Legislature(2001 - 2002)
03/14/2002 10:44 AM House O&G
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* first hearing in first committee of referral
+ teleconferenced
= bill was previously heard/scheduled
+ teleconferenced
= bill was previously heard/scheduled
ALASKA STATE LEGISLATURE
HOUSE SPECIAL COMMITTEE ON OIL AND GAS
March 14, 2002
10:44 a.m.
MEMBERS PRESENT
Representative Scott Ogan, Chair
Representative Hugh Fate, Vice Chair
Representative Fred Dyson
Representative Mike Chenault
Representative Vic Kohring
Representative Gretchen Guess
Representative Reggie Joule
MEMBERS ABSENT
All members present
COMMITTEE CALENDAR
HOUSE BILL NO. 410
"An Act establishing the Alaska Natural Gas Development
Authority, a public corporation, and providing for its
structure, management, responsibilities, and operation, and
requiring the development of a project plan for the construction
and operation of a natural gas transmission pipeline project by
the authority."
- HEARD AND HELD
HOUSE BILL NO. 423
"An Act relating to the Alaska Railroad; authorizing the Alaska
Railroad Corporation to provide financing for the acquisition,
construction, improvement, maintenance, equipping, or operation
of facilities for the transportation of natural gas resources
within and outside the state by others; authorizing the Alaska
Railroad Corporation to issue bonds to finance such facilities;
and providing for an effective date."
- HEARD AND HELD
HOUSE BILL NO. 394
"An Act relating to adjustments to royalty reserved to the state
to encourage otherwise uneconomic production of oil and gas; and
providing for an effective date."
- BILL HEARING POSTPONED
PREVIOUS ACTION
BILL: HB 410
SHORT TITLE:ALASKA NATURAL GAS DEVELOPMENT AUTHORITY
SPONSOR(S): OIL & GAS
Jrn-Date Jrn-Page Action
02/13/02 2233 (H) READ THE FIRST TIME -
REFERRALS
02/13/02 2233 (H) O&G, RES, FIN
02/13/02 2233 (H) REFERRED TO OIL & GAS
03/14/02 (H) O&G AT 10:00 AM CAPITOL 124
BILL: HB 423
SHORT TITLE:NATURAL GAS TRANSPORTATION BY ALASKA RR
SPONSOR(S): RLS BY REQUEST OF THE GOVERNOR
Jrn-Date Jrn-Page Action
02/13/02 2244 (H) READ THE FIRST TIME -
REFERRALS
02/13/02 2244 (H) O&G, FIN
02/13/02 2244 (H) FN1: (CED)
02/13/02 2244 (H) GOVERNOR'S TRANSMITTAL LETTER
02/13/02 2244 (H) REFERRED TO OIL & GAS
03/14/02 (H) O&G AT 10:00 AM CAPITOL 124
WITNESS REGISTER
SCOTT HEYWORTH
(No address provided)
POSITION STATEMENT: During hearing on HB 410, testified as one
of the primary sponsors of Initiative 01GSLN, which the bill
would supplant; suggested incorporating the nine-member Alaska
Gasline Port Authority board.
WILSON L. CONDON, Commissioner
Department of Revenue
P.O. Box 110400
Juneau, Alaska 99811-0400
POSITION STATEMENT: Explained department's fiscal note for
HB 410; cautioned about the large amount of upfront money
required, no matter what size the project is.
NELS ANDERSON JR.
(No address provided)
Dillingham, Alaska
POSITION STATEMENT: Urged that HB 410 be moved forward, but
suggested amendments.
DAVE DENGEL, City Manager
City of Valdez; and
Executive Director
Alaska Gasline Port Authority (AGPA)
P.O. Box 307
Valdez, Alaska 99686
POSITION STATEMENT: Testified in support of HB 410 and
commercializing North Slope gas; requested amendment to include
the AGPA.
ACTION NARRATIVE
TAPE 02-15, SIDE A
Number 0001
CHAIR SCOTT OGAN called the House Special Committee on Oil and
Gas meeting back to order at 10:44 a.m. Representatives Ogan,
Dyson, Fate, Kohring, Guess, and Joule were present at the call
back to order; Representative Chenault arrived shortly
thereafter. [For the overview presentation by Yukon Pacific
Corporation (YPC), see the 10:08 a.m. minutes for this date.]
HB 410-ALASKA NATURAL GAS DEVELOPMENT AUTHORITY
[Contains testimony pertaining to SB 221]
Number 0040
CHAIR OGAN announced the first order of business, HOUSE BILL NO.
410, "An Act establishing the Alaska Natural Gas Development
Authority, a public corporation, and providing for its
structure, management, responsibilities, and operation, and
requiring the development of a project plan for the construction
and operation of a natural gas transmission pipeline project by
the authority." [HB 410 was sponsored by the House Special
Committee on Oil and Gas.]
CHAIR OGAN explained that he'd decided to introduce HB 410
because of his belief that [Initiative 01GSLN, "The All-Alaskan
Gasline Initiative"] would be certified [to go on the November
ballot], which had since happened. He offered his belief that
the bill almost exactly mirrors the initiative, with a couple of
minor changes; he referred members to the bill packet [which
contained two memorandums, dated February 8, 2002, and March 13,
2002, from Jack Chenoweth, drafting attorney, Division of Legal
and Research Services] with regard to the changes.
CHAIR OGAN said this creates the Alaska Natural Gas Development
Authority as a public corporation in the state; that authority
would acquire and condition North Slope natural gas, and would
construct a pipeline to transport that gas. The route would be
from Prudhoe Bay to tidewater in Prince William Sound, with a
spur line to Glennallen and the Southcentral gas distribution
grid. The authority would operate and maintain the gas
pipeline, and would ship and market the gas. He pointed out a
five-page indeterminate fiscal note from the Department of
Revenue, saying he wanted to have discussion about it. He also
noted that the bill is silent with regard to how it interfaces
with the proposed gas pipeline [that would parallel the Alaska
Highway]. He said he believed there should at least be
discussion of this issue, since it will be on the ballot;
because it is a committee bill, however, he would defer to the
will of the committee with regard to how to proceed.
Number 0230
CHAIR OGAN noted that the constitution allows the legislature to
amend an initiative at any time, or to repeal it [after] two
years. He suggested looking at whether there are flaws in the
initiative. He also suggested this is a huge policy call, since
he said it puts the State of Alaska in the business of building
a pipeline and doing what usually the private sector does; the
state would take the risks. In the alternative, legislators
could let the initiative go forward, with what "our attorneys
think are a couple of flaws in the bill, constitutionally and
statutorily." Chair Ogan called on Scott Heyworth [one of the
primary sponsors of the initiative that HB 410 would supplant].
Number 0393
SCOTT HEYWORTH testified via teleconference, as follows:
As guaranteed by our state constitution and state law,
the citizens of Alaska have gathered more than ...
enough signatures required to place this gas line
initiative on the November ballot. I have seen or
commissioned four statewide polls in the last year
showing that the people of Alaska favor this Valdez
route by over 65 percent. My poll done by Ivan Moore
Research in just Anchorage alone shows a 70 percent
"favorability" in the town that controls 40 percent of
the statewide votes. I've also polled the state with
the exact ballot language ... you just read, Mr.
Chairman, and it passes by 65 percent statewide today.
My petitioners told me it was the most popular
petition that they've ever worked on in the state of
Alaska. That is why we were able to gather so many
signatures in the dead cold of winter, in so little
time, and without the state fair.
The bottom, bottom line of this initiative is that the
people of Alaska will now have a say in the
development and commercialization of one of their
resources, natural gas. But the legislature of our
great state has an even more wonderful opportunity.
You all can pass ... substantially similar legislation
that we would agree on, that would speed this whole
project up by one year and allow for a much earlier
construction startup date. Representative Ogan has
introduced HB 410, and Senator Taylor has introduced
SB 221, which is in front of Senator Torgerson's
Resources Committee. I have reviewed both of these
bills, and, generally, I ... in most cases agree that
they are substantially similar to our gas line
initiative.
There are a few small things that might be added. As
you know, the Alaska Gas Port Authority, or AGPA, made
up of the three large boroughs of the North Slope,
Fairbanks, and Valdez, have been working long and hard
on their own port authority idea. In fact, I
consciously stole many of their very good ideas and
wrote them into this [initiative]. I would like to
suggest that if a substantially similar bill does
emerge, that you incorporate the seven-member board
the initiative purports with the nine-member AGPA
board's model. The reason for this is, it gives
greater voice to all of Alaskans, including Juneau,
Southeast, Bristol Bay, and/or the Southwest Alaska
municipal conference.
Number 0653
MR. HEYWORTH told members he was extremely pleased to hear the
numerous references to the phrase "in-state gas use" during the
presentation by Mr. Fuhs earlier in the meeting [on behalf of
Yukon Pacific Corporation (YPC); see 10:08 a.m. minutes for this
date]. Mr. Heyworth said the potential for in-state gas use is
one of the most exciting aspects of the initiative. Alaska must
develop an energy plan for all Alaska and bring down the high
costs of rural energy as soon as possible. He reported that
propane in Dillingham costs $4.25 a gallon; in Anchorage, it
costs only $1.89. In Togiak in Bristol Bay, electricity costs
28 cents a kilowatt-hour; in Anchorage, it costs less than
9 cents. Developing a GTL [gas-to-liquids] and LPG [liquefied
petroleum gas] or propane extraction plant in Valdez, he said,
could result in three new energy sources to fuel all of Alaska:
compressed gas, propane or LPG, and LNG [liquefied natural gas].
MR. HEYWORTH said each coastal, urban, or rural community might
be unique in how its infrastructure should be built to receive
this new "Alaska energy" from the North Slope; he said he looks
forward to helping make this energy plan a reality for all
Alaskans. He added:
I want to remind each and every Alaskan of one thing:
neither Yukon Pacific nor I have ever purported that
Yukon Pacific has any responsibility whatsoever to
deliver in-state gas directly by them to any rural or
urban area of Alaska. That is the sole responsibility
of this new gas authority, and you as legislators,
even, perhaps. It is an exciting task to look forward
to creating the infrastructure and delivery systems
from Valdez and along the pipeline corridor to get
these new energy resources delivered. This will
[most] likely be done by the private sector in
contracts with this new gas authority.
This initiative gives you, as legislators, the
potential to capture another revenue stream, possibly
as early as 2007 or 2008, to help solve our fiscal gap
and budget problems. This is not the Delta barley
farms. It is not the milk farms or the hay farms over
at Point MacKenzie. It is patterned off the permanent
fund language. The permanent fund is something
Alaskans trust and believe in. It has worked. So can
the Alaska gas authority concept. It is a stand-alone
project.
With the bonding capacities ... and/or in conjunction
with the Alaska Railroad Corporation bond ideas that
have emerged, the state would own 100 percent of this
project. But this is very important to understand:
it would contract out all the work to the private
sector. This is how an authority works. The State of
Alaska is not building the gas pipeline.
Number 0867
MR. HEYWORTH suggested reading [proposed] Sec. 41.41.400,
"Credit of state not pledged", in order to fully understand that
this project doesn't put the permanent fund or the State of
Alaska at risk. Once this initiative or [bill] becomes law, the
newly appointed board is charged with putting a working plan
together and presenting an economic model to Wall Street
investors, he noted.
MR. HEYWORTH concluded by saying this model will offer a way to
get "our stranded gas to the market, something that has never,
ever happened before." He added:
If the model is sound - and I believe your confidence
level should be a bit higher after you've just seen
the model presented by Mr. Fuhs for Yukon Pacific -
then Wall Street investors will buy our bonds, and we
will begin to fully commercialize and finally
commercialize our North Slope natural gas. I look
forward to working with all of you to make this a
reality.
Number 0928
CHAIR OGAN pointed out that the fiscal note prepared by the
Department of Revenue asserts that there is some risk to the
state; after confirming that Mr. Heyworth hadn't seen the fiscal
note, he said the committee had just received it that morning.
Referring to "Development Costs," beginning on the second of
five pages of the fiscal note and analysis, he read, "First, it
is important to point out there are no guarantees that this bill
will result [in] a successful project [and,] under this
legislation, the state would be exposed to taking commercial
risks that no private firm has yet been willing to assume."
Chair Ogan remarked that it seems to allude to putting the full
faith and credit of the state at risk. He asked for Mr.
Heyworth's take on it.
MR. HEYWORTH said he totally disagrees. He again referred to
proposed Sec. 41.41.400 and said, "That's not the way the
project's set up. The private sector will invest in the bonds.
The project will sell itself. It doesn't put the state at any
risk." He acknowledged that he didn't have [the fiscal note].
He also emphasized his belief - from recent conversations with
Mr. Obinata, general counsel from Japan, and from testimony from
Mr. Muraki a year ago [at a joint hearing February 15, 2001,
before the Senate Resources Standing Committee, the House
Resources Standing Committee, and the House Special Committee on
Oil and Gas] - that the Asian and Japanese markets are "hungry
and would love to buy our gas from Valdez." He said in one year
nothing has changed, and that it is economically feasible.
CHAIR OGAN indicated his own conversation with Mr. Obinata
hadn't conveyed such a strong commitment.
MR. HEYWORTH offered his belief that the general counsel is very
open to it, however.
Number 1163
REPRESENTATIVE GUESS questioned the wisdom of specifying a route
in a bill or initiative, rather than having flexibility and
allowing the market or business [to determine it]. She asked
why the language specifies that it go to tidewater, instead of
just saying it has to end in Alaska.
MR. HEYWORTH replied:
I think my answer would be simply, number one, [the]
speed of the project, to get it going, and because,
obviously, the permits are all in line with Yukon
Pacific to go to Valdez. It was also, at one time,
tried to get the permits to go down to Kenai, which
... passes through Denali State Park, the Minto Flats,
and the Susitna wildlife refuge, and then under Cook
[Inlet], over to Kenai. And that just wasn't found
environmentally -- or a smart way to do it. And
that's why Yukon Pacific got the permitted route.
MR. HEYWORTH also suggested that once it gets to Valdez, there
are multiple markets, not only to Alaska but also to Asia, the
West Coast, Mexico, and "everywhere." He said it is an
economic, smart way to "bring our product to Valdez," and opens
up all kinds of different markets, including that spur line down
to Anchorage in order to hook into Southcentral Alaska.
Number 1270
CHAIR OGAN, noting that the bill mandates a spur line to
Anchorage, said the Department of Natural Resources (DNR)
believes there are significant gas reserves that haven't been
exploited in Cook Inlet, where drilling is just now beginning.
He asked what would happen if adequate supplies were found in
Cook Inlet for the "near and maybe mid-term future." He said he
has heard this spur line would be expensive, wouldn't pencil out
as far as what it would cost to build versus what could be
obtained for the gas, and wouldn't compete with what could be
produced locally. He asked, "Have you done any analysis on what
the spur line would cost?" If a law passes that says there must
be a spur line, he asked what would happen if it doesn't pencil
out and new gas sources are found. If the initiative passed by
a vote of the people, he said, [the legislature] couldn't change
it for two years.
MR. HEYWORTH said he understood and thought there were ways to
get around it, if necessary. He said it is an intelligent
question. He added:
There's a number of things. First of all, it's if
anybody finds new reserves. The cost that I've seen
on a paper napkin is about $300 million; I could be
high or low, in that I think it's only about 3 percent
or 4 percent of the entire project if we added that
one, so I think it's insignificant. I say, why don't
we do things right the first time? ... We would wait
to find a spur line because "if somebody finds some
gas" - it's "if" and "ands" or "buts" - it's all I've
heard ... for so many years.
I think it'd be smart to plan it and do it, and put it
in. And if we need ... to amend it or change it, as
you talked about, then the legislature can do that.
And I'm not saying that I think it should be forced
down our throats. If you can show me that it's not
right or it's not economical - I'm a reasonable person
- then maybe we can't do it that way. But at the time
that we put this initiative together six, eight months
ago -- every report that's out in front of you and
everyone in the state of Alaska says we're going to be
out of gas in Cook Inlet in ten years if we don't find
anymore. Well, there's that word "if" again. Well,
what if we don't find any more and we haven't put the
pipeline in? Then where are we at? So I think we
could work with it and look at different options, and
I think ... the wise people in the legislature can now
work with us and help us figure that out.
Number 1470
CHAIR OGAN remarked:
One of the things that's happened since then is the
Regulatory Commission [of Alaska (RCA)] has tied the
price of gas that goes into the ENSTAR [Natural Gas
Company] system to Henry Hub, or at least a formula
based on Henry Hub, which has increased the interest
in creating ... some more competition for looking for
gas in Cook Inlet.
MR. HEYWORTH responded:
As you know, some company that I don't remember their
name suddenly exposed themselves six or eight months
ago and said they found all these reserves; that was
the first report. And then when you got to the bottom
of the whole newspaper article, the thing was, "Oh,
actually we haven't found the gas; we're going to
start looking for it next summer."
These are the kind of reports that keep coming out, so
you and I and your committee and all of Alaska never
know what the truth is. They didn't find any gas;
they're going to look for gas next year, but the
headline said they found 4 billion cubic feet of gas.
It's misinformation. Nobody's found any gas recently.
They may start drilling for it this summer; ... we'll
have to take a look at that. Right now, we're going
to run out of gas, and everyone knows that's the
truth.
Number 1535
CHAIR OGAN pointed out that there has been some success in
southern Cook Inlet.
MR. HEYWORTH replied in the affirmative, saying it is just a
little bit, however, and that the talk is about sending it to
Homer [and Kenai], to his belief, which doesn't solve problems
in Anchorage and Southcentral Alaska. He suggested, "I think we
can just all be reasonable and look at this." Emphasizing his
concern over the last 16 months that "our gas is stranded," he
continued:
We're being told by the administration and the oil
companies that our project doesn't work; no one
provides any numbers. You just said you got a five-
page [fiscal note and analysis] that says it's a $16
billion project; we haven't seen it - I don't have it
in front of me. We don't know what we're talking
about at all. And yet, to make the Canadian highway
route work, the one the administration purports, they
want a $10 billion loan from Congress; the oil
companies need to have price-floor supports for some
imagined $1.25 wellhead price, all kinds of
streamlined regulation, all kinds of federal corporate
welfare to make the project work.
Our project in Alaska doesn't ask for any of those
things. And the oil companies today, as you well
know, ... don't even want to build the project, and
they still haven't given you the studies that they
promised to give you December 31; now they're telling
you it's March 31. Why won't they give you the
studies? We're giving you our studies - at least
Yukon Pacific is; it's right there in front of you
today.
Number 1624
CHAIR OGAN pointed out that the power of appropriation lies with
the legislature. He asked what happens if there is a law on the
books that the state doesn't have the money to [fund].
MR. HEYWORTH replied that he'd heard Senator Torgerson say that
someone had guessed it would be $3 million to $3.5 million to
start this. Mr. Heyworth said he himself believed it would be
more like $1 million to $1.5 million, to bring a yearly revenue
stream to Alaska of at least $500 million a year, and possibly
as high as $750 million to $1 billion. He pointed out that [the
legislature] is being asked, meanwhile, to give money to the
tourism industry and to Arctic Power, for example. He suggested
[his proposal] is a small investment relative to the return. He
said the state needs this huge new revenue source as well as in-
state gas. He called it an "interesting project to look at, and
soon, not later." He suggested perhaps HB 410 could be combined
with Senator Taylor's bill in conference, and added, "I don't
think I'd move to block it unless it was just tremendously not
substantially similar, because I think all of us in this room
today and on these conference calls are working in the best
interests of Alaskans, and that's what I'm trying to do."
Number 1729
REPRESENTATIVE KOHRING mentioned projects such as those at Point
MacKenzie and Delta in which the state invested in the past; he
voiced concern that this will be another government boondoggle
and a colossal waste of money for which taxpayers will have to
pick up the tab later. He asked Mr. Heyworth what makes him
optimistic that this is viable and will provide some real
benefit. He also asked why government should be involved in
something that, in his opinion, the private sector should be
doing. He suggested that if the private sector isn't stepping
forward to do this, perhaps it isn't a viable project and
doesn't pencil out.
MR. HEYWORTH replied that the private sector isn't stepping into
the LNG project at Valdez or the "Canadian highway project" for
many reasons. He said this isn't a state project whereby the
state builds the pipeline, in contrast to the other projects
that Representative Kohring had correctly mentioned.
Mr. Heyworth explained:
This is an authority. And the way an authority works
is, the state, yes, they do own the authority and the
project. But everything is contracted and built by
the private sector. And that's the difference between
this project and the Delta barley farms and the Point
MacKenzie milk farms and hay, and every other one
that's never worked. It's a stand-alone project. The
State of Alaska ..., through bonds or the railroad
bonds or whatever, ... could invest some money if they
wanted to. But that's not ... the way the project is
financed, Representative Kohring. It's 100 percent -
or should be or could be 100 percent - financed by
bonds. That's not any investment by the State of
Alaska. It doesn't take any money from the permanent
fund or the State of Alaska.
I ... personally think the State of Alaska should try
to own this whole project, but that's through the
bonding process, not through investment. And, again,
I've said it and I think Mr. Fuhs correctly said it,
that if you put this economic model together and put
the plan in front of Wall Street investors, if they
want to buy the bonds, that's what will determine the
efficiency of the model of the project, is Wall Street
investors themselves. And if they don't want to buy
our bonds, then I'm wrong and we don't have a project;
you're right. But if they do, we have a viable
project that'll bring a tremendous amount of revenue
to the State of Alaska, far more than any Delta barley
farms [were] ever going to do.
Number 1912
REPRESENTATIVE KOHRING questioned whether government should get
involved in a marketplace that "should be strictly a private-
sector effort." If there are Asian markets, for example, he
suggested oil companies will try to meet that demand and, if
there is a profit to be made, will rise to the challenge and
step forward with their own plans and financing, and will build
the [pipe]lines. He said he believes the private sector knows
best and has the studies, for example. He concluded, "If they
haven't stepped to the plate, then I'm really nervous about [the
government's] getting involved."
MR. HEYWORTH reiterated that the state would own the authority
and would contract with private-sector companies to do this
whole project, including going to Asia to "make the offers to
develop the infrastructure to build the pipeline." He likened
it to how the John F. Kennedy (JFK) International Airport works,
or the Houston Ship Channel; he further reported that most
sports arenas are under an authority whereby the city owns it
but the private sector builds it and then runs it. In response
to Representative Kohring's suggestion that it should be left to
the private sector, Mr. Heyworth said that is what has been for
25 years, which is why the gas is stranded.
Number 2050
REPRESENTATIVE FATE told Mr. Heyworth he may disagree a bit
because the stranded gas has to do with the economics.
Referring to Mr. Heyworth's mention of efforts at the federal
level, he remarked:
They're doing this because of the tremendous risk
involved. This is a huge, huge project. They're
doing this to try to lessen that risk, and then doing
this to raise the return on investments. You've
implied here that this will be private people doing
this work; now, they're going to have a return on
their investment also. So are we saying now that
there's no risk in just going to tidewater, or that
there is somehow an attenuated risk that is not
comparable to the risk going down the southern route?
MR. HEYWORTH replied:
I think ... the last sentence you said is exactly
correct, sir. Their project is a $20 billion-plus
project trying to move somewhere between 4 to 6
billion cubic feet of gas into a market in the Midwest
that doesn't need the gas, has no gas shortages. And
... that gas, if it ever does get there in 2010,
[2012, or 2015], will flood the market and drive the
price of gas right down to the bottom, and then the
federal price support will have to come in, and then
the taxpayers are paying for the whole project. None
of that happens with this state project.
REPRESENTATIVE FATE responded that it still doesn't attenuate
the risk, and that supposition cannot be relied upon; whether
the $16 billion figure is valid or not, it will be a huge
number, implying a huge risk.
Number 2170
MR. HEYWORTH replied that the risk would be taken not by the
state, but by the market itself - Wall Street investors or
companies that would invest in the bonds; it wouldn't indebt the
state or the permanent fund. He suggested looking "happily" at
these smaller numbers [put forth by Mr. Fuhs], which Mr.
Heyworth said work because of a smaller project. He agreed that
there would be risk, but suggested if the model were put to the
market, Wall Street experts would decide whether the project is
viable, and would give either a "thumbs up" or "thumbs down" to
people to buy the bonds. He added:
We don't incur any debt until the bonds are bought and
we start the project. That's when it happens. We
don't accrue any risk to go forward with this and see
what happens, to see if it is viable. Let the market
decide. We're not going to go into debt. ... We're
not investing in the project before it's been decided
by Wall Street that it's a viable project. It doesn't
work that way. And I really believe that it's just
such an economy of scale of the Canadian highway route
that makes it such a big project that you have to have
all those federal - what I call corporate welfare - to
make sure that it all works, as opposed to this much
smaller project that is much more sensible, deals with
multiple markets, and has many, many places to spread
that risk out that you talk about, sir.
Number 2245
CHAIR OGAN asked Mr. Heyworth whether he was willing to share
the polling numbers.
MR. HEYWORTH answered in the affirmative, noting that he has
given them out freely but hasn't had success in getting them
published in newspapers.
CHAIR OGAN offered to fax Mr. Heyworth the five-page fiscal note
and analysis.
Number 2359
WILSON L. CONDON, Commissioner, Department of Revenue, came
forward to discuss the department's fiscal note for HB 410,
expressing surprise at the controversy. He pointed out that the
initiative - as well as the bill, to his belief - mentions
getting a project up and running by 2007; he offered that it is
too optimistic. He said that clearly the objective is to get
the project done quickly, which will require upfront money. He
acknowledged that the department could have put in a fiscal note
that simply contemplated a board and support staff that would
constitute the gas development authority; those could then "go
around and talk to people and see what you might put together."
COMMISSIONER CONDON told members that in order to complete a
project by 2007, 2008, or 2009, there is a need to start to
spend real money now. He cited the need to make arrangements to
buy the gas on the North Slope and to engineer the project. In
addition, although YPC has done lots of work to get the permits
necessary for part of the proposed project, it isn't known
whether YPC would simply donate those permits to the project or
if the project would have to pay YPC for them. Furthermore, a
whole set of contracts would have to be negotiated with
customers. All that work would have to be done by someone
before there was the ability to go to Wall Street and sell
bonds. Therefore, he said, the department doesn't know at this
point how big the number is in terms of "front-end dollars" that
have to be put into this project.
COMMISSIONER CONDON explained that even though it is
contemplated that the work will be done by private-sector
contractors, they will expect to be paid; the party responsible
for paying them is this development corporation, which must have
upfront money. Until it has the contracts in place and has a
project engineered, it won't be able to borrow that money on
Wall Street, and yet the cost to put this together will be
substantial. "Great if it's done by the private sector," he
added, "but nobody's going to donate the kind of commercial and
engineering services that are going to be necessary to put this
project together."
Number 2602
COMMISSIONER CONDON said the best indicator of the money needed
is the kind of money spent by companies when looking at
engineering a project and other upfront work before being able
to turn to Wall Street for financing. He added, "So, if we're
really serious about doing this, if we want to get underway and
see whether or not the business model that's proposed in this
legislation will work, then we've told you in the fiscal note
that we think that the kind of upfront cash that's needed is
something on the order, over a two-year period of time, of 175
to 250 million bucks." He said it might not turn out to be that
much, but enough money ought to be appropriated to get it done;
if it costs less, the money can be returned. "And if we're
actually able to put the project together, we'll be able to
convert part of what we spent into borrowed money, through
bonds, on Wall Street," he added.
COMMISSIONER CONDON reiterated that [the state] won't be able to
convert all this to bonds on Wall Street, or even borrow on Wall
Street, unless it has spent the money upfront to put the project
together; he said the only way he sees of getting money to do
that is to appropriate the money "through the corporation from
some source," which is the basis of the fiscal note. He added,
"Now, the fiscal note then goes on and puts some big numbers on
the table, because presumably ... the entity, the gas
development authority, ... once it's got everything together,
... will go to Wall Street and borrow the money. ... And a
projected stream of dollars is reflected in the fiscal note."
Number 2721
COMMISSIONER CONDON also cautioned that the state could
appropriate and spend the $250 million in the fiscal note
through getting all the arrangements in place, and then Wall
Street could turn it down. Or most of the arrangements could be
put in place, but not all of them, and the state would be unable
to go to Wall Street and expect to borrow the money. He said,
"In either of those eventualities, we're simply going to be out
the money, and that's the risk we take if we're going to put
this authority in place and seriously contemplate that they're
going to put this project together."
COMMISSIONER CONDON indicated the fiscal note lists what the
Department of Revenue staff see as the risks. He acknowledged
that others evaluate these risks differently, but said, "Our job
is to tell you what we think. And your job is to decide whether
... we have the capability to think better [than], or not as
well as, Mr. Heyworth and others ... that see a little rosier
picture with respect to this proposed project than we do."
Drawing attention to the last couple of pages of the fiscal
note, which list some points with respect to the general market
around the Pacific Rim, he explained:
The way we see it is that there are lots of reserves
at tidewater with easy access ... to the places around
the [Pacific] Rim that need energy, and that with
respect to all of those reserves, ... we believe they
have about a $1.50-per-million-Btu advantage over gas
moving from the North Slope through a liquefaction
plant in Prince William Sound and via LNG tanker
either to the West Coast of North America or to Asia.
And that relative disadvantage, we think, holds up at
the small-sized project that the Yukon Pacific
[Corporation] people propose, as well as the larger
project that we mentioned in our fiscal note, which is
a project that would be many times that size.
In the past, Alaska's had one advantage with respect
to many of the places where LNG might be marketed, and
that is that, in terms of the marine-shipping distance
from south Alaska to Japan and the marine-shipping
distance from south Alaska to Southern California and
Northern Baja, we're closer. However, that advantage
has shrunk over the last four or five years with the
decline of the cost of LNG tankers, and, consequently,
the one advantage that we had ... in the business has
shrunk some.
Number 2917
COMMISSIONER CONDON continued:
With respect to focusing just on ... the Asian market,
again, lots of gas chasing a limited market. And most
of the gas that we're competing against doesn't have
... what we characterize here as the "pipeline
disadvantage." And the market in Asia is changing.
How quickly it will change, we're not sure. But in
Japan the energy market for that country has changed
with the introduction of deregulation in their ...
electric power and distribution industry. And we do
not know at this point what kind of pressure that's
going to put on prices that you can get in Asia, and
in Japan in particular. Historically, LNG has moved
into the ... market in Japan at parity with crude oil.
There has been some softening in those arrangements,
and ... over the longer term, we may see a situation
where the gas price becomes "delinked" [from the oil
price]. [The bracketed portion isn't on tape, but was
recorded in the committee secretary's log notes.]
TAPE 02-15, SIDE B
Number 2961
COMMISSIONER CONDON continued:
When you look at the California market, the way we've
analyzed it, we believe that it's cheaper to bring gas
from elsewhere around the Pacific Rim to California by
LNG tanker than it would be to bring gas from Alaska.
... The lowest that ... our analysis has yielded is
about a $4 ... per-million-Btu cost into Southern
California; if we're right there, obviously, it takes
a $4 price.
And, finally, in terms of the analysis we've done,
we've concluded that it's cheaper to move gas to
California by a pipeline to mid-North America, and
then a redistribution of gas resources in the
Lower 48, rather than a pipeline to Prince William
Sound and an LNG tanker to Southern California.
Now, we may be wrong in all those assessments.
Obviously, the ... possibility that we may be right is
something we think you should evaluate before you
undertake ... to set up this business and capitalize
it with the kind of money that we think you'd need to
capitalize the business with, in order to put things
together and go to Wall Street and buy bonds and so
on.
Number 2879
REPRESENTATIVE GUESS asked whether, if the state wants to get
into the gas pipeline business, an authority like this is
needed.
COMMISSIONER CONDON answered, "There probably are other ways
that ... you could structure the government's getting into the
gas pipeline business. But if we are going to get into the
business, in my judgment, this would be the best way to go."
Number 2841
CHAIR OGAN asked, "Where did you come up with the $16 billion?"
COMMISSIONER CONDON said the analysis was done by one of [the
department's] analysts. He added:
I don't know where he came up with that number. ...
There are all kinds of different-sized projects that
people have put on the table. You've got the port
authority, which has proposed a big project, and you
now have Yukon Pacific, which is proposing a smaller
project. And if there is a specific-sized project and
a specific-cost project that you would like us to
model, we'd be glad to do that. We were not trying to
find a project ... that was ... big that we could
somehow "dis" this idea with. ...
The point we wanted to make is that ... if we're
really serious about doing this, whatever size project
it is, we've got to be prepared to come up with a lot
of cash right now to get going.
Number 2758
NELS ANDERSON JR. testified via teleconference, emphasizing the
need for gas. He commended the committee for putting HB 410 on
the table, suggesting it is one way to "maybe shake up the oil
and gas industry that's been stranding that gas on the North
Slope." He said energy costs in the area [near Dillingham] are
much higher than elsewhere than in the state, although cheaper
in Dillingham than in nearby villages. Without something such
as what HB 410 proposes, he said he doesn't know what will
happen in rural Alaska. He therefore urged that the bill be
moved forward with dispatch. However, he expressed concerns
about the bill as written, suggesting that there be amendments
to clarify that "the State of Alaska, with its gas, would make
sure that there is in-state, guaranteed use." He said there are
in-state markets and that Anchorage has been depending on the
Cook Inlet reserves, which are depleting rapidly; he mentioned
the need there for long-term energy, and also mentioned the
Lower 48 and the Pacific Rim.
MR. ANDERSON specified that he'd like HB 410 to be in compliance
with Article VIII, Section 2, of the state constitution.
Therefore, he requested the following amendments. First, he
referred to Section 2 [page 3] under Sec. 41.41.010,
"Establishment of the authority", [paragraph] (4) [which read,
"the design, construction, and operation of other facilities
necessary for delivering the gas to market and to Southcentral
Alaska; and"]. He asked that it be amended to read, "the
design, construction, and operation of other facilities
necessary for delivering the gas to market and to communities
throughout Alaska, including Anchorage and the Railbelt".
Number 2555
MR. ANDERSON, in response to Chair Ogan, agreed to provide
suggestions in writing. Continuing with his amendments, he next
referred to Section 5 [page 15], "DEVELOPMENT OF PROJECT PLAN,"
[paragraph] (6) [which read, "a plan for delivery and pricing of
natural gas to communities along the pipeline route and to
Southcentral Alaska through a spur line;"]. He suggested adding
the phrase "including Anchorage and the Railbelt" after "spur
line".
MR. ANDERSON then referred to Section 5 [paragraph] (7) [which
read, "a plan for delivery and pricing of liquefied natural gas
to Yukon River and coastal communities;"]. He suggested adding
"throughout Alaska" after "communities".
MR. ANDERSON concluded by saying, "The sooner we get this thing
going, the better. I would rather see substantially the same
language passed as is found in the petition. I'm wondering if
42,000-plus registered voters of Alaska can be wrong, in that
they want to use Alaska's gas for their use to bring down the
cost of energy."
Number 2467
CHAIR OGAN mentioned polls indicating people support the
initiative, but questioned how many really know what they are
signing with regard to initiatives - what the costs are, for
example, or whether the producers will be willing to sell the
gas. He also inquired about the incentive to sell if there is a
floor price of $1.25.
MR. ANDERSON said this is the only game in town that has any
prospect of providing long-term, low-cost energy for Alaska. He
suggested the state should do everything possible to make
something like this happen. He said the only time North Slope
gas will be developed and moved is when the State of Alaska puts
pressure on the oil and gas industry by taxing that gas in the
ground and thus giving an incentive to move it. He said the
signers of the petition, even if they don't know all the
details, are making a demand or call on "our gas that's sitting
stranded in the North Slope." He added, "And we need it." He
said he sees this as a "hopeful, very positive move in the right
direction to develop our gas for our use, and also provide for
the markets that I think are out there in the Pacific Rim and
the Lower 48."
CHAIR OGAN responded that he shares the desire to see the North
Slope commercialized; he surmised that most Alaskans feel the
same. He recalled countless hours of talking about it in
committee.
Number 2234
DAVE DENGEL, City Manager, City of Valdez; and Executive
Director, Alaska Gasline Port Authority (AGPA), came forward to
testify. He told members:
I'm here today to offer Valdez's support to House Bill
410 and the idea of commercializing Alaska's North
Slope gas. As you know, the City of Valdez, along
with the Fairbanks North Star Borough and the North
Slope Borough, formed the Alaska Gasline Port
Authority [AGPA] ... in fall of 1999. The mission of
that port authority is to develop Alaska's North Slope
gas for the maximum benefit of all Alaskans, which ...
is very similar to what HB 410 wants to do and what
Mr. Heyworth's initiative wants to do.
Since the fall of 1999, when the port authority was
approved by the voters of Valdez, Fairbanks, and the
North Slope, over $6 million has been expended by the
Bechtel Corporation, Taylor-DeJongh, and O'Melveny &
Myers in helping the port authority to develop a cost
estimate and an economic model for the development of
North Slope gas. The economic model [that] has been
developed for the port authority shows that our
concept is economic. It also shows that it will have
a return to the State of Alaska of between $500
million and $750 million a year.
The port authority economic model shows that a
publicly owned project is economic and will provide
[a] substantial return to the state and to the
municipalities. [The] port authority model shows that
using the port authority concept, ... the project can
be 100 percent debt-financed. And this is a little
bit different than what Mr. Fuhs indicated with their
model, ... 75-25. We believe that our model and our
project can be 100 percent financed ... by the
investors so that there'd be no ... cash required by
the port authority.
The City of Valdez has worked with Mr. [Heyworth] and
his petitions, and we support his efforts. He along
with members of the legislature have brought to the
forefront the need to develop our natural gas
resources. Valdez and the port authority have a very
good working relationship with Yukon Pacific. Yukon
Pacific brings the permits and their economic model;
the port authority brings our economic model and our
cost estimates and concept; and the initiative effort,
and the legislature, brings the political will to do
the right thing in developing our natural gas.
Valdez is supportive of a project that takes natural
gas to tidewater, and manufactures LNG and LPG and
transports it to markets within ... Alaska, within the
United States, and within the Pacific Rim.
Number 2120
MR. DENGEL continued:
We support House Bill 410 and the initiative. Because
of the work that has been completed to date by the
port authority, Valdez would like to offer that the
proposed legislation be amended slightly to
incorporate the work that the Alaska Gasline Port
Authority has done, much like what Mr. Heyworth had
indicated. By incorporating our existing board and
our work into this, we can continue to move forward
with this and not have to wait one year, two years, or
three years in which to develop this project.
I want to applaud you, Mr. Chairman, and other
legislators - Senator Taylor and Representative
Whitaker - who have ... introduced legislation in the
past ... to form a statewide authority to develop our
Alaska North Slope gas. It's our belief that by using
the port authority that is in place now and working
with the legislature to amend the proposed legislation
to include the port authority, ... Alaska can move
forward with the development of our natural gas
resources without delay. By using your political
will, Yukon Pacific's permits and economic models, and
the Alaska Gasline Port Authority's concept, I believe
that we can achieve the goals of this legislation and
of Mr. Heyworth's initiative to develop North Slope
natural gas for the maximum benefit of all Alaskans in
the very near future.
Number 2056
MR. DENGEL continued:
A couple of things that I've heard in the past about
why we should wait for the private sector ... to do
this project: I think when you look at what's driving
the industry and the producers on the North Slope, ...
I've been in YPC's offices a number of times, and they
have a large map of the world on one of their walls;
... it shows where all the other LNG projects are
throughout the world, and who owns them. And I think
that that's what the North Slope gas project is
competing against, ... all these other projects. ...
Some of those countries have put requirements on those
producers that they must develop those gas resources
within a certain time. We don't have that on ours,
and that's what we're competing against. And they're
going to develop those projects before they develop
our project.
And I think it's incumbent on us as Alaskans, and ...
you as our legislative leaders, that we need to do
something with that North Slope gas now. We need to
get that into production, and get it commercialized so
that Alaskans can use it to reduce our electric costs,
our high costs of living, and also to improve the
economic picture for Alaska by providing petrochemical
plants and whatever might come of that, as well as
providing revenue back to the state from the sale of
that ... North Slope natural gas.
MR. DENGEL concluded by offering to provide the committee with a
presentation by the AGPA on its economic model and view of what
is going on.
Number 1958
REPRESENTATIVE CHENAULT asked where the petrochemical plant is
proposed to be situated.
MR. DENGEL replied that it hasn't been determined yet, although
there would be a fractionation plant in Valdez. He offered his
understanding that Williams is looking at putting a plant in
Fairbanks, and said there may be other plants located in Valdez
as well. He also mentioned the possibility of facilities in
Southcentral Alaska if the spur line goes there.
REPRESENTATIVE CHENAULT conveyed interest not only in using the
gas in-state, but also in having value-added products produced
in Alaska, which he said interests him more than LNG, even
though LNG will be a big portion of this project.
MR. DENGEL concurred but said LNG drives the project and helps
to pay for it; if the value-added end can be pushed as well,
that will be gravy to the State of Alaska. In response to Chair
Ogan, he agreed to provide a copy of his written testimony.
[HB 410 was held over.]
HB 423-NATURAL GAS TRANSPORTATION BY ALASKA RR
Number 1815
CHAIR OGAN briefly brought before the committee HOUSE BILL NO.
423, "An Act relating to the Alaska Railroad; authorizing the
Alaska Railroad Corporation to provide financing for the
acquisition, construction, improvement, maintenance, equipping,
or operation of facilities for the transportation of natural gas
resources within and outside the state by others; authorizing
the Alaska Railroad Corporation to issue bonds to finance such
facilities; and providing for an effective date."
CHAIR OGAN asked whether anyone wished to testify at the current
hearing, rather than wait until the next meeting; there was no
response. [HB 423 was held over.]
ADJOURNMENT
Number 1754
There being no further business before the committee, the House
Special Committee on Oil and Gas meeting was adjourned at 11:56
a.m. [For the overview presentation by Yukon Pacific
Corporation (YPC), see the 10:08 a.m. minutes for this date.]
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