Legislature(2007 - 2008)BARNES 124
03/29/2007 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 29, 2007
3:06 p.m.
MEMBERS PRESENT
Representative Vic Kohring, Chair
Representative Kurt Olson, Vice Chair
Representative Nancy Dahlstrom
Representative Ralph Samuels
Representative Mike Doogan
Representative Scott Kawasaki
MEMBERS ABSENT
Representative Jay Ramras
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) Heard & Held
03/28/07 (H) MINUTE(O&G)
03/28/07 (H) O&G AT 8:30 AM CAPITOL 106
03/28/07 (H) Heard & Held
03/28/07 (H) MINUTE(O&G)
03/29/07 (H) O&G AT 3:00 PM BARNES 124
WITNESS REGISTER
KIRK MORGAN, President
Kern River Gas Transmission Company
MidAmerican Energy Holdings Company
(No address provided)
POSITION STATEMENT: Testified regarding the gas pipeline
project, offered support for HB 177 and suggestions for
modification.
BILL WALKER, Project Manager
General Counsel
Alaska Gasline Port Authority (AGPA)
(No address provided)
POSITION STATEMENT: Explained the AGPA's proposed project. He
offered support for, and suggested modifications to, HB 177 and
answered questions.
PAUL FUHS, Lobbyist
for the Alaska Gasline Port Authority (AGPA)
Anchorage, Alaska
POSITION STATEMENT: Provided information on gas pipeline
development issues.
JOHN ZAGAR, General Manager, Alaska
Chevron Corporation, Inc.
(No address provided)
POSITION STATEMENT: Testified as to Chevron Corporation's
position on HB 177, and indicated support for some provisions of
the bill and suggested changes for other provisions.
TIM HOUSTON, Alaska Commercial Manager
Chevron Corporation, Inc.
(No address provided)
POSITION STATEMENT: Answered questions on gas pipeline issues.
ACTION NARRATIVE
CHAIR VIC KOHRING called the House Special Committee on Oil and
Gas meeting to order at 3:06:37 PM. Representatives Kawasaki,
Olson, Samuels, Doogan, and Kohring were present at the call to
order. Representative Dahlstrom arrived as the meeting was in
progress.
3:07:23 PM
HB 177-NATURAL GAS PIPELINE PROJECT
3:09:22 PM
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."
3:10:02 PM
KIRK MORGAN, President, Kern River Gas Transmission Company, of
MidAmerican Energy Holdings Company paraphrased from written
testimony {original punctuation provided]:
MidAmerican has assets totaling $37 billion and an
employee base of 18,000. MidAmerican, through Kern
River and its sister company, Northern Natural Gas,
owns and operates more than 17,500 miles of interstate
natural gas transmission pipelines with a combined
capacity exceeding 6.4 Bcf'd. MidAmerican's pipelines
deliver approximately 8.3% of the natural gas
delivered in the United States. The Kern River
pipeline, which our company built in 1991, brings
natural gas from the Rocky Mountain supply basins
across 926 miles of rugged mountainous and remote
desert terrain to customers in Utah, Nevada, and
California. Kern River was the largest gas pipeline
project to have been built in the United States in
more than a decade. In 2003, Kern River expanded the
pipeline, more than doubling its capacity, adding 717
miles of 36-inch and 42-inch diameter pipeline. The
$1.2 billion project was completed on time, $87
million under budget, and helped restore stability to
energy markets in the Western United States.
MidAmerican is a subsidiary of Berkshire Hathaway,
Inc. Berkshire is one of only a few companies in the
world with a AAA credit rating. Berkshire has a
market capitalization in excess of $160 billion. It
is recognized world-wide for financial strength,
investment acumen, and integrity.
The development of Alaska's huge natural gas reserves
is essential to both Alaska and the United States.
Projected market growth, combined with a decline in
North American production, has created a growing
supply/demand imbalance that cannot be adequately
addressed by traditional gas supply basins alone.
Alaska's natural gas is needed to help ensure energy
security, reliability, and price stability in the
United States.
The Alaska natural gas pipeline project is
unprecedented in its scale and complexity. The
successful development of the project will require an
alignment of stakeholder interests, including the
state of Alaska, the North Slope producers, future
North Slope explorers and producers, a pipeline
developer, shippers and the federal government.
Projects of this scale can be easily delayed. (That
has been the history of this project.) Only through
proper planning, organization and execution can the
project achieve its goals to accelerate development of
Alaska's natural gas resources and transport gas to
lower 48 markets at the lowest reasonable cost. To do
otherwise will relegate this project and development
of this resource to reacting to the next energy crisis
where goals are frequently compromised in the interest
of expediency.
MidAmerican has a serious interest in developing this
project in a manner that is consistent with the state
of Alaska's interests. From our perspective, the
negotiations conducted by the pervious administration
under the Stranded Gas Act were not fruitful for many
reasons. Foremost among these were that they produced
proposals not supported by the people of the state;
they failed to give serious consideration to
alternative proposals for development; and they
consumed years without advancing the project.
We believe AGIA is a positive step toward revitalizing
the gas pipeline development process in a way that
will move the project forward. The bill will allow
consideration of competing proposals and ideas for
developing the pipeline. The state benefits from such
competition. The bill offers positive inducements to
those who already have discovered gas to commit to the
pipeline, while defining tariff provisions that will
encourage new exploration. And the bill offers
inducements to a pipeline developer to advance the
project in a manner that the state defines as in its
best interest. Perhaps most importantly, the bill
establishes a process where each party that proposes
to develop the line must make meaningful commitments
to development milestones for the. legislature and the
public to see what it will and will not do and by what
dates.
AGIA is a good first step. AGIA is an open,
transparent and competitive process designed to
advance the project on a deliberate schedule and in a
manner that achieves the overarching goals of the
State which are to 1) encourage new exploration on the
North Slope, 2) provide for expansion of the pipeline
as new reserves are brought into production, 3)
achieve the lowest cost commercially reasonable
tariff, 4) create jobs for Alaskans, and 5) provide
natural gas to Alaskans for in-state use.
AGIA recognizes the magnitude of front-end development
risks and offers to share that risk, in a significant
way, by offering dollar-for-dollar matching of initial
development expenditures, by offering worker training
for Alaskans, and by committing to expedite state
permitting requirements. These, plus separate
inducements offered to resource owners, are
significant commitments which signal to the
marketplace that the project is moving on a serious
and credible path to completion. In the absence of
such progress, markets will have no alternative than
to seek other means to meet market demand. The most
significant alternative would be to allow imported LNG
even greater market access, uncontested by development
of Alaska's natural gas resources.
While LNG is certainly a necessary part of the natural
gas resource mix, it makes little policy sense to
unnecessarily increase our reliance on foreign energy
from many unstable and unpredictable regions around
the world. This project, in MidAmerican's view, is
undeniably necessary and the time is now to push it
forward. The key to moving the project forward is to
determine the appropriate balance of risks and rewards
for all stakeholders.
There is an alternate approach. The North Slope
producers have for years articulated their "must
haves" before advancing the project. You have heard
these prerequisites before including: 1) tax and
royalty certainty on gas and on oil, 2) regulatory
certainty in both the U.S. and Canada, 3) cost
reductions through technological advancements, and 4)
federal enabling legislation.
This approach is effectively saying that the project
will get started if and when all of the preconditions
have been met and all concessions have been extracted.
This approach has proven to be ineffective in
advancing the project. MidAmerican's approach is
different. We believe the project can be advanced
concurrent with resolution of issues that today remain
outstanding. I want to emphasize MidAmerican's view
that alignment of stakeholder interests is essential.
Parties will understandably act in their self-interest
and in their own business interest. That is why
stakeholder interest alignment is critical to a
successful project. That alignment must clearly set
forth the roles and responsibilities of each party, as
well as the commercial structure which will balance
the risks and rewards, such that investment
expectations will be known up front. Our approach does
not exclude interested parties or discount new ideas
which may be offered to help manage project risks. We
know that even if the pipeline is developed by an
independent developer, the North Slope producers will
play the crucial role as shippers on the line and
sellers of gas to other shippers. MidAmerican, as an
independent pipeline, is impartial and in a unique
position to help facilitate solutions when
stakeholders' interests diverge. We are confident that
an appropriate capital structure and rate design,
coupled with our low cost of capital and project
experience, can result in a project structure with
appropriate allocations of risk and reward for all
stakeholders, including the state of Alaska and the
producers.
Indeed, MidAmerican believes that an independent
pipeline provides the best alignment of interests.
National energy policy promotes, in fact requires,
competition and the unbundling of market segments. For
example, the market structure in the United States
typically requires that exploration and production,
interstate transportation, marketing and distribution
be performed by separate companies. Competition, not
market concentration, will lead to efficient markets.
MidAmerican has no upstream, downstream, or global
commercial interest that would create any conflicts of
interest or raise any type of market power concern
with respect to this project. Accordingly,
MidAmerican's interests align extremely well with the
state of Alaska and include:
1) Accelerating development of this critically
important project;
2) Achieving the lowest cost commercially reasonable
tariff;
3) Offering a commercial structure that encourages new
exploration and production to both expand and extend
the life of the pipeline. Thirty-five Tcf implies only
a 22- year project life, and new discoveries are
critical to fill the pipeline over its useful life;
4) Providing open-access, non-discriminatory
transportation services to ensure both receipts and
deliveries are provided for in-state use; and
5) Ensuring Alaskan jobs and workforce development.
The state's commitment to workforce training and
development is extremely important. Skilled labor
shortage is one of the contributing factors in
construction cost increases throughout the industry. A
skilled Alaskan workforce will not only ensure jobs
for Alaskans, but will help address an industry-wide
demand for these workers.
The process set forth in AGIA will allow these ideas,
and all parties' ideas and proposals, to be advanced
and tested in an open and transparent manner. We
support that process and while we can understand
debate over what constitutes the best pipeline
development proposal, it is harder to understand why
parties would object to a process that calls for an
open and transparent comparison of proposals. We urge
the legislature to approve this legislation this
session, so that a pipeline developer can be selected
in a time frame that will allow a productive 2008
field season for engineering and environmental
programs to be conducted.
That concludes my prepared testimony. Thank you for
the opportunity to appear before you today. I would be
happy to address any questions.
3:22:10 PM
CHAIR KOHRING asked if Mr. Morgan had any suggestions for
amendments or modifications to AGIA.
3:22:49 PM
Mr. MORGAN replied that AGIA is a good piece of legislation,
although not perfect. He expressed concern about how quickly
the bill could be passed and the timing of the subsequent
application and selection periods. He stated his company
desires to preserve 2008 field season and opined that to do so
would require a lot of work within a short period of time. He
went on to mention that some of the rate provisions in AGIA
could be modified to allow more negotiation in the area of
rates. He offered that the 15 percent initial cap should apply
to any rate, not just the recourse rate.
3:24:41 PM
REPRESENTATIVE DAHLSTROM asked about the 10 year tax rate
provision.
MR. MORGAN said that a project of this magnitude requires
investment certainty up front. He noted that a 10-year period
is shorter than the life of the project, and suggested it be
negotiated to cover the life of the project. He offered that
the tax protection offered could be based on the amount of gas
committed rather than a specified time period.
REPRESENTATIVE DAHLSTROM asked how a failed open season would
affect his company.
MR. MORGAN replied that he has heard talk of the possibility of
a failed open season, and offered that at this point there is no
assurance the project is economic as the last project cost
estimates were done in 2001. By the time of an open season,
there will be information to show whether the project is
economic, he opined. He expressed his belief that the producers
do not have an interest in withholding their gas from an open
season. He opined that holders will want to commit gas to a
project that appears economic. He told the committee his
company is prepared for various market scenarios as market
timing is important in the gas market. He expressed support for
project advancement through certification by the Federal Energy
Regulatory Commission (FERC). In response to a question, he
said it was too early to comment with regard to project labor
agreements and whether they should be written into the bill.
3:30:55 PM
REPRESENTATIVE SAMUELS asked about the time period to develop a
partnership agreement and complete an application.
MR. MORGAN replied that there is no definitive answer. He noted
that early in 2003, his company developed agreements with
interested parties. He noted that agreements can be done
quickly if there are motivated parties with aligned interests.
MR. MORGAN responded to a question regarding a failed open
season by explaining that first one would examine why the open
season failed. He offered that by the open season, one would
expect to have done a full cost estimate to be able to offer a
definitive tariff so that shippers have the knowledge necessary
to commit their gas. He said that if the project is economic,
but the open season fails, his company would continue to FERC
certification. If the project fails because it is not economic,
one would look to the provisions in AGIA concerning project
economics.
3:34:29 PM
REPRESENTATIVE SAMUELS noted that the producers who hold the gas
have significant leverage for the open season, and asked about
whether that leverage ever goes away.
MR. MORGAN answered that he considers the issue whether the
taxes will remain stable. He stated that investment decisions
require stability, but offered that as of today there is not
sufficient information to make a decision on tax rates. He
emphasized that there needs to be stability once an investment
decision is made. He explained that tariff rates should
encourage new exploration and a long-term commitment of the
resources.
REPRESENTATIVE SAMUELS noted that debate on the appropriate tax
will likely return in the future.
MR. MORGAN stated that an independent "top to bottom" cost
estimate will be part of the FERC filing and will provide the
benchmark for the project costs. He opined that would be the
point where there is adequate information to make decisions
regarding the appropriate tax rate. He cautioned that a 10-year
tax stabilization may not be long enough for this project.
3:40:56 PM
REPRESENTATIVE SAMUELS asked for clarification as to the effect
of the 15 percent limit above any rate.
MR. MORGAN responded that it is not uncommon to assign a
percentage of the firm transportation (FT) commitment capacity,
to a shipper for recovery. He explained that those costs can be
allocated over time. It will have a significant impact on the
tariff if those costs must be recovered over a shorter time
period.
3:43:40 PM
REPRESENTATIVE SAMUELS asked about the normal range of debt to
equity ratios for pipelines.
MR. MORGAN said that the typical range in the industry is for no
more than 70 percent debt. He said there are FERC regulated
pipelines which have 60 percent equity. In response to a
question, he noted that his company does not have pipelines in
Canada, but that he has some familiarity with the Canadian
system. He said that generally the returns in Canada are lower,
the risk profile is different, and the pipelines are more highly
leveraged. There are protections in the Canadian regulations to
protect pipelines from some risk factors such as "through put,"
he indicated.
3:46:30 PM
REPRESENTATIVE DOOGAN asked about the risks that are posed by
potential changes in tax rates and whether the witness knows of
a case in which tax changes caused failure of a company.
MR. MORGAN replied that he knows of no such case. In interstate
pipeline systems, the federal commerce clause protects pipelines
from being subject to unreasonable and multiple taxes by each
jurisdiction the pipeline passes through. He noted that when
costs rise, a pipeline company can file for a rate increase,
which is a complicated procedure. There is no guarantee that a
company may be able to pass rates through to its customers, he
explained.
The committee took an at ease from 3:51 to 4:04.
4:04:32 PM
BILL WALKER, Project Manager, General Counsel, Alaska Gasline
Port Authority (AGPA) provided the committee with a presentation
titled "Alaska Legislature Testimony" dated March, 2007 and
explained that the AGPA was formed under state statute as a
municipal port authority to build, or cause to be built, a
project to commercialize Alaska's North Slope gas. The goals of
AGPA are to ensure that a gas pipeline is built with the lowest
tariffs possible for Alaska and the marketplace. A gas pipeline
would provide a stable source of energy, employment in pipeline
and liquefaction industries, direct net-project revenue sharing
of 60 percent to the state and 40 percent to municipalities, and
an opportunity to supply gas liquids to in-state petrochemical
industries, he explained. He went on to indicate that the AGPA
is not necessarily opposed to a Y-line through Canada at some
time. He explained that the AGPA plans a "pre-build" from North
Slope to Delta Junction for later tie-in with the Alaska/Canada
Highway Project. He emphasized the need for early use of in-
state gas.
4:14:03 PM
MR. WALKER explained that the project proposed by AGPA includes
a 40 inch high density line, a liquefied natural gas (LNG)
facility in Valdez, integrated gas liquefaction and extraction
facilities, storage and vessel loading facilities. He relayed
that AGPA has purchased the Yukon Pacific Corporation ("YPC") to
facilitate obtainment of permits for the pipeline project. He
offered that there is an approved environmental impact
statement, terminal permit, and export license related to this
project. He referred to the need for LNG facilities on the West
Coast and noted that there is currently a project under
construction in Costa Azul. He predicted that Alaska gas would
go to markets in California, New Mexico, and Arizona. He said
that AGPA has made significant progress towards a pipeline to
date in areas of federal law, market research, and cost
estimates, referring to slide 7 of the presentation.
4:20:49 PM
MR. WALKER opined that the initial phase for the Alaska gas
pipeline should focus on in-state gas distribution. He said
AGPA defines "full-phase" gas distribution as a line through
Canada or an expansion of LNG capabilities. He offered that
AGPA's project is the right size project, referring to slide 9.
He offered his belief that the LNG project will allow Alaska's
gas to reach the market sooner, as exploration efforts are
underway for the larger pipeline projects. He offered that
Alaska could provide a stable supply of LNG to West Coast
markets.
4:25:12 PM
MR. WALKER opined that LNG will create "market optionality" in
ways that a single gas pipeline will not. He said that prices
can vary in markets, noting that markets in Asia have had higher
prices than markets in Alberta. He offered that the phased
development proposed by AGPA is less of a strain on the steel
and pipe markets. He said that AGPA suggests a large line out
of the basin going approximately 800 miles to Delta Junction.
Cold weather in Valdez could actually help the liquefaction
facilities operate more efficiently, he explained. He opined
that the Valdez port could accept more tanker traffic and
benefits from substantial existing North Slope infrastructure
and developed fields such as Prudhoe Bay.
4:31:39 PM
MR. WALKER suggested that HB 177 be amended to require more
details from Canadian line applicants, referring to slide 13.
He suggested that applicants be required to provide information
regarding the determination of off-take amounts at Prudhoe Bay,
the budget and timeline for exploration programs, anticipated
oil loss, analysis of liquid availability in Alaska, and the
timeline for project start up and completion.
MR. WALKER expressed support for rolled-in rates and AGIA's
support for independently owned infrastructure. He opined that
the $500 million incentive sends a positive message about
Alaska's desire to commercialize Alaska's gas. He went on to
say it is good for Alaska to have an open and competitive
process in the planning and development of this project. He
expressed support for inducements in exchange for specific risks
and for the empowering of successful applicants to build a
successful consortium prior to open season. He opined that a
return to anything like the Stranded Gas Development Act (SGDA)
would be a "step backwards." He opined that the main project
risk is that Alaska will lose out on the "great race" to move
gas into the United States markets.
4:41:41 PM
REPRESENTATIVE SAMUELS asked whether the AGPA's revenue sharing
proposal of 60 percent to the state and 40 percent to Alaska
municipalities is subject to change by the board of directors.
MR. WALKER replied that the board of directors could change this
ratio, but that there is some possibility that the AGPA would
enter a long-term arrangement restricting the ability of the
board to change this provision.
PAUL FUHS, Lobbyist for the Alaska Gasline Port Authority (AGPA)
noted that the state will receive production and severance
taxes, but if there are any net proceeds which remain with the
AGPA they would be distributed back to the state and
municipalities.
4:43:26 PM
REPRESENTATIVE SAMUELS asked if the AGPA would state at present
that it would not file a lawsuit if not chosen for the project.
MR. WALKER replied that he cannot speak for board, but he may
recommend that the board agree not to litigate in an effort to
move the project forward. He suggested that the parties could
agree to move original jurisdiction to the Alaska Supreme Court
to expedite any litigation.
MR. FUHS noted one could limit the time in which to file an
action.
REPRESENTATIVE DAHLSTROM stated it is within the committee's
scope to address dispute resolution issues and approaches.
4:46:14 PM
REPRESENTATIVE DOOGAN asked whether the AGPA will ship gas to
Valdez and beyond.
MR. WALKER replied that the gas may be sold at Valdez.
REPRESENTATIVE DOOGAN asked if the AGPA, as a tax exempt
organization, would pay property taxes.
MR. WALKER agreed with the aforementioned statement but
indicated that AGPA would pay "fixed property taxes to the state
as well" on the current status quo of 2 percent.
4:48:27 PM
CHAIR KOHRING asked about the possibility of a gas pipeline
along the Parks Highway to Port McKenzie.
MR. WALKER replied that the AGPA has looked at that possibility
but that route has significant challenges. The disadvantage of
that route is timing because a great deal of regulatory work has
been done on other routes, but not on the aforementioned
suggestion. He went on to say that the AGPA includes tie-in
points along the route.
MR. FUHS explained that AGPA's proposal includes a proposals to
include lines of various dimensions to loop into existing
systems and basically "tie in" at Palmer.
CHAIR KOHRING asked whether the AGPA would work with a Canadian
company to follow through on a spur to the South-central area as
an offshoot of the main line.
MR. WALKER said that AGPA would work with such an option, but
expressed concerns with the timing and the possibility that
delay would cause demand for Alaska gas to diminish.
4:52:07 PM
CHAIR KOHRING asked about production and shipment of gas from
Sakhalin Island and its possible effect on the market for Alaska
gas.
MR. WALKER indicated that the Sakhalin Island may be a
politically unstable region and may not be able to guarantee a
secure source of gas. In contrast, Alaska provides a
politically stable geographic area.
MR. FUHS added that the Sakhalin Island project has some
similarities to the Alaska project. The Sakhalin project has a
500 mile pipeline to an ice-free port, and requires twice as
many tankers as the Alaska project. He offered that this
provides an example of the viability of the proposal to transfer
Alaska gas to Valdez.
4:54:25 PM
REPRESENTATIVE DOOGAN queried why the AGPA project has not gone
forward.
MR. WALKER answered that the project is actually going forward,
but is in need of gas. He noted that the AGPA submitted an
offer to purchase gas in April, 2005 and that access to gas is
the "single piece" missing from its project. He went on to say
that there has been a "significant shift" in the Alaska gas
market since the termination of the Point Thomson lease.
REPRESENTATIVE DOOGAN about the amount of gas potentially
available from Point Thomson.
MR. WALKER replied that the gas at Point Thompson, in addition
to the state's royalty gas at Prudhoe Bay, is sufficient for the
AGPA project.
The committee took an at ease from 4:56:44 PM to 5:06:00 PM.
5:06:48 PM
JOHN ZAGER, General Manager, Alaska, Chevron Corporation Inc.,
provided the committee with a presentation titled "AGIA
Testimony HB 177" dated March 29, 2007. He said that Chevron
has a 1 percent interest in Prudhoe Bay which means it will have
gas available for the first open season. He noted that Chevron
is a 25 percent owner in Point Thompson, and that the lease
issues there are currently in litigation.
MR. ZAGER opined that the various stakeholders should work
together to find common ground so that this project can proceed.
He said that the Alaska gas pipeline project's large size
increases the risk inherent in the project due to the large
amount of money at stake. He explained that Chevron's investors
are disciplined and conservative, therefore may be somewhat wary
of a possibly uneconomic project. He set forth the proposal
that the objectives of the state, pipeline owners, producers,
and explorers vary for the pipeline project, referring to slide
3. He noted that all parties benefit from low tariffs as they
increase the netback, attract more gas, and encourage expansion.
He summarized his observations about HB 177 by noting that it
provides inducements for key risks in two segments: midstream
and upstream, referring to slide 4.
5:17:48 PM
REPRESENTATIVE SAMUELS asked about locking in tax rates for a
certain amount of gas instead of for a certain time period.
MR. ZAGER offered his belief that there are a number of
mechanisms that can be used to provide fiscal certainty. He
noted the aforementioned issue would have to be considered in
conjunction with the volume of gas committed.
MR. ZAGER went on to say that whether AGIA's inducement
provisions are sufficient for a successful open season is
difficult to answer because it will depend on the circumstances
at the time. He explained that although Chevron wants to sell
its gas, it will make a decision based on the economic situation
at the time.
5:20:27 PM
REPRESENTATIVE SAMUELS asked about rolled-in tariffs.
MR. ZAGER replied that the issue with the tariffs is whether a
company has gas and is putting up one of the initial firm
transportation (FT) commitments. In that case, the rate is
being locked in and will be preserved with only a possible 15
percent future increase.
5:21:19 PM
TIM HOUSTON, Alaska Commercial Manager, Chevron Corporation
Inc., opined that although the concept of rolled-in rates has
been presented, there are many variables as to how the rates
will be designed and set. In response to a question, he
explained that in Canada, pipelines receive a rate of return of
around 8 to 8.5 percent, compared to 12 to 13 percent in the
United States. He noted that although there is some confusion
about how AGIA's proposed 15 percent cap would work, it could be
beneficial.
MR. ZAGER explained that the cost and allocation of risk will
affect the commercial viability of the project. He noted that
the cost estimate is unknown at present, but that construction
costs are increasing. He said that there is uncertainty
regarding gas volumes, future gas prices, and fiscal terms.
These terms can change to help or harm the commercial success of
the project, he said. He went on to say that at present it is
difficult to argue for a particular tax rate since the project
has not yet started. He offered that the inducements offered by
AGIA offer a positive factor in favor of commercial success. He
noted that there is still a great deal of uncertainty in the
project.
5:30:03 PM
REPRESENTATIVE DOOGAN asked if these issues favor development of
a smaller, faster project rather than a larger, slower project.
MR. ZAGER replied that he would be "hard-pressed" to jump to
that conclusion, noting that there are advantages to moving
ahead at a quicker rate, yet also advantages to proceeding with
a larger project for reasons of scale and efficiency.
REPRESENTATIVE DOOGAN asked if a smaller project, with lower
construction costs and possibly fewer delays, is less risky.
MR. ZAGER noted that one rule of pipelines is to "go big" so as
to capture economies of scale.
MR. HOUSTON noted that schedule delays related to permits or
other aspects of construction will exist regardless of project
size.
REPRESENTATIVE DOOGAN referenced the possibility that a smaller,
faster project may decrease many of the uncertainties facing the
project, referring to slide 5.
5:33:49 PM
MR. ZAGER opined that a longer and more comprehensive approach
to fiscal stability will help to move the project forward by
making it more commercially attractive. He set forth that his
understanding is that AGIA proposes a cap of 15 percent on the
cumulative rolled-in rate, but offered that the provision as
currently set forth in AGIA is unclear. He queried whether the
intent is to cap the initial shippers' rates by 15 percent, or
whether it is to cap the shippers' rates with the 15 percent
increase. He suggested that this language be "tightened up" to
clearly reflect the intent. He expressed some uncertainty as to
the AGIA provisions designed to remove future uncertainties
where possible, as that provision as written seems to open the
door for regulatory changes. He opined that this provision may
provide some benefits if it is intended to allow the state to
adjust any provisions that are not working as intended.
5:37:32 PM
REPRESENTATIVE SAMUELS asked about Chevron's interest in
partnering with other parties.
MR. ZAGER replied that some type of partnership is a possibility
to seriously consider, but noted that Chevron's desire would be
to own pipeline capacity commensurate with its shipping
obligations.
5:39:26 PM
REPRESENTATIVE DOOGAN asked whether the witness is aware of
changes in a tax regime that caused pipeline project or shipper
to cease operations.
MR. ZAGER answered that he is unaware of taxes which "cratered"
an upstream project, although they can lower a project's value.
MR. HOUSTON replied that he is not aware of a project that
ceased due to changes in tax regimes.
REPRESENTATIVE SAMUELS asked if tariffs rise at the end of a
project's life.
5:41:18 PM
MR. HOUSTON responded that tariffs can rise, but it depends on
how the stakeholders allocate the volume risk up front. If
depreciation rates are set on the known volume at start-up, and
lowered as more volumes are found, the tariff rate can be higher
at the project's beginning, but not "fly up" at the project's
end. If rates are set with FERC by capacity, there can be a
"catch up" problem at the end which can increase the tariffs, he
explained.
REPRESENTATIVE SAMUELS noted Chevron's unique position as both a
producer and explorer, and asked how that may effect the
company's position on rolled-in tariffs.
MR. HOUSTON noted that Chevron's view as to the favorability of
rolled-in rates depends on the other pieces of the rate design.
He noted that sometimes during pipeline expansion, blame is
placed on rolled-in rates, when the real issue may be the rate
design as a whole. He set forth that the rolled-in rate
provisions of AGIA are not definite enough to allow an opinion
on the impact of the rolled-in rate provisions of the bill.
[HB 177 was held in committee.]
ADJOURNMENT
There being no further business before the committee, the House
Special Committee on Oil and Gas meeting was adjourned at
5:44:37 PM.
| Document Name | Date/Time | Subjects |
|---|