Legislature(2007 - 2008)BARNES 124
04/13/2007 01:00 PM House RESOURCES
| 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 | |
| + | TELECONFERENCED |
ALASKA STATE LEGISLATURE
HOUSE RESOURCES STANDING COMMITTEE
April 13, 2007
1:02 p.m.
MEMBERS PRESENT
Representative Carl Gatto, Co-Chair
Representative Craig Johnson, Co-Chair
Representative Vic Kohring
Representative Bob Roses
Representative Paul Seaton
Representative Peggy Wilson
Representative Bryce Edgmon
Representative David Guttenberg
Representative Scott Kawasaki
MEMBERS ABSENT
All members present
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
03/29/07 (H) Heard & Held
03/29/07 (H) MINUTE(O&G)
03/30/07 (H) O&G AT 8:30 AM CAPITOL 106
03/30/07 (H) Heard & Held
03/30/07 (H) MINUTE(O&G)
03/31/07 (H) O&G AT 1:00 PM BARNES 124
03/31/07 (H) -- MEETING CANCELED --
04/02/07 (H) O&G AT 8:30 AM CAPITOL 106
04/02/07 (H) Heard & Held
04/02/07 (H) MINUTE(O&G)
04/03/07 (H) O&G AT 3:00 PM BARNES 124
04/03/07 (H) Moved CSHB 177(O&G) Out of Committee
04/03/07 (H) MINUTE(O&G)
04/04/07 (H) O&G RPT CS(O&G) NT 3DP 2NR 2AM
04/04/07 (H) DP: RAMRAS, DOOGAN, OLSON
04/04/07 (H) NR: SAMUELS, KAWASAKI
04/04/07 (H) AM: DAHLSTROM, KOHRING
04/04/07 (H) O&G AT 8:30 AM CAPITOL 106
04/04/07 (H) -- MEETING CANCELED --
04/05/07 (H) O&G AT 3:00 PM BARNES 124
04/05/07 (H) -- MEETING CANCELED --
04/10/07 (H) RES AT 1:00 PM BARNES 124
04/10/07 (H) Heard & Held
04/10/07 (H) MINUTE(RES)
04/11/07 (H) RES AT 1:00 PM BARNES 124
04/11/07 (H) Heard & Held
04/11/07 (H) MINUTE(RES)
04/12/07 (H) RES AT 1:00 PM BARNES 124
04/12/07 (H) Heard & Held
04/12/07 (H) MINUTE(RES)
04/13/07 (H) RES AT 1:00 PM BARNES 124
WITNESS REGISTER
DAVID VAN TUYL, Gas Commercialization Manager
BP Exploration (Alaska) Inc. (BP)
Anchorage, Alaska
POSITION STATEMENT: Testified regarding BP Exploration (Alaska)
Inc.'s concerns about HB 177 and responded to questions.
WILLIAM M. WALKER, Project Manager
General Counsel
Alaska Gasline Port Authority (AGPA)
Anchorage, Alaska
POSITION STATEMENT: Testified in favor of HB 177 and responded
to questions.
PAUL FUHS, Lobbyist
for the Alaska Gasline Port Authority
Anchorage, Alaska
POSITION STATEMENT: Provided information on gas pipeline
development issues and on suggested amendments to HB 177.
ACTION NARRATIVE
CO-CHAIR CARL GATTO called the House Resources Standing
Committee meeting to order at 1:02:17 PM. Representatives
Gatto, Wilson, Seaton, Roses, Guttenberg, and Edgmon were
present at the call to order. Representatives Johnson,
Kawasaki, and Kohring arrived as the meeting was in progress.
HB 177-NATURAL GAS PIPELINE PROJECT
1:02:31 PM
CO-CHAIR GATTO 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." [Before the committee was
CSHB 177(O&G).]
1:03:48 PM
DAVID VAN TUYL, Gas Commercialization Manager, BP Exploration
(Alaska) Inc. (BP), referred to a PowerPoint presentation, slide
2, and paraphrased from written testimony [original punctuation
modified slightly]:
BP has a long history in Alaska. BP has been actively
involved in the exploration, development, and
production of Alaska's North Slope energy resources
for decades. [We] see the opportunity for a bright
future ahead. In fact, we envision our 50-year future
in Alaska. It's not just a slogan. So how might that
vision look to our company?
I'd like to turn your attention to the graph at the
bottom of slide 2, which shows the possibility of the
future that BP sees in Alaska, depicting BP's share of
production through time.
There are a few key points to draw from the graph.
The days of high plateau production are behind us. We
still have a significant level of production today,
but that production will continue to decline with
time. That's what the dotted red line depicts. That
shows production declining at historic levels, which
already would require significant investment.
We can make up that decline in production with new
investment that would result in new production from
heavy oil resources and from gas. But it's not a
given. It's a view of what is POSSIBLE. That future
is only made possible with an Alaska gas pipeline
project.
1:06:39 PM
CO-CHAIR GATTO asked whether one should assume the gas is in
"barrels of oil equivalents."
MR. VAN TUYL answered yes.
CO-CHAIR GATTO noted that slide 2 shows a future decline in oil
production despite continued investment, however it also seems
to indicate some future production above the projected decline.
MR. VAN TUYL explained that the chart on slide 2 shows possible
future production increases in viscous oil and gas should there
be further investment "beyond which we have had historically."
He said the historic decline rate has been around six percent
annually, but that rate could be slowed somewhat should there be
more investment in the development of viscous oil resources.
Alternately, if the investment rate was reduced, the projected
rate of future decline would be even greater.
1:08:36 PM
MR. VAN TUYL paraphrased from written testimony [original
punctuation modified slightly]:
So BP wants and needs a gas pipeline. And we need that
pipeline to be built for a low capital cost and then
operated cost efficiently. We believe that is what is
required to make the project happen and be successful.
Low costs are good for both BP and the State because it
results in lower tariffs, higher netbacks and more
revenues for the State and BP.
Also, a low cost project will provide incentive to
explore for more gas to keep the pipeline full into the
future. That is also good for the State and for BP. The
best way to ensure there is gas exploration in the future
is to get a gas pipeline built in the first place, and to
get it built for a low cost.
This is a hugely important project to BP, to Alaska and
to the nation. It represents the largest, known,
undeveloped gas resource in the United States, and in
BP's global portfolio. The gas project is important in
its own right - but it also extends the economic life of
Alaska's oil production for decades. Extending oil
production is good for the State, the nation and for BP.
1:10:10 PM
We share the governor's and the legislature's desire
to get a successful gas project moving, and BP stands
ready to engage with the administration and
legislature to reach a balanced fiscal framework that
works for all the parties.
And finally, a successful framework will set the
foundation for a stable, healthy, and viable oil and
gas business for decades to come. BP's future in
Alaska is directly linked to the gas pipeline project.
That is why we are very encouraged by the Governor's
and the legislature's enthusiasm about getting
Alaska's gas to market. That is also our vision, and
so we share your enthusiasm. It is the key to
Alaska's future, and to BP's future in Alaska.
Therefore, it is important that we get it right.
BP sees AGIA as the Administration's expression of its
commitment to advance the gas pipeline project in an
open and transparent way. We applaud that good faith
expression.
Developing the right process is difficult. Since
first seeing AGIA at its roll out to the legislature
nd
and the public on March 2, we have identified a
number of important areas of concern for you to
consider. We believe AGIA CAN be successful if some
key issues are addressed, and I have summarized those
concerns here, and will discuss them in more detail
shortly.
We believe AGIA may create some unintended
consequences that could jeopardize the vision of
getting Alaska's gas to market quickly, and at low
cost. We believe it is important for the Legislature
to consider these areas of concern as you deliberate
on AGIA.
Why do we feel these changes are so important? It is
because we want the project to be a success, because
there is much at stake for BP and for Alaskans.
1:12:15 PM
MR. VAN TUYL referred to slide 4 of the PowerPoint and
paraphrased from written testimony [original punctuation
modified slightly]:
It is worth a brief reminder of the importance of a
successful project. And I would like to emphasize that
what we need is a SUCCESSFUL gas pipeline, not just ANY
gasline. As we've said, this is a project of tremendous
scope and scale and that's what the picture reminds us
of. Because of this it presents tremendous risk. But if
it is done right, it also presents the opportunity for
great benefits as well. Because there is much at stake,
we need to get it right.
The project creates the opportunity for jobs for
Alaskans, and if we deliver a successful, low cost
project, for revenues to the State and to BP well into
the future. We can create a whole new industry of gas
exploration with a successful, low cost project. Gas
exploration and expansion are only possible if the
pipeline gets built in the first place, and if it is
built for a low capital and operating cost. That will
make it attractive for bringing new volumes into the
project, which benefits the State, gas explorers, and
initial shippers as well.
A successful gas pipeline project will provide the
opportunity to bring a long term gas supply source for
use by Alaskans. And finally, gas sales will diversify
Alaska's economy for decades into the future.
1:14:03 PM
MR. VAN TUYL opined that AGIA can help to deliver a successful
gas pipeline if certain modifications are made. He first
recommended that the bill set forth objectives instead of
prescriptive requirements and paraphrased from written testimony
[original punctuation modified slightly]:
We fully support the State clearly providing its
objectives for a successful gas pipeline project. The
concern we have is that AGIA as drafted presupposes
solutions to those objectives, such as those contained
in Section .130 starting on page 3 of the bill.
We think that prescribing solutions up front will not
result in the best project. We've heard the
administration state their intent that "we need to let
industry do what they do best". We fully agree with
that intent, and think it only gets met if industry is
allowed to offer its own unique, creative solutions.
One specific example of prescribing a solution we find
particularly troubling is the issue of toll
subsidization. AGIA as drafted can result in one
party subsidizing another [referring to the language
in Section .130(7) of the bill on page 6-7.]. AGIA
specifically requires initial shippers - who
financially underpin the project and who already bear
most of the risk associated with the project - to bear
yet another risk and additional cost: the risk of
tariff increases of 15% or more by subsidizing
expansion shippers:
First I want to make clear that the issue is not just
the potential for a 15% rise in the tariff. And by
the way, the "15% cap" as I've heard this language
characterized is not 15%, and it's not a cap. In
reality it could result in a significantly higher
increase than 15%. But the more fundamental issue is
that we believe the issue of subsidization is contrary
to FERC policy. We understand and we fully share the
State's desire for a pipeline to be expandable - it's
absolutely good business. However, we believe that
the State should carefully consider the potential
adverse consequences of requiring pipeline owners to
increase rates on their initial customers to subsidize
expansion shippers. A policy of subsidization places
additional risk on the initial shippers, making the
project less attractive, and therefore puts the
project at risk.
1:17:15 PM
Now if the State wants to subsidize others, it can
certainly do so itself, directly, as a policy choice.
But we don't believe it's good policy to do so with
other peoples' money. Congress made clear in the
Alaska Natural Gas Pipeline Act of 2004 that rates for
initial shippers should NOT increase if a mandatory
expansion was ordered. In fact, the language of the
Federal Law states that
"The [Federal Energy Regulatory Commission] (FERC)
shall…ensure that the rates do not require existing
shippers on the Alaska natural gas transportation
project to subsidize expansion shippers." - ANGPA,
Sect. 105(b)
1:18:17 PM
MR. VAN TUYL referred to Order 2005 in which FERC put in place a
rebuttable presumption of rolled in rates for expansions
provided it did not require subsidization by initial shippers.
REPRESENTATIVE ROSES asked whether future pipeline expansion
could ever result in rates lower than the shippers' initial
rates.
MR. VAN TUYL replied that it is possible for an expansion to
result in a reduction in an initial shipper's rates. However,
it is "not necessarily a given that the first expansion will
reduce rates ... [it is] just as possible that it could increase
rates."
1:20:07 PM
REPRESENTATIVE ROSES referenced FERC policy ensuring that
existing shippers are not required to subsidize expansion
shippers and asked about the situation where a new shipper is
given a lower rate than the original shippers. He asked whether
in that situation, BP would claim the new shipper was receiving
a subsidy.
MR. VAN TUYL replied that he believes the aforementioned
situation is what FERC was trying to address in Order 2005 and
that is why it established a rebuttal presumption to rolled in
rates. He said there is "quite a bit of language" in the FERC
order regarding the subsidy issue. He opined that FERC
recognizes the complexity in this area and accepts that each
case needs to be evaluated on a case-by-case basis. He pointed
out that FERC is meant to regulate inter-state gas transmission
and that there is a body of law and regulation regarding this
area.
1:22:00 PM
REPRESENTATIVE ROSES noted that prior testimony emphasized the
need for "predictability of expenses." He questioned whether
the need to go to FERC for various issues establishes or
undermines predictability.
MR. VAN TUYL replied that on this particular issue of expansion
and subsidization, he believes that the existing FERC
regulations provide predictability for initial shippers.
However, he went on to say that AGIA as currently drafted
appears to allow an expansion to take place and that the rates
would be rolled in provided they did not increase the initial
maximum recourse rate to the downstream terminus. He explained
that BP is concerned that the magnitude of the subsidy could be
"well in excess of 15 percent." He explained that the term
"initial" is a concern because the initial rate can be higher
than the rate after the "period of levelization." Additionally,
"maximum recourse" raises some concern because this term usually
means the maximum rate allowable by FERC.
MR. VAN TUYL said that most pipelines are operated under
negotiated rates, a point which seems to be recognized in AGIA.
Negotiated rates are typically 85 percent of maximum recourse
rates, he said. This could result in a potential rate increase
of 30 percent to an initial shipper, he concluded. Last, there
is some concern over the effect of the language if the rate
relates to the downstream terminus of the pipeline. He
explained that the term "downstream terminus" could mean
Chicago, Illinois if the gas was shipped to the Midwest. He
expressed concern that an expansion to a different part of the
line could perhaps still count Chicago as the downstream
terminus, which results in a "high degree of uncertainty" to the
pipeline owner. He opined that FERC policy gives more comfort
as it has precedent and policy regarding rate issues.
1:27:02 PM
REPRESENTATIVE ROSES asked if this language would be more
palatable if amended to exclude the terms "original" and
"terminus," and referred instead to the "cost at the time of
expansion," and "the cost to the point of expansion."
MR. VAN TUYL replied that although BP has concerns with the
technical aspects of AGIA, its main concern is that some
provisions of AGIA are in conflict with FERC regulation and
federal law. He suggested that a preferable approach would be
to request that the applicant describe how it would support
recovery of expansion costs consistent with FERC regulation and
federal law.
1:28:11 PM
REPRESENTATIVE ROSES sought clarification as to whether the
witness said that the initial shippers do not want to subsidize
any expansion, but do want to share should there be lowered
rates.
MR. VAN TUYL answered the aforementioned characterization is not
accurate; rather the issue is subsidization as described by
FERC. He explained that under FERC guidelines if the rate drops
as a result of expansion, it is not considered a subsidy.
However, if the rate increases it may or may not be a subsidy
depending on the situation. He reiterated that FERC has a body
of policy which it considers in making a determination as to
whether a subsidy has taken place.
1:29:34 PM
REPRESENTATIVE SEATON stated that a primary objective for the
state is to encourage expansion and further exploration.
Today's testimony seems to indicate a desire to remove possible
benefits to later shippers and explorers, he opined.
MR. VAN TUYL disagreed with the aforementioned statement. He
said BP believes it is entirely appropriate that the state
encourage design of an expandable pipeline which enhances
prospects for further exploration. He emphasized that his
comments relate more to jurisdictional issues because FERC
regulates inter-state gas transmission. He expressed concern
that AGIA as currently drafted conflicts with federal law in
this area. He opined that the state should articulate its
objective by asking the applicants to describe how they will
plan for expansion and enhanced exploration. He cautioned that
an overly specific approach regarding rates is problematic and
may conflict with federal law.
1:31:52 PM
REPRESENTATIVE SEATON relayed that the state's desire for
pipeline expansion and future exploration might be different
than FERC's regulatory structure, therefore the state should
have some control over this issue so as to accomplish its
objectives. He asked whether there are other mechanisms to
encourage future exploration such as assuring that future
explorers receive conditions of shipment similar to those
received by the initial shippers.
MR. VAN TUYL replied that he thinks that the best assurances
that can be provided to initial and expansion shippers is to
first build a pipeline at a low cost. He opined that it is
entirely appropriate for the state to desire further exploration
and an expandable pipeline. However, he expressed concern that
the state's attempts to mandate the expansion process and rates
could create conflict with federal law.
1:34:33 PM
REPRESENTATIVE SEATON said that FERC recognizes that higher
rates may or may not be considered a subsidy. He opined that
the provision in AGIA that increases within 15 percent are not
considered a subsidy is not necessarily in conflict with federal
law.
MR. VAN TUYL agreed that the above statement may or may not be
in conflict with federal law. He went on to explain it is the
manner in which "this is laid out" that could create the
conflict.
1:35:34 PM
CO-CHAIR GATTO suggested that subsequent shippers can subsidize
the initial shippers to some extent. He indicated that the
state is justified in setting forth some encouragement for
future expansion and exploration efforts.
1:38:27 PM
MR. VAN TUYL read an excerpt from FERC Order 2005, which he
characterized as putting in place a rebuttable presumption of
rolled in rates for expansion provided it does not require
subsidization by initial shippers [original punctuation
provided]:
In conclusion, to provide guidance to potential
shippers in advance of the initial open season that is
the subject of this rule, the Commission intends to
harmonize both objectives (rate predictability for
initial shippers and reduction of barriers to future
exploration and production) in designing rates for
future expansions of any Alaska natural gas
transportation project. It is consistent with our
guiding principle that competition favors all of the
Commission's customers, as well as with the objectives
of the Act, to adopt rolled-in rate treatment up to
the point that would cause there to be a subsidy of
expansion shippers by initial shippers, if any subsidy
were to be found." [Order 2005, paragraph 125]
1:39:28 PM
MR. VAN TUYL opined that the two excerpts of Order 2005 suggest
that AS 43.90.130(7) could be in conflict with federal law. He
said the issue is quite complicated, and is still being studied.
He warned that a conflict could result in delays and
uncertainties.
1:40:15 PM
CO-CHAIR GATTO asked if this issue would be resolved if the
language in section 130 (7) read "not more than zero" rather
than "not more than 15."
MR. VAN TUYL opined that even with that change there would still
be conflict and concern because it puts the state in the place
as the rate-maker rather than FERC.
1:40:55 PM
REPRESENTATIVE SEATON asked whether this is just part of a
negotiated rate process.
MR. VAN TUYL agreed that FERC certainly does allow for
negotiated rates, but he went on to say that his understanding
of AGIA is that it sets forth parameters for any negotiated
rate. He offered that this raises the issue of whether it is
really a negotiated rate or a mandated rate.
1:41:53 PM
REPRESENTATIVE SEATON noted that the state is the resource
owner, and perhaps this provision could be considered a term put
forth by one of the parties, in this case the state.
MR. VAN TUYL opined that negotiation requires terms that are
agreed to by both parties. He indicated that in this instance
there is a question as to whether it is really a negotiated rate
since AGIA's terms appear to mandate a certain structure. He
continued by explaining that BP believes a provision which
requires a subsidy for not-yet-ready shippers at the expense of
initial shippers would be a disincentive for potential shippers
to participate in an open season.
1:43:17 PM
REPRESENTATIVE ROSES asked for clarification as to whether the
concern was regarding possible conflict with federal law, or
more with the desire to allow the applicants greater leeway to
describe how they would plan for future expansion of the
pipeline.
MR. VAN TUYL emphasized that he believes it would be entirely
appropriate for the state to articulate its objectives and to
require an applicant to explain how its proposal would allow for
pipeline expansion and future exploration. He assured the
committee that expansion and future exploration are also key
objectives of BP. However, BP is concerned that an overly
prescriptive application requirement could create a conflict
with federal law.
REPRESENTATIVE ROSES asked whether it would be possible to
request a ruling from FERC as to whether the provisions in AGIA
are in conflict with FERC provisions.
MR. VAN TUYL said this is an issue of federal law, noting that
the FERC provisions referred to today are regulatory.
REPRESENTATIVE ROSES pressed on to ascertain whether the concern
would still exist if there was a ruling from the appropriate
federal entity that AGIA's language is not in conflict with
federal law.
MR. VAN TUYL replied that the issue about the conflict would be
satisfied. However, the issue of the magnitude of the potential
subsidy would still exist and could expose the shipper to a rate
increase "significantly higher" than 15 percent.
1:46:16 PM
MR. VAN TUYL suggested that a second modification that would
enable AGIA to help deliver a successful gas pipeline relates to
the issue of exclusivity. He paraphrased from written testimony
[original punctuation modified slightly]:
Under Sections .260 and .440 of the bill on pages 18
and 23, AGIA would result in an exclusive winner
before any real work is done and awards State funds
based on promises, not results. We are concerned that
this feature may actually PRECLUDE a successful
project from moving forward. That's clearly not
anyone's intent, but could be an unfortunate
unintended consequence.
Our understanding of AGIA is that expedited regulatory
handling is offered only to the licensed project, and
that the State can be penalized for assisting another
competing project. We're concerned that this approach
may actually conflict with Federal law and regulation,
which favor competition among various project
proposals and market involvement in the choice.
We think it wise that the State consider avoiding any
notion of exclusivity or the government 'picking a
winner'; I'm not aware of any example where that has
worked successfully.
1:47:34 PM
We recognize that the Administration has, in good
faith, laid out selection criteria under Section .170
to enable the selection of the exclusive winner in as
transparent a way as possible.
So that leaves a fundamental question: Should the
State pick an exclusive "winner" based only on a
proposal? That approach gives us concern. We believe
that the State can help to advance the project by
setting out a clear framework for investors - from
there the market will work to identify the most
effective project
And we support open competition in the marketplace,
rather than in advance of actual performance or before
the competition actually starts
1:48:47 PM
In fact, the FERC requires that the market demonstrate
that it wants that application before awarding a
certificate to an applicant. That's what happens in a
successful open season. We believe the Federal law
under [Alaska Natural Gas Pipeline Act of 2004] ANGPA
offers a good model, in which expedited regulatory
handling is provided to ANY project.
We certainly understand that from the State's
perspective, there are a number of specific things
desired from ANY project (jobs and training for
Alaskans, gas access for Alaskans, pipeline
expansions).
We support all of these objectives. Those objectives
can and will be addressed by a successful project
through open competition in the marketplace.
1:49:21 PM
REPRESENTATIVE ROSES asked for more clarification as to how
market factors will help determine the best solution to actual
performance if the performance is building a pipeline or
expanding an existing pipeline. He questioned how this would
work prior to establishment of a market.
MR. VAN TUYL clarified that he was referring to, as an example,
"performance through conducting a successful open season"
wherein a project sponsor does the work necessary to attract
customers to assure a successful open season. He opined that
this was the model under federal law.
REPRESENTATIVE ROSES asked if the open season should be held
before there is a bidder on the project.
MR. VAN TUYL responded that he believes the best model would be
to allow multiple projects to go forward so as to insure a
successful open season. He opined that if only one entity is
chosen, yet becomes unable to go forward to open season, it
could result in a substantial project delay.
1:51:30 PM
CO-CHAIR GATTO commented that requests for proposals (RFPs) are
a common business practice whereby proposals are evaluated. He
opined that AGIA sets forth a procedure to allow the state to
evaluate various proposals. He queried as to whether BP seeks
an open process that allows applicants to come forth with any
proposal they want.
MR. VAN TUYL said his suggestion is that the state allow
companies to advance a project through actual performance in the
marketplace. He opined that a successful open season will
provide the information necessary to know if a proposed project
will actually advance.
CO-CHAIR GATTO clarified that under the witness' description,
bidders could choose which projects they were interested in
during an open season.
MR. VAN TUYL agreed with the aforementioned scenario. He
reminded the committee that the Alaska Natural Gas Pipeline Act
of 2004 (ANGPA) provides for the federal government to grant
expedited regulatory review of "any project." He said this
encompasses the possibility that there will be multiple possible
projects, and any one of them will receive expedited approval.
He predicted that the customers will sign up for the project
that gives them the best service.
1:54:18 PM
REPRESENTATIVE SEATON said he was trying to ascertain whether
the state was setting the stage for a successful open season.
MR. VAN TUYL said that as a resource owner BP wants to have a
successful open season so that the pipeline project can advance.
He set forth that there are three components to establish the
confidence needed to bid for firm transportation (FT)
commitments and therefore assure a successful open season:
knowledge of the resource rules, confidence that the open season
sponsor can deliver the project offered, and an understanding of
the commercial terms of the FT commitments. He opined that BP
could advance a successful open season, but that there should be
marketplace competition as "we don't have the market cornered on
all the good ideas."
1:57:14 PM
MR. VAN TUYL paraphrased from written testimony [original
punctuation modified slightly]:
A third area we suggest be considered carefully is
that, although AGIA seeks to get a project moving, and
we fully support that objective, it does not
sufficiently address the resource framework, which is
the key enabler for a financeable project.
That said, we are encouraged that AGIA recognizes at
least in part, the importance of some of these key
resource issues.
In Section .310 on page 19, AGIA seeks to address the
issue of royalty valuation, which has been an historic
source of conflict between industry and the State.
But we are concerned that these terms do not provide
sufficient clarity to justify making the firm
transportation commitments required to underpin the
project.
The royalty valuation provisions depend on future
regulations; neither the shippers nor the legislature
know what those regulations might say. The valuation
regulations would allow for retroactive adjustments,
and the regulations associated with RIV/RIK switching
imply that "reasonable" disproportionate costs and
"reasonable" interference with marketing is okay. I
don't know what that means or how to evaluate that.
Also, these regulations may change every two years.
In Section .310(b)(3) on page 19 of the bill, AGIA
seeks to address royalty issues associated with
RIV/RIK switching which is incompatible with the long-
term arrangements required to make a gas pipeline
project happen (RIV = "royalty in value"; RIK =
"royalty in kind"). RIV/RIK switching is problematic
for at least two reasons:
1:59:39 PM
One is that if the State chooses to switch let us say
from in-value to in-kind, the shipper would have to
come up with additional gas to satisfy its customers
in the marketplace.
The second problem is associated with obtaining the
capacity on the pipeline if the State switches. For
instance, if the State had originally elected to take
gas in value, the shipper would have obtained the
associated capacity to ship the State's associated
share of gas. If the State then switched from in-
value to in-kind, this could result in stranding
downstream capacity, raising the question of who would
pay for that cost of unused capacity.
Under AGIA, the specific solution to RIV/RIK switching
is left to future regulation that, as I mentioned
earlier, would allow for the lessee to bear
disproportionate costs, and potentially interfere with
long-term marketing.
AGIA includes a provision related to gas production
tax in Section .320 on page 21. However, the gas
production tax rate is not established, and only
becomes known after the conclusion of the open season.
A shipper would not know what the production tax is
before having to make the FT commitment, which would
be an incredible risk.
The gas production tax rate is then only established
for a period of 10 years, which for reference is a
fraction of the period that shippers will likely be
required to make their firm transportation
commitments.
2:01:27 PM
AGIA is silent as to the many other payments made to
the State, which constitute the majority of industry
payments. It is widely understood that the resource
owners will pay the cost and bear the risk in building
a pipeline whether they own it or not. Resource
owners will pay all the costs of the pipeline, either
directly or indirectly by reimbursing the pipeline
owner through the tariff for the costs they incur.
2:02:05 PM
It's the RESOURCE that drives the construction of a
basin-opening pipeline like this project, NOT the
PIPELINE that drives the resource! Therefore, solving
the resource issues with clarity is key to allowing a
project to move forward.
Multi-billion dollar commitments spanning decades are
needed to financially underpin this project;
Just like Wall Street needs to know the rules before
lending money, resource owners need to know the fiscal
rules that will govern the project before making
commitments that will enable the pipeline to be
financed.
2:02:44 PM
Although this is widely known, the details of an
upstream framework are complex and will take time and
effort by both the State and the producers to agree -
but unless they are addressed, a project won't secure
financing; it won't advance.
MR. VAN TUYL clarified that the state is indeed a resource
owner.
2:03:13 PM
REPRESENTATIVE SEATON asked about the benefit of establishing a
gas production tax rate at the time of licensing, then for a
three year period to cover open season, and with a guarantee in
the bill that an initial shipper would get that same rate for a
10 year period.
MR. VAN TUYL agreed that certainty is good and that something
like the aforementioned approach would be a step in the right
direction. He said that other issues are the magnitude of the
rate, and the prospect that the rate will change. He opined
that it is important for an applicant to know that the rules
will not change throughout the course of the project.
2:04:51 PM
REPRESENTATIVE SEATON asked for clarification regarding BP's
concern with the royalty section, particularly with regard to
the state switching how it takes its royalty share.
MR. VAN TUYL explained that BP's fundamental concern is that
"the rules are not yet established." He agreed that the current
lease terms with regard to switching between RIK and RIV are
incompatible with a gas pipeline. He said that seeing this
issue recognized in AGIA is encouraging, however BP has concerns
with the nature of the solution. He explained that FT
commitments may require BP to commit to capacity for decades,
therefore the possibility that the state will switch its royalty
between in-value and in-kind creates the risk of stranded
capacity. He opined that it is possible to negotiate a solution
to this issue that stabilizes the risk.
REPRESENTATIVE SEATON asked for more detail regarding acceptable
terms.
MR. VAN TUYL offered that there are a number of ways to address
risk. For instance, the state could be required to choose to
take in-kind or in-value at the beginning of the project.
2:08:46 PM
REPRESENTATIVE SEATON asked whether the state's switching within
an expansion, and for a qualified amount, would take care of the
risk factor.
MR. VAN TUYL opined that "it is actually pretty complicated."
In theory the parties can agree that the state would take
responsibility for any stranded downstream capacity, however he
offered that in actuality, this type of arrangement may actually
violate FERC regulations since capacity must be posted for
competitive bidding. He expressed skepticism that the parties
could agree in advance that one party would receive another
parties stranded capacity. He set forth that he does not have a
solution to this issue regarding the royalty share short of the
state setting forth at the beginning of the project a framework
for what it intends to do with regard to its royalty share.
2:10:34 PM
MR. VAN TUYL paraphrased from written testimony [original
punctuation modified slightly]:
The provisions of Sections .310 and .320 do not
adequately address these upstream issues. To do so
requires robust interaction.
Thus far, there have been some high level discussions
between our senior management and the Governor. But
we've been disappointed in the level of interaction
with the Commissioners and their staff. That's where
the problem will ultimately be solved. Over the last
three weeks we've had three constructive discussions
with one deputy Commissioner. That's a start. We
would welcome the opportunity to increase the
frequency and depth of dialogue with the
Administration.
2:11:31 PM
What Is So Important About FT?
We've heard a fair amount, in this committee and
others, about this term called "FT" which is short for
firm transportation commitments. In listening to many
of these hearings it seems to me that the nature of
these commitments is not fully understood
However, these commitments are absolutely critical for
a gas pipeline to be successful. Therefore, I thought
I'd spend a moment hopefully adding a bit of clarity
to the understanding of FT.
These commitments, typically obligations to "ship or
pay" made by the resource owners or "shippers", are
needed by the pipeline company to get financing.
Validating just how important they are, we've heard
some very simple and straightforward comments from
pipeline companies who have testified in the past
couple of weeks. TransCanada has said "No customers,
no credit, no pipeline" (and in this context customers
means shippers)
Enbridge put it even more simply by saying "No
producers, no pipeline". Those aren't "political"
statements. They are statements about the simple
financial truths of gas pipeline projects
2:12:56 PM
FT is a binding FINANCIAL obligation. I've sometimes
heard FT described as "committing gas to a pipeline".
I've heard that quote from industry as well as others,
so I'm not pointing any fingers here. But I just
wanted to make it clear that FT is an actual financial
obligation. Typically, FT is known as a "ship or pay"
obligation. That means that a shipper commits to pay
the pipeline company for use of its service whether or
not the shipper actually delivers gas to the line
And it's also important to note that a company does
not need to have ANY gas resources to enter into a
firm transportation commitment. Any company who meets
the creditworthiness standards set by the pipeline
company is free to bid for capacity. Gas pipelines
are "open access". Anyone is free to obtain capacity
if they make the requisite commitments.
These FT commitments are real financial obligations.
We are required to disclose these commitments as
additional information with our filing with the SEC.
Clearly, an FT of this magnitude will be taken into
consideration by financial entities like banks when
evaluating our company. That's because it's a real
obligation.
Once these commitments are made to the pipeline, they
are used by the pipeline to obtain financing from the
financial markets, provide coverage for that
financing, and a return for the pipeline.
2:14:46 PM
Maybe an example to explain the nature of these
commitments would help. Let's say we've had a
successful open season, the pipeline gets project
financed, is built and it's in operation. Then,
heaven forbid, for some reason the pipeline company
goes bankrupt. Not what we're hoping for, for sure.
But what would the lenders do? So they would turn to
the FT commitments made by the shippers to get their
repayment. And these FT commitments would indeed be
paid to the lenders. That's because they are a REAL
FINANCIAL COMMITMENT. They have to be properly taken
into consideration when evaluating project economics.
The scale of these commitments is often
oversimplified. It's not "just" the capital cost of
the project, if that weren't in itself a large enough
commitment. The commitment is for what is known as
the "demand charge" which is the cost of service the
pipeline will charge through time. Capital is one
major component
But for illustration, I've provided some broad
assumptions to put the scale of these commitments in
perspective. Assuming a 4.5 bcfd project, at a unit
cost of $3.50/mcf for 25 years results in a total FT
commitment of $144 billion
2:16:57 PM
MR. VAN TUYL noted that $144 billion is a huge sum, even for a
company the size of BP. He reminded the committee the FT costs
can be three to four times more than the cost of the pipeline.
He responded to a question by explaining that FT commitment
terms vary from project to project. Sometimes in an open season
the term can be used "as a differentiation where that is bid."
The rate may vary depending on the terms of the FT commitments,
with a higher rate for shorter terms, he explained. He
indicated that the Alaska project will likely require fairly
long term FT commitments of 25 or more years, which he
characterized as fairly long term. He indicated that a more
usual FT commitment term is around 15 to 20 years.
2:18:44 PM
CO-CHAIR GATTO asked whether FT commitments are based on time,
or other terms, such as volume.
MR. VAN TUYL responded that in a typical FT commitment a company
reserves a specific amount of pipeline capacity for a specified
period. He said it is possible there are forms of FT commitment
that relate only to volume.
MR. VAN TUYL responded to a question regarding the size of the
pipeline project by explaining that this project was studied
several years ago. At that time BP considered the issue of the
size of the pipe and came to the conclusion that the rate of
around 4.5 billion cubic feet per day (Bcfd) was a good balance
between commercial viability and expandability. He explained
that at 4.5 Bcfd, there would be an opportunity with a 52 inch
pipe to expand it at a rate not to exceed the initial rate.
2:21:00 PM
CO-CHAIR GATTO asked whether there is a minimum pipe size for
this project.
MR. VAN TUYL replied that a smaller diameter simply does not
have the through-put necessary to lower the unit cost to a level
that makes it viable to get gas off the slope. He said a 48 to
52 inch size is "sort of what we were looking at."
CO-CHAIR GATTO offered that it may be difficult to compare very
different proposals, which is why AGIA has some "sideboards" to
somewhat limit the proposals so that they can be more easily
compared.
2:22:58 PM
MR. VAN TUYL said he has some concerns about requiring too much
specificity early on because very often the project details are
determined based on the outcome of the open season. For
example, if there is more demand than anticipated, the pipeline
size may have to be increased, he said.
2:24:02 PM
REPRESENTATIVE ROSES set forth that his understanding of the
aforementioned discussion is that the project license may be
awarded based on a proposal, but then the open season may
dictate a larger or smaller pipe than set forth in the original
proposal. He queried as to how the state could be assured that
the successful proposal was actually the best one if it later
has to be re-designed based on the results of the open season.
He offered that perhaps a different applicant may have done
better research to more accurately predict the outcome of on
open season, but that applicant would be foreclosed from
proceeding once the license was awarded to a different
applicant.
MR. VAN TUYL said that the aforementioned scenario is also of
concern to BP. He predicted that the best pipeline project plan
will become clear after open season - at that point the state
will know what the best solution is, he opined.
MR. VAN TUYL responded to a question by explaining that he is
unaware of the shortest and longest terms of BP's FT
commitments, but he does know that the terms vary.
2:26:43 PM
REPRESENTATIVE GUTTENBERG asked for more clarity regarding the
statement that the market will determine the best project
through actual performance.
MR. VAN TUYL replied that an example of actual performance would
be a project that conducts a successful open season. He
indicated that the open season approach is the "mechanism for
gas pipeline projects in the U.S." He said that projects come
together when customers and the project sponsor come together to
demonstrate their commitment through the open season process.
He said he is not sure how many open seasons BP has participated
in, however, he could get further information on this.
2:27:58 PM
MR. VAN TUYL responded to a question by opining that the state
is entitled to pick a project and to provide financial support
to the licensee. He suggested that a better approach would be
to allow multiple parties to proceed to open season and allow
the result of the open season itself to determine which company
has the best project. He opined that this approach would
provide a greater likelihood that the pipeline will actually be
built because the project will have demonstrated market
viability through actual performance.
2:29:50 PM
REPRESENTATIVE WILSON noted that sometimes open season are not
successful.
MR. VAN TUYL agreed it is possible to have an unsuccessful open
season. He suggested that there are a couple of key ingredients
for a successful open season. First, certainty regarding
resource terms gives the resource owners the confidence
necessary to enter into FT commitments. Furthermore, potential
customers must have confidence that the sponsor has the ability
to deliver on the services offered. Another factor is the
nature of the commitments themselves, he explained.
2:31:24 PM
CO-CHAIR JOHNSON asked about a situation where one or more
companies participated in a competing open season, and how much
it would likely cost to get to open season.
MR. VAN TUYL replied that there have been situations where
multiple sponsors have advanced their projects at an open
season. The cost of getting to an open season depends on the
nature of the open season, he said. He estimated it would take
18 months to 2 years to get to open season for the Alaska gas
pipeline project, and would cost "hundreds of millions" of
dollars. He explained that the time and high cost is due to the
need to obtain environmental information and to conduct a
"bottoms up" cost estimate. He opined that this research is
necessary to allow for a full understanding of the project prior
to open season.
2:33:24 PM
CO-CHAIR JOHNSON asked whether it would help or hinder
competition to have more than one company prepare for and
participate in an open season. He expressed some concern as to
whether it would be reasonable to expect companies to invest
time and money despite the risk of not being chosen as the
project sponsor.
MR. VAN TUYL responded that it would be preferable for the
parties to cooperate so as to advance the project. He opined
that this is why FERC expedites regulatory handling of any
project.
CO-CHAIR GATTO asked about the costs of open season should each
company proceed separately.
MR. VAN TUYL opined that it was highly unlikely that each
company would individually spend hundreds of millions to get to
open season. It would be more likely that the parties would
cooperate to find a way to advance the project.
2:35:11 PM
REPRESENTATIVE SEATON asked whether anything has prevented the
producers from working together to plan a project and hold an
open season. He expressed some skepticism about competing
bidders for open season since to date no companies have
proceeded in this direction on their own.
MR. VAN TUYL agreed with the aforementioned comment and stated
that the single most enabling ingredient would be to establish
"resource terms with clarity." He opined that:
"if that was done then the resource owners, such as
BP, would clearly be motivated to do just what you are
describing and advance ... to open season. It is the
resource that will pull the pipeline project along,
not the other way around. Once those resource terms
are known, then the framework is set for a successful
open season.
2:36:40 PM
REPRESENTATIVE SEATON observed that work on oil production taxes
during last year's legislative session was to establish known
resource terms. He suggested that now the terms are known, but
apparently not liked. He expressed continued concern with why
the producers appear to be reluctant to set forth an open season
proposal on their own.
MR. VAN TUYL replied that the process that has been laid out by
the administration is AGIA, which is why BP is working within
that framework. He said if there was another process proposed,
BP would work within that framework.
2:37:52 PM
REPRESENTATIVE WILSON summarized that BP wants the pipeline and
is waiting for the state to "put something forward so that we
can address that."
MR. VAN TUYL agreed that BP would very much like to have a
pipeline to monetize its gas resource. He reiterated that the
key enabler is an understanding of the rules governing the
resource over the long term. He stated that since the current
framework to establish the enabling factors is AGIA, BP is
providing comments regarding whether AGIA establishes the
necessary enabling factors.
2:38:58 PM
REPRESENTATIVE WILSON asked about the benefits to BP of being an
owner or part owner of the pipeline, especially since pipeline
returns are regulated.
MR. VAN TUYL responded that there are a number of reasons why BP
would like to be an owner in the pipeline. First is that BP has
world-wide experience in delivering mega-projects and is
confident it could manage the risks associated with this large
project. Second, as a resource owner, it is in BP's best
interest to deliver the resource for the lowest cost possible.
He noted that although the pipeline itself would be limited to a
regulated rate of return, FT commitments will have to be made.
These commitments represent a "significant sum of money" when
made to a third party, he explained. He offered that
information presented by the administration showing a potential
high rate of return on the pipeline neglected to consider the
cost of FT commitments. He responded to a further question
regarding BP's desire to build the pipeline by emphasizing that
BP has the experience and the commercial motivation to deliver
it at the lowest cost possible. A company that is not a
resource owner receives its revenue from the project's rate
base, he opined. He explained that any developer will want
customers, but indicated that the economic motivations vary
depending on whether the developer is an independent pipeline
company or the resource owner. He opined that in the latter
case there is more motivation to deliver the gas at the lowest
cost possible.
2:43:26 PM
CO-CHAIR GATTO referred to an issue of The Bernstein Report
which concluded that BP and other producers have project
management problems regarding pipeline construction management.
Based on this, he asked why the state should want the producers
to oversee the pipeline project.
MR. VAN TUYL characterized the aforementioned comment as a "bit
of a simplification" of what the report says. He went on to say
that BP has developed some of the more challenging projects
"across the globe." He noted that BP has completed a pipeline
in the Caspian Sea area that had political and technical
challenges. He observed that although BP does not have the
market cornered on good ideas or project delivery, it "clearly
has a unique motivation as a resource owner "to do the best job
possible to deliver the project at a low cost."
2:46:29 PM
REPRESENTATIVE ROSES asked why it would cost $400 to $500
million for BP to get to an open season for the Alaska gas
pipeline project in light of its significant experience with
difficult projects worldwide.
MR. VAN TUYL agreed that it would take this kind of money
because the Alaska project does not necessarily require
"learning what we already know." He said that in 2001 BP
studied and "literally walked" the possible Alaska gas pipeline
route to gather information on the environment. This effort
cost $125 million and will likely need to be repeated in more
detail. Additionally, BP will have to do a "bottoms up" cost
study of the project, which is very costly.
2:48:35 PM
CO-CHAIR JOHNSON asked about the effect of the state
contributing $500 million towards preparation for open season,
then providing information to potential pipeline sponsors.
MR. VAN TUYL said that would be a state policy call. He
suggested that industry participants, whether they be producers
or others, are best suited to plan and execute studies necessary
prior to an open season. He responded to further inquiry by
stating that BP "would be more than happy" to put forth the
money and effort necessary to prepare for an open season
provided it had confidence in the resource terms. He explained
that BP "would place a high premium" on needing confidence that
the work and engineering done to prepare for an open season
meets its needs and standards.
2:51:29 PM
MR. VAN TUYL continued to discuss FT commitments and other
aspects of the pipeline by paraphrasing from written testimony
[original punctuation modified slightly]:
These long term commitments are just that -
commitments. Therefore, they represent real risk.
And the size of these commitments magnifies the risk.
And that risk is borne by those making the
commitments. This next slide [slide 9] attempts to
show how risk is ultimately allocated in a major
resource development project like the Alaska Gas
Pipeline Project. I'm going to step through it one
bit at a time.
First, we start with the Resource Owners - that's of
course the State of Alaska, and it includes the
lessees, like BP, CP, EM, Chevron, and others.
2:52:22 PM
There are certain risks that are inherent to the
resource itself. There is always price risk
associated with selling a commodity like gas:
That's the risk that the price of gas will fall in the
future, possibly below the tariff.
There's also production risk
Keeping the pipeline full for project life
Being able to deliver the full volume every day
These risks are important considerations when a
resource owner has to make the firm transportation
commitments necessary to underpin the project
2:53:07 PM
Next, there's fiscal risk for a lessee; that's the
risk that the fiscal terms on the upstream business
might change. On major infrastructure projects like
this around the world, it's not uncommon for host
governments to address fiscal risk with a mutually
agreed framework.
There are also a whole host of risks associated with
constructing the pipeline itself:
Regulatory process could change - schedule risk
Material, labor, and equipment costs - cost risk,
which includes project management and execution
Need for finances from the capital markets - finance
risk
2:54:21 PM
What is critical to appreciate is that all these
project-related risks that are taken by the pipeline
company are ultimately passed through to the resource
owners through the toll. The pipeline company
receives a regulated rate of return and gets a
reasonable return on investment commensurate with the
risks.
In exchange for this regulated rate of return, the
regulators ensure that the pipeline does not take on
certain risks. These instead are passed through to
the resource owners, provided that the pipeline owner
delivers the project on time and operated efficiently.
That's how the risk / reward balance is struck by the
pipeline regulators
So ultimately, ALL RISKS are either borne directly by
the resource owners, or are passed through to the
resource owners through the toll. To ensure a low
cost project, it's important that those that are
bearing a risk are able to manage that risk. They are
commercially motivated to manage that risk downwards
To reiterate, it's critical that the fiscal system is
established in such a way that the risks associated
with the resource or "upstream" are adequately
addressed to ensure the risk / reward balance is
right. That will maximize the likelihood of having a
successful open season and a successful project. The
State is uniquely positioned to address this risk.
2:55:44 PM
So in summary, I'd like to leave you with four
messages. First, BP wants and needs a gas pipeline.
It's critical to our vision of the 50-year future in
Alaska. Second, BP fully supports an open process
that leads to a mutually agreed fiscal framework with
the State that allows a project to advance and attract
financing.
We think there should be an open and transparent
public review of the resulting framework. The
Governor has already committed to keep the legislature
and the public apprised - we fully support her in
that. It is critical that the legislature supports
and endorses that framework. The judicial branch
should review that framework to ensure
constitutionality. The people of Alaska and all 3
branches of government should and will be consulted.
We think that the resulting framework should be
available to all investors to ensure competition.
Third, we believe that a number of midstream details
in AGIA should be fixed. We think the best project
will come about if the State allows industry to offer
solutions, rather than prescribing them up front. The
provisions which result in rate subsidies of one party
to another should be eliminated. Any notion of
exclusivity or the government 'picking a winner' like
those contained in Sections .260 and .440 should be
avoided. Any process should allow competition in the
marketplace to work. It is easy to make hopeful
promises but it is harder, and vitally important, to
deliver performance. That is what we believe the
State should require -Delivery, not promises.
And finally, mutually agreeing to an upstream
framework is critical. The resource issues must be
resolved for the project to proceed and to ensure the
resource owners have sufficient confidence to make the
necessary long term financial commitments in an open
season required to advance the project. Section .310
and .320 of AGIA do not accomplish this objective.
MR. VAN TUYL concluded by stating that BP is ready to engage in
developing the necessary upstream framework.
2:58:18 PM
REPRESENTATIVE ROSES asked whether it is a fair assessment to
conclude BP would not bid on the gas pipeline project based on
the current terms of AGIA.
MR. VAN TUYL said that BP would like to bid, but would not under
the current terms of AGIA.
2:58:58 PM
MR. VAN TUYL responded to a question about the FT commitments by
explaining that longer term transportation commitments have
lower risks and tolls, which results in a higher netback. He
suggested that it would increase the risk of financing to
shorten the FT commitment terms. He said that BP's financiers
have indicated that a FT commitment terms of only 10 years for
this project will probably not qualify for financing.
3:00:23 PM
CO-CHAIR GATTO asked about methods to accomplish long-term
financial stability.
MR. VAN TUYL responded that there are any number of ways that
certainty can be structured. He noted that project finance can
be complicated, but that there are a number of ways to approach
it.
3:01:35 PM
REPRESENTATIVE SEATON asked about the possible effects of
legislation regarding carbon dioxide emissions on the tariff.
MR. VAN TUYL replied that it would increase the tariff, although
he is unaware of the magnitude of that increase. He suggested
that applicants could be required to address greenhouse gas
issues and possible effects of carbon credit legislation.
3:04:31 PM
REPRESENTATIVE WILSON asked exactly what BP means when it says
the resource terms must by clear.
MR. VAN TUYL answered that "exactly what I mean is the rules ...
that define the payments that we make to the government" be
specified "for a long period." He explained that he meant taxes
and BP would seek as much certainty as possible with regard to
all taxes. He said he cannot offer a specific ultimatum, but
indicated that there could be any number of potential solutions
to the issue of certainty of resource terms.
3:06:54 PM
REPRESENTATIVE WILSON offered her understanding that the witness
said BP would not be submitting an application. Based on that,
she asked what the state needs to do to get BP to submit an
application.
MR. VAN TUYL replied that "if he said that" he may have
misspoken. He explained that BP would like to be in a place
where it could submit an application and he offered that if
changes were made to AGIA, BP would be able to submit an
application. He indicated that BP would like to propose its
resource terms in the application so that the state could
examine BP's application to determine whether the terms were
acceptable.
3:07:36 PM
REPRESENTATIVE GUTTENBERG asked what BP looks for in its rate of
return. Second, he asked about the value of retaining basin
control.
MR. VAN TUYL replied that basin is actually controlled by the
regulator of the pipeline, in this case FERC due to the
interstate nature of the pipeline. He said that under FERC the
pipeline would have "open access" to bidders during open season.
He suggested that it is unclear who will receive access to the
pipe in the course of competitive bidding as required by FERC.
As to the successful rate of return, he explained that companies
look at a "whole host of economic indicators" to determine the
pipeline's risk.
3:09:56 PM
REPRESENTATIVE SEATON asked about the factors that influence the
pipeline's rate of return, such as the amount of equity in the
pipeline. He noted that negotiated rates could be 85 percent of
the maximum recourse rates and queried about how this could
affect the pipeline owner's rate of return.
MR. VAN TUYL answered that the shortest answer is that it
depends on the specific structure of the negotiated rate. He
agreed that it is possible that a negotiated rate of 85 percent
could reduce the rate that the pipeline operator would receive.
He responded to a question by reminding members that FERC will
establish a maximum recourse rate to insure that the rates are
just and reasonable. He explained that FERC allows parties to
negotiate rates that could be less than the maximum recourse
rates.
The committee took an at ease from 3:15:11 PM to 3:31:03 PM.
3:31:22 PM
WILLIAM M. WALKER, Project Manager, General Counsel, Alaska
Gasline Port Authority (AGPA) provided the committee with a
PowerPoint presentation. He stated that in general the AGPA
views the open and transparent process of AGIA favorably. He
opined that AGIA "has a much better feel" than the prior
Stranded Gas Development Act (SGDA).
PAUL FUHS, Lobbyist, Alaska Gasline Port Authority, opined that
prior testimony indicated a desire by the producers to return to
a process more like the SGDA.
3:36:53 PM
MR. WALKER reminded the committee the AGPA was formed under
state statute to encourage development of Alaska's gas. He
noted that a stable and secure energy source is critical to
Alaska residents. He explained that AGPA would share its
revenue as directed by statute- 60 percent to the state, 30
percent to municipalities, and 10 percent to energy related
benefits for rural Alaska.
MR. FUHS noted AGPA is a non-profit organization created to
create a public service. However, it must take in some revenue
to allow it to take on debt. The aforementioned comment
concerns the revenue surplus over AGPA's debt service.
MR. WALKER said that AGPA considers supply of gas to in-state
markets a high priority. He said that AGPA supports use of some
gas liquids for the in-state market and market optionality for
Alaska's gas. He explained it is important to maximize market
options.
3:43:25 PM
CO-CHAIR GATTO asked for further explanation of whether debt is
deducted prior to disbursement of the direct net-profit revenue
sharing split.
MR. WALKER explained that the debt comes out prior to revenue
sharing payments. In response to a question regarding gas
liquids, he explained that there would be a fractionation
facility in Valdez to take the propane and liquids out to be
shipped separately from the liquefied natural gas (LNG). He
said the volume shipped is the product not needed for in-state
use. He explained that the liquids would be shipped separately
from the LNG.
3:44:39 PM
MR. WALKER referred to slide 4 and emphasized that AGPA would
act as a facilitator for any gas pipeline project. He offered
that "world class" companies would be doing the actual pipeline
work. He explained that AGPA has been working with various
companies to obtain cost estimates.
MR. FUHS offered that it is not necessary for the resource owner
to take the risk in building a pipeline. Instead, a customer
may make a long term commitment to buy the gas.
MR. WALKER explained that AGPA plans to build a 48 inch pipeline
from Prudhoe Bay to Valdez, with a pre-build to Delta Junction
for later tie-in with the Alaska/Canada highway project. In
response to a question, he explained that "gas conditioning" is
different from a gas treatment plant (GTP). In the conditioning
process, the gas is cooled to ready it for input into the
pipeline.
3:50:04 PM
REPRESENTATIVE SEATON asked whether the gas conditioning aspect
of AGPA's project is the same as the GTP considered in the other
proposed gas pipeline projects.
MR. WALKER answered that the aforementioned statement is
correct. He said AGPA is prepared to pay a toll for gas
treatment costs, or to build a GTP.
MR. FUHS responded to an inquiry regarding the difference
between a GTP and gas conditioning by explaining that they are
very similar processes. He explained that construction requires
similar construction techniques. He said the producers planned
project may be larger.
3:51:41 PM
CO-CHAIR GATTO asked if the treatment was to produce pipeline
grade gas.
MR. WALKER replied that pipeline grade product will be coming
out of the LNG after the propane is removed. He said there
would be an LNG facility and storage capability at Valdez.
3:53:26 PM
MR. WALKER estimated projects costs for the AGPA approach as
around $10 billion. He said that one cannot have a loan
guarantee and tax exempt financing at the same time. He said
that the federal government loan terms would guarantee 80
percent of the project amount not to exceed $18 billion dollars.
He said that the project route is well-known, and has received
numerous permits, including an approved environmental impact
statement.
3:55:21 PM
REPRESENTATIVE WILSON asked if AGPA suggests building an all-
Alaska route.
MR. WALKER said that the AGPA project is not to the exclusion of
the Canadian route and that the project would allow a later line
to Canada.
REPRESENTATIVE WILSON asked whether construction of the smaller
project proposed by AGPA would make a larger line out of Prudhoe
Bay uneconomic. She asked what would happened if there was not
a Canadian line.
MR. WALKER opined that he does not think the AGPA proposal would
have the aforementioned effect. He explained that the larger
projects proposed will require further exploration to find
adequate gas reserves. He opined that the first 550 miles of
the line would be the most expensive, and could help in a later,
larger project. With respect to a Canadian line, he indicated
that he thinks the AGPA pre-build to Delta Junction would
improve the economics for a Canadian line. He characterized the
AGPA project as providing benefits to both the producers and the
state if the pre-build aspect is built first.
3:59:58 PM
REPRESENTATIVE WILSON asked what size of project and pipe AGPA
was considering.
MR. WALKER explained that "our base case is a 1.2 Bcf [billion
cubic feet] project." He estimated maximum in-state use as
"point five," which adds up to a project size of 1.7 to 2 Bcf.
Their project contemplates a pipe size of 48 inches, he said.
REPRESENTATIVE WILSON asked about the possibility that the
producers would not come to an open season due to concerns that
the AGPA project would jeopardize a larger project.
MR. WALKER characterized the above point as a good question, and
went on to say that AGPA would continue to attempt to acquire
gas from them. He said that AGPA's reading of the leases is
that there is an obligation to sell the gas. He opined that the
producers are obligated to sell their gas "if there is a
reasonable expectation of profit" and that they would "sell the
gas into a project." He reminded the committee "that the volume
of gas we are talking about" is within the volume of gas that is
currently being re-injected, and that there is a cost to re-
injecting gas.
4:03:28 PM
MR. FUHS agreed that one issue is what is the right size for
this project. He noted that as of yet, there has not been a
request of the Alaska Oil and Gas Conservation Commission
(AOGCC) as to how much gas can actually be taken off the North
Slope. He indicated that the current estimate is that 2.7 Bcf
could be removed from the North Slope without creating
catastrophic oil loss. He cautioned that a project size of 4.3
Bcf is not possible absent discovery of additional gas, a
process that can cost tens of billions of dollars. He suggested
there are benefits to looking at a smaller project with a
quicker time line, a lower risk profile, and within the already
known reserves.
4:05:50 PM
MR. WALKER responded to a question about an anti-trust lawsuit
filed by AGPA by explaining that AGPA dismissed the litigation
shortly after the current administration came into office. He
stated that the AGPA is serious about doing a project, and felt
that the prior administration's approach to the gas pipeline
left it with little choice but to pursue an anti-trust claims.
MR. WALKER continued by explaining that AGPA has recently
updated its cost estimates for the project and has entered an
memorandum of understanding (MOU) with Mitisu OSK lines for
shipping. He emphasized the importance of multiple markets and
indicated that there have been inquiries from Hawaii, the West
Coast of the United States, and Pacific Rim countries.
MR. WALKER explained that there are a variety of factors to
consider in financing and reminded the committee that federal
loan guarantees now apply to an LNG project and are very
helpful. He said that Yukon-Pacific Corporation has spent about
$100 million, while AGPA has spent around $125 to $135 million,
including spending by contractors and other entities.
4:11:07 PM
CO-CHAIR GATTO asked where the $100 million came from and
whether it was covered by the loan guarantees.
MR. WALKER explained that was from CSX corporation, when "they
funded they owned Yukon-Pacific Corporation for 20 years, and
that is what they put in ... acquiring the route" and other work
done with respect to the project. He said this was done long
before the loan guarantees were available.
MR. FUHS noted that AGPA has a significant time advantage in its
approach due to the work and permits already done.
4:12:09 PM
MR. WALKER explained that this project would likely be done on a
project finance basis. Under this approach, entities come
together and obtain financing based on the strength of the
project. He explained that non-recourse financing would "not be
tied to the balance sheet" of the companies. He said that FT
commitments are important to the project, but that they are not
the only pieces, there are other important pieces as well. He
opined that the biggest risk in project finance is a completion
guarantee. He emphasized that this is an infrastructure project
that should allow for maximum use and expansion.
4:16:14 PM
MR. WALKER addressed the issue of risk mitigation by opining
that proximity to the Trans-Alaska Pipeline System (TAPS) line
minimizes risk due to proximity and existing infrastructure. He
explained that the gas pipeline would be thicker, and thus
heavier, than that of TAPS. He was not sure of the exact
thickness, or whether infrastructure would have to be upgraded
to carry a heavier pipeline.
MR. FUHS said the Department of Transportation examined this
issue based on a 52 inch pipe, and concluded some bridges would
have to be upgraded.
MR. WALKER offered that Alaska's cold weather makes a LNG plant
more efficient to run and that the marine transportation system
offers a known shipping system. He said that the "highest
unknown" is the pipeline itself.
4:19:22 PM
REPRESENTATIVE ROSES asked about the amount of product loss with
liquefaction and re-gasification.
MR. WALKER answered that approximately 5.5 percent of the volume
is lost due to these processes. He indicated that this is the
fuel cost, not the amount of leakage.
MR. FUHS stated that some product is burned by the LNG tankers
for fuel.
REPRESENTATIVE ROSES asked if the only gas lost is the gas used
as an energy source when converting gas to liquid.
MR. WALKER explained there is not really a loss, but some fuel
must be consumed to go through the process of converting the gas
to liquid.
REPRESENTATIVE ROSES expressed some skepticism with the figure
of 5.5 percent as it is the lowest percentage he has heard,
noting that other companies have estimated the product loss as
around 11 to 14 percent.
MR. FUHS indicated that he could provide additional information
to confirm or clarify this figure.
4:23:37 PM
MR. WALKER opined that the greatest risk facing the project is
that Alaska will lose the United States market for LNG to
projects from elsewhere. He suggested that there are LNG
projects being designed worldwide and that these projects may be
complete prior to the Alaska project should the delays continue.
AGPA is also concerned about the possibility that the federal
government will take away the $18 million loan guarantee if no
one applies for it. He noted that construction costs are
constantly increasing. This is why the AGPA is pushing for the
right size project in a timely fashion, he explained.
MR. WALKER relayed his belief that an LNG project is economic
and projects a rate of return in excess of 30 percent to the
upstream producers. He said it provides gas to Alaskans sooner
and still enhances the possibility of a later, larger project
going through Canada.
4:28:31 PM
REPRESENTATIVE GUTTENBERG asked about the role of FERC and the
RCA in this project.
MR. WALKER responded that the AGPA has been advised that if the
gas is sold at Valdez, the project may be exempt from FERC
oversight. However, if "we held on to the gas" through
liquefaction and shipping, then "clearly we would be regulated
by FERC." He opined that one must consider various factors to
determine whether it is better or not to be exempt from FERC
oversight.
4:31:26 PM
CO-CHAIR GATTO noted that whoever owns the gas for shipping is
likely to come under the authority of FERC.
MR. WALKER agreed that once the gas comes back into the United
States it would be regulated by FERC. He indicated that AGPA
would determine the best approach regardless of whether it would
involve FERC regulation. In response to a question, he said he
was not sure whether the volume of LNG imported to the United
States was down last year. He did indicate that some other LNG
projects have been slowed down due to "other issues."
CO-CHAIR GATTO asked whether any re-gasification terminals are
operating at full efficiency.
MR. WALKER replied that AGPA has not tracked the efficiency of
existing facilities. He said that the initial market for their
project is the West Coast and currently no LNG receiving
terminal on the West Coast is in operation. He noted that
recent hurricanes show the need for LNG facilities in areas
besides the Gulf Coast.
MR. FUHS reminded the committee the AGPA is tax exempt, and that
can be a benefit. He noted that one cannot be tax exempt and
receive a federal loan guarantee.
MR. WALKER clarified that there cannot be tax-exempt financing
and a loan guarantee, and indicated that there is no conflict
between tax-exempt status and a federal loan guarantee.
4:36:11 PM
REPRESENTATIVE WILSON asked whether there is a limit to the
federal loan guarantees and if they could be used for the Alaska
portion and a later Canadian portion of the gas pipeline.
MR. WALKER explained that the federal loan guarantees apply for
up to 80 percent of a project up to $18 billion. It would apply
to only one project, and he is not sure if it would apply to a
subsequent Canadian line.
4:37:56 PM
CO-CHAIR GATTO referred to information dated January 2007 from
the Energy Information Administration which indicated that the
volume of LNG imports has decreased the last two years.
MR. WALKER reminded the committee that the AGPA project is
planned to begin around 2013 or 2014. He noted that issues
regarding tanker costs are part of the entire project economics.
MR. WALKER summarized that there are many benefits to an LNG
project, referring to slide 11. He opined that there is enough
gas for the planned AGPA LNG project and that this smaller
project will allow Alaska's gas to reach the market sooner.
4:46:26 PM
CO-CHAIR GATTO asked if the AGPA project would "touch Point
Thomson" and whether the amount of known Prudhoe Bay reserves is
sufficient for this project.
MR. WALKER supplied that "this would not necessarily effect
Point Thompson," although the volume of gas available there is
enough for this project. He also said AGPA would not need Point
Thomson, which he described as having "more unknowns" than
Prudhoe Bay.
4:47:22 PM
MR. WALKER suggested that there be some amendments made to AGIA.
First, he noted that AGIA requires an applicant to provide a
great amount of detail regarding any proposed LNG project and
suggested that a similar level of detail be required from
Canadian line applicants. Second, he offered that any applicant
should provide details regarding any additional gas off-take
over what is currently authorized by AOGCC. Furthermore, any
applicants should be required to provide a budget and timeline
for future exploration, an analysis of anticipated oil loss
should off-take from Prudhoe Bay be increased, and an analysis
of how much liquid would be available in Alaska for value added
processing.
4:49:19 PM
REPRESENTATIVE ROSES asked whether these suggested amendments
are related to the fact that AGPA proposes an all-Alaska
project.
MR. WALKER sought to assure the committee that AGPA does not
seek to stop any project, however, he characterized the
additional information suggested as very helpful in analyzing
the viability of any project. He opined that absent additional
information, it would be possible for the state to select a
project that requires more gas off-take than authorized by the
AOGCC.
4:51:49 PM
REPRESENTATIVE ROSES stated that there are unknowns, such as how
much gas will be committed at open season, and opined that line
capacity is a similar issue.
MR. WALKER replied that the project should be defined as to what
it takes to be economic before the open season. He offered that
prior to open season, any applicant should know if it can take
the volume of gas required for its project from the North Slope.
4:53:30 PM
REPRESENTATIVE ROSES asked whether it would be advantageous for
Alaska to have an open season prior to asking for a design and
project bid.
MR. WALKER said that AGPA is suggesting that applicants be
required to submit an application to "start the process"
required to increase off-take limits should the planned project
require more gas off-take than is currently authorized.
MR. WALKER continued by explaining that AGPA also suggests
inclusion of a timeline for project start up and completion and
current project costs estimates. He went on to say "we fully
support rolled-in rates", noting that such a system has been
successful in Canada. He opined that AGIA allows for
independently owned infrastructure.
4:58:56 PM
CO-CHAIR GATTO asked how much revenue the state would receive
under the AGPA proposal.
MR. WALKER replied that six percent is "on top" of what would go
to the state under "anybody's project." In response to a
further question, he said he does not have an exact revenue
amount, but could provide that information.
CO-CHAIR GATTO noted that all the projects seem to require
consideration of assumptions and that since the state is looking
for revenue, additional information on possible revenue would be
helpful.
5:00:34 PM
MR. WALKER responded to a question regarding the way revenues
are determined by stating that the AGPA may be willing to enter
a long-term contract with the state to "lock that in" so that
option is not available. In response to a query about the
likelihood of increased rates, he offered that the AGPA is not
looking for a certain rate of return, rather it "wants the
project to happen" to provide energy and jobs to Alaska.
CO-CHAIR GATTO asked about the number of permanent jobs under
the AGPA proposal compared to the number of permanent jobs
should the gas pipeline go through Canada.
MR. WALKER replied that "it would be greater because of
liquefaction," which he characterized as labor intensive.
5:02:52 PM
REPRESENTATIVE SEATON characterized some of the suggested
amendments as more appropriately included as part of the
commissioners' evaluation criteria rather than as part of the
state's initial "must haves."
MR. WALKER replied "it could be used either way." He stated
that the concerns brought up by AGPA are to make it clear that
there should be concern regarding the amount of gas that is
currently authorized for off-take from Prudhoe Bay.
REPRESENTATIVE SEATON stated that his understanding is that
proposals will be evaluated to determine which one provides the
greatest benefit to the state. He questioned whether the AGPA
project would provide any corporate or municipal tax benefits
and if not, how the AGPA project would compare to one that pays
taxes.
MR. WALKER said that "the actual model we run now is a taxable
model," and that the project still sets forth "robust
economics." He suggested that AGPA could provide further
information on this.
5:06:36 PM
REPRESENTATIVE SEATON characterized this issue as quite
important because the commissioners will be comparing and
evaluating proposals side-by-side. He asked if the AGPA takes
issue with any of the "must have" criteria set forth in AGIA.
MR. WALKER answered that AGPA is pleased with the "must haves"
and that none of them cause it any particular concern. He
clarified that AGPA proposes to pay taxes of 20 mils, which is
the same as TAPS pays.
5:09:14 PM
REPRESENTATIVE ROSES referred to AS 43.90.130(16) whereby
applicants waive their right to appeal, and asked whether that
provision gives AGPA any cause for concern.
MR. WALKER stated that AGPA is comfortable with the process of
AGIA and would likely be comfortable with the ultimate decision
made.
5:10:08 PM
MR. FUHS suggested an amendment to AS 43.90.210 regarding
amendments or modification to the project plans. He said that
an applicant should be allowed to suggest changes that would
provide additional value or benefits to the state.
CO-CHAIR GATTO suggested that the language as written would
allow modifications to the plan.
MR. FUHS opined that the language would need to be modified to
allow an applicant more flexibility to suggest modifications to
add benefits to the project.
MR. WALKER answered a question regarding federal income taxes,
by explaining that there could be a scenario whereby the AGPA
would be subject to federal taxes.
MR. FUHS clarified that AGPA can make revenue, but must spend it
for a public purpose.
5:14:35 PM
MR. WALKER responded to a question about the Jones Act by
explaining that it requires that shipments between U.S. ports
must be on vessels built and flagged in the United States. He
suggested that AGPA does not need that act amended for its
project because there are eight qualified LNG tankers that will
become available in 2013. He indicated that some ships may need
to be re-flagged. He opined that the AGPA project does not
"have a Jones Act problem."
CO-CHAIR GATTO asked about why tankers would be available in
2013.
MR. WALKER replied that they are currently under contract and
the contracts come due in 2013, so they could be available for
other purposes. He said AGPA is currently in the process of
working to secure shipping capacity.
MR. FUHS threw out that the AGIA process will help negotiations
with other interested parties once the applications are out.
5:19:07 PM
MR. WALKER responded to a question by stating the AGPA has been
advised that the LNG tankers referred to "will be good to go"
and will not require re-fitting.
CO-CHAIR JOHNSON asked if LNG tankers are double-hulled.
MR. WALKER said that LNG is different from oil and AGPA has not
found any reason to need double hulled tankers for transport.
MR. FUHS opined that in a liquid form LNG is quite stable.
5:21:57 PM
REPRESENTATIVE SEATON asked about the amount of carbon emissions
from the project, the amount of energy needed to operate the
pipeline and possible alternatives on how to run the pipeline.
MR. WALKER indicated that those issues are currently being
reviewed.
CO-CHAIR GATTO expressed some skepticism regarding the ease of
re-flagging a tanker.
MR. WALKER said AGPA has been advised that re-flagging may be an
easier process if the ship was built in the United States. He
said that the age of the ships has been considered and that AGPA
can provide further information on this. He offered that there
may be a shipyard in San Diego that could build an LNG tanker.
He inferred that a United States shipyard has not built an LNG
tanker since the 1970s.
[HB 177 was held in committee.]
ADJOURNMENT
There being no further business before the committee, the House
Resources Standing Committee meeting was adjourned at 5:28:34
PM.
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