Legislature(2009 - 2010)HOUSE FINANCE 519
04/02/2010 09:00 AM House FINANCE
| Audio | Topic |
|---|---|
| Start | |
| Presentation: No Shortage of Possibilities or Problems for Alaska Gas | |
| Adjourn |
* first hearing in first committee of referral
+ teleconferenced
= bill was previously heard/scheduled
+ teleconferenced
= bill was previously heard/scheduled
| + | TELECONFERENCED | ||
| + | TELECONFERENCED |
HOUSE FINANCE COMMITTEE
April 2, 2010
9:05 a.m.
9:05:15 AM
CALL TO ORDER
Co-Chair Hawker called the House Finance Committee meeting
to order at 9:05 a.m.
MEMBERS PRESENT
Representative Mike Hawker, Co-Chair
Representative Bill Stoltze, Co-Chair
Representative Bill Thomas Jr., Vice-Chair
Representative Allan Austerman
Representative Mike Doogan
Representative Anna Fairclough
Representative Neal Foster
Representative Les Gara
Representative Reggie Joule
Representative Mike Kelly
Representative Woodie Salmon
MEMBERS ABSENT
None
ALSO PRESENT
Representative Bryce Edgmond; Representative Beth Kerttula;
Representative Jay Ramras; Representative Chris Tuck;
Representative Tammie Wilson; Senator Joe Paskvan; Senator
Bill Wielechowski; Larry Persily, Federal Coordinator,
Alaska Natural Gas Transportation Projects.
PRESENT VIA TELECONFERENCE
Representative Nancy Dahlsrom
SUMMARY
^Presentation: No Shortage of Possibilities or Problems for
Alaska Gas
9:06:02 AM
Co-Chair Hawker and the committee welcomed former
legislative aide Mr. Persily. He invited any other
legislative members present to participate in the dialogue
about Alaska gas.
LARRY PERSILY, FEDERAL COORDINATOR, ALASKA NATURAL GAS
TRANSPORTATION PROJECTS, informed the committee that the
Office of Federal Coordinator is focused on getting North
Slope gas to market in North America. He stressed that he
was not present to give advice or an opinion about the in-
state line.
Mr. Persily provided a PowerPoint presentation, "No
shortage of possibilities or problems for Alaska gas, April
2, 2010."
Mr. Persily began with Slide 2, "Everybody has an opinion":
· Former Sen. Ted Stevens
· Former Govs. Frank Murkowski and Bill Sheffield
· Soon-to-be-former University President Mark Hamilton
o Says gas will never exceed $6/mcf in 2010 dollars
in his lifetime
· All of the gubernatorial candidates
· Me too
· The only thing for certain: We're probably all wrong.
Mr. Persily commented on the number of opinions about a big
pipeline to North America and listed some of the sources.
He noted that the soon-to-be-retired University of Alaska
President Mark Hamilton had recently announced that the
line would never be built. Mr. Hamilton believed that gas
would not exceed $6 per thousand cubic feet in 2010 dollars
in his lifetime. Mr. Persily added that all projections are
probably wrong; no one knows what the price of gas will be,
what the market needs will be, what the final construction
costs will be, or what the shippers will do.
9:12:47 AM
Mr. Persily reported the results of a meeting with the
White House in Washington D.C. (Slide 3, "White House
opinion"):
· Interested, engaged, involved
· Elevate focus on the project (but no office moves)
· Alaska gas line is part of a national energy plan
· Gas = lower emissions, jobs, domestic energy supply
· White House willing to work with state, project
sponsors
· No specific proposals-that's on my work list
Mr. Persily detailed that it was clear that the White House
wanted to be involved in the project and to elevate focus
on the project. He noted that the White House would not
move his physical office; the Office of Federal Coordinator
is not in any agency, but is a stand-alone federal office.
He reports to the White House but would not physically be
there.
Mr. Persily maintained that the White House believes that
an Alaska gasline bringing gas to North America is part any
national energy plan; gas has lower emissions and is
cleaner, brings jobs, and is a domestic energy supply for
decades to come. He stated that the White House is willing
to work with state and project sponsors, although there are
no specific proposals or plans in place yet. They do
recognize that the producers, pipeline developers, state,
and federal government will be involved in any final
decision.
Mr. Persily addressed "Public frustration" in Slide 4:
· So many expectations since 1968
· So many political promises
· So close, or sort of close, so many times
· Pipe vs. LNG, then pipe, then LNG, then pipe, then
LNG, then pipe, now either or both, or maybe both
· Meanwhile, Southcentral saw loss of industry and felt
the reality of market prices for gas, and they're
worried
Mr. Persily understood the level of frustration and anger
the pubic has been feeling regarding changing expectations
related to gas.
9:15:14 AM
Mr. Persily urged Alaskans: "Don't give up, not yet" (Slide
5):
· Pipeline to North America would tap into the largest
natural gas market in the world
o North America = 70 to 80 bcf/d
o Almost three times China, India, Japan, South
Korea, Taiwan
· Billions of dollars in public revenues for the state
· Gas for in-state use; possibly propane too
· Help encourage exploration and extend life of TAPS
· Open season (two) will tell us a lot
Mr. Persily advised not giving up on a big pipeline from
the North Slope going through Alaska and Canada and tying
into the grid beginning in Alberta that feeds gas across
North America, including the Pacific Northwest, California,
Upstate New York, the Midwest, and the Southeast. He called
the region "the largest gas market in the world": North
America on an average day uses three times as much gas as
China, India, Japan, South Korea, and Taiwan combined. He
pointed out that a big pipe would help the state treasury
for decades to come. In addition, there would be gas for
in-state use.
Mr. Persily emphasized that the two open seasons coming up
would tell a lot; the shippers will determine if the
project gets built and when and where.
Mr. Persily acknowledged the many problems connected with
building a big pipe (Slide 6, "Problems with Lower 48
pipeline"):
· Construction risk; high tariff; market risk
· Have to deliver all 4 bcf/d at once; new supply could
weaken the market, pulling down prices short term
· No stopping the flow, even in a down market
· Producers need long-term sales but utilities are
nervous because public utility commissions second
guess them
· There are less risky projects for investors
· It's all about minimizing, controlling and sharing
risk
Mr. Persily detailed problems with the large pipeline,
including construction risk, delays, high cost estimates
($30 to $40 billion for the TransCanada/Exxon project). He
reminded people of cost overruns for the Trans Alaska
Pipeline System (TAPS). In addition, the market is always a
risk. Shippers will have to commit and hope they know best
where the market will be ten and twenty years in the
future.
Mr. Persily continued that the 4 bcf/d would have to be
delivered all at once; the volume cannot be ramped up
slowly over several years, and the influx could weaken the
market and bring prices down short-term. Producers need
long-term sales. Shippers have to commit to use the line in
order to finance it; they would like to sell some of the
risk to utilities through long-time contracts, but
historically public utility commissions will sometimes
second-guess the situation. For example, utility A could
sign a contract to buy Alaska gas long-term; the market
could weaken (with gas being available for much less than
the contract) and public utility commissions might not
allow the utility to charge more.
9:19:00 AM
Mr. Persily noted that it would help the project if state
public utility commissions could be induced to accept long-
term deals to share some of the risk.
Mr. Persily addressed "What would help Lower 48 line"
(Slide 7):
· Economic recovery and demand build
o U.S. gas consumption fell last year, especially
industrial users
· Fuel switching from coal to gas-fired generation
o Growth in electrical power is the key
o CERA: Power demand 19 bcf/d 2009 to 35 bcf/d in
2030
o Little growth expected in industrial, residential
demand
· Promoting natural gas as transportation fuel
· Federal restrictions on CO2 emissions
9:21:34 AM
Mr. Persily turned to the subject of "The dreaded shale"
(Slide 8):
· Yes, shale gas production 10% of U.S. supply last year
· Growing across U.S. and Canada, especially Alberta,
B.C.
· Close to markets; easy to raise and lower production
· Drilling rig efficiency is up, and up and up
· States are hungry for revenues and jobs
· Shale gas will hold down price spikes; no more $14 gas
· Like Flubber, it's a perfect product--but is it?
Mr. Persily emphasized that there is consensus in the
industry that shale gas, which is abundant and easy to get
at, will hold down price spikes without permanently
depressing the market.
Mr. Persily spoke to "The darker shades of shale" (Slide
9):
· Fracking becoming about popular as an oil spill
· Water quality concerns
· EPA review: possible federal legislation
· More questions as it grows bigger, closer to urban
areas
· One big environmental disaster could change the game
· Shale needs tens of billions of dollars of new
pipelines
· Steep production decline curve; deeper wells cost more
Mr. Persily noted water quality concerns as shale gas
extraction moves closer to urban areas. The Environmental
Protection Agency has undertaken a review of "fracking"
(hydraulic fracturing) and noted on-going debate about its
safety. He pointed out that shale gas production has its
own capital needs because it often comes from undeveloped
areas without infrastructure and pipe.
9:25:06 AM
Mr. Persily discussed the option of liquid natural gas
(LNG): "LNG is an option" (Slide 10):
· But we're not alone looking west to East Asia
· Papua New Guinea, Australia (including coal-seam),
Indonesia, Sakhalin, Malaysia, and Brunei
· West African nations, Qatar, Oman, Yemen
· All either operating or building LNG plants
· Almost 10% Japans 2008 spot supply came from Atlantic
· Floating LNG; Shell's multibillion-dollar order with
Samsung will access smaller fields in Pacific Basins
Mr. Persily detailed that Alaska is not the only gas-
producing source, resulting in a surplus of LNG. Shell Oil
has contracted with Samsung to build floating LNG plants
with production, liquefaction, storage, and shipping
capabilities.
Mr. Persily informed the committee that "LNG competition is
strong" (Slide 11):
· New projects totaling 9 bcf/d online in 2009-2010
· An additional 7 bcf/d scheduled by 2015
· Once online they don't cut back; need to recover costs
· Mitsubishi forecasts potential Asia Pacific LNG supply
could exceed demand by almost 20% in 2015
· Uncertain after that, but no shortage of Pacific
options at tide water; no need for 800 miles of Arctic
pipe
Mr. Persily detailed that the investment decisions have
already been made for the new LNG projects. He pointed out
that once an investor has made the capital investment, they
will keep pumping to recover costs. After 2015 there is
uncertainty because commitments have yet to be made for new
projects in the 2015 to 2025 time frame; however, there are
a lot of supply options in the Pacific that do not need an
800-mile pipeline through the Arctic to get the gas to a
terminal.
9:28:14 AM
Representative Gara queried tide-water projects. Mr.
Persily responded that tide-water projects are at water or
very close.
Mr. Persily noted "Other supply options for Asia" (Slide
12):
· We're not the only country with shale gas
· Shell signed a 30-year deal to help China unlock tight
gas
· China and India are looking for more domestic gas
· China has pipeline gas options: Russia, Turkmenistan
· India looking for pipeline gas, too
· Tokyo Gas just signed a 20-year deal with BG Group for
Australian gas to supply 11% of its needs
Mr. Persily noted that the pipeline from Turkmenistan to
China is operational, the one from Russia will be operating
next year, and Tokyo Gas will buy Australian gas starting
in 2015.
Mr. Persily turned to Slide 13, "LNG pricing in Asia":
· The market is shifting away from near 100% reliance on
long-term sales contracts tied to oil prices
· Spot market and short-term sales now comprise almost
20% of the volume in the Asia Pacific market
· Buyers like bargain spot prices in a down market:
China paid $4.30 for Russian LNG in June 2009 and
$3.48 for an Indonesia delivery that same month
9:30:13 AM
Mr. Persily pointed out that as Alaskans think about where
Alaskan gas should go and available options, "Market size
is important" (Slide 14):
· Global gas trade in 2007
· 73% of worldwide gas production was consumed within
the producing country
· 19% of gas production was delivered to foreign
customers by cross-border pipeline
· 8% of gas was delivered by LNG tanker
· The bigger the market, the more new gas it can absorb
Mr. Persily turned to Slide 15, "Don't forget the valuable
liquids":
· North Slope gas has a high-value liquids stream
· Don't just think about the methane price
· Liquids can piggyback on methane for transportation
· Example: Qatar can sell methane at low price while
banking profit from liquids for its petrochemical
industry
· Alberta hungry for liquids to feed existing plants
· Alaska can keep propane for local use
Mr. Persily warned against looking at today's price for
methane and giving up; other molecules add value, and the
state needs to think long-term.
Mr. Persily concluded with Slide 16, "It's not easy, but
it's possible":
· Open seasons for TransCanada/Exxon and Denali an
opportunity to gauge market demand for Alaska gas
· Shippers asked to commit $100 billion in binding,
contractual commitments lasting 20 years or more
· At some point state, producers, pipeline owner and
even the federal government will need to sit down and
talk
· Pipeline to North America is possible if right things
happen and if all parties are willing to contribute
Mr. Persily opined that the state has the largest private
project ever in North America with national interests. He
believed the federal government will need to be involved.
He thought all the parties will have to sit down and figure
out what the problems and the risks are and evaluate
solutions to the risk. He believed those who are willing to
take more risk should get more reward. He stated that a
pipeline to North America is possible if market demand
builds up, electrical generation switches to gas, and if
everyone involved is willing to contribute to the solution.
9:33:43 AM
Representative Austerman referred to discussion about the
petrochemical industry (Slide 15) and propane for Alaskan
use. He noted talk in Alaska about sending jobs to Alberta
instead of extracting in-state. Mr. Persily responded that
the petrochemical industry will determine where they can
extract the liquids and make the most money. He understood
the desire to keep jobs in Alaska, but it has to be
economical. The federal government will not stop the
process, but it will not subsidize it either.
Representative Austerman asked whether there was potential
for more jobs in the gas industry than with oil. Mr.
Persily opined that processing hydrocarbons into a product
is more labor-intensive than people in a control center
running an oil pipeline.
9:35:50 AM
Representative Joule asked whether melting ice freeing up
marine transportation [for LNG tankers] in the north would
impact a big pipeline going down south. Mr. Persily
responded that he had heard speculation about the subject.
He thought the route would avoid the expensive cost of a
pipeline, but lot of expensive infrastructure would also
have to be built on the North Slope. He was skeptical that
that much shipping traffic would be allowed in the Arctic
because of environmental concerns. In addition, there has
to be certainty about the ice if that much gas is going to
be moved.
Representative Doogan referred to statements related to the
gas pipeline from Alaska. He noted the complexity of the
issues, including the political and economic issues of
going through Canada. He queried the changing role of the
federal government in the project. Mr. Persily agreed that
there were many components to the project, including market
and construction risk, state tax regimes, First Nations
problems in Canada, land claims, and environmental
permitting issues. He opined that in addition to the
explicit statutory authority for the Office of Federal
Coordinator to work with federal permitting agencies to
make sure the project goes smoothly, the federal government
will need to take a more active, assertive, and visible
role in bringing all the pieces and players together.
Representative Doogan wondered what the role of the federal
government could become. Mr. Persily did not know; he
stated that the federal government knew the project was
complex but also that it would serve national interests.
The question is when the federal government should get
involved. He maintained that the federal government had no
interest in telling the state how to run its tax regime or
decide local issues, but it could help coordinate some of
the complexity.
9:41:05 AM
Co-Chair Hawker also wanted to discuss the future role of
the federal government in Alaskan projects. He noted that
Senator Mark Begich had recently made a statement at the
joint session of the Alaska Legislature that the federal
government was willing and prepared to increase the amount
of loan guarantee on any potential project. Mr. Persily
explained that the current loan guarantee passed six years
ago is $18 billion plus inflation ($21 billion total). He
reported that both Senator Begich and Senator Murkowski
were working on legislation (supported by the White House)
that would raise the loan guarantee number to $30 billion
plus the inflation index. He added that the provision is
sitting there; no one necessarily objects to it, but it has
not come to the floor for a vote. The provision is tied up
with controversial energy legislation. In general, people
are supportive of increasing loan guarantees; for most
borrowers, that would mean a lower interest rate, which
would translate to a lower tariff to ship gas.
Representative Salmon queried when in the long Alaska
Gasline Inducement Act (AGIA) process the state would have
to decide whether the pipeline would be built or not. Mr.
Persily responded that the Office of the Federal
Coordinator does not care if the pipeline is built through
AGIA, Denali, or another entity. Statutorily, the office is
required to support and work with any project bringing gas
by pipeline to North America. Once the open season is
closed and the bids are in, under the Federal Energy
Regulatory Commission (FERC) open season process,
TransCanada, Exxon, or Denali will ask for proposals and
potential shippers submit bids; the bids are confidential
until there is a signed, binding agreement filed with FERC.
The state will not know what the terms are unless a company
releases the information voluntarily. He thought that the
state should wait until the bids are in to see what is
happening. Proposals might be too far apart, but they might
come in and potential shippers and pipeline companies might
be interested, although it would take time to negotiate
fiscal terms and environmental issues. At that time, the
state might see what it or the federal government can do to
help the process.
Representative Salmon summarized that once the process is
done, the state has to decide whether to change direction
regarding what to do with the gas. He emphasized the need
to act because of declining oil revenues. Mr. Persily
responded that there is no clear way of predicting what
will happen. He agreed that after open season it falls back
to the legislature and the governor to come up with another
plan if there are no takers.
9:46:43 AM
Representative Gara expressed frustration about the
constantly changing ideas regarding a gas pipeline. He was
glad that Mr. Persily was focusing on one project. He
wondered when it would be clear whether shale gas is a
problem and there is a demand for a gas pipeline. Mr.
Persily responded that it would become clear when pipeline
producers or shippers are willing to sign firm
transportation commitments and pay to build the line
because they feel they will be able to sell the gas at a
profit.
Mr. Persily reminded the committee that the market would
respond once a place is staked out in the market; other
projects will be delayed. The producers, the ones writing
the checks, will have to decide if the opportunity is
present; no one wants to oversupply the market and be the
last one in with a new project that cannot be sold at a
profit.
Representative Gara was optimistic about the project. He
asked whether there was any danger of another pipeline
outside of Alaska that might obligate gas and squeeze out
Alaska gas. Mr. Persily responded that the cost would be
affected. He stated that not all shale gas needs new pipe;
existing pipe or small expansions can be used. Currently
the industry consensus is that the additional supply of
shale gas will dampen prices in the future; the people
involved in the Alaska pipeline will have to look at the
market price to determine how much money can be made.
Producers will have to ask whether they can still make
money even if the price is lower. The state may have to
reduce expectations to match the market.
9:51:34 AM
Representative Kelly asked what three actions Mr. Persily
would advise the legislature and governor to take related
to oil and gas. Mr. Persily recommended separating emotions
from the discussion, such as the feeling that the state was
cheated on TAPS and should get payback through the gasline.
He emphasized the complexity of the project and pointed out
that much work had been done and money had been spent. He
advised not throwing already completed work away, but
waiting for the open season. He urged patience and
cooperation.
Co-Chair Hawker invited questions from the public.
Co-Chair Hawker commented on the history of hearings on the
subject and queried global changes that had taken place
during the past period of time. He wondered what critical
environmental changes could be anticipated in the next four
years. Mr. Persily opined that changes included the growth
of shale gas production and the decline in production. When
people were mapping prospects for an Alaska gasline
starting the winter of 2000 and 2001 when prices spiked,
everyone anticipated increasing demand. However, growth not
only stopped, but decreased. One challenge would be to
increase growth in the face of shale production. He thought
natural gas would have to be marketed to the country;
challenges would include the strong coal lobby.
Mr. Persily maintained that Alaskans could get a lot of
benefit from a natural gas pipeline, including gas and
propane for Alaskans, petrochemical industry jobs, and
public revenues. Profits might not be as high as once
hoped, but there could be many other benefits. He opined
that the cheapest way to get gas as well as propane and
petrochemicals to Alaskans would be tapping into a big
pipeline with an economy of sale; profits would be
significant, even if the price of the commodity was lower.
9:58:20 AM
Representative Austerman recalled 1995 discussions about
natural gas. He stated that he believed now what he had
believed then: when the industry can see the profitability
of natural gas flowing out of Alaska, there will be a
pipeline.
Mr. Persily referenced the Gorgon LNG project with a $40
billion investment in Australia; the government there was
requiring carbon sequestration [long-term underground
storage of carbon dioxide to mitigate global warming].
Producers are concerned about the carbon dioxide staying
underground and future liability; the Australian government
responded by agreeing to take the liability and risk
related to carbon sequestration rather than putting it on
the companies. Other countries are considering what needs
to be done to attract investment dollars.
Representative Austerman asked whether Alaska should secede
from the country and handle the issue itself. Mr. Persily
believed the country was doing "pretty well" on a lot of
things.
Co-Chair Hawker queried changes that would be made in the
federal coordinator's responses to the issues. He wondered
whether Mr. Persily would function as a mediator rather
than as an advocate of one side or the other. Mr. Persily
responded that he hoped to get more involved with
communicating the situation to Alaskans. He believed the
project could get done with the right players negotiating
the right terms, and he proposed that a federal presence
could help. He did not necessarily think of himself as a
mediator.
10:02:52 AM
Co-Chair Hawker recalled Mr. Persily's experience as an
ombudsman. He asked whether Mr. Persily would spend more
time in Alaska actively involved in discussions. Mr.
Persily replied that he planned to spend a lot of time in
the state. He noted that there are issues that have to be
overcome in spite of the upcoming open seasons.
Representative Fairclough asked whether the legislature
could send a message to Washington D.C. supporting
international cooperation between Alaska and Canada to
secure North American energy. She pointed out that nearly
20 percent of continental U.S. natural gas is currently
coming out of the Canadian market. Mr. Persily responded
that the project is as important to Canada as to the U.S.,
whether the subject is natural gas liquids and/or
petrochemicals entering the infrastructure. He underlined
that there is a huge North American pipeline grid starting
in Alberta and running nationwide; as conventional
production in the Western Canadian sedimentary basin
declines, the spare capacity of the pipes will increase. He
thought it was in Canada's best interest to have Alaska gas
enter the system. He reported that he had met with the
Canadian ambassador and Canadian Consul General and would
continue to work closely with them.
Representative Fairclough referred to concerns in Canada
and hoped Mr. Persily could speak to that with the
administration. Mr. Persily responded that he would.
10:06:44 AM
Representative Gara queried TransCanada's assessment
regarding Alaska gas and the oil sands. Mr. Persily
reported that he had met with environmental groups in
Anchorage; one has asked whether the federal government
could give assurance that Alaska gas will not get burned at
the Alberta oil sands. He had responded that there could be
no such assurance; there is no law dictating where someone
can sell carbon molecules. He opined that the oil sands
have thrived without Alaska gas and will thrive whether
Alaska gas is there or not. He noted that every
manufacturing plant wants to get the lowest-priced
commodity possible, so of course would use whatever gas is
cheapest. He believed the market for Alaska gas would be
electrical generators and consumers in the Lower 48, which
he hoped would bring a better price. He believed that as
gas got more expensive, the oil sands plant would use less
and less of it.
Co-Chair Hawker welcomed Mr. Persily to come before the
committee in the future.
ADJOURNMENT
The meeting was adjourned at 10:09 AM.
| Document Name | Date/Time | Subjects |
|---|---|---|
| Presentation 040210.pdf |
HFIN 4/2/2010 9:00:00 AM |