Legislature(2009 - 2010)BUTROVICH 205
03/22/2010 03:30 PM RESOURCES
Download Mp3. <- Right click and save file as
* first hearing in first committee of referral
= bill was previously heard/scheduled
= bill was previously heard/scheduled
SB 228-TAX INCENTIVES FOR GAS-TO-LIQUID 3:40:15 PM CO-CHAIR MCGUIRE announced SB 228 to be up for consideration. [CSSB 228(RES), 26-LS1324\P, was before the committee.] She said in preparation of SB 228 they would hear first from Paul Metz. 3:40:22 PM PAUL METZ, Director, Mineral Industry Research Laboratory, University of Alaska, Fairbanks, Alaska, did a presentation called "The Key to Energy Security: Converting Coal to Gas to Synthetic Fuels to More Petroleum Production." He said this presentation was not on behalf of the Laboratory but it was approved by the University. He said he would look at Alaska's energy challenges, look at the alternatives for developing an energy plan, discuss the subject of coal to synthetic gas and converting it to liquid fuels, discuss carbon dioxide enhanced oil recovery, and present some alternatives for financing these megaprojects, discuss how to get these products of these resources to markets via the Alaska Railroad, and summarize the synergistic effects of these major energy projects. He began with Alaska's Energy Challenges. Alaska has decreasing oil production and revenues from the North Slope, decreasing natural gas production in Cook Inlet, and increasing federal and state regulations that increase incentives to find and develop more natural oil, natural gas and coal, in particular, the increasing federal and state regulations that increase the cost of petroleum refining and will increase with climate change and carbon capture and storage, alternate and lower cost sources of supply of natural gas to the contiguous states that place the large diameter natural gas pipeline in question, and highly fluctuating energy cost as a function of the world-wide demand for petroleum - natural gas being priced as a function of the market price of petroleum. Finally, the combined and negative effects of these costs and limited fuel supplies on the air cargo industry in Anchorage, in particular, and the transportation and tourist industries in general. 3:43:21 PM MR. METZ said the key to developing a plan that provides cost effective and stable energy supplies and energy security for Alaska and the nation includes a public private partnership between the state, the federal government and the various industries that facilitate the full utilization of our coal natural gas and petroleum resources. Our fossil fuels are and will remain major sources of energy for the foreseeable future. 3:43:57 PM The resources are: natural gas - about 26 tcf of proven reserves on Kuparek and Prudhoe Bay fields, about 9 tcf at Pt. Thomson; for a total of 35 tcf that will provide about 23 years of supply for a 4.5 bcf/day natural gas pipeline. Most gas pipelines are designed for a 30-year life or longer. So, additional resources would have to be found on the North Slope to support even a 4.5 bcf/day pipeline. CO-CHAIR MCGUIRE asked if the state has data on gas hydrates potential. MR. METZ replied no; these are reserve estimates. Resources such as gas hydrates, coal bed methane, synthetic gas from coal are potentially useful to humans, but aren't measured quantities under current economic conditions. The gross value of the measured reserves at various prices of natural gas range from $200 billion $500 billion. 3:45:33 PM By comparison, he said, about 67 billion barrels (BB) of oil were in place on the North Slope when the TAPS pipeline came into production; an expected total recovery without enhancement is about 22 BB. That leaves about 45 BB of oil in place when and if the pipeline is shut down before enhanced oil recovery is put into action. The gross value of recovering 8 BB of additional oil through enhanced oil recovery methods is $1.1 trillion, much larger values than the proven reserves of natural gas on the North Slope. 3:46:52 PM MR. METZ said by comparison, the coal resources that are widely distributed in Alaska, are immense. The USGS estimates that the western end of Arctic Slope of the Brooks Range the North Slope contains an estimated 5.5 trillion tons of high unit value coal. The magnitude of this resource is if we could convert our domestic requirements for electricity into 100 percent-coal, Alaska could generate the electrical demand for the United States for about 2500 years. If we converted all of our liquid fuel demand (23-million barrel/day consumption) of oil to coal as well as generated all of our electricity with coal, the western Arctic would still have enough coal to supply the U.S. for about 1000 years. In addition to the western Arctic another estimated 3 trillion tons of deep coal is in the Cook Inlet Basin and smaller coal resources in the Upper Susitna Valley and the north flank of the Alaska Range. The values at various prices per ton of coal dwarf the estimated resource values for the oil and gas measured in thousands of trillions of dollars. Mr. Metz said the gas reserves on the North Slope contain about 1617 3X10 btus, oil in place contains 4X10 btus, and the coal 20 resources have 2X10 btus, ten-thousand times the energy contained in natural gas. 3:49:12 PM He posed the question of whether these energy sources are competing or have synergisms in looking at some aspects of the instate gasline - a coal-to-liquids plant, for instance (the Fairbanks example has some conceptual engineering design and numbers for a project that was advocated by the Fairbanks Economic Development Corporation) and enhanced oil recovery through the use of the CO2 that would be produced from a synthetic fuels plant. 3:50:22 PM He stated that the Cook Inlet Basin has supplied Anchorage with electrical generation and domestic and commercial heating for three-plus decades. Shortages are expected by 2015 during peak demand periods. The Department of Energy estimates it would take capital investment of $5-6 billion to replace the original 3 tcf in Cook Inlet. But the difficulty with the whole natural gas market in the state is the low quantities that both Fairbanks and Anchorage would actually require and the fact that bringing it from the North Slope is a large capital investment. 3:51:19 PM For the sake of having numbers, Mr. Metz said, the Enstar bullet line (bringing gas to Fairbanks, Anchorage and potentially to export from is estimated to cost $3.8 billion for 24 in. 0.5 bcf/d from either the Gubik field (dry gas) on the North flank of the Brooks Range or alternatively from the Prudhoe Bay field that has wet gas that would require investing in a conditioning plant. Anadarko's estimated it would cost $1 billion for delineating sufficient resources in the Gubik field. Taking the large diameter gas line and scaling a $6-plus billion conditioning plant to a size to handle 0.5/day would cost about $1 billion. Because of the limited market and the high capital cost he thought it would cost significantly more than $3.8 billion to build. There needs to be a large domestic or international industrial user of the excess gas from 0.5 bcf/d line. A coal-to-liquids plant as envisioned by Fedco could actually use all of the gas in an instate gas line if the project were up-scaled. CO-CHAIR WIELECHOWSKI asked how much it would cost to expand that to 1 full bcf/d and if it is better to build a 500 mcf now and expand it later or is it better to build bigger now. MR. METZ replied that there is insufficient market today for the 0.5 bcf/d and to build a larger plant than that and have it idle for a considerable period of time is not a good return. He said the Fedco project looked at a 40,000 barrel/day plant with a capital cost of $4.6 billion. That has been revised down to $3.2 billion. The products in that plant would be Jet A and diesel at a production cost of about $2.60/gallon. That plant at that scale was estimated to return about 12 percent on the capital, but in 2008 prices of diesel went up to $5/gallon. CO-CHAIR WIELECHOWSKI asked where they projected building this plant. MR. METZ replied somewhere in the Interior. This is a preliminary design only. The money that was provided initially for the Air Force was to site the plant at Eielson Air Force Base, but for a number of reasons that won't happen. 3:56:38 PM SENATOR WAGONER asked what they would do with the CO2 emissions. MR. METZ replied that he is proposing to use that for enhanced oil recovery on the North Slope. SENATOR WAGONER said for that to happen the plant would have to be closer to the North Slope. 3:57:12 PM MR. METZ replied no; a pipeline would be built to the North Slope. He said for every ton of coal you burn you get about 3.5 tons of CO2 and that could be considered a bad thing, but it is good in terms of enhanced oil recovery. In 2005 the Department of Energy did an analysis of enhanced oil recovery potential on the North Slope as well as the potential in the Gulf of Mexico and found about 8000 kilometers of CO2 pipeline to the Mississippi Valley bring CO2 to the offshore oil fields in the Gulf. Some of the fields in the Gulf of Mexico as well as the North Slope are amenable to miscible CO2 injection and enhanced oil recovery. Cook Inlet is not, but the resource on the North Slope at 45 billion barrels is very large. CO-CHAIR MCGUIRE asked the difference in recovery rates between CO2 and gas as a mechanism for lifting up the oil. MR. METZ replied injecting CO2 or natural gas changes the physical and chemical characters of the oil. The CO2 decreases the viscosity, increases the volume of the fluid and adds pressure to the reservoir before it becomes miscible. Methane injection reduces viscosity, too, but the CO2 enhancement is much more effective. 3:59:51 PM CO-CHAIR MCGUIRE asked why injecting CO2 as an enhanced oil recovery technique is not possible in Cook Inlet. MR. METZ responded that oil is not amenable to miscible injection of CO2. The CO2 will not form a single phase in the oil when it's injected at high pressures, therefore you don't get the reduction in viscosity or the increases in volume that you do on the North Slope or in the Gulf of Mexico. 4:01:10 PM (Slide 9) He said the operators on the North Slope have experimented with this, but the problem is it has insufficient CO2 at about 10 percent. That is part of the reason for the conditioning plant - to remove the water as well as the CO2 from the natural gas. But even if they were producing at 4.5 bcf/d they would still have 1/10 of the CO2 that would be necessary for enhanced oil recovery. That is where the coal-to-liquids plant comes in. Scaling the 40,000 barrel/day plant up to what the oil industry feels is a minimum plant size for synthetic fuels of 200 barrels/day would produce about 1 tcf/year of CO2. That is what the DOE estimated would be the requirements for recovery of 8-12 BB of oil. The DOE estimated that in addition to the large volume of CO2 you would had to have it at a reasonable price, and it was estimated at 5 percent of the wellhead price of oil. At that time they were looking at $25/barrel. 4:02:12 PM He provided an extract of the rates of return (ROR) from the sale of CO2 from a 200,000 barrel/d plant at 5 percent of the wellhead price of oil at various prices. Adding this to the 1/8 royalty resulted in very large numbers. Nothing else would generate this kind of income and return for the state. 4:03:12 PM CO-CHAIR WIELECHOWSKI asked if these figures include the cost of piping it to North Slope. MR. METZ replied it is just from the direct sale by the plant assuming that a prudent North Slope producer would engage in the capital investment to build a pipeline that could deliver 1 tcf/yr. to the North Slope. He added that CO2 is very compressible compared to methane and he estimated $2.5-3 billion for that. The price of CO2 within 5 percent of the wellhead price would make that investment very attractive to the oil industry. 4:04:20 PM Slide 12 showed the financing for a coal-to-liquids plant anywhere in Alaska. The plant would use about 17 million tons of coal a year or 10 times what the Usibelli Coal Mine produces today. Delivering the 1 tcf of CO2 to the North Slope and the recovery of additional oil at simply a 1/8 royalty at $80/barrel oil would bring $100 billion to the state in royalties (equivalent to the amount of taxes in total that the state has recovered from North Slope oil production since 1977). At 12 BB that increases to $120 billion. In addition, the state would receive royalties on the coal that is produced whether it goes into gasification or into a plant. MR. METZ said an added synergism for the Susitna hydro project is adding the ability for it to generate hydrogen and oxygen from the electrolysis of water rather than using steam to convert the coal to methane which would greatly reduce the capital cost of the coal-to-liquids plant. At 200,000 barrels/day, Hatch proposed a coal-to-liquids plant that would use 2000 mgw (120 mgw more power than Susitna). The beauty of this alternative is that once the need for CO2 on the North Slope was achieved oil production would taper off and the coal- to-liquids plant could be operated with hydrogen and oxygen from the electrolysis of water. The result would be a zero CO2 emission coal-to-liquids plant, which would then produce liquid fuels with lower total carbon emissions than refined petroleum. "So, there is a great synergism between having a low-cost source of electrical energy and liquids fuels production." 4:07:22 PM CO-CHAIR WIELECHOWSKI asked if he envisioned mining the coal and then converting it or doing underground coal gasification. MR. METZ replied that underground combustion is far more attractive. It would lower the capital and operating cost of the coal-to-liquids plant - producing coal gas and then conditioning that and transporting it to a plant at some location. CO-CHAIR WIELECHOWSKI asked how much CO2 could be captured with this process. MR. METZ replied that they would be looking at 70-80 percent recoveries, but the existing technologies are expensive and capital intensive and he didn't know the exact answer. The DOE is spending a lot of money on research in that area and that technology is changing very quickly, however. 4:09:32 PM He summarized that the synergisms between a coal-to-liquids plant and enhanced oil recovery has the potential of extending the life of the North Slope oil fields for another 30 years, replacing Cook Inlet natural gas with North Slope gas to both Anchorage and Fairbanks, and supplementing the petroleum production from North Pole with low sulfur synthetic fuels. Availability of markets outside of Alaska would not be an issue with respect to an instate gas line. The price of coal is not tied to the price of petroleum, so it would have less fluctuation than the price of synthetic Jet A and diesel as compared to petroleum derived products. There would be long term stable fuel supplies for the military both in state and in the Pacific Rim, there would be stable prices for the air cargo and other transportation industries in Alaska, which would anchor those industries here. MR. METZ said that last Friday the Department of Defense announced that the Defense Energy Supply Center and the Air Transportation Association of America had signed a cooperative agreement for a public private partnership to develop synthetic fuels, which they have been saying for the past year needs to happen. 4:11:46 PM CO-CHAIR MCGUIRE said that this presentation pertained to two bills, SB 228 and SB 287, which incentivize these kinds of plants through two different methods. The first is SB 228 the Special Investment tax credit and the other is the amendment to ACES clarifying that gas used in the state as a fuel or feed stock in the manufacturing process creating an end product in the state shall be considered as instate gas at the instate gas rate. And there is the potential for ARRC bonds to be used as a part of the financing for a project like this. Finding no further comments, Co-Chair McGuire closed public testimony. CO-CHAIR WIELECHOWSKI stated that the more he learns the more he thinks a gas-to-liquids plant or a coal-to-liquids plant or several of them are critical for Alaska's future; they create anchors for the bullet line and provide the opportunity for enhanced oil recovery and creating whole new industries. Experts have estimated that creating one plant could create 650 new full time jobs, not to mention 10-15,000 construction jobs. It would help protect our military bases and provide heat sources for generating 350 mgw power plants. He moved to report CSSB 228(RES), version P, from committee with individual recommendations and attached fiscal note(s). There were no objections and it was so ordered. CO-CHAIR MCGUIRE noted that she talked to a Sassol representative in Houston who confirmed they had looked at Alaska for two decades and sadly, the reason they hadn't done more here is they consider Alaska to have an unattractive business climate.