Legislature(2013 - 2014)HOUSE FINANCE 519

03/17/2014 08:30 AM FINANCE

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08:49:10 AM Start
08:49:41 AM Gas Markets Overview
09:57:04 AM Adjourn
* first hearing in first committee of referral
+ teleconferenced
= bill was previously heard/scheduled
--Delayed to 8:45 a.m. Today--
+ Gas Markets Overview by Larry Persily, Office TELECONFERENCED
of the Federal Coordinator
+ Bills Previously Heard/Scheduled TELECONFERENCED
                  HOUSE FINANCE COMMITTEE                                                                                       
                      March 17, 2014                                                                                            
                         8:49 a.m.                                                                                              
8:49:10 AM                                                                                                                    
CALL TO ORDER                                                                                                                 
Co-Chair Austerman called the House Finance Committee                                                                           
meeting to order at 8:49 a.m.                                                                                                   
MEMBERS PRESENT                                                                                                               
Representative Alan Austerman, Co-Chair                                                                                         
Representative Bill Stoltze, Co-Chair                                                                                           
Representative Mark Neuman, Vice-Chair                                                                                          
Representative Mia Costello                                                                                                     
Representative Bryce Edgmon                                                                                                     
Representative Les Gara                                                                                                         
Representative David Guttenberg                                                                                                 
Representative Cathy Munoz                                                                                                      
Representative Steve Thompson                                                                                                   
MEMBERS ABSENT                                                                                                                
Representative Tammie Wilson                                                                                                    
Representative Lindsey Holmes                                                                                                   
ALSO PRESENT                                                                                                                  
Larry Persily, Federal Coordinator, Alaska Natural Gas                                                                          
Transportation Projects.                                                                                                        
OVERVIEW: GAS MARKETS                                                                                                           
8:49:41 AM                                                                                                                    
^GAS MARKETS OVERVIEW                                                                                                         
8:50:01 AM                                                                                                                    
LARRY PERSILY, FEDERAL COORDINATOR, ALASKA NATURAL GAS                                                                          
TRANSPORTATION PROJECTS, discussed the PowerPoint, "Alaska                                                                      
LNG, Does the market need us?" (copy on file).                                                                                  
Mr.  Persily highlighted  slide 1,  "The world  changed, not                                                                    
     Global LNG trade has quadrupled since 1995                                                                                 
     Asian LNG demand alone could double by 2025                                                                                
     China demand growing double-digit annual rate                                                                              
     Europe looking for alternatives to Russian gas                                                                             
     Worldwide concerns over coal, nuclear plants                                                                               
     Alaska LNG could be the victor of circumstances                                                                            
Mr.  Persily  discussed slide  2,  "Global  LNG trade  grows                                                                    
fast." The growth  in LNG demand was  attracting hundreds of                                                                    
billions  of  dollars  of  worldwide  investment  in  export                                                                    
projects.  The  global LNG  import  demand  in 2013  totaled                                                                    
approximately 32  billion cubic feet  per day. The  gas that                                                                    
moved as LNG across the world  was only 10 percent of global                                                                    
natural  gas   consumption.  Approximately  90   percent  of                                                                    
natural gas consumed in the world was moved by pipeline.                                                                        
Mr. Persily addressed slide 3,  "Asian LNG imports increased                                                                    
2011 to 2012."  He stressed that various areas  of the world                                                                    
purchased  natural  gas, but  Asia  made  up 70  percent  of                                                                    
global demand.  The real growth  potential was in  China. In                                                                    
December 2013,  China's LNG  demand was  up 20  percent from                                                                    
December 2012.  China had some  shale gas reserves,  but had                                                                    
not conducted much exploration. Much  of their shale gas was                                                                    
in arid, dry areas of  the country, and hydraulic fracturing                                                                    
required a substantial amount of water.                                                                                         
Mr. Persily looked at slide  4, "China's domestic gas supply                                                                    
deficit."  He remarked  that China  had been  producing more                                                                    
than enough gas  to meet its own demand, but  could not keep                                                                    
up with  their own  economy. China  imported roughly  has of                                                                    
its  gas  by tanker  and  pipeline,  and paid,  on  average,                                                                    
almost $10  per thousand  cubic feet  for pipeline  gas from                                                                    
Turkmenistan; more than $10 per  thousand cubic feet for gas                                                                    
from  Uzbekistan;  and  $12 per  thousand  cubic  feet  from                                                                    
Myanmar. He  stressed that those  costs did not  include the                                                                    
cost to bring the gas to the cities.                                                                                            
8:56:02 AM                                                                                                                    
Mr.  Persily   highlighted  slide  5,  "Global   gas  prices                                                                    
diverge."  The slide  illustrated  what has  changed in  gas                                                                    
prices and transportation. He remarked  that prices began to                                                                    
split  off five  or six  years prior.  He stressed  that the                                                                    
prices  would  not  last  forever,   and  stated  that  most                                                                    
analysts expected the  gap to continue widen  enough to make                                                                    
a profit.                                                                                                                       
Mr. Persily displayed slide 6, "Enough business to share."                                                                      
     Worldwide natural gas demand is forecast to grow                                                                           
     faster than any other energy source                                                                                        
     In addition to 12 LNG export projects under                                                                                
     construction, more will be needed by 2025                                                                                  
     As many as 10 or 12 more in next decade                                                                                    
     Several hundred billion dollars in investment                                                                              
     Cost competitiveness will decide the winners                                                                               
Mr. Persily highlighted slide 7, "Price is everything."                                                                         
     Japan paid $70-plus billion for LNG in 2013                                                                                
     Energy a big reason for $112 billion trade gap                                                                             
     Third year in a row of trade deficit in Japan after                                                                        
     more than 30 years of a trade surplus                                                                                      
     Japan leading the charge for new suppliers, more                                                                           
     competition and lower LNG pricing regime                                                                                   
     But prices must be enough to justify investment                                                                            
Mr. Persily discussed slide 8, "No project has it easy."                                                                        
     BG Group says 525-mile natural gas pipeline to Prince                                                                      
     Rupert, BC, could cost up to $10 billion                                                                                   
     LNG tax debate under way in British Columbia                                                                               
     Dredging, harbor, berthing costs estimated at $1.5                                                                         
     billion for Australia's Wheatstone LNG                                                                                     
     Russian politics out ahead of project economics                                                                            
     Buyers hold back, wait to see LNG pricing trend                                                                            
Mr. Persily looked at slide 9, "Canada eager, but delayed."                                                                     
     First Nations want to consult on air quality, pipeline                                                                     
     routing, economic and jobs issues                                                                                          
     High development costs at remote gas fields                                                                                
     Pipelines 300 to 525 miles; 2 mountain ranges                                                                              
     Access to Prince Rupert may have to go offshore                                                                            
     Provincial tax and regulatory regimes delayed                                                                              
     No project has all its permits, customers and FID                                                                          
Mr. Persily addressed slide 10, "Lower 48 faces hurdles."                                                                       
     Tough politics between producers & customers                                                                               
     Oversupply holds down prices for gas buyers                                                                                
     Producers want freedom to seek best market                                                                                 
     Energy Department export approvals are slow                                                                                
     Unknown Panama Canal tolls worry LNG buyers                                                                                
     Local opposition to Maryland, Oregon plants, and                                                                           
     against fracking as source of gas production                                                                               
Mr. Persily discussed slide 11, "Australia and Russia,                                                                          
     Cost overruns in Australia scare investors                                                                                 
     Contentious debate is growing that exports are driving                                                                     
     up prices for Australian customers                                                                                         
     Environmental, economic issues stacking up                                                                                 
     Russian gas comes with politics attached                                                                                   
     Distance from gas, distance from market a problem for                                                                      
     at least two Russian LNG projects                                                                                          
9:06:25 AM                                                                                                                    
Mr. Persily highlighted slide 12, "Alaska has its                                                                               
     Proven gas reserves; no exploration risk                                                                                   
     Low-cost production vs. greenfield projects                                                                                
     Almost 40 years experience at Prudhoe Bay                                                                                  
     LNG plant much more efficient in cold climate                                                                              
     Shorter LNG carrier voyages to Asian markets                                                                               
     North Slope gas high Btu value fits the market                                                                             
Mr. Persily addressed slide 13, "Alaska has changed, too."                                                                      
     Prudhoe Bay growing older, economics  look better as an                                                                    
     oil and gas play rather than oil only                                                                                      
     Point  Thomson under  development and  would supply  25                                                                    
     percent of the gas for the LNG project                                                                                     
     Major   North   Slope   producers  willing   to   spend                                                                    
     significant money to advance the LNG project                                                                               
     Alaskans   appear   willing   to   consider   investing                                                                    
     significant state money into the huge project                                                                              
Mr. Persily looked at slide 14, "Patience is a virtue."                                                                         
     Patience is a must for state LNG investment                                                                                
     Long wait for the first check - but long payback                                                                           
     Norway  invested  billions  in  oil and  gas  and  then                                                                    
     waited years  for any return;  it took a  decade before                                                                    
     real investment payback started to roll in                                                                                 
     If  it wants  to  act  like an  oil  and gas  business,                                                                    
     Alaska must think like one - and think long term                                                                           
Mr. Persily addressed slide 15, "What's changed since                                                                           
     Department  of Revenue  'Risks and  Rewards' report  in                                                                    
     2002 looked at a pipeline, not LNG                                                                                         
     Different markets, sales, risks and regulations                                                                            
     State is in  a better cash position  today ($17 billion                                                                    
     in savings) than 2002 ($2 billion)                                                                                         
     State  equity  investment  in 2002  might  have  needed                                                                    
     assistance from the Permanent Fund                                                                                         
     100 percent state ownership was on the table in 2002                                                                       
Mr. Persily highlighted slide 16, "Some things haven't                                                                          
     DOR 2002  report recommended  the state  match pipeline                                                                    
     capacity with its share of the gas                                                                                         
     Report  said conflicts  as an  owner and  regulator are                                                                    
     real,  but  state-owned  corporation  could  provide  a                                                                    
     partial barrier to minimize the conflicts                                                                                  
     Minority ownership doesn't give state control                                                                              
     Report warned: Keep politics out of the business                                                                           
9:11:19 AM                                                                                                                    
Mr. Persily discussed slide 17, "Big step for Alaska."                                                                          
     Role of risk-taking owner  much different than watching                                                                    
     as a tax-collecting observer                                                                                               
     Provides state a voice in project decisions                                                                                
     Provides return to state on its investment                                                                                 
     Capital draw concurrent with budget deficits                                                                               
     State shares  risk of overruns, delays,  prices; shares                                                                    
     in rewards of gas and public revenue                                                                                       
Co-Chair Stoltze remarked on two separate phrases: cost-                                                                        
competitiveness  will  decide  the  winners;  and  price  is                                                                    
everything. He  wondered why Alaska could  compete globally,                                                                    
and queried  the advantages. Mr.  Persily stressed  that the                                                                    
presentation was  based on his  opinion. He stated  that the                                                                    
advantages included the tanker  ships, that the liquefaction                                                                    
plant would  put Alaska  at a  great advantage.  He stressed                                                                    
that Alaska had  proven reserves. In Australia,  there was a                                                                    
plan  to buy  third  party  gas before  their  gas could  be                                                                    
produced. Alaska  had lower  cost feed  gas. He  pointed out                                                                    
that  Alaska was  a proven  producer, and  the Asian  market                                                                    
valued that historical success.                                                                                                 
9:16:52 AM                                                                                                                    
Co-Chair  Stoltze queried  how tax  policy worked  viability                                                                    
worked into the  markets. Mr. Persily shared  that there was                                                                    
probably no  tax regime anywhere  in the world that  the oil                                                                    
and gas industry loved. British  Columbia had proposed a new                                                                    
net income tax on LNG  exports, but they allow the companies                                                                    
to  recover all  their capital  up front.  The tax  would go                                                                    
from  1 percent  to 7  percent after  cost recovery  on that                                                                    
capital expense.                                                                                                                
Co-Chair  Stoltze  wondered  if   Alaska  had  the  patience                                                                    
necessary to  make a proper  business decision.  Mr. Persily                                                                    
replied that  Alaskans must learn  patience, because  of the                                                                    
substantial  yearly investment  that  was  required for  the                                                                    
eventual success of the project.                                                                                                
Co-Chair Stoltze  wondered if perhaps  an increase  to pre-K                                                                    
should wait a few years.                                                                                                        
Representative Costello  looked at slide 4,  and wondered if                                                                    
the trend would  continue. Mr. Persily replied  that he felt                                                                    
that  the trend  would continue.  He stressed  that the  air                                                                    
quality in China was the worst in the world.                                                                                    
9:21:51 AM                                                                                                                    
Representative  Costello wondered  if  there  were plans  to                                                                    
outfit China's  coal plants with clean  coal technology. Mr.                                                                    
Persily replied  that there were some  efforts towards clean                                                                    
coal technology, but  stressed that there were  limits as to                                                                    
how clean one  could make coal. He stated that  if gas had a                                                                    
good price, it was a better deal than trying to clean coal.                                                                     
Representative Costello  pointed to  slide 10,  and remarked                                                                    
that one  of the bullets  showed that export  approvals were                                                                    
slow. She  relayed that there were  regulations that ensured                                                                    
environmentally safe practices. She  asked if there were any                                                                    
delays that  were anticipated with the  project. Mr. Persily                                                                    
replied that  the biggest delay  that was the  Department of                                                                    
Energy approval  to export  LNG to  countries that  the U.S.                                                                    
did  not have  free  trade agreements,  including China  and                                                                    
Japan.  For  decades,  there were  few  regulations  in  the                                                                    
Department  of Energy.  Recently there  were many  approvals                                                                    
and regulations  that were required for  resource export and                                                                    
development.  He  remarked  that  there  was  a  contentious                                                                    
debate in the Lower 48 over  what to do with the natural gas                                                                    
wealth,  but that  debate would  not extend  to Alaska.   He                                                                    
hoped  that  the  LNG  licenses would  get  stalled  in  the                                                                    
9:25:38 AM                                                                                                                    
Representative Costello  queried the importance of  the high                                                                    
BTU  content. Mr.  Persily responded  that, in  Japan, their                                                                    
generators were set  to burn at a higher BTU  value than the                                                                    
United States.  The Alaska gas  stream should  fit perfectly                                                                    
in the Japanese market.                                                                                                         
Co-Chair Austerman stressed  that the price of  gas was tied                                                                    
to the  price of oil in  Alaska. He pointed out  that gas in                                                                    
the lower  48 was not tied  to the price of  oil. He queried                                                                    
the cost  of Alaska's LNG  compared to the costs  from other                                                                    
producers in the world. Mr.  Persily responded that it would                                                                    
cost more to  liquefy the gas, than it would  to transfer it                                                                    
through the pipeline.  On the U.S. Gulf Coast,  it was close                                                                    
to $5 per  thousand cubic feet at Henry Hub.  He stated that                                                                    
there  was one  plant under  construction in  Louisiana that                                                                    
had signed  a contract at  $5 per thousand cubic  feet, plus                                                                    
15  percent  more  for  the  burned gas,  plus  $3  for  the                                                                    
liquefaction charges, plus the  tanker charges; so the total                                                                    
gas would  be close to  $12 per  thousand cubic feet  by the                                                                    
time it has landed. He  relayed that the buyers were looking                                                                    
for something cheap  and without the volatility  of the U.S.                                                                    
prices. The  alternative in  Asia would  always be  oil, but                                                                    
have some sort of hybrid pricing.                                                                                               
9:31:57 AM                                                                                                                    
Co-Chair  Austerman wondered  if there  was some  discussion                                                                    
regarding the cost of oil  because of the competitive nature                                                                    
of gas.  Mr. Persily replied  that there were  many analysts                                                                    
that believed  oil could go to  $80 or $90 per  barrel. On a                                                                    
BTU basis, under  current pricing formula, there  would be a                                                                    
substantial price for LNG.                                                                                                      
Co-Chair Austerman  remarked that  the liquefaction  was the                                                                    
most expensive aspect of developing  LNG. He stated that the                                                                    
tidewater in the Kenai gave  opportunity for the rest of the                                                                    
state  to  have  off  takes  in  taking  gas  that  was  not                                                                    
liquefied,  and  therefore  should  be  competitive  in  the                                                                    
energy  market.  Mr.  Persily  agreed,  and  furthered  that                                                                    
Alaska would  be pulling off  a few percent for  the instate                                                                    
needs. He stressed  that the economies of  scale should give                                                                    
Alaskans a good opportunity for affordable gas.                                                                                 
Co-Chair Austerman wondered if  the pre-FEED work would give                                                                    
Alaska a sense of the  price. Mr. Persily felt that pre-FEED                                                                    
would only  identify the  larger hurdles,  but it  would not                                                                    
determine the cost of the contracts.                                                                                            
Representative  Gara remarked  that there  was a  balance of                                                                    
benefitting  Alaskans with  affordable  gas  that would  net                                                                    
export money, and independent  explorers that would discover                                                                    
economic  gas. He  shared  that the  last  iteration of  the                                                                    
pipeline  stated that  there would  be rolled  in rates  for                                                                    
expansion of  the gas line.  He wondered what could  be done                                                                    
to  increase   the  chances   of  securing   contracts  with                                                                    
independent producers  to get their  gas into  the pipeline.                                                                    
He  also queried  the  definition of  rolled  in rates.  Mr.                                                                    
Persily  responded  that  the   chances  of  an  independent                                                                    
producer increasing the  BTU were very slim,  because it was                                                                    
a very substantial  amount of gas. He stated  that there was                                                                    
a better  chance of  a newly discovered  field using  gas to                                                                    
produce oil  for many years,  and would only  bring millions                                                                    
of cubic feet a day.  Not billions. He stressed that Prudhoe                                                                    
Bay and  Pt. Thompson did  not have  enough gas to  keep the                                                                    
pipe full,  and felt that  the second decade of  the project                                                                    
would show  a decrease in production.  The industry partners                                                                    
were  banking on  the possible  discoveries of  trillions of                                                                    
cubic feet of  additional gas, because they need  the gas to                                                                    
keep the  pipe full for forty  or fifty years. He  felt that                                                                    
the discussion should be focused  on initial building of the                                                                    
pipeline, and focus on expansion later.                                                                                         
9:40:35 AM                                                                                                                    
Representative  Gara understood  that  compression would  be                                                                    
the  cheapest way  to expand  the pipeline.  He wondered  if                                                                    
there was  a problem for  a new producer  to put gas  in the                                                                    
pipeline,  if there  was no  option to  expand. Mr.  Persily                                                                    
replied that it would be  difficult if the cost of expansion                                                                    
was greater than  what was desired. He stressed  that it was                                                                    
difficult to  plan for unknowns,  but understood  that there                                                                    
should be a consideration of  how much the pipeline could be                                                                    
expanded  by compression  stations and  how much  that would                                                                    
Representative Gara  queried the benefits and  detriments of                                                                    
the state  taking its gas  in kind  as opposed to  in value.                                                                    
Mr. Persily replied  that there was trust in  the company to                                                                    
sell  the gas  at the  highest price  possible in  value and                                                                    
give a  fair return. He stated  that the in kind  take would                                                                    
requirement a contract  to market the gas. The  risk with in                                                                    
kind was that there would be a bad marketing deal.                                                                              
Representative Guttenberg looked at  slide 17, and noted the                                                                    
large  steps for  Alaska.  He wondered  what  was lost  when                                                                    
Alaska gave  up its sovereignty  and becomes a  partner with                                                                    
the  industry. Mr.  Persily did  not  understand how  Alaska                                                                    
gave up its sovereignty.                                                                                                        
Co-Chair  Stoltze  felt it  may  be  a political  term.  Mr.                                                                    
Persily felt that  Alaska would not give  up its sovereignty                                                                    
in the agreement.                                                                                                               
9:45:27 AM                                                                                                                    
Representative  Guttenberg  wondered  how  the  division  of                                                                    
marketing  and  partner would  work  in  the agreement.  Mr.                                                                    
Persily replied  that the  departments would  work together,                                                                    
but knew  that there was  a responsibility of  government to                                                                    
enforce the laws,  even if it would drive up  costs. He felt                                                                    
that there should be thoughtful  discussion, so all involved                                                                    
realized that the issues were fully addressed.                                                                                  
Representative Guttenberg  wondered if  this was  similar to                                                                    
Norway's  model.  He  wondered  what kind  of  hurdles  that                                                                    
Norway  faced. Mr.  Persily replied  that Norway  had state-                                                                    
owned  companies, but  stated that  Norway  had a  different                                                                    
political  situation than  Alaska. He  stressed that  Norway                                                                    
was  extremely  disciplined. There  was  a  stoic virtue  of                                                                    
behaving, and no one disrupted that.                                                                                            
Co-Chair Stoltze  stressed that Norway  was a nation,  not a                                                                    
Representative Guttenberg remarked that  Alaska would have a                                                                    
25 percent  ownership in the  pipeline, which gave  Alaska a                                                                    
minority voice.  He wondered  how minority  voices succeeded                                                                    
in enforcing  their points  that may not  be in  the overall                                                                    
best interest. Mr.  Persily replied that votes  may be lost,                                                                    
but at least the argument was voiced.                                                                                           
Representative Guttenberg remarked that  one major source of                                                                    
gas to  China was  pipeline. He queried  the source  of that                                                                    
gas.  Mr. Persily  replied that  most of  the gas  came from                                                                    
Turkmenistan, Uzbekistan,  and Myanmar. The pipeline  gas to                                                                    
the Canadian border was priced  somewhere around $10 to $12,                                                                    
and the  average price paid  for LNG imported into  China in                                                                    
2013 was $11.80.                                                                                                                
9:50:48 AM                                                                                                                    
Representative Guttenberg  noted that the  Canadian proposal                                                                    
would  hook into  Alaska's pipeline.  Mr. Persily  responded                                                                    
that the  proposal was  to bring oil  from Alberta.  He felt                                                                    
that the proposal was not economic, and very expensive.                                                                         
Representative Thompson  remarked that  there were  a couple                                                                    
of consultant  reports that stated  that the proposal  was a                                                                    
radical  shift  from  the  state's  current  situation.  Mr.                                                                    
Persily agreed  that the  proposal was  unusual, and  he was                                                                    
not aware of another state  that had a similar situation. He                                                                    
did not  feel that  the state was  not giving  up regulatory                                                                    
authority.  He  remarked  that   the  state  would  be  both                                                                    
competing and  contracting. He  had not  seen a  better plan                                                                    
for bringing  the AKLNG  to market.  He understood  that the                                                                    
proposal was highly unusual, but  stressed that the benefits                                                                    
and risks should be carefully examined.                                                                                         
Representative Munoz  queried the  effect of oil  tax policy                                                                    
changes on the gas pipeline.  Mr. Persily responded that the                                                                    
oil companies depended on an attractive tax environment.                                                                        
Co-Chair Stoltze  felt that there  were many impacts  of tax                                                                    
9:57:04 AM                                                                                                                    
The meeting was adjourned at 9:57 a.m.                                                                                          

Document Name Date/Time Subjects
Gas Markets HFIN 3-17-14.pdf HFIN 3/17/2014 8:30:00 AM