Legislature(2007 - 2008)BARNES 124
03/27/2007 03:00 PM House OIL & GAS
| Audio | Topic |
|---|---|
| Start | |
| HB177 | |
| Adjourn |
* first hearing in first committee of referral
+ teleconferenced
= bill was previously heard/scheduled
+ teleconferenced
= bill was previously heard/scheduled
| += | HB 177 | 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.]
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