Legislature(2007 - 2008)HOUSE FINANCE 519

05/04/2007 01:30 PM FINANCE

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01:43:30 PM Start
01:45:23 PM HB177
04:11:08 PM Adjourn
* first hearing in first committee of referral
+ teleconferenced
= bill was previously heard/scheduled
Heard & Held
-- Testimony <Invitation Only> --
- Alaska Gasline Port Authority (AGPA):
Bill Walker, Project Manager, General
Counsel and Paul Fuhs, Legislative Dir.
-BG North America, LLC: David Keane, Vice
President of Policy and Corporate Affairs
- AOGCC: John Norman, Chair, Commissioner
- Palin-Parnell Administration, Financing
for Independent Pipeline Co.: Brian
Andrews, Deputy Commissioner, Treasury
Division, Revenue
                  HOUSE FINANCE COMMITTEE                                                                                       
                        May 4, 2007                                                                                             
                         1:43 P.M.                                                                                              
CALL TO ORDER                                                                                                                 
Co-Chair Chenault called the House  Finance Committee meeting                                                                   
to order at 1:43:30 PM.                                                                                                       
MEMBERS PRESENT                                                                                                               
Representative Mike Chenault, Co-Chair                                                                                          
Representative Kevin Meyer, Co-Chair                                                                                            
Representative Bill Stoltze, Vice-Chair                                                                                         
Representative Harry Crawford                                                                                                   
Representative Les Gara                                                                                                         
Representative Mike Hawker                                                                                                      
Representative Reggie Joule                                                                                                     
Representative Mike Kelly                                                                                                       
Representative Mary Nelson                                                                                                      
Representative Bill Thomas Jr.                                                                                                  
MEMBERS ABSENT                                                                                                                
Representative Richard Foster                                                                                                   
ALSO PRESENT                                                                                                                  
Representative  Mark Neuman;  Bill  Walker, Project  Manager,                                                                   
General  Counsel,  Alaska  Gasline   Port  Authority  (AGPA),                                                                   
Anchorage;  Paul Fuhs, Legislative  Director, Alaska  Gasline                                                                   
Port   Authority  (AGPA),   Anchorage;   David  Keane,   Vice                                                                   
President of Policy and Corporate  Affairs, BG North America,                                                                   
LLC;  John Norman  Chair,  Alaska  Oil and  Gas  Conservation                                                                   
Commission,  Anchorage; Brian  Andrews, Deputy  Commissioner,                                                                   
Treasury  Division, Department  of  Revenue; Deven  Mitchell,                                                                   
Executive  Director, Alaska  Municipal  Bond Bank  Authority,                                                                   
Department of Revenue                                                                                                           
PRESENT VIA TELECONFERENCE                                                                                                    
Kathy Foerster, Commissioner,  Alaska Oil and Gas Commission,                                                                   
Anchorage;  Frank   Ingrassia,  Managing  Director,   Goldman                                                                   
Sachs,  New  York;  Tim  Romer,  Managing  Director,  Goldman                                                                   
Sachs, Los Angeles                                                                                                              
HB 177    An  Act relating to  the Alaska Gasline  Inducement                                                                   
          Act; establishing the Alaska Gasline Inducement                                                                       
          Act matching contribution fund; providing for an                                                                      
          Alaska Gasline Inducement Act coordinator; making                                                                     
          conforming amendments; and providing for an                                                                           
          effective date.                                                                                                       
          HB 177 was HEARD & HELD in Committee for further                                                                      
          TESTIMONY taken from:                                                                                               
          Alaska Gasoline Port Authority (AGPA)                                                                                 
          BG North America, LLC                                                                                                 
          Alaska Oil and Gas Conservation Commission (AOGCC)                                                                    
          Palin-Parnell Administration: Financing                                                                               
HOUSE BILL NO. 177                                                                                                            
     An Act  relating to the  Alaska Gasline Inducement  Act;                                                                   
     establishing the Alaska Gasline  Inducement Act matching                                                                   
     contribution  fund;  providing  for  an  Alaska  Gasline                                                                   
     Inducement    Act   coordinator;    making    conforming                                                                   
     amendments; and providing for an effective date.                                                                           
1:45:23 PM                                                                                                                    
ALASKA GASLINE PORT AUTHORITY (AGPA)                                                                                          
BILL  WALKER,   PROJECT  MANAGER,  GENERAL   COUNSEL,  ALASKA                                                                   
GASLINE  PORT AUTHORITY  (AGPA), ANCHORAGE,  pointed out  the                                                                   
handout, which  he intended  to follow  during a power  point                                                                   
presentation.  (Copy on File).                                                                                                  
Mr. Walker referenced.                                                                                                          
Slide 2 - Project Description:                                                                                                  
   ·    Gas conditioning plant in Prudhoe Bay                                                                                   
   ·    Pipeline from Prudhoe Bay to Valdez                                                                                     
   ·    LNG facility in Valdez                                                                                                  
1:47:15 PM                                                                                                                    
Slide 3 - A phased-in project to provide for better cost                                                                        
overrun risk management:                                                                                                        
   ·    The 800 mile pipeline would be 100% adjacent to                                                                         
        Trans-Alaska Pipeline System (TAPS) & 100% in                                                                           
   ·    With the infrastructure in place for the entire line                                                                    
       including roads, bridges, camp pads, and etc.;                                                                           
   ·    A LNG project with a lower overall cost over-run                                                                        
   ·    A phased approach with LNG project proceeding with                                                                      
        the first 2/3 less cost, equaling a 2/3 less risk;                                                                      
        and that                                                                                                                
   ·    Phase 1 would proceed with only one producer, rather                                                                    
        than three.                                                                                                             
1:51:31 PM                                                                                                                    
Slide 4 - Project Status:                                                                                                       
   ·    Project route permitted                                                                                                 
   ·    12 senior permits acquired                                                                                              
   ·    Bechtel cost estimates, complete & updated                                                                              
   ·    Marine transportation/Jones Act                                                                                         
   ·    Access to multiple markets                                                                                              
   ·    Anticipated financing @ 80% federal loan guarantee &                                                                    
        20% private funding                                                                                                     
Co-Chair  Meyer   asked  if  the  loan  guarantee   would  be                                                                   
available  only if  that gas  was shipped  within the  United                                                                   
States.  Mr.  Walker advised that the facilities  on the West                                                                   
coast applying  for permits are Long Beach,  California, Coos                                                                   
Bay & Braidwood,  Oregon, one in Washington State  and one in                                                                   
British Columbia.                                                                                                               
1:58:54 PM                                                                                                                    
PAUL  FUHS,   LEGISLATIVE  DIRECTOR,   ALASKA  GASLINE   PORT                                                                   
AUTHORITY (AGPA),  added that when shipping to  Mexico, it is                                                                   
considered  the   United  States  (U.S.).     The  Jones  Act                                                                   
addresses final destination points,  not delivery.  He stated                                                                   
that only the U.S. gas will need  to be clarified as that law                                                                   
is  not clear.   Co-Chair  Meyer  pointed out  that would  be                                                                   
assuming, they use the same loan guarantee.                                                                                     
2:00:10 PM                                                                                                                    
Mr. Walker continued the power point presentation.                                                                              
Slide  5 -  The  indicative  Alaska Gasoline  Port  Authority                                                                   
(AGPA) project  structure, highlighting the  Port Authority's                                                                   
involvement   during   the  project   as   the   facilitator.                                                                   
Financing  of  a project  this  large,  requires  world-class                                                                   
Mr.  Fuhs acknowledged  that  Alaska  has not  had  a lot  of                                                                 
experience  with  the  Port  Authority;   but  instead,  used                                                                   
extensively  for big  public projects  around  the world  and                                                                   
always done with private sector companies.                                                                                      
2:02:42 PM                                                                                                                    
Mr. Walker commented that:                                                                                                      
Slide 6 -  AGIA would be good  for Alaska.  The  AGIA process                                                                   
consists of:                                                                                                                    
   ·    Being open, transparent and competitive                                                                                 
   ·    Identifying clear evaluation criteria                                                                                   
   ·    Inducements for  project applicants  in exchange  for                                                                   
        specific commitments                                                                                                    
   ·    Empowering selected  applicants  to build  successful                                                                   
        consortium, leading to an open-season                                                                                   
   ·    Separating the mid-stream from the upstream                                                                             
   ·    Bringing  additional   interested  parties   to  help                                                                   
        develop Alaska's gas resource                                                                                           
2:04:26 PM                                                                                                                    
Mr. Walker continued:                                                                                                           
Slide 7 - AGIA recommends amendments regarding:                                                                                 
   ·    If additional gas reserves were needed,  a budget and                                                                   
        timeline for the exploration portion                                                                                    
   ·    Analysis of  making liquids  available in Alaska  for                                                                   
        value added processing                                                                                                  
   ·    Current  project  cost  estimates  required  with  an                                                                   
Mr.  Walker  addressed  AGIA  benefits  in  advancing  a  gas                                                                   
   ·    Rolled in rates would be good for Alaska's future                                                                       
  ·    Allowing for an independently owned infrastructure                                                                       
   ·    Following successful models  used in other  countries                                                                   
        that use rolled in rates and independently owned                                                                        
   ·    $500 million  dollars  "skin in  the  game", sends  a                                                                   
        positive   message    about   Alaska's    desire   to                                                                   
        commercialize the gas                                                                                                   
   ·    Supporting low tariffs                                                                                                  
2:08:57 PM                                                                                                                    
Mr. Walker  referenced  the handout from  the TransCanada,  a                                                                   
proven basin  developer, an  independent pipeline  model with                                                                   
rolled  in tolls.   (Copy  on File).   He  suggested that  it                                                                   
would be wrong to compare the  economics of a small line to a                                                                   
larger one, but instead, determine  which line could be built                                                                   
now and accommodate  an expansion.  He thought  that the Port                                                                   
Authority's  proposal was  similar to  that of  Trans-Canada.                                                                   
The market  indicates  that Alaska has  the best  opportunity                                                                   
for movement of  the resource.  He believes that  it is a low                                                                   
risk and a good fit for Alaska and the federal legislation.                                                                     
2:12:02 PM                                                                                                                    
Representative  Crawford understood  that last  year, it  was                                                                   
indicated that  Alaska could adjust  for a 4.5  billion cubic                                                                   
feet  (BCF)   per  day;  however,   presently  the   4.5  BCF                                                                   
projections is causing  a disruption.  He asked  how the pipe                                                                   
would be sized  for a 2 BCF  a day.  Mr. Walker  envisioned a                                                                   
larger line  (48") to Delta Junction  and then a  smaller one                                                                   
from Valdez,  with the  actual size to  be determined.   AGPA                                                                   
has been  advised that  with the  compression, they  would be                                                                   
able  to take  it up  to 5.9  BCF.   He  reiterated that  the                                                                   
project is  the right size for  the off-take of  Prudhoe Bay.                                                                   
There  were  many  bids  presented  during  the  process;  he                                                                   
thought there is an advantage to Alaska's stability.                                                                            
Mr. Walker pointed out that when  the effort started in 1998,                                                                   
there  were  issues,  which  changed  significantly  with  no                                                                   
federal loan guarantees.   He believed that  the market price                                                                   
forecast of $5.50 was appropriate.                                                                                              
2:15:58 PM                                                                                                                    
Representative  Gara asked about  a number recommended  other                                                                   
than  $500 million  dollars.   He  understood  that the  Port                                                                   
Authority was comfortable with putting the $500 million up-                                                                     
front; however,  recommended receiving  it back in  the event                                                                   
of a  successful project.   Mr.  Walker thought that  concept                                                                   
was possible  and applauded  anything  that could reduce  the                                                                   
Representative Gara  emphasized the provision is  generous to                                                                   
the  State.   AGIA recommends  the State  paying 80/20  ratio                                                                   
from the open-season to certification.   Mr. Walker commented                                                                   
they  were  receptive  to  the proposal  and  that  the  Port                                                                   
Authority would continue even after an unsuccessful open-                                                                       
season.   Mr. Walker thought that  a small volume  during the                                                                   
initial open-season would be adequate for AGPA.                                                                                 
Representative Gara  stated there are other  options for pay-                                                                   
back as part of the bidding criteria.                                                                                           
2:20:47 PM                                                                                                                    
Representative  Gara inquired  the type  of authority  needed                                                                   
for re-flagging.   Mr.  Walker responded  that AGPA  had been                                                                   
advised  by the  U.S. Congressional  staff that  it could  be                                                                   
done through  the Coast Guard  Reauthorization Act.   At this                                                                   
time, there are questions regarding the process.                                                                                
Mr. Fuhs  pointed out that much  of the re-flagging  was done                                                                   
during the conversion of the U.S.  200-mile limit.  It is not                                                                   
controversial and that it is separate from the Jones Act.                                                                       
Representative Kelly  pointed out that ConocoPhillips  is the                                                                   
most aggressive of  the producers.  He asked  if the proposed                                                                   
approach would  bring only them  to the "table".   Mr. Walker                                                                   
said yes  because of  their ownership of  the gas  in Prudhoe                                                                   
Representative  Kelly   asked  if  it  could   be  guaranteed                                                                   
bankable.     Mr.  Walker   commented  that  the   producer's                                                                   
financial  market would  not take  a  reserve risk.   If  the                                                                   
producers coming  to the project have sufficient  control and                                                                   
access,   that   should   be    sufficient   for   financing.                                                                   
Representative  Kelly summarized  that  with relationship  to                                                                   
capacity,  only  one  player   would  need  to  be  involved;                                                                   
however, he  did not  think they  had sufficient reserves  to                                                                   
make  the  project  work.   Mr.  Walker  countered  that  one                                                                   
producer could have enough reserves for the project.                                                                            
2:26:11 PM                                                                                                                    
BG NORTH AMERICA, LLC                                                                                                         
DAVID KEANE, VICE PRESIDENT OF  POLICY AND CORPORATE AFFAIRS,                                                                   
BG  NORTH AMERICA,  LLC,  referenced  the handout,  BG  North                                                                   
American Legislative Hearings.  (Copy on File).                                                                                 
2:26:51 PM                                                                                                                    
Mr. Keane pointed out:                                                                                                          
Slide 3 - BG Group snapshot:                                                                                                    
   ·    A world leader in natural gas                                                                                           
   ·    A FTSE 20-company listed in both the Long Island &                                                                      
        New York Stock Exchanges                                                                                                
   ·    Market capitalization of over $49 billion dollars                                                                       
   ·    Production circa of 70% gas & 30% oil                                                                                   
   ·    Employs approximately 4,700 staff - with 64% outside                                                                    
        of the United Kingdom (UK)                                                                                              
2:28:04 PM                                                                                                                    
Mr. Keane continued:                                                                                                            
Slide  4  - Indicates  the  business  model,  connecting  the                                                                   
natural  gas to  the necessary  markets through  transmission                                                                   
and distribution.                                                                                                               
2:29:08 PM                                                                                                                    
Mr. Keane explained:                                                                                                            
Slide 5  - Identifies the  countries and current  operations,                                                                   
with over 25 countries including  Canada, Bolivia, Argentina,                                                                   
Egypt, India, China, Thailand & the Philippines.                                                                                
Slide 6 - Highlights the gas market  focus for connecting gas                                                                   
to the market.                                                                                                                  
The developed markets are in:                                                                                                   
   ·    North America                                                                                                           
   ·    UK/Europe focus                                                                                                         
The developing markets are:                                                                                                     
   ·    Bolivia/Brazil                                                                                                          
   ·    India                                                                                                                   
2:30:49 PM                                                                                                                    
Mr. Keane pointed out that:                                                                                                     
Slide  7 -  Highlights  global gas  trade  during the  recent                                                                   
Slide 8 - Indicates global gas  trade gradually evolving into                                                                   
a globalizing gas industry.                                                                                                     
2:32:12 PM                                                                                                                    
Mr. Keane stated that:                                                                                                          
Slide  9  -  Shows  a  couple  supply  projects  that  BG  is                                                                   
currently involved with, the Atlantic  LNG, Trinidad/Tobago &                                                                   
Egyptian LNG.                                                                                                                   
Slide 10 - Identifies the U.S. market summary:                                                                                  
   ·    Lake Charles import terminal                                                                                            
   ·    Phase I expansion Q4 2005                                                                                               
   ·    Phase II expansion Q2 2006                                                                                              
   ·    Elba Island import terminal                                                                                             
2:33:05 PM                                                                                                                    
Mr. Keane continued:                                                                                                            
Slide  11 -  Provides a  chart highlighting  the LNG  imports                                                                   
from 2003  to present and that  BG has been the  largest U.S.                                                                   
LNG importer from 2003 to 2006.                                                                                                 
2:33:29 PM                                                                                                                    
Mr. Keane indicated that:                                                                                                       
Slide 12 - Identifies the Alaska E&P with 2.1 million acres                                                                     
located in the Foothills of the Alaska North Slope (ANS) and                                                                    
.2 million in the ENS.                                                                                                          
Slide 13 - Addresses the AGIA plan:                                                                                             
   ·    BG is  investing in  Alaska and  exploring along  the                                                                   
        North Slope and ENS.                                                                                                    
   ·    BG supports AGIA  because the  process is  fair, open                                                                   
        and inclusive; BG  supports the mandatory  provisions                                                                   
        on  access  and  rates  and  BG  will  encourage  new                                                                   
        explorers to invest in Alaska.                                                                                          
   ·    AGIA  provides  input  opportunities  for  interested                                                                   
        parties   &    legislators    during   the    initial                                                                   
        legislation,   when    pipeline   applications    are                                                                   
        submitted and  during the legislative  review  of the                                                                   
        winning application.                                                                                                    
2:35:09 PM                                                                                                                    
Mr. Keane addressed:                                                                                                            
Slide 14 - The AGIA Plan:                                                                                                       
   ·    AGIA addresses  BG's concerns  by  providing a  level                                                                   
        playing field for all participants.   It will provide                                                                   
        certainty that when gas is discovered,  there will be                                                                   
        access to  pipeline capacity,  providing a  mechanism                                                                   
        to ensure reasonable rates.                                                                                             
   ·    AGIA creates  competition to  build the pipeline  and                                                                   
        perhaps an LNG export facility.                                                                                         
  ·    AGIA spells out what is required of any applicant.                                                                       
   ·    AGIA clearly identifies the "must haves" for Alaska.                                                                    
   ·    BG's "must  haves"  are  a regulated  pipeline,  open                                                                   
        access  provisions  in   the  tariff  and   just  and                                                                   
        reasonable rates.                                                                                                       
2:36:09 PM                                                                                                                    
Slide 15 - Outlines the key message of BG:                                                                                      
   ·    AGIA is  good  for Alaska  and  for  the natural  gas                                                                   
   ·    AGIA will  encourage  the  continued  development  of                                                                   
        Alaska's untapped natural gas reserves.                                                                                 
   ·    AGIA's purpose is to facilitate  commercialization of                                                                   
        the North Slope gas resource; to  promote exploration                                                                   
        and development  of  oil  and  gas resources  on  the                                                                   
        North Slope; maximize  benefits to the people  of the                                                                   
        State from development  of oil  and gas resources  in                                                                   
        the State;  and encourage  oil land  gas lessees  and                                                                   
        other persons  in  the State  to  commit natural  gas                                                                   
        from the  North Slope  to a gas  pipeline system  for                                                                   
        transportation to markets in the State or elsewhere.                                                                    
2:36:42 PM                                                                                                                    
Representative Kelly  asked if there were provisions  in AGIA                                                                   
that  could cause  project  failure.   Mr.  Keane noted  that                                                                   
would happen if the Legislature was "not on board".                                                                             
Representative Kelly asked the  connection between BG and BP.                                                                   
Mr. Keane replied that they are  completely separate yet both                                                                   
are head-quartered in the UK.                                                                                                   
2:38:52 PM                                                                                                                    
Representative  Gara  inquired  about  the  fears  &  threats                                                                   
presented by  the three major  producers.  Mr. Keane  said he                                                                   
could  not speak  for  the producers.    He anticipated  that                                                                   
shareholders  would  expect their  companies  to  bid and  to                                                                   
commit  their reserves  to capacity.   He  could not  imagine                                                                   
that  if the  project is  economically  viable, why  reserves                                                                   
would not be moved to market.                                                                                                   
Co-Chair Chenault noted the pressures  placed on producers by                                                                   
the State,  the federal government  and the shareholders;  he                                                                   
did   see  shareholders   carrying  much   weight  in   those                                                                   
2:43:03 PM                                                                                                                    
ALASKA OIL AND GAS CONSERVATION COMMISSION (AOGCC)                                                                            
JOHN  NORMAN,   CHAIR,  ALASKA   OIL  AND  GAS   CONSERVATION                                                                   
COMMISSION (AOGCC), ANCHORAGE,  discussed the AOGCC's role in                                                                   
the North Slope gas sales by providing a status report.                                                                         
He  indicated  that  most  knowledgeable  Alaskans  know  the                                                                   
significance of 35  TCF of natural gas; however,  few realize                                                                   
millions of  barrels of oil and  condensate could be  lost if                                                                   
gas off-take is  not correctly managed.  Mr.  Norman stressed                                                                   
that oil is Alaska's nest egg.   The AOGCC is responsible for                                                                   
setting the gas  off-take allowable from the  North Slope oil                                                                   
fields to  ensure that  there is no  harm to the  investment.                                                                   
Maintaining  reservoir pressure  enhances  oil recovery,  but                                                                   
producing gas  depletes reservoir  pressure.  Therefore,  gas                                                                   
reserves in most  fields are usually sold only  after most of                                                                   
the oil has been produced.  Until  that time, the gas that is                                                                   
produced with  the oil  is used  to promote increased  liquid                                                                   
Mr. Norman pointed  out that North Slope gas  sales are going                                                                   
to involve  trade-oils between oil  and gas recovery.   It is                                                                   
not  practical  to get  all  oil  out  of the  ground  before                                                                   
starting gas sales.                                                                                                             
2:47:33 PM                                                                                                                    
Mr.  Norman advised  that  the  AOGCC does  not  take such  a                                                                   
position; however, the State needs  to ensure that the trade-                                                                   
offs result in  greater recovery of both gas and  oil.  It is                                                                   
important  to  understand  that  Prudhoe  Bay  does  have  an                                                                   
existing gas  off-take allowable, which  is 2.7 BCF  per day.                                                                   
That rate  was set in 1977.   The AOGCC usually waits  for an                                                                   
application from the operator  to modify pool rules including                                                                   
off-take rates.  In 2005, it was recognized that:                                                                               
   ·    Serious discussions were taking place concerning                                                                        
        major North Slope gas sales;                                                                                            
   ·    The 2.7 BCF per day gas off-take allowable for                                                                          
        Prudhoe Bay  was set  in 1977, when  the field  first                                                                   
        began to  produce.   The off-take  rate was based  on                                                                   
        the  best   information  available   at  that   time;                                                                   
        however, now the  State has 30  years and  11 billion                                                                   
        barrels of production and production-related  data to                                                                   
        help determine a better number;                                                                                         
   ·    Most of the publicly discussed pipeline options                                                                         
        could require  more  than 2.7  BCF  per day  off-take                                                                   
        from Prudhoe Bay;                                                                                                       
   ·    Performing the necessary studies to determine an                                                                        
        appropriate current  off-take rate  would take  time;                                                                   
   ·    AOGCC does not intend to be the cause of any project                                                                    
Mr. Norman continued, therefore,  to acquire the most current                                                                   
information, BP  and the other  Prudhoe Bay working  interest                                                                   
owners  agreed to  provide the  AOGCC  staff and  consultants                                                                   
access   to   the   simulators   including   the   underlying                                                                   
engineering,  geologic, and  geophysical  information.   They                                                                   
voluntarily  set up a  data room  in BP's Anchorage  offices,                                                                   
equipped  with  computers  and  software,  allowing  for  the                                                                   
review of simulator results.                                                                                                    
2:50:33 PM                                                                                                                    
Mr.  Norman  said it  is  important  to  note that  data  and                                                                   
information  provided  falls   within  the  standards  of  AS                                                                   
31.05.035(d) and 20 AAC 25.537(b),  governing confidentiality                                                                   
of  information.   On February  28, 2007,  AOGCC published  a                                                                   
summary report,  which is  now available on  the website  - a                                                                   
multi-variable  equation.   The  right off-take  volume  will                                                                   
depend on when sales start how  aggressively the oil has been                                                                   
produced  and  what the  mitigating  steps are  in-place  and                                                                   
planned.   There are  legal restrictions  on what results  of                                                                   
the  study can  be  shared.   As soon  as  an application  is                                                                   
received or they otherwise have  enough information to make a                                                                   
meaningful determination, AOGCC  will convene public hearings                                                                   
to make information  available as needed and  legally allowed                                                                   
to  support  changes  in  the   allowable  off-take  assigned                                                                   
natural gas.                                                                                                                    
2:53:08 PM                                                                                                                    
Mr.  Norman added,  there is  sufficient  information in  the                                                                   
record to support any decision that the Commission reaches.                                                                     
Representative  Gara asked  if  the AGOCC  statutory  mandate                                                                   
requires that it be the most efficient  means of reaching gas                                                                   
and oil or if there is flexibility,  while not destroying the                                                                   
project.    Mr.  Norman  affirmed   there  are  some  general                                                                   
principles,   one  which   address   gas  off-take,   natural                                                                   
deterioration recoverability.                                                                                                   
Representative  Gara questioned if  the gas efficiency  could                                                                   
be  off-loaded  and  if  there  was a  chance  to  loose  the                                                                   
pipeline project.   Mr. Norman explained they  could consider                                                                   
practical   considerations  to   an  extent   but  that   the                                                                   
Commission  can  not  excuse  waste  of  the  resource.    He                                                                   
clarified  that  for each  day  the  oil passes  through  the                                                                   
pipeline, the conservation risks  become less. The Commission                                                                   
recognizes a  point of diminishing  returns; the oil  and gas                                                                   
must both contribute to the economics of the project.                                                                           
3:01:14 PM                                                                                                                    
Mr.  Norman addressed  Slide 4,  pointing out  the intent  to                                                                   
complete  the evaluation  by holding  hearings  and making  a                                                                   
final ruling on allowable gas  off-takes for both Prudhoe Bay                                                                   
and Point Thomson in time for  the "open season" process.  At                                                                   
this time:                                                                                                                      
   (1) The later the gas sales begin, the smaller the oil                                                                       
   (2) The lower the off-take rate, the smaller the oil                                                                         
   (3) The more the oil production is accelerated before                                                                        
        gas sales start, the smaller the oil losses;                                                                            
   (4) The more that is done to mitigate detrimental                                                                            
        effects of gas sales, the smaller the oil losses;                                                                       
   (5) Oil loss is more sensitive to the acceleration of                                                                        
        oil production and mitigating steps than it is to                                                                       
        start-up timing or off-take rates;                                                                                      
   (6) Depending on the life of the North Slope                                                                                 
        infrastructure, delaying gas off-take too long can                                                                      
        result in a decreased gas recovery.                                                                                     
By the  time a pipeline  project is  ready, selling  gas from                                                                   
Prudhoe Bay could proceed at a  higher off-take rate than the                                                                   
current  2.7  BCF  per  day, provided  BP  and  its  partners                                                                   
continue working toward:                                                                                                        
   ·    Accelerating oil production; and                                                                                        
   ·    Mitigating gas losses.                                                                                                  
3:02:37 PM                                                                                                                    
Co-Chair Chenault  asked the  limiting factors from  removing                                                                   
oil out of the ground.                                                                                                          
KATHY    FOERSTER,     (TESTIFIED    VIA     TELECONFERENCE),                                                                   
COMMISSIONER,  ALASKA  OIL  AND  GAS  COMMISSION,  ANCHORAGE,                                                                   
explained  that the Prudhoe  Bay owners  were working  within                                                                   
the constraints  of the  number of  rigs & people  available.                                                                   
Currently,  every available  rig  is working,  testing  water                                                                   
injection into  the gas  cap while undertaking  multi-lateral                                                                   
drilling.   They are working to capacity.                                                                                       
3:04:42 PM                                                                                                                    
Mr. Norman  stressed all  possible interruptions  need  to be                                                                   
avoided and  that any shut downs  will increase the  risk and                                                                   
defers production, which ultimately,  creates competition for                                                                   
future gas.                                                                                                                     
3:05:48 PM                                                                                                                    
Representative Crawford  voiced surprise with  Ms. Forester's                                                                   
comments.    He  understood  that  oil  production  was  down                                                                   
because it had been maxed-out  with what the facilities could                                                                   
Ms. Foerster clarified  that they are looking  for wells with                                                                   
a higher  oil cut and lower  gas & water cut,  replacing more                                                                   
marginal wells.  Another option  is a facility expansion, but                                                                   
those are very  expensive.  She recommended that  BP be asked                                                                   
the question.   Representative  Crawford asked if  a facility                                                                   
expansion  would be  the place  to hold  the gas,  such as  a                                                                   
pipeline.   Ms. Forester did not  think that would be  a good                                                                   
facility expansion.                                                                                                             
Representative  Crawford  suggested that  there  will come  a                                                                   
point during  the life of Prudhoe  Bay that the gas  could be                                                                   
taken in  addition to the oil.   Ms. Forester agreed  and was                                                                   
optimistic that  by the  time the State  has a pipeline,  gas                                                                   
sales would be right; now is too soon.                                                                                          
Representative  Gara worried  about  the  seriousness of  the                                                                   
producer's  attitude since  they have  not requested  AOGCC's                                                                   
for the new off-take ruling.                                                                                                    
3:10:48 PM                                                                                                                    
Mr.  Norman   acknowledged  that  he  expected   an  off-take                                                                   
petition.  Ms.  Foerster added that the producers  were asked                                                                   
to  work with  the Commission.   If  a filing  had been  made                                                                   
before the  study was complete,  the process would  have been                                                                   
3:12:46 PM                                                                                                                    
Mr. Norman referred to the Commission's  mitigation plan; she                                                                   
wanted  to see  the  mitigation measures  employed.   If  the                                                                   
slate  is wiped  clean of  any oil  discoveries, Prudhoe  Bay                                                                   
[with just the  remaining oil] would still be  the largest in                                                                   
the United  States.   Prudhoe Bay has  reserves of  2 billion                                                                   
barrels remaining,  which equates to $120 billion  dollars in                                                                   
gross revenue,  approximately $15  billion in royalties.   He                                                                   
stressed the importance of the oil to the State.                                                                                
3:15:34 PM                                                                                                                    
Representative Kelly  asked if the Commission  might conclude                                                                   
that the capacity of the pipeline  was too small.  Mr. Norman                                                                   
explained  that  the  Commission  has  received  confidential                                                                   
information, which allows certain  considerations.  The AOGCC                                                                   
works like a court  in that they wait for parties  to come to                                                                   
them, before a  ruling can occur.  The AOGCC can  act if they                                                                   
believe  waste is  eminent.   It  would be  improper for  the                                                                   
Commission  to declare  a number  at this  time, without  the                                                                   
public  process.   The Commission  can  not provide  specific                                                                   
numbers.   They are as  comfortable as  they can be  with the                                                                   
information they  have at this  time.  Discussions  have been                                                                   
happening  for   a  number  of   years,  and   explained  the                                                                   
Commission  intends to  work with  the producers.   He  noted                                                                   
that there are  a number of variables; the  Commission is not                                                                   
as comfortable with Point Thomson  as it is with Prudhoe Bay.                                                                   
3:20:43 PM                                                                                                                    
Representative  Kelly referenced the  first phase  of Prudhoe                                                                   
Bay;  he  asked  how  comfortable  they  were.    Mr.  Norman                                                                   
stressed  it is  important not  to  get ahead  of the  public                                                                   
process.   He  observed that  estimated  numbers of  off-take                                                                   
continue  to  change.   The  Commission  needs a  specific  &                                                                   
tangible  project;  otherwise,  they are  speculating.    The                                                                   
AOGCC has  gathered information  and believe they  could rule                                                                   
quickly on Prudhoe Bay.                                                                                                         
3:23:59 PM                                                                                                                    
Mr. Norman  commented the  AOGCC is  confident that  unless a                                                                   
substantial delay  occurs, they  will be adequately  prepared                                                                   
to make a determination  of the correct Prudhoe  Bay gas off-                                                                   
take allowable rate when the application is received.                                                                           
Mr. Norman  added, there is confidence  in Point Thomson.   A                                                                   
year ago,  AOGCC and  Exxon agreed on  a similar  process for                                                                   
studying allowable  gas off-take from  that area.   The AOGCC                                                                   
contracted  reservoir evaluation  consultants  to assist  the                                                                   
technical  staff in  performing that  study.   Exxon and  its                                                                   
partners agreed to  give the AOGCC staff access  to data from                                                                   
the Exxon's  Houston office.   Unfortunately,  AOGCC  was not                                                                   
able to follow  the required time line; there  were delays in                                                                   
preparing the Exxon  data room and information.   The process                                                                   
was finally  slated to begin late  last year; since  then the                                                                   
study has been pending resolution  for legal issues.  Without                                                                   
a  thorough study,  it is  difficult  for the  AOGCC to  have                                                                   
sufficient  information  to make  a  gas off-take  ruling  on                                                                   
Point Thomson; it remains a "wild card".                                                                                        
3:26:57 PM                                                                                                                    
Mr. Norman summarized:                                                                                                          
   ·    There is a lot of oil and condensate at risk if                                                                         
        Alaska does not manage their natural gas off-take                                                                       
   ·    The AOGCC is charged with setting gas off-take                                                                          
        allowable that will prevent loss to the State's                                                                         
        valuable hydrocarbon resources.                                                                                         
   ·    The AOGCC intends to perform its function before an                                                                     
        open season in order that the project is not                                                                            
   ·    The AOGCC has done the technical work to address                                                                        
        Prudhoe Bay's off-take without causing a delay.                                                                         
   ·    A lot of work remains for the Point Thomson area;                                                                       
        delay is quite possible.                                                                                                
3:28:03 PM                                                                                                                    
Representative  Gara asked  if the AOGCC  statutes allow  for                                                                   
the  encouragement  of  the  producers  to  drill  &  produce                                                                   
faster.  Mr. Norman replied they  do not; it is not the place                                                                   
of the  Commission to  dictate development,  but rather,  the                                                                   
landowner    determines    the    developmental    functions.                                                                   
Representative  Gara  pointed  out  that  timing  is  not  as                                                                   
imperative in the  lower 48, emphasizing that  Alaska has one                                                                   
shot at a pipeline.                                                                                                             
3:31:26 PM                                                                                                                    
Representative  Hawker  referred  to Point  Thomson  and  the                                                                   
reservoir's  dynamics.    He   summarized  that  liquids  are                                                                   
removed and  the gas is taken  off at the end of  the field's                                                                   
life.   He  noted  that  Point  Thomson has  unknown  factors                                                                   
relating  to high pressure  and questioned  if the  structure                                                                   
would change.   Mr. Norman  responded that the  Point Thomson                                                                   
reservoir is counter intuitive.   Until recently, it has been                                                                   
treated as an oil reservoir.   It is below the threshold of a                                                                   
reservoir.   The  Commission will  need  to have  a plan  for                                                                   
development from the operator.   Ms. Forester added that in a                                                                   
retrograde  reservoir, pressure  is the  key & when  dropping                                                                   
below a  certain pressure, the  hydrocarbon liquids  drop out                                                                   
in  the reservoir,  impeding  the  production.   Pressure  is                                                                   
essential for maximum gas production.                                                                                           
3:35:52 PM                                                                                                                    
Representative Hawker inquired  if there could be a situation                                                                   
in  which  the  gas  &  the  condensates   must  be  produced                                                                   
simultaneously  early or  re-injecting at  high pressures  to                                                                   
protect  the condensates.    Ms. Forester  acknowledged  that                                                                   
without regard to economics, only  maximizing the hydrocarbon                                                                   
recovery could be accomplished  by re-injecting the gas.  The                                                                   
reservoir pressure must be retained.                                                                                            
Representative  Hawker  questioned  if  regulation  would  be                                                                   
different for oil versus gas field.   Ms. Forester replied it                                                                   
would & explained that a gas field  does not need an off-take                                                                   
allowance; it is  classified as an oil field,  then the AOGCC                                                                   
would need to do an off-take.   If classified as a gas field,                                                                   
indicates that  the gas/oil ratio was above  100,000 standard                                                                   
cubic feet per barrel, which would  stipulate that the liquid                                                                   
recovery was lean and a secondary concern.                                                                                      
Representative Hawker asked if  there should be a legislative                                                                   
change identifying  Point Thomson  as an oil  feet and  not a                                                                   
gas field.  Ms. Foerster said yes.                                                                                              
Representative  Hawker asked  how a producer  could  go about                                                                   
declaring Point Thomson a gas  field.  Ms. Foerster explained                                                                   
that they would  have to go to someone other  than the AOGCC.                                                                   
The AOGCC is  charged with maximizing hydrocarbon  recovery &                                                                   
preventing  waste.   Representative Hawker  inquired if  that                                                                   
would be  a legislative decision.   Mr. Norman  affirmed that                                                                   
the   Legislature  has   the   authority   to  override   the                                                                   
Commission; however, he cautioned  that the rest of the world                                                                   
would be watching and questioning.                                                                                              
3:41:27 PM                                                                                                                    
Representative  Hawker  concluded  that  the  probability  of                                                                   
having  Point Thomson  as a  gas field,  discounting oil  was                                                                   
nil.   Mr. Norman  recommended the best  approach is  to move                                                                   
forward, obtaining  more information.  He stated  that no one                                                                   
has come before the Commission  providing a vehicle to answer                                                                   
these questions.   Representative  Hawker applauded  the work                                                                   
of  the  Commission   and  noted  his  confidence   in  their                                                                   
3:44:12 PM                                                                                                                    
Representative  Crawford   commented  there  is   a  dropping                                                                   
production;  he questioned  why  Point Thomson  has not  been                                                                   
developed.   He  asked  how much  gas has  been  used in  the                                                                   
production of Prudhoe  Bay to operate the field  and how much                                                                   
has  been  lost from  attrition.    Mr. Norman  advised  that                                                                   
questions regarding production  should be directed toward the                                                                   
operators, noting  the Commission  would be delighted  to see                                                                   
Point Thomson active.                                                                                                           
Representative  Crawford thought  that  [the producers]  want                                                                   
new wells  with a lower  cut of gas  and water &  higher oil.                                                                   
Mr. Norman observed  that Point Thomson presents  its own set                                                                   
of  challenges.   He observed  that they  have received  well                                                                   
applications that are two years away.                                                                                           
3:48:27 PM                                                                                                                    
Ms. Forester  explained that  it will  be more involved  than                                                                   
simply drilling wells  at Point Thomson.  There  will need to                                                                   
be  a   lot  of  investment   infrastructure  in   production                                                                   
facilities    before   production    can   actually    occur.                                                                   
Representative  Crawford suggested  a  spur will  need to  be                                                                   
AT EASE:       3:49:51 PM                                                                                                     
RECONVENE:     3:57:46 PM                                                                                                     
PARNELL ADMINISTRATION: FINANCING                                                                                             
BRIAN  ANDREWS,   DEPUTY  COMMISSIONER,  TREASURY   DIVISION,                                                                   
DEPARTMENT  OF REVENUE,  referenced the  handout, The  Alaska                                                                   
Gasline  Inducement Act  - Alaska  Gasline  Project from  the                                                                   
Lender's Perspective.  (Copy on File).                                                                                          
He   mentioned  his   investment   experience  and   provided                                                                   
perspective from  his understanding.  The  Administration has                                                                   
received  much  enthusiasm in  the  AGIA project  within  the                                                                   
investment   community.     He   described  the   fundamental                                                                   
considerations of lenders:                                                                                                      
   ·    Capacity and the debt repayment capability of the                                                                       
        pipeline project;                                                                                                       
   ·    Collateral and the secondary source of debt                                                                             
   ·    Character/Credit and the project sponsors who are                                                                       
        experienced in the pipeline industry, with solid                                                                        
        credit history;                                                                                                         
   ·    Commitment,   both   financial    and   non-financial                                                                   
        commitments    from   sponsors    indicating    their                                                                   
        incentives to the success of the pipeline project;                                                                      
   ·    Conditions for future markets including regulatory,                                                                     
        economic and environmental conditions could impact                                                                      
        the viability of a project.                                                                                             
Mr. Andrews continued, the critical  items for agreement of a                                                                   
natural gas export pipeline from  Alaska include a firm long-                                                                   
term commitment to ship natural  gas at a price, quantity and                                                                   
term  sufficient  to service  and  repay the  necessary  debt                                                                   
financing;  equity  funding  typically   at  20%-30%  of  the                                                                   
project's forecast  capital structure;  and division  of cost                                                                   
overrun  risks among the  parties, which  have the  financial                                                                   
strength and skills  to manage that risk; and  Federal Energy                                                                   
Regulatory Commission  (FERC) and other regulatory  approval.                                                                   
Each of the  critical elements are magnified due  to the size                                                                   
of  the project  and that  federal loan  guarantees would  be                                                                   
helpful to  maximize the  quantity of debt  and to  limit the                                                                   
cost of the pipeline debt financing.                                                                                            
Mr. Andrews  pointed out the firm transportation  commitments                                                                   
to ship  natural gas  at a  price &  quantify to service  and                                                                   
repay   the  debt  financing;   the  bulk   of  the   shipper                                                                   
commitments  would likely come  from the  parties that  own a                                                                   
gas supply.   Equity commitments are a pre-condition  to debt                                                                   
financing  and   federal  guarantees;  the   FERC  regulation                                                                   
pipeline  project would  be funded with  20%-30% base  equity                                                                   
given  the opportunity  to  attract  equity sponsors.    Cost                                                                   
overruns are a key financing concern.   Substantial increases                                                                   
in cost  of large  capital projects  have occurred  in recent                                                                   
years across the globe.  He noted  that because of the market                                                                   
conditions and the  project size, there is a  limited ability                                                                   
to  shift   cost  overrun  risks   to  the  contractors   and                                                                   
suppliers.  The  magnitude of the cost overrun  risks and the                                                                   
modest equity returns typically  associated with the pipeline                                                                   
equity  will drive  the  need for  sharing  the risk  between                                                                   
equity investors and shippers.                                                                                                  
The Alaska  Natural Gas  Pipeline Act of  2004 gave  the U.S.                                                                   
Department of Energy  the ability to issue up  to $18 billion                                                                   
dollars in  loan guarantees in  support of the project.   The                                                                   
key  loan  guarantee  provisions are  favorable.    Favorable                                                                   
legislative  terms may  be limited by  practicalities  of the                                                                   
Department of Energy implementations.                                                                                           
Mr. Andrews summarized that AGIA has helpful elements:                                                                          
   ·    Up to $500 million dollars of risk sharing;                                                                             
   ·    FT commitments; and                                                                                                     
   ·    Requirements that an application should describe the                                                                    
       means for preventing & managing cost overruns.                                                                           
A  pipeline  would   not  be  built  without   lenders'  debt                                                                   
financing and  the financing of  the pipeline  project should                                                                   
be supported by firm transportation  commitments and a robust                                                                   
federal  guarantee.   He  acknowledged  that  there are  many                                                                   
questions and unknowns within  the project; however, there is                                                                   
nothing in AGIA that precludes project financing.                                                                               
4:04:18 PM                                                                                                                    
FRANK  INGRASSIA,  (TESTIFIED VIA  TELECONFERENCE),  MANAGING                                                                   
DIRECTOR,  GOLDMAN  SACHS,  NEW   YORK,  reinforced  previous                                                                   
comments that there is nothing  in the legislation that would                                                                   
prevent   successful  financing   of  the   pipeline.     The                                                                   
legislation in  its current state  is a "skeleton  that needs                                                                   
meat on the  bones", to allow for successful  financing.  The                                                                   
project needs:                                                                                                                  
   ·    Firm transportation commitments;                                                                                        
   ·    Positive project economics including a cost                                                                             
        structure resulting in gas prices well within the                                                                       
        forecast of the commodity prices; and                                                                                   
   ·    A tight contractual structure with an appropriate                                                                       
        risk allocation [construction risk];                                                                                    
   ·    A strong, credit worthy team with a record of                                                                           
        success in other large project financings.                                                                              
Mr.  Ingrassia  reiterated  the  legislation  is  permissive,                                                                   
putting  out  a  financable  plan.    He  offered  to  answer                                                                   
questions of the Committee.                                                                                                     
4:09:00 PM                                                                                                                    
Co-Chair  Chenault asked  if there  would be  concerns for  a                                                                   
federal  loan  guarantee  with  gas  moving  through  foreign                                                                   
countries.   Mr. Andrews knew  that a federal  loan guarantee                                                                   
could be used  through Canada; he was uncertain  of gas sales                                                                   
through other countries.                                                                                                        
4:10:03 PM                                                                                                                    
Representative  Gara noted  that  since  the loan  guarantees                                                                   
were backed by  the federal government, would  it be possible                                                                   
to secure a lower  interest loan.  Mr. Andrews  said that the                                                                   
guarantees allows  for an increased quantity of  debt as well                                                                   
as lower cost tariffs.                                                                                                          
4:11:08 PM                                                                                                                    
HB 177 was HELD in Committee for further consideration.                                                                         
The meeting was adjourned at 4:11 P.M.                                                                                          

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