Legislature(2009 - 2010)BARNES 124
03/19/2009 03:00 PM House ENERGY
| Audio | Topic |
|---|---|
| Start | |
| HCR12 | |
| Adjourn |
* first hearing in first committee of referral
+ teleconferenced
= bill was previously heard/scheduled
+ teleconferenced
= bill was previously heard/scheduled
| + | TELECONFERENCED | ||
| *+ | HCR 12 | TELECONFERENCED | |
ALASKA STATE LEGISLATURE
HOUSE SPECIAL COMMITTEE ON ENERGY
March 19, 2009
3:09 p.m.
MEMBERS PRESENT
Representative Bryce Edgmon, Co-Chair
Representative Charisse Millett, Co-Chair
Representative Nancy Dahlstrom
Representative Kyle Johansen
Representative Jay Ramras
Representative Pete Petersen
Representative Chris Tuck
MEMBERS ABSENT
All members present
OTHER LEGISLATORS PRESENT
Senator Thomas Wagoner
Senator Gene Therriault
COMMITTEE CALENDAR
HOUSE CONCURRENT RESOLUTION NO. 12
Requesting that the governor and the attorney general review and
reevaluate the license issued to TransCanada Alaska Company,
LLC, and Foothills Pipe Lines Ltd., jointly as licensee, under
the Alaska Gasline Inducement Act to determine whether the
project proposed by the licensee sufficiently maximizes the
benefits to the people of the state and merits continuing the
license, taking into consideration economic changes affecting
project financing, the availability of liquefied natural gas and
natural gas from nonconventional sources, the state's risk of
paying treble damages associated with an in- state gas pipeline,
and the expected budget deficit; and requesting that the
governor and the attorney general report the outcome of the
review and reevaluation within six months.
-HEARD AND HELD
PREVIOUS COMMITTEE ACTION
BILL: HCR 12
SHORT TITLE: URGING REEVALUATION OF AGIA LICENSE
SPONSOR(s): REPRESENTATIVE(s) RAMRAS
03/12/09 (H) READ THE FIRST TIME - REFERRALS
03/12/09 (H) ENE, RES
WITNESS REGISTER
REPRESENTATIVE CRAIG JOHNSON
Alaska State Legislature
Juneau, Alaska
POSITION STATEMENT: Presented HCR 12 as the co-sponsor.
DON BULLOCK, Attorney
Legislative Legal Counsel
Legislative Legal and Research Services
Legislative Affairs Agency
Juneau, Alaska
POSITION STATEMENT: Speaking as the drafter, answered questions
regarding the proposed CS for HCR 12, 26-LS0156\C.
TOM IRWIN, Commissioner
Department of Natural Resources (DNR)
Anchorage, Alaska
POSITION STATEMENT: Testified during the hearing on HCR 12.
PAT GALVIN, Commissioner
Department of Revenue (DOR)
Juneau, Alaska
POSITION STATEMENT: Testified during the hearing on HCR 12.
TONY PALMER, Vice President
Alaska Development
TransCanada; President
TC Alaska; CEO
Foothills Pipelines, Ltd.
Calgary, Alberta
POSITION STATEMENT: Testified during the hearing on HCR 12.
ACTION NARRATIVE
CO-CHAIR BRYCE EDGMON called the House Special Committee on
Energy meeting to order at [3:09] p.m. Present at the call to
order were Representatives Dahlstrom, Ramras, Petersen, Tuck,
Millett, and Edgmon. Representative Johansen arrived as the
meeting was in progress. Also in attendance were Senators
Therriault and Wagoner.
HCR 12-URGING REEVALUATION OF AGIA LICENSE
CHAIR EDGMON announced that the only order of business would be
HOUSE CONCURRENT RESOLUTION NO. 12, Requesting that the governor
and the attorney general review and reevaluate the license
issued to TransCanada Alaska Company, LLC, and Foothills Pipe
Lines Ltd., jointly as licensee, under the Alaska Gasline
Inducement Act to determine whether the project proposed by the
licensee sufficiently maximizes the benefits to the people of
the state and merits continuing the license, taking into
consideration economic changes affecting project financing, the
availability of liquefied natural gas and natural gas from
nonconventional sources, the state's risk of paying treble
damages associated with an in- state gas pipeline, and the
expected budget deficit; and requesting that the governor and
the attorney general report the outcome of the review and
reevaluation within six months.
3:10:20 PM
REPRESENTATIVE TUCK said he was looking forward to learning more
about AGIA.
3:11:14 PM
CO-CHAIR MILLETT moved to adopt committee substitute (CS) for
HCR 12, 26-LS0156\C, Bullock, 3/18/09, as the working document.
3:11:32 PM
CO-CHAIR EDGMON objected for the purpose of discussion.
3:12:06 PM
REPRESENTATIVE CRAIG JOHNSON, Alaska State Legislature,
presented the committee substitute for HCR 12 as the co-sponsor
with Representative Ramras. Representative Johnson called
attention to the difficulties caused when the government hands
out large amounts of money without keeping a close eye to
prevent unintended consequences. In fact, the administration
has authorized the payment of $500 million dollars and
"we've heard very little since then." He recalled that during
his recent trip to the Energy Council conference, there were
discussions of the difficulties of the gas market on a global
scale that may have an impact on securing financing for the
Alaska gas pipeline. In fact, Alaska's gas may not be needed in
a glutted market. He stressed that HCR 12 does not require a
rewrite of Alaska's Gasline Inducement Act (AGIA), but requires
a report on the progress of the legislation. House Concurrent
Resolution 12 is a resolution of the people and it can be
changed if the language is too strong or too soft.
Representative Johnson expressed his surprise at the minority's
protest against this resolution, and asked, "Who can be opposed
at getting more information?" He cautioned against authorizing
this money and then "walk[ing] away without information." He
said he was heartened by the governor who said the resolution
asked the administration to make sure its decisions, with regard
to the gas pipeline, are truly in Alaska's best interest.
Representative Johnson mentioned the testimony that will come,
and stressed that all he is asking for is for the parties to
show the information that will answer his constituents'
questions. This resolution asks for a report on the progress
that is being made and he encouraged the committee to move it
out to the next committee.
3:15:43 PM
CO-CHAIR EDGMON asked the sponsors to walk through the changes
in the proposed CS.
3:16:32 PM
REPRESENTATIVE RAMRAS recalled advice from former Governor
Hickel to freshman legislators and opined Governor Palin would
agree that the debate of AGIA was whether it was for "the
maximum benefit of the people for the state to induce a
competitive environment for two gas pipelines, which is what has
materialized ...." Furthermore, any company in America, after
investing $500 million, needs regular benchmarks and written
reports in order to glean a sense of whether a project remains
economic or is losing its commercial footing. After attending
the Energy Council, he said, "I came away excited for America
and frightened for the prospects for Alaska." The U.S. is
reinventing its cornerstone energy source; in fact, the Federal
Energy Regulatory Commission (FERC) is permitting three
pipelines and two liquefied natural gas facilities (LNG) in
Oregon, over the objections of many of the residents. This is
happening in an effort to build a natural gas infrastructure
even though the capacity for the importation of LNG was six bcf
per day last year, and will be twenty bcf per day next year. In
addition, he noted the increase of nonconventional sources of
gas, such as shale, that are being developed by smaller, up and
coming producers. Shale is available in increasingly larger
quantities and the cost of tariff transportation is low.
Sources at the Energy Council stated Congress and Americans want
energy independence, although what they really want is energy
security, and that is possible with the amount of natural gas
available in the Lower 48. Moreover, with 4.3 trillion cubic
feet (tcf) of storage in natural geologic formations, America
has the ability to store more gas than is possible in Europe or
Asia. America uses the most energy, has the ability to store
the most, will have the most receiver ports for imported LNG,
and is now developing vast shale resources at lower prices than
before. Representative Ramras pointed out the North Slope is a
brand new "brown field", that must be explored for gas; however,
in the Lower 48 there are "green fields" where the gas has
already been located and the infrastructure is in place. All of
these factors are putting the Alaska pipeline somewhat at risk.
He asked, "They certainly want Alaska gas in the Lower 48, but
are they willing to pay for it, once you deduct the cost of
lifting it, the capital cost, and the cost of transporting it
and the embedded construction risk that comes in it?" Further,
he questioned whether the state's inducement of $500 million
enhances the market, or if the market will be created naturally
when "the marketplace is ready." He opined the governor and the
sponsors of HCR 12 are in agreement, and all of the parties want
regular information such as written benchmarks, that are part of
routine business practice. Representation Ramras stressed that
HCR 12 asks for a written report, within 180 days, from the
administration on how AGIA is doing, the effects of a changing
marketplace on economics, and whether the inducement is still
worthwhile. This report is the orderly dissemination of
information analyzing the greater marketplace and the
advancement of AGIA.
3:25:43 PM
CO-CHAIR EDGMON asked the sponsors to present the changes to the
resolution reflected in the proposed CS.
3:25:58 PM
REPRESENTATIVE RAMRAS advised the changes in the "whereas"
clauses are very straightforward. He then referred to HCR 12,
26-LS0156\S, page 4, lines 25-26, that read:
[Alaska] Gasline Inducement Act) to determine whether
the project proposed by the licensee sufficiently
maximizes the benefits to the people of the state and
merits continuing the license,
REPRESENTATIVE RAMRAS explained the above language is replaced
by the language in the proposed CSHCR 12, 26-LS0156\C, page 5,
lines 2-6 that read:
[Alaska] Gasline Inducement Act) to determine whether
the project proposed by the licensee fails to maximize
the benefits to the people of the state, or is
uneconomic, taking into consideration economic changes
affecting project financing, the availability of
liquefied natural gas and natural gas from
nonconventional sources, the state's risk of paying
treble damages associated with an in-state gas
pipeline, and the expected budget deficit;
REPRESENTATIVE RAMRAS further explained the material change is
from "sufficiently maximizes the benefits to the people of the
state and merits continuing the license" to "fails to maximize
the benefits to the people of the state or is uneconomic." He
assured the committee the intent of the resolution is to get a
lot of information at regular intervals, but not to rewrite
AGIA. In response to Representative Tuck, he noted that treble
damages are the same as triple damages.
3:29:48 PM
DON BULLOCK, Attorney, Legislative Legal Counsel, Legislative
Legal and Research Services, Legislative Affairs Agency,
informed the committee he was also the drafter of AGIA. He
explained the key change in the proposed CS is the question of
whether the project is uneconomic. The process of AGIA was to
offer $500 million, and the benefits of a pipeline coordinator,
to any entity that would propose a project and agreed to what is
commonly known as the "must-haves." The proposal from
TransCanada was determined as the best project to maximize the
benefits to the people of the state. This led to confusion as
the original language in the resolution asked for consideration
as to whether the project does maximize the benefit to the
people of the state and if the license should be continued;
however, at this point AGIA is a contract and he opined the
intent of the original resolution was not to undue the award of
the contract. Therefore, he said he looked at AGIA as a
contract and searched for provisions within the contract that
allow the evaluation of the project as it is underway. He cited
AS 43.90.210, Amendment for Modifications of the Project Plan,
and said this amendment allows the licensee to propose
modifications if circumstances have changed. Also, AS 43.90.240
Abandonment of the Project, addresses the economic issues
related to the pipeline. The first provision allows the
licensee and the state to agree that if the project can not be
built with value at "the wellhead," the parties can walk away
from the contract. However, if there is disagreement, for
example, the state feels the project is not viable, but
TransCanada does, the parties can go to arbitration. Mr.
Bullock then described the evidence that would prove the
economics of the project. He concluded the economics can, and
should, be constantly monitored and that the point of the
resolution, by asking for economic status, is consistent with
AGIA.
3:35:10 PM
REPRESENTATIVE PETERSEN referred to Mr. Bullock's legal opinion
included in the committee packet. He asked if he correctly
interpreted Mr. Bullock's opinion that if Alaska backs out of
"this deal," the state would be liable for treble damages.
3:36:15 PM
MR. BULLOCK said, "Not entirely." If the state offers
inducements of money and the benefits of a pipeline coordinator
to a competing gas pipeline with the capacity of more than
500,000 cubic feet per day, the damages provision is triggered.
Damages would equal three times the amount of the expenses up to
that point.
3:37:12 PM
REPRESENTATIVE RAMRAS opined discussion of this opinion is not
relevant due to the changes in the proposed CS.
3:37:22 PM
MR. BULLOCK clarified his memo addressed the issue of the state
arbitrarily canceling the contract. He pointed out that a
business will sometimes pay damages to get out of a contract
that carries a risk of costing them more; however, the AGIA
contract is different in that the state is subsidizing the
development of an independent business. He concluded without
speculating on what the damages of unilateral termination of the
contract would be.
3:39:07 PM
REPRESENTATIVE PETERSEN asked whether the amount would be higher
or lower than "half a billion dollars."
3:39:23 PM
MR. BULLOCK surmised TransCanada's first billings will be
received soon and the commissioners of the Departments of
Revenue (DOR) and Natural Resources (DNR) are in a better
position to know. He reminded the committee that another factor
to determine damages is TransCanada's reliance on the state's
backing.
3:39:56 PM
TOM IRWIN, Commissioner, Department of Natural Resources,
informed the committee HCR 12 requests the governor and the
attorney general review and reevaluate the AGIA license issued
to TransCanada Alaska and Foothills Pipe Lines Ltd. He opined
the purpose of this request is a belief that there are changed
conditions that may affect whether the AGIA project still
sufficiently maximizes the benefits to the people of Alaska, and
merits the AGIA license. He described the elements of analysis
within AGIA and said the following testimony will discuss why
the review and reevaluation is unnecessary. Commissioner Irwin
recalled that, prior to this administration, there was no work
being done on the Alaska natural gas pipeline such as field work
and regulatory preparation for an open season or a FERC
certificate; in fact, all of the gas reserves in the state were
the result of the search for oil, and proposed contracts under
the Stranded Gas Development Act (SGDA) failed to pass.
However; today there are two entities working toward open
season, there are multiple companies exploring for gas on the
North Slope, and there is a proven pipeline company committed to
build the project. Also, the following critical open access
provisions are assured: a low, reasonable tariff structure;
expansion commitments; and rational expansion tariffs.
Commissioner Irwin stated the AGIA project has the assurances to
support Alaska's economic future.
3:46:36 PM
COMMISSIONER IRWIN continued to explain that during negotiations
under the Stranded Gas Development Act, there was no interest
from the oil producing companies to assure open access
protections. This situation led the administration to the
development of AGIA and its elements remain essential to Alaska
today. The AGIA process included: soliciting of applications;
analysis of the applications; findings of the project proposal;
and public and legislative review. TransCanada met all of the
requirements of the legislation and, as the licensee, must abide
by all of the commercial terms that protect Alaska's future
economic interests. Commissioner Irwin turned attention to the
analysis of AGIA that is required of the administration. He
reviewed the requirements of the legislation and the process
followed by the commissioners of the DOR and the DNR to issue
the license. Outside experts such as Wood Mackenzie, Goldman
Sachs, Black & Veatch, Greenberg-Tarig, Gaffney, Cline & Assoc.,
and others, were consulted to contribute to the associated
finding; in fact, the cost of this extremely rigorous analysis
and finding was $13 million. He also described the modeling
employed to generate the net present value (NPV) to the state
and to assess risks to the state including price uncertainties,
changing project capital costs, timing, interest rates, the cost
of capital financing, operation and maintenance costs, and
escalation rates. Commissioner Irwin concluded that the AGIA
analysis identified the risks referred to in HCR 12, and the
results are reflected in the AGIA finding.
3:51:32 PM
CO-CHAIR MILLETT asked whether the project was currently under
review by the DOR.
3:52:08 PM
PAT GALVIN, Commissioner, Department of Revenue (DOR), answered
yes. He clarified that the type of analysis underway may not be
meeting the expectation of HCR 12. The ongoing analysis is
basically two-fold: evaluating new information as it is known in
terms of price expectation and cost; and comparing proposed
changes to the state fiscal system that will affect the
project's economics. In addition, there are studies currently
taking place associated with the project and the project's
impact on North American natural gas prices, labor, industry,
and environmental concerns. Secondly, there is a separate
analysis regarding the potential role of the state and federal
government in the financing of the project.
3:54:30 PM
CO-CHAIR MILLETT surmised the DOR is currently analyzing
everything required by the proposed resolution. She asked
whether the department can share this information with the
legislature.
3:55:02 PM
COMMISSIONER GALVIN advised the department is not doing the
comprehensive review required by the resolution. This would
require that all of the consultants "re-do all of their numbers"
and would divert resources from the project's budget. "The
premise that we're currently underdoing the scope of analysis
contemplated in the resolution is, I would say, not an accurate
premise, but as far as sharing the information ... we're very
happy to do that," he said.
3:55:57 PM
CO-CHAIR MILLETT asked whether the department still has
consultants under contract.
3:56:18 PM
COMMISSIONER GALVIN indicated Goldman Sachs is under contract
for the evaluation of the potential roles of the state and
federal government. Similarly, Black & Veatch is under contract
for the evaluation of the project's effect on the national
economy. Neither of the contracts include a review of the
contractor's previous work.
3:57:09 PM
CO-CHAIR MILLETT asked whether Commissioner Galvin was confident
that the project is economical.
3:57:30 PM
COMMISSIONER GALVIN said yes.
3:57:43 PM
COMMISSIONER IRWIN concurred.
3:57:55 PM
REPRESENTATIVE RAMRAS quoted Dr. Antony Scott and opined that
with the pressure of shale, LNG, a recession, and a changed
marketplace, at today's prevailing price, this project would be
"underwater."
3:58:14 PM
COMMISSIONER GALVIN questioned the accuracy of the quote.
3:58:30 PM
REPRESENTATIVE RAMRAS asked whether, if today's price of natural
gas - $3.60 to $3.80 - is the same in 2018, the project would be
underwater.
3:58:56 PM
COMMISSIONER GALVIN said the answer depends on the tariff.
TransCanada has a tariff of below $3. The department's risk
assessment factor estimates a tariff of around $4; thus the
department's analysis is that the project is still economic.
3:59:24 PM
REPRESENTATIVE RAMRAS re-stated his question.
3:59:39 PM
CO-CHAIR EDGMON asked Commissioner Galvin to proceed with the
presentation.
3:59:52 PM
COMMISSIONER GALVIN presented PowerPoint slide 2, "Revisiting
the AGIA Decisions." He opined the resolution raises the
questions of whether it is timely to revisit the AGIA decisions
and whether anything has happened since the AGIA decisions were
initially made to justify revisiting them. He broke the
questions down into two pieces: The commissioners' findings and
conclusions, and the passage of AGIA. Commissioner Galvin first
addressed changes in the world since the legislature approved
the license, such as the global economic downturn, the continued
development of shale gas supplies, and the expansion of LNG
import capacity. Not recognized in the resolution is the
increased likelihood of carbon regulation and the decrease in
project cost indices. He elaborated that both of these factors
favor the project; in fact, the carbon regulation will improve
the relative economics of natural gas. Further, the global
economic downturn has resulted in lower costs for energy
projects that require large amounts of steel.
4:03:08 PM
COMMISSIONER GALVIN reminded the committee another change is
that prior to the passage of AGIA, there were no active major
gasline projects, and now there are two. Before returning to
the first question, he reviewed the basic premise of AGIA that
issuing the license to TransCanada would sufficiently maximize
the benefit to Alaskans. This decision was based on two
factors: a ranking of the net present value (NPV) of the
anticipated cash flows to the state from the project, and the
project's likelihood of success. There are three primary
factors to determine NPV: the expectation of natural gas prices
in the years from 2018 - 2043, the cost of transportation, and
the project schedule. Commissioner Galvin stressed the
evaluation can not reflect the natural gas price, supply, or
demand of today, but the expectation ten years from now. The
primary factors to determine the likelihood of success are
project economics, the technical development plan, and the
financing plan.
4:07:08 PM
COMMISSIONER GALVIN began to put the aforementioned changes in
context. For example, the global economic downturn means the
price and demand for natural gas is going down and is expected
to stay down for the next six to twenty-four months. In
addition, the financial markets have "tightened up
significantly." He related he has no indication from experts
that this situation will extend into the five year timeframe of
the project. Thus, the global economic downturn does not affect
the project. He stated the continued development of shale gas
was anticipated, as was the continued increase in LNG import
capacity. However, unseen was the introduction of carbon
regulation, and the subsequent increased demand for natural gas.
Also not included in the analysis last spring was the decrease
in project cost indices. He restated that both of these are
changes "in the opposite direction." To illustrate the fall in
steel costs, Commissioner Galvin presented slide 9, "Global
Steel Price Index" that indicated the price of steel has gone
from $180 May 2007, to $250 in July 2008, and back down to $140
in March 2009. The fact that the price of steel is one-half what
was anticipated is going to have a positive effect on the
economics of the project. He then summarized the changes that
are new and relevant and concluded that the overall effect of
the changes is just as likely to be positive as negative.
4:12:55 PM
COMMISSIONER GALVIN presented several excerpts from the
commissioners' AGIA Finding and Determination; AGIA NPV report.
These excerpts were a variety of consultants' testimony
regarding shale gas production rates, technological innovation,
technical advancement, LNG import capacity expansion, and LNG
import volumes.
4:19:25 PM
REPRESENTATIVE RAMRAS remarked:
I just want to point out to the committee that what
we're getting is the information we requested in HCR
12, and not discussing whether we should be pursuing
HCR 12. I mean, this is what we've all been waiting
for, is this kind of detailed information, not the
answer to each of the whereas [clauses] .... We're
not discussing the resolution, we're meticulously
dissecting each of the whereas [clauses] which is
precisely why we're frustrated.
4:20:23 PM
CO-CHAIR EDGMON appreciated Representative Ramras' comments;
however, he said the subject matter is not simple and listening
to detailed background information is appropriate.
4:20:57 PM
COMMISSIONER GALVIN observed that Representative Ramras raised a
question: In the relationship between the legislature and the
administration, what is necessary in order to get this
information? "Frankly, we were never asked to present this
information," he said. He assured the committee there is no
need to pass a resolution, but the committee could ask him to
come to a committee and present "where things are in relation to
the current market." He stated that this presentation is for
members who did not participate in the AGIA hearings, and also
so the committee will understand that a reevaluation of the AGIA
decision is "plumbing the depths of a tremendous amount of
analysis that has already been done." The department needs to
clarify what the sponsors are looking for in order to respond.
4:22:19 PM
REPRESENTATIVE JOHNSON observed there was not a very large
percentage of the legislature present. The sponsors seek to
educate every member of the legislature on this subject;
however, they would like to avoid calling a joint session. What
the sponsors would like to see is a concise report that
legislators can read, not a presentation at a meeting.
Representative Johnson stressed that this presentation needs to
be in a format that is accessible to everyone, not just members
of the House Special Committee on Energy or the House Resources
Standing Committee.
4:23:39 PM
COMMISSIONER GALVIN acknowledged Representative Johnson's
suggestion was very helpful, and assured the committee the
department is happy to provide the information required to keep
members fully informed.
4:24:07 PM
REPRESENTATIVE RAMRAS remarked:
How about Black & Veatch, their number was a tariff of
$4.73, including the conditioning plant, and the fact
that gas is at $3.70, what's our strategy going to be
if gas is at $3.70 ten years from now? I mean, that's
the whole notion of what HCR 12 gets to ....
REPRESENTATIVE RAMRAS further noted the discussion was focused
on whereas clauses and not the "Be it resolved" of HCR 12.
4:24:59 PM
CO-CHAIR EDGMON said in order to fully understand the "problem
statement" brought by the bill sponsors, the committee must
backtrack and thoroughly examine "how we got here today,
especially with some new members around the table."
4:25:37 PM
CO-CHAIR MILLETT asked whether Commissioner Galvin was opposed
to HCR 12.
4:25:52 PM
COMMISSIONER GALVIN said he was opposed to the resolution
because it does not provide for what is being requested, which
is simply an update on the project. He opined the resolution
requires the governor and the attorney general to determine
whether the project fails to maximize benefits and to take into
consideration all of the subjects begin discussed. He disagreed
that the department is discussing the whereas clauses; in fact,
he suggested that the committee look at the question, "Is now
the time to revisit a full evaluation of these things, our
answer is 'no'."
4:26:55 PM
REPRESENTATIVE JOHNSON expressed the need for a report from the
administration that he can take to his constituents at a town
hall meeting. This information needs to be available to the
public, not just to the legislature.
4:27:54 PM
COMMISSIONER GALVIN said the department is available to answer
questions at constituent meetings. He presented slide 18,
"Which of These Changes are Truly New and Relevant?" that
indicated additional shale and LNG supplies were factored into
the price assumptions for the project. In fact, the findings
incorporated a significant increase in LNG imports from two bcf
per day in 2007, to seventeen bcf per day in 2025. He noted the
actual import volumes of LNG have gone done since AGIA was
passed.
4:29:16 PM
CO-CHAIR MILLETT asked why bigger LNG tankers are being
constructed.
4:29:44 PM
COMMISSIONER GALVIN explained that LNG is the primary method of
gas transportation in the rest of the world. The growth in LNG
is driven by demand growth in the markets of Asia and Europe. He
concluded the analysis that was done provided tremendous insight
into the global LNG market, as well as the North American
market.
4:31:04 PM
REPRESENTATIVE JOHNSON asked whether the new ships that gasify
on-board were "figured into this."
4:31:33 PM
COMMISSIONER GALVIN said yes. Again, the issue with LNG imports
is not a matter of import capacity or the amount of gasification
available, but of the supply of gas to justify that capacity
created by the construction of new facilities. The expansion of
re-gas facilities is not the limiting factor on import volumes,
but the limited factor will be the price differential between
the North American price and elsewhere.
4:32:36 PM
REPRESENTATIVE JOHNSON surmised this new technology was included
in the original assessment completed last spring.
4:32:53 PM
COMMISSIONER GALVIN confirmed that gas capacity expansion and
the fact there will be technological advancements in gas import
capacity were factored in. He then explained what the continued
development of shale gas means to the Alaska gas pipeline
project. When the price of Alaska gas is compared to shale, the
Alaska gas will most likely come in at a lower cost. Therefore,
shale gas is not a primary threat to the Alaska gasline project,
but the inverse: The advent of Alaska gas coming into the North
American market is a primary risk factor for the economics of
shale gas plays. He reported that at a recent investment
conference, analysis was provided by an investment company with
holdings in shale gas, that the Alaska gas project is the "game
changer" for the economics of shale gas. Commissioner Galvin
concluded that on the questions concerning the relevance of
additional shale gas and LNG supplies, the overall effect is
just as likely to be positive as negative. In addition, short
term demand slow-down and tightened financial markets are
currently not viewed as long-term effects. He then provided a
quote from Jim Mulva, Chairman and CEO of ConocoPhillips,
published on March 13, 2009 in Petroleumworld.com., regarding
costs and prices. His conclusion was that nothing has happened
since the AGIA decisions to justify revisiting the
commissioners' Findings and Conclusions.
4:37:24 PM
COMMISSIONER GALVIN divided the next issue about whether recent
changes justify revisiting the AGIA legislation into two
questions: "Does AGIA restrict the state's ability to meet in-
state gas needs?" and "Are the underlying purposes of AGIA still
valid?" On the matter of an in-state gas line, he assured the
committee the obligation of treble damages only applies to a gas
pipeline project capable of shipping over 500 million cubic feet
per day (cf/d). The demand expectation for the state over the
next ten years does not exceed 250 million cf/d, thus a bullet
line meeting in-state needs does not reach this limit, does not
compete with the AGIA project, and does not expose the state to
the risk of treble damages. This is also the case for a
pipeline from the North Slope, or a pipeline bringing gas from
Cook Inlet to Fairbanks. Finally, he addressed the validity of
the underlying purposes of AGIA. Commissioner Galvin recalled
the purposes of AGIA were to move the pipeline forward with an
enforceable timeline. The circumstances of today reinforce
this goal because a long-term project of this importance to the
state can not be driven by the vagaries of the daily market.
Also, the dual goals of a lower tariff and open access
provisions remain critical to the state's long-term economic
future. Commissioner Galvin urged the committee to not overlook
that one of the key purposes of AGIA is the leverage provided to
the state in its discussions with producers relating to the
project; in fact, without AGIA, if the state wants a pipeline it
must capitulate to producers' demands. His final conclusion was
that the purposes of AGIA are valid and its passage is still
relevant.
4:42:17 PM
REPRESENTATIVE JOHANSEN read from the working document, page 1,
line 1, "Requesting that the governor and the attorney general
review and reevaluate the project." He then asked Commissioner
Galvin to whom in the executive branch that task would be
assigned.
4:43:46 PM
COMMISSIONER GALVIN surmised the most cost effective assignment
would be to the gasline team, although the resolution also tasks
the attorney general.
4:44:23 PM
REPRESENTATIVE JOHANSEN assumed Commissioner Galvin,
Commissioner Irwin, and Deputy Commissioner Rutherford would "be
the lead on this review."
4:44:41 PM
COMMISSIONER GALVIN said yes; however, there may be an
interpretation of the resolution that precludes the
commissioners from doing the review.
REPRESENTATIVE JOHANSEN then asked whether the appointed
attorney general relies on departments and divisions for
technical back-up information on projects, and if there is
interaction between departments.
COMMISSIONER GALVIN said yes.
4:44:45 PM
CO-CHAIR MILLETT observed the department has not received
billings from TransCanada Alaska (TC), thus it is unaware of any
work TransCanada Alaska has completed up to this point.
4:45:05 PM
COMMISSIONER GALVIN stated the department has regular status
discussions with TC and has a general idea of the work done;
however, TC has not formally submitted [billings for
reimbursement.]
4:45:16 PM
CO-CHAIR MILLETT asked for an estimate on the amount of money TC
has invested up to this point.
4:45:40 PM
COMMISSIONER GALVIN deferred the question to Mr. Palmer. In
further response to Co-Chair Millett, he said his personal
knowledge is a clear understanding of what they have done, but
the department does not have a "dollar value" of what TC has
expended. He asked her to clarify the question.
4:46:28 PM
CO-CHAIR MILLETT said she was curious about Commissioner
Galvin's comfort level. She assumed there is a close
relationship between the department and TC, and asked when the
first reimbursement billing would be submitted.
4:46:57 PM
COMMISSIONER GALVIN answered the billings are due at the end of
[March, 2009]; however, the billings for the work done thus far
will not shed any light on the economics of the project. The
billings will show whether TC is keeping on task with the
project development schedule.
4:47:29 PM
CO-CHAIR MILLETT remarked:
Doesn't that parlay into costs and if they're keeping
on project schedule ... a delay could cost the project
quite a bit of money.... I think it does interpret
into a cost.
4:47:44 PM
COMMISSIONER GALVIN explained that information gleaned from the
billing that the project may cost a different amount is
possible, but that is unlikely. The billing is more likely to
be a reflection on the costs of design, engineering, and the
steps toward permitting. The status reports received by the
department indicate TC is on schedule and there is no current
information indicating the project is in any difficulty.
4:48:33 PM
REPRESENTATIVE RAMRAS acknowledged the commissioners are opposed
to HCR 12. He provided the example of a corporation in America
that looks at progress reports every quarter. He then asked
whether the commissioners could recommend changes to HCR 12 so
that the commissioners would report to the legislature
quarterly. These reports could include statements from those
working closely with the gasline team and "an occasional expert
now and then." Commissioners may also provide modifications so
that the quarterly report would benchmark certain items, such as
market changes. A redraft could make HCR 12 a document useful
to the DNR, the administration, legislators, and the public.
4:50:26 PM
COMMISSIONER IRWIN suggested that the committee hear Mr.
Palmer's testimony. He then said, "We will discuss everything,
but to me [whereas clauses] are issues leading up to a
conclusion. We address the [whereas clauses] ... I don't want
any misunderstanding, TC Alaska is working aggressively and [is]
very communicative with us on issues."
COMMISSIONER GALVIN answered yes to Representative Ramras.
4:52:50 PM
TONY PALMER, Vice President, Alaska Development, TransCanada,
informed the committee he would comment on the resolution
regarding the capacity to finance the project and changed
circumstances in the natural gas market. Mr. Palmer began his
PowerPoint presentation with a slide that listed 2008 pipeline
accomplishments. He called attention to the Alberta Pipeline
System and noted that it was approved to be regulated by the
National Energy Board [Canada] rather than the Province of
Alberta. He explained that this change could save Alaskan
customers $1.3 billion to $1.8 billion. Secondly, he pointed
out TransCanada is actively pursuing shale gas in western Canada
and has secured customers through 2014 for 1.5 bcf per day of
new shale gas. On the other hand, conventional gas in western
Canada is continuing to decline by 1 bcf per day and is expected
to continue to decline for the next two years; in fact, this
decline will offset the gain from shale. Mr. Palmer reminded
the committee that the AGIA license allows two options for
Alaskan gas; at the initial open season service will be offered
to customers who want to deliver within Alaska, that want to
deliver to Alberta, and that want to deliver into the LNG market
via the Lower 48 or to Asian markets. He encouraged parties
to consider these options before deciding whether there are
changed circumstances on the project. Mr. Palmer spoke about
the progress on the project and pointed out TC has no control
over natural gas prices or what its competitors will do;
however, TC is focused on the control of its costs and
scheduling. He noted that the current toll estimate of $2.76
million Btus was forecast in 2007. In answer to Representative
Ramras' question about whether this project would be competitive
in today's marketplace, he said "it depends, because, not only
have gas prices changed, but costs have changed as well." In
fact, there is a strong correlation in the oil and gas business
between oil and gas prices and the cost of projects. He
stressed it is not fair to compare today's prices with costs
calculated in a "high price environment." TransCanada Alaska is
also participating in ongoing discussions with potential
shippers. He presented slide 7, "TransCanada's access to
Capital Markets" and said in the last four months, during a
turbulent credit market, TransCanada has raised C$5.5 billion in
capital. In addition, the Alaska Pipeline Project will have
access to a US$18 billion federal loan guarantee and financing
will commence at the "decision to proceed" scheduled for 2014-
2015; thus, the status of the capital markets in five years, not
today, is relevant. Mr. Palmer said he did not have a new
capital cost estimate at this time, but that one is underway and
will be complete in one year's time; however, he provided a
slide that showed changes in "bare pipe" prices from 2007 to
2009. The graph indicated that first quarter 2009 pipe prices
have returned to the same level as they were at the time of
TransCanada's AGIA application.
5:01:06 PM
MR. PALMER explained that he would not have complete economics
on the LNG project because TransCanada is not preparing the
liquefaction facility or constructing the ships, or looking at
the ultimate markets. Instead, he presented a chart of crude
oil price forecasts from four reputable consultants. The
projections were that oil prices would be between $80 and $100
per barrel in 2018. Slide 10 was a chart of natural gas price
forecasts from five consultants. Mr. Palmer advised that when
consultants prepare forecasts they look at all of the sources of
supply and demand, alternative fuels, and prices for competitive
fuels. The forecasts were all prepared between November 2008,
and March 2009, and all of the consultants anticipated a sharp
decline lasting for as long as two years. However, by 2018, the
forecasts indicate a price for natural gas of over $8 per
million Btu. Slide 11 "U.S. EIA Alberta Hub Gas Price
Forecasts" showed that the current U.S. Energy Information
Administration (EIA) forecasts natural gas prices from 2009 to
2029, to be approximately $2 per million Btu above its December,
2006 forecast. Slide 12 "Impact on Project Economics" was a
comparison of the projected revenue utilizing the December 2006,
forecast and the March 2009, forecast. The calculations showed
the current U. S. EIA forecast would result in an extra $125
billion earned by the producers and government entities above
what was forecast at the time of the AGIA application. Mr.
Palmer then summarized the following points: the AGIA bill has
been approved and the license issued; TC is aggressively
advancing the project; a contract was awarded to URS; the
project schedule has been unaffected by the turbulent financial
market; TC has solid access to capital markets; current gas
prices result in an increase of $125 billion revenue to
producers/governments as compared to projections in TC's AGIA
application; major projects succeed or fail based on long-term
plans, not on short-term swings in natural gas prices; and TC
will continue to focus on costs, schedule, and attracting
customers. Mr. Palmer concluded by saying that he has not seen a
forecast from major consultants that have natural gas prices at
$3 ten years in the future.
5:06:44 PM
REPRESENTATIVE RAMRAS asked Mr. Palmer to describe the breadth
of TC's work force in Alaska.
5:07:20 PM
MR. PALMER recalled his previous testimony before the House and
Senate Resources Committees during which he identified direct
employees of TC, and consultants who have been retained. He
emphasized that this is not a "make work" project for TC or for
Alaska; in fact, the focus is on keeping costs low for a
successful project. "We don't think the measure [of success] is
how many people we have in an office and how big our office is,"
he said. In further response to Representative Ramras, Mr.
Palmer said there are two TC employees who work out of the
office and a number of consultants working out of their own
offices. Both the employees and the employees of the consulting
firms are Alaskans.
5:09:06 PM
CO-CHAIR MILLETT opined the $500 million investment the state is
making "weighs heavy on all of us." She said during the Energy
Council she met with FERC, and noted the competing project has
gone through the pre-file process and is spending a lot of
capital. Representative Millet asked why TC has not pre-filed,
and whether TC is "parallel" to Denali-The Pipeline Project
(Denali) in preparatory work.
5:10:34 PM
MR. PALMER responded that TC is on schedule to conclude an open
season by July, 2010. That is earlier than Denali's schedule
"towards the end of 2010." He explained that TC has not pre-
filed because it is the norm in the industry that pre-filing is
made after the open season. However, FERC has requested a pre-
file, and TC is only "cautious" because of the additional costs
involved. He reminded the committee that after filing in the
normal manner, FERC retains a third party contractor at the
applicant's expense. His understanding is that Denali received
a number of waivers; that is not the normal situation and TC is
participating in discussions with FERC at this time. If
negotiations with FERC are successful TC may pre-file; however,
he assured the committee that the fact TC has not pre-filed has
not affected its schedule, its ability to advance the project,
or its ability to hold the open season. On the other hand,
FERC will be a regulator for the project and TC understands its
desire for pre-filing, thus discussions will continue.
5:12:48 PM
CO-CHAIR MILLETT asked whether the state created a
disincentive to pre-file by the [AGIA provision that TC pays 90
percent of costs after open season.] She also asked whether TC
has previously completed a $40 billion project, or if the Alaska
pipeline project was unique.
5:13:20 PM
MR. PALMER explained TC has not done a $40 billion project, but
has built pipelines that are longer and more technologically
challenging; in fact, it has a $26 billion project under
construction. TransCanada does want to be aligned with FERC
and is working to resolve the issue with them. He acknowledged
there is a 50/50 sharing of costs with the state in advance of
the open season, and a 90/10 split after; furthermore, based on
TC's cost estimates, it can "prepare all of the work and go
through FERC for $611 million." This would expend 100 percent
of the state's investment and more, thus there is no impact on
TC by advancing the application or not. There will be an impact
if the regulation process is started early and the total
expenditure is more. He assured the committee TC will continue
to work with FERC "to accommodate their needs, as well as ours."
5:15:52 PM
CO-CHAIR MILLETT asked whether the difference between TC's and
Denali's commitments will influence the producers' decision at
open season.
5:16:25 PM
MR. PALMER advised the normal process is for filing after open
season; therefore, he did not expect any impact. He restated TC
will pre-file if the issues with FERC are resolved. In
addition, a pre-file now or in 201l, will not affect the date of
the actual FERC application that is scheduled for 2012. In
response to an earlier question, he explained that TransCanada
will be submitting its first billing for reimbursement under
AGIA early [in April.] A billing was not submitted for 25 days
in December, thus this billing will be for three months plus the
25 days in December. He estimated that the qualifying
expenditures through the end of March are approximately $2
million, and TC is seeking reimbursement for one-half of that.
5:17:33 PM
CO-CHAIR MILLETT asked whether TransCanada supports the
resolution.
5:17:43 PM
MR. PALMER said he did not support the premise that there has
been a change in the gas market or in the financial market that
is a detriment to the project. If the resolution requests an
update, he said, "I have no opposition to the State of Alaska
keeping itself updated as to how the project is proceeding ...."
5:18:39 PM
CO-CHAIR MILLETT observed that the U. S. public perceives there
is a credit problem that may threaten the project, and that in
fact, "everything has changed."
5:19:31 PM
MR. PALMER expressed his hope that his presentation indicated
that when this project is in service, and for the 25 to 50 years
after, that is not the case. He reviewed his previous points.
5:21:12 PM
CO-CHAIR EDGMON recalled statements heard at the [Energy
Council] that the Denali project appears to be on a faster
track. The main goal is to get the gas, and he noted there was
skepticism as to whether TC was going to get the gas.
5:22:23 PM
MR. PALMER stressed TC has constructed 36,000 miles of pipeline
and continues to ship gas that it does not own. Furthermore,
his company has attracted producers for customers on the same
basis in the past. The rationale of AGIA was to hold an open
season and also require an applicant to continue through to FERC
certification; on the other hand, the normal procedure in the
industry is that a company would not proceed after a failed
initial open season.
5:23:45 PM
CO-CHAIR EDGMON stated he also heard that the supply picture has
fundamentally changed, or is changing, since the AGIA bill
passed.
5:24:38 PM
MR. PALMER reminded the committee TC's estimate for the cost of
the project is $26 billion, not $40 billion, and of the
importance of keeping the costs down. Secondly, the estimates
for new gas supplies were forecast by reputable consultants and
the EIA. Forecasts for the supply of gas will go up and down
over time, but a long-term project can not halt based on a
short-term basis.
5:26:28 PM
REPRESENTATIVE PETERSEN stated he saw the projections of gas
prices and for increases in the supply of gas at the Energy
[Council]. He expressed his concern that a message was given to
allow an advantage to competitors of the Alaska gas pipeline
project. In fact, he believed the participants at the
conference may have been given a "low-ball estimate."
5:28:08 PM
MR. PALMER reviewed his comments on the projected price of gas.
He reminded the committee that during the initial open season,
customers can nominate Valdez if they believe the North American
market is overwhelmed by shale gas. This would allow parties to
move Alaskan gas to the global LNG market.
CO-CHAIR EDGMON handed the gavel to Co-Chair Millett.
REPRESENTATIVE RAMRAS expressed his respect for Mr. Palmer. He
then noted that in Canada the banking system is intact, there is
no housing debacle, employment is high, and there is prosperity
even during this economic downturn. However, Alaskans will be
"fatigued" when they have to choose between funding capital
projects and sharing costs with TransCanada. Furthermore, he
questioned whether the $500 million is moving the project
forward or if the project is advancing because the underlying
economics do, or do not, support it. Representative Ramras
explained his extreme concern about TC's decision "[to] not go
through the process in the way that the FERC told me ... they
would prefer ... which is with a pre-file."
5:32:32 PM
MR. PALMER reminded the committee that the potential pay-off to
Alaskans for their $500 million investment is $100 billion.
5:33:27 PM
REPRESENTATIVE RAMRAS opined the forecasts provided by Mr.
Palmer were unrealistic.
5:33:45 PM
MR. PALMER stated the forecasts were from reputable sources.
5:34:02 PM
CO-CHAIR MILLETT suggested that the committee recess to a call
of the chair as there is further testimony to be heard on the
resolution.
REPRESENTATIVE DAHLSTROM recalled testimony that TransCanada is
working on three pipelines, and the Alaska pipeline was "number
three, in the order of priority." She asked whether this meant
that after the Mackenzie [Gas Project] is built, there will be
no need to build other [pipelines].
5:36:32 PM
MR. PALMER advised the exact quote was "sequencing," which is
very different than "priority." TransCanada is constructing a
$12 billion oil pipeline and the first portion is scheduled to
be completed next year. In addition, the Mackenzie project is
currently on schedule to be completed by 2014. The Alaska
pipeline is scheduled for completion in 2018. In terms of
sequencing, the Alaska project is third; however, both the
Mackenzie and the Alaska gas pipelines are needed in the
marketplace and TC supports both.
5:37:34 PM
[HCR 12 was held over.]
ADJOURNMENT
The House Special Committee on Energy meeting was recessed at
5:37 p.m. to a call of the chair. [The meeting was reconvened
March 20, 2009 at 11:02 a.m. HCR 12 was scheduled but not
heard.]
| Document Name | Date/Time | Subjects |
|---|---|---|
| BENTEK Presentation.pdf |
HENE 3/19/2009 3:00:00 PM |
HCR 12 |
| Alaska Legislature House Energy Cte Mar 19 2009 w-o note.pdf |
HENE 3/19/2009 3:00:00 PM |
HCR 12 |
| Call for Information.pdf |
HENE 3/19/2009 3:00:00 PM |
HCR 12 |
| Prison Article.pdf |
HENE 3/19/2009 3:00:00 PM |
HCR 12 |
| Lynn Canal Article.pdf |
HENE 3/19/2009 3:00:00 PM |
HCR 12 |
| HCR12 Blank CS.pdf |
HENE 3/19/2009 3:00:00 PM |
HCR 12 |
| HCR12 to CS HCR 12 changes.pdf |
HENE 3/19/2009 3:00:00 PM |
HCR 12 |
| FERC Docket Sheet.pdf |
HENE 3/19/2009 3:00:00 PM |
HCR 12 |
| Rep Petersen Legal Opinion.pdf |
HENE 3/19/2009 3:00:00 PM |
HCR 12 |
| Denali FERC Correspondence.pdf |
HENE 3/19/2009 3:00:00 PM |
HCR 12 |
| FERC Powerpoint.pdf |
HENE 3/19/2009 3:00:00 PM |
HCR 12 |
| Commissioners AGIA Presentation.pdf |
HENE 3/19/2009 3:00:00 PM |
HCR 12 |