Legislature(2007 - 2008)CAPITOL 106
04/05/2008 02:00 PM House ECONOMIC DEV., TRADE, AND TOURISM
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| Presentation: Overview of Alaska's Gas Needs and Market Assessment by Alaska Natural Gas Development Authority (angda) & Science Applications International Corporation (saic) | |
| Adjourn |
* first hearing in first committee of referral
+ teleconferenced
= bill was previously heard/scheduled
+ teleconferenced
= bill was previously heard/scheduled
ALASKA STATE LEGISLATURE
HOUSE SPECIAL COMMITTEE ON ECONOMIC DEVELOPMENT, INTERNATIONAL
TRADE AND TOURISM
April 5, 2008
2:06 p.m.
MEMBERS PRESENT
Representative Mark Neuman, Chair
Representative Carl Gatto
Representative Wes Keller
Representative Bob Lynn
Representative Mike Doogan
MEMBERS ABSENT
Representative Kyle Johansen
Representative Andrea Doll
OTHER LEGISLATORS PRESENT
Representative Jay Ramras
Representative Berta Gardner
Senator Charlie Huggins
Senator Bill Wielechowski
Senator Thomas Wagoner
Senator Gene Therriault
COMMITTEE CALENDAR
PRESENTATION: OVERVIEW OF ALASKA'S GAS NEEDS AND MARKET
ASSESSMENT BY ALASKA NATURAL GAS DEVELOPMENT AUTHORITY (ANGDA) &
SCIENCE APPLICATIONS INTERNATIONAL CORPORATION (SAIC)
- HEARD
PREVIOUS COMMITTEE ACTION
No previous action to record
WITNESS REGISTER
HAROLD HEINZE, Chief Executive Officer
Alaska Natural Gas Development Authority (ANGDA)
Department of Revenue
Anchorage, Alaska
POSITION STATEMENT: Participated in the presentation by Alaska
Natural Gas Development Authority (ANGDA) and Science
Applications International Corporation (SAIC).
CHRIS ELLSWORTH, Director
Energy Markets and Forecasting
Scientific Application International Corporation
Anchorage, Alaska
POSITION STATEMENT: Participated in the presentation by Alaska
Natural Gas Development Authority (ANGDA) and Science
Applications International Corporation (SAIC).
ACTION NARRATIVE
CHAIR MARK NEUMAN called the House Special Committee on Economic
Development, International Trade and Tourism meeting to order at
2:06:32 PM. Representatives Keller, Doogan, Gatto, Lynn, and
Neuman were present at the call to order. Also in attendance
were Representatives Ramras and Gardner, and Senators Huggins,
Therriault, Wielechowski, and Wagoner.
^PRESENTATION: Overview OF Alaska's Gas Needs and Market
Assessment by Alaska Natural Gas Development Authority (ANGDA) &
Science Applications International Corporation (SAIC)
2:06:50 PM
CHAIR NEUMAN announced that the only order of business would be
a presentation by Alaska Natural Gas Development Authority
(ANGDA) & Science Applications International Corporation (SAIC).
2:07:13 PM
HAROLD HEINZE, Chief Executive Officer, Alaska Natural Gas
Development Authority (ANGDA), Department of Revenue, informed
the committee that this presentation is in response to a request
by the House Special Committee on Economic Development,
International Trade and Tourism, that ANGDA review the issues
related to value added, in-state manufacturing based on natural
gas and natural gas liquids. He stressed that this is a
progress report, as the study is not complete; however, there
are points worth the committee's attention at this time. In
answer to a question, he clarified that the full report will be
available at the beginning of the special session and will be
presented in person by the consultants.
2:09:33 PM
CHAIR NEUMAN stated that questions would be taken during the
presentation.
2:09:51 PM
REPRESENTATIVE DOOGAN asked when the full report will be
available.
2:10:02 PM
MR. HEINZE said that the report will be ready for presentation
early in the session beginning June 3, 2008.
2:10:17 PM
REPRESENTATIVE DOOGAN observed that the start date is in
question.
2:10:27 PM
REPRESENTATIVE LYNN confirmed that the special session start
date is the third of June; however, legislative leadership is
contemplating a pre-session.
2:10:53 PM
MR. HEINZE related that, for ANGDA to respond to the committee's
request, it became clear that the best way to begin was to look
at a high quality study done in 2006, by Scientific Applications
International Corporation. This extensive study was done under
contract by the U. S. Department of Energy and included a
detailed and professional analysis of the potential industrial
segments in Alaska, including value added manufacturing. Mr.
Heinze retained SAIC to update its study, considering the energy
price environment of the world today, as compared to 2006. He
opined that this is a very professional job.
2:12:53 PM
CHRIS ELLSWORTH, Director, Energy Markets and Forecasting,
Scientific Application International Corporation, stated that
the agenda for the presentation includes background information,
study assumptions and methodology, study conclusions from 2006,
preliminary findings from the recent update, and a summary. Mr.
Ellsworth explained that the overall objective, in 2006, was to
evaluate the feasibility of a spur pipeline on the proposed
Alaska natural gas transmission system. The proposed spur line
was to serve Southcentral Alaska, including the Kenai Peninsula,
and four markets: residential, industry, commercial, and power.
The study considered existing and future industries that could
utilize North Slope natural gas to the maximum. The
calculations are also based on the estimated maximum price for
natural gas. He further explained that the SAIC Anchorage
office provided the assessment of the Cook Inlet gas supply and
that the update was primarily focused on the industrial use of
natural gas in Alaska and does not consider the residential,
commercial, or power use sectors.
2:17:03 PM
MR. HEINZE pointed out that Mr. Ellsworth was referring to the
full report; however, the update was on one part of the 2006
report.
2:17:26 PM
MR. ELLSWORTH noted that an advisory group, consisting of
Alaskan entities, assisted SAIC and the Department of Energy to
understand and frame the issues for Alaska.
2:18:20 PM
MR. HEINZE added that the advisory group also provided an
element of peer review as the work was in progress.
2:18:39 PM
CHAIR NEUMAN asked how this organization was brought together.
2:18:50 PM
MR. HEINZE stated that the study was done, under an earmark of
federal money through the Department of Energy, to look at
Alaska's gas needs and pipeline needs. The direction of the
work was done by the Department of Energy through the National
Energy Technology Laboratory.
2:19:26 PM
MR. ELLSWORTH turned to the methodology of the study and said
that there was a bottom up approach to determine the level of
the sustainable demands on natural gas. To provide anchor
customers to a pipeline there would need to be petrochemical,
Liquefied Natural Gas (LNG), and gas to liquids (GTL) markets in
Southcentral Alaska. In addition, an integrated market analysis
was done to show the impact of the price of gas in the Lower 48
states. Mr. Ellsworth summarized that the study looked at the
following: the current and potential users of natural gas; what
products they produce; what markets are available for the
products; and what the users can pay for the gas.
CHAIR NEUMAN asked Mr. Ellsworth to describe the availability of
natural gas in the Lower 48.
2:22:08 PM
MR. ELLSWORTH opined that the Lower 48 is in a gas shortage that
is resulting in high gas prices, a relative boom in LNG imports,
and the construction of import terminals. Also, there is new
interest in bringing gas from the North Slope to the Lower 48.
He assured the committee that there will be further information
on this subject in the final report. Mr. Ellsworth then spoke
of the industries studied, primarily expansion of the LNG
industry and gas to liquids. Gas to liquids (GTL) is a new
technology that has become attractive due to high oil prices.
In addition, the study looked at the Agrium Inc. plant, some
smaller industries, the petrochemical industry, and the gas
demands of propane. Mr. Ellsworth provided estimates of the gas
requirements for various industries.
2:26:48 PM
MR. ELLSWORTH presented a graph that demonstrated the capacity
for industries and residential use that would support a 1.3
billion cubic feet (bcf) per day spur pipeline. The graph also
indicated the maximum price customers are estimated to pay for
residential and industrial power before turning to an
alternative source. The estimated maximum price is about four
to four and one-half dollars per million British thermal units
(MMBtu).
2:29:22 PM
CHAIR NEUMAN asked Mr. Heinze to comment on the 2006 study
conclusions.
2:29:43 PM
MR. HEINZE stressed that, in 2006, although Alaska was a growing
power market for up to 300 million cubic feet per day (MMcfd),
industry's use of gas was insufficient to economically support a
pipeline.
2:30:28 PM
MR. ELLSWORTH agreed, and added that the market price in
Southcentral Alaska was linked to the Henry Hub forecast. He
described the process for forecasting the price and calculating
the ultimate price to consumers in Southcentral Alaska. Turning
to the update, Mr. Ellsworth informed the committee that
assumptions for the findings of the 2008 update were adjusted
for: capital costs, operating costs, product prices, natural
gas feedstock prices, gas composition, and 2007 dollars,
adjusted for inflation. Moreover, two price scenarios were
used; the low case, produced by the Energy Information
Administration, and the high case, based on a March, 2008,
futures strip. He pointed out that the price for Henry Hub has
risen from the 2006 forecast of $5.60 to the low case forecast
of $6.27 and the high case forecast of $8.54. In response to a
question asked by Representative Neuman, Mr. Ellsworth said that
feedstock prices are very low.
2:36:29 PM
MR. ELLSWORTH revealed updated product prices and pointed out
that the price of LPG has risen from $383 per ton to a low case
of $639 per ton and a high case of $834 per ton. Similarly,
Japanese distillate has risen from $9.46 MMBtu to a low case of
$11.37 MMBtu and a high case of $15.47 MMBtu. He noted that the
LNG market in Asia is changing and new markets are opening in
China and Singapore. Market dynamics, with the entry of new
markets, are pushing up prices beyond the historical rates for
Japan; in fact, Japanese LNG contracts have been reported at $20
per MMBtu.
2:40:01 PM
CHAIR NEUMAN asked for Mr. Ellsworth's forecast of prices in
2010.
2:40:27 PM
MR. ELLSWORTH opined that expectations, by the federal
government and other sources, are that prices will remain high,
but not quite as high as today. However, there is a fundamental
energy shortage around the globe, primarily due to the fact that
resources are increasingly in state controlled hands, as in
Russia and Saudi Arabia. Also, the large populations of India
and China are raising expectations that prices will continue to
be high.
2:42:54 PM
CHAIR NEUMAN recalled previous testimony to the committee that
Asian markets are interested in gas products because China is
buying large volumes of propane.
2:43:57 PM
MR. ELLSWORTH agreed. He also advised that long term
arrangements with other countries for supplies of gas products
would relieve some of the risk of investment in new facilities.
2:44:29 PM
MR. HEINZE observed that oil demand is projected to be strong
for at least ten years because of China and India. He opined
that the gas market is expected to restructure to a world gas
market over the next twenty years.
2:45:38 PM
MR. ELLSWORTH reviewed the preliminary findings for the low
price scenario, that is, about $12 MMBtu, with a feedstock price
in Alaska of $8 to $8.50 MMBtu. He forecasted that gas is in
short supply in the Lower 48, but the maximum a West Coast
facility could pay for Alaska natural gas is between $3.50 and
$4.50 per MMBtu, which is below the market price. Propane,
Japan LNG, and fertilizer prices are very good, most likely due
to the increase in urea and ammonia prices, the opening of Asian
markets, and the interest in ethanol for vehicles. He expressed
the uncertainty around the technology for GTL; in fact, GTL
plants are still in the experimental stages. Again, he reminded
the committee of the increases in capital costs since the 2006
study.
2:48:40 PM
CHAIR NEUMAN asked for the price of gas that would make an in-
state GTL plant economically viable.
2:49:05 PM
MR. ELLSWORTH said around $3.50 MMBtu.
2:49:16 PM
MR. HEINZE explained that the price forecasts are based on the
volume and product from a world scale facility. He opined that
local markets would need to be augmented by an export market to
support this type of facility.
2:50:06 PM
MR. ELLSWORTH agreed, and added that the forecasts are based on
a 50,000 barrel per day plant, which is much larger than plants
in other parts of the world. He then presented the high price
scenario that increases the Alaska market price to the $6.80
range. Essentially, the rise of prices in the Lower 48, and the
rise in global energy prices, make the potential for developing
gas in Alaska more attractive than just two years ago.
2:51:55 PM
MR. HEINZE pointed out that there has been an increase to a
potential market of one-half to one billion cubic feet per day
(cf/d) for value-added industry in the state.
2:52:19 PM
CHAIR NEUMAN stated his priority to market Alaska's gas in-
state.
2:52:45 PM
MR. ELLSWORTH then directed the committee's attention to the
areas of potential market demand: British Colombia, the U.S.
and Mexico West Coasts, China, Japan, the U. S. Gulf Coast, and
Korea. Gross revenues are estimated at a total of between $4.7
billion to $5.9 billion.
2:53:22 PM
MR. HEINZE stated that the investment number to build the
necessary facilities is comparable.
2:53:35 PM
Mr. Ellsworth confirmed that the details for revenue and
investment will be provided in the full report.
2:53:42 PM
MR. HEINZE surmised that building the facilities would create
thousands of jobs.
2:53:48 PM
CHAIR NEUMAN asked for a comparison of risk between building
facilities inside of, and outside of, Alaska.
2:54:01 PM
MR. ELLSWORTH acknowledged that when global companies look at
economics, Alaska costs are much higher. He opined that a major
company would still consider Alaska profitable and with more
stability than in other parts of the world. An Alaska location
is a more expensive, but safer, place to locate.
2:55:36 PM
REPRESENTATIVE GATTO asked what type of plant was proposed.
2:55:48 PM
MR. ELLSWORTH explained that estimated capital costs are
available for plants of each technology.
2:56:16 PM
MR. HEINZE described an LPG plant as a small investment.
However, a GTL plant could cost $1 to $2 billion. The point is
that all of the plants could be built for $5 billion, and each
would enjoy open access to gas.
2:57:44 PM
MR. ELLSWORTH summarized the following: increases in prices
have changed the feasibility of industrial options for natural
gas use; these increases suggest that LNG and fertilizer
projects are now feasible; high and uncertain capital costs and
technology make GTL the most questionable investment; higher
energy and product prices enhance the feasibility of gas
intensive industries in Southcentral Alaska; the investment
climate of these industries will remain highly uncertain given
ongoing volatility in energy and product prices; and long term
contracts can reduce this uncertainty.
2:59:41 PM
MR. HEINZE asked for the top five prospects interested in
building facilities in Alaska.
2:59:51 PM
MR. ELLSWORTH indicated that Dow Chemical Company (Dow),
ConocoPhillips Alaska, Inc., Suez Oil Company, Shell Oil, BP,
and Sasol Internet would all be interested.
3:01:19 PM
REPRESENTATIVE DOOGAN asked whether Dow Chemical is buying gas
in Alberta, or just processing gas.
3:01:42 PM
MR. ELLSWORTH answered that Dow is processing natural gas in
Alberta; in fact, Alberta's natural gas and natural gas liquids
are in decline. He recalled discussions with Dow, in 2006,
about plant locations in Alaska.
3:02:30 PM
REPRESENTATIVE DOOGAN asked whether Dow could just process
Alaska's gas, if the pipeline goes to Alberta, using its
existing facilities.
3:03:02 PM
MR. ELLSWORTH affirmed this possibility. However, Dow may want
access to the Asian market through Alaska.
3:03:31 PM
SENATOR WAGONER asked about the future value of clean burning
GTL, after possible legislation mandating the use of clean fuels
in California and on the East Coast.
3:04:11 PM
MR. ELLSWORTH described GTL as the equivalent to ultra low
sulfur diesel, and agreed that California may mandate its use.
This fuel is expensive to refine and is in short supply. He
expressed the difficulty to say how high the price will go;
however, the premium between Japan and the West Coast is
increasing as Japan is willing to pay more per gallon due to its
pollution issue. Over time, that differential will equalize,
but ultra low sulfur diesel and GTL will be in short supply.
3:05:52 PM
REPRESENTATIVE GATTO asked whether there is a demand for GTL
when ultra low sulfur diesel is already available.
3:06:09 PM
MR. ELLSWORTH said yes. He explained that the demand is due to
the emphasis on burning clean fuel. Some refiners will not be
able to upgrade their facilities to produce it, due to the high
cost.
3:07:03 PM
CHAIR NEUMAN noted that the federal government will require the
use of low sulfur diesel by 2010 and synthetic fuels will be
blended.
3:07:27 PM
REPRESENTATIVE GATTO asked whether it would be economic to build
a GTL plant on the North Slope and ship the liquids through the
Trans-Alaska Pipeline System.
3:08:11 PM
MR. ELLSWORTH stated that the 2006 study indicated that it cost
30 percent more to build and operate a GTL plant at the North
Slope than in Anchorage. He said that the economics are
uncertain.
3:09:09 PM
MR. HEINZE explained that the scope of the study has not
included recommendations for specific locations of facilities,
beyond considering Alaska as a general location. He opined that
the results of the study, so far, are encouraging enough to look
at specific opportunities; for example, a separate clean
hydrocarbon line from the North Slope, or a small line to
extract natural gas liquids (NGL) for Alaska from the main line
to Canada.
3:10:51 PM
CHAIR NEUMAN asked Mr. Heinze whether a spur line to
Southcentral is economically feasible on its own, or whether
more industry is needed for a market for the gas.
3:11:29 PM
MR. HEINZE recalled that, in 2006, a reasonable look at the in-
state volume was on the edge economically. Now, the possibility
of adding one to one-half billion MMcfd dramatically strengthens
the potential for successfully marketing a high pressure gas
line.
3:12:53 PM
REPRESENTATIVE DOOGAN observed that, even at these prices, and
counting on significant, additional industrial capacity to be
built as a market, it is not entirely clear that a pipeline can
deliver a product cheaply enough.
3:14:00 PM
MR. HEINZE acknowledged that companies would not build plants
based on the information presented today. However, he
encouraged looking at the opportunity for an in-state industrial
market. He remarked:
The presumption here of two hundred billion, or two
hundred million a day into an LNG plant, is premised
on the plant that exists. That number might be much
bigger, if you make it two or three times bigger, for
instance. ... We're just not in a position to say how
it all plays, but, we ... all of a sudden went from a
case where the industrial contribution to help paying
the bill for the citizens, basically heating and
lighting their house, it, it went from being a small
number to a big number. ... That's the significance
from our point of view.
Mr. Heinze further opined that Japan would make the investments
based on the supply of propane alone.
3:15:59 PM
REPRESENTATIVE DOOGAN cautioned that a degree of confidence is
missing on the ability to project gas prices over time. He
asked whether there is an attempt to perfect predictions of gas
pricing far enough into the future to make decisions.
3:17:06 PM
MR. HEINZE opined that it was a certainty that prices can not be
predicted. However, all investment is based on long term
commitments, and those commitments buy the equivalent of
reserves in the ground. He cited the Agrium Inc. plant as an
example. When the plant was purchased, Agrium did not buy the
reserves, and could not save the plant. He gave another example
of a situation where there is a long term commitment and the
parties have a long term price relationship that guarantees that
the investor can compete over the longer term. All of the
parties must be involved, especially those who already have
reserves on the North Slope.
3:19:30 PM
CHAIR NEUMAN emphasized the need for the state to have long term
stability for industry.
3:20:06 PM
REPRESENTATIVE DOOGAN expressed his concern that, if prices go
down, the industry will not pay its gas taxes to the state.
There must be confidence that the price regimen will stay high
over an extended period of time.
3:21:35 PM
MR. HEINZE opined that the plants and the big pipe will be built
based on long term commitments. If there is a proper
environment to support a $30 billion pipeline, a $5 billion
investment in plants, that will employ citizens and contribute
to the tax base, should also be possible. Mr. Heinze concluded
that, at the time for the special session, in-state issues will
not drive the decisions about the gas pipeline. However, he
encouraged the committee to think about the opportunities for
in-state industry and to keep a positive attitude toward this
option.
3:23:53 PM
ADJOURNMENT
There being no further business before the committee, the House
Special Committee on Economic Development, International Trade
and Tourism meeting was adjourned at 3:23 p.m.
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