sellers had walked away from
previous Asian contracts.
MR. SHIPKOFF said if the two parties could not agree they were
both in trouble. He said in the case of a dispute the contract
still prevailed. This was a difficult question to answer, he
said, because it depended on the situation and perceptions of
the buyer and seller in question.
3:06:48 PM
SENATOR THOMAS referring to the graph on page 21 of the report,
asked if the differences from early 2005 to the end of 2006 were
due to changes in theory and how the contracts were written.
MR. SHIPKOFF said the pink line representing China was
instructive. He said British Petroleum (BP) contracted with
China to supply LNG to what was expected to be a huge growth
market. The growth did not materialize because, he said, the
Chinese were very price sensitive, had a lot of coal and did not
like to burn expensive gas if cheap coal was available. He added
the Chinese contract was largely perceived as a attempt to gain
entry into the Chinese market.
MR. SHIPKOFF continued to page 22 of the report and said the
current perception was the market was very highly favorable to
suppliers and sellers. He said the PA did not believe the
favorable sellers market would continue. He added the Gas
Strategies report on LNG pricing was a good one.
CHAIR HUGGINS said time was up for the day and asked if the
presenters could return the next day.
MR. WALKER and Mr. Shipkoff said they would see if it was
possible.
SB 3001 was held over.
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