Legislature(1995 - 1996)
02/02/1996 08:08 AM House O&G
| Audio | Topic |
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* first hearing in first committee of referral
+ teleconferenced
= bill was previously heard/scheduled
+ teleconferenced
= bill was previously heard/scheduled
JOINT HOUSE STANDING COMMITTEE ON RESOURCES AND
HOUSE SPECIAL COMMITTEE ON OIL AND GAS
February 2, 1996
8:08 a.m.
HOUSE RESOURCE COMMITTEE MEMBERS PRESENT
Representative Joe Green, Co-Chairman
Representative William K. (Bill) Williams, Co-Chairman
Representative Scott Ogan, Vice-Chairman, via teleconference
Representative Alan Austerman
Representative Pete Kott
Representative Don Long
Representative Irene Nicholia
HOUSE RESOURCE COMMITTEE MEMBERS ABSENT
Representative Ramona Barnes
Representative John Davies
HOUSE OIL AND GAS MEMBERS PRESENT
Representative Norman Rokeberg, Chairman
Representative Scott Ogan, Vice-Chairman, via teleconference
Representative Gary Davis
Representative William K. (Bill) Williams
Representative Tom Brice
Representative Bettye Davis
HOUSE OIL AND GAS MEMBERS ABSENT
Representative David Finkelstein
OTHER HOUSE MEMBERS PRESENT
Representative Gene Kubina, via teleconference
Representative Con Bunde
Representative Mike Navarre
COMMITTEE CALENDAR
Presentation by Representatives of the Natural Gas Producers.
WITNESS REGISTER
JUDD MILLER, JR., Vice-President
Exxon Company, USA
P.O. Box 2180
Houston, Texas 77024
Telephone: (713) 656-2508
POSITION STATEMENT: Presented information on the proposed natural
gas pipeline.
JOHN MORGAN, President
BP Exploration (Alaska) Incorporated
P.O. Box 196612
Anchorage, Alaska 99519
Telephone: (907) 564-5429
POSITION STATEMENT: Presented information on the proposed natural
gas pipeline.
KEN THOMPSON, President
ARCO Alaska, Incorporated
P.O. Box 100360
Anchorage, Alaska 99516
Telephone: (907) 265-6511
POSITION STATEMENT: Presented information on the proposed natural
gas pipeline.
WILSON L. CONDON, Commissioner
Department of Revenue
P.O. Box 110420
Juneau, Alaska 99801-0400
Telephone: (907) 465-2300
POSITION STATEMENT: Presented information on the proposed natural
gas pipeline.
ACTION NARRATIVE
TAPE 96-6, SIDE A
Number 000
The Joint House Standing Committee on Resources and House Special
Committee on Oil and Gas was called to order by Co-Chair Joe Green
at 8:08 a.m. Members from the House Resources Committee were
Representatives Green, Williams, Kott, and Austerman. House Oil
and Gas members present at the call to order were Representatives
Rokeberg, G. Davis, Williams, Brice, and B. Davis. This meeting
was teleconferenced to Anchorage, Fairbanks, Cordova and Valdez.
CO-CHAIRMAN JOE GREEN introduced the gas producers and invited them
to come forward and make their presentation.
Number 034
JUDD MILLER, JR., Vice-President, Exxon Company, USA, said he was
here with Ken Thompson of ARCO and John Morgan of BP to share
results of studies produced by the three companies. He said these
studies concerning the commercialization of the North Slope gas and
have been developed over a number of years. He said there have
been three pipeline proposals, one is a pipeline down to the
continental United States, the other is liquification of natural
gas (LNG) for export to Far East markets, and the final proposal is
converting the natural gas to a hydrocarbon liquid on the North
Slope which could then be pumped through the attached oil pipeline.
He said none of these proposals are commercially viable.
MR. MILLER said studies regarding the LNG export began in detail in
1992. He said last year they terminated their Phase 3 part of the
study and that is what they will comment on today.
CO-CHAIRMAN GREEN clarified that questions could be asked during
the presentation.
Number 100
KEN THOMPSON, President, ARCO Alaska, Incorporated, began a slide
presentation. A hand-out was given whose first page read "ANS Gas
Commercialization." This hand-out follows along with the slide
presentation. Mr. Thompson said he would cover three key points,
these include activities of the past ten years, recent
accomplishments and the next steps to success. He said these next
steps include what needs to be done in order for Alaskan LNG to
compete in the market. He added these steps include further cost
reduction, market certainty for large volumes of LNG and government
tax and regulatory certainty.
Number 129
MR. THOMPSON said the largest natural gas reserves are at the
Prudhoe Bay Unit (PBU) and contain 26 trillion cubic feet of gas,
representing a little over 85 percent of the North Slope gas
reserves. PBU is thought to be the anchor of the Alaskan LNG
product, but PBU is not a gigantic field. He said north field in
Qatar in the Middle East is 250 trillion cubic feet making PBU a
tenth of that size. He said PBU has small economies of scale
compared to Indonesia and the Middle East.
MR. THOMPSON pointed out that both the gas cap and the oil rim have
substantial gas reserves. He said 70 percent of the 26 trillion
cubic feet are the gas cap and 30 percent of that volume is in the
oil rim. He then pointed out the ownership of the PBU gas. He said
ARCO and Exxon both own 32 percent, BP owns 21 percent, and the
state of Alaska owns 12.5 percent (this is the state's royalty
share.) He added that there are eight other minor owners who share
2 percent of the gas.
MR. THOMPSON said the three gas producers often get asked whether
"the two participating areas in the agreements cover those hinder
the sale of North Slope gas." He said the three gas producers do
not believe that it hinders gas sales. Producers do have
disagreements on whether natural gas liquids, such as propane and
butane, should be injected into the oil reservoir or should be
shipped down the TransAlaska Pipeline System (TAPS.) He said those
two possibilities are currently be negotiated with the Oil and Gas
Conservation Commission. He said despite this one area, the three
gas producers see no differences of opinion in gas sales and
agreements covering major gas sales.
Number 243
MR. THOMPSON said the three gas producers have invested more money,
devoted more personnel towards commercialization of North Slope gas
than anyone else. He discussed these various systems. The first
one he discussed was the Alaska Natural Gas Transportation System
(ANGTS.) Research on ANGTS was conducted in 1980 to 1982 and
involved a proposed overland gas pipeline along the haul road and
then travel down the Alaska Highway to the Lower 48. He said money
was spent on engineering details as well as construction of plants
and facilities to the sum of $800 million. No gas sales were ever
derived from this effort. He said during the time of this project
the natural gas prices were high, but then collapsed due to
increased gas supplies from both the Gulf of Mexico and Canada.
MR. THOMPSON then discussed the Alaska-Canadian Energy
Transportation System (ACETS.) He said this project began in 1984
and ran through May 1987 and was funded by ARCO, Exxon and Sohio at
a cost of $3 million. This project was an attempt to locate an
alternative route to bring natural gas supplies to the Lower 48.
He said prices could not be reduced down to a competitive level and
this project was abandoned.
MR. THOMPSON said in 1984 to 1987, one of the most interesting
projects was done. This project was called the Alaska Asia Gas
System and this work was funded primarily by ARCO and the Japanese
Institute of Energy Economics with additional funding from Yukon
Pacific Corporation. The state of Alaska was given this report and
it's conclusions. He said this study is very similar to the
proposal made by the Yukon Pacific Corporation today.
MR. THOMPSON said joint work was done by BP, Exxon and ARCO for
Alaska North Slope (ANS) gas commercialization. This work began in
1992 and continues up to today with expenditures of $10 million
dollars. Most of the discussion today will focus on this last
effort. He said the three companies have concluded that a project
approach occurring every two years does not work and gas
commercialization needs an on-going continuous effort. The three
producers have full time personnel, including marketing personnel,
in the Far East.
MR. THOMPSON said the three producers addressed the concept of
selling gas to communities located on the proposed southern route
pipeline. He said they have also studied the use of a technology,
called gas conversion, which would convert the gas under high
pressures and temperatures to liquids on the slope which would
allow it to be sent down the TAPS pipeline.
Number 260
MR. THOMPSON said the most immediate option is the Alaskan LNG
export system which involves liquefying it and then shipping it to
market. He pointed to a slide listing the major components of the
export system. He said most LNG projects have certain components.
In the North Slope this includes the gas reservoir, the gas
conditioning plant which removes the 12 percent carbon dioxide from
the gas before it is shipped, the pipeline, an LNG plant marine
terminal. He added that the gas producers feel this facility
should be located next to the oil facility with higher
technological automation and process safety methodology which has
been advanced in the last few years. He said he felt this facility
would both the most economical and safest operation. The other
component of this export system include LNG ships which would take
it to the Pacific Rim markets.
MR. THOMPSON said the Alaskan LNG project differs from other
projects in that it has oil associated with the project. He said
the three producers have come up with a reservoir simulator and
derived figures regarding oil loss. He said that if LNG sales
began in 2005, oil loss from PBU would be 400 million barrels. If
gas sales began in 2010, oil loss would be around 100 million
barrels. He said the three producers see this as a secondary issue
because oil loss at that kind of volume is minor compared to the
billions of barrels produced at PBU.
MR. THOMPSON said the things needed to make Alaskan LNG competitive
are cost reduction, market certainty and close cooperation with the
state and federal government for tax and fiscal certainty. He said
the three producers will continue to inject gas back into the gas
cap as well as injecting it back into the oil rim so that reservoir
pressure is maintained and assists oil recovery. This injection
into the oil wells contributes 200,000 barrels of oil per day of
the 1 million barrels per day from PBU. He said PBU will have one
of the most efficient oil recoveries in the world though this
missable oil recovery.
MR. THOMPSON showed a slide listing the differences between LNG and
crude oil projects. He said crude oil has a large commodity
market. Today, a little over 60 million barrels a day in oil is
produced. A discovery of 100,000 barrels a day can be easily
placed in the domestic and international market. He said oil is
absorbed quickly with little price change unless you have large
volumes of oil. He then referred to the LNG market and said that
it has few dedicated buyers. He said it is an international market
with only one minor exception. This LNG market absorbs new supply
slowly. Currently the Far East LNG market is 55 million tons per
year. The proposed figure of 14 million tons per year of Alaskan
LNG is 25 percent of the world market. He compared that figure
with PBU oil which is only one-sixtieth of the market. Placing too
much LNG into the market can easily cause price fluctuations and
price decreases.
MR. THOMPSON compared the short term contracts of oil and the long
term, 20 to 30 year, contracts of LNG. He said oil does not
require relationships with the buyers, but that it is essential in
the LNG market. Project costs for oil varies greatly, whereas in
LNG projects the cost is always large compared to the energy size.
Oil projects always see some recovery over shorter time period, in
LNG it is often a long payout. Fiscal terms for oil are broad.
The oil regulations in Alaska apply, for the most part, to all oil.
In LNG, the project must be negotiated with the host government.
Number 393
MR. THOMPSON said success is defined as having a project having
competitive prices in the world market. He pointed to a slide
discussing the issues versus the competition and remarked that
Taiwan, Korea, and Japan listed positive of the Alaskan project
when the three producers visited them. He said the buyers
mentioned the fact that a field development is in place at PBU, as
compared to new projects whose wells are still speculative. The
amount of gas at PBU is firmly established.
MR. THOMPSON said another positive for LNG commercialization is the
potential for integrating the gas and oil facilities along the
pipeline, as well as in Valdez, for cost savings. Other positive
include helping the Japanese/United States trade imbalance and the
geographical closeness. Alaska is closer to Japan lowering
shipping costs.
MR. THOMPSON said a negative of an Alaskan LNG project is the
fiscal uncertainty regarding the lack of a balanced state budget
and the incremental $5 billion pipeline investment. Other LNG
projects do not face this cost as there are usually located near
the water. The ramp up factor is also a negative aspect. Ramp up
is when you go from the start of sales to maximum output, this is
0 to 14 million tons of North Slope gas sales. He said if it takes
10 years or 15 years versus 5 years there is a big difference in
economics. It is more difficult to ramp up in a shorter time span,
but it is important to work with the buyers to determine the time
span. He again mentioned the carbon dioxide content and that no
incremental liquids, such as methane, butane and propane would be
sold during the gas project. This is because PBU is currently
selling those incremental liquids at a rate of 90,000 plus barrels
a day down the TAPS pipeline.
Number 448
MR. THOMPSON said the steps that need to happen in order to make a
gas project successful were located on the next slide, titled,
"Alaskan Gas: Steps to Success." He said this gas project would be
largest private investment project ever in the history of the
United States. He said the three gas producers have come close to
finishing an aggressive technical approach yielding cost reductions
and establishing a common understanding among gas owners. He said
the three producers must adhere to these steps in a timely fashion.
He said during 1996 and 1997 the producers must meet fiscal,
environmental and regulatory challenges and make agreements with
the state of Alaska about tax and regulatory certainty. During
that time frame they must also establish further cost reductions
and a conceptual response from the gas market. If these steps are
accomplished during this time, the producers feel they have
emerging competitiveness.
MR. THOMPSON said Yukon Pacific Corporation has done an admirable
job in the area of permitting. He said in 1996 and 1997, the
producers want to address the regulatory challenges and have
informal discussions with Yukon Pacific Corporation to better
understand their permits and determine if those permits are of
value to the project or whether they would be cost prohibitive. He
said if the permits Yukon Pacific Corporation obtained were not
thought to be useful, the producers would begin the permit process
on their own.
MR. THOMPSON said that when the producers achieve further
reductions in cost, market certainty and government certainty in
tax and regulations, then, only at that point will project
structure be looked at. He stressed the complexity of the gas
project structure which includes manufacturers, engineering firms,
trading houses, buyers, producers and the state of Alaska's
possible investment. He said at that time, the producers would not
rule out involvement by the CSX corporation or any other potential
investor to invest in this project, if they so desire, and the
terms were correct.
Number 502
CO-CHAIR GREEN recognized that Representative Kubina was listening
on teleconference from Valdez. Representatives Nicholia, Bunde,
Brice and Navarre also joined the joint committee meeting.
Number 510
JOHN MORGAN, President, BP Exploration (Alaska) Incorporated said
he would discuss cost reduction efforts in the area of project
definition, the supply issues which will drive the market for
Alaskan gas and finally the observations on the role of governments
in the world and their role in major LNG projects. He began with
addressing project costs and reiterated Mr. Thompson's estimate of
a $15 billion gas project cost, one of the largest civil projects.
He said within the $5 billion pipeline cost distinguishes this
project from other greenfield, or grassroots, LNG projects. He
said, when the pipeline was looked at, two approaches were
analyzed. The first was to look at ways to integrate the proposed
gas pipeline more closely with the existing TAPS pipeline. The
second was to look at ways to reduce the length of the pipeline and
as a result two proposed western routes were suggested.
Number 520
MR. MORGAN said the first proposed western routes would emerge east
of Wainwright at a distance of 300 miles, the other proposed route
would emerge north of Kivalina at a distance of 500 miles. The
shorter pipeline and the fact that there is not mountainous terrain
to cross are advantages to these routes. The disadvantage is that
you emerge in northern ports which have ice conditions a
substantial part of the year.
Number 546
CHAIRMAN ROKEBERG referred to the map showing the proposed southern
route and asked if the circles on the map referred to the TAPS pump
stations. He then asked if integrating a gas pipeline with the
existing TAPS pipeline would result in some cost reductions.
Number 550
MR. MORGAN differed the question to later in his presentation. He
said, when studying the technical feasibility of the western
routes, experts, including shipping experts with knowledge of
similar ice conditions, were brought in to study the project.
Number 552
MR. MORGAN referred to a slide with two diagrams of the terminal at
Wainwright. The left diagram showed the landfast ice located next
to the shore, a shear zone of ice rubble next to it and then a
stretch of open sea before the ice pack zone. He said an
underground, 2.7 mile, 18 foot diameter tunnel would be built out
to loading platforms. The loading platform would consist of two
single point mooring facilities. He said lower costs could be
achieved from the shorter pipeline length, but higher shipping
costs would be involved including icebreaking LNG tankers and
icebreaking vessels to keep the routes clear. He said some of the
technical feasibility of the route is understood, but more work
needs to be done.
Number 580
MR. THOMPSON said it had been understood that the Japanese did not
want the icebreaking tankers because of their size and draft, but
he said at meetings, between the Japanese and the producers, the
Japanese said they were open to this concept. A suggestion was
made at those meetings to use current icebreaking vessels which
would tow modified hull, LNG tankers to reduce the costs of new LNG
tankers.
Number 589
MR. MORGAN then discussed the southern route and the proposed
sharing of facilities between the gas pipeline and the TAPS
pipeline. He referred to a slide, titled, "Infrastructure
Sharing," with a diagram of some typical pipeline alignments. He
said the ability to use the Dalton highway during construction
would potentially be important.
MR. MORGAN then cited the benefits of a shared infrastructure at
the terminal point in Valdez. He said these benefits include the
ability to use the loading berth, existing access roads, existing
power generation facilities, existing control systems, maintenance
facilities and basically the site itself. He said studies have
been made on a shared facility and appear to be promising, but work
would need to be done with the regulatory agencies. He said this
terminal sharing is important because half of all the cost savings,
approximately $1.4 billion, would be a result of using those shared
facilities. He said that on the North Slope the ability to use the
PBU compression, camps and power generation would also be
important.
MR. MORGAN referred to Chairman Rokeberg's question and said that
pump stations along TAPS could certainly be used for cost
reduction.
Number 617
CO-CHAIRMAN GREEN asked if the pump stations would be a re-cooling
station or would just be used to push the gas along the pipeline.
Number 620
MR. THOMPSON said they are mainly compressor stations, but provide
some additional dehydration. He referred to the 1984 study under
the AAGS project and said Anderson Bay had been examined as a
possible terminal site, but it is currently felt that the more
viable option is the integration of facilities. He said increased
automation technology and process safety management have allowed
the possibility of oil and gas facilities to be located in close
proximity to each other. He said, at major refineries in the
United States, there is a shared oil and gas infrastructure.
Number 631
MR. MORGAN discussed the use of state of the art technology in
terms of pipeline construction and shipping. He said in pipeline
construction there has been an increased lay rate of piping and the
use of X-90 pipe which is a type of steel having great strength.
In the areas of shipping, simulation models have been built
utilizing weather, wave conditions as well as ice conditions in
order to build larger LNG tankers from 135,000 cubic liters up to
150,000 cubic liters.
Number 644
MR. MORGAN said the overall project cost is $15 billion. He said
the three producers have determined $3 billion in cost savings
which come from infrastructure sharing, pipeline and shipping
construction. This figure is derived from the proposed southern
pipeline route. He said it is important to maintain western route
option. He said further cost reductions will need to be made to
make this project viable.
Number 658
MR. MORGAN presented a slide titled, "Far East LNG Demand &
Possible Need for Grass Roots Projects." This slide included a
diagram of the complex Japanese market. He said 25 percent of the
gas goes directly into the Japanese gas distribution system, the
other 75 percent goes for use in power generation. He said a
competitive interfuel situation occurs, with LNG accounting for 23
percent of the fuel used to generate power. He mentioned the
recent advances in coal technology allowing coal to be burned less
expensively in an environmentally acceptable manner.
He said there are deregulation processes within the fuel market and
the Japanese have not decided how they will meet their future fuel
needs.
TAPE 96-6, SIDE B
Number 000
MR. MORGAN then referred to the same slide and explained the
projected supply. The diagram included existing LNG supplies,
current projects under construction amounting to 14 million tons a
year of LNG. He said the producers have examined potential
expansions which amount to 15 million tons a year of LNG. He said
it is felt that these expansion projects will enter the market
before any new grass roots projects can, this includes the Alaskan
project. He then mentioned the potential grass roots projects,
including the Alaskan project, would amount to 84 million tons of
LNG.
MR. MORGAN discussed the demand curve on the slide diagram. He
said the producers made their projection of demand from a number of
sources, including the Asian countries, and averaged those figures
to form two demand curves. One of those curves is the average low
demand the other being the average high demand. On the low average
curve, LNG space in the market would amount to 4 million tons a
year from new grass roots activity. He said on the high end, a
demand of 26 million tons per year could be placed into the market.
MR. MORGAN referred to a slide titled, "Far East LNG Supply," and
discussed existing supply schemes, including the Cook Inlet
project. He then referred to projects under construction which
include an expansion project and a grass roots project in Qatar
which amounts to some 14 million tons of LNG. Lastly he looked at
potential projects, including three expansion projects, which
amounts to 15 million tons of LNG, and then listed 11 grassroots
schemes. Of those grass roots schemes the largest, Alaska and
Natuna, will face different problems because of their size. He
then listed the different sizes of the different projects.
MR. MORGAN said Alaska needs to sell LNG to a number of countries
including Korea, Taiwan and Japan. He said all of these countries
are undergoing a period of deregulation, increasing the uncertainty
for their market. He said that during the 1980s only two new grass
roots projects came on line, and during the 1990s only the Qatar
project will come into the market.
Number 075
MR. THOMPSON mentioned that Cook Inlet was the first natural gas
producer in the Asian market. He said it has been a profitable
venture, but added that it is located on the water and a few miles
from an LNG plant.
Number 085
REPRESENTATIVE MIKE NAVARRE mentioned that incentives by the state
were given to assist that project when it was first under
construction.
Number 089
MR. MORGAN said he would like to discuss how government can assist
the Alaskan LNG project, specifically regarding modifying the
fiscal terms and providing stability. He discussed the Arthur D.
Little study, done at the request of the Government of Papua New
Guinea, one of the competing grass roots project sites. The report
concludes that LNG projects are typically not as profitable as oil
projects. As a result government percentages will be less and
governments will need to give LNG projects special fiscal terms.
He mentioned a number of countries that have are in the process of
modifying their fiscal terms, including Indonesia, Malaysia, Oman,
Papua New Guinea and Qatar.
MR. MORGAN then mentioned the need to provide stability in fiscal
terms. In this aspect the A. D. Little study concluded that
stability was very important to encourage investors and financing.
The report also felt that if fiscal terms were changed they needed
to be offset by some type of compensation. A novel approach,
suggested by this study, was to use international arbitration if
fiscal disputes occur.
MR. MORGAN said, in the Indonesia's Badak project, the government's
participating company has accepted the responsibility to pay all
taxes outside of income taxes. In Australia's Northwest Shelf
project, the government has exempted the project for the resource
rent tax. He mentioned that the governments of Abu Dhabi, Brunei,
Indonesia, Malaysia and Qatar have opted to participate directly in
LNG projects through investment.
MR. MORGAN said the other approach to fiscal stability is through
permitting and regulatory arrangements which assist in reducing
cost of the program.
Number 163
REPRESENTATIVE CON BUNDE asked if the gas producers could expand on
Alaska's possible investment in the LNG project.
Number 170
MR. MORGAN said, the three companies are not in the position to
respond to that issue, they are focusing their efforts on the
commercial aspects an LNG project. The three producers are now
determining what fiscal terms and regulatory permitting the state
will need to provide in order for the project to succeed. He said
when the structure of the project is determined, it is at that
stage that investment by the state will be considered.
Number 193
CO-CHAIRMAN GREEN said on teleconference from Anchorage, Loren
Landsbury and Kristen Nelson were on line. Cordova was also on the
teleconference line.
Number 200
MR. MORGAN said the producers have made good progress on project
definition and costs, yet the project is not economic. He said a
project of this size, cost and complexity will require the
involvement of many parties, most notably the state and federal
governments. He added that there were significant uncertainties
around the areas of fiscal structure and certainty, the regulatory
environment, market timing, product pricing and project costs.
MR. MORGAN said further improvements are needed to ensure a
competitive ability including improvement in the fiscal area,
timely and consistent permitting and finally maintaining market
contacts to understand market timing issues and to get a rapid
build up of LNG volumes.
MR. MORGAN said progress must be seen in those three areas before
money is invested for project cost definition. He said the next
steps require close cooperation between the three gas producers,
the state of Alaska and the federal government. He said it is
important to determine what the state's role should be in helping
this project become competitive. He reiterated what the producers
feel the next phase to a successful project was.
Number 274
MR. THOMPSON presented a slide, titled, "ANS Gas Commercialization
Operator's Market Visit, October 1995," and said these are the
largest LNG buyers in the world. The Tokyo Electric Power Company
(TEPCO) is the largest buyer of LNG in the world at 14 million
tons, the same size of the proposed Alaskan LNG project. The
producers visited buyers and other trading companies as well as the
Agency of Natural Resources and Energy. This agency determines the
future fuel consumption in terms of how much will be in coal, oil,
LNG or nuclear fuel. At that meeting, it was learned that there is
growing sentiment against nuclear power plants in Japan and a
decreased use of coal, unless clean burning technology is
developed. These agency insights were included in the demand
estimates.
Number 306
MR. THOMPSON said they also visited the Chinese Petroleum Company,
who sell to the Taiwan Power Company. The Taiwanese market is
relatively small at two million tons of LNG per year, but is
growing. He said they also visited Korea, which buys about 5.8
million tons of LNG per year. He added that the end result of this
trip was the determination that the LNG market is growing at 5 to
10 percent per year and most of these companies prefer a mix of
nuclear, oil, coal and LNG for security reasons. He said that if
one of the fuels price goes up or down, then they are not relying
too heavily on one type of fuel.
MR. THOMPSON repeated that the buyers comment that Alaskan LNG must
be priced competitively in order to compete against alternative
projects and fuels. In the past LNG contracts were tied to the
fluctuations in the oil price. The buyers are becoming more
sophisticated, and now the LNG price will also be tied to coal
prices as well as competing LNG prices. The big challenge in the
next few years is to make Alaskan LNG competitively priced. He
concluded that 14 million tons will be difficult to place in the
market and that there needs to be five, six or more buyers of LNG.
MR. THOMPSON listed the positive of the Alaskan project including
the stability and security of the Alaskan market and its affect on
the trade imbalance. The buyers also thought BP, ARCO and Exxon
were capable sponsors of such a large project. Alaska also
increases the diversity of the buyers LNG supply portfolio.
MR. THOMPSON said there was concern that environmental and
permitting opposition is viewed as a country wide risk in the
United States. He explained that the buyers saw that, even when
permits were obtained, environmental groups and opposition would
develop lawsuits which effectively shut down operations for years.
The gas producers said when they reassured the buyers, one of the
buyers turned around and reviewed the whole history of the TAPS
pipeline. He stressed the need for the state to work together with
the gas producers to avoid these situations in the future.
MR. THOMPSON said emerging deregulations, in the Asian countries,
for the independent power producers are competitive threats to the
power companies. He said this might create some business for
Alaskan LNG and added that if this occurred it would be the first
time in the history of Korea and Taiwan that deregulation occurred.
This potential deregulation would happen in 1998 or 1999.
MR. THOMPSON said the operators were pleased to meet with the gas
producers. He said business relations were found to be important
and visiting every quarter term was not enough. Personnel have
been established in Asia by all three producers. The Asian buyers'
feedback was that it was essential to work with the state and
federal governments for fiscal environment and permitting. The
buyers commented repeatedly about the need for market
relationships. The project timing of 2005 to 2010 was well
received. Most companies have established a gas supply though 2002
to 2003, with TEPCO securing their supply through 2004. He said
the market for large volumes of LNG falls within this 2005 to 2010
period. The gas producers do not feel that the market potential
will end after this period of 2005 to 2010.
MR. THOMPSON said some buyers expressed interest in investing in
this project.
MR. MORGAN remarked that these are sophisticated investors and if
they are interested, it shows that they feel the Alaskan LNG
project can deliver a project at a competitive price. He said the
buyers are interested in seeing the gas producers as they achieve
the steps listed earlier in their presentation.
Number 426
REPRESENTATIVE BUNDE asked about the Chinese LNG market potential.
Number 430
MR. THOMPSON said there are emerging markets in China and India
that could become significant, but most likely this will not occur
until after 2005 to 2010. Discussions between ARCO and China have
occurred and the market will not be ruled out, but it is at too
early a stage. He emphasized that the large buyers of LNG must be
secured because it sends a signal to the smaller companies that
this is a worthwhile project.
Number 445
REPRESENTATIVE BETTYE DAVIS asked for differences as well as areas
where the gas producers and Yukon Pacific Corporation can work
together, specifically in the permit issues and the timing issues.
Number 461
MR. THOMPSON said the gas producers differ from Yukon Pacific
Corporation in that they do not respond to the limited market
window theory. He said, if there was such a limited market window
it would increase the risk of price collapse and oversupply which
would mean this is not a good investment. The gas producers
believe that the demand will grow in the base countries of Japan,
Korea, and Taiwan. The demand will also increase as a result of
emerging independent power producers as well as emerging markets in
other countries.
MR. THOMPSON said there is agreement between the producers and
Yukon Pacific Corporation in the need to make Alaskan LNG
competitive to fit into the market and again outlined those needs.
In regards to permits, the gas producers plan on working with
agencies in 1996 and 1997 to determine permit needs. Informal
discussions have been held with Yukon Pacific Corporation to better
understand those permits and see if they are applicable to the gas
producers project. He said the Yukon Pacific Corporation project
is a little different and the differences in the Yukon Pacific
Corporation project might not make the LNG project economically
feasible. If similarities can be found, permits might be shared,
but if they are not then the gas producers will start the
permitting process from scratch.
MR. THOMPSON said investment by CSX or other parties will not be
ruled out.
Number 491
CO-CHAIRMAN GREEN said Representative Ogan was listening via
teleconference from Anchorage and Fairbanks was also on the
teleconference line.
Number 497
CHAIRMAN ROKEBERG asked the length of time it would take to obtain
permits, from scratch, for both the northern and southern routes.
He then asked whether or not it would take an act of Congress have
the route cross the National Petroleum Reserve in Alaska (NPRA).
Number 506
MR. THOMPSON said that if the route was chosen, he hoped that the
federal government would realize the importance of this project to
the state of Alaska and the possibilities for an international
balance of trade. He said the gas producers are currently in the
process of determining how long it would take to obtain these
permits and compare that with possible cost and time savings from
working with existing Yukon Pacific Corporation permits obtained.
Number 510
MR. MORGAN said starting the permit process from scratch might take
a long time and stressed the importance of working with the states
to scale these regulatory issues in as fast a time frame as
possible. He added that this process should begin in the next few
months.
Number 520
CHAIRMAN ROKEBERG asked how long the pipeline would take to build.
MR. THOMPSON said once the detailed engineering and the
construction taking eight years and permitting would be done
concurrently.
Number 531
CHAIRMAN ROKEBERG asked if it would take 13 years for pipeline
construction.
Number 534
MR. MILLER said there is three years of detailed engineering which
would involve obtaining permits, some of which could be obtained
earlier, and then five years of construction. He said with the
projected start up date of 2005, it would mean a ten year project
span.
Number 542
REPRESENTATIVE GARY DAVIS asked how the Yukon Pacific Corporation
project differs from the proposed project by the gas producers.
Number 545
MR. THOMPSON said the most significant difference is in the timing
issue. He said the gas producers do not believe the earlier time
frame proposed by Yukon Pacific Corporation is commercial for
Alaska. He said the gas producers have also tried to integrate the
gas pipeline more closely with the oil pipeline whereas the Yukon
Pacific Corporation project is more similar to the AAGS study which
proposed an Anderson Bay LNG facility.
Number 559
REPRESENTATIVE G. DAVIS asked if the proposed projects in Malaysia
and Qatar are tied to solid contracts or are based on speculation.
Number 563
MR. MORGAN said he believed they are linked to solid contracts.
Number 564
MR. MILLER said, generally, expansion and new projects in the LNG
business have contracts drawn before the project begins.
Number 568
CO-CHAIRMAN GREEN asked if the contracts stay firm once they are
established.
Number 575
MR. MORGAN said yes, the contracts would remain firm for a 25 year
period. He said the Japanese government is establishing what the
right diversity is for fuel consumption, but this needs to finished
soon because their energy demand is increasing.
Number 582
CO-CHAIRMAN GREEN asked if there was a target price which would
make the LNG project competitive.
MR. MORGAN said he couldn't answer that questions because
everything is so interwoven. He again mentioned that fiscal
certainty, lowering costs, market timing and build up need to be
understood to make this project competitive and that he couldn't
give a price.
Number 597
CO-CHAIRMAN GREEN discussed various roles the state could play such
a deferred royalty either in a flat rate or as royalty earning and
ownership and asked if those possibilities were included in the
proposed project development.
Number 608
MR. MORGAN said, for the record, the producers are not advocating
or requesting state involvement in the project. He referred to
other countries involvement in LNG projects and that the state
might want to examine what has been done.
Number 624
MR. THOMPSON said the project is not at the stage where they are
drawing in investors, but at the time the project is ready, the
state might want to look at what other countries are doing to help
LNG projects. He said, at this point, the three gas producers are
mainly interested in working with the state on the mentioned key
concepts.
Number 630
CO-CHAIRMAN GREEN said state involvement might shorten the time
frame of this project.
Number 634
REPRESENTATIVE BUNDE mentioned the federal governments unfriendly
approach to development in Alaska. He asked if the gas producers
have taken that into consideration in establishing the time frame.
Number 645
MR. MORGAN said it is important to work with the state to develop
a comprehensive plan to progress the permitting and the fiscal
issues at the state and federal levels as was done with Arctic
National Wildlife Refuge and lifting the export ban.
Number 655
CO-CHAIRMAN GREEN clarified that oil loss is not seen as an
impediment, and then asked if the gas sales sources were being
pursued with the same vigor as oil sales sources.
Number 665
MR. MORGAN representing BP, said yes, and added that the expansion
projects that were listed have a competitive advantage. He said
that the Alaskan project will be promoted as hard as the other
grass roots projects.
Number 675
MR. MILLER said, speaking for Exxon, that they have no competitive
LNG projects currently, but are developing six potential projects
which would compete with the Alaska project. No priorities
regarding one project over the other have been stated, but instead
he hoped that all would find their place in the market.
Number 686
MR. THOMPSON said ARCO has discovered potential gas sources which
one day might be competitive, but delineation drilling must first
establish the size of the field. ARCO would like to participate in
any and all commercial projects. He mentioned Shell and Mobile are
the dominant companies in the LNG business and were not mentioned
in the Yukon Pacific Corporation presentation.
TAPE 96-7, SIDE A
Number 000
REPRESENTATIVE ALAN AUSTERMAN asked about liquefying the gas so
that it could be pumped through the TAPS pipeline.
MR. THOMPSON said it is referred to as gas conversion and said it
is a technology for this type of scale, but is not commercial as of
yet. Only three plants use this technology currently and said it
probably take 10 to 20 years to utilize it.
Number 032
WILSON L. CONDON, Commissioner, Department of Revenue (DOR), was
next to testify. He said he would discuss the position of the
state and what it can do to facilitate the commercialization of the
North Slope gas resource. He mentioned a memorandum, sent to the
Governor from the Cabinet Heads which included the Commissioners of
DOR, the Department of Natural Resources, Commerce and Economic
Development, and the Attorney General. This memorandum, dated
January 22, 1996, and is located in the committee packet. He said
that memorandum makes 14 recommendations, 13 of which are pertinent
to the proposed LNG pipeline. The Governor has accepted the 14
recommendations and has told the cabinet heads to proceed.
COMMISSIONER CONDON said the memorandum is a baseline planning
document and some items might change over time. He said it invites
suggestions and participation from the legislature to make the
commercialization of North Slope gas feasible.
COMMISSIONER CONDON said he wanted to talk about feasibility,
revenue forecasts, where gas revenue fits into revenue forecasts
and provide general comments. He referred to a slide, the first
was titled, "State Revenue, North Slope Natural Gas, 50 Cent per
Million Cubic Feet Wellhead Value." He listed three variables
including at what price LNG can be sold in the Far East market,
project and transportation costs and rate of return for investors.
He said LNG is currently being sold in the market for $3.55 per
million British Thermal Units (BTUs) and is linked to oil prices.
He said BTU is the common energy unit. He said to buy a BTU
derived from LNG, the cost is 115 percent of the cost of a BTU
derived from oil. He restated that there is a 15 percent premium
on a BTU derived from LNG in the Far East market.
COMMISSIONER CONDON said the market price for LNG can be calculated
from world oil prices. The $17.50 per barrel cost of oil, divided
by five, results in a figure of $3.55 is derived.
Number 203
COMMISSIONER CONDON said a $15 billion project cost, with a rate of
return less than that derived from the TAPS pipeline a well as
transportation cost, involves a $5.00 per million BTUs price. He
said a market price, under current conditions and the return that
investors might require, a $4.50 price would be required. If a $12
billion project would reduce the price to $4.00 per million BTUs.
A $10 billion project cost would reduce the price down to current
market price which makes it competitive. This scenario
incorporates a zero wellhead price and is based on the assumptions
that he outlined.
Number 225
COMMISSIONER CONDON said the state of Alaska can assist in lowering
project cost and create an attractive investment climate where
investors are willing to accept a lower rate of return. He said
the 14 steps listed in the memorandum outline how the state can
assist in these two ways.
Number 250
COMMISSIONER CONDON said at the Senate Resources Committee, he was
asked to refer specifically to state revenues from this proposed
project. He said in order to get the gas resource to achieve a 50
cent per million cubic feet wellhead value, on a $15 million
project, it would require a $5.50 per million BTUs price. He said
that energy prices would have to rise to $27.50 per barrel level of
North Slope gas, and added that world energy prices would have to
increase by 60 percent. If this happened, state revenue would be
derived initially from the $220 million property tax, half of which
is shared with local municipalities. The properties taxed include
the pipeline, conditioning facility at PBU, and the liquification
plant at Valdez which amounts to a total appraised value of $11
billion. He said as the property value depreciates annually, the
property tax revenue would decrease at a rate of $9 million per
year.
COMMISSIONER CONDON said at 50 cents per million cubic feet, the
state would receive royalties, a severance tax and state corporate
income tax of $30 million each for a total of $90 million. He
concluded that the total state revenue would be $200 million and
another $100 million going to local communities.
Number 314
COMMISSIONER CONDON said this does not figure to be a rich project,
but it is a large resource and the state should assist in its
development.
Number 317
CO-CHAIRMAN GREEN asked if the BTU referred to methane.
Number 319
COMMISSIONER CONDON said the financial projections were based on
the idea that there would be a significant enhancement of the BTU
content for the volumes delivered as a consequence of including
methane, propane and butane in the product.
Number 328
CO-CHAIRMAN GREEN asked if the Administration figures were based on
spiked gas.
Number 329
COMMISSIONER CONDON said the figures are based on the producers
worst case scenario of a $15 million project that takes five years
to ramp up to full delivery. He said a shorter ramp up would
reduce the figures substantially and the three gas producers as
well as Yukon Pacific Corporation have proposed other ways to
reduce project costs.
Number 343
CO-CHAIRMAN GREEN received clarification from Commissioner Condon
that the report used a hotter gas.
Number 345
CHAIRMAN ROKEBERG said the memorandum helps focus the issues. He
then asked what the Administration is doing to modify the fiscal
situation and create stability.
Number 357
COMMISSIONER CONDON said he was not in the position to make a
recommendation today, but the Administration has made a list of
things to look at and this list will incorporate suggestions. He
said the three gas producers and Yukon Pacific Corporation have
made suggestions for the Administration to look at, but have not
told them specific things that the state must do.
Number 373
REPRESENTATIVE SCOTT OGAN asked if the Far East market was a
situation where demand will outstrip the supply during a window of
opportunity, he then asked if it is a reasonable assertion that the
market will re-correct itself, making it cost feasible. He
referred to the Natuna project, which is being built at a cost of
$20 million, and asked why would that project be built if it was
thought there wouldn't be a demand. He said, it seemed to him,
that whoever gets there first with the production capabilities will
get to adjust the market price because of the supply problem.
Number 387
COMMISSIONER CONDON said the balance between supply and demand has
a great deal to do with the price. He said this is a larger energy
market and the LNG prices do not exactly coincide with oil prices.
He said, if the price of LNG doubled, the power companies would
most likely chose another fuel, despite the environmental
advantages of LNG. During the next few decades, LNG will be
competing with oil and coal as a source of energy in the Far East
markets. He said other grass roots projects are attempting to
create opportunities in the market place.
Number 413
CHAIRMAN ROKEBERG said the number 12 footnote, on page 21 of the
memorandum, refers to the interfield compensatory agreements
between the various gas cap and oil rim members. He then asked if
the dispute over those agreements are having an impact on the
development of the gas pipeline project.
Number 425
COMMISSIONER CONDON said there have been disagreements in the past
over the implementation of the agreements. He said the specific
references in that footnote, issues resolution agreement, are
complex. Generally this agreement was an attempt to resolve
disagreements. The second agreement that is referred to, involved
the obligation to supply the material that is used for the missable
injectant enhanced oil project at PBU and the operation of the
central gas facility. Today there is a major disagreement
involving the natural gas liquids recovered from the field, but
this disagreement does not affect this proposed gas pipeline
project. He said the state is closely monitoring the disagreements
between the oil and gas producers.
Number 453
CHAIRMAN ROKEBERG thanked the commissioner for clarification that
these disputes should be monitored.
COMMISSIONER CONDON said it is important, because the state's
interests are affected if they get into a dispute.
Number 460
CHAIRMAN ROKEBERG discussed the tools available to the state to
assist the gas pipeline project.
COMMISSIONER CONDON said those are all areas that the state will
study.
Number 469
CO-CHAIRMAN GREEN asked if the state had considered a larger volume
of LNG and if so, would that economy of scale affect the states
current figures.
Number 473
COMMISSIONER CONDON said the larger figures would certainly have an
impact on the figures because the investment would be spread over
a lot more units of product.
Number 476
CO-CHAIRMAN GREEN asked if written questions could be submitted for
response to the operators and the Administration. He received
confirmation from all parties that this was possible.
ADJOURNMENT
There being no business to come before the Joint House Standing
Committee on Resources and the House Special Committee on Oil and
Gas, Co-Chairman Green adjourned the meeting at 10:12 a.m.
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