Legislature(2005 - 2006)SENATE FINANCE 532
07/14/2006 09:00 AM Senate SPECIAL COMMITTEE ON NATURAL GAS DEV
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| Start | |
| SB3001 | |
| SB3002 | |
| Adjourn |
* first hearing in first committee of referral
+ teleconferenced
= bill was previously heard/scheduled
+ teleconferenced
= bill was previously heard/scheduled
| += | SB3001 | TELECONFERENCED | |
| += | SB3002 | TELECONFERENCED | |
SB 3001-OIL/GAS PROD. TAX
CHAIR SEEKINS said he had asked some of the producers if they
would address the committee on Basin Control issues today. He
introduced Wendy King, Director of External Strategies, ANS Gas
Development Team, ConocoPhillips Alaska; Brad Keithley, of the
law firm Jones Day, representing BP; and Patrick Coughlin,
Counsel for BP.
9:22:36 AM
BRADFORD G. KEITHLEY, Partner, Jones Day, Counsel to BP gave
some background on Jones Day and his own experience in oil and
gas issues. He had worked extensively with the Federal Energy
Regulatory Commission (FERC) and was asked by BP to appear
before the committee to discuss pipeline affiliate issues.
He said that he wants to make sure the record is complete on
three issues that came up in yesterday's meeting. First, Mr.
Shepler's concern that the FERC cannot deal with pipeline issues
that arise after the open season as additional exploration
occurs; second, Mr. Shepler's concern that the FERC is too far
away and proceedings are too slow; third, Mr. Harper's
suggestion that various specific terms such as a pipeline tariff
could and should be drafted at this point. He emphasized that
all three of those points are wrong.
9:24:45 AM
MR. KEITHLEY said Mr. Shepler also indicated that the contract
needs provisions to prevent discrimination against non-
affiliates after the open season, because FERC does not have the
authority to do so. In fact, the FERC's existing rules do deal
with producer/pipeline affiliate issues of exactly the type
raised here.
In FERC Order No. 2004 [Standards of Conduct for Transmission
Providers], the FERC noted that as of 2003, 16 pipelines in the
Lower 48 were transporting gas with their production affiliates,
and held an average of 37 percent of the pipeline's capacity. On
6 of these, producer affiliates held more than 60 percent of the
firm transportation capacity. Consequently, FERC Order No. 2004
provided rules and remedies related specifically to expansions
on affiliated pipelines after the initial open season.
He said that in FERC Order No. 670 [Prohibition of Energy Market
Manipulation], the commission also issued rules making it clear
that it is unlawful for a pipeline or an affiliate to engage in
any action "for the purpose of impairing, obstructing, or
defeating a well-functioning market." Refusal to expand a
pipeline in order to coerce other producers into selling their
lease position or restricting their ability to market gas, would
violate Order 670, resulting in civil and criminal sanctions
against the pipeline and the producer affiliate.
He stressed that it is BP's goal to be in the business of
producing and exploring for gas and oil on the North Slope, not
to put others out of that business, and the FERC orders compel
it to behave in a way that promotes open access.
MR. KEITHLY also pointed out that Section 105 of the Alaska
Natural Gas Pipeline Act (ANGPA) gives the FERC unprecedented
authority to require expansions. That authority is in direct
response to state and non-affiliated producer concerns expressed
at the time that the ANGPA was passed.
9:28:26 AM
He said that Mr. Shepler also expressed concern that the FERC is
too far away and these issues would require extensive
proceedings, but that is not the case. The FERC has developed an
Enforcement Hotline that is staffed 12 hours per day, every
business day, to deal with potential violations. It has also
established audit teams that conduct onsite audits for
compliance with the Commissioner's orders. Another enforcement
tool is that the state has the power to act as a policeman in
connection with these issues and can provide information to the
FERC directly in order to expedite its response.
MR. KEITHLY said that, with regard to Mr. Harper's position that
we should be preparing a tariff now, a pipeline tariff is
usually several hundred pages long and provides the details of
pipeline rates and terms and conditions of service. To prepare
it requires full knowledge of the costs involved, the operating
parameters, the design, the pressures, and the takeoff and
delivery points. It is unreasonable to believe the participants
have all of those details now.
He said that BP is already developing a plan to comply with the
non-discriminatory aspects of the FERC regulations and Order 670
requirements. It is also working on how to separate the pipeline
function from the producer function, how to ensure non-
disclosure of information from the pipeline side to the producer
side, and on selection of an internal chief compliance officer
as required by the FERC regulations.
9:33:58 AM
SENATOR OLSON arrived.
9:34:30 AM
SENATOR GREEN asked about the state's obligation, as a partner
in the pipeline, to provide information in a FERC investigation.
PATRICK COUGHLIN, Senior Counsel, BP, responded that exactly
what information the state could disclose publicly would be
covered in the LLC agreement. In terms of operating the pipeline
business that would be dealing with FERC, the state would be in
a position to share that information just as any other member of
the LLC would be.
SENATOR GREEN corrected that she was not asking whether the
state would be free to share that information, but whether it
would be obligated to do more than another partner would in the
same circumstances.
MR. COUGHLIN answered that, if the state thought that the LLC
was not complying with FERC regulations, it would have an
obligation to report that.
9:36:15 AM
SENATOR BEN STEVENS asked Mr. Keithley if he had ever seen a
tariff published prior to sanction.
MR. KEITHLEY replied that he has never seen a draft tariff
prepared prior to that. It is available at the open season so
all parties know the terms and conditions of service that will
be applied to the pipeline they are bidding on.
9:37:19 AM
SENATOR BEN STEVENS asked if it is unusual for a non-owner group
to request publication of a tariff on a project of this size
with multiple owners.
MR. KEITHLEY replied that it is not unusual, but it is not
possible to bring the information together this early. He went
on to say that the behaviors he has seen are what he ordinarily
expects in a large project, that a lot of posturing goes on and
people sometimes ask for things that they don't expect to get.
SENATOR BEN STEVENS said he finds it interesting to hear that
this is nothing new in terms of trying to garner an advantage.
9:40:34 AM
WENDY KING, Director of External Strategies, ANS Gas Development
Team, ConocoPhillips Alaska, Inc. emphasized that she sees this
as a Basin-Opening opportunity for oil and gas exploration in
the state, as oil and gas often exist in the reservoirs
together. She said it is safe to assume that the FERC will
scrutinize this project to ensure open-access, because it is
estimated to be between 6 and 10 percent of the nations domestic
supply, which is a significant portion from one project.
She said that in the base design, laid out in the 2001-2002
[feasibility] study [undertaken by the Alaska Gas Pipeline
Producers Team: ConocoPhillips, ExxonMobil, BP], it was
estimated that it would a take about 50 trillion cubic feet
(tcf) of gas to fill the pipe for approximately 30-35 years. Of
that 50 tcf, only 35 tcf is publicly known resource, indicating
that the pipeline company anticipated the need for exploration
volumes to fill the pipe over the project scope. She also noted
that since the pipeline doesn't know who will show up and bid
for capacity, it may need more than 50 tcf to fill the base
design as a result of the open season.
MS. KING said that, in that 2001-2002 study, the pipeline
producers were looking at roughly a 4.5 billion cubic feet (bcf)
per day pipeline. In-fill compression (adding compressor
stations) can increase the deliverability in the pipeline from
roughly 4.5 to 5.6 bcf per day, but significant gas volumes will
be needed to fill that additional bcf per day. So, exploration
will be necessary to fill the base design and any expansion. She
emphasized that there is no "one size fits all" expansion model.
There is a whole host of scenarios that could evolve over time.
9:44:36 AM
MS. KING then addressed yesterday's discussions relating to a
FERC petition submitted by the pipeline producers, which
addresses the need to streamline the permitting process. Delays
in the project will result in increased costs, so the sponsors
are continuing to advance this petition on that sole issue.
Thus, FERC established numerous unprecedented procedures,
conditions, and presumptions, applicable to the award of
capacity on and rates for Alaska Natural Gas Transportation
Projects in order to promote competition in the
exploration, development, and production of Alaska Natural
Gas. These extensive requirements are not challenged here.
This petition challenges the commission's authority in
Sections 157, 157.36, and 157.37 to mandate, long after the
open season has ended, increased capacity for an Alaska Gas
Pipeline project or expansion and to dictate the amount of
unsubscribed capacity and unused expandability that initial
project must build in.
9:46:04 AM
MS. KING said that since the FERC Order 636 [The Restructuring
Rule (1992)] was issued in April 1992, there have been a number
of producer-owned pipelines, and all pipelines that have a
portion in the US are subject to Order 2004 and the FERC
Affiliate Rules. ConocoPhillips believes it is important to
align its ownership in the pipe with the firm shipping
commitments (Firm Transportation [FT] Commitment) and the
expected gas volumes. The costs get passed on to the holders of
the FT Commitments, which underpin the project. Because it is
such a significant cost to stand behind the FT commitment,
ConocoPhillips feels it should have an ownership position.
9:48:36 AM
SENATOR STEDMAN said that there have been discussions regarding
the potential for 100-200 bcf within the basin area, and asked
how much exposure the state is actually facing in trying to get
from 35-50 bcf when the estimates are so much higher, and a vast
area is yet unexplored.
MS. KING responded that Senator Stedman is correct, she has seen
data from a number of public sources, including USGS Minerals
Management Service, that have indicated there is exploration
potential between the North Slope and the Chuckchi Sea in the
order of magnitude of 50-100 tcf or more. She said that the
exploration potential is a function of whether you can find the
gas, whether you can find it in commercial quantities, and
whether it can be developed in a timely fashion. That is why the
producers have factored the need for additional volumes into the
design. The state's estimate was for 70 tcf on the upstream
model contract, but the condition of that was 4.5 bcf expanding
to 5.6 bcf per day over the course of the pipeline, which means
about 70 tcf per day would be needed to fill the expanded volume
over a period of 30-35 years.
9:51:04 AM
BOB LOEFFLER, Morrison & Foerster, Counsel to the Governor, went
back to questions posed earlier by Senator Green related to
information and the Public Records Act. He said that the state
is trying to strike a balance in the LLC between protecting
confidential information and recognizing that the public has an
interest in this project, so it does not have a general
exemption from the Public Records Act, but there is protection
of confidential information. Also, there is an exemption in
PipeCo [Alaska Natural Gas Pipeline Corporation] from the public
meetings part of state law.
9:52:37 AM
BILL MCMAHON, Alaska Gas Commercial Manager, ExxonMobil, said
there is a concern about what the FERC will do in the future in
terms of protecting the pipeline, but the administration, the
legislature, and independent producers have all been very
successful in getting their issues before FERC and having them
reflected in rule-making. This pipeline will have three ways to
expand: the traditional voluntary expansion, FERC mandated
expansion, and the state-initiated expansion that is in the
fiscal contract.
He explained that a shipper coming in outside of the open season
would have three additional ways to move gas on the line,
existing shippers could release excess capacity. The pipeline
could have a reverse auction, in which companies with excess
capacity give it back to the pipeline to go to another shipper,
and there are business deals that could be made to sell gas to a
shipper that has capacity available.
9:54:52 AM
SENATOR BEN STEVENS asked Mr. Clark and Mr. Loeffler what the
state's interest would be, as a shareholder and royalty owner,
in a new discovery made by an entity that is not an existing
shipper after the open season.
JIM CLARK, Chief Negotiator, Office of the Governor, responded
to Senator Steven's question by referencing Mr. McMahon's
explanation of what the state has done before FERC up to this
point, both in legislation that has passed Congress and in the
FERC open season regulations. He said that the state took an
ownership interest in the gas, in part, to assure all potential
producers in Alaska that it can get that gas to market and
because it gives us added royalty and tax cash shares. He said
that the administration's intent is to increase activity on the
North Slope as much as possible.
9:57:52 AM
He explained that some of the things the administration is
looking at are more reflected in the fiscal interest findings
than in the contract. The state is taking gas-in-kind, has a
mileage-sensitive rate, and has four takeoff points. It is
hoping that Anadarko will be successful in the Foothills and
that other producers will come to Alaska to buy leases and
explore.
9:59:03 AM
MR. LOEFFLER added that the state has a financial interest in
getting more volumes to market and in expansion. More gas equals
more cash. Expansion equals more investment in the pipeline and
greater returns.
SENATOR BEN STEVENS commented that, if he understands correctly,
the way that the contract is crafted aligns the state with the
independents for the development of future expansion, and it is
interesting that, although the committee has been established
for over a month and has continued to hear concerns about
independent expansion, not one independent has come before the
committee to express those concerns.
CHAIR SEEKINS responded that the consultants the legislature
hires advise it on what is in the best interests of the people
of Alaska and understand how important it is to make sure the
independent non-owners can get their gas to market.
10:02:42 AM
MR. CLARK said that he fully subscribes to the Chair's comments
and believes the administration has strong policies to assure
independent access.
10:04:21 AM
SENATOR WILKEN prefaced his question by saying that he
understands that inexpensive compression expansion would allow
an increase of about 25 percent, but anything more gets very
expensive. He also understands that the state cannot tell the
FERC what to do, although it can express a preference. He then
asked Mr. Clark whether there is [or should be] a formal
expression in the contract that expansion will be limited to
rolled-in rather than incremental pricing.
MR. CLARK deferred to Mr. Loeffler to answer the question.
MR. LOEFFLER answered that the state's position has always been
in favor of rolled-in pricing within limits. Some parties have
suggested that it should be willing to pay for an uneconomic
expansion, but the state favors the FERC policy in that regard,
which states that there is a presumption of rolled-in pricing,
but because every expansion is so fact-specific, each will be
dealt with on a case-by-case basis.
10:06:46 AM
MR. CLARK added that opponents to an application for expansion
would have to prove to the FERC that it is a subsidy in order to
preclude rolled-in pricing. The position the state has taken in
Article 8.7 of the contract, is that it would take on state-
sponsored expansion in order to ensure expansion and so that
dispute resolution is contractual and not only a regulatory
matter.
10:08:05 AM
SENATOR HOFFMAN apologized for getting off topic, but said that
he wanted to bring up a couple of comments made by the governor
in his address of the previous evening. In that presentation he
talked about sharing energy with Alaskans who pay property
taxes, but many of the people who have the highest energy needs
do not pay property taxes. Also, he talked about how to get the
use of in state gas to Kenai, Anchorage, Fairbanks, and other
major metropolitan areas, but did not explain how the rest of
Alaska will benefit from it.
10:10:39 AM
MR. CLARK responded that the governor's speech included a
reference to using the Yukon River takeoff point to strip
propane and butane from the gas and barge it to villages along
the Arctic-Yukon-Kuskokwim (AYK) River system, thereby lowering
rural energy costs. He also envisioned using part of the PPT
funds to provide relief for property owners, but that is
balanced with his intent to fully endow the Power Cost
Equalization (PCE) Fund.
10:13:29 AM
SENATOR ELTON asked if anything in the contract could preclude
the kind of expansion downstream that would prevent expansion
upstream.
MR. LOEFFLER replied that there can be all sorts of expansions,
and one does not necessarily preclude another. Also, the state
would have the same rights on the Canadian side that it does on
the Alaskan side to participate in planning. He then deferred to
Ms. King to answer from an engineering standpoint.
10:15:41 AM
MS. KING said that she is a reservoir engineer, not a pipeline
engineer, but she understands that there are multiple options
for expansion, and each must be handled on a case-by-case basis.
She knows you would need to look at the J-curves, but if the
committee would like further information on that, ConocoPhillips
has pipeline-engineering experts who can address it in more
detail.
SENATOR ELTON said he'd like to see follow-up on this.
10:17:43 AM
MR. LOEFFLER agreed that one of the tricky issues on expansion
is that, expanding one field could foreclose a field coming on
in a different geographic area, and so it is good to have a
formula for optimal expansion.
10:18:53 AM
MS. KING added that productivity generally plateaus for a time
and then the reservoir pressure starts to decline, creating new
capacity. So, before doing an expansion, one would want to look
at where there might be capacity available due to natural
decline. Also, the cycle time from discovery of a reservoir to
production is considerable, and should be included in the
formula when calculating capacity.
10:21:36 AM
KEN GRIFFIN, Deputy Commissioner, Department of Natural
Resources, explained that a J-curve refers to the energy
efficiency of a compressor or a pipeline system. The equipment
has a range at which it is most efficient, and when it goes
above or below that range, efficiency declines increasingly
rapidly. Terrain, temperature and other things affect
efficiency, so the appropriate expansion method will change from
one part of the system to another.
10:24:23 AM
CHAIR SEEKINS said that the committee had finished discussion of
expansion issues, and that Mr. Harper would provide a written
summary of his comments and observations. He also said that the
Legislative Budget and Audit Standing Committee (LB&A) has
agreed that he can request consultants as they are needed and
has given authorization to proceed with an independent analysis
of the port authority plan using Econ One Research, Inc.
10:26:34 AM
CHAIR RECESSED from 10:27:06 AM to 10:42:33 AM
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