Legislature(2007 - 2008)SENATE FINANCE 532

07/23/2008 01:00 PM Senate SENATE SPECIAL COMMITTEE ON ENERGY


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01:10:37 PM Start
01:14:30 PM SB3001|| HB3001
04:46:56 PM Adjourn
* first hearing in first committee of referral
+ teleconferenced
= bill was previously heard/scheduled
+= SB3001 APPROVING AGIA LICENSE TELECONFERENCED
Heard & Held
+= HB3001 APPROVING AGIA LICENSE TELECONFERENCED
<Pending Referral>
-- Testimony <Invitation Only> --
                  SB3001-APPROVING AGIA LICENSE                                                                             
                  HB3001-APPROVING AGIA LICENSE                                                                             
                                                                                                                                
CHAIR HUGGINS brought  SB 3001 before the committee.  He asked Mr.                                                              
Walker  to  explain  the  makeup  of the  Port  Authority  to  the                                                              
audience before Mr. Shipkoff resumed his presentation.                                                                          
                                                                                                                                
BILL  WALKER,  Project  Director, Alaska  Gasline  Port  Authority                                                              
(AGPA),  Anchorage,  AK, said  the  Port  Authority is  an  entity                                                              
created  in  1999   by  three  municipalities;  the   North  Slope                                                              
Borough, Fairbanks  North Star  Borough, and  the City  of Valdez.                                                              
Their  goal  is to  build  an all-Alaska  gas  pipeline.  Recently                                                              
Mitsubishi Corporation  and Sempra LNG joined their  effort, which                                                              
brought  unique expertise  to the  project.  He  pointed out  that                                                              
Sempra LNG has the  only receiving terminal on the  West Coast and                                                              
is affiliated with  Sempra Energy, the largest  single distributor                                                              
of  natural  gas in  the  United  States.  He described  the  AGPA                                                              
project as a 40-inch  line from Prudhoe Bay to  Delta Junction and                                                              
42-inches  from Delta to  Valdez, with  approximately 18  off-take                                                              
points in the state.                                                                                                            
                                                                                                                                
CHAIR HUGGINS  shared the sentiments  of a citizen who  called him                                                              
just before the  meeting to express her support  for an all-Alaska                                                              
gas pipeline.                                                                                                                   
                                                                                                                                
1:14:30 PM                                                                                                                    
RADOSLAV  SHIPKOFF,  Director, Greengate  LLC,  Washington,  D.C.,                                                              
said  that before  resuming his  presentation  [from the  document                                                              
"Alaska  Gasline  Port  Authority, Presentation  to  Alaska  State                                                              
Senate,  July  22,  2008,  Juneau,  Alaska]."  he  would  like  to                                                              
provide  answers to  several specific  questions  that were  asked                                                              
yesterday. Senator  Wagoner asked  about re-gas capacity  in North                                                              
America.  Mr. Shipkoff  displayed  several  slides of  information                                                              
from  the FERC  [Federal  Energy Regulatory  Commission]  website,                                                              
which  shows  existing  projects, those  under  construction,  and                                                              
projects approved  but not  yet under  construction. The  total of                                                              
the  capacity  of existing  and  under-construction  projects  was                                                              
21.8  bcf/day  out of  a  total  U.S. consumption  of  roughly  65                                                              
bcf/day.  He pointed  out that  the number  of approved  terminals                                                              
that had  not yet started construction  added up to  an additional                                                              
26.7  bcf/day. Proposed  terminals,  those that  had not  obtained                                                              
their regulatory approvals, represented another 18.1 bcf/day.                                                                   
[http://www.ferc.gov/industries/gas/indus-act/pre-filing.asp.]                                                                  
                                                                                                                                
CHAIR HUGGINS  asked for clarification  of the projects  listed as                                                              
"under Coast Guard jurisdiction."                                                                                               
                                                                                                                                
MR. SHIPKOFF explained  that if a project is far  enough offshore,                                                              
a certificate is  issued by the Coast Guard, not  the FERC. He was                                                              
not sure, but thought the distance was 10 or 11 miles.                                                                          
                                                                                                                                
He  also addressed  the senator's  question about  imports of  gas                                                              
into the U.S.  The first slide showed monthly  imports of pipeline                                                              
gas according to  the EIA [Energy Information  Administration] and                                                              
illustrated that  Canadian imports dominate at approximately  9 to                                                              
12 bcf/day,  with very  small amounts coming  in from  Mexico. The                                                              
next slide  showed monthly  imports of  LNG [liquid natural  gas].                                                              
He  separated imports  from Trinidad  because it  is located  very                                                              
close to the  U.S.; so it makes  sense for them to send  their gas                                                              
here even if there are attractive prices in Europe or elsewhere.                                                                
                                                                                                                                
CHAIR HUGGINS recognized Senator Fred Dyson's arrival.                                                                          
                                                                                                                                
1:19:37 PM                                                                                                                    
SENATOR WIELECHOWSKI  asked  Mr. Shipkoff  on average, what  price                                                              
and tariff the U.S. is paying to import LNG.                                                                                    
                                                                                                                                
MR. SHIPKOFF answered  that the FERC reports average  basis prices                                                              
on the  same website  where he  found monthly  imports, but  it is                                                              
not  always updated.  For the  most  part, he  said, LNG  imported                                                              
into the  U.S. is  imported under  a sales  and purchase  contract                                                              
indexed to a pricing hub near the terminal where it comes in.                                                                   
                                                                                                                                
SENATOR WIELECHOWSKI  observed that  the market  seems to  be very                                                              
sporadic.                                                                                                                       
                                                                                                                                
MR. SHIPKOFF  explained  that occurs  when sellers  are in  a very                                                              
strong position  and are  able to  negotiate diversion  rights for                                                              
their cargos. In  the U.S. a buyer of LNG has  alternatives; if an                                                              
LNG  shipment doesn't  show up,  the buyer  can purchase  pipeline                                                              
gas. Asian buyers  are not usually excited about  giving diversion                                                              
rights to  their sellers because  they have no alternative  source                                                              
of gas, which is  one reason they have to pay a  premium. A seller                                                              
who  has successfully  negotiated  diversion rights  can send  the                                                              
cargo wherever the  highest price is. Typically,  contracts have a                                                              
provision that  the seller must compensate  the buyer if  the cost                                                              
of purchasing replacement  gas exceeds the amount  the buyer would                                                              
have  paid  under  the  contract.  Any  loss  resulting  from  the                                                              
necessity for  the buyer to  obtain alternative supply  is usually                                                              
negligible and  is far outweighed  by the incremental  benefits to                                                              
the seller of diverting the cargo.                                                                                              
                                                                                                                                
1:23:55 PM                                                                                                                    
SENATOR  THOMAS asked  if the  price  [of gas]  can be  positively                                                              
determined  based  on  FERC reports  of  information  provided  by                                                              
sellers or transporters  when they go to the regulatory  agency to                                                              
establish  the price.  He assumed  part  of the  formula would  be                                                              
what they  paid at the point  of importation, plus  transportation                                                              
costs from the import point to the distribution center.                                                                         
                                                                                                                                
MR. SHIPKOFF  advised Senator Thomas  that the FERC does  not have                                                              
any approval authority over the price of importation.                                                                           
                                                                                                                                
SENATOR THOMAS asked  if gas prices and transportation  costs have                                                              
to be reported to the FERC.                                                                                                     
                                                                                                                                
MR. SHIPKOFF  answered  that once  gas enters  the U.S. system  it                                                              
travels  on FERC-regulated  pipelines.  What FERC  reports is  the                                                              
contractual  price under which  LNG is  imported at the  terminal;                                                              
it does  not report costs  downstream of  that. He added  that LNG                                                              
receiving terminals  are not subject to FERC  economic regulation;                                                              
they are subject to FERC approval and siting regulation.                                                                        
                                                                                                                                
SENATOR THOMAS  said he  is trying  to get  at the calculation  of                                                              
cost to  the customer and  whether the sellers'  rates have  to be                                                              
approved somewhere along the line.                                                                                              
                                                                                                                                
MR.  SHIPKOFF acknowledged  that Senator  Thomas' observation  was                                                              
correct in  the sense  that a seller  of LNG  who tries  to access                                                              
the U.S.  market faces a number  of costs that must  be subtracted                                                              
before   reaching    the   ultimate    netback.   These    include                                                              
regasification  and transportation  via  pipeline  to the  nearest                                                              
liquid  point or  to  wherever the  consumer  is  located. If  the                                                              
seller's contract  is indexed  to Henry  Hub, regardless  of where                                                              
the gas  is being sold,  it will typically  have a provision  that                                                              
subtracts  a certain amount  from the  Henry Hub  price; so  it is                                                              
Henry  Hub   minus  "x"  or  a   percentage  of  Henry   Hub.  The                                                              
differential  is intended  to account  for the  fact that  someone                                                              
has to pay the  costs to get the gas to market.  He commented that                                                              
sales  contracts to  Asia are  structured  differently. The  buyer                                                              
takes possession at  the offloading point, so gas  is delivered x-                                                              
ship   price  and   the  seller   does   not  pay   the  cost   of                                                              
regasification and transportation.                                                                                              
                                                                                                                                
1:28:59 PM                                                                                                                    
CHAIR HUGGINS  recognized that Senator  Donald Olson  is attending                                                              
via teleconference.                                                                                                             
                                                                                                                                
SENATOR ELTON  said he is still  struggling with the  chart [slide                                                              
2: U.S. Imports  of LNG] and asked for Mr.  Shipkoff's assistance.                                                              
He  compared April  2008 to  April 2007  and noted  that April  of                                                              
2008 showed  roughly a quarter  of the imports  that the  U.S. had                                                              
in 2007 and  April 2006 showed about  half. He asked if  the spike                                                              
in 2007 occurred  because other markets were softer  and presented                                                              
an opportunity for sellers to get a better price.                                                                               
                                                                                                                                
MR. SHIPKOFF said  Senator Elton was correct; the  fluctuation can                                                              
be  attributed  to  variations in  the  relative  pricing  between                                                              
different markets.  Once LNG plants are  up and running  it is not                                                              
a  good   idea,  from   a  technical   standpoint,  to   interrupt                                                              
production; so  if the  LNG is not  showing up in  the U.S.  it is                                                              
probably because  sellers exercised their diversionary  rights and                                                              
went somewhere else.                                                                                                            
                                                                                                                                
1:32:20 PM                                                                                                                    
SENATOR ELTON asked  what the vulnerabilities might  be of selling                                                              
Alaska  gas  into  an  LNG market  with  these  kinds  of  radical                                                              
fluctuations.                                                                                                                   
                                                                                                                                
MR.  SHIPKOFF pointed  out that  they are  not looking  at an  LNG                                                              
market; they are  looking at imports of LNG into  the U.S. market,                                                              
which is a very  large, very deep market. He pointed  out that the                                                              
peaks  show a little  over  3 bcf/day  of imports  out of over  65                                                              
bcf/day  total  U.S.  consumption;  so imports  represent  a  very                                                              
small percentage  of overall U.S.  consumption and are  not likely                                                              
to influence  price. He added that  the Asian markets do  not show                                                              
the  same   kind  of   fluctuation  because   they  do   not  have                                                              
alternatives.  From Alaska's point  of view,  he said,  this graph                                                              
shows the benefit of being a seller.                                                                                            
                                                                                                                                
SENATOR ELTON  said his understanding  was that Alaskan  LNG would                                                              
be subject  to long-term  contracts, which would  not give  us, as                                                              
sellers, the ability to switch to other markets.                                                                                
                                                                                                                                
MR.  SHIPKOFF said  diversionary  rights are  exercised under  and                                                              
embedded  into  the long-term  contracts.  The  contract  provides                                                              
volume security and  a base-line revenue security because  it is a                                                              
seller's option to divert.                                                                                                      
                                                                                                                                
1:35:55 PM                                                                                                                    
MR. SHIPKOFF  said the  next slide  [slide 3: Transportation  Cost                                                              
Comparison  (2019)],  addresses  Senator  Wielechowski's  question                                                              
from  the day  before.  The  left  bar showed  the  transportation                                                              
costs of  LNG and the  right bar  showed the transportation  costs                                                              
of  the 4.5  bcf/day pipeline  project  based on  their model.  He                                                              
pointed out that  these figures are different from  those shown in                                                              
AGPA's application  because they recalculated the  tariffs in this                                                              
analysis   using   the  administration's   assumptions   for   the                                                              
pipelines,  conditioning plant,  escalation of  capital costs  and                                                              
escalation   of   operating   costs,    in   order   to   minimize                                                              
discrepancies  between the  assumptions.  As a  result, the  total                                                              
cost was  higher than the cost  he indicated during  his testimony                                                              
yesterday.                                                                                                                      
                                                                                                                                
1:38:32 PM                                                                                                                    
CHAIR HUGGINS called  a short at ease to fax copies  of the slides                                                              
to Senator Olson.                                                                                                               
                                                                                                                                
1:43:26 PM                                                                                                                    
CHAIR HUGGINS called the meeting back to order.                                                                                 
                                                                                                                                
1:43:51 PM                                                                                                                    
MR.  SHIPKOFF  resumed with  the  second  of  2 slides  [slide  4:                                                              
Netback  Pricing at  GCP  Inlet (2019)]  showing  a comparison  of                                                              
transportation  costs  and  netbacks  between  the  two  projects,                                                              
assuming first gas  in 2017. The 2.7 bcf/day LNG  project showed a                                                              
projected  price of $12.16  per mmBtu  in Japan  based on  the EIA                                                              
reference  case  price  assumptions. That  price  minus  projected                                                              
transportation  costs  of $7.71  produced  a  netback at  the  gas                                                              
conditioning  plant  of $4.45.  The  corresponding  AECO price  in                                                              
Alberta, using  the same set of  assumptions, was projected  to be                                                              
$8.26 minus $4.22  of transportation costs for a  netback price of                                                              
$4.03.                                                                                                                          
                                                                                                                                
CHAIR HUGGINS asked  if this analysis is based  on his assumptions                                                              
and   data,  not   a   comparison  between   his   data  and   the                                                              
administration's data.                                                                                                          
                                                                                                                                
MR. SHIPKOFF said  the analysis uses AGPA's financial  model based                                                              
on EIA  price forecasts  and the  capital cost  estimates for  all                                                              
the  common  components for  which  they  had estimates  from  the                                                              
administration's analysis.  So they used the  administration's P50                                                              
capital  cost  estimates for  the  Valdez  2.7 pipeline,  for  the                                                              
conditioning plant,  and for the  4.5 bcf pipeline case  in Alaska                                                              
and  in the  Yukon and  Alberta.  They used  the Port  Authority's                                                              
estimate  for  the LNG  plant  capital  cost and  shipping  costs,                                                              
which were not very different from the administration's.                                                                        
                                                                                                                                
1:47:22 PM                                                                                                                    
MR.  SHIPKOFF   shifted  back  to   where  he  left  off   in  his                                                              
presentation  yesterday,  on  the   slide  which  illustrates  the                                                              
evolution  of  LNG  pricing  formulas in  the  East  Asian  market                                                              
[slide  21]. The  key point,  he said,  is that  sales prices  are                                                              
directly  related to  the price of  oil. He  stressed that  AGPA's                                                              
analysis  does not  assume  the  highly favorable  selling  prices                                                              
currently  in place  will continue;  rather  they anticipate  that                                                              
the dynamic will  shift back toward slightly more  favorable buyer                                                              
terms. That means  they will not be able to sell  LNG at parity or                                                              
above parity  with oil,  which is  what some  projects are  doing.                                                              
The administration  put forward a  set of three cases  to evaluate                                                              
what  Alaska  LNG pricing  might  look  like.  He said  that  AGPA                                                              
adopted  their  base-case  assumption  for  the  purpose  of  this                                                              
analysis, which uses  0.1485 times the oil price plus  90 cents to                                                              
calculate  the price  in dollars  per mmBtu. He  pointed out  that                                                              
typically  price indexation  formulas  in Asia  are  indexed to  a                                                              
basket of  crudes called  JCC or "Japan  crude cocktail;"  but for                                                              
simplicity they just  called it "oil price." They did  not use the                                                              
high case  from the gas strategies  report, which would  have been                                                              
significantly  more favorable  for  the LNG  project. Neither  did                                                              
they  use  the  low  case  because  they  do  not  believe  it  is                                                              
realistic  based on  their analysis  as well  as discussions  with                                                              
their partners and potential buyers.                                                                                            
                                                                                                                                
MR. SHIPKOFF  moved away from discussion  of the Asian  LNG market                                                              
to talk a  little bit about  North American gas pricing,  which he                                                              
said will determine  the netback on the pipeline side.  Page 23 of                                                              
his presentation [slide  23, North American Prices:  WTI and Henry                                                              
Hub]  graphed  historical  monthly   prices  of  WTI  [West  Texas                                                              
Intermediate] and Henry  Hub. He explained that the  scales on the                                                              
left side  in dollars  per barrel  and the  right side in  dollars                                                              
per  mmBtu are  actually on  a thermal  equivalent  basis; so  one                                                              
could also  look at  the blue  line representing  oil in  terms of                                                              
dollars per  mmBtu. They generally  move together,  however recent                                                              
years  have seen  a bit of  a disconnect  as gas  prices have  not                                                              
kept pace with rising oil prices.                                                                                               
                                                                                                                                
CHAIR HUGGINS commented  that oil was at about  $124.50 per barrel                                                              
and gas at $10.40 something, down from about $12.50.                                                                            
                                                                                                                                
MR.  SHIPKOFF responded  "Exactly," so  the ratio  would be  about                                                              
$12.00.                                                                                                                         
                                                                                                                                
1:51:01 PM                                                                                                                    
SENATOR  THOMAS remarked  that the  gas seems  to spike at  almost                                                              
the same  time every  year, from about  December through  June. He                                                              
asked  if   that  is  just  a   winter  spike  based   on  weather                                                              
conditions.                                                                                                                     
                                                                                                                                
MR. SHIPKOFF  confirmed that  North American  gas prices  are very                                                              
seasonal and  typically spike  in the  winter time, especially  on                                                              
the East Coast.  Another way to look  at the issue is  by plotting                                                              
the  oil-to-gas    price  ratio,   which  is  exactly  what  Chair                                                              
Huggins'  point  addressed [slide  24:  WTI  and Henry  Hub  Price                                                              
Ratio].  Historically, it  fluctuates pretty  wildly. The  average                                                              
over the previous  five years was about 8; but it  had been higher                                                              
in recent years.                                                                                                                
                                                                                                                                
He explained  the reason  the ratio is  important in  this context                                                              
is that  a higher  crude oil to  Henry Hub  price ratio  means the                                                              
differential  projected  between Asian  and  North America  prices                                                              
will  increase  [slide  25]. Higher  oil  prices  directly  affect                                                              
Asian LNG  prices via  the indexation formulas;  so if  that ratio                                                              
is higher,  it means  higher LNG prices  and lower North  American                                                              
gas prices.                                                                                                                     
                                                                                                                                
The  next slide  [slide 26:  DOE  EIA Forecast  Price Ratios  (AEO                                                              
2008)]  compared the  five price  cases  published by  the EIA  in                                                              
their Annual  Energy  Outlook from  June 2008.  The ratios  in the                                                              
high economic  growth case  and the low  economic growth  case are                                                              
almost  identical to  the  reference  case. In  all  3 cases,  the                                                              
ratio is  about 10 and  projected to stay  that way  through about                                                              
2030.  The "high  price case"  shows a  significant increase  from                                                              
between  10 and  12 to about  14, while  the low  price case  goes                                                              
back to the historical  ratio of 8 and is projected  to decline to                                                              
about 7 by 2030.                                                                                                                
                                                                                                                                
MR. SHIPKOFF  advised that the  higher oil-to-gas price  ratios in                                                              
higher  oil price  environments  occur,  especially  in the  long-                                                              
term, because  one of the principal  uses of natural gas  is power                                                              
generation.  In the  long-term, natural  gas  competes with  other                                                              
fuels such  as coal, which do  not generally increase in  price to                                                              
the same degree as oil.                                                                                                         
                                                                                                                                
The  next slide  showed  the Wood  Mackenzie  forecast, which  was                                                              
used  by   the  administration  in   their  analysis   [slide  27:                                                              
Administration's  forecast (Wood  Mackenzie)]. AGPA  did not  have                                                              
access  to  the  actual  numbers  in  the  forecast;  however  the                                                              
administration did  publish a chart which was  copied and included                                                              
in  this  presentation.  The  dotted  line  shows  the  oil-to-gas                                                              
ratio. On the  right side of the  axis it starts high  to date and                                                              
is projected  to go down to about  8 then increase to  about 9; so                                                              
it is somewhere between 8 and 9 during the forecast period.                                                                     
                                                                                                                                
Slide  28:  Price   Ratio  Forecast  Comparison,   the  historical                                                              
average at  about 8.1  for the  past 10  years and summarized  the                                                              
average through  2030 of all  5 EIA cases to  be between 8  and 9.                                                              
The  projected average  of the  implied ratios  under the  futures                                                              
market was 12.5.                                                                                                                
                                                                                                                                
MR. SHIPKOFF  turned  to slide  29 and  said he was  going to  put                                                              
together the  capital cost assumptions  he talked  about yesterday                                                              
and  a range  of different  price assumptions  discussed today  to                                                              
show the  relative netbacks of the  2 projects. He  first reviewed                                                              
the assumptions that went into their calculations:                                                                              
 · Capital cost assumptions - The source of the assumption for                                                                  
    everything except the cost of the LNG facilities was taken                                                                  
    from the administration's P50 estimates.                                                                                    
    [slide 30, Other Assumptions]                                                                                               
 · Capitalization ratios used were the same as those proposed by                                                                
    TransCanada and assumed by the administration.                                                                              
 · Return on equity was taken from the same sources.                                                                            
 · The spread between the cost of guaranteed and non-guaranteed                                                                 
    debt was 150 basis points and was taken from the Econ One                                                                   
    analysis.                                                                                                                   
                                                                                                                                
He  emphasized  that  the  LNG would  benefit  from  zero  percent                                                              
guaranteed  debt. They  have assumed  that  the pipeline  benefits                                                              
from 100 percent  guaranteed debt, even though  the financing plan                                                              
analysis  presented by Goldman  Sachs assumed  that a  substantial                                                              
part of  the federal  debt guarantee  would not  be used.  Goldman                                                              
Sachs projected that  only 30 percent of the debt  on the pipeline                                                              
would actually  be guaranteed,  assuming no  cost overruns  occur.                                                              
So to the  extent that a significant  portion of pipeline  debt is                                                              
not guaranteed, the  netbacks would be lower than for  it than the                                                              
LNG plant.  This analysis  assumes  100 percent  of their debt  is                                                              
guaranteed.                                                                                                                     
                                                                                                                                
CHAIR HUGGINS asked if that is primarily due to higher tariffs.                                                                 
                                                                                                                                
MR. SHIPKOFF answered  yes, reducing the portion  of the guarantee                                                              
increases the average  interest rate, which increases  the cost of                                                              
capital, which increases the tariff.                                                                                            
                                                                                                                                
1:58:29 PM                                                                                                                    
The LNG  plant factor  was 95  percent, which  increased the  unit                                                              
tariff because  fewer Btu's  were being  transported on  an annual                                                              
basis.  The LNG  sales price  used the  same formula  as the  base                                                              
case  assumed  by  Gas  Strategies.  The  shipping  costs  were  a                                                              
function of  the information  provided to  AGPA by their  shipping                                                              
consultants,  Mitsui OSK  Lines; they obtained  price quotes  from                                                              
shipyards so these  were actual non-committed cost  estimates. The                                                              
shipping costs, plus  time charter and voyage costs,  boil off and                                                              
fuel consumption, come  to a nominal cost in 2019  of about $1.10.                                                              
For  the  purposes of  this  analysis,  they  assumed a  rich  gas                                                              
scenario  as presented  in  the  RFA [request  for  applications].                                                              
They had lean  in the rich gas  case and the reason it  was $11.33                                                              
instead of $11.16  here was because, for the LNG  case you have to                                                              
strip out  all the CO2 rather  than leaving 1.5 percent,  which is                                                              
what  the RFA  gas composition  assumed. They  also changed  their                                                              
original escalation  assumption to  what the administration  used:                                                              
4  percent  per annum  for  Capex  and  3 percent  per  annum  for                                                              
operating expenses.                                                                                                             
                                                                                                                                
MR. SHIPKOFF  introduced  slides 31 through  36 showing  different                                                              
scenarios  under various  assumptions  and  comparing the  average                                                              
netback at  the GCP [gas conditioning  plant] inlet in  real, 2008                                                              
terms.  He  said  they  took the  nominal  25  year  project  life                                                              
netbacks,  de-escalated  them to  2008  terms, and  averaged  them                                                              
out.  In each  case  graph, the  red  bar represents  the  netback                                                              
under the 2.7  bcf LNG project; the  dark blue bar is  the 4.5 bcf                                                              
pipeline;  and the light  blue bar  is the  3.5 bcf pipeline.  The                                                              
EIA  reference case  reflected an  average  netback advantage  for                                                              
the LNG  project of about  80 cents. In  the EIA high  price case,                                                              
this advantage  increased substantially  because there was  a very                                                              
high oil-to-gas  price ratio;  therefore the differential  between                                                              
the  Asian LNG  price  and  the lower  48  prices,  or rather  the                                                              
Alberta  prices, increased  substantially to  almost $6.00.  Under                                                              
the  low price  scenario,  the  pipeline  was more  attractive  by                                                              
about $1.50.                                                                                                                    
                                                                                                                                
2:01:37 PM                                                                                                                    
CHAIR  HUGGINS  asked  Mr.  Shipkoff if  his  reference  case  was                                                              
essentially  an  intermediate  case   between  the  high  and  low                                                              
scenarios.                                                                                                                      
                                                                                                                                
MR. SHIPKOFF  responded that,  in some of  their recent  runs they                                                              
used  this  as  their  base  case.   The  reference  case  is  the                                                              
Department of Energy's EIA base case forecast.                                                                                  
                                                                                                                                
SENATOR ELTON  said, in terms of  netback, he remembers  the "road                                                              
show"  presentations  showed that  over  the  life of  a  pipeline                                                              
taking gas  to the North  American markets,  the state  would earn                                                              
in the  neighborhood of  $66 billion and  the comparable  with LNG                                                              
was  in the  neighborhood  of  $30 billion.  He  asked  if he  was                                                              
correct  in assuming  that the main  difference  in the return  to                                                              
the state  was the volume  of gas moved,  that is, 4.5  bcf/day as                                                              
compared to 2.7 bcf/day.                                                                                                        
                                                                                                                                
MR. SHIPKOFF confirmed  his assumption. He explained  that if they                                                              
preserved these  assumptions and generated these  results in terms                                                              
of unit,  per mmBtu  netback, then showed  the actual  net present                                                              
value [NPV]  of the  total amount  of cash  flow sent upstream  to                                                              
the producers  and the state and  shared it according to  a fiscal                                                              
structure  upstream, the  fact  that under  the  vast majority  of                                                              
cases they show  a higher unit netback would not  be sufficient to                                                              
compensate for the  LNG project showing lower total  present value                                                              
because  they were  comparing a  2.7  bcf/day project  with a  4.5                                                              
bcf/day project ... it is just a volume issue.                                                                                  
                                                                                                                                
2:03:48 PM                                                                                                                    
CHAIR HUGGINS called a brief recess.                                                                                            
                                                                                                                                
2:21:27 PM                                                                                                                    
CHAIR HUGGINS called the meeting back to order.                                                                                 
                                                                                                                                
MR. SHIPKOFF  described  the first  of the set  of slides  showing                                                              
the  netback comparisons  under a  range  of different  scenarios.                                                              
This  slide [slide  31] showed  the  results for  the 3  different                                                              
price cases forecast by EIA.                                                                                                    
                                                                                                                                
The next  [slide 32] assumed a  flat constant 2008  USD $60/barrel                                                              
oil and 3 different  oil-to-Henry Hub price ratios:  10/1, 9/1 and                                                              
8/1. At 10/1 the  LNG project had about a $.50  advantage. It fell                                                              
a little  below the  4.5 bcf  pipeline at  9/1 but the  difference                                                              
was  negligible.   At  8/1  however,   it  showed   a  significant                                                              
disadvantage of about $.80.                                                                                                     
                                                                                                                                
The next  slide [slide 33] showed  the same set of  assumptions in                                                              
terms of 3 price  ratios, but used an oil price  of $80/barrel. At                                                              
10/1 LNG  was more attractive than  the 4.5 bcf pipeline.  The 9/1                                                              
ratio produced  a slight advantage of  about $.40. But at  8/1 the                                                              
LNG was still less attractive by about $.65.                                                                                    
                                                                                                                                
MR.  SHIPKOFF moved  to  slide 34,  which  showed the  assumptions                                                              
using $100/barrel  oil. Under  this scenario  the LNG project  had                                                              
an even  greater advantage  at the  10/1 and  9/1 ratios;  and the                                                              
disadvantage was narrower at 8/1.                                                                                               
                                                                                                                                
Slide 35  showed a different  kind of  sensitivity. They  kept the                                                              
EIA  reference  case  price  assumption   and  all  other  factors                                                              
constant for all  3 cases, except that they increased  the cost of                                                              
the  LNG plants.  The left  set of  bars showed  their base  case,                                                              
which  was  $8  billion  un-escalated.  In  the  middle  that  was                                                              
increased  by 40 percent  and on  the right  by 80 percent,  which                                                              
was roughly  the same as the  administration's P50  estimate. This                                                              
graph  showed that  at base  case +  80 percent  they would  break                                                              
even with the 4.5 bcf pipeline.                                                                                                 
                                                                                                                                
The final  sensitivity  case [slide  36] was included  to give  an                                                              
indication of what  the sensitivity would be to  variations in the                                                              
guaranteed portion  of the pipeline debt. He reiterated  that they                                                              
had  assumed none  of  the LNG  project  debt  would be  federally                                                              
guaranteed  because they  are not  eligible for  the federal  loan                                                              
guarantee.  However, they  anticipated that  some fraction  of the                                                              
pipeline debt might  not be guaranteed because there  would not be                                                              
a sponsor completion  guarantee for the debt; therefore  they were                                                              
reserving   a  substantial   portion   of  the   guarantee  as   a                                                              
contingency cost-overrun  facility. He  explored a range  from 100                                                              
percent,  which was  the base case,  at which  they would  benefit                                                              
from all  of their debt  being guaranteed,  to 0 percent,  meaning                                                              
none of  their debt  would be  guaranteed, and  the variation  was                                                              
not very  big. Their costs  increased and their  netback decreased                                                              
by about $.07 for each 50 percent of the debt.                                                                                  
                                                                                                                                
MR. SHIPKOFF stated  that what all of these cases  are intended to                                                              
convey  is not that  they are  absolutely certain  that under  all                                                              
cases  they will  have a  higher  netback than  the pipeline,  but                                                              
that under  a wide range of  different assumptions the  results do                                                              
in fact  show that the  smaller 2.7  bcf project generates  higher                                                              
unit  netback results  [slide 37].  As  a point  of comparison  he                                                              
suggested  that the  legislators compare  the similar  assumptions                                                              
in this slide with  what the Econ One analysis  showed using their                                                              
model.                                                                                                                          
                                                                                                                                
He commented  that the  next and  final slide  [slide 38]  went to                                                              
the point  Senator Elton  raised earlier, which  was that  the LNG                                                              
project  generates  smaller  present   value  in  terms  of  total                                                              
absolute cash  flow, not  in terms of  per-unit price  netback. He                                                              
said that is because  it is a smaller project.  Even though, under                                                              
many  assumptions,  under several  scenarios,  it  shows a  higher                                                              
mmBtu  netback, the  volume is  not sufficient  to compensate  for                                                              
the nearly 60 percent higher volume on the 4.5 bcf pipeline.                                                                    
                                                                                                                                
MR. SHIPKOFF  concluded by saying  that AGPA does  not necessarily                                                              
view the  smaller volume  and therefore  smaller NPV [net  present                                                              
value]  associated  with  this project  as  a  disadvantage.  They                                                              
believe the lower  volume requirement increases the  likelihood of                                                              
success  because  it  enhances their  prospects  of  securing  gas                                                              
supplies sufficient  to implement  the project. Furthermore,  they                                                              
do not  view the  2 options  as mutually  exclusive. Reports  that                                                              
address the  YTF [yet to find]  reserves indicate that there  is a                                                              
lot of gas on  the North Slope, enough gas for  both projects even                                                              
if  the 4.5  bcf  pipeline is  expanded  to 6  bcf  or more.  They                                                              
believe  it  makes  the most  economic  sense  to  monetize  those                                                              
molecules  that can  attract the  highest price,  the highest  per                                                              
mmBtu value,  in the way  that maximizes  their value; so  if they                                                              
can monetize 2.7  bcf and attract a higher value  on volumes going                                                              
to Asia,  they think it  makes sense to do  that and still  do the                                                              
4.5 bcf pipeline.                                                                                                               
                                                                                                                                
2:28:56 PM                                                                                                                    
MR. WALKER thanked  the legislature again for this  opportunity to                                                              
detail the  reasons they  believe theirs  is the superior  project                                                              
on  the economics.  He also  shared  the fact  that they  recently                                                              
received  a letter,  which was  also sent  to the  Speaker of  the                                                              
House and the President  of the Senate, from the  State of Hawaii,                                                              
expressing interest  in LNG from Alaska. Mr. Mark  Glick [Economic                                                              
Development   Director]  of   the  Office   of  Hawaiian   Affairs                                                              
contacted them  approximately a year  earlier to  express Hawaii's                                                              
interest in  Alaskan LNG.  Hawaii was  importing large  amounts of                                                              
coal from  Australia. That  letter marked  the end  of a  12 month                                                              
study by  Hawaii to determine  the feasibility of  replacing their                                                              
coal-fired power  generation with LNG.  He pointed out  that their                                                              
volume requirements  were similar  to Alaska's,  from 3 to  5 bcf,                                                              
and represented  another positive market opportunity.  He believed                                                              
that the export  license and Jones Act issues were  covered in the                                                              
teammate agreement they had for the ships.                                                                                      
                                                                                                                                
                                                                                                                                
MR. WALKER  added that  about 10  days ago,  he discovered  Canada                                                              
had been  faced with  a similar dilemma  regarding a  $300 million                                                              
transcontinental pipeline  in the 1950s.  He located a  book about                                                              
it entitled,  "Pipeline:  Trans Canada  and the  Great Debate  / A                                                              
History  of  Business  and Politics"  [by  William  Kilbourn]  and                                                              
found that  the situation was  pretty similar to  Alaska's. Canada                                                              
wanted to  move gas  from the Alberta  area to  Toronto and  had 2                                                              
proposals on  the table. One would  have looped through  the Great                                                              
Lakes area,  picked up  market in  the U.S.,  then looped  back up                                                              
into  Toronto. The  other  was referred  to  as the  "all-Canadian                                                              
line"  and  Parliament became  quite  involved  in the  matter  of                                                              
which route  they should go with.  The U.S. route would  have been                                                              
about $50  million cheaper to build;  but they were  emphatic that                                                              
the all-Canadian route  should be built first. It  didn't have the                                                              
best  economics, but  there were  communities in  parts of  Canada                                                              
that would not be  serviced with the U.S. route.  They also wanted                                                              
to  retain control  over  the project.  They  were concerned  that                                                              
when  it  crossed  into  the  U.S.  and  back  there  would  be  a                                                              
different jurisdiction,  a different set  of laws. To make  a long                                                              
story  short,  the  government  of Canada  got  involved  in  that                                                              
process and  did a loan to make  the financing work so  they would                                                              
take the  risk and it was  a very successful project.  TransCanada                                                              
ultimately  did  the project  in  conjunction with  the  competing                                                              
line; they  basically became  one. The analogy  was too  close not                                                              
to comment  on and  some people  involved in  AGPA's project  felt                                                              
the only way  it was going to get  off of dead center  was for the                                                              
state of Alaska  to take an ownership  position in it to  the tune                                                              
of 100  percent on infrastructure,  even if  they divested  it the                                                              
next day. There  was a clear example  of how that was  done in the                                                              
past.                                                                                                                           
                                                                                                                              
2:36:28 PM                                                                                                                    
SENATOR WAGONER interjected that actually took place in 1956.                                                                   
                                                                                                                                
MR. WALKER agreed.                                                                                                              
                                                                                                                                
CHAIR HUGGINS asked who built that pipeline.                                                                                    
                                                                                                                                
MR. WALKER replied that it was built by TransCanada.                                                                            
                                                                                                                                
CHAIR HUGGINS  commented that  they can  ask TransCanada  about it                                                              
later.                                                                                                                          
                                                                                                                                
MR. WALKER  asserted that they did  a great job and  the parallels                                                              
couldn't be stronger.                                                                                                           
                                                                                                                                
2:37:07 PM                                                                                                                    
SENATOR  WIELECHOWSKI  said he  has  gotten a  lot  of emails  and                                                              
phone  calls about  comments made  by  the CEO  of TransCanada  on                                                              
first developing  Keystone, then developing the  Keystone Project,                                                              
then building  Mackenzie and  then building  Alaska. He  asked Mr.                                                              
Walker for any comments  he might have and how that  fits into the                                                              
timelines that have been set forth under the AGIA process.                                                                      
                                                                                                                                
MR.  WALKER  said he  received  the  same  email and  watched  the                                                              
comments on  his computer.  He said he had  been asked  before why                                                              
he thought  Mackenzie was  going to  go first,  and it  seemed the                                                              
chairman of  TransCanada answered  that pretty clearly  yesterday.                                                              
The way  he saw  it, it would  be the  Keystone project,  then the                                                              
Keystone expansion,  then Mackenzie,  and then Alaska.  He thought                                                              
the  timeframe was  probably  in line  with  what the  application                                                              
said, about the  end of the next decade, about 2018;  but it would                                                              
certainly put us behind three other projects.                                                                                   
                                                                                                                                
2:39:00 PM                                                                                                                    
SENATOR  WAGONER said  he wanted  to go back  to discussions  they                                                              
had  yesterday  on  capital  cost  assumptions.  He  said  he  had                                                              
received some  additional information,  including an  article from                                                              
Tom  Phalen,  Vice  President  of  upstream  operations  at  Fluor                                                              
Corporation,  who was  responsible for  directing Fluor's  project                                                              
operations for LNG  facilities on a global basis.  Senator Wagoner                                                              
stressed that  this reaches farther  than Alaska's gas  liquids or                                                              
the  LNG project;  they  have to  take  it into  consideration  on                                                              
pipeline  costs, gas  to liquids,  gas liquids,  the whole  works.                                                              
Basically  what Mr.  Phalen said  was that all  LNG project  costs                                                              
had escalated since  2005 at the same 20 percent  per year rate as                                                              
other  upstream projects,  creating  a higher  degree of  economic                                                              
uncertainty  for liquefaction  projects. In  addition to that,  he                                                              
said doubling of  the EPC project technical  resource requirements                                                              
between  2005-2007 would  create  a 10  to 15  percent deficit  of                                                              
people to  staff the projects by  2010. Senator Wagoner  said he'd                                                              
like the  AGPA folks to respond  to that, because they  said these                                                              
were 2007  actual estimated  costs and this  is kind of  scary for                                                              
not only this but the pipeline project.                                                                                         
                                                                                                                                
MR.  SHIPKOFF responded  that they  share  his concerns.  It is  a                                                              
legitimate issue and  a big issue for any project  that is a major                                                              
capital-intensive  project  in planning.  He  said  that over  the                                                              
past couple of  years, whether it's LNG projects,  petrochemicals,                                                              
chemicals   or   pipelines,   all    projects   have   experienced                                                              
substantial  cost overruns. They  saw this  in their own  numbers;                                                              
they practically  doubled from 2005 to  2007. So he could  not say                                                              
with any certainty  what was going  to happen in 2012.  He said he                                                              
is  always reluctant  to quote  a tariff  or to  give the  netback                                                              
price in dollars  and cents because he is afraid  it will convey a                                                              
false  sense of  precision,  as if  they know  what  the price  is                                                              
going to be  down to the last  cent. They don't. He  admitted that                                                              
there are very few  things he can say with confidence  about their                                                              
analysis or anybody  else's; but he can say with  a high degree of                                                              
confidence that all  of these numbers that they  are talking about                                                              
today  are  going   to  be  wrong;  its  going   to  be  something                                                              
different.  Capital cost  increases  are a  significant issue  and                                                              
have  been the  result of  a number  of  factors: materials  costs                                                              
increases, steel  and other materials; energy cost  increases; the                                                              
EPC   market   has  tightened   substantially;   the   contractors                                                              
themselves  are having  a hard  time  finding qualified  engineers                                                              
and then  between the  universe of contractors  who qualify  to do                                                              
these projects,  all of  them are booked  because there  have been                                                              
so  many projects  that  have proceeded  and  attempted  to go  to                                                              
financing  and have secured  contracting services  that there's  a                                                              
huge  backlog at  all of  the major  firms. He  hoped the  backlog                                                              
would clear  in the next few  years, for their project's  sake and                                                              
for the pipeline  project's sake. He  said one of the  issues they                                                              
had  to  address  with  Bechtel when  they  were  looking  at  the                                                              
pipeline component of  the project was whether they  were going to                                                              
find enough welders  and engineers to do all the  detail work that                                                              
was going to have to be done during the development process.                                                                    
                                                                                                                                
2:43:52 PM                                                                                                                    
CHAIR  HUGGINS reminded  members  that according  to the  articles                                                              
they had seen on  Mackenzie, it had gone from $4  billion to $16.2                                                              
billion  in  recent years;  so  Senator  Wagoner was  right  about                                                              
escalation.                                                                                                                     
                                                                                                                                
SENATOR WAGONER  asked Mr.  Walker if  AGPA had current  contracts                                                              
or if they  were working on  contracts with their  other partners,                                                              
such as Mitsubishi or Sempra.                                                                                                   
                                                                                                                                
MR.  WALKER  answered   that  they  currently  had   an  MOU  with                                                              
Mitsubishi  and  Sempra  that  provided   for  further  definitive                                                              
agreements  by the end  of August.  He confided  that a  factor in                                                              
their  timing  was   that  they  felt  this  process   would  have                                                              
concluded by  the end of August so  they could decide where  to go                                                              
from there.                                                                                                                     
                                                                                                                                
2:45:13 PM                                                                                                                    
SENATOR ELTON opined  that they need a buyer but  they also need a                                                              
seller  at the  other  end of  the  pipe, and  asked  if they  had                                                              
started a process with potential sellers.                                                                                       
                                                                                                                                
MR. WALKER  confirmed  that is a  necessary piece  of the  process                                                              
and the  process had started;  but said he  could not be  any more                                                              
specific about it than to say other meetings were scheduled.                                                                    
                                                                                                                                
SENATOR ELTON  said he recognized  that Mr. Walker could  not tell                                                              
them the  status of those [meetings]  but asked if he  was correct                                                              
in assuming they  wouldn't be before the committee  if they didn't                                                              
think they'd ultimately be successful.                                                                                          
                                                                                                                                
MR. WALKER assured  Senator Elton he was not trying  to be evasive                                                              
but said there had  been a first round of meetings  and subsequent                                                              
meetings  were   being  scheduled.   If  there  hadn't   been  any                                                              
interest,  he  didn't think  there  would  be  a second  round  of                                                              
meetings.  They were  pleased with  the interest  and wouldn't  be                                                              
there today  if they  didn't feel  optimistic that their  partners                                                              
had the ability to buy.                                                                                                         
                                                                                                                                
2:47:01 PM                                                                                                                    
CHAIR HUGGINS  said, in the interest  of time, they would  have to                                                              
alter the  schedule a  little before  bringing the  administration                                                              
forward. He said  he would like to ask Mr. Palmer  to come forward                                                              
to address an issue about the in-country Canada line.                                                                           
                                                                                                                                
2:47:43 PM                                                                                                                    
TONY PALMER,  Vice President  of TransCanada  Alaska Company  LLC,                                                              
Calgary, Alberta,  Canada, said  he came in  part way  through Mr.                                                              
Walker's discussion but did hear the bulk of it.                                                                                
                                                                                                                                
CHAIR HUGGINS  asked if Mr. Walker  would do a quick  synopsis for                                                              
Mr. Palmer.                                                                                                                     
                                                                                                                                
MR. WALKER  stated that  his understanding of  what he  read about                                                              
what happened  in the mid-fifties was  that there was a  desire to                                                              
move gas from Alberta  to Toronto in Eastern Canada  and a dilemma                                                              
about which  route to  follow, the  all-Canada  route or one  that                                                              
looped through  the U.S. and  back up. The  desire was  clearly to                                                              
follow the all-Canadian  route, which he believed  was proposed by                                                              
TransCanada; so the  government stepped in to make  that possible.                                                              
TransCanada paid the  loan off early and did a  wonderful job and,                                                              
from what he could tell it was a wildly successful project.                                                                     
                                                                                                                                
2:49:29 PM                                                                                                                    
MR. PALMER  said  he had read  the same  book many  years ago  and                                                              
recalled  that.  In  fact,  he  said,   over  the  course  of  his                                                              
testimony in  front of one of  the many committees  he's testified                                                              
to over  the last  several years,  he spoke  to that exact  point.                                                              
That  is,  in order  for  that  project  to  proceed there  was  a                                                              
significant  debate in the  Canadian parliament  and the  Canadian                                                              
government did take  a very active role in the  decision regarding                                                              
how the project  would go forward. In fact, they  took a financial                                                              
position in it.                                                                                                                 
                                                                                                                                
CHAIR HUGGINS  asked if he could  refresh the committee  about the                                                              
debate,  as  they had  not  read  the book  and  he was  the  only                                                              
Canadian the room.                                                                                                              
                                                                                                                                
MR.  PALMER said  it was  a prolonged  debate  in the  mid-fifties                                                              
about how  or if  a gas  pipeline should  be constructed  to serve                                                              
Canadian  needs.   Western  Canadian  suppliers   had  significant                                                              
natural  gas  surplus available  and  there  was a  large  market,                                                              
mostly  in Ontario  and  Quebec, Eastern  Canada.  The debate  was                                                              
over whether a pipeline  could be put in place, how  that would go                                                              
about and whether  it would go north or south of  the Great Lakes.                                                              
He  commented  that,   if  they  knew  that  terrain   they  would                                                              
understand  that from  a  pipeline construction  standpoint,  it's                                                              
much  easier to  go south  of the  Great Lakes  rather than  going                                                              
through  the  granite  of  Northern   Ontario.  That's  one  major                                                              
factor. And  the second  major factor  was and  is that  there are                                                              
more customers  south of the Great  Lakes than there are  north of                                                              
the  Great  Lakes.  So  those  were   the  considerations  of  the                                                              
commercial   aspects.  On   the  other  hand,   there  were   some                                                              
nationalistic   aspects  and  public   policy  matters   that  the                                                              
government of Canada  had to consider. That was the  nature of the                                                              
debate  He thought  Mr. Walker  had  correctly characterized  that                                                              
there  were two  potential  projects  put forward  with  different                                                              
proponents; and they  ultimately came together and  put together a                                                              
project  that  was  approved  by  the  government  of  Canada  and                                                              
supported  financially  by the  government  of Canada  in  certain                                                              
ways.                                                                                                                           
                                                                                                                                
CHAIR HUGGINS  asked if it was  like the loan guarantees  they saw                                                              
with this  [project]  and what the  history of  support by  Canada                                                              
for pipelines was.                                                                                                              
                                                                                                                                
MR. PALMER said  he was going from  memory of a book  that he read                                                              
several years  ago; but as he  recalled, the government  of Canada                                                              
had  to take  an ownership  position  in the  section in  Ontario,                                                              
particularly   Northern  Ontario,  where   there  were   very  few                                                              
customers. They also  provided a loan guarantee or a  loan for the                                                              
section  across the  prairies  in Western  Canada.  As Mr.  Walker                                                              
described, the  project was very  successful and, as  he recalled,                                                              
TransCanada  purchased the  Ontario  section  from the  government                                                              
and was  able to pay off  the loan over  the course of years  in a                                                              
normal  fashion. He  did not  recall how  many years  it took  for                                                              
TransCanada to pay off the loan for the Prairie Section.                                                                        
                                                                                                                                
CHAIR HUGGINS  said his  assumption was that  the politics  of his                                                              
position  and Canada's  position  and probably  the U.S.  position                                                              
have evolved  over time. He asked  if that was accurate  and if he                                                              
would bring the committee up to speed.                                                                                          
                                                                                                                                
MR.  PALMER  agreed  that  the politics  had  evolved  over  time.                                                              
Governments  in  Canada had  been  involved  many times  over  the                                                              
course  of the  last  50 years  in  deciding how  projects  should                                                              
proceed in  many different fields.  The government of  Alberta for                                                              
example,  was involved  in establishing  a  pipeline company  that                                                              
was  the predecessor  of Nova  Corporation, TransCanada's  Alberta                                                              
system. They  decided they  did not wish  to own the  pipeline and                                                              
in effect  gave the  TransCanada predecessor,  which at  that time                                                              
was called  The Alberta  Gas Trunk  Line, a  franchise to  provide                                                              
the service as  a private company to customers  across Alberta. He                                                              
added that they  had seen how successful that  predecessor company                                                              
was over  time in some  of the presentations  he had  provided. It                                                              
was  a   privately  financed   company,  privately  owned,   which                                                              
received a franchise from the government of Alberta.                                                                            
                                                                                                                                
2:54:38 PM                                                                                                                    
CHAIR HUGGINS  called a brief recess.  He said when  they returned                                                              
he would ask  for 2 representatives from the administration  and 2                                                              
from  the  Port  Authority  to  talk   project  economics  and  to                                                              
contrast the analyses.                                                                                                          
                                                                                                                                
3:03:27 PM                                                                                                                    
CHAIR HUGGINS called the meeting back to order.                                                                                 
                                                                                                                                
He  explained  that  what  he  would  like to  do  is  to  have  a                                                              
discussion  about   the  Port  Authority's  perspective   and  the                                                              
administration's  perspective.  To kick  that  off,  he wanted  to                                                              
look at  the rationale  behind their  different approaches  to the                                                              
analysis.  The   administration  apparently   did  a   "top  down"                                                              
analysis while the  Port Authority's analysis was  "bottom up." In                                                              
addition,  he said,  Mr. Shipkoff  stated that  AGPA shared  their                                                              
model with the administration, but that was not reciprocated.                                                                   
                                                                                                                                
3:04:50 PM                                                                                                                    
PATRICK GALVIN,  Commissioner, Department of Revenue,  Juneau, AK,                                                              
responded that  the first  question with regard  to the  nature of                                                              
the analysis  goes to  the current exercise.  They were  trying to                                                              
answer  the  question,  with  regard  to  the  TransCanada  Alaska                                                              
application, did  it sufficiently  maximize benefits  to Alaskans?                                                              
In order  to do that,  they had  to do a  full comparison  of that                                                              
decision and the issuance of an AGIA  license with the opportunity                                                              
to pursue  an LNG project.  But they did  not have a  singular LNG                                                              
project  to  use as  for  their comparison;  they  were  comparing                                                              
against a  potential LNG  project. Two  had come  in the  door and                                                              
there  were  others that  could  potentially  go forward  as  they                                                              
progressed with other  interested parties; so they had  to look at                                                              
it  from  the  vantage  point  of LNG  as  a  project  option  and                                                              
determine a comparison of values  both in terms of economic values                                                              
and in terms of likelihood of success.  From that vantage point it                                                              
became a discussion  with the technical team in terms  of the best                                                              
way to accomplish  that. He deferred to Mr. Sparger  regarding the                                                              
nature of  the actual  analysis and  the way  they built  the cost                                                              
estimates  in particular.  He  thought Mr.  Smith  from Black  and                                                              
Veatch could talk about the financial  modeling, but felt that was                                                              
one remove from some of the issues  being discussed here that went                                                              
to the  cost estimates and the  difference between what  they were                                                              
using  in their  financial  models  versus  the numbers  the  Port                                                              
Authority presented  as their expectations  about their  costs. He                                                              
suggested that it  seemed most appropriate to start  by having Mr.                                                              
Sparger talk about the cost modeling.                                                                                           
                                                                                                                                
3:07:01 PM                                                                                                                    
COMMISSIONER  GALVIN continued  that as far  as "top-down"  versus                                                              
"bottom-up,"  they  didn't have  a  particular project  they  were                                                              
trying to  analyze or build;  they were  trying to create  a range                                                              
of possibilities given  the types of projects that  exist. He felt                                                              
that was the most  appropriate way to try to capture  the range of                                                              
possibilities  related  to  LNG,   as  opposed  to  comparing  one                                                              
particular project to another particular project.                                                                               
                                                                                                                                
3:07:54 PM                                                                                                                    
BILL SPARGER,  Energy Project  Consultants, Colorado  Springs, CO,                                                              
was  performing  technical  consulting  for the  state  of  Alaska                                                              
administration.                                                                                                                 
                                                                                                                                
CHAIR  HUGGINS  asked Mr.  Sparger  if  his organization  did  the                                                              
analysis.                                                                                                                       
                                                                                                                                
MR.  SPARGER  replied that  he  headed  up  a technical  team  and                                                              
various members of  the team and subcontractors  did various parts                                                              
of the analysis.                                                                                                                
                                                                                                                                
CHAIR HUGGINS asked when they began the analysis.                                                                               
                                                                                                                                
MR. SPARGER answered that they started January 6, 2008.                                                                         
                                                                                                                                
MR. SPARGER  stated that,  from the  LNG side,  they were  given a                                                              
series  of options  roughly  configured  like the  Port  Authority                                                              
application,  the  TransCanada  Y-line,  and  the  Little  Susitna                                                              
application.   They   had  a   2.7   bcf  pipeline,   48/42   inch                                                              
configuration; the  Y-line; and the  Little Susitna, which  was 48                                                              
inch  all the  way to  Valdez. Taking  those  one at  a time,  the                                                              
pipeline  was bottom-up.  It  was bottom  up  for TransCanada  and                                                              
they simply  prorated their estimates   for the  pipeline portion.                                                              
It was bottom  up because the  pipeline itself had been  worked on                                                              
for a  long time  and was  relatively simple  compared to  the GTP                                                              
[gas  treatment  plant]  or  an  LNG  plant  and  TransCanada  had                                                              
provided  a lot of  information that  they used  to develop  their                                                              
own estimates.                                                                                                                  
                                                                                                                                
3:10:27 PM                                                                                                                    
MR. SPARGER  said the GTP is  common to any project.  No applicant                                                              
provided any extensive  details about the GTP;  they, through some                                                              
of their  experts and engineering  firms, built a  stand-alone GTP                                                              
range. Their  analysis did not arrive  at a cost estimate  per se.                                                              
They  arrived at  a best-case/worst-case  range of  both cost  and                                                              
schedule. They  were not  trying to prepare  a proposal  to submit                                                              
to someone  as the  Port Authority,  TransCanada and others  were,                                                              
but to  provide the  commercial team who  would take  that capital                                                              
cost information  and  run it through  their MPV  model with  many                                                              
other economic  assumptions. That  was their task;  it was  not to                                                              
provide  an estimate.  So,  looking  at worldwide  facilities  and                                                              
factoring those  for current dollars,  then factoring  for Alaska,                                                              
both  the GTP  and the  LNG ranges  were  fed into  a Monte  Carlo                                                              
simulation model  that effectively picks these things  randomly at                                                              
thousands of iterations and comes up with a probability curve.                                                                  
                                                                                                                                
3:13:09 PM                                                                                                                    
MR. SPARGER  explained that  a probability  curve is nothing  more                                                              
than  the  probability  that  the percentage  will  fall  on  that                                                              
curve. In other  words, a cost with a P50 or  probability 50 means                                                              
there is a 50/50  chance that will be the cost;  a P90 means there                                                              
is  a 90  percent chance  that  costs will  be  exceeded. That  is                                                              
important because  P50 is not an  estimate; it is simply  the mid-                                                              
point in  the probability curve.  The reason it's not  an estimate                                                              
is  that  for most  projects,  this  one  in particular  but  most                                                              
projects, the  worst-case range  is much  higher. In other  words,                                                              
it is further from  what you might think than the  best-case range                                                              
is,  because  there  is less  chance  the  costing  schedule  will                                                              
improve than there  is that it will get worse. So  in the way they                                                              
perform the ranging,  by sheer definition, P50 is  always going to                                                              
be higher  than a point estimate.  In fact, he asserted,  they did                                                              
an estimate on  TransCanada and their estimate was  more like P15.                                                              
It's important  to remember that when  you try to compare  a point                                                              
estimate  like  the Port  Authority's,  like  TransCanada's,  like                                                              
Little   Susitna's,  to   P50,  you   already   have  a   built-in                                                              
differential because P50 is not an estimate.                                                                                    
                                                                                                                                
3:15:22 PM                                                                                                                    
MR.  SPARGER said,  going  back to  LNG, the  LNG  costs were  put                                                              
together top-down. There  are few LNG projects of  this size built                                                              
in the world  at any given  time. Their LNG experts,  using public                                                              
and proprietary  databases that  they had access  to, looked  at a                                                              
series of projects  across the world with ready-for-service  dates                                                              
since 2003,  mostly from  2006-2009. Unfortunately, there  weren't                                                              
any projects  in the  arctic except one  in Norway called  Snovit,                                                              
which was  a horrible  example. The  cost of  Snovit was  probably                                                              
double; it  would be way  beyond P90 or P95  on the curve.  But we                                                              
did look  at it because  it was in the  arctic and decided  it was                                                              
not  representative  so  it  was not  included  in  the  analysis.                                                              
Likewise, we  threw out the  bottom. So there  are a whole  lot of                                                              
projects  lumped in  the P20-P30  range, which  means lower  cost;                                                              
and then about an equal number up in the very high range, P80-                                                                  
P90, and  none in the  middle range. He  admitted they  don't know                                                              
why; but what  it indicates is that  projects are coming  in on an                                                              
adjusted basis. Projects  are coming in at the $1000  dollar a ton                                                              
range [of LNG]  and at the $350-$400  range on the lower  end with                                                              
some falling in between.                                                                                                        
                                                                                                                                
3:17:53 PM                                                                                                                    
Going back  to what  the administration was  trying to  do, trying                                                              
to  see how  good  or  bad it  could  be,  Mr. Sparger  said  they                                                              
couldn't  limit  the range  to  the  lower  end because  they  can                                                              
almost  guarantee  it  would  go  up  from  there,  not  down.  So                                                              
regarding  the   little  arrows  depicting  the   projects,  those                                                              
project costs were  not directly used to generate  the probability                                                              
curve, only to generate  the range that went into  the Monte Carlo                                                              
analysis.                                                                                                                       
                                                                                                                                
3:18:42 PM                                                                                                                    
MR. SPARGER  said he was a  little confused. They  heard yesterday                                                              
about  the  Bechtel  top-down  cost estimates  and  he  wanted  to                                                              
respond to  the methodology that  was used for their  estimate. He                                                              
read out of the Port Authority's application:                                                                                   
                                                                                                                                
     The execution  phase cost estimates were  prepared under                                                                   
     a  variety  of  estimating techniques  to  build  up  an                                                                   
     indicative  cost. As there  is little design  definition                                                                   
     available at  this stage, the  costs were arrived  at by                                                                   
     comparing costs  from a variety of similar  projects and                                                                   
     making  adjustments   to  reflect  the   differences  of                                                                   
     location, scoping, timing, and technical parameters.                                                                       
                                                                                                                                
He  submitted that  was  exactly what  the  administration did;  t                                                              
hey were  not looking  for a  point number.  The Port  Authority's                                                              
point number  falls on this  curve, in that  lower end  group. But                                                              
the range  of projects on a  worldwide basis and trying  to adjust                                                              
for location,  scope, timing,  etc., told him  that the  lower end                                                              
group was  not appropriate for the  state to use in  analyzing the                                                              
MPV.                                                                                                                            
                                                                                                                                
3:20:17 PM                                                                                                                    
COMMISSIONER GALVIN  said, from the administration's  perspective,                                                              
what they wanted  was to ensure they had a comparable  analysis on                                                              
the  TransCanada   Alaska  license  project  to   what  they  were                                                              
comparing  on  the  LNG side.  They  had  a  similar  differential                                                              
between what  TransCanada said they  expect their costs to  be and                                                              
what they came in  at as far as their range and  the midpoint they                                                              
used for all of  their financials. Similarly on the  LNG, they had                                                              
a  range they  ran LNG  projects  against and  the Port  Authority                                                              
falls on  the low end  of that. The  issue for the  administration                                                              
was a  combination of  both economic  risk and  where the  project                                                              
could  fall  on  the  cost  side.  Separate  and  apart  from  the                                                              
economic analysis  was the likelihood  of success. He  didn't want                                                              
to  give the  impression  that one  drove the  other  or that  one                                                              
dominated  the  decision;  they separately  participated  in  what                                                              
resulted in their conclusion.                                                                                                   
                                                                                                                                
The  final  point  he  wanted to  make  was  that  throughout  the                                                              
hearing process,  one of their challenges  had been how  to convey                                                              
to a large  group of people the  breadth of the analysis  that was                                                              
done in  the context  of hearings focused  on a particular  topic.                                                              
Most  of  the  focus  had  been  on  issues  associated  with  the                                                              
TransCanada Alaska  project because  that was the  license project                                                              
on  the table.  He did  not  believe enough  time  was devoted  to                                                              
discussion of LNG.                                                                                                              
                                                                                                                                
3:22:40 PM                                                                                                                    
COMMISSIONER GALVIN  said the large  amount of material  that went                                                              
into the  LNG analysis  was not done  on a  cursory basis  or last                                                              
minute.  All   of  the   materials  the  administration   provided                                                              
presented different  aspects of  that analysis, including  reports                                                              
dealing  with  the  technical  engineering   cost  estimates;  the                                                              
financial  estimates  with  price   analyses;  and  the  financial                                                              
analysis  performed  by Goldman  Sachs  running the  same  numbers                                                              
through the  evaluation they used  for the TC Alaska  project, all                                                              
of which were summarized in chapter 4 of their finding.                                                                         
                                                                                                                                
3:24:08 PM                                                                                                                    
COMMISSIONER GALVIN  summarized that  they found LNG  projects are                                                              
economic  and  viable.  In  comparison   to  a  Canadian  overland                                                              
however, they found  that they're not likely to be  as economic or                                                              
to  result in  as much  money coming  back  to the  state as  they                                                              
would  expect  from the  Canadian  project.  They also  found  the                                                              
state's long-term  interests would be  best served by  having both                                                              
and  that it  is  in  the state's  interest  to insure  that  they                                                              
maximize   the   opportunity  for   an   LNG  component   to   the                                                              
distribution  of  Alaska's  natural gas.  The  administration  was                                                              
pleased   about  going   forward   with  the   licensed   project,                                                              
recognizing   that  ultimately   the   markets   will  drive   the                                                              
conclusion as  to whether an LNG  or an overland project  gets the                                                              
first gas off the north slope in the initial open season.                                                                       
                                                                                                                                
3:25:30 PM                                                                                                                    
SENATOR WIELECHOWSKI  commented  that there  was a several  dollar                                                              
difference between  the tariff AGPA calculated and  the tariff the                                                              
administration calculated  for the LNG  line. He asked  if hearing                                                              
AGPA's analysis  changed Commissioner Galvin's opinion  in any way                                                              
as to what the proper tariff should be.                                                                                         
                                                                                                                                
COMMISSIONER GALVIN  said he would  let Mr. Sparger and  Mr. Smith                                                              
address that question.                                                                                                          
                                                                                                                                
3:26:05 PM                                                                                                                    
MR. SPARGER  said, from a  technical standpoint, which  means cost                                                              
and schedule, they  did not hear anything that  would change their                                                              
opinion or  their report. He  thought they had properly  evaluated                                                              
and analyzed  it. Basically, even  though the LNG plant  itself is                                                              
somewhat different  from a capital cost estimate  standpoint, when                                                              
it is added to  the total of the pipeline and  the LNG facilities,                                                              
that  difference narrows  because  their pipeline  cost was  lower                                                              
than  the Port  Authority's  pipeline  cost.  The other  thing  he                                                              
pointed out  was, when he  added the 2 numbers  on page 15  of the                                                              
Port Authority's  presentation, he  came up  about $2 billion  shy                                                              
of the numbers  for those same facilities in the  application that                                                              
was received  in mid-December  and he didn't  know why.  If AGPA's                                                              
application  numbers were  correct,  then the  total capital  cost                                                              
between  the  Port Authority  estimate  and  the  administration's                                                              
P50, (once again it  is not an estimate, but he  said he would use                                                              
AGPA's  terminology) is  within 10  percent.  At this  stage in  a                                                              
project, if two  independent estimates can come within  10, 15, 20                                                              
percent of each other, that's good.                                                                                             
                                                                                                                                
3:27:46 PM                                                                                                                    
SENATOR  WIELECHOWSKI  said  there  were  a couple  of  things  he                                                              
thought he heard  from the Port Authority that  the administration                                                              
hadn't  considered in  their  analysis. First  was  the fact  that                                                              
AGPA said  it [the natural  gas] was at  much higher  pressure and                                                              
that  would  lower  the costs.  Second,  there's  a  cold  weather                                                              
impact  that  needs  to  be  included  in  the  calculations,  and                                                              
obviously  it's  colder  in  Valdez  than  in  Qatar.  Third,  the                                                              
administration, he  believed, had calculated  it at a 4.5  bcf LNG                                                              
facility;  and they  had  calculated at  a  2.7. He  asked if  Mr.                                                              
Sparger could address  those things and whether they  had any sort                                                              
of impact on the tariff.                                                                                                        
                                                                                                                                
3:28:46 PM                                                                                                                    
MR.   SPARGER   started   with   the   last   issue   first.   The                                                              
administration provided  capital costs and schedules  for a number                                                              
of scenarios,  one of  which was exactly  what the Port  Authority                                                              
proposed,  the exact  pipe configuration  and 2.7  bcf. They  also                                                              
did a 4.5.  They actually expanded  the liquefaction, the  GTP and                                                              
the pipe,  putting more compression  on it to  come up with  a 4.5                                                              
bcf case  with their pipeline configuration.  So, he said,  it was                                                              
incorrect to  say they did  not look at or  model the 2.7  from an                                                              
MPV standpoint, because that was done.                                                                                          
                                                                                                                                
SENATOR WIELECHOWSKI  said he could  have been mistaken,  since he                                                              
was trying to recall what he thought he heard.                                                                                  
                                                                                                                                
MR. SPARGER  said yes, Valdez is  colder and to produce  LNG or to                                                              
get the  natural gas  to LNG  you must  lower the temperature,  so                                                              
that  does  help  somewhat.  The   process  requires  getting  the                                                              
pressure up and  in this case it's already up at  a certain level.                                                              
He said  they assumed they  would have to  hold it up  above about                                                              
1300 psi  for to keep the  hydrocarbons in the gas  stream. That's                                                              
the  same thing  that  was  assumed  on the  TransCanada  overland                                                              
route  and that's  why  they  used a  2500  psi pipeline  in  both                                                              
cases; if  the pressure  drops too low  the liquids start  falling                                                              
out. Obviously,  it takes  compression somewhere  to get  that and                                                              
in this case, it's built into the pipeline.                                                                                     
                                                                                                                                
3:30:47 PM                                                                                                                    
MR.  SPARGER  continued  that  they  recognize  there'll  be  some                                                              
savings,  and he thought  that is  why their  costs were  on lower                                                              
end of  the range.  He thought  the range  had already  taken that                                                              
into consideration.                                                                                                             
                                                                                                                                
3:31:10 PM                                                                                                                    
COMMISSIONER  GALVIN  said  the   initial  question  went  to  the                                                              
tariffs  and they  only  dealt with  the cost  side.  He asked  if                                                              
Senator  Wielechowski   wanted  to  expand  the   conversation  to                                                              
include what Mr. Smith would add.                                                                                               
                                                                                                                                
SENATOR WIELECHOWSKI  rejoined he is just trying to  get at what's                                                              
the   correct  tariff   here,  because   there's   a  pretty   big                                                              
discrepancy. He  deferred to the  chair but said he  wouldn't mind                                                              
if more people  wanted to jump  in; he wouldn't mind  hearing from                                                              
the Port  Authority if they  disagreed; he  just wanted to  get to                                                              
the bottom of it.                                                                                                               
                                                                                                                                
CHAIR HUGGINS  agreed. He said  he had a copy  of the text  of the                                                              
slides from  their meeting on January  30, 2008. One of  the slide                                                              
components  said "commitment  to evaluate  LNG project options  as                                                              
part of  the AGIA  evaluation process."  He reminded  Commissioner                                                              
Galvin  that he expressed  his concern  at that  time, that  after                                                              
months of  the process they were  just committing to look  at LNG.                                                              
His question  remained, what were  they thinking prior  to January                                                              
  th                                                                                                                            
30?   Why weren't they committed  to evaluating LNG,  because it's                                                              
a  methodology of  getting gas  to  market? Commissioner  Galvin's                                                              
answer, according  to the  text, was that  they committed  to that                                                              
                        th                                                                                                      
"today"  on  January  30   and  a  letter went  out  to  the  Port                                                              
Authority  and  Governor  Hickel  saying they  were  committed  to                                                              
that.  Chair  Huggin's  concern  was why  were  they  not  already                                                              
committed to it  since it was a methodology of  marketing Alaska's                                                              
gas; and he  remained concerned because the project  most Alaskans                                                              
were behind mentally wasn't going to be considered.                                                                             
                                                                                                                                
3:33:32 PM                                                                                                                    
COMMISSIONER GALVIN  asserted that the  issue was when  the public                                                              
statement  of commitment  was made,  which is  the nature of  both                                                              
the letter  and the  testimony. The  sequence  of events was  that                                                              
they received  applications in  November and two  of them  had LNG                                                              
as the primary  component. Those were reviewed over  the course of                                                              
the  next month  and it  wasn't until  the first  week of  January                                                              
that  they made  the  determination  with regard  to  completeness                                                              
that the LNG projects  were not complete and would  not be subject                                                              
to a direct  comparison within the  constrict of AGIA.  He pointed                                                              
out that  Mr. Sparger had  just said in  response to  the question                                                              
about when they  started this process, the evaluation  of LNG as a                                                              
general  comparison to  the TC  Alaska  project began  immediately                                                              
after that decision;  however, it wasn't until the  end of January                                                              
that they had a  hearing down here. In the interim,  they received                                                              
inquiries  from  both  the  Port  Authority  and  Governor  Hickel                                                              
asking  how  they  were  going  to  proceed  with  regard  to  the                                                              
evaluation of  the TC Alaska  project if  they didn't have  an LNG                                                              
comparison;  and they  made the  public statement  that yes,  they                                                              
would  do it.  They  had  already  made the  decision  internally,                                                              
which started the  process Mr. Sparger described.  He didn't think                                                              
a lack  of focus  on LNG  was an  issue at any  point during  that                                                              
period  of  time.  He  insisted   that  they'd  talked  about  the                                                              
distinction  and the  inherent  competition  between overland  and                                                              
LNG  since  the beginning  of  the  AGIA  process and  that  never                                                              
changed. It  transitioned over that  first week in January  from a                                                              
direct competition  between two proposed projects  to a comparison                                                              
of one  proposed project  and a suite  of options associated  with                                                              
LNG.                                                                                                                            
                                                                                                                                
3:35:27 PM                                                                                                                    
CHAIR  HUGGINS said  he  was reading  the text  and  it said  "the                                                              
                                                 th                                                                             
commitment was  made today." That  was on the  30  of  January. It                                                              
always concerned him  because of the support the  Port Authority's                                                              
concept enjoyed  in Alaska, that  they didn't get a  commitment to                                                              
look at LNG until two months after the application process.                                                                     
                                                                                                                                
3:35:54 PM                                                                                                                    
COMMISSIONER   GALVIN  reiterated   that  the  responsibility   to                                                              
evaluate LNG  was on the administration  from the  beginning. They                                                              
acted on  it and  began the  process of  doing the evaluation.  At                                                              
the hearing  and in the  letter they made  a public  commitment to                                                              
assure  the public that  it was  being included  in the  analysis,                                                              
because  they knew  the  analysis wasn't  going  to be  out for  a                                                              
                                            th                                                                                  
couple of months. It's  just that January 30   was the opportunity                                                              
to make that public statement.                                                                                                  
                                                                                                                                
3:36:57 PM                                                                                                                    
CHAIR HUGGINS  said as  he recalled, the  Port Authority  gave the                                                              
administration  their modeling  process  and  requested that  they                                                              
reciprocate; but the  administration chose not to do  so. He asked                                                              
if that was true.                                                                                                               
                                                                                                                                
COMMISSIONER GALVIN  replied that  he would not characterize  what                                                              
the  Port  Authority  may  or  may   not  have  provided  to  them                                                              
because....                                                                                                                     
                                                                                                                                
CHAIR HUGGINS  interjected that  he would  let the Port  Authority                                                              
speak to it and called on Mr. Shipkoff to repeat his statement.                                                                 
                                                                                                                                
MR.  SHIPKOFF  responded  that, on  the  procedural  matters  with                                                              
respect to  what the Port Authority  provided or did  not provide,                                                              
he would have to defer to Mr. Walker.                                                                                           
                                                                                                                                
3:37:49 PM                                                                                                                    
MR. WALKER  said yes,  they did provide  their financial  model as                                                              
part of their  application, so the administration  had full access                                                              
to it.                                                                                                                          
                                                                                                                                
COMMISSIONER GALVIN  said that in  a discussion subsequent  to the                                                              
release of the  finding, the Port Authority asked  them to release                                                              
the Black & Veatch  financial model. They talked  to the technical                                                              
folks,   particularly  those   at  DNR   [Department  of   Natural                                                              
Resources], the Division  of Oil and Gas, about  what was embedded                                                              
in that  model and confirmed that  there was a  substantial amount                                                              
of proprietary,  confidential information about production  and so                                                              
forth embedded  in it;  so they  responded to  the Port  Authority                                                              
that they  were going to have  to take the  time to find a  way to                                                              
strip  that info  out  in order  to provide  the  non-confidential                                                              
portion  of the  model. He  admitted  that unfortunately,  because                                                              
it's  an integrated  financial model,  it's fairly  time-intensive                                                              
to do that and  it will be a joint effort between  the Division of                                                              
Oil and Gas  and the Black and  Veatch folks, so they  had not had                                                              
the time  to do  it; but  they intended to  get to  it as  soon as                                                              
possible.                                                                                                                       
                                                                                                                                
3:39:25 PM                                                                                                                    
CHAIR HUGGINS  said, with all due  respect, the legislature  is in                                                              
the process  of making  a decision  and having a  vote and  to the                                                              
extent  that one  of the  parties  has some  concerns about  their                                                              
viability, he would  hope the administration would  respond. "They                                                              
are   here,  a   voice  at   the  table   and  they're   asking...                                                              
information-wise,  they had an expectation...  As an  Alaskan, not                                                              
as  a  senator  sitting  at  this end  of  the  table,  it  sounds                                                              
practical to me."                                                                                                               
                                                                                                                                
COMMISSIONER   GALVIN  agreed   that  it   did  sound   practical.                                                              
Unfortunately it  was not. He said  they simply can't get  it done                                                              
in  the  timeframe  provided  by   this  decision-making  process;                                                              
however  they  had  made their  folks  available  for  discussions                                                              
about  what  went into  the  decision  making, how  the  financial                                                              
models  were  structured  and  the   nature  of  any  distinctions                                                              
between the methodologies.  He did not believe  there was anything                                                              
they'd withheld in that regard.                                                                                                 
                                                                                                                                
3:40:40 PM                                                                                                                    
MR.  WALKER  clarified  that,  of   course  they'd  like  to  have                                                              
received it  long ago, but if they  can receive it at  some point,                                                              
somewhat late is  better than never. He admitted it  does make the                                                              
                                     st                                                                                         
process somewhat  awkward. On  May 31   the gasline team  was kind                                                              
enough  to come  to Fairbanks  and  meet with  the Port  Authority                                                              
board, which  is when  he initially requested  the model.  At that                                                              
time they  explained  some of the  sensitivities  in that;  but he                                                              
also asked  for the  assumptions and what  the inputs  were, which                                                              
would  certainly not  be  confidential, and  those  were not  made                                                              
available.  Sometimes the  assumptions provide  a good  indication                                                              
of what went  into the model; what  comes out is based  in a large                                                              
part on what goes into it.                                                                                                      
                                                                                                                                
3:41:39 PM                                                                                                                    
COMMISSIONER GALVIN  said a lot  of times there are  communication                                                              
difficulties  in  terms  of understanding  the  request.  All  the                                                              
assumptions that went  into the model are in the  reports. He said                                                              
when they  get down  to a  discussion of  what the Port  Authority                                                              
really  wants, it  is  beyond the  nature  of simply  assumptions,                                                              
which are  part of the  public record, and  into the  mechanics of                                                              
the model  and the  difficulty of  extracting  that as a  separate                                                              
component.                                                                                                                      
                                                                                                                                
3:42:24 PM                                                                                                                    
MR. SHIPKOFF  added that he  does not see  a tremendous  amount of                                                              
benefit in  reviewing the  administration's  model at this  point.                                                              
It  would  be  nice  to  see  it   and  be  able  to  enhance  his                                                              
understanding of their  methodology; but as Mr.  Walker said, what                                                              
goes into  the model is more  important than the model  itself. He                                                              
conceded  that in  some scenarios  their  model generated  results                                                              
that  indicated  the  LNG  project is  less  attractive  than  the                                                              
pipeline. If  the capital cost  of the LNG  plant is high  and the                                                              
price ratios are  not favorable, it shows the same  thing. He said                                                              
his biggest concern  about the comparative analysis  was that they                                                              
came up  with an  LNG plant cost  estimate of  $8 billion  and, he                                                              
insisted,  they had  not changed  the  numbers from  those on  the                                                              
application. But  the administration's P50 estimate  which, as Mr.                                                              
Sparger explained is  not an estimate, it's a P50  result that has                                                              
a 50 percent chance  of being higher or lower than  the actual, is                                                              
substantially  higher than  the Port  Authority's  number. On  the                                                              
other  hand, the  estimates for  the  pipeline were,  in the  Port                                                              
Authority's  estimate, greater  than their  P50 estimates  for the                                                              
pipeline. He  felt there was  some disconnect there,  something on                                                              
the technical  side, something  in the  methodologies perhaps.  He                                                              
admitted he is not  an engineer, and is not ready  or qualified to                                                              
engage Mr.  Sparger on  any of the  details behind the  estimates.                                                              
That would  be much  better done by  Bechtel, who actually  worked                                                              
on  the development  of the  Port Authority's  cost estimates.  He                                                              
wanted  to understand  what caused  that  wide divergence  between                                                              
the  costs for  the two  categories, acknowledging  that they  may                                                              
very  well be  wrong and,  if so,  they  would like  to have  that                                                              
discussion. As  Mr. Walker indicated,  the Port Authority  offered                                                              
to make  Bechtel's engineers available  to make sure  everyone was                                                              
on the same  page. He thought  that the difference between  an $11                                                              
billion and $13  billion building on the pipeline  was notable but                                                              
not  fatal; however,  the difference  between $8  billion and  $14                                                              
billion for the LNG plant seemed to indicate a big disconnect.                                                                  
                                                                                                                                
3:45:16 PM                                                                                                                    
MR. SPARGER  asked Chair Huggins if  he could comment on  that. He                                                              
said  the  approach  used  when building  a  project  estimate  is                                                              
different  than it  is  when looking  at  the  potential range  of                                                              
outcomes as  they did in their  analysis. The Port  Authority said                                                              
they  disagreed with  the administration's  P50  analysis and  its                                                              
economic  results; but  he opined  that  TransCanada was  probably                                                              
equally  frustrated  with  their  P50  on  the  pipeline  overland                                                              
route.  For  the  sake of  comparison,  he  said,  recognize  that                                                              
TransCanada's cost  estimates and economic analysis  resulted in a                                                              
$2.73  tariff  estimate,  while their  analysis  on  TransCanada's                                                              
project  resulted in  a tariff rate  of $4.70.  That $4.70  tariff                                                              
was what  they compared  to the LNG  analysis. It  would not  be a                                                              
fair  comparison to  take our  ranged  analysis on  the TC  Alaska                                                              
project  and compare  it  to  the Port  Authority's  project-based                                                              
estimates. He  summarized that they  focused on using  the experts                                                              
they had  available to  them to  give them  the range of  possible                                                              
outcomes  on  an  overland  project  and  the  range  of  possible                                                              
outcomes  on  an  LNG  project  and  compare  them  using  similar                                                              
methodologies.                                                                                                                  
                                                                                                                                
He felt that  focusing in on the distinction was  appropriate, but                                                              
wanted  to  make sure  they  came  back  to  the outcome  of  this                                                              
result,  which is  a  licensed project  that  will go  to an  open                                                              
season  in which the  opportunity  for an LNG  project to  proceed                                                              
exists and the market will decide.                                                                                              
                                                                                                                                
3:47:45 PM                                                                                                                    
SENATOR  STEDMAN asked  the  commissioner if  he  was hearing  him                                                              
correctly  to  say  that  they  have  little  to  no  interest  in                                                              
releasing the data inputs.                                                                                                      
                                                                                                                                
COMMISSIONER  GALVIN repeated  that the  data inputs  area all  in                                                              
the public record.                                                                                                              
                                                                                                                                
SENATOR STEDMAN  suggested they  back up a  little because  he was                                                              
probably  using the  wrong terminology.  The issue  of the  inputs                                                              
into  the  model  was the  discussion  here;  the  Port  Authority                                                              
wanted to know  what was put in  that model. He asked  if that was                                                              
correct or if he was still off base.                                                                                            
                                                                                                                                
COMMISSIONER  GALVIN   answered  that  they  were   using  similar                                                              
terminology and maybe talking about different things.                                                                           
                                                                                                                                
3:49:07 PM                                                                                                                    
MR.   SHIPKOFF  said   he   thought  he   had   a  pretty   decent                                                              
understanding  of  what  went  into   the  model  because  it  was                                                              
described in  their finding. His  concern was that the  people who                                                              
generated  the numbers  did  not appear  to  be on  the same  page                                                              
because the  numbers are very different.  He stressed that  he did                                                              
not generate  the $8 billion estimate  for the LNG  plant, Bechtel                                                              
did that  with a  team of  30 engineers  who had  been working  on                                                              
this project  for 10  years. He  felt they  needed to discuss  the                                                              
apparent disconnect  between that number and  the administration's                                                              
number. He  did not feel it was  useful for the Port  Authority to                                                              
say they are  confident their number is correct  because he didn't                                                              
know  if it  was  correct.  But it  was  very different  from  the                                                              
number the  administration used in  their comparative  analysis to                                                              
calculate  tariffs for the  LNG plant.  He said  he still  did not                                                              
understand  why there  was such  a  big disconnect  and he  didn't                                                              
think the  right people on  their side were  engaged to  deal with                                                              
it.                                                                                                                             
                                                                                                                                
3:50:27 PM                                                                                                                    
SENATOR STEDMAN  asked the  chairman and  the commissioner  how to                                                              
rectify this. He admitted that he was interested to know.                                                                       
                                                                                                                                
3:50:39 PM                                                                                                                    
CHAIR HUGGINS  interjected that  if this was  being brought  up by                                                              
the 2  people from California,  it would  be a different  thing in                                                              
his mind; but  this [LNG] concept is widely supported  by Alaskans                                                              
and he wants to  make sure they are given clear  information about                                                              
why  the Port  Authority is  not going  forward, potentially.  The                                                              
Port Authority has some questions that deserve an answer.                                                                       
                                                                                                                                
COMMISSIONER GALVIN  said it is also  important for the  public to                                                              
understand  when they  talk about  the  Bechtel information,  that                                                              
Bechtel studied  this issue  and provided  a tremendous  amount of                                                              
engineering  work  in  generating  their numbers;  but  he  didn't                                                              
believe they  submitted that level  of detail in  the application.                                                              
They received  a certain amount of  detail in the results  of that                                                              
work, so it  was not a matter  of all the information  on one side                                                              
being   provided  and   the   administration   ignoring  it.   The                                                              
administration  took  the  information  that  the  Port  Authority                                                              
provided and  what they received  from the Little  Susitna project                                                              
and engaged  the expertise of folks  who had been involved  in LNG                                                              
projects  around the  world  to provide  their  assessment of  the                                                              
potential  cost  ranges  for similarly  sized,  similarly  located                                                              
projects. As to  why there was such a distinction,  he didn't know                                                              
except  to say  they  had  a credible  team  of experts  who  were                                                              
directed  to provide  a range  of cost  numbers to  plug into  the                                                              
model.  This is  what they  came back  with. For  the purposes  of                                                              
this discussion,  the issue was whether  or not this would  be the                                                              
driving  point of  a  decision.  The administration  considered  a                                                              
number of factors  with regard to LNG projects  and, regardless of                                                              
the  economic  issues,  they  believed   the  overland  route  was                                                              
superior  because of  likelihood  of success  as  well. They  were                                                              
confident in their conclusions.                                                                                                 
                                                                                                                                
3:54:20 PM                                                                                                                    
MR. WALKER  asked Chair  Huggins  if he could  read one  paragraph                                                              
from  a letter  that  he'd sent  to  both Commissioner  Irwin  and                                                              
                                  rd                                                                                            
Commissioner Galvin on February 3.                                                                                              
                                                                                                                                
     Based  upon your testimony  before the  House caucus  on                                                                   
                 th                                                                                                             
     January   30,   it   appears  you   intend  to   utilize                                                                   
     information  from the  Port  Authority's application  to                                                                   
     assemble  the  optimal  LNG   project.  Since  the  Port                                                                   
     Authority  is  no  longer  a  participant  in  the  AGIA                                                                   
     process,   we  offer   our  assistance   to  the   Palin                                                                   
     administration  in that effort.  Our advisors have  been                                                                   
     engaged in  this particular  LNG project since  1999 and                                                                   
     in  numerous  other  LNG projects  worldwide.  The  Port                                                                   
     Authority's  project team will  bring much value  to the                                                                   
     state's   analysis   of  an   LNG  project.   The   Port                                                                   
     Authority's  experts  are  the most  qualified  to  work                                                                   
     with and  analyze the data  submitted, therefore  in any                                                                   
     analysis,  the  Port Authority's  data  and  information                                                                   
     should    include   the    integral   involvement    and                                                                   
     participation of the Port Authority's project team.                                                                        
                                                                                                                                
He  added,  that certainly  would  have  included Bechtel,  so  we                                                              
attempted to make all of our experts available to that process.                                                                 
                                                                                                                                
3:55:54 PM                                                                                                                    
COMMISSIONER  GALVIN   pointed  out  that  the  nature   of  their                                                              
analysis was  not a  critical assessment  of the Port  Authority's                                                              
application  or the information  that was  submitted. That  wasn't                                                              
the nature  of the administration's  analysis. Their  analysis was                                                              
to look at LNG  as an alternative to the license  project. In that                                                              
regard  they did  not  feel  it was  appropriate  to  go into  one                                                              
particular project's application and do an analysis of that.                                                                    
                                                                                                                                
3:56:36 PM Chair Huggins called a short at-ease.                                                                              
                                                                                                                                
Chair Huggins called  the meeting back to order at  4:08:22 PM. He                                                            
asked   for   Mr.   Shipkoff   and   a   representative   of   the                                                              
administration to come forward.                                                                                                 
                                                                                                                                
4:09:38 PM                                                                                                                    
CHAIR HUGGINS  said they had about  10 minutes to  cover lingering                                                              
issues  regarding  the  Port  Authority  presentation  before  Mr.                                                              
Palmer's presentation was scheduled to begin.                                                                                   
                                                                                                                                
RADOSLAV  SHIPKOFF  said  that,   with  regard  to  Mr.  Sparger's                                                              
suggestion that  the Port Authority  had changed the  numbers used                                                              
in his  presentation yesterday  from those that  were used  in the                                                              
application,  that  was  not  so. He  directed  the  committee  to                                                              
tables 8 and  9 in the replacement application  and reviewed those                                                              
numbers briefly  to illuminate his  point. He explained  that they                                                              
didn't break  out the  numbers between LNG  and the pipeline  side                                                              
in  their application;  but they  did do  that today  in order  to                                                              
compare more closely with the administration's numbers.                                                                         
                                                                                                                                
Regarding  the  quote  Mr. Sparger  read  from  their  application                                                              
about  Bechtel's  methodology, if  his  contention  was that  they                                                              
performed  a top-down  estimate using  data mining,  that was  not                                                              
done. His  understanding was that  Bechtel used a number  of their                                                              
own completed  LNG projects  as a starting  point for  their work.                                                              
They used  numbers for projects using  the same plant  design with                                                              
specific  adjustments  for the  Anderson  Bay location.  He  added                                                              
that they  anticipated the  administration would have  discussions                                                              
with  Bechtel under  a confidentiality  agreement  and would  have                                                              
access  to the  confidential data  that  was not  included in  the                                                              
application.                                                                                                                    
                                                                                                                                
MR. SHIPKOFF continued  that, with respect to the  cost estimation                                                              
methodology  using Monte  Carlo  simulation  analysis versus  cost                                                              
estimates  not  in  a probabilistic  sense,  they  understand  and                                                              
appreciate the difference.                                                                                                      
                                                                                                                                
4:16:29 PM                                                                                                                    
He insisted that two important factors have to be considered:                                                                   
The  wide range  of probability  distribution in  the Monte  Carlo                                                              
simulation skewed  the P50  result to a  higher number,  which Mr.                                                              
Sparger explained  very well. To the Port Authority  that approach                                                              
introduced an  inconsistency in the  evaluation between  a project                                                              
that  had  probability  distribution   only  on  the  basis  of  2                                                              
pipelines using  1 type  of methodology  and another project  that                                                              
had a pipeline and an LNG plant with a very broad distribution.                                                                 
                                                                                                                                
He said he did  not want to spend time talking  about the validity                                                              
of different  methodologies; he  was sure they  would not  be able                                                              
to convince the  administration that their numbers  are wrong, nor                                                              
did he say  they were. Neither did  he believe they would  be able                                                              
to  convince  the  administration  or  the  committee  that  their                                                              
numbers are  correct; they  cannot say that  is true.  His concern                                                              
had  to do  with  the process  which  prevented  the narrowing  of                                                              
differences between  the results  of the different  approaches. He                                                              
agreed  with  Mr. Galvin  that  the  market  has to  decide  which                                                              
project  is more  attractive.  The Port  Authority  did not  think                                                              
either of  the projects  would proceed on  the basis  of arguments                                                              
about whose  methodologies was correct;  ultimately it  would come                                                              
down to  which project  can convince the  producers and  the state                                                              
that the  project is in a  position to offer concrete  contractual                                                              
terms  about  gas  purchase.  Until then  they  won't  know  which                                                              
project is more attractive.                                                                                                     
                                                                                                                                
He  reiterated  that he  does  not see  why  they have  to  decide                                                              
between one project or the other.                                                                                               
                                                                                                                                
4:21:18 PM                                                                                                                    
COMMISSIONER   GALVIN   commented   that  Mr.   Shipkoff's   final                                                              
statements served  to show their common interests.  With regard to                                                              
what  the committee  has heard,  he commended  the Port  Authority                                                              
for the  work they have  done for many  years and agreed  that LNG                                                              
has the  right to participate  in the competition  to get  the gas                                                              
commitments  to  bring  the  gas  to market.  He  said  they  look                                                              
forward to  continuing to  work with both  the Port Authority  and                                                              
other proponents of LNG as they move toward an open season.                                                                     
                                                                                                                                
4:22:38 PM                                                                                                                    
BILL  WALKER  asked if  he  could  reserved his  closing  comments                                                              
until after Mr. Palmer's presentation.                                                                                          
                                                                                                                                
CHAIR HUGGINS  said he  hoped they  would have representatives  of                                                              
the  Canadian government  available via  teleconference at  1:00pm                                                              
tomorrow.                                                                                                                       
                                                                                                                                
4:23:37 PM                                                                                                                    
CHAIR HUGGINS  asked Mr. Palmer to  talk them through  the concept                                                              
of simultaneous open seasons.                                                                                                   
                                                                                                                                
TONY PALMER said,  as they indicated in their  application and had                                                              
clarified  over the  course of the  last 50  days, if  TransCanada                                                              
was granted  a license  under AGIA  by the  first of August,  they                                                              
would  hold an  open  season by  July of  2010.  That open  season                                                              
would provide  potential customers  with commercial terms  as well                                                              
as  updated cost  estimates and  other  terms they  would have  to                                                              
meet  to be  a  customer  on the  pipeline.  They would  have  the                                                              
opportunity  to nominate  deliveries along  the pipeline route  in                                                              
Alaska,  through the  Yukon  and all  the way  to  Alberta, or  to                                                              
Valdez.  They  would  have  the  opportunity  to  do  that  for  a                                                              
simultaneous open  season. By that,  he said, he meant  they would                                                              
be able  to nominate  Valdez, Tok, Fairbanks,  or Alberta.  At the                                                              
conclusion  of that open  season, those  customers would  know the                                                              
volumes  TransCanada had  received.  Each customer  would have  to                                                              
meet  the  same  terms  and  conditions  no  matter  what  is  the                                                              
location of  their delivery point,  which is a standard  procedure                                                              
they apply throughout their business.                                                                                           
                                                                                                                                
4:25:52 PM                                                                                                                    
SENATOR WIELECHOWSKI  told  Mr. Palmer that  they heard  testimony                                                              
yesterday  that a TransCanada  official said  they would  consider                                                              
building  a line  to  Valdez after  the main  line  was built.  He                                                              
asked if that is true.                                                                                                          
                                                                                                                                
TONY  PALMER thanked  Senator Wielechowski  for  bringing that  up                                                              
and said he  followed up on it  with the individual who  gave that                                                              
presentation. He clarified that what was said was:                                                                              
                                                                                                                                
     A continental  pipeline, a pipeline  going to  the lower                                                                   
     48, is TransCanada's  basic proposal with  a possibility                                                                   
     of   a  Y   line  coming   most   reasonably  post   the                                                                   
     continental  trunk  line,  but with  the  provision  the                                                                   
     market will  decide the fate  of any LNG option  via the                                                                   
     open season.                                                                                                               
                                                                                                                                
He was never  asked about an  alternative where they only  got LNG                                                              
volumes,  for example; but  hoped he  had been  very clear  on the                                                              
record that,  in the  event they only  receive volumes  to Valdez,                                                              
if there is sufficient  to make the project economic  and if those                                                              
customers  meet the  conditions  that any  other  customer has  to                                                              
meet, TransCanada would  construct a line to Valdez  instead of to                                                              
Alberta.                                                                                                                        
                                                                                                                                
4:27:36 PM                                                                                                                    
SENATOR  WIELECHOWSKI  said he  understood  if they  conducted  an                                                              
open season  to Valdez,  it wouldn't  include  an open season  for                                                              
the liquification  plant. He asked if TransCanada  would object to                                                              
the legislature funding a liquefaction plant.                                                                                   
                                                                                                                                
TONY  PALMER agreed  that TransCanada's  proposal was  to build  a                                                              
gas  treatment plant  and  a pipeline  and  not facilities  beyond                                                              
that   point  to   Valdez;   so  it   would   be  the   customer's                                                              
responsibility   to  make  arrangements   to  have   liquifaction,                                                              
shipping  and ultimate  markets.  It would  clearly be  up to  the                                                              
state  to  choose  whether  to  participate  in  the  liquifaction                                                              
project  if  the  party  is  a  customer  on  their  pipeline.  If                                                              
however, it was  a competitive project and were to  go outside the                                                              
bounds of AGIA, they would take issue with it.                                                                                  
                                                                                                                                
4:29:12 PM                                                                                                                    
SENATOR  WIELECHOWSKI  asked  about   the  timing  of  the  Alaska                                                              
project.  He quoted  from a  TransCanada representative  regarding                                                              
the timeline for building the Alaska pipeline:                                                                                  
                                                                                                                                
     The  Alaska project  is  a long  way  off.  Just to  put                                                                   
     everything  in time  sequence, we would  the $5  billion                                                                   
     phase  one  of the  Keystone  over  the next  couple  of                                                                   
     years,  then  we move  into  the Keystone  expansion  we                                                                   
     announced today;  then our plans would see  us construct                                                                   
     the  Mackenzie Valley  pipeline  and only  in the  later                                                                   
     part of  the next  decade would  the Alaska pipeline  be                                                                   
     built.                                                                                                                     
                                                                                                                                
He  said it  concerned him  a lot,  because he  thought they  were                                                              
going  to be  building  it in  the  middle or  early  part of  the                                                              
decade and  now they  seemed to be  pushing it  off. He  wanted to                                                              
know if TransCanada  still planned to adhere to  the timeline they                                                              
agreed to under AGIA.                                                                                                           
                                                                                                                                
TONY  PALMER stated  that  Mr.  Kvisle went  on  to  say, "In  our                                                              
perfect plan,  it fits  really well;  but in  reality it  may turn                                                              
out  differently." What  he set  forth is  what TransCanada  hopes                                                              
occurs going forward.  When he referred to the latter  part of the                                                              
next  decade, 2018  in service  is the  same time  frame they  had                                                              
been  talking about  for  the last  50 days  of  testimony and  is                                                              
indeed  the latter  part  of the  next  decade.  He conceded  that                                                              
whether or  not MacKenzie  would be completed  on this  time frame                                                              
was an open  question, as it  was still in the  regulatory process                                                              
in Canada. He  added that Mr. Kvisle's comments  in that interview                                                              
were primarily to address the Keystone project.                                                                                 
                                                                                                                                
He summarized  that TransCanada's  commitments remained  the same.                                                              
                                  st                                                                                            
If they had  a license by August 1,   they would be  concluding an                                                              
open season by July of 2010 and targeting a September 2018 in-                                                                  
service date, all  subject to getting customers  and the necessary                                                              
regulatory approval.                                                                                                            
                                                                                                                                
4:33:04 PM                                                                                                                    
SENATOR THOMAS  asked Mr. Palmer  to explain their  involvement in                                                              
the MacKenzie pipeline project.                                                                                                 
                                                                                                                                
TONY PALMER  responded that  TransCanada is a  small owner  in the                                                              
project,  which  is owned  primarily  by  a subsidiary  of  Exxon,                                                              
Imperial  Oil  Canada.  The  other major  players  are  Shell  and                                                              
Conoco  Phillips.  TransCanada  is  funding the  interests  of  an                                                              
aboriginal pipeline group,  so they have the right to  take a 3 to                                                              
5 percent  ownership in that project  and are paying about  1/3 of                                                              
the bills.                                                                                                                      
                                                                                                                                
SENATOR THOMAS asked  him to comment on TransCanada's  involvement                                                              
versus the producers' in the tar sands.                                                                                         
                                                                                                                                
TONY  PALMER answered  that TransCanada  has no  ownership in  the                                                              
oil sands.  They have  gas pipelines  that supply  service  to and                                                              
from that  region of  Alberta and the  Keystone project  will move                                                              
some oil away from  the oil sands fields. That  is their interest,                                                              
but they are not  producers of oil or gas in Canada  or the United                                                              
States; they transport other people's gas.                                                                                      
                                                                                                                                
4:36:21 PM                                                                                                                    
SENATOR THOMAS  said his last  question was whether  the producers                                                              
in Prudhoe Bay have any relationship to the tar sands.                                                                          
                                                                                                                                
TONY PALMER said  he thinks almost all of the  major international                                                              
oil companies have an interest in the oil sands.                                                                                
                                                                                                                                
4:37:32 PM                                                                                                                    
SENATOR HUGGINS commented that the Chinese also have a position.                                                                
                                                                                                                                
TONY  PALMER said  that  is true,  they are  partial  owners in  a                                                              
development opportunity.                                                                                                        
                                                                                                                                
4:37:52 PM                                                                                                                    
SENATOR  STEDMAN asked  Mr.  Palmer  to talk  a  little about  the                                                              
labor  pool and  source  of materials  from  a pipeline  company's                                                              
perspective with  regard to the MacKenzie  Valley line and  the TC                                                              
proposal.   He  wondered   if   it  was   possible   to  do   both                                                              
simultaneously from a manpower and materials standpoint.                                                                        
                                                                                                                                
MR.  PALMER  replied, although  it  would  not be  impossible,  it                                                              
would be  very difficult and costly  for both to proceed  with the                                                              
same schedule.  He admitted  there is already  a shortage  of both                                                              
labor and  materials and, although  adjustments are  occurring and                                                              
should  eventually relieve  some  of the  pressure,  it will  take                                                              
time.  He said  if  MacKenzie  stays on  track,  they  will be  in                                                              
service  in  2014  or  2015  and   if  Alaska  proceeds  with  the                                                              
timeframe they hope  for, it will be in service by  2018. The bulk                                                              
of  the employment  would  occur  during the  construction  phase,                                                              
which  means somewhere  in  that  2014-2015 timeframe  onward.  It                                                              
will be  a good thing  if MacKenzie  stays 2 to  4 years  ahead of                                                              
the Alaska  line as  far as  cost savings  and synergies.  If they                                                              
pancake on top of  each other somehow, that will  be a problem for                                                              
both projects.                                                                                                                  
                                                                                                                                
4:40:44 PM                                                                                                                    
BILL  WALKER said  they  receive  calls from  Alaskans  frequently                                                              
asking  them  to  continue  what  they are  doing,  and  they  are                                                              
concerned about  the continuing  delay. He  firmly believes  it is                                                              
best for Alaska  to take control  and do its own project  now. The                                                              
Port Authority  will absolutely  work within  the AGIA  process if                                                              
they  must; but  they  don't think  it is  the  best option.  They                                                              
think the  best option  is to start  immediately on an  all-Alaska                                                              
project owned by the state of Alaska.                                                                                           
                                                                                                                                
4:44:46 PM                                                                                                                    
SENATOR  ELTON  expressed  his appreciation  to  all  parties.  He                                                              
commented that  he would read the  book Mr. Walker  suggested; but                                                              
said another  lesson they could take  away from that book  is that                                                              
the  Canadian  Parliament  made   decisions  based  on  what  they                                                              
thought the  federal imperatives could  and should be,  and that's                                                              
one  of the  concerns  he said  he has  about  the all-Alaska  gas                                                              
pipeline.  The federal  government,  our federal  government,  may                                                              
decide they  want to control the  direction of the flow  of energy                                                              
and there has, in  fact, been some discussion about  this. He said                                                              
he  is concerned  that  our federal  government  may mandate  that                                                              
Alaska have  a project that  will deliver  energy to the  lower 48                                                              
states  rather than  to foreign  markets.  He told  Mr. Walker  he                                                              
would appreciate  getting the title of  the book and where  he can                                                              
get a copy.                                                                                                                     
                                                                                                                                
MR. WALKER  offered to  provide his  copy of  the book to  Senator                                                              
Elton and  said he looks  forward to the  opportunity to  sit down                                                              
with the  federal government  to talk about  the project.  If they                                                              
have to take LNG to the lower 48, he said, that won't be a deal-                                                                
killer.                                                                                                                         
                                                                                                                                
SB 3001 and HB 3001 were held over.                                                                                             

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