Legislature(2007 - 2008)CAPITOL 106
03/28/2007 07:30 AM 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 28, 2007
7:34 a.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 Carl Gatto
Representative John Coghill
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
03/28/07 (H) O&G AT 7:30 AM CAPITOL 106
03/28/07 (H) O&G AT 8:30 AM CAPITOL 106
WITNESS REGISTER
RON BRINTNELL, Director
Gas Development
Enbridge, Inc.
Calgary, Alberta
Canada
POSITION STATEMENT: Testified at the hearing on HB 177.
WENDY D. KING, Manager
Alaska North Slope Gas Development
ConocoPhillips Alaska, Inc.
Anchorage, Alaska
POSITION STATEMENT: Testified at the hearing on HB 177.
MARK HANLEY, Manager
Alaska Public Affairs
Anadarko Petroleum Corporation
Anchorage, Alaska
POSITION STATEMENT: Testified at the hearing on HB 177.
ACTION NARRATIVE
CHAIR VIC KOHRING called the House Special Committee on Oil and
Gas meeting, which recessed on 3/27/07 at 5:51 p.m., back to
order at 7:34:42 AM. Representatives Ramras, Doogan, Kawasaki,
Dahlstrom, Samuels, and Kohring were present at the call back to
order. Representative Olson arrived as the meeting was in
progress.
HB 177-NATURAL GAS PIPELINE PROJECT
7:35:08 AM
CHAIR KOHRING announced that the first 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."
7:35:45 AM
RON BRINTNELL, Manager, Alaska Gas Project, Enbridge Inc.
(Enbridge), informed the committee that he will present
Enbridge's candid views on the Alaska gas pipeline project.
Enbridge, he said, wants to see the project go ahead because the
gas supply is desperately needed. He continued to say that
Enbridge maintains a network of pipelines supplying oil and gas
throughout North America and abroad, including the Alliance
line, which is very similar to the proposed Alaska gas pipeline.
Enbridge also owns Canada's largest utility company, is
knowledgeable regarding the supply of natural gas, and is
experienced regarding the construction and maintenance of
facilities in northern climates.
7:39:38 AM
REPRESENTATIVE RAMRAS asked for Enbridge's market capitalization
value.
MR. BRINTNELL answered that Enbridge's value is approximately
US$15 billion and its stock is traded on the U. S. and Toronto
stock exchanges.
REPRESENTATIVE RAMRAS further asked for Enbridge's balance sheet
debt level.
7:40:41 AM
MR. BRINTNELL responded that its debt equity ratio is 65 percent
to 35 percent.
REPRESENTATIVE RAMRAS then asked how Enbridge would bond the gas
pipeline project.
MR. BRINTNELL explained that the project would be financed by
shipping commitments.
7:41:32 AM
REPRESENTATIVE RAMRAS observed that Enbridge would leverage
financing back from the customer to the project source.
7:41:42 AM
MR. BRINTNELL explained that, directly or indirectly, it is the
strength of the shipping commitments, the producers, and the
state that will be the basis of obtaining credit. Mr. Brintnell
continued his presentation by noting that during previous
projects Enbridge has gained significant experience in terms of
ordering steel and dealing with the tight labor market. He
added that Enbridge is ready to train Alaskan workers who are
interested in working on Canadian projects now; however,
Enbridge's current projects will be near completion by the time
construction begins on the Alaska gas pipeline.
7:42:51 AM
MR. BRINTNELL told the committee that Enbridge believes that the
pipeline can not be built without the producers as shippers.
The North Slope producers and the state are in the best position
to make shipping commitments. His concern, he said, is that
delay in the construction of the gas pipeline will cause other
sources of energy to be developed because the market for energy
is high. Mr. Brintnell encouraged the state and the producers
to re-establish negotiations. He said Enbridge feels that gas
pipeline development through the Federal Energy Regulatory
Commission (FERC) process is a well defined and sound process
for Alaska.
7:46:38 AM
MR. BRINTNELL said that Enbridge is encouraged to see that the
state has placed a priority on the gas pipeline; however, the
Alaska Gasline Inducement Act (AGIA) is insufficient due to its
focus on the pipeline and not on the producers and shipping
commitments.
7:47:30 AM
CHAIR KOHRING asked for suggestions on how to accomplish the
goal of obtaining commitments from the producers and the
shippers.
7:47:45 AM
MR. BRINTNELL suggested that the state and the producers begin a
flexible and open dialog. He said that he believes that the
producers want the gas pipeline to be constructed.
REPRESENTATIVE DOOGAN asked for confirmation that Enbridge
believes that the economics are such that a commitment for gas
will result in viable project.
7:49:50 AM
MR. BRINTNELL assured the committee that the project is
commercially viable, but not without risk, due to the cost of
the project and the unstable market price of gas.
7:50:36 AM
REPRESENTATIVE RAMRAS commented that the price of gas today is
$7.20 according to the Henry Hub natural gas index.
7:50:50 AM
MR. BRINTNELL pointed out that gas prices have ranged from $15
million cubic feet (Mmcf) to $4 Mmcf, due to storms, warmer
winter temperatures, and the availability of gas reserves.
7:51:31 AM
REPRESENTATIVE DOOGAN asked what the state could do to lower the
project risk and gain commitments from the producers.
MR. BRINTNELL responded that the risk is not just the pipeline
cost but also the future market price and, most importantly, the
uncertainty of tax rates.
7:54:31 AM
REPRESENTATIVE DOOGAN asked whether Enbridge has built a
pipeline that, after construction, became uneconomic by changes
in the tax regime.
7:55:16 AM
MR. BRINTNELL recalled that, typically, pipeline companies will
pass increases in tax rates to the shippers. He explained that
the pipeline company takes its risk in controlling operating and
construction costs.
7:56:40 AM
REPRESENTATIVE DOOGAN re-stated his question by asking whether
Enbridge is aware of a project that became uneconomic due to a
tax rate change assessed to the producers.
7:57:31 AM
MR. BRINTNELL answered no; however, as a shipper, the pipeline
company would not be impacted unless the tax rate is so high the
producers can not ship their product.
7:59:32 AM
REPRESENTATIVE SAMUELS requested clarification on Enbridge's
need to be part of a consortium in order to participate in the
gas pipeline project.
8:00:16 AM
MR. BRINTNELL explained that, to participate, his company will
require shipping commitments prior to developing the project.
Enbridge will not hold an open season unless it is confident of
a successful outcome. Typically, non-binding open seasons can
be held at a lower cost and garner many responses. Enbridge's
job, he said, is to develop pipeline concepts, look at the
fundamentals, and propose a project through a non-binding open
season or through direct dialog with producers. Before
proceeding to a binding open season, Enbridge will have shipping
commitments in place.
8:02:29 AM
CHAIR KOHRING asked whether rights of way and permitting in
Canada will pose problems.
8:03:08 AM
MR. BRINTNELL replied that permits on the Canadian side will
fall in place in a timely fashion. The Canadian government, he
said, knows the importance of this project. He assured the
committee that TransCanada Corporation (TransCanada) does not
have exclusive rights to build the pipeline. In fact, the
Canadian government has announced that its priorities for a
northern gas pipeline are to let the market decide on the
builders, to establish a regulatory regime, to support
Aboriginal economic development, and to retain benefits for
Canadians. Mr. Brintnell continued to say that creating
alignment with the producers is important due to their
experience, financial resources, and the fact that the producers
will bear the largest risk during the development of the
project.
8:10:36 AM
REPRESENTATIVE DOOGAN requested a description of the project
Enbridge is proposing.
8:10:57 AM
MR. BRINTNELL replied that his company anticipates the
construction of a gas pipeline to Alberta, Canada. After
reaching Alberta, there is sufficient capacity in existing
pipelines to reach the U. S. markets. Mr. Brintnell cautioned
that the existing pipelines, however, may not be the best choice
for shipping the gas. He also warned the committee that they
should be concerned about the possibility of a failed open
season due to the high cost of the project and the unbalance of
the risks involved.
8:14:24 AM
CHAIR KOHRING asked whether the $500 million is a sufficient
inducement to prospective applicants.
8:14:43 AM
MR. BRINTNELL, replied that the grant is a favorable factor, but
it is unnecessary.
CHAIR KOHRING asked for Enbridge's opinion of the evaluation
criteria established in AGIA.
8:15:56 AM
MR. BRINTNELL informed the committee that the AGIA process is
unnecessary. He expressed his belief that negotiations with the
producers are most important for the project to proceed.
8:17:11 AM
REPRESENTATIVE DOOGAN asked for more information regarding the
value of the $500 million grant.
MR. BRINTNELL answered that the real issue is the longer risk,
not the initial cost. He pointed out that during the
construction of the first gas pipeline in Alberta, the future
growth of the market was unknown.
8:20:36 AM
MR. BRINTNELL observed that at this time it is unrealistic to
expect builders to make an unconditional commitment to the
project due to uncertainties related to permitting, regulations,
market price, and the labor market. Mr. Brintnell added that
completing FERC and [Canadian] Northern Economic Development
(NED) applications requires spending hundreds of millions of
dollars that Enbridge cannot spend without commitments from
shippers. He concluded his presentation by saying that AGIA
does not address the tax concerns of the producers. He
expressed his belief that the terms of AGIA are weighted in
favor of the pipeline companies and do not resolve the
producer's issues; therefore, AGIA will not attract their
support. In addition, government financial assistance is not
essential, and the additional regulatory process outlined by
AGIA is unnecessary. Finally, Mr. Brintnell emphasized that
Enbridge believes in the future demand for natural gas and
desires a role in the construction and operation of the
pipeline.
8:28:33 AM
REPRESENTATIVE SAMUELS asked how long it would take for Enbridge
to develop a consortium in order to participate in the project.
8:29:23 AM
MR. BRINTNELL opined that the first step would be to complete
fiscal arrangements with the producers. After that, agreements
between partners will be completed within months.
8:29:51 AM
REPRESENTATIVE SAMUELS then asked how long it would take for the
consortium to prepare for open season.
8:30:08 AM
MR. BRINTNELL told the committee that a reasonable estimated
timeline is two to three years.
8:30:54 AM
REPRESENTATIVE SAMUELS asked for Mr. Brintnell's opinion of the
15 percent limit [on a tariff increase].
8:31:27 AM
MR. BRINTNELL replied that rolled-in rates (RIR) are a concern
for Enbridge for the reason that, as a potential shipper, it is
required to get permission for its shipping rates from a
regulatory body. Thus, subsequent rate increases are
undesirable.
8:34:17 AM
REPRESENTATIVE SAMUELS remarked:
What percentage of the gas that you haul in Canada,
where they have the presumption of rolled-in rates, is
negotiated? And what part of it is just rolled-in,
that's because the government says that that's the
policy of the country?
8:34:45 AM
MR. BRINTNELL replied that the Alliance pipeline has rates that
were negotiated with the shippers prior to construction;
recently constructed pipelines in Canada and the U. S. tend to
have negotiated rates.
8:37:03 AM
MR. BRINTNELL, responding to a question, informed the committee
that Canada's energy regulatory body is the National Energy
Board (NBA).
8:37:50 AM
CHAIR KOHRING announced that the next order of business would be
testimony by ConocoPhillips Alaska, Inc.
8:39:18 AM
WENDY D. KING, Manager, Alaska North Slope Gas Development,
ConocoPhillips Alaska, Inc., informed the committee that
ConocoPhillips Alaska, Inc., (ConocoPhillips), is the state's
largest producer of oil and gas and has completed 1,200
uninterrupted liquefied natural gas (LNG) shipments since 1969.
Ms. King continued to say that ConocoPhillips is the largest
acreage holder on federal and state lands on the North Slope,
has drilled 60 exploration wells since 1969, and that 13 percent
of its production is based in Alaska. The construction timeline
of the natural gas pipeline is critical, and ConocoPhillips is
committed to development of the North Slope gas resource. She
noted that the midstream part of the project includes the
transmission lines to transport the gas to the gas treatment
plant (GTP) and the large pipeline to take gas to Alberta,
Canada. Ms. King explained that the resource terms of the
project are related to the gas itself or to the holders of the
firm transportation (FT) commitments. She compared the Alaska
gas pipeline to previous North American projects and pointed out
its large size and estimated cost.
8:47:15 AM
REPRESENTATIVE DOOGAN confirmed that ConocoPhillips's project
cost estimate is for a gas pipeline to Alberta.
8:48:02 AM
MS. KING clarified that the 2001 cost estimate of $20 billion is
for a pipeline terminating in Chicago. She added that questions
concerning the costs of the Alberta to Chicago portion of the
pipeline depend on the future capacity, cost of fuel, and
tariffs on existing pipelines. Ms. King continued to say that
another key unknown to the cost of the project is the
instability of the market price for natural gas. There is no
question, she said, that U. S. markets need a long term source
of gas; however, industry market predictions of prices are
unreliable. She affirmed that ConocoPhillips wants to work with
the administration and the legislature on a balanced framework
that will advance the project. Ms. King informed the committee
that ConocoPhillips has artic experience and financial strength
to bring to the project.
8:51:03 AM
REPRESENTATIVE RAMRAS commented that the "Predicting Natural Gas
Prices" chart provided to the committee by ConocoPhillips is a
distortion and asked for the source of the information.
8:54:19 AM
MS. KING assured the committee that she would be happy to
provide the details and specifics that support the data
presented.
8:55:11 AM
REPRESENTATIVE RAMRAS reiterated his concern that the data
presented not an accurate presentation of the movement in the
price of natural gas.
8:55:47 AM
MS. KING continued her testimony by saying that ConocoPhillips
has already spent millions of dollars to advance the Alaska gas
pipeline project. She said that her company is in the process
of reviewing the terms of AGIA, and is interested in working
with the legislature to address the resources needed to support
the long term shipping commitments. Ms. King pointed out the
imbalance of the risk factors regarding the midstream and
upstream portions of the project. ConocoPhillips's review of
AGIA reveals that the initial, and greater, risk is borne by the
producers. The first area of ConocoPhillips's is concern is
exclusivity, and it asks why the state would block alternative
projects and discourage the free market process.
8:59:04 AM
MS. KING referred to AS 43.90.340 and remarked:
I'll read from these sections here, except as
otherwise provided in this chapter, I'm on line 23
now, "The state grants a licensee assurances that the
licensee has exclusive enjoyment of the inducements
provided under this chapter. If the state extends to
another person preferential royalty, tax, or monetary
treatment for the purpose of facilitating the
construction of a competing natural gas pipeline
project in this state, and if the licensee is in
compliance with the requirements of the license and
with the requirements of state and federal statutes
and regulations relevant to the project, the licensee
is entitled to payment from the state of an amount
equal to three times the total of the reasonable costs
that the licensee has incurred in developing the
licensee's project as of the date that the state first
extended preferential treatment to another person."
... Why wouldn't state offer the benefits of
streamlined coordination to any project? That was how
the federal process was set up.
MS. KING further noted that the inducements provided in section
340(b) will only apply to the licensed project and could be
interpreted to mean that state agencies have the authority to
burden competing projects by withholding permits and
authorizations.
9:01:15 AM
REPRESENTATIVE DOOGAN urged Ms. King to explain the existence of
a competing project.
9:01:32 AM
MS. KING expressed her belief that one project will be developed
but that there may be spur lines and complimentary projects.
What is important, she said, is that multiple projects should
advance to licensing.
9:03:03 AM
REPRESENTATIVE DOOGAN said:
I don't understand how we get a competing pipeline
project. ... I'm having a hard time with the practical
problem that this represents.
MS. KING remarked:
If somebody has some good ideas, we think it's
important that they could be able to advance their
project. ... What if a winner is chosen and it's the
wrong winner?
9:04:49 AM
REPRESENTATIVE RAMRAS noted that, after an election, it is
incumbent on everyone to work with the successful candidate.
For this reason, he suggested, it is also incumbent on
ConocoPhillips to participate in the legislation that passes and
to work with the state for the success of the project.
9:06:42 AM
MS. KING highlighted that ConocoPhillips is making efforts to
assess the bill and make improvements.
9:07:32 AM
REPRESENTATIVE RAMRAS repeated his belief that the producers can
suggest improvements, but ultimately they need to work within
the framework of AGIA.
9:08:13 AM
REPRESENTATIVE DOOGAN stressed that the inducements are an
integral part of AGIA and asked what progress can be made
without them.
9:10:17 AM
MS. KING advised the committee that ConocoPhillips is not
proposing removing inducements, but allowing them to apply to
other projects.
9:11:14 AM
REPRESENTATIVE DOOGAN reminded Ms. King that inducements must be
exclusive to be meaningful.
9:12:11 AM
MS. KING pointed out that three of the four inducements are
exclusive and those are of concern to ConocoPhillips. The $500
million grant is acceptable, she said.
9:14:16 AM
REPRESENTATIVE DAHLSTROM requested clarification of
ConocoPhillips objections to AS 43.90.330.
9:15:30 AM
MS. KING responded that the company is concerned that the
language will allow roadblocks to be put in the way of a
competing project.
9:16:45 AM
REPRESENTATIVE DAHLSTROM expressed her understanding that the
position of an Alaska Gasline Inducement Act coordinator is
meant to be a help, not a roadblock. She said she will research
the intent of the creation of this position.
9:17:33 AM
MS. KING continued her testimony by calling the committee's
attention to the 16 application requirements described in AS
43.90.140. She surmised that rejection of one item on the
application would result in a non-conforming bid.
REPRESENTATIVE RAMRAS assumed that the committee will be
addressing this situation through an amendment.
9:19:32 AM
REPRESENTATIVE DAHLSTROM agreed with Representative Ramras, and
she then added that the bill also allows an opportunity for the
applicant to complete an incomplete application.
9:20:33 AM
MS. KING offered an example to illustrate ConocoPhillips
objections. She told the committee that AGIA requires a number
of fixed deadlines, and that the industry's experience is that
with a project this size, flexible and alternative work
commitments are vital.
9:22:11 AM
REPRESENTATIVE RAMRAS requested the location in the bill of the
dates to which she was referring.
9:22:19 AM
MS. KING answered:
Conclude by a date certain, it's ... page 5, line 17
through 30, there's three dates in there. There's the
[indisc.] pre filing, the applying for the FERC
certificate and for concluding an open season. ... And
page 4, ... line 19, receipt and delivery points, and
the size and design capacity of the proposed natural
gas pipeline at the proposed receipt and delivery
points. That is what an open season is for.
9:24:04 AM
REPRESENTATIVE RAMRAS expressed his desire to remind the
producers that AGIA'S timeline is its best feature. The bill
requires only the outline of a project and an expedited open
season will accelerate the process.
9:26:44 AM
MS. KING assured the committee that ConocoPhillips understands
work commitments. However, she noted that conceptually million
of dollars can be saved by proper planning in the early stages
of a project. ConocoPhillips wants to find creative solutions
to the challenge of building the best project at the lowest
price.
9:28:21 AM
REPRESENTATIVE RAMRAS remarked that the administration is
sensitive to the need to keep tariffs low.
9:28:54 AM
MS. KING explained that tariff prices are determined by the
capital cost of project. ConocoPhillips is focused on
maintaining a low capital cost project. She then returned to
the subject of bid requirements and said that ConocoPhillips
estimates a cost of $400 million to $500 million to conclude an
open season. Bid requirements specify that the successful
applicant would take a portion of the $500 million grant prior
to the open season. In fact, ConocoPhillips feels this should
be a variable and should be determined by the company.
Unfortunately, another concern resulting from the exclusivity of
the state's evaluation process is the possibility of an
applicant submitting empty promises and phony estimates.
9:31:46 AM
MS. KING further said that ConocoPhillips believes it has
creative solutions to these questions. Granted, the state wants
must- haves included in this project, and the applicants, she
noted, can include those items in the context of bid variables.
She returned to her analysis of AGIA and said that Article 3
relates to the resource owners and that section 310 of Article 3
creates the greatest obstacle: the state's taxes and royalty
terms. The importance of fiscal stability is noted by the
administration, but the bill is designed to make changes to the
tax structure not by negotiation, but by regulation.
ConocoPhillips will be asked to sign up for 15 year to 25 year
shipping commitments, even though royalty in-kind (RIK) and
royalty in-value (RIV) terms can change. In addition, the
Production Profits Tax is stable, but other taxes may change.
ConocoPhillips needs to know what the resource package looks
like, and suggests that the resource package be converted to a
variable bid package.
9:36:31 AM
REPRESENTATIVE RAMRAS asked:
If you had a choice, ... and you could either change
one of these two variables, either the time increments
that are prescribed in the bill, or the resource
package. Which of those two would be the more
important variable change to you?
9:36:59 AM
MS. KING said:
We put those both in the context of bid requirements
to bid variables, so we think by that solution we can
address both of those issues.
9:37:31 AM
REPRESENTATIVE RAMRAS asked:
If we opened it up so that it can be a much more
interpretive resource package, if you will, if we
leave the prescribed time requirements in there is
that something that is accommodative to Conoco? ...
Would you rather keep the time increment and be able
to innovate your own resource package design?
9:39:30 AM
MS. KING replied that ConocoPhillips requires the flexibility to
provide suggestions regarding a resource package and the ability
to offer alternatives to time management of the project. Both
of these choices are critical, she said.
9:40:06 AM
REPRESENTATIVE RAMRAS requested an answer to his question as
soon as possible.
9:41:52 AM
MS. KING told the committee that she will be submitting
recommendations for amendments to HB 177.
9:44:00 AM
REPRESENTATIVE SAMUELS expressed his belief that the competition
to build the pipeline is the race for the gas. Thus,
ConocoPhillips has an advantage because they have the gas. He
then said:
If you make everything a bid variable, if you don't
have gas, are you even going to come to play? ... How
do you find that middle ground there, ... I believe
true competition is ... is to let everybody come back
with their best proposal. ... But automatically you
get to attach gas to yours so you have this huge
advantage and then nobody else plays, and we're right
back to where we started. ... Going completely the
other way, making everything a bid variable, might
exclude all other players other than the producers.
9:46:51 AM
MS. KING commented that ConocoPhillips doesn't want litigation.
She also reminded the committee that the producers are
independent of each other. The prescriptive lists of
requirements in the bill remain a problem for ConocoPhillips.
9:49:25 AM
REPRESENTATIVE SAMUELS asked if ConocoPhillips is authorized by
its operating agreements to ship gas independently of its
partners.
9:50:25 AM
MS. KING responded that the operating agreements vary from field
to field. This issue, she added, will need to be addressed on a
case by case basis.
9:51:00 AM
REPRESENTATIVE SAMUELS asked if internal operating agreements
are a matter of public record.
9:51:28 AM
MS. KING expressed her understanding that the administration has
access to the operating agreements for Prudhoe Bay. She noted
that overall oil production in Prudhoe Bay may be affected by
one party taking off gas.
9:52:33 AM
REPRESENTATIVE SAMUELS further asked whether ConocoPhillips, if
in a partnership with a pipeline company, would be in a position
to spend $400 million in preparation for open season.
9:53:41 AM
MS. KING replied that ConocoPhillips would participate in
parallel work activities during the preparation for the open
season. The concern is that if open season is held and the
technical work is not done to update the cost estimate,
customers will not trust the cost estimates and will be
reluctant to bid. The three producer's previous cost estimate,
she noted, cost $125 million to complete and she estimated an
update would take six months at an unknown cost.
9:55:55 AM
CHAIR KOHRING recessed the meeting until after the House floor
session.
11:21:30 AM
CHAIR KOHRING adjourned the House Special Committee on Oil and
Gas meeting of Tuesday, March 27, 2007, and called to order the
meeting of Wednesday, March 28, 2007. Representatives Doogan,
Kawasaki, Dahlstrom, Samuels, and Kohring were present at the
call to order. Representatives Olson and Ramras arrived while
the meeting was in progress.
CHAIR KOHRING announced that Wendy King of ConocoPhillips
Alaska, Inc. will complete her testimony.
11:21:32 AM
MS. KING answered a question Representative Samuels asked prior
to the meeting's recess. She said that the mandated RIR
operating agreements on state approved units are a matter of
public record.
11:23:07 AM
MS. KING continued by saying that ConocoPhillips's testimony on
HB 177 is focused on eliminating exclusivity and changing bid
requirements to bid variables. The final item to be addressed
regarding bid variables is the question of mandating expansions
and rolled-in rates (RIR). ConocoPhillips operations include
acreage in the National Petroleum Reserve - Alaska (NPRA) which
is known to be gas prone. Mandated expansions and RIR's mean
that the initial shippers will be required to make firm shipping
commitments, thereby taking on more risk than required by
existing statutes and regulations. She pointed out that parties
can wait until after the project is built with the knowledge
that expansion will occur and the tariffs will be mitigated
through RIR subsidies. ConocoPhillips has been working since
2001 to advance the pipeline project and has already spent
millions of dollars. She asked why a company would drill now
when the state will provide guaranteed subsidized rates to those
who defer drilling.
11:24:41 AM
MS. KING asked the committee to consider ConocoPhillips's
prospective of AGIA's project risk allocation. Initial shippers
are asked to take risks, beginning early in the development of
the project and with uncertainties regarding the future tolls.
In addition, the initial shippers must prepare for the delivery
of gas at the same time as they are involved in the construction
of the pipeline. In contrast, late shippers can come in at the
time of expansion, without the previous costs, and with shorter
shipping commitments. Ms. King explained that this shorter time
commitment also results in less state take. Size, duration,
scope, and project delays are additional risks for initial
shippers. Obtaining shipping commitments from creditworthy
parties and project delays are risks faced by the pipeline
company; however, the actual project cost will be passed along
to the initial shipper through the toll.
11:28:10 AM
MS. KING estimated that a toll of $3.50 at 1Bcf per day for a 20
year initial shipping commitment will total $25 billion. The
financial strength needed to back a commitment of this size,
with the possibility of low gas prices or field deliverability
problems, is enormous. Ms. King turned to the subject of the
ability of the non-owners to access producers' facilities. She
emphasized that the U. S. Congress created mandated expansion
provisions effective only in Alaska, and the real question is
not access, but the cost of the access. ConocoPhillips
encourages the formation of partnerships to control costs and it
feels access should not be part of AGIA's requirements.
11:32:46 AM
MS. KING stressed that ConocoPhillips does not oppose the
application of RIR's for some, not all, expansions and that it
supports FERC regulations that allow RIR's for some expansions.
However, one reason mandating potential expansions is not
acceptable is due to the effect of disparate shared royalty on
lands. If new gas developments are discovered on lands without
royalty, the state may benefit from toll increases by FERC
regulation. Moreover, later expansions may result in higher
tolls that act as a subsidy for other and perhaps less well-
managed producers.
11:37:23 AM
REPRESENTATIVE SAMUELS recalled that TransCanada provided
estimates on the capacity of the gas pipeline that did not
exceed the original maximum rate.
11:38:08 AM
MR. KING explained that some expansions will not be full in-fill
compression. The cost of these expansions for lower capacities
will be greater than estimated and will bring engineering
challenges. Looping expansions are impacted by the need to
predict the costs of steel and fuel. She warned that expansion
costs are difficult to estimate and there may be situations
where incremental rate increases are desirable.
11:40:45 AM
REPRESENTATIVE SAMUELS asked for the reason that ConocoPhillips
and TransCanada have such different estimates and concerns.
11:41:26 AM
MS. KING expressed her belief that ConocoPhillips sees the
benefit of RIR's in some potential scenarios, but not all, and
it encourages the state to allow FERC regulations to prevail.
11:42:52 AM
REPRESENTATIVE SAMUELS asked whether ConocoPhillips assumed RIRs
in its Canadian operations. Some pipelines, he noted, cross
borders and may be subject to varying regulations.
MS. KING responded that she is unfamiliar with ConocoPhillips's
Canadian agreements; in fact, the NEB has a bias for RIRs.
However, the Alaska gas pipeline, she added, travels a long
distance before reaching the Canadian border and continues
afterward into the Lower 48 to markets.
11:46:33 AM
REPRESENTATIVE SAMUELS surmised that one-third of the gas
pipeline will be regulated by the Canadian authority and that
the RIR issue covers the distance between the North Slope and
the Canadian border.
11:47:29 AM
MS. KING expressed some doubt about the jurisdiction over the
Alberta portion of the pipeline if new, rather than existing,
pipeline is used.
REPRESENTATIVE SAMUELS further asked whether differing rates
will impact expansions and tariffs.
MS. KING assured the committee that the FERC and the NEB have
previously regulated pipelines that cross national borders. She
said that regardless of who owns the pipeline, there will be a
different entity in Canada that will offer a toll and that will
have an open season. The Alaska entity will conform to FERC
regulation, she added.
11:48:48 AM
MS. KING continued her testimony by describing an example of a
pipeline with an expansion to allow a short haul service to
Fairbanks at a certain cost. Then, 10 to 20 years later, an
expansion of the other part of the pipeline could raise consumer
prices even though the gas was initially committed at a lower
price.
11:50:46 AM
REPRESENTATIVE DAHLSTROM volunteered to provide a copy of FERC
order 5(a) to committee members for their reference. She then
observed that rate increases can be compared to discounts used
to attract new customers.
11:51:47 AM
MS. KING clarified that ConocoPhillips does not want to pay
costs that are the result of someone else's action.
11:52:08 AM
REPRESENTATIVE DAHLSTROM further noted that ConocoPhillips is
requesting the opportunity to negotiate for prices.
11:52:28 AM
MS. KING reiterated that ConocoPhillips wants the right to
debate its case before the FERC.
11:52:57 AM
REPRESENTATIVE DAHLSTROM questioned whether ConocoPhillips wants
that right written in the bill.
11:53:21 AM
MS. KING stated that this provision does not have to be included
in the bill.
11:54:41 AM
MS. KING summarized that the state has many inducements to offer
to pipeline construction applicants. ConocoPhillips does not
want unknown gas prospects that are ten years away from
development to determine the success of the pipeline project.
She encouraged the committee to consider that ConocoPhillips is
ready to solve problems and that efforts to resolve the resource
issues will begin to move the project to completion. She said
that the Alaska gas pipeline is a difficult project and
compromise is necessary to achieve the goals of a new source of
revenue for the state, jobs for Alaskans, and new development
for the industry.
11:56:28 AM
REPRESENTATIVE SAMUELS asked how long would it take for
ConocoPhillips to enter into a partnership and apply for a
license.
11:57:14 AM
MS. KING replied that the timely formation of a partnership
would depend on the parties. She added that the challenge of
the project is to balance the partnership between the two
distinct parts of upstream and midstream development.
11:58:09 AM
REPRESENTATIVE SAMUELS asked how long ConocoPhillips, without
partners, would need to prepare for a successful open season.
11:59:16 AM
MS. KING responded that ConocoPhillips has estimated 18 months
to 24 months to get to open season.
12:02:49 PM
REPRESENTATIVE SAMUELS remarked:
Does ConocoPhillips think that the tax debate should
happen now, before the application process moves
forward or do you think that it would be okay to have
the tax discussion, as long as you have it ... before
the open season. ... Do you think having it now ...
would be beneficial, realizing all the of the
political ups and downs. ...
12:03:52 PM
MS. KING suggested that the committee amend the bill to make the
resource package variable, due to its complexity. Then, the
parties will be able to work together.
12:05:24 PM
The committee took an at-ease from 12:06 p.m. to 12:11 p.m.
CHAIR KOHRING announced that the committee will hear testimony
by Anadarko Petroleum Corporation.
12:12:15 PM
MARK HANLEY, Manager, Alaska Public Affairs, Anadarko Petroleum
Corporation (Anadarko), informed the committee that Anadarko is
an independent company that explores for and produces oil and
gas without downstream operations. Anadarko has partnered with
the major oil companies and has maintained operations in Alaska
for 10 years. Mr. Hanley said that Anadarko maintains good
relations with ConocoPhillips and Atlantic Ritchfield Company
(ARCO). At this time, Anadarko's biggest interest is in
beginning construction of the Alaska gas pipeline project, and
it is significantly aligned with its partners on some of the
issues involved.
12:15:42 PM
MR. HANLEY continued to explain that Anadarko holds about 5.4
million acres of gross exploration acreage and 1.8 million acres
of net exploration acreage. Anadarko's partners include
ConocoPhillips, BG Group (BG), Artic Slope Regional Corporation
(ASRC), Petro-Canada. He noted that the Foothills region is
ready for exploration and Anadarko has four prospects there that
are ready to drill. Exploration, given that the gas pipeline is
still uncertain, is done to meet the lease requirements to the
state, and to prepare for participation in the initial open
season. However, the challenge is to continue to prepare for the
production of gas while controlling costs. Mr. Hanley explained
that even if exploration drilling in 2008 is promising, Anadarko
will not be in a position to go to an open season until after
delineation of the field and additional wells are drilled. In
any case, it will take three to four years to determine if the
economics will support a gas commitment to the gas pipeline.
Furthermore, Anadarko, he said, does not think its prospects
will be sufficient to underpin the gas pipeline.
12:21:59 PM
REPRESENTATIVE SAMUELS observed that the time delay in AGIA is
designed to give the explorers time to prepare for gas
production. He then remarked:
To me, shortening the timeline up to as soon as you
can have a real open season with real information ...
[so] the people who do have gas can decide whether
they want to come or not, makes more sense than
waiting a little bit longer if you're not ... if you
can't be reasonably certain that you can come to us
... [and] participate.
12:23:28 PM
MR. HANLEY expressed his belief that Anadarko's policy decisions
will be based on the earliest available information. Anadarko
will begin planning before the open season, in fact, if the
pipeline is designed for expansions that lower the tariff,
Anadarko will want to participate in the inexpensive expansion.
Anadarko may be in a position to participate one or two years
after the initial open season and request an expansion before
the pipeline is in service. Mr. Hanley said that additions
during construction can be a part of the design of the pipeline.
12:25:57 PM
REPRESENTATIVE SAMUELS asked whether Anadarko considers the
benefit of the tax freeze associated with the first open season
to be unfair.
12:26:57 PM
MR. HANLEY replied that the tax freeze will be a competitive
advantage. Anadarko will not be at the open season, but feels
that any company that makes commitments to the pipeline should
qualify for tax certainty. He stressed that the more that the
state can do to improve fiscal stability will also improve the
economics of the project and reduce the risk. Anadarko would
not like to see competitive disadvantages for the companies that
do not participate in the initial process.
12:29:01 PM
MR. HANLEY continued his testimony on AGIA by pointing out that
Anadarko appreciates the opportunities to comment on the
legislation now, during the public comment period after the
applications are revealed, and during the review of the
successful application by the legislature. He agreed that the
earliest development of the project is a benefit for all
parties. Mr. Hanley called the committee's attention to AS
43.90.110 and stated that Anadarko is not a pipeline company and
will not be submitting an application for the license.
Therefore, it feels that the $500 million inducement will reduce
the tariff and that it is a benefit. Regarding the criteria for
the application, Mr. Hanley stated that Anadarko has concerns
about the sub-subparagraph (ii) on marine transportation of
liquefied natural gas (LNG). This item requires a description
of transportation services and a detailed description of all
access and tariff terms on a marine route only. Anadarko feels
that this language should apply to any proposed pipeline route.
12:34:16 PM
MR. HANLEY suggested that the AGIA application should also
require stating the operating pressure of the pipeline as part
of the design standards and gas quality requirements.
Additionally, Anadarko supports section 140, paragraph (5), that
requires the applicant to assess the market demand for
additional pipeline capacity at least every two years through
non-binding solicitations, and paragraph (6), that requires
expansions to encourage exploration. Mr. Hanley expressed
Anadarko's concern about the motivation of parties in the
industry who would influence the process representing either the
owner of the pipeline, or the producers. He recalled earlier
testimony that the bigger risk is borne by the shippers and the
bigger return will be on the resource, not on the regulated
pipeline. The large producers, he noted, will represent both
roles, that of a competitor and that of a partner in the
pipeline. In fact, a pipeline company may propose a RIR, or,
when its interest as a shipper dominates, may request an
incremental rate. The incentive for a producer owned pipeline
is often to request a high rate.
12:39:52 PM
MR. HANLEY added that Anadarko feels that a producer owned
pipeline should be held under the close scrutiny that AGIA
requires.
12:40:35 PM
REPRESENTATIVE SAMUELS requested Anadarko's opinion of the
producer's argument that the scale of the project and the fact
that they will provide the gas should put the pipeline under the
producer's control. He asked:
What would you tell the three people with the [gas
reserves] that say, "If I'm wrong about building the
pipeline I'm paying the higher tariff and my gas is
not as competitive. If I'm right, then my costs are
less." ... How do you find the middle ground there?
12:42:26 PM
MR. HANLEY answered that Anadarko feels that the access and
expansion provisions in AIGA address some of these issues in a
reasonable manner.
12:43:03 PM
REPRESENTATIVE SAMUELS opined that, in this case, Congressional
and FERC regulations are insufficient.
MR. HANLEY stated that some of the issues, for example, the
design of the pipeline, are critical, and have yet to be
decided. He called the committee's attention to a graph of
Indicative Expansion Tariffs, that compares the incremental
tariff of $1.07 to a rolled-in rate tariff of $1.47 at the first
expansion to 5.5 billion cubic feet (Bcf) per day. Anadarko, he
said, is concerned that a 42-inch pipe would need to be looped
at the first expansion. In that case, incremental tariffs would
make would make any expansions uneconomic. Mr. Hanley pointed
out that the producers are appealing FERC regulations over
pipeline design. If FERC regulations are overruled, he said,
the pipeline could be designed to effectively eliminate the
possibility of future low cost expansions. Mr. Hanley read the
FERC regulations that are under appeal.
12:49:13 PM
REPRESENTATIVE DAHLSTROM requested clarification on the FERC
regulations under appeal.
12:50:02 PM
REPRESENTATIVE SAMUELS said that his reference was to the
rebuttable presumption of rolled-in tariffs. Congress and the
FERC, he said, recognize the presumption that the producer-owner
of the pipeline has an inherent conflict.
12:50:17 PM
MR. HANLEY expressed his understanding that the presumption of
rolled-in rates applies to voluntary expansions only. A
producer who owns the pipeline may refuse an expansion request
and that would force the issue to litigation. In fact AGIA, he
said, merely instructs shippers to ask FERC for rolled-rates.
Mr. Hanley returned to the tariff graph and pointed out that a
second expansion to 6.5 Bcf per day results in an incremental
tariff of $1.73 and a rolled-in rate of $1.5l. These rates are
less than the initial tariffs, but higher than the first
expansion. If Anadarko is participating in the first expansion,
it assumes the risk of paying a higher rate for a rolled-in
tariff. Mr. Hanley explained that this is an acceptable risk in
order to proceed with the project. However, designing a
pipeline for expansion and setting a limit on the expansion rate
are critical factors.
12:56:12 PM
REPRESENTATIVE RAMRAS asked for the origin of the tariff rates
reflected in the graph.
12:56:43 PM
MR. HANLEY expressed his belief that the rates were provided by
the Department of Revenue.
12:56:59 PM
REPRESENTATIVE RAMRAS concluded that the rates are "stylized"
numbers.
12:57:27 PM
REPRESENTATIVE SAMUELS remarked:
Realizing the example [on the graph] in the United
States does simply the marketplace take care of your
example in expansion number four, eventually, nobody
is going to bid $3.25 while somebody is paying $1.50.
Or is that the way in the United States it works, ...
you've got various way to ship your gas.
12:58:14 PM
MR. HANLEY reminded the committee that the Alaska gas pipeline
is a monopoly and in the Lower 48 a shipper would have other
options such as building a new pipeline. Again, the initial
design of the pipeline is a critical factor in the economics of
expansion.
REPRESENTATIVE SAMUELS observed that Trans-Canada's estimations
remained under the 15 percent limit throughout the life of the
project.
12:59:25 PM
REPRESENTATIVE DOOGAN referred to the Indicative Expansion
Tariffs graph and asked whether expansions 1 and 2 are
compression expansions, and whether expansion 3 is a looping, or
new construction, expansion.
12:59:43 PM
MR. HANLEY answered yes.
1:00:04 PM
REPRESENTATIVE SAMUELS asked whether tariffs are normally
increased to match the rate of inflation.
1:00:48 PM
MR. HANLEY said he is unsure and will provide an answer to that
question. He continued his testimony by saying that Anadarko is
supportive of AGIA's requirements regarding the debt ratio and
the evaluation criteria. Anadarko would suggest the comment and
review period in AS 43.90.180 be amended to say "a minimum 60-
day period." Again, Anadarko supports offering inducements to
all parties rather than creating competitive advantages for the
successful applicant.
1:02:45 PM
MR. HANLEY told the committee that Anadarko's risk during
upstream development is equal to or greater than that of the
North Slope producers. In fact, the risk of gas reserves and
deliverability is higher due to the uncertainty of gas
discovery. This bill, he said, creates benefits for the initial
shipper that are not available to the late shipper, such as the
certainty on taxes. Again, Anadarko will bear the risk of
increased tariffs and the producers have the ability to manage
costs. In addition, for Anadarko to participate in the
pipeline, it will need to ship one-half Bcf per day in
production.
1:08:31 PM
MR. HANLEY concluded by saying that Anadarko appreciates the
opportunity to discuss the bill with the committee. He repeated
that the issue of RIRs and whether they can be negotiated with
FERC remains to be resolved. In addition, he recommended that
the state include its must-haves in the statute. Anadarko, he
said is also supportive of the process established by AGIA and
of the fact that AGIA addresses many issues for the explorers.
REPRESENTATIVE DAHLSTROM recalled an issue regarding a previous
cross-border pipeline wherein the exact transition point was in
question. She asked if this type of situation can occur again.
1:13:58 PM
MR. HANLEY assured the committee that many pipelines have
successfully crossed the U. S. and Canada border.
1:14:14 PM
REPRESENTATIVE OLSON recalled Mr. Hanley's past legislative
experience and asked for guidance.
1:14:52 PM
MR. HANLEY advised that committee members should not rush to
judgment, but need to keep the process moving forward. He noted
that the legislature has the final review after the license is
issued.
[HB 177 was held over.]
1:16:37 PM
ADJOURNMENT
There being no further business before the committee, the House
Special Committee on Oil and Gas meeting was adjourned at 1:16
p.m.
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