Legislature(2007 - 2008)BARNES 124

03/27/2007 03:00 PM OIL & GAS


Download Mp3. <- Right click and save file as

Audio Topic
03:11:15 PM Start
03:11:29 PM HB177
05:51:32 PM Adjourn
* first hearing in first committee of referral
+ teleconferenced
= bill was previously heard/scheduled
-- Recessed to 07:30am on 3/28/07 --
+= HB 177 NATURAL GAS PIPELINE PROJECT TELECONFERENCED
                    ALASKA STATE LEGISLATURE                                                                                  
             HOUSE SPECIAL COMMITTEE ON OIL AND GAS                                                                           
                         March 27, 2007                                                                                         
                           3:11 p.m.                                                                                            
                                                                                                                                
MEMBERS PRESENT                                                                                                               
                                                                                                                                
Representative Vic Kohring, Chair                                                                                               
Representative Kurt Olson, Vice Chair                                                                                           
Representative Nancy Dahlstrom                                                                                                  
Representative Jay Ramras                                                                                                       
Representative Ralph Samuels                                                                                                    
Representative Mike Doogan                                                                                                      
Representative Scott Kawasaki                                                                                                   
                                                                                                                                
MEMBERS ABSENT                                                                                                                
                                                                                                                                
All members present                                                                                                             
                                                                                                                                
OTHER LEGISLATORS PRESENT                                                                                                     
                                                                                                                                
Representative David Guttenberg                                                                                                 
Representative Carl Gatto                                                                                                       
                                                                                                                                
COMMITTEE CALENDAR                                                                                                            
                                                                                                                                
HOUSE BILL NO. 177                                                                                                              
"An  Act   relating  to  the   Alaska  Gasline   Inducement  Act;                                                               
establishing   the  Alaska   Gasline   Inducement  Act   matching                                                               
contribution  fund; providing  for an  Alaska Gasline  Inducement                                                               
Act coordinator; making conforming  amendments; and providing for                                                               
an effective date."                                                                                                             
                                                                                                                                
     - HEARD AND HELD                                                                                                           
                                                                                                                                
PREVIOUS COMMITTEE ACTION                                                                                                     
                                                                                                                                
BILL: HB 177                                                                                                                  
SHORT TITLE: NATURAL GAS PIPELINE PROJECT                                                                                       
SPONSOR(s): RULES BY REQUEST OF THE GOVERNOR                                                                                    
                                                                                                                                
03/05/07       (H)       READ THE FIRST TIME - REFERRALS                                                                        
03/05/07       (H)       O&G, RES, FIN                                                                                          
03/06/07       (H)       O&G AT 3:00 PM BARNES 124                                                                              
03/06/07       (H)       -- MEETING CANCELED --                                                                                 
03/08/07       (H)       O&G AT 3:00 PM BARNES 124                                                                              
03/08/07       (H)       -- MEETING CANCELED --                                                                                 
03/13/07       (H)       O&G AT 3:30 PM HOUSE FINANCE 519                                                                       
03/13/07       (H)       Heard & Held                                                                                           
03/13/07       (H)       MINUTE(O&G)                                                                                            
03/15/07       (H)       O&G AT 3:00 PM BARNES 124                                                                              
03/15/07       (H)       Heard & Held                                                                                           
03/15/07       (H)       MINUTE(O&G)                                                                                            
03/19/07       (H)       O&G AT 8:30 AM CAPITOL 106                                                                             
03/19/07       (H)       Heard & Held                                                                                           
03/19/07       (H)       MINUTE(O&G)                                                                                            
03/20/07       (H)       O&G AT 3:00 PM BARNES 124                                                                              
03/20/07       (H)       Heard & Held                                                                                           
03/20/07       (H)       MINUTE(O&G)                                                                                            
03/21/07       (H)       O&G AT 5:30 PM SENATE FINANCE 532                                                                      
03/21/07       (H)       Heard & Held                                                                                           
03/21/07       (H)       MINUTE(O&G)                                                                                            
03/22/07       (H)       O&G AT 3:00 PM BARNES 124                                                                              
03/22/07       (H)       Heard & Held                                                                                           
03/22/07       (H)       MINUTE(O&G)                                                                                            
03/23/07       (H)       O&G AT 8:30 AM CAPITOL 106                                                                             
03/23/07       (H)       Heard & Held                                                                                           
03/23/07       (H)       MINUTE(O&G)                                                                                            
03/24/07       (H)       O&G AT 1:00 PM SENATE FINANCE 532                                                                      
03/24/07       (H)       -- Public Testimony --                                                                                 
03/26/07       (H)       O&G AT 8:30 AM CAPITOL 106                                                                             
03/26/07       (H)       Heard & Held                                                                                           
03/26/07       (H)       MINUTE(O&G)                                                                                            
03/27/07       (H)       O&G AT 3:00 PM BARNES 124                                                                              
                                                                                                                                
WITNESS REGISTER                                                                                                              
                                                                                                                              
TONY PALMER, Vice-President of Alaska Business Development                                                                      
TransCanada Corporation, Inc.                                                                                                   
(No address provided)                                                                                                           
POSITION STATEMENT:   Testified regarding  TransCanada's interest                                                               
in the  Alaska gas pipeline  project and regarding aspects  of HB                                                               
177.  He also answered questions.                                                                                               
                                                                                                                                
ACTION NARRATIVE                                                                                                              
                                                                                                                                
CHAIR VIC KOHRING  called the House Special Committee  on Oil and                                                             
Gas  meeting to  order at  3:11:15 PM.   Representatives  Doogan,                                                             
Olson, Samuels,  and Kohring were  present at the call  to order.                                                               
Representatives Ramras,  Kawasaki, and  Dahlstrom arrived  as the                                                               
meeting was  in progress.   Representatives Gatto  and Guttenberg                                                               
were also in attendance.                                                                                                        
                                                                                                                                
3:11:29 PM                                                                                                                    
                                                                                                                                
HB 177-NATURAL GAS PIPELINE PROJECT                                                                                           
                                                                                                                                
CHAIR KOHRING announced that the  only order of business would be                                                               
HOUSE  BILL NO.  177,  "An  Act relating  to  the Alaska  Gasline                                                               
Inducement Act;  establishing the  Alaska Gasline  Inducement Act                                                               
matching  contribution  fund;  providing for  an  Alaska  Gasline                                                               
Inducement  Act coordinator;  making  conforming amendments;  and                                                               
providing for an effective date."                                                                                               
                                                                                                                                
3:11:38 PM                                                                                                                    
                                                                                                                                
TONY  PALMER,  Vice-President  of  Alaska  Business  Development,                                                               
TransCanada  Corporation, Inc.,  explained  that TransCanada  has                                                               
been  in  business  over  50  years  and  owns  36,500  miles  of                                                               
regulated  natural  gas  transmission  lines.   He  provided  the                                                               
committee   with  a   presentation  titled   "Alaska  Legislature                                                               
Testimony," dated March  26/27, 2007.  TransCanada  has built gas                                                               
pipelines that  are longer than, and  at least as complex  as the                                                               
contemplated  Alaska gas  pipeline,  he explained.   The  company                                                               
moves approximately  15 billion  cubic feet  (Bcf) of  gas daily.                                                               
He  explained that  as North  America's largest  gas transmission                                                               
company,  they  own  approximately two-thirds  of  the  take-away                                                               
capacity  from the  Alberta  Energy Company  Ltd.,  (AEC) hub  to                                                               
North American markets.   He explained that  a pipeline project's                                                               
complexity  is not  just  based  on cost,  but  also on  pipeline                                                               
length,  regulatory, and  socio-economic  issues.   He said  that                                                               
TransCanada possesses  gas storage capacity  and has a  cash flow                                                               
sufficient to fund  the equity component of  the Canadian project                                                               
for one year.  He also  put forth that TransCanada has sufficient                                                               
ability to raise significant funds.                                                                                             
                                                                                                                                
3:19:54 PM                                                                                                                    
                                                                                                                                
CHAIR  KOHRING  asked  about  TransCanada's  recent  purchase  of                                                               
pipelines to transfer gas from the  Gulf Coast to the Midwest and                                                               
asked whether that would present  a problem since Alaska's gas is                                                               
destined for the same markets.                                                                                                  
                                                                                                                                
MR. PALMER  replied that once gas  reaches the AEC hub,  it could                                                               
be  sold to  numerous  regions.   He opined  that  there will  be                                                               
sufficient capacity  on TransCanada's systems to  move the entire                                                               
volume of Alaska  gas through the AEC hub.   He opined this would                                                               
increase the  ability to seek  market diversity and  reduce costs                                                               
as Alaska could take advantage of existing pipelines.                                                                           
                                                                                                                                
3:22:21 PM                                                                                                                    
                                                                                                                                
MR. PALMER relayed  that TransCanada is a  proven basin developer                                                               
in Alberta.  He said  that the Alberta development was structured                                                               
under an  independent pipeline  model with  "roll-in" tolls.   In                                                               
response to  a question, he  explained that rolled-in  tolls have                                                               
been standard in Canada for decades.   He opined that this system                                                               
has  been  successful  in helping  foster  development  from  the                                                               
western  Canadian  gas  basins  to   market.    He  reminded  the                                                               
committee that Canada, like Alaska,  is far from the gas markets.                                                               
He went  on to  say that TransCanada's  evaluation of  the Alaska                                                               
gas pipeline  shows ways to  structure the process  and expansion                                                               
to  keep  toll  prices  reasonable.   He  characterized  the  "15                                                               
percent issue" as a "red herring up through 7 Bcf."                                                                             
                                                                                                                                
3:27:22 PM                                                                                                                    
                                                                                                                                
REPRESENTATIVE  SAMUELS asked  to what  extent TransCanada  would                                                               
absorb the risk of tariff increases.                                                                                            
                                                                                                                                
MR. PALMER noted that his  company would need to consider various                                                               
scenarios in determining  risk.  He offered that it  is normal in                                                               
the Canadian  model to  see some fluctuation  in toll  rates, but                                                               
they would  not go  back to  the 4.5  Bcf a  day level  under his                                                               
company's analysis.                                                                                                             
                                                                                                                                
3:29:24 PM                                                                                                                    
                                                                                                                                
REPRESENTATIVE RAMRAS  referenced the possibility  that rolled-in                                                               
rates could fluctuate and affect the  tariffs.  He asked how much                                                               
of a rate increase is reasonable when the pipeline expands.                                                                     
                                                                                                                                
MR. PALMER  replied that the original  toll of $3.00 for  4.5 Bcf                                                               
would decline  from $3.00  to a  lower number  as one  moves down                                                               
through 5.9 Bcf  a day, which he characterized as  the "bottom of                                                               
the  cost curve"  as the  pipeline would  be fully  compressed at                                                               
that level.   As the pipeline  expands from 5.9 Bcf  up through 7                                                               
Bcf a  day, the toll  will increase from  $2.80, but will  not be                                                               
back to the $3.00 level of 4.5 Bcf.                                                                                             
                                                                                                                                
3:32:22 PM                                                                                                                    
                                                                                                                                
REPRESENTATIVE  RAMRAS asked  whether  the rolled  in rate  could                                                               
have the effect of taking costs down.                                                                                           
                                                                                                                                
MR. PALMER  replied that the  design proposed by  TransCanada for                                                               
this  project would  have the  tolls  declining on  average on  a                                                               
rolled  in basis,  from 4.5  Bcf  down to  5.9 Bcf.   They  would                                                               
increase slightly  beyond the 5.9  Bcf, but would still  be below                                                               
the initial 4.5 Bcf toll.                                                                                                       
REPRESENTATIVE RAMRAS  asked about the  effect on tariffs  if the                                                               
gas pipeline was not initially subscribed  to 4 Bcf, but was at a                                                               
lower rate of 2 Bcf.                                                                                                            
                                                                                                                                
MR. PALMER replied that the  toll will be significantly higher if                                                               
the pipeline  does not receive as  large a volume of  gas at open                                                               
season as it is capable of receiving.                                                                                           
                                                                                                                                
3:34:57 PM                                                                                                                    
                                                                                                                                
REPRESENTATIVE   SAMUELS  asked   whether  the   15  percent   is                                                               
irrelevant.                                                                                                                     
                                                                                                                                
MR. PALMER  answered that  he has  not looked  beyond 7  Bcf when                                                               
considering  this   issue.    However,   he  is   confident  that                                                               
TransCanada  will not  reach  the 15  percent  rate proposed  for                                                               
expansion  up  to  50  percent  more than  the  initial  4.5  Bcf                                                               
capacity.  He went on to  say that ultimately one would hope that                                                               
expansion would include a second  pipeline to move additional gas                                                               
with little  or no compression.   He noted that  further modeling                                                               
of the  various scenarios is rather  complex and labor-intensive,                                                               
but  offered that  he believes  his company  has been  relatively                                                               
fair with  the committee  to identify what  would happen  with an                                                               
expansion up  to 50  percent of initial  capacity.   He expressed                                                               
some discomfort  about providing further  details as to  what may                                                               
happen  when the  pipeline reaches  7 Bcf.   He  offered that  he                                                               
would  be putting  forward those  numbers in  his Alaska  Gasline                                                               
Inducement  Act (AGIA)  proposal.   He replied  to a  question by                                                               
agreeing that  rolled in rates may  have a different affect  on a                                                               
pipeline design different  from that planned by  TransCanada.  He                                                               
stated his  company has proposed  a 48 inch, high  pressure, 2500                                                               
pound  pipeline  system, but  that  another  company may  propose                                                               
something different, which would  affect the estimates related to                                                               
rates.    He  also  explained that  "looping"  generally  uses  a                                                               
pipeline of the same size  and strength as the original, although                                                               
it can sometimes vary.                                                                                                          
                                                                                                                                
3:40:00 PM                                                                                                                    
                                                                                                                                
REPRESENTATIVE  GATTO   asked  whether  TransCanada   planned  on                                                               
submitting a conforming bid.                                                                                                    
                                                                                                                                
MR. PALMER replied that TransCanada  will closely examine AGIA if                                                               
it passes  and the state's application  requirements to determine                                                               
if it can submit a bid that complies with the requirements.                                                                     
                                                                                                                                
MR. PALMER said  that TransCanada has been a lead  player in this                                                               
project  and  has  invested  more than  $2  billion  in  bringing                                                               
Alaskan  gas  to market.    He  told members  that  TransCanada's                                                               
subsidiary, Foothills Pipe Lines  Ltd., holds exclusive and valid                                                               
certificates  for construction  of  the Canadian  section of  the                                                               
project.   He  said that  there is  a treaty  between the  United                                                               
States  and  Canada specifically  for  this  project wherein  the                                                               
Canadian provinces  agree to charge  the same property  tax rates                                                               
on this project as  they do for domestic gas.  He  went on to say                                                               
that the treaty also sets  forth the rights of Canadian customers                                                               
to receive gas from the line.                                                                                                   
                                                                                                                                
MR.  PALMER explained  that TransCanada  holds an  easement under                                                               
the Northern Pipeline  Act (NPA) through the  Yukon Territory for                                                               
this project  and has paid  fees on  that easement for  25 years.                                                               
This easement  has been  recognized in  First Nations  land claim                                                               
settlements.     TransCanada  also  has  assets   in  Alaska,  he                                                               
explained.                                                                                                                      
                                                                                                                                
3:47:42 PM                                                                                                                    
                                                                                                                                
REPRESENTATIVE  RAMRAS asked  whether  there  is any  foreseeable                                                               
possibility  that   TransCanada  would  be  a   partner  in  duel                                                               
applications for the Alaska gas pipeline project.                                                                               
                                                                                                                                
MR. PALMER  said that  it is  too early  to answer  that question                                                               
clearly  and  that  the  answer  will  depend  on  AGIA  and  the                                                               
application process.   He opined that the best approach  may be a                                                               
collaboration between TransCanada, the  producers, and the state.                                                               
He put  forth that in the  pipeline business, it is  not uncommon                                                               
to  partner with  different entities  on various  projects.   The                                                               
goal is  to put forward  the best project  to obtain the  bid, he                                                               
said.                                                                                                                           
                                                                                                                                
REPRESENTATIVE  RAMRAS  asked  whether   an  applicant  could  be                                                               
included as a  partner in more than one application  for the same                                                               
project.                                                                                                                        
                                                                                                                                
MR. PALMER  replied that scenario  is possible if allowed  by the                                                               
application process.   He noted  that some projects only  allow a                                                               
company to be part of one bid on a project.                                                                                     
                                                                                                                                
3:52:26 PM                                                                                                                    
                                                                                                                                
REPRESENTATIVE  GATTO  asked  if  the  Canadian  permits  require                                                               
TransCanada to follow a certain corridor.                                                                                       
                                                                                                                                
MR. PALMER replied  that the permits do generally  follow a route                                                               
by the  highway, but  they allow  for reasonable  divergence from                                                               
the general route.  He  reviewed the Canadian history with regard                                                               
to the NPA and opined that  TransCanada is the only party to hold                                                               
the necessary certificates for this project.                                                                                    
                                                                                                                                
3:57:49 PM                                                                                                                    
                                                                                                                                
MR. PALMER explained  that TransCanada can bring  northern gas to                                                               
the  liquid Alberta  hub where  it can  connect to  other markets                                                               
through the Nova Inventory Transfers  (NIT) system.  He said that                                                               
the TransCanada system  uses the Albert hub.  He  opined that the                                                               
Alberta Hub (NIT) is the most  liquid natural gas market in North                                                               
America and that it continues to grow.                                                                                          
                                                                                                                                
3:59:55 PM                                                                                                                    
                                                                                                                                
REPRESENTATIVE RAMRAS asked about  available capacity by the time                                                               
the Alaska gas pipeline is ready to move gas.                                                                                   
                                                                                                                                
MR. PALMER opined that in  2017 there will be sufficient capacity                                                               
at the Alberta  hub (NIT) to move the entire  4.5 Bcf of Alaska's                                                               
gas.   He offered that  it is  important to have  diverse markets                                                               
and that  abbreviating the project  to Alberta will  mitigate the                                                               
capital costs risks.                                                                                                            
                                                                                                                                
MR. PALMER stated that in  the 1990s TransCanada constructed 7000                                                               
miles  of pipeline  on time  and  within 0.5  percent of  budget.                                                               
Since 1999, there  has been little additional  gas development in                                                               
Western Canada,  therefore there has  not been much  new pipeline                                                               
construction since then.  He  said TransCanada has recently built                                                               
a  small  pipeline  in  Mexico and  has  constructed  some  power                                                               
plants.                                                                                                                         
                                                                                                                                
REPRESENTATIVE RAMRAS  asked about TransCanada's  experience with                                                               
construction in varying terrain and weather conditions.                                                                         
                                                                                                                                
MR. PALMER offered his opinion that  the terrain in Ontario is at                                                               
least as challenging  as that of the pipeline  route from Prudhoe                                                               
Bay  to Alberta.    He said  his company  is  familiar with  cold                                                               
weather construction and  challenging terrain.  In  response to a                                                               
question, he  explained that in  1991 and 1994  TransCanada built                                                               
1,000  miles of  pipeline and  that the  Canadian section  of the                                                               
Alaska pipeline will be approximately 1,000 miles.                                                                              
                                                                                                                                
4:07:34 PM                                                                                                                    
                                                                                                                                
REPRESENTATIVE  RAMRAS  asked   about  the  normal  circumference                                                               
pipelines.                                                                                                                      
                                                                                                                                
MR.  PALMER answered  that most  of  the pipelines  built by  his                                                               
company range from 24 to 48  inches in diameter, depending on the                                                               
distance and volume.   He said that TransCanada's  proposal is to                                                               
construct a 48 inch pipeline for this project.                                                                                  
                                                                                                                                
REPRESENTATIVE  RAMRAS  put  forth  for  committee  consideration                                                               
whether  the pipeline  size should  be part  of the  criteria set                                                               
forth in AGIA.                                                                                                                  
                                                                                                                                
4:11:16 PM                                                                                                                    
                                                                                                                                
REPRESENTATIVE SAMUELS asked about  system capacity after the gas                                                               
is delivered to Alberta.                                                                                                        
                                                                                                                                
MR.  PALMER clarified  that pipeline  companies  besides his  own                                                               
have spare capacity  in their lines leaving Alberta.   He went on                                                               
to say  that the total  spare capacity  from Alberta is  4.5 Bcf,                                                               
while total capacity  in 10 years may be around  15 Bcf, although                                                               
there  may only  be 10  Bcf of  gas actually  moving through  the                                                               
pipelines.   In  response to  a question,  he explained  that gas                                                               
pipelines  are  built  in  segments,   called  "spreads"  in  the                                                               
industry.   For the  Alaska gas pipeline,  he predicted  that the                                                               
bulk of  construction would  occur in  2015.   He opined  that by                                                               
that  time the  current construction  rush may  be over,  leaving                                                               
more labor  and resources to build  the Alaska gas pipeline.   He                                                               
told the  committee that TransCanada's costs  for compression are                                                               
"significantly below  average" without  compromising reliability.                                                               
The company has an excellent  record in maintenance and safety he                                                               
explained,  referring  to  slides  13  and  14.    He  said  that                                                               
TransCanada  inspects  at  least  12  percent  of  its  pipelines                                                               
annually,  compared to  an industry  average  of 9  percent.   He                                                               
noted  that  some   lines  are  being  put   underground,  a  new                                                               
technology  that  can  save  maintenance  costs,  and  that  this                                                               
technology may be used on a  conservative basis in the Alaska gas                                                               
pipeline project.                                                                                                               
                                                                                                                                
4:19:40 PM                                                                                                                    
                                                                                                                                
REPRESENTATIVE RAMRAS  asked about  the effect  of Alaska  gas on                                                               
the  capacity of  gas lines  leaving  Alberta and  the effect  of                                                               
Alaska gas going  to a liquefied natural gas  (LNG) plant instead                                                               
of to Alberta.                                                                                                                  
                                                                                                                                
MR. PALMER reiterated his estimate that  in 2017, there will be a                                                               
spare  capacity of  4.5  Bcf in  gas  pipelines leaving  Alberta.                                                               
When Alaska  gas comes on line,  it can move to  various markets,                                                               
such as  Chicago.  He noted  that this issue is  for the shippers                                                               
to  decide.   He explained  that having  gas pipelines  with full                                                               
capacity will  lower the cost  of gas in Canada.   As to  LNG, he                                                               
opined that it  is needed, but that it serves  no project to wait                                                               
for other projects to develop.   He opined that most LNG would be                                                               
delivered on the West Coast.   TransCanada believes that there is                                                               
a market  for Alaska  gas now, and  that 10-year  projections are                                                               
for  lowered demand,  he  said.   He said  that  supply has  been                                                               
relatively  flat, which  leaves  a  market for  Alaska  gas.   In                                                               
response  to  a  question,  he  said  that  current  tariffs  for                                                               
pipelines of  10 to 25 years  old are around $0.60  to $0.80 from                                                               
Alberta to  Chicago.  He is  not aware of possible  tariff prices                                                               
for a possible new line.                                                                                                        
                                                                                                                                
4:28:26 PM                                                                                                                    
                                                                                                                                
REPRESENTATIVE RAMRAS asked whether is  it likely that tariffs on                                                               
new lines would be higher.                                                                                                      
                                                                                                                                
MR.  PALMER  explained  that  generally,  yes.    He  noted  that                                                               
inflation   increases  tariff   costs,   and   older  lines   are                                                               
depreciated, which lowers tariffs.                                                                                              
                                                                                                                                
REPRESENTATIVE OLSON asked about plans for gas liquids.                                                                         
                                                                                                                                
MR. PALMER said that TransCanada is  open to moving a liquid rich                                                               
gas stream, if proposed by the  shipper.  The shipper will decide                                                               
where the  gas will go  and where  the liquids will  be stripped.                                                               
The  amount  of  liquid  in  the shipped  gas  effects  the  toll                                                               
calculation, he explained.                                                                                                      
                                                                                                                                
4:33:36 PM                                                                                                                    
                                                                                                                                
REPRESENTATIVE   DAHLSTROM  asked   about   the  Federal   Energy                                                               
Regulatory Commission  (FERC) process  and what happens  if there                                                               
is a  failed open season.   She also  queried about the  value of                                                               
FERC certification should there be a failed open season.                                                                        
                                                                                                                                
MR.  PALMER   summarized  that  TransCanada   has  worked   in  a                                                               
constructive  fashion with  the previous  administration to  help                                                               
this  project  progress.    He  opined that  the  state  and  the                                                               
producers have  not reached agreement  and there is  currently an                                                               
impasse.   He said he  believes AGIA  was introduced to  move the                                                               
project  forward, and  that TransCanada  supports efforts  to end                                                               
the impasse.   He  offered his belief  that all  key stakeholders                                                               
are best served by a large scale, 4.5 Bcf per day trans-                                                                        
continental project.  He stated  that TransCanada prefers a five-                                                               
party  compromise   developed  in  conjunction  with   AGIA  that                                                               
includes the three  Alaska North Slope producers,  the state, and                                                               
TransCanada.    He  expressed concern  with  AGIA's  proposal  to                                                               
require the  licensee to obtain FERC  certification regardless of                                                               
the outcome  of the  initial open  season.   Independent pipeline                                                               
developers may not participate if  this provision is not amended,                                                               
he  opined.   He expressed  support for  the state's  proposal to                                                               
share costs 50:50  up to open season, but  cautioned that private                                                               
developers will  be reluctant  to commit money  to pursue  a FERC                                                               
certificate if  the initial open  season does not  attract enough                                                               
gas commitments to make the  project viable.  He recommended that                                                               
AGIA  be  amended  to  remove the  requirement  that  a  licensee                                                               
proceed  with   FERC  certification  absent   sufficient  shipper                                                               
commitment, unless  an alternate  source of  credit is  in place.                                                               
He  expressed  his  company's willingness  to  continue  to  work                                                               
towards resolution of these issues.                                                                                             
                                                                                                                                
The committee took an at ease from 4:43:01 PM to 4:58:15 PM.                                                                
                                                                                                                                
4:59:58 PM                                                                                                                    
                                                                                                                                
REPRESENTATIVE SAMUELS asked about the  time period for forming a                                                               
solid partnership with other interested parties.                                                                                
                                                                                                                                
MR. PALMER opined  that it would take months, possibly  as few as                                                               
two  or  three, to  reach  an  understanding with  other  parties                                                               
sufficient to  allow them to  make a joint response  for purposes                                                               
of AGIA.                                                                                                                        
                                                                                                                                
REPRESENTATIVE  SAMUELS asked  about  the  proprietary nature  of                                                               
information regarding pipeline issues.                                                                                          
                                                                                                                                
MR.  PALMER  responded that  regulated  gas  pipelines in  Canada                                                               
provide a "huge" amount of  information to the public.  Financial                                                               
information is  publicly filed in  relation to  rate proceedings,                                                               
he  explained.   He indicated  that there  is some  difference in                                                               
rate proceedings  in Canada  and the  United States,  noting that                                                               
the FERC  process has  more settlements and  is generally  a more                                                               
"lighter-handed method"  of rate  proceedings.   He said  that in                                                               
general there  is more public information  on pipelines available                                                               
in Canada.                                                                                                                      
                                                                                                                                
5:06:36 PM                                                                                                                    
                                                                                                                                
MR.   PALMER,  in   response  to   a  question,   said  that   in                                                               
TransCanada's view, the  monies spent on a  FERC certificate will                                                               
not  directly obtain  customers for  the shipper.   It  still has                                                               
some value, however,  he said.  He predicted  that if TransCanada                                                               
was  the   licensee,  and  did   not  have   sufficient  customer                                                               
commitments  in   open  season,  it  would   focus  on  obtaining                                                               
additional customers.   TransCanada proposes to  capture value on                                                               
this project  based on return of  equity relative to the  cost of                                                               
the equity, he said.   He noted that project development requires                                                               
an evaluation of  the costs, risks, and  probability of capturing                                                               
customers.                                                                                                                      
                                                                                                                                
REPRESENTATIVE SAMUELS asked about  how the project would proceed                                                               
after a successful open season.                                                                                                 
                                                                                                                                
5:11:56 PM                                                                                                                    
                                                                                                                                
MR. PALMER  set forth that his  understanding of AGIA is  that if                                                               
there is a  successful open season, the toll would  be lowered by                                                               
"the  amount of  those  dollars  the state  would  advance."   He                                                               
opined  that in  such  a situation  it would  be  normal for  the                                                               
equity  sponsors to  continue to  fund through  the certification                                                               
process.   He said it is  favorable for an equity  holder to have                                                               
another party  funding the project  during the most  risky period                                                               
of  the  project, which  "is  before  I'm  getting some  debt  in                                                               
there."                                                                                                                         
                                                                                                                                
REPRESENTATIVE  SAMUELS  asked  for  estimates  on  the  cost  of                                                               
getting to the open season.                                                                                                     
                                                                                                                                
5:15:31 PM                                                                                                                    
                                                                                                                                
MR. PALMER  estimated that it may  cost somewhere in the  tens of                                                               
millions of dollars to prepare for  open season.  If the licensee                                                               
had the gas  committed to it at the beginning  of the project, it                                                               
could reduce the risk by waiting, which increases costs.                                                                        
                                                                                                                                
5:17:52 PM                                                                                                                    
                                                                                                                                
REPRESENTATIVE  SAMUELS   asked  about  the  calculation   of  an                                                               
attractive debt to equity split.                                                                                                
                                                                                                                                
MR.  PALMER  replied that  pipelines  have  risk, and  that  risk                                                               
cannot  be passed  through  to the  customer.   Therefore,  these                                                               
projects cannot  be funded with  100 percent debt.   Furthermore,                                                               
100  percent equity  financing would  cause the  tolls to  be too                                                               
high.  He  said that pipeline projects in the  United States tend                                                               
to have higher  equity ratios than in Canada.   Many new Canadian                                                               
pipelines have  been constructed  with 25  to 35  percent initial                                                               
equity,  which often  increases over  time as  the project  costs                                                               
depreciate.   He went on  to say that if  a party was  willing to                                                               
fund cost  overruns with 100  percent debt, the company  is still                                                               
motivated to moderate costs.   He noted that companies desire low                                                               
tolls, and  although a  low debt  rate will  lower the  costs, it                                                               
will also increase the tolls.                                                                                                   
                                                                                                                                
5:22:05 PM                                                                                                                    
                                                                                                                                
REPRESENTATIVE DAHLSTROM  asked about the difference  of value of                                                               
a FERC certificate in the United States and Canada.                                                                             
                                                                                                                                
MR. PALMER  clarified that an  open season that does  not capture                                                               
sufficient volumes to  make the project viable  changes the value                                                               
attributable to a  FERC certificate.  In response  to a question,                                                               
he  indicated it  is not  for him  to say  whether it  is in  the                                                               
state's interest to pursue a FERC  certificate in the event of an                                                               
unsuccessful open season.                                                                                                       
                                                                                                                                
5:24:59 PM                                                                                                                    
                                                                                                                                
REPRESENTATIVE DAHLSTROM  asked about  the process  of evaluating                                                               
project risk.                                                                                                                   
                                                                                                                                
MR.  PALMER  replied  that   it  is  relatively  straight-forward                                                               
examination  for  a  potential  licensee  to  consider  costs  to                                                               
potential rewards.                                                                                                              
                                                                                                                                
REPRESENTATIVE  DAHLSTROM asked  whether there  was value  in the                                                               
state proceeding with this project.                                                                                             
                                                                                                                                
MR. PALMER answered yes.                                                                                                        
                                                                                                                                
5:26:36 PM                                                                                                                    
                                                                                                                                
REPRESENTATIVE RAMRAS  asked for further  clarification regarding                                                               
the  ratio of  tariff  costs  relative to  the  barrel of  energy                                                               
equivalent.   He noted that the  current tariff on TAPS  is about                                                               
$6.00 per barrel of oil.                                                                                                        
                                                                                                                                
MR. PALMER  replied that transporting  oil through a  pipeline is                                                               
less expensive than transporting gas.   He said that in the past,                                                               
the  cost of  transporting gas  from  Alberta to  other areas  of                                                               
Canada or the United States has been  as high as 40 to 50 percent                                                               
of the  value of  the commodity ultimately  delivered.   He noted                                                               
that is  not the case today,  as gas prices are  relatively high.                                                               
However, he reminded the committee  that gas transportation costs                                                               
through newly  constructed pipelines can  be 30 to 50  percent of                                                               
commodity value.                                                                                                                
                                                                                                                                
5:29:42 PM                                                                                                                    
                                                                                                                                
REPRESENTATIVE  RAMRAS  asked  about   the  relationship  of  the                                                               
transportation  system to  the volatile  nature of  the commodity                                                               
and its effect on risk analysis.                                                                                                
                                                                                                                                
MR. PALMER replied  that in general the gas  pipeline business is                                                               
more risky than the oil  pipeline business.  Contracts reduce the                                                               
business  risk inherent  in the  gas transportation  business, he                                                               
explained.                                                                                                                      
                                                                                                                                
REPRESENTATIVE  RAMRAS asked  about  the  evaluation of  economic                                                               
risk  in conjunction  with gas  pipelines in  light of  the ratio                                                               
between  the  commodity's  value and  the  commodity's  transport                                                               
costs.                                                                                                                          
                                                                                                                                
MR. PALMER  explained that if the  expected toll on a  project is                                                               
one-third of  the ultimate value of  the gas at market,  then gas                                                               
sold at $3.00 would be subject to  a toll of $1.00.  For oil, the                                                               
toll  may only  be  $0.30.   If  there was  a  huge capital  cost                                                               
overrun  of 100  percent, the  toll would  increase to  $2.00 for                                                               
gas,  but only  to  $0.60 for  oil.   He  described the  narrower                                                               
margin of profits  to costs inherent in gas pipelines  as part of                                                               
the increased  risk inherent in these  projects.  In answer  to a                                                               
question, he noted  he is unaware of whether  FERC calculates the                                                               
increased risks of gas transportation in determining tariffs.                                                                   
                                                                                                                                
5:36:52 PM                                                                                                                    
                                                                                                                                
MR.   PALMER  responded   to  a   question  by   explaining  that                                                               
TransCanada proposes  that discussions between it,  the three ANS                                                               
producers and the  state occur now, even before  passage of AGIA.                                                               
After AGIA  passes, any  discussions must  be compliant  with its                                                               
terms which  may limit  the breadth  of possible  discussions, he                                                               
opined.   He indicated one  possibility would be to  come forward                                                               
with a joint response, if possible, under AGIA.                                                                                 
                                                                                                                                
5:39:58 PM                                                                                                                    
                                                                                                                                
REPRESENTATIVE DOOGAN asked about  TransCanada's role in possible                                                               
early negotiations.                                                                                                             
                                                                                                                                
MR. PALMER  explained that TransCanada  would like to  see issues                                                               
resolved, such  as how  to split the  upstream revenues,  so that                                                               
the  project moves  forward.   He opined  that TransCanada  could                                                               
bring significant skills and property rights to the project.                                                                    
                                                                                                                                
REPRESENTATIVE  DOOGAN   asked  about  how  customers   would  be                                                               
solicited  if  there  was  a   failed  open  season  and  a  FERC                                                               
certificate was not pursued.                                                                                                    
                                                                                                                                
MR. PALMER explained  that in that situation, the  funds would be                                                               
spent   on   business   development   initiatives   and   further                                                               
negotiations  with  interested  parties.     He  said  that  this                                                               
approach  was  on  a  different   scale  from  the  "hundreds  of                                                               
millions" of dollars necessary to pursue a FERC certificate.                                                                    
                                                                                                                                
5:43:14 PM                                                                                                                    
                                                                                                                                
REPRESENTATIVE DOOGAN  asked about the effectiveness  of the $500                                                               
million inducement set forth in AGIA.   He asked if the provision                                                               
requiring  that a  successful bidder  pursue  a FERC  certificate                                                               
after a failed open season makes AGIA less attractive.                                                                          
                                                                                                                                
MR.  PALMER  answered  that  the   $500  million  is  clearly  an                                                               
inducement for the risky early stages  of the project.  He stated                                                               
that   the  requirement   to  pursue   a  FERC   certificate  has                                                               
significant  costs,   and  makes  it  a   significant  factor  in                                                               
evaluation   project  risks.     He   declined  to   declare  the                                                               
requirements regarding a FERC certificate  a deal breaker at this                                                               
early stage.                                                                                                                    
                                                                                                                                
The committee took an at ease from 5:46 to 5:47.                                                                                
                                                                                                                                
[HB 177 was held over.]                                                                                                         
                                                                                                                                
ADJOURNMENT                                                                                                                   
                                                                                                                                
The House  Special Committee on Oil  and Gas was recessed  at the                                                               
call of  the chair at  5:51:32 PM.   [The meeting  was reconvened                                                             
March 28, 2007.]                                                                                                                

Document Name Date/Time Subjects