Legislature(2007 - 2008)FBX CARLSON CENTER
06/13/2008 10:00 AM House RULES
| Audio | Topic |
|---|---|
| Start | |
| SB3001|| HB3001 | |
| Adjourn |
* first hearing in first committee of referral
+ teleconferenced
= bill was previously heard/scheduled
+ teleconferenced
= bill was previously heard/scheduled
| + | HB3001 | TELECONFERENCED | |
ALASKA STATE LEGISLATURE
JOINT MEETING
HOUSE RULES STANDING COMMITTTEE
SENATE SPECIAL COMMITTEE ON ENERGY
CARLSON CENTER, FAIRBANKS
JUNE 13, 2008
10:21 a.m.
MEMBERS PRESENT
HOUSE RULES
Representative John Coghill, Chair
Representative John Harris (AGIA Subcommittee, Chair)
Representative Anna Fairclough
Representative Craig Johnson
Representative Ralph Samuels (AGIA Subcommittee)
Representative Beth Kerttula (AGIA Subcommittee)
Representative David Guttenberg
SENATE SPECIAL COMMITTEE ON ENERGY
Senator Charlie Huggins, Chair
Senator Bert Stedman, Vice Chair
Senator Kim Elton
Senator Lyda Green
Senator Lyman Hoffman
Senator Lesil McGuire
Senator Donald Olson
Senator Gary Stevens
Senator Joe Thomas
Senator Bill Wielechowski
Senator Fred Dyson
Senator Thomas Wagoner
MEMBERS ABSENT
HOUSE RULES
All members present
SENATE SPECIAL COMMITTEE ON ENERGY
All members present
OTHER LEGISLATORS PRESENT
Representative Sharon Cissna
Representative Mike Doogan
Representative Bryce Edgmon
Representative Les Gara
Representative Mark Neuman
Representative Berta Gardner
Representative Woodie Salmon
Representative Peggy Wilson
WITNESS REGISTER
Clark Bishop, Commissioner, Department of Labor and
Workforce Development; Guy Bell, Assistant Commissioner and
Director, Division of Administrative Services, Department of
Labor and Workforce Development; Brynn Keith, Chief Research
and Analysis, Department of Labor and Workforce Development;
Conrad Mulligan, ARCADIS; Frank Richards, Deputy
Commissioner, Highways & Public Facilities, Department of
Transportation & Public Facilities; Kevin Banks, Director,
Division of Oil & Gas, Department of Natural Resources.
COMMITTEE CALENDAR
HOUSE BILL NO. 3001
"An Act approving issuance of a license by the commissioner
of revenue and the commissioner of natural resources to
TransCanada Alaska Company, LLC and Foothills Pipe Lines
Ltd., jointly as licensee, under the Alaska Gasline
Inducement Act; and providing for an effective date."
- HEARD AND HELD
SENATE BILL NO. 3001
"An Act approving issuance of a license by the commissioner
of revenue and the commissioner of natural resources to
TransCanada Alaska Company, LLC and Foothills Pipe Lines
Ltd., jointly as licensee, under the Alaska Gasline
Inducement Act; and providing for an effective date."
- HEARD AND HELD
ACTION NARRATIVE
CALL TO ORDER
Senator Charlie Huggins called the joint meeting of the
House Rules Subcommittee on AGIA and the Senate Special
Committee on Energy to order at 10:21:40 AM.
SB3001-APPROVING AGIA LICENSE
HB3001-APPROVING AGIA LICENSE
10:22:53 AM
CHAIR CHARLIE HUGGINS observed that the pipeline project
would require a large workforce and major training effort to
meet that requirement.
CLARK BISHOP, COMMISSIONER, DEPARTMENT OF LABOR AND
WORKFORCE DEVELOPMENT observed that the Alaska Gas line
Inducement Act (AGIA) Training Strategic Plan is the
culmination of over 18 months of work, which brought
educators, industry, labor and government together. Phase
one of the plan is complete; phase two is halfway to
completion. Phase three will not begin until more
information is available from TransCanada. The training plan
acknowledged the current short-term skills gap. The state of
Alaska's current non-resident workforce is at 20 percent/
The state's non-resident workforce in oil and gas related
professions is 30 percent. He stressed the need to develop
apprenticeships to maximize Alaska hire. He pointed out that
there are 10,000 new entry level employees [in terms of
graduating seniors] every year, which represent a valuable
potential workforce. The plan addresses new hires, older
workers and workers being retrained. He maintained that kids
today want to work and are focused. The department intends
to speak with graduating high school seniors regarding
apprenticeships.
10:29:58 AM
GUY BELL, ASSISTANT COMMISSIONER AND DIRECTOR, DIVISION OF
ADMINISTRATIVE SERVICES, DEPARTMENT OF LABOR AND WORKFORCE
DEVELOPMENT provided members with a power point presentation
AGIA Training Strategic Plan (copy on file). The AGIA gas
line workforce goal is a trained and available workforce for
gas line related occupations. There are 113 gas line related
occupations, which do not just address construction. The
focus is to provide Alaskan workers for Alaskan jobs. Skill
gaps were identified and defined as "occupations for Alaskan
workers that are not available for skilled jobs". The
department works to minimize skill gaps through career
awareness, effective labor exchange, job center network and
accessible training services with the goal of assuring
"Alaskans meet the need of Alaska employers for legacy jobs
and long term careers."
MR. BELL spoke to the Department of Labor and Workforce
Development's training system, which partners with the
University of Alaska, Department of Education and Early
Development and regional training centers. The department is
taking steps to improve service continuums from secondary
and postsecondary education to jobs. There are multiple
funding sources
10:32:41 AM
MR. BELL spoke to challenges facing the department and
state. There has been an unprecedented 20 year economic
growth in the state of Alaska. During this time, industries
have had significant upward and downward fluctuations. There
has been a significant increase in the oil industry, while
the timber industry has seen significant reductions.
Approximately, 70,000 workers move in and out of Alaska each
year. The workforce is graying, and leaving skilled
positions. Approximately, 113,000 Alaskans are between the
age of 51 and 65. However, there are 11,000 Alaskans turning
18 each year. Alaska has one of the highest levels of
unemployment and a significant non-resident workforce
(approximately 20 percent). Career awareness is a challenge,
as is the cost and accessibility of training. Employees need
to be drug free, have a valid driver's license, and have
meaningful and transferrable certification.
10:35:00 AM
MR. BELL discussed the department's four AGIA strategies.
The first is to increase awareness of and access to careers
in natural resource development, which addresses education
and the basic skills, and career potentials, as well as
improvements to their web-based and other information
services.
Second, develop comprehensive career and technical education
system. There is room for significant career and technical
education improvements or enhancements. The department would
like to assure that high school graduates are work ready
with a career plan and basic employability skills along with
applied skills in math, reading and locating information. A
new program, career readiness certificate, is being
introduced by the Department of Education and Early
Development and is supported by the Board of Education.
Technical occupation opportunities need to be expanded, such
as the construction academies funded by the legislature,
which teach basic construction skills to both in school
students and out of school youth and adults. Industry skill
standards are needed as a guide to training programs to
assure that training is recognized and accepted by
employers.
Third, the department wants to increase registered
apprenticeships and on-the-job training opportunities.
Registered apprenticeships offer a program of work and
training that leads to skills and high paying opportunities.
The department is working with employers around the state to
increase registered apprenticeships and, where appropriate,
support structured on the job training opportunities. The
Department of Labor and Workforce Development offers
financial support for training and partial payment of wages
subject to agreement with employers to train and retain
Alaskan workers. Success is measured by the number of people
who enter and exit training and pre and post training wages.
MR. BELL observed that the fourth strategy is to increase
training for operations, technical and management workers.
The focus is on people in the workforce that need skill
upgrades and have the potential to enter management. The
legislature has supported the expansion of the engineering
program at the University of Alaska, Fairbanks. Incumbent
workers need to have access to training opportunities. He
summarized that the focus is on the current skills gap,
"meeting today's job needs", and the legacy of long term
jobs.
10:39:02 AM
BRYNN KEITH, CHIEF RESEARCH AND ANALYSIS, DEPARTMENT OF
LABOR AND WORKFORCE DEVELOPMENT noted that it is a "bit
early" in the gas pipeline process for the department's
research and analysis portion to generate "solid" employment
information. The focus has been on the development of
preliminary measures of the current and projected skills
gap. She observed that 113 occupations have been associated
with AGIA, such as: safety professions, logistics,
environmental issues, equipment operations, crafts and
administrative support. Occupations run the full gamut from
on the job training to highly academic preparations. The
wages also vary dependent on the education and training
requirement. The department used existing occupational
supply and demand data to identify potential gaps. Data was
derived from employer unemployment insurance quarterly
reports and employer surveys. Alaska Permanent Fund dividend
information was also used to obtain a demographic profile of
workers. There is no definitive data for supply and demand.
It is impossible to know at any given time how many workers
are available and skilled or needed. Proxy measures are used
to try to determine the skills gap. The current gap was
assessed by the percent or number of non-resident workers in
an occupation. The lack of available skilled labor force is
one of the primary reasons employers hire non-residents. In
2006, 16 percent of those working in gas pipeline related
occupations were non residents, which represents a
significant opportunity for Alaskans. Of these, over 37
percent were 45 years or older. Many of these workers will
need to be replaced in the next 10 to 15 years.
10:43:10 AM
MR. BELL explained the licensing agreements between Canada
and the United States, in terms of reciprocity for
engineers. Alaska Law contains a Comity provision, which
allows the Board of Architects, Engineers and Land Surveyors
to recognize the credentials of educated and experienced
foreign engineers and allow them to apply toward licensure
in Alaska (Title 8). He did not know if the level of
reciprocity in Canadian law was equal. He needed to research
similar provincial and federal Canadian laws. There is a one
year experience requirement. Canadian candidates for Alaska
licensing also need to demonstrate that they have taken an
Arctic engineering course.
CHAIR HUGGINS raised the question to determine if
adjustments needed to be made.
10:45:49 AM
COMMISSIONER BISHOP summarized that a Canadian engineer can
have one year of experience, come to Alaska, complete an
Arctic engineer course and receive a stamp. An Alaska
engineer would have to serve a one year apprenticeship under
a Canadian engineer to be licensed. He noted that he would
discuss the issue in the Yukon.
CHAIR HUGGINS stressed the need for equality.
SENATOR BILL WIELECHOWSKI observed that approximately 15,000
temporary jobs would be created and that 30 percent of the
jobs currently on the North Slope are from out-of-state. He
questioned what percentage of the 15,000 created jobs would
go to Alaskans.
10:47:50 AM
COMMISSIONER BISHOP could not estimate the number jobs that
would go to out-of-state workers.
10:49:11 AM
REPRESENTATIVE BERTA GARDNER spoke to the expected worker
shortage due to the graying workforce in Alaska and
questioned if there is a similar phenomenon in Canada.
COMMISSIONER BISHOP observed that Canada is vying for
employees as well. He maintained that there would not be
enough labor in Alaska, but could not respond to whether
there would be sufficient labor in Canada.
10:52:13 AM
REPRESENTATIVE PEGGY WILSON stressed the importance of
education opportunities.
10:53:09 AM
REPRESENTATIVE LES GARA expressed concern regarding Alaska
hire. He observed that there is currently a 16 percent
shortfall in employees. He wanted to see an unprecedented
amount of job training in order to fill the Union halls. The
amount needed will be massive. He stressed the need to avoid
the community dislocation that occurred during the pipeline
construction.
10:55:05 AM
REPRESENTATIVE ANNA FAIRCLOUGH asked for more information
regarding how the training would occur without putting the
jobs in an unemployment market. She observed that the need
would be for 2 - 3 years.
10:56:30 AM
COMMISSIONER BISHOP observed that exploration and
development jobs will still exist once the gas pipeline is
complete. Gas is different from oil. He stressed that a new
industry is starting and emphasized that expansions will
take time.
10:58:55 AM
SENATOR JOE THOMAS suggested that more work needs to be done
in the educational high school system in terms of the desire
and need to work.
COMMISSIONER BISHOP agreed and emphasized that he has met
with the Commissioner of Department of Education and Early
Development and they are in agreement that more needs to be
done to enhance and educate. He observed that high school
seniors by 2009 must take a "work ready - college ready"
test. He noted that they are working on uniformity and
standards are being developed, but stressed that there are
not enough high school counselors. More volunteers and
advocates are needed. He emphasized that there are 10,000
graduating seniors entering the workforce each year and that
kids are having difficulty finding jobs.
11:06:04 AM
CHAIR HUGGINS suggested that a prototypical system for
vocational training needs be developed.
11:07:29 AM
REPRESENTATIVE MIKE DOOGAN attempted to bring precision to
the numbers. He recalled that some trades allowed Alaskans
to remain in Alaska once the pipeline construction was
completed. He asked for a break down by category or trades
and an estimate of the current workforce in each. He wanted
an estimation of how many jobs would remain. There will be a
big emphasis on vocational education that he would like to
see supported by long term jobs.
MS. KEITH responded that the department is trying to
identify the supply and demand and legacy jobs.
11:10:24 AM
REPRESENTATIVE MARK NEUMAN observed that many learn their
trades on the job. He asked how Alaskan workers can be
brought on to jobs when they are not in an organized labor
union.
COMMISSIONER BISHOP noted that a project labor agreement
would have to be signed with the builder of the pipeline. He
felt that a project labor agreement would be reached that
would allow qualified Alaskans to be hired first.
REPRESENTATIVE NEUMAN questioned who would be given
priority: a qualified non-union or apprenticed union
employee.
COMMISSIONER BISHOP observed that it would depend on the
projected. He did not have an answer.
11:14:51 AM
REPRESENTATIVE WOODIE SALMON asked the definition of
"local". He stated he would like to define that early on in
the process.
11:18:06 AM
COMMISSIONER BISHOP observed that he is very passionate
about Alaska hire. He does not always approve foreign labor
hires.
11:20:31 AM
CHAIR HUGGINS asked for more information regarding hiring
parameters.
COMMISSIONER BISHOP stressed the scope of the project and
the need for further data before estimates on labor can be
made.
11:23:13 AM
SENATOR ELTON asked if the focus on AGIA occupations would
hurt other employers.
COMMISSIONER BISHOP could not respond. He noted that
employees at the Department of Labor and Workforce
Development are also leaving to work on the North Slope.
11:25:26 AM
MS. KEITH acknowledged that "back filling" will be a problem
and that it is a difficult question, which the department is
attempting to address.
11:26:17 AM
REPRESENTATIVE BRYCE EDGMON spoke to the focus on school
vocational training.
COMMISSIONER BISHOP observed that a program was recommended
th
for mine training begin in the 6 grade and maintained they
are already behind the curve.
MR. BELL added that vocational education programs are a
critical component of secondary education. The department is
in discussion with the Department of Education and Early
Development regarding introduction of a career and
vocational education program to suit local needs.
MR. BELL commented that the legal means to define "local" to
the community level may not exist. He added that the
department can help to develop training programs locally
that assure that people at the local level have the skills
for available jobs. He commended the Denali Commission
projects, which are an excellent model for local delivery.
11:29:44 AM
REPRESENTATIVE RALPH SAMUELS noted that the Commissioner
suggested that it would take a billion dollars to complete
the permits, while the application by TransCanada estimates
$611 million.
COMMISSIONER BISHOP explained that his number came from
previous discussions with producers who estimated it would
cost a billion dollars for engineering.
REPRESENTATIVE SAMUELS asked if TransCanada, the Port
Authority, BP (British Petroleum) or ConocoPhillips
participated in the development of the Phase One training
program and to what extent.
COMMISSIONER BISHOP observed that ConocoPhillips, BP,
Alyeska Pipeline, and others have participated.
11:31:14 AM
REPRESENTATIVE SAMUELS questioned if TransCanada is doing
training programs.
COMMISSIONER BISHOP could not respond, but observed he has
indicated to TransCanada that their involvement would be
welcomed.
11:32:13 AM
REPRESENTATIVE WILSON stressed that legislators are willing
to help remove any potential stumbling blocks.
11:34:10 AM
MS. KEITH explained that non residency is measured by the
permanent fund dividend definition. The percent of workers
are also gleamed from permanent fund dividend applications.
The graying of the Alaskan workforce is an issue. Alaska has
a long history of drawing seasonal workers from the lower 48
states and other locations, but this will be made more
difficult by the fact that the graying workforce is a global
phenomenon. Wage data comes from surveys of Alaskan
employers. The department did not receive adequate response
from their 2007 survey to compile data for that year. The
average 2006 wage was just over $28 [per hour]. The next
step is to identify legacy jobs.
11:36:12 AM
CONRAD MULLIGAN, ARCADIS provided members with a power point
presentation: Modeling of Short and Long Term Employment
Generated by Construction and Operation of an Alaska Natural
Gas Pipeline Project (copy on file). The data presented is
based purely on Alaskan jobs and were compiled by ARCADIS.
11:37:45 AM
MR. MULLIGAN explained that ARCADIS generated projections
for three phases: Construction Phase of the pipeline and
installation of compressor stations, Gas Treatment Plant
(GTP) and LNG facility; Operation Phase of the pipeline and
related facilitates (compressed stations, GTP and LNG
plants); and Exploration and Development work on the North
Slope and elsewhere in the state, spurred by operation of
natural gas pipeline. Data sources included the
TransCanada's (TC Alaska) application and data generated by
the Division of Oil and Gas. He explained that the IMPLAN
economic impact modeling system was used. The model was
cost-driven and used Alaska specific labor factors. The
model assumed that the gas treatment plant and LNG facility
would be built outside of the state of Alaska; major
equipment and materials would be purchased outside; and the
labor force in Valdez would be constrained by the size of
the camp that could be physically located in Valdez.
11:39:33 AM
MR. MULLIGAN spoke to the Construction Phase Employment
Results. He observed that any mainline natural gas pipeline
project would created thousands of short-term jobs in the
state of Alaska. The largest number of these jobs will only
be available during a brief peak period. A LNG project (4.5
Bcf/per day) from the North Slope to Valdez would provide
16,000 jobs in a single peak construction year. An overland
pipeline, as proposed by TC Alaska or the producers (Denali
project) would create 15,000 years in a peak year.
Employment during construction does not follow a bell curve.
The initial increase will be small until the major
construction begins, at which time; there will be a short
lived massive increase and a rapid drop off. Long-term
employment would not occur.
11:40:50 AM
MR. MULLIGAN reviewed the employments impacts of the
operation of the pipeline system. An overland pipeline by TC
Alaska or the producers would create 200 operational jobs in
Alaska on the pipeline and the GTP facility on the North
Slope.
The TC Alaska project would produce 600 long-term jobs: 200
on the pipeline and GTP and 400 jobs at a LNG facility at
Prince William Sound. In both cases the jobs would be in
existence during the life of the pipeline.
11:41:35 AM
MR. MULLIGAN discussed employment impacts from exploration
and development. The FERC regulations mandate that a natural
gas pipeline in Alaska will be an open access pipeline. He
explained that ARCADIS looked at "how open would be that
access." He observed that effective open access is different
from FERC mandated open access. Effective open access would
provide reasonable and affordable transportation rates, and
timely and voluntary expansions to all shippers. A non-
effective open access pipeline system would have higher
transportation rates that may not be affordable to all
shippers and would not offer voluntary expansions. The only
expansions on the line would be those that were petitioned
for before FERC. An LNG facility may be included that is not
required to operated on an open access basis. He explained
that the system would not operate on an open access basis if
one part of the pipeline system did not operate on an open
access
11:43:31 AM
REPRESENTATIVE SAMUELS interpreted Mr. Mulligan's remarks as
stating that FERC would not allow capacity expansion because
"they will always rule with what the state of Alaska
thinks". He stressed that FERC would make the decision and
questioned Mr. Mulligan's assumptions.
MR. MULLIGAN explained that their presentation was based on
the best and worst case scenarios. He suggested that the
truth would probably lie somewhere between.
11:46:55 AM
REPRESENTATIVE FAIRCLOUGH referred to the number of
operational jobs remaining. She thought that TransCanada had
estimated there would be 50 jobs.
COMMISSIONER BISHOP explained that TransCanada estimated
that there would be 70 full-time jobs [long-term].
MR. MULLIGAN explained that the TransCanada figures did not
include the LNG North Slope facility.
11:48:23 AM
MR. MULLIGAN summarized that effective open access with
voluntary expansion and reasonable tariffs would lead to
favorable explorer economics and aggressive new exploration
and development activity on the North Slope. Non-effective
open access with no voluntary capacity expansion would limit
natural gas exploration and development work on the North
Slope until current producing fields fall off of their
production plateaus.
11:49:32 AM
CHAIR HUGGINS questioned if petro chemical on different
order of magnitudes in the United States were considered.
The assumption has been that the value added products would
go to Alberta. He questioned what would be the affect on
jobs.
COMMISSIONER BISHOP responded that the department is
addressing the issue.
11:50:18 AM
MR. MULLIGAN assumed that new production facilities on the
North Slope would be constructed in the state of Alaska. New
natural gas fields would be brought on line to keep lines
full at a given assumed capacity. The best case scenario
would be 5.9 Bcf/per day. The worst case scenario would be
4.5 Bcf/d.
MR. MULLIGAN explained that under the TC Alaska proposal
there could be 72,000 jobs created between the years 2015 -
2045. Non-effective open access could result in
approximately 47,000 jobs from 2015 to 2045. Jobs could be
created as early as 2015 with open access, but non-effective
open access jobs could be delayed as late as 2026.
11:52:06 AM
REPRESENTATIVE CISSNA questioned if support industries were
included in the estimates. Mr. Mulligan promised to provide
the data.
MR. MULLIGAN spoke to the timing of exploration and
development of job creation as a function of the pipeline's
characteristics. He summarized that effective open access
equals jobs sooner and that the timing of the jobs are
important to offset declining North Slope production in
order to maintain existing skill sets and a talent pool in
Alaska.
CHAIR HUGGINS recessed the meeting at 11:56:53 AM.
CHAIR HUGGINS reconvened the joint meeting of the House
Rules Standing Committee Subcommittee on AGIA and the Senate
Special Committee on Energy at 1:36:07 PM.
1:36:19 PM
FRANK RICHARDS, Deputy Commissioner of Highways & Public
Facilities, Office of the Commissioner, Department of
Transportation & Public Facilities (DOT&PF), presented a
PowerPoint report titled "Gas Pipeline Corridor." He
explained that he will discuss some of the challenges and
issues Alaska will face when preparing roads, airports, and
infrastructure prior to gas line construction along the
highway route from Prudhoe Bay to the border. He informed
the committees that his assumptions are going to be based on
previous departmental discussions with the producers.
During the Murkowski Administration the department had
discussions with the producers regarding the construction
needs for infrastructure development. From that, the
department gained insight into what the producers' pipeline
would look like. The department, he related, learned that
the gas line, in contrast to TAPS, will be a buried
pipeline, which will require more earth work and movement of
materials by trucks. Furthermore, there will be heavier
loads due to the pipe thickness of 1.25 inch. Moreover,
there will be challenges due to the fairly large module
movements for the compressor stations and the associated
freight necessary to support the gas line. The gas line, he
further related, will likely have more ports of entry and
possibly more air freight traffic. Mr. Richards said that
there will be more background traffic; in fact, the traffic
will be a mix of construction equipment, pipeline equipment,
and small vehicular and truck traffic. He then highlighted
that the pavement on the existing highway system is nearing
the end of its useful life, and therefore it is likely there
will be deteriorating pavement conditions.
MR. RICHARDS informed the members that a typical load for
the gas line will likely be single sticks of pipe on an
individual truck. From the producers' perspective, he
anticipated that there would be 80 foot long sections of
pipe in order to reduce the number of field welds. The
proposal calls for approximately 750 miles of pipeline
running along the highway system, which equates to almost
50,000 truck loads of pipe that would be transferred over
Alaska's roads. For an individual legally-sized truck,
weighing in at 80,000 pounds, that amounts to about 3,600
vehicles transiting the highway system. The weight of the
pipe used for the pipeline amounts to almost 885 million
vehicle trips, which will significantly impact the condition
of the highway system. Therefore, it is necessary to
improve the road system prior to the aforementioned heavy
traffic.
MR. RICHARDS, referring to slide 4 titled "Why Now?"
explained that he's discussing infrastructure development
now because in order to have gas flowing into the market by
2018 or 2019, construction must begin by 2015. He
emphasized that in order to avoid competing projects, DOT&PF
needs to have its work done in approximately six
construction seasons "starting today." The aforementioned
is a very aggressive timeline. The department, he related,
needs time to develop and design the project, proceed
through environmental permitting, obtain the necessary
rights-of-way, and put out bids such that contractors can
complete the work in a timely fashion. In reality, the
department is already behind, he said. Mr. Richards opined
that there are benefits achieved by going out to bid sooner
rather than later, such as obtaining less costly materials.
For instance, asphalt costs have significantly increased
over the last five months. He highlighted that currently
the state is relying heavily on Federal Highway
Administration (FHWA) funds to construct and reconstruct the
state's highways and infrastructure. However, the state can
not rely on those federal funds to accomplish all the work
because there are not enough federal funds coming into
Alaska and there are competing projects already in the
statewide transportation improvement program (STIP).
Furthermore, the federal process that accompanies the
federal funds is lengthy and adds a considerable burden to
achieving the project in a short timeframe. Mr. Richards
pointed out that in some instances such as for bridges
requiring improvement to handle the heavy [truck] loads,
federal dollars can not be used for additional capacity
because it is beyond the specified federal standard. Mr.
Richards emphasized that the infrastructure projects going
forward will be great opportunities for training for the
workforce development that will be necessary for gas line
construction. He then highlighted that during the
construction of TAPS there was a significant spike in
accidents and fatalities that occurred. Therefore, the
department's goal is to improve the infrastructure in order
to reduce the number of accidents due to the increased
traffic volumes.
MR. RICHARDS, referring to slide 6 titled "State Funds
Advantages," explained that the chart illustrates the
individual phases of a project through to construction under
the federal process and the state process. The chart
indicates that state-funded projects provide the ability to
perform parallel phases, which cuts the time by two to three
years as well as the costs for those two to three years.
Upon reviewing the overall infrastructure needs for the gas
line construction, there will be key "chokepoints" along the
route, as illustrated by slide 7. Those chokepoints include
Atigun Pass and the Yukon River Bridge. He questioned
whether the Yukon River Bridge will be load limited and
whether it will be able to handle the extra pipe placed on
it due to the gas line. He noted that there will be urban
area traffic flow for freight and goods and the congestion
associated with those areas may impact construction as well.
He then highlighted the need to determine ports of entry for
the pipe and the associated freight. He reiterated the
existence of older bridges that have height and weight
limits, such as that presented in the slide titled "Example
of Limiting Bridge Gerstle River - Alaska Highway." He
related the need to replace such bridges and avoid
chokepoints. Therefore, a program to reconstruct deficient
highway embankments, improve alignment on existing routes,
reduce the grades, and address the bridges needs to be
developed. One of the primary goals, he related, is to
search for and develop much needed material sites for
aggregates necessary for the pipeline and the highway.
1:46:10 PM
REPRESENTATIVE STOLTZE returned attention to the
chokepoints, specifically the Anchorage to Wasilla
chokepoint. He noted that he and Senator Huggins have been
working on a remedy for that chokepoint, which he identified
as the Knik Arm Crossing. He noted that from his
discussions with the industry, he has gleaned that the
industry views Port MacKenzie as the port for gas line
deployment. Therefore, he asked if DOT&PF will re-evaluate
the next phase of the Knik Arm Crossing in the scope of
increased fuel costs and increased necessary costs and
avoiding the congestion in downtown Anchorage and Wasilla.
He asked whether DOT&PF will provide the administration with
reliable information regarding alternative costs and avoided
costs while taking an objective look at the project.
MR. RICHARDS related that the department has asked very
pointed questions of the Knik Arm Bridge and Toll Authority
(KABATA) in order to determine the state's risk associated
with the project. The desire, he further related, was to
get a handle on the overall monetary and construction
timeline risks, particularly the permitting issue. In
regard to Port MacKenzie, Mr. Richards said it will depend
upon where the producers or TransCanada decide to bring in
the freight. The department wants Port MacKenzie to be the
entry point of freight and thus desires roads to be in
sufficient condition to handle the freight traffic. He
reminded the committee that this year's capital budget
included funding on the Burma Road to be able to proceed
with purchase of the right-of-way.
1:49:10 PM
CHAIR HUGGINS interjected that a rail spur is part of the
aforementioned. Therefore, he opined that a briefing of
this sort without mention of rail is incomplete. In fact,
he expressed the need to discuss rail first and then
alternatives such as asphalt otherwise the state's
infrastructure will be destroyed.
1:49:39 PM
SENATOR WIELECHOWSKI opined that it is critical to discuss
and determine the entry point for freight, which he assumed
would be the Port of Anchorage. He further opined that the
port is also a major issue that needs to be addressed in
terms of whether it is adequate and has the necessary
facilities.
MR. RICHARDS noted his agreement with regard to the need to
review all transportation assets, but the challenge is that
DOT&PF has not been able to have an extensive conversation
with TransCanada yet. The aforementioned, he said, is why
he wanted to focus today's discussion on the road assets
that parallel the pipeline while acknowledging that there
are other needs that must be addressed. Until information
is received from TransCanada, the department is at a
disadvantage.
CHAIR HUGGINS recognized Governor Palin's presence.
1:51:45 PM
REPRESENTATIVE GARDNER questioned whether the Canadian side
is going through a similar process with regard to
identifying their needs.
MR. RICHARDS informed members that the department met with
representatives from the Yukon Government last month and
discussed many topics, including their ability to move
forward and improve their highway assets prior to
construction of the pipeline. He recalled that the biggest
challenge expressed from the Yukon Government was in regard
to their heavy reliance on Shakwak funds. He explained that
the Shakwak funds are funds that are provided to the Yukon
Government by the U.S. Congress in order to address the
needs on the Alaska Highway. Approximately 60 percent of
[the Yukon Government's] capital program relies on Shakwak
funding to cover [the Yukon Government's] highway program.
In the next reauthorization of the federal highway
legislation, which is due next year, there is much
anticipation that the Shakwak funding will not be available.
The aforementioned will significantly impact the Yukon
Government and its ability to address highway needs, he
remarked.
1:53:34 PM
MR. RICHARDS, returning to his presentation, related that
his goal is to develop a programmatic approach in order to
have a system in place that allows the design and
environmental documentation, as well as construction on
multiple projects. He reiterated that the highway work will
include realignment, widened road surfaces, embankment, and
surfacing improvements. The aforementioned will improve the
maintainability of the roads as well as ensuring
structurally sound surfaces for existing and future
construction traffic. The benefit, he said, is that there
will be utility now and in the future during pipeline
construction. Mr. Richards then turned attention to slide
10, which illustrates a typical module move and the width
and height requirements.
MR. RICHARDS moved on to slide 11 titled "Transportation
Corridors Identified for Ongoing Analysis", which depicts
the all-Alaska pipeline as well as the logistical corridors
that may feed that. He highlighted the logistical hub
located on the Haines highway, which may be a major point of
entry for the pipe and feed the Yukon, British Columbia, and
Alberta areas. He then turned his focus on the Prudhoe Bay
to Fairbanks highway route, which is essentially located on
the Dalton and Elliot Highways. There would be a hub in
Fairbanks that would serve as a key logistic point. He
explained that some of the freight may be moved by the
railway from Seward into Fairbanks and then placed on trucks
to be shipped north and east. The second segment would be
from Fairbanks, east of the Yukon border, on the Richardson
and Alaska Highways. The common challenge on all of these
routes, he specified, is that they are underlain by
continuous and discontinuous permafrost. Mr. Richards,
referring to slide 13 titled "Dalton Hwy Corridor Cost
Summary," informed members that the department has
identified approximately 36 projects on the Dalton Highway.
The Dalton Highway is a rugged road that was built in
advance of TAPS and then used during the construction of
TAPS. Ultimately, the Dalton Highway was given to the state
and opened to the public as part of the National Highway
System. He noted that although the state has spent some of
its FHWA funds on the Dalton Highway, very little has been
spent on the Dalton Highway over the last three years. The
aforementioned highway is in need of improvements due to the
steep grades, blind corners, reduced visibility, and aging
infrastructure. Mr. Richards characterized the Dalton
Highway as the industrial highway as it provides access and
feeds the industry. This is an aggressive program with
approximately $1 billion in costs for the Dalton Highway.
He informed the committee that although several projects for
the Dalton Highway have been designed, the projects have not
been achieved due to the lack of federal funds. The goal
over six years would be approximately $167 million to
achieve the aforementioned work. He acknowledged that it is
an aggressive timeline, but highlighted that it is necessary
in order to avoid conflict. He reiterated that DOT&PF has
three projects on the books that are nearly ready to bid.
These projects, were the department able to obtain funds in
the amount of $75 million, would go out this winter. He
emphasized that the most important matter is obtaining some
upfront funds to start the necessary design of the most
critical area, which is located at the start of the Dalton
Highway to the Yukon River Bridge, as well as to initiate a
material site study.
1:58:43 PM
REPRESENTATIVE FAIRCLOUGH, recalling the 64 percent increase
in the cost of asphalt over the last five months, inquired
as to the capital construction cost inflation number Mr.
Richards used with the $1 billion request.
MR. RICHARDS, characterizing these as high level numbers,
specified that the analysis used about a 4 percent
inflationary increase.
REPRESENTATIVE FAIRCLOUGH said that she appreciates the
conservative number. However, with such sharp increases in
construction costs, she expressed concern as to whether $1
billion will be enough. She characterized $167 million a
year for six years as being a low number, and therefore the
legislature may want to review a transportation fund due to
the infrastructure needs of the state.
2:00:26 PM
REPRESENTATIVE ROSES asked if the bridges and roads would
need to be upgraded if a pipeline is not constructed.
MR. RICHARDS replied yes. In further response, Mr. Richards
confirmed that the department would like to improve the
Dalton Highway. He then highlighted that with the help of
the legislature, starting several years ago, DOT&PF was able
to initiate a heavy maintenance initiative on the Dalton
Highway. The department received approximately $9 million a
year and this year the department received $5 million and
$14 million in a GO [general obligation] bond package to
address the most critical surfacing needs. The work being
proposed is to improve the structure in order to meet the
national highway standards in terms of alignment and grade.
With regard to the 4 percent [inflation], Mr. Richards
explained that existing contract numbers are being used in
order to be conservative. He acknowledged that the 4
percent is challenging in the face of energy cost increases,
but he pointed out that he did not know if that spike will
continue.
2:02:49 PM
REPRESENTATIVE FAIRCLOUGH remarked that one of the
challenges with the inflation number is the quality of the
rock, the aggregate. She requested Mr. Richards's thoughts
on aggregate.
MR. RICHARDS stated that one of the issues with traffic was
rutting. One of the primary tools used to address rutting
is the use of hard aggregate. Hard aggregate, he explained,
is rock that does not degrade due to traffic volumes or the
use of studs. In fact, when Tudor Road [in Anchorage] was
repaved, test sections were paved. One test section was
paved with regular aggregate while the opposing section was
paved with a hard aggregate. Those sections have been
monitored in order to determine if the hard aggregate
provides resistance to stud wear. Mr. Richards pointed out
that when considering the materials slate for the Dalton
Highway, it is considering hard aggregate as well as
materials such as gravel and hard rock sources. The
material sites provided from the TAPS construction and in
intervening years have played out. Therefore, it is
necessary to identify the options for opening material sites
for highway construction needs as well as for the pipeline.
2:05:05 PM
CHAIR HUGGINS reminded members that the University of Alaska
Fairbanks (UAF) has an asphalt laboratory that has and
continues to work on the aggregate problem. He then turned
attention to slide 13, which specifies that the Dalton
Highway Corridor will take six years to [construct].
However, he challenged [DOT&PF] to return with a request for
funding that will result in a compressed timeframe. Chair
Huggins related the need for the department to do better
with its [timelines] and accomplishing its tasks. He
emphasized the need for the department to rejuvenate its
approach, planning, and execution in order to avoid price
increases and lengthening of the timelines.
MR. RICHARDS said that what Chair Huggins is asking of the
department is warranted. He highlighted that the shift from
a federally funded program is a cultural shift. Although
the aforementioned can be done, it requires leadership in
the department to meet the aggressive timelines.
2:08:19 PM
SENATOR ELTON asked if DOT&PF views the infrastructure
improvements as an increment of the ongoing work with
existing ongoing projects, such as urban interchanges and
rural airports. If that is the case, he then asked if [the
state] has the financial and worker resources to do both.
MR. RICHARDS highlighted that the department has already
identified much of this work in its long-range
transportation plan that was published this spring. Over
$12 billion of highway work was identified, including this
[infrastructure upgrade] work. Therefore, the work has been
on the books, although the department has not had the
funding mechanism to accomplish the work in the near term.
The heavy dependence on federal highway funds and the
declining of those funds has resulted in the projects being
pushed farther downstream until a funding source was
available. With regard to the contracting community, Mr.
Richards related that he understands that they have the
workforce and the wherewithal to accomplish these projects.
SENATOR ELTON surmised that if the funds necessary to
[achieve infrastructure upgrades] are committed, there will
be fewer dollars for other projects that have already been
identified.
MR. RICHARDS clarified that the competing needs related to
urban interchanges and safety enhancement improvements on
other roads remain. That work is necessary, is included in
the STIP, and needs to move forward. The funding source for
the work being discussed is unknown, and thus it is
necessary to discuss with the legislature how best to fund
the work because the department cannot rely on the dwindling
federal funds.
2:11:45 PM
MR. RICHARDS returned to his presentation referring to the
slide titled "Elliot Hwy Corridor." For this work effort,
the department is reviewing solely the 70 miles from
Fairbanks to Livengood. The department has identified six
projects along this route, including three highway projects,
one airport, one bridge, and one facility. The timeline
[for the Elliot Highway Corridor] is 2009-2014 and estimated
costs are approximately $100 million. He then moved on to
the slide titled "Richardson Hwy Corridor," which focuses on
the portion of the Richardson Highway from Fairbanks to
Delta Junction, that parallels the pipeline. Along that 95-
mile segment, approximately 21 projects were identified,
including railroad crossings, overpasses, passing lanes, and
truck rest areas. The projects also included providing new
and improved weigh stations. On this portion of road, a
considerable amount of work exists to rehabilitate the
existing alignment and address bridges. Very little of this
work has started, he noted. Continuing with the slide
titled "Alaska Hwy Corridor," Mr. Richards explained that
the Alaska Highway Corridor runs from Delta Junction east to
the border and parallels the Tanana River. This area
presents some of the most challenging highway needs, but
there is no current funding to complete these projects. He
specified that there are several large and costly bridge
replacements for which the work will total approximately
$160 million. The highway work, he noted, will address
distressed pavements, add passing lanes and pullouts for
trucks, as well as pullouts at bridge abutments in order to
avoid impeding traffic. Mr. Richards pointed out that the
replacement of maintenance stations is included along the
Alaska Highway Corridor because the existing maintenance
stations are beyond their useful lives.
2:15:07 PM
MR. RICHARDS, referring to slide 22 titled "Why Start With
Dalton Hwy Corridor," specified that the department started
with the Dalton Highway because it has bid projects ready
that total approximately $75 million. That work can be put
out for bid and be under construction by this time next
year. The design efforts can begin too, so that there will
be work in 2010 and 2011 in order to identify, permit, and
open up the material sites. Turning to the slide titled
"Issue of Financial Responsibility," Mr. Richards pointed
out that regardless of who obtains a FERC license, work will
be necessary to ensure no adverse impacts to gas line
construction. Under previous FERC rulings, the FERC has
said that the highway agency could not back charge the gas
line for use or deterioration of the highway assets unless
all users could be charged. The question of who pays is one
which the legislature should continue to discuss with the
department. As mentioned earlier, federal funding is not
looking good as the trust fund is scheduled to go negative
in 2009. With the current high cost of gasoline, nationally
less vehicle miles are being driven and thus less funds are
flowing back to the trust fund that is ultimately allocated
to the state.
MR. RICHARDS reminded the members that the statewide needs
are large, approximately $12 billion, and growing.
Furthermore, the STIP already has projects with a great
expectation that those will be fulfilled. As mentioned
earlier, the Yukon's heavy reliance on Shakwak will be in
for a rude awakening if there are no Shakwak funds in the
next reauthorization. Therefore, going forward there will
need to be good consultation with the gas line owner in
order to implement the necessary features, including turn
lanes, truck pullouts, passing lanes, and module safety
areas. Since these features will be unique, there will need
to be discussion regarding who will pay for those features.
Furthermore, there are new technologies that the department
hopes to implement at the weigh stations in order to
facilitate quick pass-through of commercial vehicles. To
date DOT&PF has hired a full-time coordinator to ensure that
DOT&PF is aware of the improvements necessary to be ready
for gas line construction. As mentioned earlier, DOT&PF has
been in consultation with the producers and most recently
with TransCanada with regard to the infrastructure needs.
The department has identified the key work as presented.
Although there are federally funded projects underway at
various airports and highways, those federal funds will not
be sufficient to meet the overall needs of the program.
With the passage of the capital budget, the GO bonds address
some of the significant impacts on the highway system and it
will be up to a vote of the people to determine whether
those projects are worthy. He then directed attention to
the slide titled "Visible Progress," which illustrated
recent improvements such as the Washington Creek Bridge
replacement and raising the grade on the Dalton Highway.
2:19:56 PM
MR. RICHARDS referred to slide 28 titled "New Jobs Created,"
which relates specifically to the Dalton and Elliot
Highways. The chart illustrates that the workforce within
DOT&PF, the ancillary or created jobs associated with that
$1 billion worth of work amounts to approximately [1,400
positions] a year over the six-year program. He reiterated
that when the department receives appropriations to move
forward, the Dalton Highway will be the focus.
2:20:42 PM
REPRESENTATIVE DOOGAN related his understanding that Mr.
Richards has laid out roughly $2 billion worth of highway
work of which about half of the work is located on an
industrial highway while the remainder is located on
highways on which Alaskans will drive. At this point, there
is no knowledge as to whether this work to aid the pipeline
will actually have a pipeline at the end of it. Therefore,
he questioned why the department has decided to start work
on the road that is only necessary if there is a pipeline
versus those portions of the road that Alaskans would
benefit regardless of the construction of the pipeline.
MR. RICHARDS said that the work he is discussing today would
be useful to Alaskans because Alaskans, in terms of the
trucking industry, will drive the freight and goods to the
North Slope. Therefore, he opined that the proposed road
work will benefit Alaskans now as well as for use during
[pipeline construction and operation].
REPRESENTATIVE DOOGAN said, "... not exactly the same
Alaskans or the same kind of use." He then posed a scenario
in which there was knowledge that there would be funding for
these projects, a date of completion for the projects, and
which will be directly connected. In such a scenario, he
inquired as to how long it would take to perform what is
suggested. He questioned whether it would be a staggered
series of projects year-to-year or several projects in
progress at once.
MR. RICHARDS described "ramping up' for the projects and
initial design work as well as a condensed timeline during
which construction will be underway in order to accomplish
the projects. He said, "The sooner the better." If the
construction can be spread out, better bids could come from
the contractors. With regard to a cash flow basis and
construction, the goal is to ultimately achieve completion
of the necessary infrastructure work prior to [construction
of] the gas line. Therefore, this construction work needs
to begin in 2009 and ramp up 2010-2013. Mr. Richards
pointed out that the department has identified $2 billion
worth of work from Prudhoe Bay to the Canadian border.
Taking that $2 billion over six years is on par with the
state's existing annual highway program federal funds;
however, if federal funds decrease the state will likely see
significantly less. He opined that the state will have the
capacity in the contracting community and within DOT&PF to
develop the projects with support from consultants.
2:25:33 PM
REPRESENTATIVE DOOGAN observed that the state is spending
funds on highways in anticipation of a pipeline that may not
go forward. He questioned the department's wisdom in
picking the parts of the highway that have the least utility
to Alaskans for [repair] upfront, rather than "projects ...
we get better roads out of whether there's a pipeline or
not."
2:26:36 PM
REPRESENTATIVE JOHNSON asked whether there has been
consideration of a railroad to the North Slope that could be
used to transport LNG. With or without a pipeline the
railroad would fulfill the needs of Alaskans.
MR. RICHARDS stated that he knew of no study for a railroad
going north to Prudhoe Bay.
2:27:52 PM
REPRESENTATIVE GUTTENBERG reminded members that Prudhoe Bay
is the "largest industrial area on the planet now and its
infrastructure needs a lot of support." Ten years ago the
estimate to improve the Dalton was about $900 million and
the ability for long-term maintenance has not been built
into the DOT&PF plan. He opined that a different kind of
planning structure needs to be in place to think about long-
term needs for gavel and material. Representative
Guttenberg asked whether long-term planning is included in
the projects.
MR. RICHARDS assured the members that the development of the
project identifies the need for maintenance and the need for
critical stockpile placement to better operate the road. He
said that the department is relying on the expertise of the
long-term operators on the highway.
2:30:22 PM
SENATOR ELTON referred to the slide titled "Issue of
Financial Responsibility." He asked whether the department
is suggesting that highway improvements needed for the
pipeline project ought to be covered in the tariff.
MR. RICHARDS said that he wanted to identify that there are
funding alternatives, whether or not they are selected is up
to the legislature.
SENATOR ELTON said, "I am right in assuming that you're
suggesting that some of these costs can be recovered through
a pipeline tariff."
MR. RICHARDS clarified that he was not making a suggestion,
but pointing out that in previous pipeline tariff
discussions with FERC, this was an issue.
SENATOR ELTON asked whether he has talked about this with
TransCanada.
MR. RICHARDS said no.
2:33:04 PM
REPRESENTATIVE NEUMAN observed that a lot of money is being
laid on the table. He expressed his preference to have a
long-range plan to address decreasing federal highway funds
and increasing ferry costs. He reviewed other billion
dollar state programs and requested that the administration
provide an accounting of funding requests from all of the
departments for the next few years.
2:35:16 PM
MR. RICHARDS agreed to provide an accounting of long-term
need.
2:35:43 PM
REPRESENTATIVE NEUMAN pointed out that there is a lot of
money going out without a pipeline "locked in."
2:35:59 PM
REPRESENTATIVE WILSON requested that DOT&PF provide a best-
and worst-case scenario in order to obtain a range of costs.
MR. RICHARDS said he would be glad to do so.
2:38:15 PM
CHAIR HUGGINS encouraged members not to underestimate what
additional infrastructure may be needed in Canada.
2:38:36 PM
REPRESENTATIVE COGHILL advised that there is tension between
the lane miles and safety issues of Southcentral Alaska and
the industrial access needed to the North Slope. He noted
that Fairbanks is interested in making sure that the
corridor serves the rest of the state. He referred to Mr.
Richard's earlier statement that DOT&PF is working on to how
to get state regulations to do things concurrently. He
asked if there are only state dollars put into the Dalton
Highway whether the state would still have to deal with the
federal regulatory style or timelines. Also, would that be
true in the lane mile issue for major corridors such as the
Seward Highway or the Parks Highway. Representative Coghill
said, "Is our timeline helpful or [are] our dollars going to
go in with the expectation that we're going to do concurrent
regulations and then fall into the federal's hands for those
timelines for the regulatory framework?"
MR. RICHARDS explained that his reference to the federal
process was of the environmental regulatory process under
[National Environmental Policy Act of 1969 (NEPA)] that is
the guideline that must be followed when using federal
highway, aviation, and railroad funds. The reference to the
Dalton Highway was of the national highway standards for
alignment and grade for safety aspects. He opined that the
benefit of using state funds is that the department would
not have to follow the NEPA process, but rather would use
less onerous state requirements that allow environmental
work to be done concurrently with design and right-of-way
phases.
REPRESENTATIVE COGHILL observed that the pipeline project
will involve moving heavy equipment over bridges that
require upgrades; in fact, river crossings require
regulations from the U.S. Army Corps of Engineers. He asked
whether the state is in charge of the timelines for bridge
changes.
MR. RICHARDS agreed that there are two aspects to bridges;
where there is a passage of flood waters the state looks to
the U.S. Army Corps of Engineers and hydrology studies.
However, regarding the superstructure and substructure of
the bridge and its capability to handle a heavy load, by
using state funds the bridges can be built stronger because
federal funds have a cap in terms of the design loads that
are eligible.
2:43:12 PM
REPRESENTATIVE FAIRCLOUGH expressed her belief that the
discussion of alternative funding for highways is
counterproductive to exploration and the opening up of the
North Slope basin; in fact, driving up the tariff to fund
the Dalton Road and highway projects will limit exploration
and production. She asked whether revocation of the Shakwak
funding will prompt Canada to look to Alaska for funding for
Alaska Highway upgrades, and if Alaska declines, whether the
cost for those improvements would end up in the tariff.
2:44:51 PM
CHAIR HUGGINS agreed that there may be an expectation
incumbent upon Alaska to contribute to the infrastructure.
In addition, "the rate would be counterproductive: no
pipeline."
2:45:08 PM
REPRESENTATIVE GARA observed that the improvement funds for
the Dalton Highway are general fund (GF) funds to be spent
on a road that is primarily used for the oil service and
production industry, and the numbers are staggering. He
asked, "I'm wondering how much of the tax revenue that we're
taking in we're giving back in terms of road construction
projects? ... Is this all normally a GF expense?"
MR. RICHARDS responded that GF expenditures on the Dalton
Highway have to date covered mostly maintenance and
operations of the highway; however, the state has
contributed capital monies of approximately $9 million in
the past three years to cover heavy maintenance. In
addition, there have been federal funds used for
improvements in the past eight to ten years. He pointed out
that using federal highway dollars precludes setting up a
toll on the Dalton.
REPRESENTATIVE GARA further asked whether the significant
road upgrades expected for the construction of the pipeline
and to support oil production on the North Slope are
expected to be at state cost with no reimbursement.
MR. RICHARDS answered that the source of the funds is up to
the will of the legislature. In further response, he said
that the current expenditures on the Dalton Highway are a
combination of federal and state funds, a portion of which
are fuel taxes to the state.
2:48:21 PM
CHAIR HUGGINS said, "Our challenge to you is that we would
prefer not to be surprised by the requirements that go into
infrastructure at a later date, understanding that our
[request] for you is [to] bring us in a timely fashion as
you can, what we are going to do in the respect of on our
side of the border, and on the other side of the border, as
it pertains to infrastructure: rail, air, and surface."
2:48:51 PM
MR. RICHARDS presented slide 29 titled "Next Steps" and
expressed the department's need to prepare for the fiscal
year [FY] 2010 budget. The budget must include
transportation improvements not only associated with the gas
line but in terms of the general fund programs in the Alaska
Transportation Fund and the safety corridors in the Mat-Su
valley. Regarding the gas pipeline, he related the
department's intent to create a state gas line permit office
to receive project information and streamline the permit
process. Further, the office would work concurrently with
the federal permitting process in order to advance the
transportation projects and the pipeline process. He
continued to explain that DOT&PF would also like to
establish an apprenticeship program in order to develop the
needed workforce with the skill sets gained from the
educational system set up by the Department of Labor &
Workforce Development (DLWD). He stressed that the
department will continue its dialog with its Canadian
counterpart to learn what their needs are and how Alaska can
work with them in order to avoid "a major hiccup coming down
the line."
MR. RICHARDS then presented slide 30 titled "Other Issues"
and reviewed DOT&PF's responsibility to streamline
commercial vehicle enforcement to provide for over-size and
over-weight permit issues for existing companies and
contractors on the gas line. In addition, the department
must address maintenance and operations support during the
construction of the pipeline, safety and law enforcement
needs, aviation needs, and right-of-way (ROW) issues for the
TransCanada Alaska line and the potential bullet line that
may pass through Denali National Park and Preserve which
would require a review of the Alaska National Interest Lands
Conservation Act (ANILCA).
2:53:21 PM
MR. RICHARDS concluded that the last issue is to look at the
construction impact on tourism and other industries in the
state. He opined that construction of the gas line is an
uphill battle that will require a concerted effort on many
entities within DOT&PF, the legislature, the administration,
and the pipeline owner to accomplish.
2:54:00 PM
REPRESENTATIVE COGHILL asked whether accommodations for
tourism, such as pullouts and rest stops, have been reviewed
for the Richardson and Parks highways.
MR. RICHARDS acknowledged that additional wayside rest stops
are necessary; in fact, there will be a need for module
wayside pullouts at bridges to allow traffic to go through.
Those features, plus passing lanes, are included in cost
estimates in order to have a better and safer highway
system.
2:55:51 PM
The committee took an at-ease from 2:55 p.m. to 3:22 p.m.
3:22:56 PM.
CHAIR HUGGINS called the meeting back to order.
3:24:51 PM
KEVIN BANKS, Director, Central Office, Division of Oil &
Gas, Department of Natural Resources, presented a PowerPoint
report titled "An Explorer's View of Gas Pipeline Issues."
He informed the members that a decision to explore is based
on the analysis of the same two questions posed during the
AGIA process: What is the [Net Present Value] and what is
the likelihood of success. He explained that given the set
of uncertainties and the risk of failure, or of finding less
gas and oil than expected, must be first considered in a
decision on the possible outcome of a project, including a
"dry hole" or a "very big find." Mr. Banks presented slide
2 titled "Explorer's Decision Tree" that illustrated a
decision tree and a timeline from prospect exploration to
production. He pointed out that a decision tree is not a
timeline, but a tool to provide analysts with the ability to
know whether a project is worthwhile before any work is
committed.
CHAIR HUGGINS asked Mr. Banks to provide clarification of
the qualification "assumes land position already
[established and prospect is identified and ready to drill]"
on the decision tree illustration.
MR. BANKS responded that the illustration of the decision
tree assumes the entity is now in position to make the first
large decision to drill an exploration well after acquiring
the leases, conducting some seismic work, and study by
geologists to portray and characterize the prospect. "Put
yourself in the position of a commercial analyst sitting in
on this team [who] has been asked whether or not to go
ahead, to make that decision to drill the first well," he
said. He added that when a company comes to this point,
timing is a factor in terms of calculating the net present
value; however, this is the point to decide whether to drill
an exploration well that will cost $50 million. He
estimated that the risk of losing that investment is 60
percent. The decision is based on the likelihood of success
and a company may study other "look alike" basins with
similar structure, and may also draw on past experience with
finding gas.
3:27:41 PM
SENATOR WIELECHOWSKI stated his appreciation of the
description of the decision tree, but noted that the
companies are already at the production phase as significant
quantities of gas have already been discovered. He asked
whether this presentation is for general purposes.
MR. BANKS stated that the presentation is about companies
who are in a position to explore for gas and whether the gas
pipeline will be ready for them to put newfound gas into.
He explained that he is discussing the effect on an
explorer's decision to know about the tariffs and the
possibility of expansion on the pipeline. "This is truly
about a new exploration play in the event the pipeline's
there, but we're now looking for some kind of expansion," he
said.
3:29:15 PM
MR. BANKS continued to explain that the second step in
thinking about the probability of success is the delineation
phase. There remains a potential for failure even if there
was success with the first well in the exploration phase.
During the delineation phase other wells are drilled to
prove up the size of the prospect and to determine the
upside potential. The additional wells may involve more
testing to further assess the formation. Referring back to
the decision tree, he said that the intent is to incorporate
into the thinking what all of the outcomes will be in a
potential development strategy. To begin, he reviewed the 5
percent chance of finding a $3 billion revenue stream;
alternatively, there may be an uneconomic outcome when the
revenues are less than the cost of development. A Monte
Carlo kind of analysis would reveal a set of outcomes that
are illustrated as a distribution where thousands of
outcomes may be included in the evaluation. The notion is
that all of the potential outcomes are accounted for and
equal 100 percent. For example, if it is known that there
are 10:1 odds, then to bet $10, one would ensure that the
winnings will be at least $100, which is the expected
monetary value. In this kind of analysis, for each outcome
it is determined what the net present value would be and the
associated probability of outcome; the resulting value is
the expected monetary value. Mr. Banks continued to explain
that the expected monetary value of this project is
$800,000, even though one of the outcomes predicts revenues
of $3 million. He stressed that at the time a company is
making the decision to drill it is only looking at the
$800,000 net present value. He concluded that exploration
decisions are pretty fragile because the gains and the
potential losses are amplified by these probabilities.
3:34:55 PM
REPRESENTATIVE NEUMAN opined that as far as the gas pipeline
the project is still in the exploration and development
phase because the wells that have been drilled are oil
wells. He remarked:
TransCanada's expectations that we're going to be
up to 40, 48 t in 10 years [and] after the gas is
flowing, upwards of 90 in 25 years; in fact, we'd
still be at the very left hand side of exploration
and development as far as gas, and AGIA, the
pipeline is concerned, so all this is all brand
new.
MR. BANKS agreed with that perspective because the state
knows that there are existing reserves and has gone far in
establishing what those reserves should look like to support
a pipeline for a certain amount of time; however, expansion
of a pipeline, and keeping gas in a pipeline beyond some
period of time, will rely and depend upon successful
exploration. The following discussion will reveal how
expansion is governed and its effect on exploration.
3:37:29 PM
SENATOR ELTON asked whether the projections account for any
of the credits that the state extends for activity on the
North Slope.
MR. BANKS said that the modeling does account for the
credits. He observed that tax credits are important because
the state is participating in the decision tree at
exploration, where the outcome could very well be a dry
hole. He said, "So when the state puts its money there, it
is, really has a great deal more horsepower than it does
when we've already found gas and we're now stepping into
development."
3:38:32 PM
SENATOR THOMAS pointed out that wells have been drilled and
there are known reserves of 35 trillion feet; he questioned
why, when wells have discovered gas, Mr. Banks would
consider the project to be at the beginning phase.
MR. BANKS acknowledged perhaps speaking too loosely; in
fact, a probability of 60:40 dry hole to success is pretty
good. Through the 80s and to the mid-90s in Alaska a "rank"
exploration prospect probably was successful 5 percent of
the time. The ability to find gas and oil is improving
because recent exploration activities are in areas that have
already been drilled and there is knowledge of the geology
as well as better seismic surveys. He added that the model
takes the evolution of exploration into account; however,
this discussion is about new gas that would be brought into
a pipeline and that rolled-in rates, expansion terms, and
tariff structures are important features to explorers
because the benefits to explorers are amplified through the
kind of risk profile with which they have to deal when
exploring for gas.
3:41:37 PM
REPRESENTATIVE WILSON expressed her understanding that this
discussion pertains to the explorer's decision to take part
in the second open season after the pipeline is built and
the tariffs are known.
MR. BANKS indicated yes.
3:42:57 PM
MR. BANKS presented slide 4 and turned to the subject of
AGIA. He explained that AGIA lays out a capital structure -
TransCanada has offered a 75:25 debt to equity structure -
and possible lower tariffs in expansion through rolled-in
rates. He pointed out that the Federal Energy Regulatory
Commission (FERC) will allow rolled-in rates if the rate is
lower; if the subsequent expansion yields a rate that goes
up, an incremental rate is charged. He acknowledged that
a rebuttable presumption governs the Alaska pipeline and
calls for rolled-in rates. Mr. Banks then stressed the
importance of the requirement of expeditious and predictable
expansion, and noted that TransCanada's application under
AGIA is an agreement ahead of time that expansions will be
offered every two years.
3:44:24 PM
REPRESENTATIVE SAMUELS pointed out that TransCanada also
offers 60:40 for expansions "which explorers would also
factor into their economics as a bad thing." Furthermore,
TransCanada's rate of return would fluctuate between 14 and
22 [percent] which, again, explorers would factor into their
economics. He opined that FERC will not allow TransCanada
to have a 14 percent rate of return; in fact, FERC will
choose the rate of return, the debt equity split, and "all
of these things."
MR. BANKS agreed that FERC will determine whether or not the
tariff will be the recourse rate on the pipeline. He opined
that regarding the debt equity ratio, there is evidence that
FERC has a broad view of what an appropriate ratio should
be. He remarked:
We feel that this is, in a way, setting up the ...
what at least remains the high side of a
negotiated rate and one that does have some
impact, we believe, a significant impact as I will
demonstrate here, on what explorers will be
looking at in their own economics.
REPRESENTATIVE SAMUELS emphasized that the only relevant
point is the FERC ruling on the requests from TransCanada
and others. He said, "You're not going to have a 'rest
assured' exploration. ... Congress has laid out some rules
and the FERC has laid out some rules, on what they will
follow."
3:48:22 PM
MR. BANKS presented slide 5 titled "Tariff Provisions." He
acknowledged Representative Samuels' comments and continued
to explain that the expansions that have been modeled
illustrate the benefits that rolled-in rates and 75:25
treatment of the tariff yield for the expansion shipper.
The slide illustrated the benefit at the time of each
expansion, assuming that the rolled-in rate treatment that
would apply is not the rebuttable presumption, but rather
the fact that rolled-in rates go down as a consequence of
each expansion. On the other hand, if rates go up, only
expansion shippers pay for the increase. The numbers take
into account the expected monetary value which is the risk
facing the explorers factored into the project. Similarly,
a change to the debt equity structure from a 50:50 split to
a 75:25 split has a fairly significant and much higher
contribution to the explorer.
3:50:27 PM
CHAIR HUGGINS said, "As Representative Samuels mentioned
60:40 comes to play in later scenarios. Could you explain
to us the rationale that the state had in accepting that in
later dates?"
MR. BANKS responded that he would rather not speculate.
3:51:04 PM
MR. BANKS presented slide 7 and addressed the question of
delay. There is a difference between whether explorers can
anticipate that the pipeline sponsor will offer the
opportunity to expand every two years versus explorers
having to request an expansion. He opined that this
difference affects the timing and the impact of discounting
as illustrated by the graph on slide 8. Mr. Banks presented
slide 9 titled "Prospect Economics" that further illustrated
the impact of delay on a prospect over a period of eight
years at a 15 percent rate of return. He concluded that
much of the economic benefit of the project will occur
because the state anticipates a more robust, vigorous, and
diverse exploration and production industry on the North
Slope as a consequence of an AGIA gas pipeline.
3:53:19 PM
REPRESENTATIVE COGHILL voiced his expectation that the
exploration with the project under the AGIA license would be
robust; however, under the Denali project, regarding the
exploration model, it seems that prior to open season there
would be interest into leasing and other acquisition issues.
He asked how the state would deal with that part of the work
load and specifically, whether the proposed license holder
would get preferential treatment from the department or
would others searching for leases and land improvements
outside of AGIA [be served]. He opined that if the license
and the Denali project go forward, "a lot of things are
going to get ratcheted up." Representative Coghill asked,
"How do you see that working in your department?"
MR. BANKS reminded members that the inducements would only
apply to those producers making commitments in the initial
open season. The Division of Oil and Gas will be developing
a refinement to the way value for royalties are paid that is
more predictable and does not involve constant readjustment.
The present terms in the leases have always been a bone of
contention between the state and the industry. In addition,
the inducement can be offered to change how the state takes
royalty-in-kind. Further, if there is more interest in
leasing and from lessees that want to combine their land
positions into units, create units, and expand existing
units, that will become a major effort. However, he assured
the members that the treatment of any lessee, in those
instances, will be the same whether it is the Denali project
or the AGIA project.
REPRESENTATIVE COGHILL observed that granting of the license
is a commitment, but he said that he does not want all of
the resources of the DNR to be sequestered by one particular
project.
3:57:09 PM
REPRESENTATIVE KERTTULA asked whether there was discussion
about creating an entity like the [Joint Pipeline Office
(JPO)] to facilitate "one stop shopping" for interaction
between the agencies.
MR. BANKS related that AGIA calls for a coordinator who
would presumably work under the governor's office. He
confirmed that his staff has discussed not just coordinating
permitting, but managing the commercial relationship between
TransCanada and the state without affecting the other
responsibilities of the Division of Oil and Gas. He stated
that "AGIA has demonstrated that we can suck the life out of
my division, to the detriment to a lot of other things that
really need to be done." Mr. Banks indicated that the DNR
has begun to address that situation.
3:58:56 PM
CHAIR HUGGINS announced the schedule for public testimony on
June 14, 2008.
[HB 3001 and SB 3001 were heard and held.]
ADJOURNMENT
There being no further business before the committees, the
House Rules Standing Committee Subcommittee on AGIA and the
Senate Special Committee on Energy meeting was adjourned at
3:59:54 PM.
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