Legislature(2007 - 2008)CAPITOL 124
02/14/2007 01:00 PM House RESOURCES
| Audio | Topic |
|---|---|
| Start | |
| Overview: Discussion of a Producer-owned Gas Line with British Petroleum, Conocophillips, and Exxon | |
| Adjourn |
* first hearing in first committee of referral
+ teleconferenced
= bill was previously heard/scheduled
+ teleconferenced
= bill was previously heard/scheduled
ALASKA STATE LEGISLATURE
HOUSE RESOURCES STANDING COMMITTEE
February 14, 2007
1:58 p.m.
MEMBERS PRESENT
Representative Carl Gatto, Co-Chair
Representative Craig Johnson, Co-Chair
Representative Vic Kohring
Representative Bob Roses
Representative Paul Seaton
Representative Bryce Edgmon
Representative David Guttenberg
Representative Scott Kawasaki
MEMBERS ABSENT
Representative Peggy Wilson
COMMITTEE CALENDAR
OVERVIEW: DISCUSSION OF A PRODUCER-OWNED GAS LINE WITH BRITISH
PETROLEUM, CONOCOPHILLIPS, AND EXXON
- HEARD
PREVIOUS COMMITTEE ACTION
No previous action to record
WITNESS REGISTER
M. E. (MARK) NELSON
U.S. Joint Interest - Alaska
ExxonMobil Production Company (ExxonMobil)
Houston, Texas
POSITION STATEMENT: Assisted in presenting an overview in
support of a producer-owned gas pipeline.
CRAIG HAYMES, Production Manager - Alaska
ExxonMobil Production Company (ExxonMobil)
Anchorage, Alaska
POSITION STATEMENT: Presented an overview in support of a
producer-owned gas pipeline.
DAVID VAN TUYL, Gas Commercialization Manager
BP Exploration (Alaska) Inc. (BP)
Anchorage, Alaska
POSITION STATEMENT: Presented an overview in support of a
producer-owned gas pipeline.
WENDY KING, Director of External Strategies
ConocoPhillips Alaska, Inc. (ConocoPhillips)
Anchorage, Alaska
POSITION STATEMENT: Presented an overview in support of a
producer-owned gas pipeline.
ACTION NARRATIVE
CO-CHAIR CARL GATTO called the House Resources Standing
Committee meeting to order at 1:58:57 PM. Representatives
Gatto, Seaton, and Roses were present at the call to order.
Representatives Guttenberg, Edgmon, Kawasaki, and Kohring
arrived as the meeting was in progress.
^OVERVIEW: DISCUSSION OF A PRODUCER-OWNED GAS LINE WITH BRITISH
PETROLEUM, CONOCOPHILLIPS, AND EXXON
2:00:04 PM
CO-CHAIR GATTO announced that the only order of business would
be an overview discussion of a producer-owned gas line with BP
Exploration (Alaska) Inc., ConocoPhillips Alaska, Inc., and
ExxonMobil Production Company.
2:00:23 PM
M. E. (MARK) NELSON, U.S. Joint Interest - Alaska, ExxonMobil
Production Company (ExxonMobil), introduced Mr. Craig Haymes.
CRAIG HAYMES, Production Manager - Alaska, ExxonMobil Production
Company (ExxonMobil), paraphrased his presentation from the
following written statement [original punctuation provided]:
Good afternoon Representative Gatto, Representative
Johnson and members of the House Resources Committee.
My name is Craig Haymes. I recently moved to Alaska
from ExxonMobil Canada, where I had been involved with
arctic oil and gas developments and operations for the
past 4 years. I have assumed the role of ExxonMobil
Production Manager for Alaska, replacing Richard Owen.
Although I've only been here a short while, it is
obvious that this state has a lot to offer. My family
and I are really excited to have the opportunity to
live and work in Alaska.
Mark Nelson joins me today. Mark has worked on our
Alaska team for many years in different capacities and
during the past 3-4 years, has been part of the Alaska
Gas Commercialization team. He has been active in the
fiscal negotiations.
Thank you for the opportunity to discuss the important
issue of Alaska gas commercialization.
The Alaska Gas Pipeline project is important to
Alaska, to ExxonMobil, and to our nation. The Project
has the potential to generate billions of dollars in
revenues for the State of Alaska, the U.S. federal
government, and Canada, and could provide a stable and
secure source of clean energy for Alaska and North
America for decades to come. Let me assure you that
EM is ready to work with Governor Palin and her
cabinet and the Legislature to move forward on Alaska
gas pipeline development.
To demonstrate the project's significance to EM, let
me provide a few numbers. This project has the
potential to add over 1 billion cubic feet per day (EM
share) of gas sales for EM, which is more than a 10%
increase to our current daily gas production. The
Project could also add over 1 billion oil equivalent
barrels of proved reserves - nearly enough to replace
a full year of our production. Given the significant
impact this project could have on our business, we are
obviously very interested in progressing it.
EM has spent more than $180 million studying ways to
commercialize Alaska gas. Since the 1970's we have
evaluated LNG, gas to liquids and gas pipeline
alternatives. Based on our studies, including those
with BP and ConocoPhillips, we have determined that a
Producer gas pipeline project will result in the best
value for the State, the Producers and the nation.
Because of the time and resources that EM and many
others have devoted to progress Alaska gas
development, we are disappointed that these prior
efforts have not resulted in a way to move forward.
Nevertheless, we made significant progress last year
in developing a fiscal framework necessary to progress
the project. However, we recognize that we must
address the issues identified in the public comments
to the satisfaction of the State and the Producers.
We are ready to engage in a process to address these
concerns and will do this in a manner that involves
the Legislature.
We understand the Governor is currently considering
proceeding under an RFP process. We have expressed
our thoughts to the Governor and are hopeful a process
that will lead to a successful result will be
developed. We believe it is important that the
process not foreclose any options…flexibility is very
important.
Let me take a few minutes to discuss the magnitude of
this project and the associated risks.
Because this project appears to be "simply" a gas
treating / gas pipeline project, the tendency exists
for all of us to underestimate the size, magnitude and
risks associated with it. The Alaska Gas Pipeline
Project is a world-scale undertaking with significant
risks. In fact, the Project will be the largest
private investment in North America - significantly
larger than most "model" worldwide oil and gas "mega"
projects. There is not really a project that
compares.
Because of this size, many factors impact commercial
viability.
First there is cost:
Our previous estimate of $20 billion ($2001)
is now substantially higher. Since 2001, steel prices
have nearly doubled. Industry and construction labor
costs are experiencing hyperinflation. In addition,
world-wide mega-projects are placing pressure on
global materials, contracting services and skilled
manpower.
Next there is gas price:
Despite recent increases, natural gas prices
remain highly volatile. The price before 2000 was
less than the estimated project toll.
Finally, there are many other risks.
These include cost overruns, schedule
delays, construction conditions, and regulatory and
State fiscal uncertainties. It is also important to
note that project investment will occur many years
before gas flows down the pipeline and is sold at the
marketplace.
With size comes complexity, and an even greater
premium on getting the design concept, contracting and
marketing plans right…and then executing these plans
efficiently and effectively. Most importantly, size
also amplifies the consequences of poor execution.
Maximizing the value to the State of Alaska and the
resource holders means selecting the right design
concept for this mega-project and then executing to
deliver the project at the lowest possible cost.
A limited number of companies have demonstrated the
capabilities and financial strength to effectively
participate in and manage world-scale mega-projects.
The Producers are strongly represented as project
developers in mega-projects worldwide, and have
demonstrated success in meeting project objectives.
It is important to recognize that the federal
government has helped address risks by enacting ANGPA
of 2004 to provide regulatory certainty, completing
FERC open season regulations, and establishing a
Federal Coordinator position, which is held by Drue
Pearce.
There are several reasons why a Producer Gas Pipeline
Project is the best way forward. First, we believe a
Producer gas pipeline project will result in maximum
value to the State and the Producers. The Producers
and the State have maximum incentive to control cost.
Low capital and operating costs, which results in a
lower toll, and access to premium market price results
in higher netback value on gas. Keep in mind that the
State will receive the majority of its revenue from
value of gas sales, not from taxes.
There is no such incentive for third-party owners, who
benefit from increased capital costs.
On a "mega-project" of this size and magnitude,
project and operating experience should be a
significant consideration. The Producers have the
necessary project and operating experience in Alaska
and world-wide. Specifically, we have "mega-project"
experience on numerous projects world-wide and Arctic
experience in Alaska and throughout the world.
In addition, it is important to remember that this is
a basin-opening project, and any basin-opening project
requires alignment between the host government and the
leaseholders. The Producers and the State both want
to develop ANS gas and open the basin to gas
exploration.
Also, based on the demand for workers that this
project will generate, Alaskans are obviously key to
successful project execution. Both the State and the
producers want Alaskans to benefit from the many job
opportunities that will exist. When you add it up, a
producer pipeline will provide maximum value to the
State of Alaska.
Now I would like to briefly discuss how gas pipelines
are financed and who ultimately bears project risks.
Commercially-sound oil, gas, and pipeline projects
traditionally have been financeable if they have
strong sponsors with proven track records and the
financial strength to both provide sponsor equity and
to backstop key project commitments. These
commitments include any required completion support
and firm transportation agreements, or FT. While the
contractual commitments associated with this project
will be substantial, the Producers possess the
necessary financial strength to underpin such
commitments.
To provide financing / funding to a pipeline project,
financial institutions would generally require
substantial firm, long-term, ship-or-pay contracts
provided by creditworthy "shippers" that own and ship
the gas (i.e., the Producers and, directly or
indirectly, the State). These contractual commitments
are substantial, in the tens of billions of dollars.
FT commitments are needed for a pipeline investor to
show creditors it has capacity confirmed over a
sufficient duration to secure financing. Therefore
pipeline investors rely on the financial strength of
shippers to secure project financing.
Through project financing, shippers provide the
underpinning for the pipeline debt financing. The
development costs and the associated over-run risk are
ultimately borne by the shipper via the tariff
commitment. Again, we believe only the Producers have
the financial strength/incentive to backstop such
commitments and bear such risk. Therefore, the
Producers cannot make firm commitments unless they are
confident the gas pipeline project can be built cost
effectively and operated on a long-term, commercially
viable basis, including being competitive with other
sources of supply.
Because of the nature and magnitude of the risks -
billions of dollars of financial commitments,
unprecedented cost and scope, potential for
construction delays - the parties taking the risks
need to be able to manage those risks.
In closing, I would like to reiterate that ExxonMobil
is committed to moving the gas pipeline project
forward. Our company possesses the financial strength
and project experience required to make this project a
success. We are ready to get to work on putting in
place a framework that would make the risks I've
mentioned manageable and allow the project to
progress. Thank you for your attention and for the
opportunity to talk with you today. I look forward to
addressing your questions.
2:12:54 PM
MR. HAYMES, in response to questions, reiterated that one
billion cubic feet (BCF) per day would be ExxonMobil's share of
the gas being moved through the gas line and that this would be
a 10 percent increase in the company's daily worldwide
production. He clarified that these figures are simply
ExxonMobil's share of gas and that they do not relate to the
total volume of gas that the pipeline itself would be capable of
moving. He also clarified that his comment regarding "recent
efforts" was in relation to the previous administration and the
Alaska Stranded Gas [Development] Act, [not current efforts
under the new governor].
2:14:42 PM
MR. HAYMES, responding to additional questions, affirmed his
statement that estimates for building the gas line are now much
higher than the 2001 estimate of $20 billion, and that these
estimates are for building the gas line all the way to Chicago.
He related that the costs of two other worldwide mega-projects
increased by 50 and 100 percent in the last three years. He
also noted that the Upstream [Capital] Costs Index (UCCI), a
measure of labor and materials such as steel, went up 53 percent
between the years 2005 and 2006. He acknowledged that he does
not know what the current total estimate is for building the gas
line because estimates are still being updated, but that the
examples give an idea of the magnitude of recent cost increases.
Mr. Haymes further reported that he has seen estimates for the
gas line in the range of $30+ billion, but that those estimates
are not ExxonMobil estimates. He remarked that there has
clearly been a "super heated" cost escalation over the past few
years.
2:18:30 PM
REPRESENTATIVE GUTTENBERG asked whether ExxonMobil is prepared
to allow the state access to its royalty-in-kind gas on the
North Slope and to allow transportation of the royalty gas
through a producer-owned pipeline, given ExxonMobil's litigation
against the state over Point Thomson.
MR. HAYMES said he did not have an answer and will get back to
the committee.
2:20:36 PM
MR. HAYMES concluded his presentation by stating that ExxonMobil
has been in Alaska for over 50 years and has invested over $11
billion in the state. He said ExxonMobil will be in Alaska for
another 50-100 years and looks forward to working with the state
to advance gas development.
2:21:15 PM
CO-CHAIR GATTO asked whether the First Nations of Canada have
approved the gas line's planned route over their lands.
MR. HAYMES said he did not know.
2:22:51 PM
CO-CHAIR GATTO asked whether ExxonMobil would still be
interested in moving its Point Thomson gas through an
intrastate-only pipeline should a route through Alberta not come
to fruition.
Mr. Haymes said that ExxonMobil would like to work together with
the state on a gas pipeline and to progress Point Thomson.
2:24:21 PM
CO-CHAIR JOHNSON inquired as to whether ExxonMobil would allow
gas line ownership by other companies that are willing to make
firm transportation commitments (FTs).
2:24:38 PM
MR. HAYMES said he did not know the answer because he has only
been in his new position for three and one-half weeks. However,
he said that ExxonMobil is willing to work with the state to
come up with a solution for commercializing the gas.
2:25:39 PM
DAVID VAN TUYL, Gas Commercialization Manager, BP Exploration
(Alaska) Inc. (BP), stated that BP is keenly interested in the
gas line project because it represents the largest known, but
undeveloped, resource in the company's portfolio. He said that
the gas line project plays a key role in extending the economic
life of oil production on the North Slope. Therefore, BP stands
ready to work with the new administration and the legislature to
reach a balanced fiscal framework that works for all parties so
that the project can successfully move ahead. This framework
will set the foundation for a stable, healthy, and viable oil
and gas business in Alaska for decades.
MR. VAN TUYL pointed out BP's long history of energy exploration
and production on the North Slope, and that the company
envisions being in Alaska for another 50 years. He discussed
BP's share of possible energy production in Alaska through the
year 2050, as illustrated on slide 2 of his PowerPoint
presentation. He emphasized that the days of high plateau
production are gone and that while today's production is still
significant, it will continue to decline. He noted that BP will
need to invest up to $1 billion annually to maintain production
even though the production is declining. New investment in gas
and heavy oil resources is one way to make up for the decline,
but only if there is a gas pipeline. A gas line will extend
economic oil production from the North Slope and will allow
heavy oil resources to be unlocked. It will create new gas
exploration and development industry in Alaska and will generate
a new source of revenue for both Alaska and BP. He emphasized
that BP's future in Alaska is directly linked to this gas
pipeline project, but that this opportunity also has world-scale
challenges.
2:31:24 PM
MR. VAN TUYL, in response to several questions, stated that the
projected net production depicted on slide 2 includes both new
and current reserves. The gas pipeline is seen as an "enabler"
because it extends the base life of facilities, thereby
providing time for development of the technology necessary for
accessing heavy oil. Additionally, it is possible that CO, a
2
byproduct of the gas pipeline, might also be able to be used.
He further explained that the difference between viscous and
heavy oil is the degree of viscosity, and that heavy oil is the
thicker of the two.
MR. VAN TUYL, in response to more questions, said he did not
know what the [daily] flow through the Trans-Alaska Pipeline
System (TAPS) was in 2003, but that he thought it was in the
range of a million barrels or slightly above. He said that the
gross daily flow today is about 800,000 barrels. He projected
that if the $1 billion annual investment is maintained, the
percent decline in flow will be about 6 percent per year; if the
rate of investment is increased or decreased, the rate of
decline will be more or less accordingly.
2:34:52 PM
CO-CHAIR JOHNSON asked at what volume does transporting oil
through TAPS become uneconomical and when is this projected to
occur.
MR. VAN TUYL said that he did not know, but that he will
research the information and provide it to the committee. He
confirmed Representative Gatto's statement that investment in
new pump station equipment has now provided the ability to pump
a smaller volume of oil through the pipeline than was previously
possible, and that this will extend the life of the pipeline.
He noted that investment in renewal of existing North Slope
facilities is also necessary in order to maintain the economic
life of the oil fields.
2:36:17 PM
CO-CHAIR JOHNSON asked how long before the gas flows once there
is an agreement with somebody for [building] the gas pipeline.
MR. VAN TUYL advised that once the "ink is dry" on an agreement,
it will take about 10 years provided that everything works
according to plan. However, he said that the answer could be
different depending on who the "somebody" is.
2:37:34 PM
CO-CHAIR JOHNSON expressed his concern that there will be a time
gap of several years between the end of life for TAPS and the
first flow of gas through a gas pipeline.
MR. VAN TUYL, in response to comments by Co-Chair Johnson and
further comments by Co-Chair Gatto, related that the Department
of Revenue (DOR) is predicting the end of economic oil field
life in the year 2030. He said he was unsure how BP's forecasts
comported with the state's, but that he would provide that
information to the committee.
2:39:52 PM
MR. VAN TUYL returned to his presentation and reiterated that
the gas pipeline is a huge opportunity that also has significant
risks, as summarized on slide 3 of his presentation. Project
risks include the price, the costs, and fiscal and regulatory
issues. Price is a significant risk because the resource owners
are price takers, not price makers, and this is coupled with
price volatility. Costs for materials, fabrication, labor,
engineering, permitting, and equipment are significant risks
because they have been rising dramatically in recent years, and
that the cost risk is especially amplified on a mega-project.
He defined a "mega-project" as any project costing over $1
billion. He said that the Alaska gas pipeline would be the
largest privately funded infrastructure project ever. Another
significant risk is the fiscal risk and this risk is mitigated
by the investor knowing the rules. He emphasized that managing
costs is absolutely critical to maximizing the value of the
resource and that [the entities] holding the cost risk must be
able to minimize and manage the costs.
MR. VAN TUYL noted that the project's risks ultimately reside
with the resource owners - the state and the lease holders. He
reviewed details of the various risks depicted on Slide 4. He
noted that price and production risks are inherit with the
resource itself, and that fiscal risks to the lessee are
upstream changes in government fiscal terms, an example being
the Petroleum Profits Tax (PPT). Changes in the regulatory
process could result in a schedule risk for building the
pipeline. There is a repayment risk to the capital markets that
provide financing for the project. He explained that the
schedule and capital market risks, along with the cost risks,
are borne by the pipeline company. The pipeline company is a
federally regulated entity that earns a regulated rate of return
on its equity. The pipeline company is limited in the amount of
risk that it is allowed to take, so the risk is passed on to the
resource owners via the pipeline toll. Thus, all the
aforementioned risks are ultimately borne either directly or
indirectly by the resource owners that obtain capacity on the
gas pipeline. Mr. van Tuyl explained the difference between the
terms "toll" and a "tariff." A "toll" is the unit rate for cost
of service on the pipeline. A "tariff" includes the toll plus
the associated written terms and conditions for the pipeline
service.
2:47:13 PM
MR. VAN TUYL emphasized that those entities bearing a risk are
commercially motivated to manage that risk downward. He said
that the producers are best positioned to manage the key project
risks by having their affiliates own the pipeline. He directed
attention to slide 5 and discussed why BP believes that the
three producers are the best qualified and most motivated to
deliver a successful project. He defined "successful project"
as being a low cost, timely project that maximizes the value of
Alaska's gas resource.
MR. VAN TUYL said that BP, ConocoPhillips, and ExxonMobil are
qualified because they have a proven track record in:
successfully delivering mega-projects, developing technology,
pioneering Arctic energy development, and having the financial
capability to make the multi-billion dollar firm transportation
(FT) commitments necessary for this project. As an example of
mega-project experience, Mr. van Tuyl noted that in 2006 BP
successfully delivered the largest, most complex midstream
project in the world - the Baku-Tbilisi-Ceyhan Pipeline Company
("BTC Co") project.
MR. VAN TUYL conveyed that the three producers are commercially
motivated to deliver a low capital-cost project and a low
operating-cost project. A low-cost project results in a low
toll and maximum gas netback, thus maximizing the value of the
gas to the producers and the state. He reiterated that BP is
strongly motivated to deliver a successful project because the
gas line is the key to BP's 50-year vision for its future on the
North Slope.
MR. VAN TUYL contended that a third-party pipeline operator is
not commercially motivated to keep the costs low because the
operator's only source of income is the pipeline tariff. Cost
increases will raise the rate base that the pipeline operator is
allowed to charge, subsequently reducing the netback and
resource value for the state and producers. A producer's
commercial motivation is to develop the resources, not leave
them undeveloped. Therefore, BP wants to advance the project
promptly, but with discipline to ensure that the costs are
managed. He advised that access to either a producer-owned
pipeline or a third-party-owned pipeline is exactly the same
because access is governed by the Federal Energy Regulatory
Commission (FERC) in the U.S. and the National Energy Board
(NEB) in Canada.
MR. VAN TUYL opined that the key is getting the risk and reward
balance right. An open process, with the same rules for all
parties, will allow the free market to work and move the project
forward. The talk will end and the work will begin once the
risk and reward balance is jointly defined. He declared that BP
stands ready, willing, and able to work in that open process so
the project can begin.
2:56:49 PM
MR. VAN TUYL, in response to Representative Roses, reiterated
that BP feels it is the most qualified for the gas line project
because of its international experience, technical expertise,
and commercial motivation. He said that BP's commercial
motivation is key because it owns the resource and wants to
deliver that resource to the market at the lowest possible cost.
2:57:38 PM
CO-CHAIR GATTO questioned whether BP is really a price "taker"
rather than a price "maker," given that it is both an owner and
a major marketer of natural gas.
MR. VAN TUYL said that BP's production is only five to six
percent of the market and that the company is considered a
"merchant marketer" because it markets other companies' gas. He
said that the market itself is highly regulated and that BP must
"take the price that the market makes available to us."
MR. VAN TUYL, in response to questions from Co-Chair Gatto about
the BTC Co project, confirmed that the oil-related segment of
the BTC Co project is complete and that the gas-related segment
is nearing completion. He explained that the midstream portion
of the BTC Co project is analogous to the Alaska gas pipeline
project and that it is built on "the back of a fiscal stability
agreement" with the governments of Azerbaijan, Turkey, and
Georgia, and that this agreement provided the terms for a 60-
year, fiscal-stability contract. The 60-year lock on fiscal
terms is the "government-take" and would be equivalent to the
taxes and royalties associated with the Alaska gas pipeline. In
further response to Co-Chair Gatto, Mr. van Tuyl said that BP
has entered into long-term lease agreements with the state to
have access to the resource for the purpose of selling it.
Commercially, whether in effect or in legality, BP gets the
economic benefit from that lease or "ownership." He noted his
agreement with Co-Chair Gatto that a lease is treated the same
way as ownership.
3:02:32 PM
CO-CHAIR JOHNSON asked what kind of financial resources a
company would need to have to undertake the gas pipeline project
if that company did not have FTs to finance the project.
MR. VAN TUYL advised that the $20-$30 billion of investment that
will be required for building the pipeline is greater than the
market capitalization of most companies, including General
Motors Corporation. There must be confidence that the pipeline
is being undertaken by a company that has the ability to
backstop the investment required to deliver a successful
project. He agreed with Co-Chair Johnson that not many
companies would have this ability.
3:04:15 PM
REPRESENTATIVE GUTTENBERG expressed his concern regarding a
recent FERC ruling that is being disputed by the producers. In
his opinion, this dispute challenges the best interests of the
state.
MR. VAN TUYL offered his belief that the challenge being
referenced is FERC Order 2005-A. He explained that this dispute
is over the narrow issue of whether or not the FERC can mandate
design changes after an open season, and that this dispute has
nothing to do with the open access rules. He said that BP
supports open access because exploration volumes are needed to
keep the pipeline toll low and provide benefit to all entities.
In response to further questions, Mr. van Tuyl related that
access to TAPS is granted under the Natural Gas Act of 2004 -
any entity can obtain capacity to the pipeline any time there is
an open season. He stated that he did not know if arguments had
yet been made before the FERC regarding Order 2005-A and that he
will get further information to the committee.
3:07:11 PM
CO-CHAIR GATTO turned the gavel over to Co-Chair Johnson.
3:07:45 PM
CO-CHAIR JOHNSON inquired as to whether only lease owners can
enter into FTs; in other words, could a third party that does
not hold leases make an FT.
MR. VAN TUYL related that any party can come to an open season
and receive capacity on an open access pipeline as long as the
party makes the commitment for a certain volume of gas for a
certain period of time. He said that in the U.S., any natural
gas pipeline that moves gas inter-state is an open access
pipeline. He further explained that obtaining pipeline capacity
is a corporate or individual commitment and that an entity that
does not own gas today, but is expecting to own gas in the
future, could go to an open season. However, he cautioned that
shipper pay commitments obligate an entity to pay for moving gas
whether or not it actually does so.
3:09:44 PM
CO-CHAIR JOHNSON asked whether BP would still participate in an
open season if it is not chosen to construct the gas pipeline.
MR. VAN TUYL stressed that the project must be low cost to
ensure that the tariff will be low enough for BP to get its gas
to market for a reasonable rate. He said that BP, as a resource
owner, would also need some form of guarantee that the risks it
bears have been managed, particularly the fiscal risk on the
upstream business.
3:11:36 PM
WENDY KING, Director of External Strategies, ConocoPhillips
Alaska, Inc. (ConocoPhillips), assured the committee that
ConocoPhillips is committed to advancing the gas pipeline
project. While her supervisor, Joe Marushack, has moved to the
company's Australian operations, an experienced and capable team
is continuing to work on the pipeline. She advised that timing
on this project is a real issue because competition is growing
and the gas market is volatile. A volatile market tends to
correct itself and the demand will look to additional or new
sources to feed itself, such as coal and LNG. Another issue is
competition for the actual critical components needed for the
project, such as steel, machinery, and labor. She said there is
common agreement that a project of this magnitude and complexity
will take a timeframe of 9-10 years. She emphasized that it is
important for the market to see Alaska gas coming forward soon.
Due to this sense of urgency, ConocoPhillips will be doing what
it can to find creative solutions to move this project forward.
MS. KING said ConocoPhillips believes that if the resource
issues are addressed and firm shipping commitments are made, the
pipeline project will happen. She defined "resource issues" as
being the upstream portions of the project. She explained the
concept of "netback" - if the market price is $6 and it costs $5
to get the gas to market, then the netback is $1. That $1 will
have to cover the costs of finding, exploring, developing, and
paying the taxes and royalties on that gas. Thus delivering the
highest netback is something that ConocoPhillips is keenly
interested in.
3:16:29 PM
MS. KING noted that a long-term shipping commitment requires
payment to the pipeline operator regardless of whether a company
actually ships gas on the pipeline every day. She said that
long-term shipping commitments will be made in an open season
within 18-24 months of the project moving forward. These
commitments are key to financing the project and enabling it to
move ahead. If the shipping commitments are based on an
estimated toll of $3 and then the actual cost of building the
pipeline is higher, the toll will increase proportionately.
This means that the resource owners holding the shipping
commitments will be "on the hook" for cost overruns, and that is
why [the three producers] are uniquely motivated to keep those
costs down.
MS. KING emphasized that the two components of the gas line -
the resource and the pipeline - have very different risk-reward
balances. The pipeline owner, unlike the resource owners, has
stability and low risk because the return is regulated - if
costs or taxes go up, regulations allow the pipeline owner to
pass on those increases by raising the toll. She noted that the
only time a pipeline owner has risk is prior to the open season.
She said that ConocoPhillips estimates that the upfront costs
prior to the open season will be about $400 million gross. This
estimate is based on four seasons of gathering environmental
field data for the preparation of environmental impact
statements for FERC and NEB. In response to a question, Ms.
King said that she did not know whether this estimate for
upfront costs would be the same for other companies, but that it
is consistent with the expenses being incurred on other large
pipeline projects.
3:20:42 PM
CO-CHAIR JOHNSON asked what would happen if no FTs were made
during the gas pipeline's open season. Would that be $400
million of upfront costs down the drain?
MS. KING stated that the initial $400 million is a very small
risk in the scheme of this project. She explained that getting
to the project sanction point will cost about $1 billion and
take roughly four years: 18-24 months to get to open season, 6
months for the open season window, and about 2 years for the
FERC and NEB permitting phases. During the period between open
season and the project sanction point, there will be firm
shipping commitments behind [the $1 billion in expenditures].
She further stated that the $400 million of exposure must also
be looked at in comparison to the total cost of completing the
project.
3:22:37 PM
CO-CHAIR JOHNSON commented that $400 million may not be much
money to ConocoPhillips, but that it is a lot of money to the
state and other people and that is why he is asking what kind of
a balance sheet would be required for financing this project
upfront.
3:23:34 PM
MS. KING, in response to questions from Representative
Guttenberg, clarified that the figures and timelines she is
quoting are for the Alaska North Slope to Alberta ("A to B")
portion of the project, as well as additional commercial and
engineering work to develop the appropriate solution from
Alberta to the Lower 48 market. In response to further
questions, Ms. King acknowledged that she is not an expert on
the Canadian regulatory regime, but that ConocoPhillips
currently has people in Canada working to lay the foundation for
building the pipeline through Canada. She emphasized that
ConocoPhillips believes there is a solution in Canada because
the project will also bring benefits to that country.
MS. KING cautioned that discussion on pipeline "what-ifs" could
become endless. She advised that at some point there must be
focus on "the size of the prize." Moving the project forward
will provide the opportunity for looking at other things such as
spur lines, extracting different portions of natural gas
liquids, other jobs, and new exploration and development
prospects. Ms. King then warned against assumptions that this
project is a "guaranteed economic return." All projects have
risks and these risks are based on several issues: what is the
price of the commodity, what is the cost of the project, will
the reserves be there, and can the reserves be delivered at the
rate. She said that predicting gas prices for the next 50 years
is basically impossible. Regarding the project cost, she said
that ConocoPhillips spent one million man-hours studying the
last cost estimate. Since costs have escalated so
significantly, ConocoPhillips cannot give a new estimate with
confidence until more engineering, technical, and environmental
work is completed. Ms. King related that U.S. Department of
Energy (DOE) statistics show that exploration, development, and
production costs have doubled since 1999. Additionally, the $20
billion project estimate does not include the costs of preparing
the upstream fields. She also pointed out that a project of
this magnitude will put a strain on resources throughout the
entire world.
3:30:05 PM
MS. KING stated that ConocoPhillips will have to find more gas
reserves if it signs a 20-year shipping commitment. This will
require additional investment and there is no guarantee that
those reserves will actually be there. Companies with firm
shipping commitments will be on the hook for tens of billions of
dollars, possibly even hundreds of billions, and this
significant amount of investment requires getting the highest
netback possible. She said that ConocoPhillips wants an
ownership position in the pipeline in order to align its project
risk with its shipping commitment risk. During periods of low
gas prices, ownership of the pipeline provides a hedge because
the company is paying itself. She pointed out that this
advantage would also have been there for the state had it taken
an ownership in the pipeline. She emphasized that
ConocoPhillips will be motivated to keep the costs down if it
owns the pipeline.
MS. KING maintained that ConocoPhillips would bring management,
technical, environmental, and regulatory expertise to the
project. The company is experienced in Arctic and LNG
operations, as well as world-wide mega-projects. She noted that
ConocoPhillips owns 29,000 miles of pipeline through its
downstream refining and marketing business, and the company has
another 56,000 miles of pipeline in the U.S. through its
midstream relationship with Duke Energy Field Services. She
noted that ConocoPhillips is also a significant player in the
chemicals business through Chevron Phillips Chemical Company
LLC.
MS. KING pointed out that ConocoPhillips is Alaska's largest
explorer and that it would like to bring in partners and co-
venturers because it does not like to drill exploration wells at
100 percent working interest. Spreading out working risk among
numerous exploration wells gives a "portfolio approach" and this
is why ConocoPhillips wants new partners and entrants. She
returned to the issue of netback and noted that the higher the
netback, the greater the motivation to explore for more gas.
3:34:27 PM
MS. KING addressed the issue of FERC Order 2005-A. She said
that if the design is changed after a company completes four
years of environmental, engineering, and permitting work, it
will take another two years to do the work again.
ConocoPhillips is only challenging this narrow issue, she said.
MS. KING pointed out that ConocoPhillips is a large company with
assets of $165 billion as of the end of 2006. The company has
access to capital and to financial markets that will help with a
project of this magnitude. As a 36 percent working interest
owner in Prudhoe Bay and an owner in Point Thomson,
ConocoPhillips also has access to the resource. Additionally,
ConocoPhillips has a large position in exploration and other
assets on the North Slope.
MS. KING stressed that ConocoPhillips is ready to solve issues.
The resource issues must be addressed by providing adequate
security to the companies that are being asked to make long-term
shipping commitments. She said that Prudhoe Bay is unique to
making this project happen because of its large natural gas
volume. Since ConocoPhillips, ExxonMobil, and BP have working
interest owner positions in Prudhoe Bay, they will be asked to
make large shipping commitments. She reiterated that
ConocoPhillips believes there is value in aligning an ownership
position with a shipping commitment. Timing is important and
ConocoPhillips wants to find new ways to come up with compromise
for moving the project forward. The prize is tens of billions
of dollars - if natural gas prices hold and if the costs can be
managed. Additionally, the project will create a new
exploration business for gas. Thus, ConocoPhillips is motivated
to find solutions.
3:38:48 PM
CO-CHAIR JOHNSON requested that the three producers provide the
committee with information regarding whether there will be a
time gap between when moving oil through TAPS becomes
uneconomical and when gas begins flowing through the gas
pipeline.
3:39:49 PM
ADJOURNMENT
There being no further business before the committee, the House
Resources Standing Committee meeting was adjourned at 3:40 p.m.
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