Legislature(2003 - 2004)
07/29/2004 08:34 AM House BUD
| Audio | Topic |
|---|
* first hearing in first committee of referral
+ teleconferenced
= bill was previously heard/scheduled
+ teleconferenced
= bill was previously heard/scheduled
ALASKA STATE LEGISLATURE
JOINT MEETING
JOINT COMMITTEE ON LEGISLATIVE BUDGET AND AUDIT
SENATE RESOURCES STANDING COMMITTEE
July 29, 2004
8:34 a.m.
MEMBERS PRESENT
LEGISLATIVE BUDGET AND AUDIT
Representative Ralph Samuels, Chair
Representative Mike Chenault
Representative Mike Hawker
Representative Beth Kerttula
SENATE RESOURCES
Senator Scott Ogan, Chair
Senator Tom Wagoner, Vice Chair
Senator Fred Dyson
Senator Ralph Seekins
Senator Kim Elton
MEMBERS ABSENT
LEGISLATIVE BUDGET AND AUDIT
Representative Vic Kohring
Senator Gene Therriault, Vice Chair
Senator Con Bunde
Senator Gary Wilken
Senator Ben Stevens
Senator Lyman Hoffman
SENATE RESOURCES
Senator Ben Stevens
Senator Georgiana Lincoln
OTHER LEGISLATORS PRESENT
Representative Nancy Dahlstrom
Representative Beverly Masek (via teleconference)
Representative Lesil McGuire
Representative Les Gara
Senator Gary Stevens
Senator Gretchen Guess
COMMITTEE CALENDAR
OVERSIGHT ALASKA NATURAL GAS PIPELINE ISSUES/ACCESS TO ORIGINAL
AND EXPANSION CAPACITY
PREVIOUS COMMITTEE ACTION
No previous action to record
WITNESS REGISTER
Presentations By:
BILL BOYCOTT, General Manager
Kenai Nitrogen Operations
Agrium Inc.
TONY PALMER, Vice President
Alaska Business Development
TransCanada Corporation
HAROLD HEINZE, Chief Executive Officer
Alaska Natural Gas Development Authority (ANGDA)
ACTION NARRATIVE
TAPE 04-16, SIDE A [BUD TAPE]
Number 001
CHAIR SCOTT OGAN called the joint meeting of the Joint Committee
on Legislative Budget and Audit and the Senate Resources
Standing Committee to order at 8:34 a.m. Joint Committee on
Legislative Budget and Audit members present were
Representatives Samuels, Chenault, Hawker, and Kerttula. Senate
Resources Standing Committee members present were Senators Ogan,
Wagoner, Dyson, Seekins, and Elton. Also in attendance were
Representatives Gara, Dahlstrom, McGuire, and Masek (via
teleconference), and Senators Guess and Gary Stevens.
Number 019
BILL BOYCOTT, General Manager, Kenai Nitrogen Operations, Agrium
Inc., said he hoped to provide the committees with the
perspective of a value-added manufacturer and relay some of its
experiences and challenges in the Cook Inlet and how such may
impact the legislature's decisions regarding North Slope gas.
He remarked that differing paths in the production of North
Slope gas could lead to very different outcomes as well as the
development of other opportunities within the state. He went on
to say:
The Cook Inlet natural gas actually generates about 15
percent of the exports from Alaska. That takes the
form of ... about 200 [billion cubic feet (bcf)] a
year of gas; about 80 bcf of that goes into the
[liquefied natural gas (LNG)] facility for direct
export. We, at capacity, consume approximately 53 bcf
of gas, which we convert to anhydrous ammonia and urea
- white pellets of fertilizer. And that export is
going: ... the anhydrous ammonia primarily to Korea,
the fertilizer all across the Pacific Rim but
primarily Mexico.
MR. BOYCOTT relayed that he is quoting the following from a
statement made by the McDowell Group that was used in a handout
provided to the committee by Agrium Inc.: "By Alaska economic
standards, the Agrium Inc. operation is exceptional for its
combination of high pay levels, amount and concentration of
expenditures in the local area, and the degree of value added
manufacturing that occurs in Alaska prior to export. The result
is a high multiplier impact." He noted value-added
manufacturing consists of taking a resource and converting it to
a product of higher value, and that value-added manufacturing
occurs at the Agrium Inc. facility and at the refineries in
Fairbanks, Valdez, and Nikiski area.
MR. BOYCOTT relayed that for Agrium Inc., value-added
manufacturing results in a $9.35 impact on the state's economy
for every 1,000 standard cubic feet of gas that is consumed;
this impact comes from Agrium Inc.'s payrolls, from businesses
that provide support services to Agrium Inc., and from purchases
of the resource. By extrapolating such information to the
development of North Slope gas, he opined, one can envision that
the potential impact on Alaska is quite large. He mentioned
that with regard to international competition, there has been a
lot of activity lately on the Australian shelf, Trinidad, and
Venezuela; the foregoing industries are already developed to
bring a product - such as LNG, methanol, and other petrochemical
products - to market, beyond the ammonia and urea that Agrium
Inc. is currently in producing.
Number 054
MR. BOYCOTT remarked that such industries share a common thread
in that it takes a lot of technology and resources to convert
natural gas into the aforementioned products, and so in areas
where such conversion occurs, there has been a large impact on
the local economy. He added: "This is an opportunity for
Alaska. Value-added industry brings a lot to the state; if done
properly, it has a potential to have a large economic impact on
the state. Already, [from] what we see in the state, there is a
large economic impact here, and there is potential for ...
additional economic impact ...."
MR. BOYCOTT posited that a lot of industries worldwide are
interested in developing gas resources, adding that the high
economic multiplier of doing so also helps diversify the
economy. He remarked that a large part of the Kenai Peninsula's
economic base results from the presence of a refinery - the
second largest in the U.S. with regard to nitrogen complexes -
which has created a lot of diversity in that economic base.
Developing a value-added manufacturing environment requires
large amounts of gas that are readily available; entities
looking to bring that gas to market in a value-added way; a
conducive regulatory environment that will encourage development
of the resource in a responsible manner; competitive pricing; an
efficient infrastructure, whether new or existing; market access
to the product; and political stability.
MR. BOYCOTT concluded by saying that some of the questions to be
considered regarding bringing North Slope gas to market are
whether Alaska would want to utilize some of the gas instate or
just send all of the gas down to the Lower 48, and how best to
position itself to take advantage of the gas.
Number 110
SENATOR DYSON surmised that access to infrastructure means being
at tidewater or at a deepwater port.
MR. BOYCOTT replied, "One of the things that we bring to the
table in Alaska is that we have good access to the Pacific Rim;
[at] the Cook Inlet [facility], we have deepwater wharf
facilities." Because of this, agricultural products consumers
in Mexico say that the quality of "the Kenai product" is the
best they have access to and that they like its availability
with regard to a short transportation time. Cook Inlet provides
good access to the market, but there are still problems getting
the product from the well to the consumer, he remarked, and such
should be considered when looking at bringing North Slope gas to
market; "We need to ensure that we encourage production of the
resource, that the independents that want to come and
participate are encouraged to do so and have ready access to the
market with the product that they bring to the surface."
SENATOR DYSON raised the issue of competitive value and asked
Mr. Boycott to comment.
MR. BOYCOTT said he has not seen numbers that will tell him
"what will North Slope gas be delivered into." He mentioned,
however, that the higher the gas price is, the more difficult it
will be for anybody in a value-added industry to compete on an
international basis. It is difficult to "make a call forward"
because his industry is very cyclical, he added, and supply-
demand levels can drive the value of the product up or down
depending on many factors.
SENATOR DYSON asked, "Is it a good assumption that the world
demand for nitrogen-based fertilizers will continue to
increase?"
MR. BOYCOTT replied, "I believe that's true."
CHAIR OGAN asked about current prices.
Number 0166
MR. BOYCOTT replied that Middle East, Trinidad, and Venezuela's
gas runs $1.00-$1.50; there is "some upward pressure" in the
former Soviet Union, which used to send its gas into its plants
for free.
CHAIR OGAN surmised that it must be pretty hard to compete with
entities that get gas at those prices.
MR. BOYCOTT concurred, but mentioned that Agrium Inc. does have
an advantage with regard to transportation into different
markets; additionally, the overall world-demand plays a factor
in product pricing. Mentioning the possibility of bringing a
spur pipeline down into the Cook Inlet, he noted that such would
provide access into the existing infrastructure. Currently
there are constraints within that infrastructure; there are
times when Agrium Inc. leaves gas at the well because it cannot
transport it to its plant due to the constraints placed on that
piping system. In looking to the future, he offered, it's
important to consider not only how the new infrastructure is
regulated, but also how the old infrastructure is regulated in
order to ensure that gas will be brought into a system that is
being managed in such a way that the gas can be effectively
brought to market.
MR. BOYCOTT opined that sufficient infrastructure does exist to
support all of the demand in the Cook Inlet, but reiterated that
Agrium Inc. is not currently able to get all of the gas to
market. Despite the fact that Cook Inlet gas is in decline,
Agrium Inc. still finds itself in a position of not being able
to transport gas due to private ownership and the current way
the system is operated; "we have systems running below capacity
and yet gas [is] left wanting to be moved." Agrium Inc. faces
"private ownership of lines"; constraints on the infrastructure
that are both physical and nonphysical constraints; affiliated
ownership issues; restricted access; high transportation rates;
"and, [in] our belief, [the fact that] the public interest is
not always served, because we feel that the way the system is
being utilized currently doesn't necessarily encourage the
independent to come in and develop the resource."
Number 215
MR. BOYCOTT continued: "As we look at other players who want to
come into the Cook Inlet and develop the resource, they find
themselves in a position where ... they're constrained on who
they [are] actually able to sell that product to because of ...
access to the pipelines." He suggested that when considering
North Slope development, the legislature should learn from what
has gone on in the Cook Inlet in order to ensure that there will
be open access to the pipeline systems at fair and reasonable
rates. He cautioned that in developing the North Slope, the
legislature should do what it can to ensure that the public
interest is protected, that new entrants into the state are
encouraged, and that business development is encouraged.
MR. BOYCOTT went on to detail some of Agrium Inc.'s motivating
factors and its development in the Cook Inlet, and again
commented on the potential for developing value-added industries
in Alaska.
SENATOR WAGONER asked whether Agrium Inc.'s parent company does
anything with gas liquids in Canada.
MR. BOYCOTT said not that he is aware of.
CHAIR OGAN asked Mr. Boycott to comment on what he sees in
Agrium Inc.'s future with regard to gas supplies in Alaska.
MR. BOYCOTT indicated that Agrium Inc. anticipates being able to
continue to operate [its Cook Inlet] facility through 2007, but
acknowledged that continuing to find a long-term supply of gas
might be problematic. He remarked: "I believe that ... if we
open the market and open the infrastructure, that we will see
the independents expressing an interest in working to develop
the resource at competitive pricing."
CHAIR OGAN asked what Agrium Inc. contributes to the local
borough tax base.
MR. BOYCOTT said he thinks last year's total tax burden was
approximately $2.5 million.
Number 351
TONY PALMER, Vice President, Alaska Business Development,
TransCanada Corporation, displayed for the committee a map of
the proposed pipeline system, and provided the following
comments regarding the topic of "decision-making on expansions":
Developing the initial pipeline system from Alaska to
major North American markets has been and remains a
challenging undertaking. Attracting the initial
volumes of sufficient scale to make the project
economic, under satisfactory terms that share the
risks of this project in a deregulated natural gas
market, has proven to be difficult. Representatives
from the Alaskan producers, pipeline companies, [and
the] governments of Alaska and the United States are
all working diligently to see the initial pipeline
come into service in an expeditious manner. This task
remains in our view the most critical at this point
for the "Alaska Highway Pipeline" project.
TransCanada is focused on working with all
stakeholders to develop a structure that will advance
the project and see the initial pipeline in service by
2012, transporting Alaskan gas to major North American
markets.
It's also important to ensure that future customers
will have fair, non-discriminatory access to the
pipeline for expansions or extensions of the initial
gas transportation contracts. The State of Alaska,
[and] the pipeline owners and shippers seeking future
access all need to know the rules of the game in
advance in order to encourage extensive natural gas
exploration across the state of Alaska. The initial
shippers must also be confident that they will be
treated equitably relative to future customers.
TransCanada is an independent pipeline company with
almost 50 years of experience in North America and
many years of international experience. We have
successfully managed these issues and encouraged the
expansions of our initial facilities without
disadvantaging our anchor shippers. My testimony
today will focus on the broad requirements and
considerations for expansions of major pipeline
systems, and later today in my testimony I will
elaborate on some of the benefits of certain tariff
methodologies for expansions.
Number 395
MR. PALMER offered the following as factors that influence
access [to] future volumes [of] an initial pipeline system: the
system planning for the initial pipeline - what will be the
pipeline diameter, the pressure, the routing, and the initial
contracted capacity; the impact on pipeline operations and
operational feasibility; the impact on services to other
customers, both initial and for future expansions; the ability
to comply with safety and environmental laws and regulations;
the suitability of arrangements for reimbursement of
construction costs and/or the adequacy of the volumes to be
transported to support the extra investment and operating costs
required for the new facilities relative to required facilities;
and the tariff methodology - incremental or "rolled in" tolling
for expansion volumes. He went on to say:
TransCanada has selected a pipe platform of 48 inch,
2,500 pounds per square inch, to transport an initial
volume of 4.5 bcf a day, with a relatively inexpensive
expansion capability, up to approximately 6 bcf a day.
This pipe platform, which uses a pipe size with which
TransCanada has years of experience - ... we have
hundreds of miles of that pipe in the ground today -
and [has] a pipe strength of "X80," ... is optimal for
the volumes we've described. ... It provides the
lowest, long-term tariff for customers and also an
attractive and efficient fuel ratio.
The fuel ratio is an important factor in the overall
costs of transportation for Alaskan gas simply because
of the distance to market. The final engineering
design for the pipeline will be completed ... once the
initial volumes to be shipped are known and the
expectations for the timing, location, and volumes of
future expansions are more certain. Based on our
system design, the 48-inch pipe platform with an
initial volume of 4.5 bcf a day would provide
inexpensive expandability for an additional 1.0 - 1.5
bcf a day using primarily additional compression
facilities rather than new pipeline loops - a pipeline
loop is a ... section of pipe [parallel] to the
initial pipeline, generally of the same diameter ...
[but] not necessarily. ...
Number 451
MR. PALMER continued:
The fuel ratio will increase at total levels above 4.5
bcf a day with the initial compression, but still
remain at very efficient levels. Volumes in excess of
6 bcf a day would require a combination of pipeline
looping and compression facilities. It is important
to note, of course, that exploration success will
drive new pipeline expansions. ... Significant
additional gas reserves will have to be proven in
Alaska prior to an expansion beyond 6 bcf a day, since
25 years of production at 6 bcf a day totals about 55
[trillion cubic feet (tcf)] as compared to the
approximate 35 proven today.
Future expansions beyond the initial 4.5 bcf a day
will depend upon a number of factors. The first is
the location of the additional gas relative to the
existing or future compressor stations and meter
stations. Additional volumes must make sense relative
to the engineering increment in the pipeline's overall
system planning; in other words, the additional
volumes need to be sized for logical economic
increments relative to the new facilities. For
example, with an initial contracted capacity of 4.5
bcf a day, you wouldn't expect to see an expansion of
supply for [10 million or 20 million] a day; ...
[that] would not be efficient from an engineering
standpoint, on this pipeline, for new supply.
You will need large pieces because each additional
compressor or compression station or number of
compression stations will be significant. That's the
norm on large pipeline systems, and that will be in
place for this pipeline as well. [It is] generally
not appropriate to construct sub-optimal facilities
for a small volume, or to contract for a small volume
that does not approximate the additional capacity
provided by the optimal facilities. However,
potential expansions will be examined on a case-by-
case basis to determine the economic and operational
feasibility. ... The design of the pipeline and
operational flexibility can provide opportunities for
smaller volume increments. And when I'm describing
smaller volume increments, I'm of course speaking to
the supply side as opposed to the demand side.
Number 491
MR. PALMER added:
The second factor to be considered is the impact
expansion volumes could have on pipeline operations
and operational feasibility. In most cases, this is
not a concern on expansion volumes because they're
incorporated into the pipeline at logical physical
locations. Also, operational measures taken by the
pipeline company and its future shippers can ensure
there are no negative impacts. The shipper will be
required to provide its gas at the receipt point - or
take delivery at the delivery point - at a suitable
pressure, temperature, and gas quality that aligns
with the pipeline's engineering and economic
requirements. That is standard across the industry.
The pipeline company also has a responsibility to
ensure that the impact of expansion volumes on
existing shippers is equitably balanced with the fair
treatment of those new volumes. Gas [pipeline
companies] are generally contract carriers ... [that]
commit to provide a specified amount of firm capacity
to their shippers. Additional volumes onto the
pipeline do not result in a pro-rationing of the
volumes to the initial firm shippers. In other words,
expansion facilities are normally needed in order to
provide contracted service to new customers on the
pipeline. The specific location of the new customer's
requested receipt or delivery point can play a ...
role in the impact on existing customers and the
operational flows on the pipeline.
As in the initial construction of the pipeline system
and its day-to-day operation, expansion volumes must
comply with safety/environmental laws and regulations.
These factors are as critical in determining the
precise location of new receipt and delivery points as
are economic or engineering factors. In most cases,
the pipeline company will own any facilities located
on its right-of-way, including any incremental meter
stations or compressor stations required to transport
the expansion volumes. The pipeline may construct the
laterals to receive or deliver additional gas, but
those laterals may also be owned by other pipeline
companies, gas producers, or other parties.
Number 542
MR. PALMER said:
If the pipeline company constructs the additional
facilities, it will calculate the additional potential
revenues versus the costs for the new volumes, both
operational and capital, as well as [for] fuel. And a
capital contribution may be required from the new
shipper as an upfront payment to reimburse the
pipeline for facilities such as a new meter station at
a different location that does not provide service to
the overall customer base. Once again, pretty
standard in the pipeline industry.
New major natural gas pipeline systems are underpinned
by long-term firm transportation contracts with
initial shippers. Historically, long-term firm
service has often been the only type of service
provided by the pipeline for existing or new customers
in the early years of pipeline operation. Firm
customers may also be offered overrun service to allow
those customers to utilize spare capacity on the
pipeline - on an interruptible basis - over and above
their firm contracted quantity; and of course the
spare capacity on an interruptible basis results from
... operational flexibility due to ambient
temperature, load diversity, or other operational
considerations.
As the pipeline grid has matured in North America,
interruptible service was made available to non-firm
customers. In some cases, overrun service has been
removed by regulatory authorities to permit broader
access to non-firm customers. New expansion volumes
... on a firm basis can affect, either positively or
negatively, the availability of overrun or
interruptible service to existing customers depending
upon the stage of additional facilities constructed
relative to the new firm volumes and the overall
impact on pipeline system planning.
Number 579
MR. PALMER relayed:
The final significant factor when considering
expansion volumes is the tariff methodology for
additional volumes. The regulatory model used by the
[Federal Energy Regulatory Commission (FERC)] has
expansion volumes being charged a tariff that reflects
their incremental costs, unless rolling in the
incremental costs to existing customers would decrease
their tariffs - with some modest exceptions. ... In
Canada, the National Energy Board has applied a
rolled-in methodology for many years as the primary
model for expansion volumes whether or not this
increases or decreases tariffs for existing customers.
This philosophical difference has had significant
implications for expansions of the Canadian pipeline
systems over the past two decades. I will speak to
this issue in my second piece of testimony. In
summary, we believe that expansion policies that
fairly balance the interests of initial and future
shippers will lead to optimal long-term results for
pipeline customers, owners, and governments.
MR. PALMER made the following remarks regarding the issue of
open access:
Earlier in my testimony I described the significant
challenges in attracting initial customers to the
Alaska Highway Pipeline Project. TransCanada believes
that all stakeholders - Alaskan producers and
explorers, pipeline sponsors, [the] State of Alaska,
and the U.S. Government - have important roles to play
in sharing the initial project risks by establishing
the conditions necessary for an early in-service date
for the project.
We believe that each of these stakeholders and U.S.
consumers will be large beneficiaries of this project
and should work cooperatively towards a 2012 in-
service date. We're a longstanding developer of major
pipeline systems, both in North America and [in]
international regions, and, in our opinion, certain
open-access [conditions can assist in laying the
groundwork for long-term success of an initial
pipeline project as well as its future growth and
development.] [Tape ends mid-sentence; the previous
bracketed portion was taken from Mr. Palmer's written
statement from which he had been paraphrasing.]
TAPE 04-16, SIDE B [BUD TAPE]
Number 613
MR. PALMER continued:
Governments at the local, state, and federal levels
are strong supporters of new pipeline projects. They
are also seeking a solid foundation for future
exploration and development within gas-producing
basins to enhance economic and social conditions in
their regions. The additional revenues to governments
from new exploration, development, and production may
exceed the royalties and taxes collected over the life
of the project from the initial gas volumes. There
are many positive examples of this in North America
and beyond when a new gas pipeline is constructed into
a frontier basin.
Pipeline companies also are strong proponents of new
gas exploration in order to attract additional volumes
to the pipe and enhance the security of supply for the
base volumes. Consumers, both in the supply region
and in traditional consuming regions, wish to see
additional exploration and expansion of pipes in order
to enhance their security of supply and to meet
overall demand growth. Gas producers or other
potential shippers that have not yet taken out a gas
shipping position on a pipeline are also strong
supporters of free and open access and fair terms for
expansions.
The initial shippers on a pipeline often also want
future expansions to provide access to markets for
additional gas supplies they may secure. Those
shippers incurred significant risks when signing the
anchor transportation contracts on the pipeline, and
they need to be confident that their initial contracts
will be equitably treated relative to the new
customers. It is also prudent for pipeline companies
to ensure that their access terms for expansions do
not disadvantage the initial shippers and have fairly
balanced the overall benefits and risks for all
stakeholders.
Number 627
MR. PALMER went on to say:
The tariff methodology for expansions can play a large
role in determining the timing and degree of future
exploration in a new gas basin. TransCanada believes
the Alaska Highway Pipeline should be designed and
operated to be efficient in design and total cost to
initial shippers, and to also provide fair and
inexpensive access for expansion shippers. In
addition to the design of the pipeline, one method of
encouraging long-run growth in a supply basin is to
use a rolled-in tariff methodology for both additional
facilities and the fuel.
TransCanada's pipeline systems in Canada have operated
with a rolled-in tariff methodology for expansions for
many years. Canadian gas has been remarkably
successful in capturing new markets in North America
over the past two decades. The rolled-in tariff
methodology has, in our opinion, assisted in this
success. Canadian gas basins are mostly located
farther from major markets than the majority of Lower
48 gas. It therefore has a higher transportation cost
component and lower wellhead prices relative to most
Lower 48 gas.
Therefore, maintaining low transportation costs with
an appropriate tariff methodology to encourage
expansions has proven to be critically important for
Canada. This has assisted in improving the
competitiveness of Canadian gas as evidenced by the
300 percent increase in Canada's gas exports into the
U.S. since 1985. Rolled-in tolls, combined with the
other factors, can be a catalyst to encourage growth
in a new gas basin. Although each basin around the
world is different, and Alaska has its own unique
characteristics, I wanted to illustrate the
development of TransCanada's system within the
province of Alberta under rolled-in tolls.
Number 649
MR. PALMER then referred to some slides he'd brought with him
and said:
[The] first slide you'll see here ... [is] a map of
the province of Alberta; on the left-hand side you see
our system in 1960. The actual red components are the
expansions from our original pipeline system, which
was constructed in 1957 through 1960. In 1957 our
original pipeline system was 118 miles long, moving
220 million cubic feet a day. You'll see, as we moved
to 1970, we continued expansion of that system ...;
the red in this case is for what happened in the
previous five years ....
I think you'll see from these maps ... how
[TransCanada's Alberta pipeline system] has developed
since its inception in the late 1950s. You'll see how
small our pipeline system in Southeastern Alberta was
in the original system; it had modest volumes, few
customers, and few receipt and delivery points. It
has since grown to a 15,000-mile comprehensive,
integrated pipeline system across the province that
can deliver approximately 12 bcf a day to customers
within Alberta, and to Alberta's borders for delivery
into other pipelines to serve customers across Canada
and throughout the United States. ...
The next three slides show that not just geographic
reach has been extended, but also the [corresponding]
impact on TransCanada's Alberta system volumes, number
of customers, and receipt and delivery points as the
natural gas system has evolved over the past 40 years.
The first slide here would show you the very modest
volumes that we started with pre-1960; you can see
that by 1960 we're about 250 million ... [bcf] a day -
and you can see ... these are annual volumes ... - and
by 1999 we're up to 4.5 tcf per year that we're moving
on our system within the province of Alberta. [The]
next slide deals with the number of customers; you can
see that we had a couple of customers in 1958, and, as
of the late 1990s, we're up to 350 customers ... and
[we] currently [have] about 1,000 receipt points [in]
our province. So we go generally from our gas plants
... to major markets in Alberta and to the boarders,
and you can see the number of delivery points is in
the order of 200 at this point.
Number 690
MR. PALMER added:
As you would be aware, there have been a number of
developments that have caused these significant
increases - growing gas markets, changing gas prices,
supply/demand dynamics, regulation and deregulation,
as well as tariff methodology. TransCanada's proven
track record in offering the appropriate fundamentals
for non-discriminatory, open-access service to its
initial and expansion customers, and a rolled-in
tariff methodology, have been critical factors in
increasing our number of customers, receipt and
delivery points, annual volumes, and geographic reach
across the province of Alberta.
A similar story can be told [about] ... our cross-
Canada pipeline system from the Alberta border to
Eastern Canada and into the U.S. Midwest and
Northeast. We started with a single pipeline leaving
Alberta, and currently ... you'll see five parallel
pipelines in the same right-of-way; that's as a result
of expansions over the past almost 50 years.
MR. PALMER concluded:
TransCanada believes that on balance, a rolled-in
tariff methodology for the Alaskan and Canadian
sections of the pipeline can be a positive factor to
enhance the long-term development of Alaska's natural
gas basin. It merits serious consideration by the
state, the U.S. Government, gas producers, and
pipeline companies as the initial project is
developed. Thank you for this opportunity to testify
at this proceeding, and I am available to answer any
questions you may have.
Number 707
REPRESENTATIVE LES GARA asked:
What are your thoughts on open access that could be
done in a way that would allow somebody who doesn't
have their gas on line yet to have the opportunity to
get their gas into a pipe? ... You're not going to
have your gas ready to go if you don't have a contract
with the pipeline carrier yet. ... How do you do that?
MR. PALMER replied:
Through a number of ways, but the first component
would be: what is the appropriate system design for
the pipeline, what is the appropriate diameter for the
pipeline, what is the appropriate pressure, and what
is the appropriate expandability for the pipeline.
And then I can tell you that's based upon an
understanding of what the initial volumes will be,
what the gas reserves are in the basin, [and] what the
expected timeframe is for expansions.
And you can see that our proposal, if the initial
volumes are 4.5 bcf a day, is to construct a pipeline
system that is expandable, cheaply, up to almost 6 bcf
a day. So if you are an explorer in Alaska today and
are unable to participate in the initial capacity of
the pipeline at 4.5 bcf a day, you would understand
that there [will be] relatively cheap expandability
right up to 6 bcf a day in logical increments that
would allow you to get access to the pipeline in the
future; you know that there's going to be future open
seasons where you can participate in that.
MR. PALMER added:
Now, the limit on the pipeline system is not 6 bcf a
day. Clearly, you can start looping the system as I
described ...; you can loop the system beyond that,
but, at that point, your costs are higher and tolling
becomes much more important. Tolling methodology,
tariff methodology - rolled in or incremental - makes
a very significant difference when you pass the point
[where] ... you're adding capacity with compression
rather than pipeline looping. So initially you do it
with ... the appropriate system planning ... [in] the
initial design? And also ..., generally, independent
pipeline companies would commit to have regular open
seasons to expand pipeline [systems]; they're in [the]
business of growing more additional volumes, growing
their business.
Number 741
SENATOR WAGONER asked: "Does it make any difference whether ...
the gas is dried on the Slope or Fairbanks ..., as far as
shipping product on down into Alberta?"
MR. PALMER said that from a project standpoint, it doesn't make
a difference. The owners of the gas will decide where the
liquids are removed; TransCanada is no longer a participant in
that business. However, the actual unit tariffs will be
impacted if the gas doesn't contain the liquids, since there
will be "fewer [British thermal units] to spread the pipeline
over."
REPRESENTATIVE SAMUELS asked how long it would take for a
pipeline to increase its capacity once an explorer finds gas.
How long will the explorer have its capital tied up?
MR. PALMER said it could take one to two years, assuming that
the pipeline is in service. In response to another question, he
relayed that Canada has a policy of having a rolled in tolling
methodology, and that some, but not all, other countries do as
well. He went on to say:
I'm not suggesting there aren't tradeoffs to the
policy. Of course there are. I'll ... give you an
example ...: if you had [an] initial pipeline tariff
of 10 cents, and the incremental cost of the new pipe
is 15 cents, ... [with incremental tolling] the new
customer will pay 15 cents over the life of his
contract; if you roll it in, you'll go from the
initial 10 cents to 10.5 cents for everyone. And the
next increment of pipeline expansion may be 11 cents
or it may be 8 cents, and you effectively average them
all together. And, over time, it has been effective
for Canada to come up with an average tolling
methodology because ..., as volumes increase, you have
relatively modest changes. ...
Number 792
REPRESENTATIVE GARA asked whether there is any danger that an
owner of gas won't sell it. And if so, is there anything the
legislature can do to ensure that there will be gas in the
pipeline once it is built.
MR. PALMER pointed out that TransCanada is generally an
independent provider of transportation services, similar to a
railway company; TransCanada will look for customers that will
own the product and become a shipper on its pipeline system. He
mentioned that although North Slope gas producers have examined
the feasibility of building their own pipeline system,
TransCanada "holds rights in Canada" and believes - and will
maintain the belief - that it has the right to build the
pipeline through Canada. He offered his understanding that
TransCanada was granted that right as a result of the
commitments it made 25 years ago, and [that it] is written into
a treaty between Canada and the U.S. as well as in Canadian
legislation.
SENATOR ELTON asked for an explanation of the term "anchor
shipper."
MR. PALMER said he is using that term to mean "initial shipper."
He added: "Clearly, it would not be unusual for a pipeline
company on a project of this scale to solicit interest from
parties in advance of an open season, [though] not necessarily
to pre-commit. And as I described to you, we intend to build a
pipeline that has significant expandability."
SENATOR WAGONER asked whether TransCanada has considered using
pipe of a size other than 48 inches.
MR. PALMER relayed that TransCanada had given consideration to
different volumes - initial and future; different pipeline
diameters; and different pressures. He gave some examples of
some of the combinations that were considered, but offered his
belief that a 48-inch pipe platform would prove optimal. In
response to another question, he indicated that as long as any
proposed spur line is part of the initial development,
TransCanada could "telescope the pipeline down" once there is an
understanding of what the spur line's volume will be.
Number 887
REPRESENTATIVE KERTTULA asked Mr. Palmer to describe
TransCanada's experience with getting gas into smaller
communities and remote areas.
MR. PALMER replied:
We do serve everything from very small communities to
large customers. We're not a local distribution
company, I can tell you that. We serve to what is
described as a "city gate." So we serve to the border
of the local distribution company, but we clearly
serve some very tiny ... "farm taps" ... for
individual farms as we go through the province of
Saskatchewan, and that is on the existing "prebuild"
for the Alaska pipeline project.
And there [are], of course, ... commitments to put
interconnections at certain locations - in effect,
taps off our system on the original pipeline system.
We do not have commitments at this point to build the
laterals away from the pipeline, but we do have
commitments to put [in] valves; in effect, to allow
future connections to small communities or ... large
communities. So we have done that for more than 50
years, domestically and internationally.
REPRESENTATIVE KERTTULA asked Mr. Palmer if he had any advice
for getting Alaska's rural communities cheaper energy through
the proposed gas line.
MR. PALMER replied:
Clearly, having access to the pipeline will be
important. It would be normal that that would be a
condition imposed by a government. I won't describe
which government agency, but that would be normal that
there would be some imposition of some commitments.
Clearly, not every "one man" community can
economically get access to [the] pipeline - that would
not be normal - but regular takeoffs on the pipeline
system would be a normal commitment, understanding
that there are costs to that and those costs get
allocated to the customers of the pipeline.
There needs to be a balance of interests, and I hope I
described for you today that a balancing of interests
is the best way to construct a major pipeline system
that's going to have a long life and serve its
customers both domestically, in the region, and
internationally, or back into the Lower 48. You need
to balance the extra costs with the long-term
potential and your social and economic goals as a
state.
Number 929
CHAIR OGAN, acknowledging that a certain amount of processing
might be involved, asked what would be the minimum-sized
community that could economically get "an offtake."
MR. PALMER said that would be difficult to answer at this point
because TransCanada has not examined that issue and is "not in
that business and wouldn't understand what incentives the
government of Alaska or local distribution companies might be
prepared to provide to those local communities."
CHAIR OGAN predicted that there will be a tremendous amount of
interest by some communities regarding getting "hooked up," and
suggested that TransCanada give that issue some thought as its
representatives travel throughout Alaska endeavoring to garner
community support.
MR. PALMER agreed to do so, but cautioned that any of
TransCanada's responses to communities regarding that issue will
be conditional based on whether it is looked at from a purely
economic standpoint or from a local, state, or federal
government's or local distribution company's standpoint.
CHAIR OGAN remarked, "I would much rather see barges of propane
going down the Yukon River, rather than barges of diesel going
up the Yukon and Kuskokwim [Rivers]." He offered some examples
of areas and communities that might be good choices for handling
the appropriate processing. He predicted that it would be
helpful to be able to say to communities what the costs of
hooking them up to the gas pipeline will be, so that individual
communities can take those costs into consideration when
determining the feasibility of whether or not to get hooked up.
MR. PALMER said that is good advice, and relayed that
TransCanada has some commitments to serve small communities in
the Yukon, and so will endeavor to be responsive to communities
regarding this issue.
REPRESENTATIVE SAMUELS, with regard to access by an explorer,
asked who has input in determining whether an expansion will
take place.
[The counter numbers roll over to 000.]
Number 000
MR. PALMER offered his understanding that the pipeline company
will have some say over whether a proposed increase in supply is
sufficient to warrant additional facilities. However, the
standards regarding what amounts of gas are sufficient to
warrant an expansion will be established by the FERC and the
National Energy Board (NEB), and so some "modest incremental
volumes" might be allowed under those standards depending on the
circumstances. In response to another question, he remarked
that it would be unlikely that the FERC and the NEB would have
conflicting rulings regarding expansions. He noted that the NEB
does have the authority to impose an expansion on a pipeline
company, under certain circumstances, though the FERC does not.
SENATOR SEEKINS asked Mr. Palmer what the capacity is of a 48-
inch pipe platform.
MR. PALMER reiterated that the maximum pressure would be 2,500
pounds per square inch, to transport an initial volume of 4.5
bcf a day with a relatively inexpensive expansion capability up
to approximately 6 bcf a day. He added that there would be six
separate compressor stations located throughout Alaska. In
response to another question, he reiterated that the term
"pipeline loop" refers to a second piece of pipe parallel to the
initial pipe that is interconnected and that is run in
combination with additional compressors to relieve the pressure
constraints and allow additional pipeline volume to be
transported. He mentioned that the cost of "looping" is
dependent on several factors, though many of the initial costs
of building a pipeline would not reoccur when building a loop.
He estimated a modest cost savings of 10-20 percent to build a
loop as opposed to building the initial pipeline.
SENATOR SEEKINS surmised, then, that any increase in Alaska's
instate needs could be met via pipeline loops.
MR. PALMER concurred.
CHAIR OGAN asked whether "takeoffs" for looping are designed
into the original construction.
MR. PALMER said yes, adding that although loops generally
originate from near compressor stations, "hot taps" can also be
done and are a relatively normal procedure.
Number 159
SENATOR WAGONER asked about "farm taps."
MR. PALMER reiterated his earlier comments regarding farm taps,
adding that this service is provided at a specific rate and that
TransCanada owns the interconnection.
REPRESENTATIVE KERTTULA asked how many "shipper owned" pipelines
there are in Canada and whether they follow the same rules under
the NEB as other pipelines.
MR. PALMER replied:
The only ... major gas pipeline that I'm aware of that
has been constructed by the shippers was the "Alliance
Project." It was constructed primarily by natural gas
producers; subsequent to the initial contracting,
pipeline companies acquired the original equity from
the original owners. That occurred through the
construction stage and right up until recent times -
post construction. ...
REPRESENTATIVE KERTTULA surmised, then, that Canada didn't have
anything analogous to the Trans-Alaska Pipeline System (TAPS) or
"the one proposal by the producers."
MR. PALMER replied, "There are clearly some examples on the oil
side; on the natural gas side, like in the United States, ...
the vast majority of the pipeline infrastructure has been
constructed by what I would call independent pipeline companies
over the past 50-75 years."
Number 208
REPRESENTATIVE GARA said his concern is that by the time the
proposed pipeline gets interconnected with "Canadian pipes, we
reach a point where all of sudden there's so much Canadian gas
that there's not enough room for our 4.5 bcf to go through" to
the Lower 48. He asked whether such is a possibility.
MR. PALMER offered his belief that under certain conditions,
that is not a possibility. He elaborated:
The lead time, in our opinion, to build the project
from Prudhoe Bay to Alberta will be longer than to
build from Alberta to market. ... We believe ... that
it's expected that there will be some spare capacity
on the Alberta system and the systems away from
Alberta for you to move at least a portion of your 4.5
bcf a day to market without expansions. It's an open
question, at this point, whether or not there will be
4.5 bcf a day of spare capacity when this gas comes.
I think we would argue a couple of things. [First]
that decision can be made a couple of years after the
decision is made [to build] ... the project from
Alaska to Alberta - just from a physical timeframe
standpoint - and, [second], as I've described to you,
the pipeline companies are going to compete for your
business to move that incremental capacity away from
Alberta at whichever markets you or the gas producers
wish to serve. ... That happens today - you see that
competition occurring from Alaska to market.
TAPE 04-17, SIDE A [BUD TAPE]
Number 001
MR. PALMER used an example in which one wanted to move 4.5 bcf a
day to Chicago every day. "You would have to judge two years or
so after the decision was made [to build] ... the pipeline from
Prudhoe Bay to Alberta, how you want to move that gas," he said.
One option would be to move the gas on existing pipeline
systems, which are generally at a lower price because of the
depreciated costs. Another option would be to build a new
pipeline for say, 2 bcf a day, which could be constructed and
receive regulatory approval faster than the piece from Alaska to
Prudhoe Bay because the new construction would be along existing
corridors and isn't as complex a project. Mr. Palmer said that
he didn't believe Alaska's gas would be stranded in any fashion.
In fact, he predicted that there would be competition to move
the gas to market.
CHAIR OGAN relayed his experience from the Energy Council that
most factor in 4.5 bcf a day worth of gas and the worry is with
regard to where the supply is coming from beyond that. Even
with 4.5 bcf a day being Alaskan gas, "they're" looking at
importing 20 percent of the U.S.'s gas from LNG from foreign
sources. It's clear that there's a market for gas, he remarked.
REPRESENTATIVE GARA relayed his understanding that some gas can
be offloaded in Alaska and there could continue to be an
efficient pipeline from Alaska to Alberta. However, he posed a
scenario in which it becomes economic to do the line to Valdez
as well, and there are substantial markets in Asia for LNG
through Valdez. He asked if the aforementioned would require a
looped pipe from the North Slope to the Alaska cutoff point or
could it be accommodated through additional pressure stations.
Number 025
MR. PALMER noted that he wasn't present to testify to the
specifics of an LNG project. However, he posed a scenario in
which there is a volume of 1 bcf a day for a LNG project out of
Valdez after the construction of the initial pipeline. In such
a situation, one would need to review the stage of development
of the pipeline system at the time. If, two years after
construction of the 4.5 bcf a day pipeline, there are sufficient
reserves, markets, and the economics at work, the entire system
wouldn't have to be looped because there is expandability up to
about 6 [bcf a day] by using compression. However, if the
pipeline has been expanded to 5.5 [bcf a day] or so for North
American markets, there would be some looping once it went
beyond 6 bcf a day.
CHAIR OGAN expressed the need to obtain information or
presentations regarding the jurisdiction of the FERC and the
National Energy Board (NEB). He inquired as to the hurdles of
shipping gas that originates in one country, moves through
another country, and ultimately arrives in the country of
origin.
MR. PALMER noted that for almost 50 years Canadian gas has been
moved across the border into the U.S. via multiple pipelines.
With regard to tolls and tariffs, on the Canadian side, the NEB
regulates it, and on the U.S. side, the FERC regulates it. The
aforementioned hasn't constrained the movement of gas over the
last 50 years. Mr. Palmer, turning to the specific situation
presented in Chair Ogan's question, pointed out that such was
addressed 25 years ago when Canada and the U.S. established a
treaty that would, under certain terms and conditions, allow the
movement of gas from one country through another country and on
to the country of origin. For example, the government of Canada
agreed that under the treaty, it wouldn't discriminatorily tax
the pipeline project.
SENATOR ELTON opined that it's important to discuss this further
at a future meeting because there is also the issue of access.
He posited that perhaps Alaskan access to the capacity of the
pipeline will impact access of Canadian gas from the Northern
Territories.
Number 092
HAROLD HEINZE, Chief Executive Officer, Alaska Natural Gas
Development Authority (ANGDA), informed the committee that his
presentation would be from the perspective of a public
corporation of the state. He noted that he provided the
committees with a copy of Title 38, the portion dealing with the
state's position with regard to pipeline right-of-ways. He
acknowledged that [the state] is preparing to consider Stranded
Gas Act applications, which is different law. However, in Title
38, there is a very clear statement by the legislature with
regard to the policy on how pipelines are to provide service and
why. The policy, he emphasized, speaks to any pipeline,
intrastate or interstate. Therefore, Mr. Heinze said he would
translate the aforementioned policy into specific things that
should be contemplated in this specific case of a pipeline going
down the highway into Canada.
MR. HEINZE began by explaining that a takeoff point is [a point
at which] gas can be taken out and something is done with the
gas, and perhaps some of the gas or liquid is returned into the
line. The take-off point could also be a place at which there
could be production in the line. He highlighted that getting
gas to the tidewater is a specific issue that's very important
to Alaska. He said that he would specifically like to discuss
the gas spur line to the Cook Inlet area. He turned attention
to the Power Point presentation from the ANGDA, which included a
diagram entitled, "Benefits to Alaskans". The diagram, he
explained, illustrates things which could happen that could be
good for Alaska [if there is a natural gas pipeline].
Number 136
MR. HEINZE said that the obvious reason one would take gas off a
large pipeline is to make electricity. The diagram lists some
communities that he believes might have enough electrical demand
that it would be worth putting in a major gas-fired, efficient,
co-generation power plant. If gas is taken off the pipeline and
propane is removed, [there could be propane distribution
centers] as listed in his presentation materials. For instance,
a propane distribution center in the Tok Northway area would be
very significant in terms of impacting the residents' quality of
life. All of the fuel in that area has to be brought a very
long distance, and therefore the transportation component of the
fuel cost for the area is very high. However, the fuel [from
the natural gas pipeline] would be going right by the area.
MR. HEINZE remarked that it's logical to review some places for
which the use of fuel is at a high enough density that there
could be a distribution system for gas. Certainly, Fairbanks
has enough of a population that it would make sense, at some
point, to have a distribution system if there was a plentiful
and affordable supply of gas. Additionally, the military bases
represent areas for which there is a high concentration of
energy use. Although all of the areas listed for the [electric
power plants, propane distribution centers, and piped gas
distribution systems] may not make the cut, there could be more
than just two or three takeoff points. He opined that there
should be take-off points for electricity, propane, and local
distribution spaced at distances of at least every 100 miles and
at least at every compressor station.
Number 189
SENATOR DYSON inquired as to the number of customers it would
take to make it economical for all of the [necessary equipment].
MR. HEINZE replied, "We really don't know yet." However, he
said that one of the things that should be required as part of
the Stranded Gas Act submittals to the state is a standardized,
simple design to accomplish "these purposes." The testimony
from TransCanada, he surmised, indicates the need for at least
the concept of "stubbing out" in order to make connections. He
said that such is fairly modest in cost. He emphasized that
these are cost elements which he estimates are .1 percent of the
$20 billion project. In this type of concept, he said he didn't
envision the pipelines providing anything other than the "stub
out." He opined that an unattended facility might work for 100
miles of highway line feeding propane and would work for a
Glennallen-sized power plant. The issues of dropping pressure
and cooling gas and dropping out propane can be addressed via a
very simple mechanical systems, he pointed out.
MR. HEINZE turned to the issue of getting gas to tidewater. The
first important reason for getting gas to tidewater is because a
large percentage of the population lives on the water.
Therefore, getting gas to tidewater can result in getting gas to
those communities on the water via barges or other methods.
Between Ketchikan and Kotzebue there are at least 50 major
communities that may be helped by having this type of energy
availability and pricing. He noted that he is taking a long-
term view. He then turned to LNG, which provides an economy of
scale to "the loading" in Alaska. "The fact that you go into
other markets with our gas allows you to achieve some economies
of scale," he said, adding, "we keep the savings for ourselves
... - we lower our cost ... [in order] to get our fuel ...
cheaper." Additionally, the notion of exporting may also help
with the cost of getting shipments to coastal communities.
MR. HEINZE directed attention to the new industrial or
manufacturing plants about which Agrium Inc. provided a
presentation. He mentioned that Agrium Inc. painted the value-
added feature in a way that is relevant to Agrium Inc..
However, Mr. Heinze pointed out that Agrium Inc.'s LNG plant and
the fertilizer facility are large, but Agrium Inc.'s economics
would improve with expansion. The reason Agrium Inc. hasn't
expanded is a lack of supply. Therefore, if the state had a
large amount of gas available for [Agrium Inc.'s LNG plant and
fertilizer facility], Agrium Inc. would review the issue of
expansion, and a certain number of entrepreneurial folks would
be attracted. He clarified that he is referring to true
entrepreneurs.
Number 262
MR. HEINZE opined that gas to tidewater could be done at a cost
of service, which would be a $1.50 under the delivery cost to
the world market. The aforementioned $1.50 looks very possible
in terms of a price advantage in Alaska. He noted that the
ANGDA has been reviewing the spur line issue by choosing the
Glennallen to Palmer project to review in more detail. The
aforementioned project was chosen because, of all the
possibilities, it's the only one without any right-of-way
information on file with the state. Furthermore, the Glennallen
to Palmer project seems to be a good model for any of the other
spur lines in the system.
MR. HEINZE said that in about a month, the ANGDA will put out a
report that includes alignment, potential costs of delivery of
gas through the system, et cetera. Looking at this from an
intrastate pipeline view, it would fall under the gas
transportation pipeline part of the statute, AS 42.06.
Furthermore, [the gas pipeline] wouldn't be under the FERC's
jurisdiction; rather, it would be under the RCA, the processes
for which seem reasonable and appropriate. He posited that the
statutes related to "intrastate" may be burdensome and complex.
Although Mr. Heinze said he reserves the right to suggest a
revision to the language in the future, he stressed that on an
intrastate basis, Alaska is in reasonably good shape.
MR. HEINZE informed the committees that the concept of the ANGDA
as a state-owned gas transmission company functioning as a
utility will offer a tremendous "cost to service" advantage to
Alaskans. However, that doesn't mean that the ANGDA wouldn't go
to a company such as the ENSTAR Natural Gas Company to design,
build, and operate something. Still, when one looks at the
state as an owner/financer of this type of project, [the ANGDA]
is very attractive. He relayed that in working on this matter,
it has been determined that there is a "bullet line" concept
that could be adopted [to address a Cook Inlet gas shortage],
though this idea has not progressed to the point of determining
a specific [route/location].
MR. HEINZE added that a bullet line, as is implied, means that
the line goes as directly as possible. One logical route is to
follow the Trans-Alaska Pipeline System (TAPS) right-of-way to
about pump station 7 and then move cross country as straight as
possible, and go by McKinley Park. He mentioned the possibility
of a bullet line following TAPS down to Delta and taking the
turn with TAPS to Glennallen on down to [Cook Inlet]. He
emphasized the need to conceptualize a pipeline that delivers a
fairly sizable volume of gas to this area.
Number 370
MR. HEINZE reminded the committees that there is already a
policy specifying the need to make the gas available in Alaska.
However, there are two basic threats to that policy through the
current system. One threat is the physical ability to take gas
off. Mr. Heinze suggested that prior to any open season, the
legislature should set a basic condition that some locations be
specified as to where some gas will be taken off. He said that
if the legislature can't get an entity interested in building a
pipeline through the common land to [submit a proposal
specifying take-off points], he would do it if the legislature
appropriated money for that purpose.
CHAIR OGAN opined that it makes good business sense for any
company building a pipeline to make as much gas as possible
available to local residents.
MR. HEINZE turned to the issue of tariffs, and noted that
because this is an interstate gas pipeline, [the ANGDA] has no
control over intrastate tariffs; rather, the FERC does. If
there are multiple drop-off points under the system, there's no
guarantee that the tariff will reflect the fact that the gas
wasn't transmitted all the way down. For instance, it might
cost $2.39 to take the gas off anywhere in Alaska, which is the
same as taking it to Alberta. Therefore, Mr. Heinze suggested
that as part of the Stranded Gas Act, one of the conditions
should be a "distance proportion" tariff requirement within
Alaska such that a tariff to the border has to be set and, thus,
if [the gas] only goes halfway to the border, only half the
tariff is collected.
CHAIR OGAN commented that the aforementioned makes good business
sense.
Number 450
MR. HEINZE said, "As an Alaskan of many decades, I am not
prepared to trust this issue to an agency in Washington, D.C."
He went on to note that the argument is that the millions of
consumers in the Midwest shouldn't have to subsidize the
delivery of gas to the few thousands of customers in Alaska, and
such an argument might resonate in Washington, D.C.. He said
that there's an easy way to deal with this issue through the
fiscal terms of the Stranded Gas Act. He reiterated his belief
that when the legislature faces a contract, it should consider
including a "distance proportion" tariff requirement within
Alaska.
MR. HEINZE turned to the "open season" process, and informed the
committees that one of his responsibilities is to think about
how to make the LNG project interact in a positive manner with
the highway project. One of the keys to designing the LNG
project is to determine the gas composition. He emphasized that
he has no knowledge of the gas composition on which the pipeline
design was based. The aforementioned isn't public information.
The informational issue is extraordinarily important because the
legislature is going to have to make a multi-billion dollar
decision on the Stranded Gas Act contract. He stressed the need
to check the information, at least at some level.
MR. HEINZE posed a situation in which there is a 120-day open
season, which, if it started in June, would mean that the 120
days would expire during the legislature's interim. Such a
situation would potentially require the legislature to be called
in for a special session. Mr. Heinze opined that the concept of
a fair and equitable "open season" process would ring truer if
there was more disclosure. He offered his belief that the
committees could've asked Agrium Inc. what it's process would be
in terms of due diligence in making a major commitment during an
open season period; he acknowledged, however, that such wouldn't
happen quickly. "The more prepared we are, the better this can
work," he added.
MR. HEINZE turned to the access issue with the LNG project. At
this point, there hasn't been much discussion regarding market
access because people assume that the market is there. However,
that's not the case with LNG because LNG has to have a place to
go. The place "we logically want to go" is the West Coast. He
showed the committees a map from the FERC that notes proposed
[facilities], many of which would be in the Gulf of Mexico.
Although the "lassiez faire" approach by the FERC seems to be
working, he opined, there is concern that of the many proposed
[facilities] on the West Coast, only one of those may occur in
the U.S. under the FERC's jurisdiction. Furthermore, if that
proposed [facility] is proprietary, Alaska LNG could be "locked
out on this." He noted that he has raised this issue with the
FERC and he raises it today because he believes it's an issue
that should receive some thought.
Number 561
CHAIR OGAN recalled the Energy Council meeting in Alabama where
when driving east of Mobile, about every fifth house had a sign
in its yard saying "No LNG". He commented that he felt right at
home, and further commented that there are people everywhere who
don't want anything built. Therefore, one of the topics of the
Energy Council has been in regard to how to site an LNG plant
because of the resistance to it. Now the only place folks are
thinking of building LNG plants is offshore, where there would
be major security issues.
MR. HEINZE agreed with Chair Ogan. He then noted that he didn't
discuss the East Coast because of the number of proposals is
modest while the resistance is very high. He characterized the
aforementioned as a local struggle. However, he reiterated that
the good news is that the offshore opportunities are in the Gulf
of Mexico, whereas the West Coast is always going to present a
difficult situation.
CHAIR OGAN commented that the Gulf of Mexico is a fairly mature
oil province, and therefore one would think there wouldn't be as
much resistance. "America is going to have to wake up or start
paying a lot more money for gas; same thing ... for the Cook
Inlet," he said.
MR. HEINZE returned to the map and explained that the blue
arrows show the LNG coming in. In wrapping up his presentation,
Mr. Heinze recalled Senator Bunde asking, at another meeting,
whether any other states involved with [gas pipelines] get
involved with tariff and access issues. The State of Wyoming
[under the] Wyoming Natural Gas Authority is one such example.
TAPE 04-17, SIDE B [BUD TAPE]
Number 632
MR. HEINZE continued, "[tape begins midspeech] ... if you'll
drill more wells, I'll build a pipeline to you," adding that the
aforementioned dialogue occurs around the world. He returned to
the topic of the "Alliance pipeline," which was built because a
bunch of producers broke the deadlock and took the risk of
building a pipeline. In Wyoming, the state has decided that it
was losing so much money from the royalty in Texas that it
decided to step in. Therefore, within the last few years, the
Wyoming Natural Gas Authority was activated. [The Wyoming
Natural Gas Authority's] bonding is $1 billion to build
pipelines in order to "de-bottleneck" its gas.
MR. HEINZE said the tariff difference from the world price has
been well over $1.00 because of the difficulty of getting from
Wyoming to the marketplace. The objective is to drive that
number down to $.50. Therefore, every unit of production is
going to be worth more. Additionally, the pipeline capacity
will be expanded so that the take out for Wyoming is increased
from 4 bcf to 6 bcf a day. He commented that Wyoming is a very
conservative place, and that he didn't believe the state
receives any federal money for education so that the federal
government can't be involved in how the state runs its schools.
Mr. Heinze said that the Wyoming model will be reviewed and
explored.
Number 668
SENATOR SEEKINS offered his understanding that during the time
when a gas pipeline is built, the FERC decides how risky the
pipeline is and specifies that the [entity] can make somewhere
between the guaranteed return on the ownership of 12-14.5
percent. He asked if the cost of financing is part of the
capitalized cost of the return.
MR. HEINZE explained that pipeline financings are done in a
"debt equity" structure. For example, if the debt is 70 percent
and equity is 30 percent, then for tariffs, whatever the bond
rate is [on the debt] can be included as a cost; in other words,
what is paid in interest is a cost and becomes a component of
the tariff. Another component of the tariff pertains to how
many dollars of equity there are and what is allowed to be
earned on that equity, which is the 12-14.5 percent.
MR. HEINZE said that in a "cost of capital" sense, it's
reasonable to use a 70:30 percent [debt to equity ratio] with a
12 percent return on the equity and 8 percent on the debt. For
smaller projects, such as a spur line, [the ANGDA] is looking at
100 percent debt, which is typically how a local utility would
do it. On a 100 percent, there is the potential for a low
interest rate. "That's why I'm able to show you some numbers
that indicate that our cost of service would be a lot less than
other people; now, I'm not making that claim in [regard] to a
$20 billion project or even a $10 billion project, but I am as
far as smaller projects that are more Alaska-sized," he stated.
SENATOR SEEKINS surmised, then, that a company with a lot of
cash could leverage "pledging," receive a low interest rate, and
roll it into the tariff.
MR. HEINZE said that traditionally, a pipeline company favors
using a higher percentage of debt if it can be obtained without
materially increasing the debt rate. Oil companies, on the
other hand, tend to be very equity oriented, and perhaps would
structure it at 50:50. He predicted that the state would
probably aim for 90:10 because the state isn't oriented toward
the return on the investment as much as it is oriented toward
getting the lower cost of service.
SENATOR WAGONER turned to the "bullet line" option and asked
about timing, the sizing, and the capacity of it [with regard
to] handling the needs of the entire Cook Inlet basin.
Number 724
MR. HEINZE proposed a scenario in which the [bullet line]
started at Point Thompson with a 24 inch line that is laid down
over the TAPS right-of-way, which would be followed down to
Delta and then over to Glennallen. Such a line could easily be
designed to handle a half billion cubic feet a day if not a
billion cubic feet a day. He pointed out that by going down the
TAPS right-of-way, there is a pad, gravel, and access. The
desire would be to keep it as simple as possible, and such a
system could be built fairly fast because the lead times for
procurement wouldn't be too long and only a couple construction
seasons [would be necessary]. With regard to the question of
[completion] by 2008 or 2009, he said he didn't believe [such
was possible], nor did he believe [the legislature] would be
wiling to make such a decision in the next couple of years.
MR. HEINZE informed the committees that he was one of the
reviewers of the Department of Energy study discussed by the
ENSTAR Natural Gas Company yesterday, and although the study
concludes that the exploration potential is there, he relayed
his concern with a scenario in which nothing happens within the
next two to four years. If the aforementioned happens, then
something like a bullet line would be a solution if other things
haven't progressed. Mr. Heinze specified that his concern is in
regard to dealing with the Alaska issues in a wide variety of
scenarios because there are various ways that this could play
out.
MR. HEINZE added: "If nothing is happening in a few years and
if this area is not finding gas, we better figure out something
because, again, I've sketched through the alternatives [and]
none of them are pleasant." One of the alternatives would be to
build coal-fired power plants because there is a lot of coal in
the area. Another alternative would be to resurrect the
"Susitna Hydro Project." And, yet another option would be to
import LNG from Indonesia. Mr. Heinze explained that the
ANGDA's concept of the bullet line is to make sure there is a
fallback option that makes some sense in Alaska and under Alaska
jurisdiction.
Number 771
SENATOR SEEKINS returned to Wyoming's situation and relayed that
in talking with a Senator from Wyoming he was surprised to learn
how much of the natural gas infrastructure deals with coal bed
methane and its transportation. He offered his understanding
that about $1 billion a year is brought into the state treasury
from coal bed methane. He asked whether that's part of the
reasoning behind Wyoming's increase in marketing.
MR. HEINZE pointed out that Wyoming has a lot of stranded gas
that can't be gotten to market because there aren't enough
pipelines going out. Furthermore, the pipelines in the area are
already full. Therefore, the options are to build new
interconnects or do something to "de-bottleneck" the system in
order to address the transportation issue. The billion dollars
worth of bonds is in reference to "de-bottlenecking" the system
and making it more attractive [by] lowering the shipping charge
and increasing the volume.
MR. HEINZE said that with regard to the coal bed methane,
Wyoming was probably the major coal producer in the U.S. several
decades ago. Due to the decline of coal being used for electric
power generation, Wyoming has seen [coal production] wane.
Still, there is probably a huge coal resource base and parts of
Wyoming have determined that they can utilize that resource base
through a coal bed methane approach rather than an open pit
mine. He noted that Wyoming also has very large conventional
oil and gas resources. The gas resources were only found
recently due to their depth. He mentioned that at this point,
there are estimates that Wyoming was losing $135 million worth
of taxes and royalties because the gas was stranded. There are
also estimates that with the improvements through the pipelines,
the state would realize additional revenues in the amount of
$500 million a year.
SENATOR WAGONER emphasized that if gas isn't taken to Cook Inlet
by 2009, or more gas reserves aren't discovered, the economy of
the entire Cook Inlet Basin, including Anchorage and the Mat-Su
Valley, will be in trouble. Without cheap gas, the entire
economic wellbeing of Southcentral Alaska is at risk. Senator
Wagoner posited that Alaska has the cheapest natural gas in the
U.S., but that will change if care isn't taken.
MR. HEINZE said that all the factual information that he has
supports the anecdote that [Southcentral Alaska] grew largely on
the basis of cheap energy. However, that's over and the problem
is that the supply situation could be worse than the price
situation.
CHAIR OGAN expressed the need to have someone discuss the costs
to off-take gas out of the pipeline. Chair Ogan announced that
he was going to ask [Legislative Legal and Research Services] to
review the state law in regard to ensuring Alaskans access to
the gas.
The committee took an at-ease from 11:20 a.m. to 11:25 a.m.
[The at-ease was inadvertently recorded.]
Number 902
REPRESENTATIVE KERTTULA thanked everyone for his or her efforts.
She then relayed that her biggest desire is to hear what the
administration is doing regarding this issue. She highlighted
the last question on the agenda: "What is Your Company Willing
to Offer on Access Beyond What Is Required By Law?" She noted
that Mr. Rutherford and Mr. Heinze talked about the
aforementioned question vis-à-vis the right-of-way. She
expressed interest in an outline of the ideas with regard to
this question, as well as an outline regarding what the
legislature should specifically look at in a contract. She also
expressed interest in obtaining more information with regard to
how rolling in rates would work.
REPRESENTATIVE LESIL McGUIRE expressed interest in anything that
would provide members a more solid understanding of the process
that the FERC goes through, the interactions it has with the
NEB, how the decisions are made, and the what the role of the
state would be. She suggested that it would be interesting to
hear from a representative from Wyoming in regard to what it
went through to arrive at its decision.
SENATOR GRETCHEN GUESS expressed the need to have the discussion
regarding the FERC with the FERC rather than just listening to
others offer opinions on what the FERC might do. Perhaps, it
would also be helpful to have someone from the NEB. She, too,
expressed the need for information with regard to the mechanics
of rolling in rates.
CHAIR OGAN suggested that the shippers may have a bit of
"heartburn" with [rolling in the rates] because it will increase
their costs.
SENATOR GUESS remarked that she didn't understand the
mathematical process with regard to how one methodology is
determined over the other.
[The counter numbers roll over to 000.]
Number 010
SENATOR SEEKINS highlighted the fact that the legislature has to
wait and see what is proposed while simultaneously attempting to
plan statutes that would facilitate reasonable development,
remove possible statutory impediments, and protect the interests
of Alaskans. He likened this situation to buying a car that one
hasn't yet seen. Senator Seekins opined that the process is
difficult because he is trying to be prepared to make a wise and
reasonable decision in a short period of time on something
unknown. He said he agrees with the suggestion of having a
representative from Wyoming speak about Wyoming's experience.
CHAIR OGAN noted that Senator Cole, a Wyoming state legislator,
will be present for the Energy Council meeting, and therefore he
offered to have his staff try to schedule a meeting with that
senator during that time. He encouraged everyone to come to the
Energy Council meeting.
REPRESENTATIVE GARA said he agrees with those wanting a briefing
on the FERC rules and suggested that there also be a briefing
from a supplier that relies on the FERC rulings but isn't a
pipeline owner. He suggested that there is a chance that a
pipeline project in this state will be hampered if those who are
in possession of large amounts of gas don't want to sell it
unless it is through their own pipeline. He offered his
understanding of the argument that if someone is willing to
build a pipeline and [those in possession of the gas] won't sell
it, it's a waste and the lease to sell gas would be lost. The
aforementioned could be litigated for 10 years or so and
ultimately kill the pipeline project. Therefore, he suggested
the need to review whether there is anything the legislature can
do to ensure that existing gas supplies are made available,
under fair terms, to a pipeline. Until there is such an
agreement, a pipeline can't be built, he opined.
CHAIR OGAN directed attention to what he termed as "Ogan's
Golden Gas Rule," which is that those with the gas make the
rule, and opined that the aforementioned is a problem. He
acknowledged that many have wanted to build a transportation
system and many dollars and much time have been spent and still
the state remains without a gas pipeline.
REPRESENTATIVE GARA said that's his point, and clarified that
his question is whether the legislature can do anything to
control [the state's] own destiny.
CHAIR OGAN highlighted that the market has changed, especially
the Lower 48 gas market; cheap gas is now a thing of the past.
Number 129
SENATOR DYSON remarked that the need for gas for Alaskans is
huge. He noted that he was impressed with the legislature's
action to not allow the "over the top" route, and suggested the
producers would've eventually concluded [that it was not
feasible] due to permitting and environmental issues. He
suggested that the legislature should take actions which
acknowledged that having gas available for Alaskans is of the
highest priority. The royalties, he surmised, aren't enough to
meet the needs of Alaskans. However, he maintained that if the
major [producers] are going to be forced to supply gas to
Alaskans, then it should be done in a manner that is fair.
SENATOR WAGONER agreed, and suggested reviewing a legislative
package that could address some of the potential problems
highlighted today.
REPRESENTATIVE HAWKER remarked that this process has been
extremely valuable and from it he has created a list of less
than 10 items that are parameters by which the proposals could
be evaluated. He expressed the need to obtain a better
understanding of the international treaty and the interplay
between the FERC and the NEB. He further expressed the need to
explore the issue of ownership of a potential line, particularly
in relation to a Canadian-owned company.
CHAIR OGAN suggested having a panel discussion in the future.
TAPE 04-18, SIDE A [BUD TAPE]
Number 001
CHAIR OGAN reiterated the need to discuss the costs of the off-
takes and who would pick up the costs if it were too expensive
for a community. He suggested reviewing whether the
aforementioned could be accomplished through federal or state
subsidies or through a joint partnership with the corporate
entity that constructs the pipeline.
ADJOURNMENT
There being no further business before the committees, the joint
meeting of the Joint Committee on Legislative Budget and Audit
and the Senate Resources Committee was adjourned at 11:55 a.m.
| Document Name | Date/Time | Subjects |
|---|