Legislature(2007 - 2008)KENAI
06/26/2008 01:00 PM House RULES
| Audio | Topic |
|---|---|
| Start | |
| HB3001|| SB3001 | |
| 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 COMMITTEE
SENATE SPECIAL COMMITTEE ON ENERGY
Kenai, Alaska
June 26, 2008
1:01 p.m.
MEMBERS PRESENT
HOUSE RULES
Representative John Coghill, Chair
Representative Anna Fairclough
Representative Craig Johnson
Representative Ralph Samuels (AGIA Subcommittee)
SENATE SPECIAL COMMITTEE ON ENERGY
Senator Bert Stedman, Vice Chair
Senator Lesil McGuire
Senator Gary Stevens
Senator Bill Wielechowski
Senator Fred Dyson
Senator Thomas Wagoner
MEMBERS ABSENT
HOUSE RULES
Representative John Harris (AGIA Subcommittee, Chair)
Representative Beth Kerttula (AGIA Subcommittee)
Representative David Guttenberg
SENATE SPECIAL COMMITTEE ON ENERGY
Senator Charlie Huggins, Chair
Senator Kim Elton
Senator Lyda Green
Senator Lyman Hoffman
Senator Donald Olson
Senator Joe Thomas
OTHER LEGISLATORS PRESENT
Representative Mike Chenault
Representative Sharon Cissna
Representative Harry Crawford
Representative Nancy Dahlstrom
Representative Andrea Doll
Representative Mike Doogan
Representative Mike Hawker
Representative Lindsey Holmes
Representative Reggie Joule
Representative Wes Keller
Representative Mike Kelly (via teleconference)
Representative Gabrielle LeDoux
Representative Kurt Olson
Representative Ralph Samuels
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
PREVIOUS COMMITTEE ACTION
BILL: HB3001
SHORT TITLE: APPROVING AGIA LICENSE
SPONSOR(s): RULES BY REQUEST OF THE GOVERNOR
06/03/08 (H) READ THE FIRST TIME - REFERRALS
06/03/08 (H) RLS
06/03/08 (H) WRITTEN FINDINGS & DETERMINATION
06/04/08 (H) RLS AT 9:00 AM CAPITOL 120
06/04/08 (H) Heard & Held; Assigned to Subcommittee
06/04/08 (H) MINUTE(RLS)
06/04/08 (H) RLS AT 10:00 AM TERRY MILLER GYM
06/04/08 (H) Heard & Held
06/04/08 (H) MINUTE(RLS)
06/05/08 (H) RLS AT 9:00 AM TERRY MILLER GYM
06/05/08 (H) Heard & Held
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06/06/08 (H) RLS AT 10:00 AM TERRY MILLER GYM
06/06/08 (H) Heard & Held
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06/07/08 (H) RLS AT 10:00 AM TERRY MILLER GYM
06/07/08 (H) Heard & Held
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06/08/08 (H) RLS AT 1:00 PM TERRY MILLER GYM
06/08/08 (H) Heard & Held
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06/09/08 (H) RLS AT 10:00 AM TERRY MILLER GYM
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06/12/08 (H) RLS AT 10:00 AM FBX CARLSON CENTER
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06/13/08 (H) RLS AT 10:00 AM FBX CARLSON CENTER
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06/14/08 (H) RLS AT 10:00 AM FBX CARLSON CENTER
06/14/08 (H) Heard & Held
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06/16/08 (H) RLS AT 9:00 AM ANCHORAGE
06/16/08 (H) Heard & Held
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06/17/08 (H) RLS AT 9:00 AM ANCHORAGE
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06/24/08 (H) RLS AT 1:00 PM MAT-SU
06/24/08 (H) Heard & Held
06/24/08 (H) MINUTE(RLS)
06/26/08 (H) RLS AT 1:00 PM KENAI
BILL: SB3001
SHORT TITLE: APPROVING AGIA LICENSE
SPONSOR(s): RULES BY REQUEST OF THE GOVERNOR
06/03/08 (S) READ THE FIRST TIME - REFERRALS
06/03/08 (S) ENR
06/03/08 (S) REPORT ON FINDINGS AND DETERMINATION
06/04/08 (S) ENR AT 10:00 AM TERRY MILLER GYM
06/04/08 (S) Heard & Held
06/04/08 (S) MINUTE(ENR)
06/05/08 (S) ENR AT 9:00 AM TERRY MILLER GYM
06/05/08 (S) Heard & Held
06/05/08 (S) MINUTE(ENR)
06/06/08 (S) ENR AT 10:00 AM TERRY MILLER GYM
06/06/08 (S) Heard & Held
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06/07/08 (S) ENR AT 10:00 AM TERRY MILLER GYM
06/07/08 (S) Heard & Held
06/07/08 (S) MINUTE(ENR)
06/08/08 (S) ENR AT 1:00 PM TERRY MILLER GYM
06/08/08 (S) Heard & Held
06/08/08 (S) MINUTE(ENR)
06/09/08 (S) ENR AT 10:00 AM TERRY MILLER GYM
06/09/08 (S) Heard & Held
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06/10/08 (S) ENR AT 10:00 AM TERRY MILLER GYM
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06/12/08 (S) ENR AT 10:00 AM FBX Carlson Center
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06/13/08 (S) ENR AT 10:00 AM FBX Carlson Center
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06/14/08 (S) ENR AT 10:00 AM FBX Carlson Center
06/14/08 (S) Heard & Held
06/14/08 (S) MINUTE(ENR)
06/16/08 (S) ENR AT 9:00 AM ANCHORAGE
06/16/08 (S) Heard & Held
06/16/08 (S) MINUTE(ENR)
06/17/08 (S) ENR AT 9:00 AM ANCHORAGE
06/17/08 (S) Heard & Held
06/17/08 (S) MINUTE(ENR)
06/18/08 (S) ENR AT 9:00 AM ANCHORAGE
06/18/08 (S) Heard & Held
06/18/08 (S) MINUTE(ENR)
06/19/08 (S) ENR AT 9:00 AM ANCHORAGE
06/19/08 (S) Heard & Held
06/19/08 (S) MINUTE(ENR)
06/20/08 (S) ENR AT 9:00 AM ANCHORAGE
06/20/08 (S) 9am - 5pm - Testimony <Invitation Only>
06/24/08 (S) ENR AT 1:00 PM MAT-SU
06/24/08 (S) 1pm - 5pm - Testimony <Invitation Only>
06/26/08 (S) ENR AT 1:00 PM KENAI
WITNESS REGISTER
TONY PALMER, Vice President
Alaska Business Development
TransCanada Alaska Company, LLC
Calgary, Alberta
POSITION STATEMENT: Presented a PowerPoint report on
TransCanada's proposed pipeline project and answered questions.
PATRICK GALVIN, Commissioner
Department of Revenue
Juneau, Alaska
POSITION STATEMENT: Answered questions during the hearing on HB
3001 and SB 3001.
ALLAN ULEN
Soldotna, Alaska
POSITION STATEMENT: Representing himself, testified during the
hearing on HB 3001 and SB 3001.
JOHN WILLIAMS, Mayor
Kenai Peninsula Borough
Soldotna, Alaska
POSITION STATEMENT: Testified during the hearing on HB 3001 and
SB 3001.
DEBBIE BROWN
Kasilof, Alaska
POSITION STATEMENT: Representing herself, testified during the
hearing on HB 3001 and SB 3001.
PAT HAWKINS
Soldotna, Alaska
POSITION STATEMENT: Representing himself, testified during the
hearing on HB 3001 and SB 3001.
TOM PATMOR
Clam Gulch, Alaska
POSITION STATEMENT: Representing himself, testified during the
hearing on HB 3001 and SB 3001.
BILL WARREN
Nikiski, Alaska
POSITION STATEMENT: Representing himself and his granddaughter,
testified during the hearing on HB 3001 and SB 3002.
STEVE MAPES
Nikiski, Alaska
POSITION STATEMENT: Representing himself and his sons,
testified during the hearing on HB 3001 and SB 3001.
JIM KAUFFMAN
Kenai, Alaska
POSITION STATEMENT: Representing himself, testified during the
hearing on HB 3001 and SB 3001.
JIM COOPER
Soldotna, Alaska
POSITION STATEMENT: Representing himself, testified during the
hearing on HB 3001 and SB 3001.
BOB PENNEY
Soldotna, Alaska
POSITION STATEMENT: Representing himself, testified during the
hearing on HB 3001 and SB 3001.
JIM GILBERT, President
Udelhoven Oilfield System Services, Incorporated
Anchorage, Alaska
POSITION STATEMENT: Testified during the hearing on HB 3001 and
SB 3001.
JAMES E. FISHER
Soldotna, Alaska
POSITION STATEMENT: Representing himself, testified during the
hearing on HB 3001 and SB 3001.
JACK BOWEN
Kenai, Alaska
POSITION STATEMENT: Representing himself, testified during the
hearing on HB 3001 and SB 3001.
JOHN BOWEN
Kenai, Alaska
POSITION STATEMENT: Representing himself, testified during the
hearing on HB 3001 and SB 3001.
GORDON SPAULDING
Kenai, Alaska
POSITION STATEMENT: Representing himself, testified during the
hearing on HB 3001 and SB 3001.
LEN MALMQUIST
Soldotna, Alaska
POSITION STATEMENT: Representing himself, testified during the
hearing on HB 3001 and SB 3001.
MARK HALL
Kenai, Alaska
POSITION STATEMENT: Representing himself, testified during the
hearing on HB 3001 and SB 3001.
FRANCES DANIEL PRIOR
Kenai, Alaska
POSITION STATEMENT: Representing himself, testified during the
hearing on HB 3001 and SB 3001.
GREG DYER
Soldotna, Alaska
POSITION STATEMENT: Representing himself, testified during the
hearing on HB 3001 and SB 3001.
ACTION NARRATIVE
VICE CHAIR BERT STEDMAN called the joint meeting of the House
Rules Standing Committee and the Senate Special Committee on
Energy to order at 1:01:10 PM.
HB3001-APPROVING AGIA LICENSE
SB3001-APPROVING AGIA LICENSE
1:03:41 PM
VICE CHAIR STEDMAN reviewed the agenda for the day. Members and
presenters present introduced themselves.
1:09:36 PM
TONY PALMER, Vice President, Alaska Development, TransCanada
Alaska Company, LLC, related his background, including that this
is his 30th year in infrastructure development around the world.
He noted that most of his infrastructure development has
occurred in North America, although he performed a great deal of
work in Asia and South America in the 1990s. In fact
TransCanada Alaska Company, LLC, (TransCanada) constructed the
first three natural gas pipes across the Andes in South America
and at the same time had a large construction project occurring
in North America. Mr. Palmer explained that TransCanada has
pursued and held the rights for the Canadian side of this
project since its inception 30 years ago. When AGIA passed,
TransCanada decided to pursue the entire project, not just the
Canadian portion, as TransCanada believes the Alaska gas line
has strong economics. If gas prices were to stay at the $10 to
$11 range in Canada and the $12 to $13 range in the Lower 48 for
the next 30 years, the project would remain viable. He noted
that most believe that although gas prices may be volatile, over
time they increase. Pipeline projects involve state, federal,
and international governments, as well as commercial parties.
He highlighted that no commercial party could construct the
pipeline alone. In fact, no commercial party owns the land
between Prudhoe Bay and the Lower 48. Therefore, any interested
commercial party would have to cooperate with government. Mr.
Palmer then noted that TransCanada, upon reviewing the matter,
believes the state and its people want and support this project.
He then reviewed the process that led to the Alaska Gasline
Inducement Act (AGIA) under the Palin Administration. The AGIA
statute identifies the rights and responsibilities of both
parties, which led to TransCanada's bid.
1:16:47 PM
MR. PALMER then informed the members that the Alaska gas line is
a strategic fit in that TransCanada has been in the gas pipeline
business for 50 years and is primarily based in North America.
Furthermore, the proposal is for a gas pipeline, which is
TransCanada's core business, and the project is located within
TransCanada's geographic footprint. The project also has
synergies with TransCanada's existing business. In fact,
TransCanada has a large infrastructure which has spare capacity.
Filling that spare capacity is valuable to TransCanada's
customers because although it won't earn extra revenue, it would
lower costs to its customers. The aforementioned is very
attractive to TransCanada. At the inception of the Alaska
project, TransCanada and its antecedents were going to construct
the Canadian portion of this project. In fact, there's specific
Canadian legislation to expedite this project. Mr. Palmer
related that TransCanada believes it's aligned with the state's
objectives as TransCanada is in favor of short term basin
development that results in a pipeline early, while also having
long term basin development. He related his understanding that
one of the goals of AGIA and Alaskans is to foster competition
for this pipeline. There is a second component, which is
competition upstream at the wellhead. In fact, to the
sovereign, the state and its citizens, the second component can
be more important in the long term than who constructs the
pipeline and how it's constructed. Upstream competition is
important so that in 30 or 50 years, the state has many
producing companies that are active in the state and promoting
development. The more competition, the more likely that there
would be more employment, in-state gas use, and more revenue for
the sovereign. Mr. Palmer, turning to TransCanada's
application, characterized the AGIA process as unusual. Under
AGIA, applicants were required to reveal commercial secrets in
advance of selection, which is highly unusual and TransCanada
has never done so before.
1:22:04 PM
MR. PALMER then highlighted TransCanada's U.S. presence. He
emphasized that TransCanada is a North American corporation with
12,000 miles of natural gas interstate pipeline in the U.S.
Furthermore, TransCanada is one of the largest U.S. natural gas
pipeline companies with offices through the nation. He said
that TransCanada runs an integrated business similar to that of
the highly integrated oil and gas business across North America.
He informed the members that Canada has been exporting its
surplus natural gas for some 40 years. In fact, Canada exports
9 billion cubic feet a day (Bcf/d), which is double what this
project would initially run, across the border every day.
TransCanada moves 20 percent of North American gas, although it
doesn't own any of that gas. The aforementioned is normal, he
said.
1:24:00 PM
MR. PALMER related that he is present because he believes the
Western Canadian model is very similar to Alaska. He informed
the members that the Canadian gas business started 50 years ago
with a small local market. Canada, like Alaska, was the
furthest from major markets. Canada started with a small number
of initial customers, but a very prolific basin. Alaska has
significant parallels to that, he opined. With regard to
whether TransCanada can do a project of this size, and the
notion that TransCanada isn't motivated to control its costs,
TransCanada's operating costs have been benchmarked against
Canadian and U.S. pipeline companies for the last several years.
TransCanada's operating costs are 25-35 percent lower than its
competitors. Although there has been no independent
benchmarking study on capital costs, TransCanada performed its
own analysis based on 1990-2003 projects. The aforementioned
comparisons illustrate that TransCanada's costs are 19 percent
lower than its competitors and 38 percent lower than its U.S.
competitors for large-diameter pipeline construction. He noted
that the large-diameter pipe is similar in size to what would be
necessary for this project. "I would tell you that I have seen
no facts and figures from any of our competitors that have made
those statements," he said.
1:26:28 PM
MR. PALMER then related TransCanada's experience in constructing
major projects. Since TransCanada's corporation started 50
years ago, it built a pipeline from Alberta to Eastern Canada,
which is a longer distance than from Prudhoe Bay to Alberta.
The aforementioned was done at the inception of the corporation,
when market capitalization was practically zero. Also, in the
1990s, TransCanada built four times the distance of this
proposed project on schedule and within 0.6 percent of budget.
No other corporation has that record in the natural gas pipeline
business, he assured the members. He reminded the members that
other components, such as regulatory, community, First Nations,
Native corporations, environmental requirements, commercial
requirements, and financial requirements are important. He then
highlighted that TransCanada's proposal is to construct a
pipeline from Prudhoe Bay to Alberta. In the event that
customers wish to nominate liquefied natural gas (LNG) at Valdez
during the initial open season, they would have the opportunity
to do so. He clarified:
At the same time as we hold an open season, parties
will be able to nominate locations for delivery along
the route of the pipeline in Alaska, in the Yukon, in
British Columbia, in Alberta, or at Valdez. And in
the event that sufficient volumes are nominated at
Valdez and those customers meet the same conditions as
customers in Alberta, or at Tok, or in Whitehorse, or
at Fairbanks, we will build a pipeline to Valdez.
1:29:10 PM
MR. PALMER, in response to Vice Chair Stedman, explained that an
open season is when a pipeline company approaches potential
customers and solicits business. The process is public and puts
forth the terms, conditions, and costs for potential customers
who then have an opportunity to request service. The
aforementioned is usually overseen by a regulator such as the
Federal Energy Regulatory Commission (FERC), and in Canada, the
National Energy Board (NEB). [An open season usually results]
in binding long term contracts for 25 years or more.
1:30:03 PM
MR. PALMER moved on to TransCanada's experience in long term
basin development. TransCanada, he opined, believes it's
important for Alaskans to move the 35 [trillion cubic feet] Tcf
of proven gas at Prudhoe Bay and Point Thomson and the other
proven fields, as well as the potential 235 Tcf. The latter, he
opined, is where the growth opportunity lies as well as the
opportunities for long term employment and revenue for the
state. Mr. Palmer pointed out that Alaska's proven reserves at
Prudhoe Bay and Point Thomson, and a few other proven fields,
would supply about 1.5 years of U.S. consumption if it could all
be produced in one year. However, it can't all be produced in
one year. He echoed his earlier comments that there is a huge
sum of gas in the North Slope reservoirs. Furthermore, the
potential is huge relative to the U.S. available proven reserves
and Canadian proven reserves. Mr. Palmer said, "So, you have a
prolific basin with a high potential of usage."
1:31:58 PM
REPRESENTATIVE LEDOUX asked if the term "customer" refers to the
entity producing the gas or the entity purchasing the gas.
MR. PALMER answered that TransCanada wouldn't know who the
customer is prior to the open season. However, he noted that
it's often the producers and occasionally the downstream buyer.
In fact, historically it was the downstream purchaser; the local
distribution companies (LDCs) such as ENSTAR Natural Gas Company
(ENSTAR). As the market has shifted and been deregulated since
1985, the majority of pipeline customers on long-distance
pipelines in North America have become the producers. However,
that's not the norm in other parts of the world. For instance,
in Asia the customers are primarily the LDCs or an industrial
customer or marketing company. No matter [who the customer is],
they all have to meet the same requirements for the pipeline as
would a producer.
1:33:45 PM
SENATOR STEVENS inquired as to the rights that TransCanada holds
in the Canadian portion of the pipeline. He further inquired as
to the advantages those rights would afford TransCanada and the
disadvantages to others such as Denali - The Alaska Gas Pipeline
("Denali project").
MR. PALMER, recalling 30 years ago when the Alaska project was
first conceived, reminded the members that there were three
potential projects within Alaska and two in Canada. There were
the following three proposals in Alaska: to go down the
highway, the over-the-top, and an LNG project at Valdez. There
were hearings in the U.S., and in Canada, there were 214 days of
hearings before the National Energy Board (NEB). TransCanada
and its antecedents participated in those hearings. The NEB
chose the highway route and a subsidiary of TransCanada,
Foothills Pipe Lines Ltd. ("Foothills"), holds the Canadian
rights. Subsequent to the NEB hearings, the Canadian government
decided to sign a treaty between Canada and the U.S. for this
project. A specific piece of legislation, the Northern Pipeline
Act (NPA), was passed for this project. The NPA specifies the
rights and responsibilities of Foothills for this project; in
fact, Foothills is the main pipeline sponsor for that project in
Canada under the NPA. A single window regulator was established
to bring together the entire power of the Canadian government to
expedite this project. The NPA remains valid and has no sunset
date, which is highly unusual in Canada. In addition to the
aforementioned, in 1983 TransCanada obtained a right-of-way
through the entire Yukon Territory from the Canadian government.
In 1993 the Canadian government, the Yukon government, and the
Council of Yukon Indians, on behalf of the entire First Nations,
signed the umbrella final agreement. The aforementioned
agreement recognizes the Foothills right-of-way through Yukon as
a carve-out from any potential land claim. Since 1993 six of
the eight First Nations along the right-of-way have resolved
their final land claim. In each case, the Foothills right-of-
way was carved out and recognized in the final land claim and
that would also be the case for the final two when they settle
their final land claims. The aforementioned advantages are in
addition to the 30 years of work and geotechnical, engineering,
and environmental data that no other corporation has, he noted.
1:39:00 PM
REPRESENTATIVE FAIRCLOUGH recalled testimony in previous
hearings that TransCanada pays $200,000 per year to maintain the
right-of-way.
MR. PALMER replied yes. In further response, Mr. Palmer
specified that the right-of-way payments commenced in 1983 when
TransCanada received the right-of-way.
1:40:02 PM
REPRESENTATIVE FAIRCLOUGH inquired as to the current financial
assets in Foothills to help make this project move forward under
the newly organized company.
MR. PALMER clarified that the Canadian entities aren't newly
organized, but rather are 30 year old entities. He further
clarified that there is a newly organized entity for the Alaskan
component of the project. The Foothills entities are the same
entities that have been present since 1978.
REPRESENTATIVE FAIRCLOUGH asked if the liabilities, in terms of
the costs for the right-of-way payments, would be transferred to
the newly formed subsidiary.
MR. PALMER reiterated that there isn't a newly formed subsidiary
for the Canadian portion of the project.
1:41:10 PM
REPRESENTATIVE FAIRCLOUGH inquired as to the costs of the right-
of-way acquisition, which she opined are allowable costs that
could be brought forward. Representative Fairclough asked:
Alaska is bringing the full faith and credit of the
State of Alaska into play in being a partner with you
to make a natural gas pipeline work for Alaskans. I
want to know what TransCanada, inside of the newly
formed TC Alaska Corporation, has at risk. ... And
two, what is the actual price tag of your geotechnical
and other information and work product and the
$200,000 multiplied by 25 years, I'm assuming with
interest, ... and your return is somewhere between
eight and twelve percent, that would be brought into
all those years. I'd like to know what that liability
is as it's going to be applied to the tariff.
1:42:34 PM
MR. PALMER confirmed that TC Alaska is a newly formed
corporation with no assets or liabilities at this point. In the
event it is granted the AGIA license, it would proceed and
create assets. On the Canadian side, there are a number of
Foothills subsidiaries, including locations with physical
assets. He informed the members that the pre-build section of
this project was constructed 25 years ago. In event this gas
goes to the Alberta Hub and then to market in the Lower 48,
Foothills Yukon, and Foothills North BC would be dealt with and
the assets they hold are the geotechnical work, the right-of-way
payments, and other environmental assets. He assured the
members that if TransCanada includes them in any tariff for this
project, it would be a huge bargain relative to what any other
party would spend to duplicate that, if they could do so.
TransCanada, he related, believes that information can't be
duplicated.
1:44:26 PM
REPRESENTATIVE FAIRCLOUGH acknowledged that there's value in
holding the right-of-way for over 30 years. However, the
payments alone, $200,000 a year for 25 years, amount to over $5
million. Therefore, she inquired as to the interest and the
contingent liability.
1:45:08 PM
MR. PALMER, in response to Representative Fairclough and Vice
Chair Stedman, addressed the concerns that TransCanada, or any
of its entities, would have a liability of $8 or $10 billion if
it constructs the Alaska component of the project. He recalled
that 30 years ago there were a group of mostly U. S. companies
and TransCanada subsidiaries that were pursuing the ownership of
the Alaska section only. Normally, with the pipelines existing
today, the U.S. portion is owned by U. S. companies, and the
Canadian sections are owned by Canadian companies. Thus 30
years ago, there was a consortium of 11 corporations and
subsidiaries that was led by Northwest Pipeline. In the 1980s
and 1990s, two TransCanada subsidiaries joined the partnership.
Also during that time, from 1984 through 1994, all of the other
partners withdrew from the partnership. As a result of their
withdrawal, the former partners lost all rights as a partner;
however, the original partnership agreement, for the Alaska
section, granted a specific contractual right to the withdrawn
partners. Mr. Palmer explained, "Let me stipulate that for you.
In the event that that partnership, and that partnership was
called, its acronym is ANNGTC, in the event that that
partnership, constructed the project, put it into service, and
the payments could be made to those partners for their original
contributions, plus interest, that those payments could be made
without undue hardship on the partnership, that, those are the
three triggers that would allow those parties to recover their
funds, with interest." He continued to explain that those
partners and TransCanada contributed $230 million to $275
million to advance the Alaskan portion of the project 30 years
ago. Applying 14 percent interest, compounded for 30 years,
totals about $8 billion. He remarked:
That number today, last fall, when it came forward as
a contingent liability; by the way it's a contingent
liability and I gave you the three triggers. There is
no liability today, but that liability clearly
outweighs the value of the Alaskan assets that this
entity created. This entity created, once again, some
geotechnical work, a federal right-of-way through the
State of Alaska, and some engineering work. Clearly,
those assets in no way are equivalent to this
contingent liability if you ever had to pay it.
There's no possible way that this entity could compete
with a new party that would build a project in Alaska
for approximately 10 billion dollars, and then have to
pay former partners an additional 10. So that
partnership made a decision last fall, and that
decision was, it was not viable. ... And that
partnership has not pursued the project, TransCanada
has not used that entity in any way, nor any of the
assets, for its application under AGIA. Nor will we
use any of those assets going forward for this project
if we're selected under the AGIA process. And in
fact, we've initiated action to dissolve that
partnership.
MR. PALMER assured the members that conditions to meet the
contingent liability would never be met.
1:51:24 PM
REPRESENTATIVE LEDOUX asked whether there has been a legal
opinion written regarding the contingent liability.
MR. PALMER responded that there has been no legal opinion filed
by TransCanada, but expressed his understanding that the
administration has reviewed the issue. In fact, the Legislative
Budget and Audit Committee wrote letters to each of the
withdrawn partners regarding their rights and the responses are
available on the state's website.
1:52:59 PM
REPRESENTATIVE SAMUELS related that the Legislative Budget and
Audit Committee attorneys and attorneys for the administration
have said liability can not be rolled into the tariff. However,
there is no definitive answer on whether the state, by becoming
a partner with TransCanada with royalty gas, or by buying
[Foothills], would then be subject to the liability.
1:54:28 PM
MR. PALMER reiterated that Legislative Budget and Audit has
indicated that the liability can not be included in the rates,
and that TransCanada specifically indicated that it would not
seek to include any liability from those partners. He said, "If
any liability from this project ever comes home to TransCanada,
we would not seek to include it in the toll for the customers.
That also gives you some view as to our confidence that this is
not a major issue."
1:55:05 PM
REPRESENTATIVE LEDOUX asked whether TransCanada could bear an $8
billion judgment and still build a pipeline.
MR. PALMER replied yes, and added that TransCanada would not
undertake this project if that were a "significant risk."
1:56:07 PM
REPRESENTATIVE LEDOUX noted Mr. Palmer's reference to legal
opinions that are not made public. She asked whether
TransCanada has "in the due diligence work, an opinion of
council as to liability."
MR. PALMER agreed that during the purchase of one corporation by
another there would be significant due diligence; however, this
entity is not pursuing the project, has nothing to do with the
AGIA application, and is not building the project.
1:57:27 PM
REPRESENTATIVE JOHNSON asked for clarification on the group that
decided not to participate.
MR. PALMER clarified that the TransCanada subsidiaries that are
the remaining partners decided that the obligation of the
contingent liability outweighed the assets of the partnership.
Therefore, the partnership decided it could not pursue the AGIA
application. In further response, he explained that the
TransCanada subsidiaries made the decision independently of
TransCanada Corporation; in fact, the withdrawn partners have no
right to vote. He concluded that TransCanada's subsidiaries,
that are the only remaining partners, made the decision based on
the partnership's assets and potential liabilities.
1:59:40 PM
MR. PALMER pointed out TransCanada's objectives as illustrated
on slide two of the presentation. The project is TransCanada's
largest investment opportunity in its core business line and
geographic footprint; it utilizes spare capacity on the existing
North American pipelines; and it provides the LNG market as an
alternative investment opportunity. In addition, TransCanada is
in favor of encouraging long-run basin development; of serving
in-state and other markets; of increasing the market and supply
diversity; of expansion and the creation of a "virtuous circle"
of more exploration, drilling, and expansion. Furthermore,
TransCanada supports equitable treatment for all customers:
initial, future, big, and small. Mr. Palmer provided slide
three that illustrated TransCanada's pipeline system throughout
Canada and the Lower 48 that connects to markets from California
to Boston and New York. He explained that utilizing the
existing system through the Alberta Hub, as opposed to building
a new pipeline to Chicago, would result in the benefit of higher
netback to Alaskans. Secondly, there would be more market
diversity available through the Alberta Hub rather than "locked
in" to the Chicago market by a pipeline to Chicago. Mr. Palmer
stressed that the price of gas changes and access to markets
from the West Coast to the East Coast would allow Alaskan gas to
seek the highest market. Thirdly, the pipeline system in the
Alberta Hub is highly liquid and allows shippers to trade gas on
a daily basis, similar to the stock market. Finally, the risk
of capital cost overrun is reduced because there would be less
construction of pipe.
MR. PALMER, in response to Vice Chair Stedman and Representative
Kelly, assured the members that the right-of-way permits are
exclusive to TransCanada and are not available to any other
parties.
REPRESENTATIVE SAMUELS asked, "If it's such a great deal ... for
us to use the [Alberta Hub], and that is what the economists
have said right now, ... why do you force us to do it?"
MR. PALMER answered that downstream of the Alberta Hub, the
state is not restricted from building more pipeline. The
project proposal choose the location that is advantageous to
Alaska, shippers, and TransCanada. However, after reaching the
Alberta Hub, pipeline can be built to any destination.
REPRESENTATIVE SAMUELS said, "But we still have to fill your
empty pipes in the hub itself."
MR. PALMER reiterated that the proposal moves gas from Prudhoe
Bay to the Alberta Hub which gives access to the hub for the
best netbacks, highest liquidity, best market diversity, and
lowest capital cost risk.
2:07:12
MR. PALMER continued his presentation by pointing out
TransCanada's construction record on large scale projects.
TransCanada's original pipeline build was 2,300 miles across
difficult terrain in Ontario. Also, in the 1990s, TransCanada
built a project in the Andes and 7,000 miles of pipe across
North America. Currently under construction, in partnership
with Conoco-Phillips, is the Keystone project, which is 2,150
miles of oil line scheduled for completion in 2009.
2:09:17
MR. PALMER highlighted TransCanada's experience with development
in areas similar to Alaska, such as Alberta. The Alberta system
began with 200 miles of pipe and three customers and now has
15,000 miles of pipe, 1,100 receipt and delivery points, and 300
customers. Furthermore, this expansion happened under the
structure of rolled-in tolls that average the cost of the old
facilities with the new facilities. Slide five illustrated the
system away from Alberta into Eastern Canada. The original pipe
was a 2,300 mile system that today includes six parallel pipes.
The parallel pipes, called "looping" were added as the economics
required.
2:12:49
MR. PALMER presented slides seven and eight that illustrated
AGIA "Must Haves." Before further discussion of slide nine,
titled "TransCanada's Competitive Response to AGIA," he spoke
of the competition that occurred prior to the submission of
TransCanada's application. He then pointed out some of the
competitive provisions of TransCanada's [application] such as:
an initial system design with inexpensive expandability; the
preference not to own the gas treatment plant at the North
Slope, but would do so if no one else does; and an equity
opportunity for shippers committing gas, above a threshold
level, in the initial open season.
2:16:55
MR. PALMER stated that an additional competitive provision is
AGIA's requirement of a minimum debt level. A project of this
nature is financed with debt and equity; the equity of U.S.
pipelines is usually 30 percent to 60 percent and higher. Debt
components run from 40 percent debt to 70 percent debt.
However, AGIA requires the applicant to have a minimum of 70
percent debt; this increases the risk on the pipeline owner and
reduces its potential return. Thus, TransCanada would not earn
money off of the debt against the project, but only from the
equity. TransCanada's provision is for 75 percent debt, which
equals a toll reduction of $0.09 per mmBtu, or about $150
million total reduction per year. An additional unusual
provision offered by TransCanada is that in the event of capital
cost overruns, it would take a reduction on its rate of return.
He then pointed out that the project would be of significant
value for Western Canadian producers; in fact, in the event
Alaska gas enters the system at the Alberta and British Columbia
border, TransCanada would reduce tolls for all of its customers
by an estimated $10 billion in the first 15 years of service.
However, TransCanada has proposed to Canadian regulators that
approximately $3 billion of that reduction should flow back to
Alaskan customers.
2:21:38
MR. PALMER corrected his previous response to Representative
Fairclough regarding the payment for the Yukon right-of-way.
The correct amount is $30,000 per year for a total of $750,000.
VICE CHAIR STEDMAN requested that Mr. Palmer further address
this subject at a later hearing.
2:22:55
MR. PALMER presented a map of the project on slide 10.
2:23:45
REPRESENTATIVE LEDOUX referred to testimony from the Alaska
Gasline Port Authority (AGPA) regarding export permits. She
asked how to be sure that 30 year old permits are viable today.
MR. PALMER answered that TransCanada has constructed 25 percent
of the project under this legislation; in fact, the last use of
the legislation was in 1998. Moreover, he described the single
window regulatory agency and the Alaska pipeline act and treaty
as "a living piece of legislation in Canada."
2:25:36
SENATOR DYSON recalled his meeting with Canadian government
officials who maintained that the permits are valid and would
withstand court challenges; however, there may be a need for
updated environmental data.
MR. PALMER noted his agreement. He assured the members that, as
during the construction of the pre-build sections, current
environmental terms and conditions of the day would be met
during the future construction of the remainder of the project.
2:27:20
MR. PALMER, presented slide 11 titled "Project Description," and
re-stated the proposal as follows: to develop a large capacity
pipeline based on 4.5 bcf per day with possible expansion by
about 30 percent with compression; to use the existing pipeline
system from the Alberta Hub to the Lower 48; by 2018, to move
the entire Alaska volume of gas to market. In response to
speculation that Alaska's gas would end up in the Alberta tar
sands, he assured the members that there would be sufficient
Canadian surplus gas for the next 10 years and beyond.
2:30:13
MR. PALMER presented slide 13, titled "Project Economics." He
reminded the audience that TransCanada's application was based
on assumptions provided by the administration to all applicants.
About $26 billion is estimated for the project, of which $600
million would be spent for the open season and regulatory
certification. This cost would result in a toll of just under
$3.
2:31:33
MR. PALMER addressed the issue of FERC certification and noted
that in order to construct a pipeline that crosses U. S. state
or national borders permission must be obtained from the Federal
Energy Regulatory Commission (FERC). This approval requires
years of extensive preparation and processing. Mr. Palmer
presented slide 13, titled "Financial Parameters," and explained
that TransCanada can finance this project with a debt ratio of
75 percent because of the U.S. government loan guarantee, not to
exceed $18 billion plus inflation, for up to 80 percent of
capital costs of the project. This unusual loan guarantee
would assist the project; however, future expansions would have
to be financed on a traditional 60 percent debt and 40 percent
equity basis. He further explained that pipeline companies make
money based on a return on the equity invested in the project
and not on the volume of gas flowing through the pipeline.
2:35:20
REPRESENTATIVE FAIRCLOUGH asked whether separate treasury notes
would be issued for expansions or if the entire project would be
re-financed on a 60 percent to 40 percent ratio at the time of
expansion.
MR. PALMER clarified that the entire project would be funded on
a blended basis; the original capital would be at a 75 percent
to 25 percent ratio and the expansion capital would be at a 60
percent to 40 percent ratio. He predicted that at an expansion
to 7 bcf per day, the ratio would remain below 70 percent to 30
percent.
2:36:15
REPRESENTATIVE SAMUELS asked whether Mr. Palmer expects FERC to
allow a 10 year treasury note at 13 percent to 14 percent for
TransCanada's return on equity.
MR. PALMER expressed his belief that considering the risk and
magnitude of this project, TransCanada has made a fair and
generous offer. He compared this proposal to other projects.
REPRESENTATIVE SAMUELS asked, "Do you have any other return on
equity in any of your pipelines that have something similar to
this?"
MR. PALMER said, "I'm not aware that we do, in the United
States, but, that actually has been the norm in Canada since
1994, where the National Energy Board has created a structure
that is driven off interest rates. They reset the number each
year, based on a forecast of interest rates and a premium above
it, and we have lived with it since 1994 in Canada."
REPRESENTATIVE SAMUELS remarked, "And you think it's reasonable
for the fourteen percent, because it's such a high risk
project."
MR. PALMER said, "TransCanada thinks that this proposal, the
debt equity structure we've proposed, and the return, is a
reasonable return."
2:38:21
REPRESENTATIVE FAIRCLOUGH remarked:
Should I decide to press the green button, that is not
saying that I support FERC charging a rate of return
of fourteen percent. We've heard before that
TransCanada has ... many projects in North America and
the rate of return is not to the extent that we're
seeing here. And so, I had wanted to bring up at some
particular point in time a discussion that just
because someone would choose to vote "yes" or "no" on
this particular licensing application, does not mean
that we don't want FERC to do their job and protect
Alaskans and shippers and ultimately the consumer who
receives the product.
2:39:10
MR. PALMER said that it is important for people to understand
that the debt and equity ratio is interlinked with the return.
A pipeline company earns on the total dollars invested times the
rate, he explained. Thus, TransCanada's proposal of 14 percent
times 25 percent equals a relatively low number. In comparison,
the $5 billion Rockies Express project has been approved by FERC
for a 13 percent return on equity on 55 percent equity;
multiplying 13 times 55 gives a number of almost 7, whereas
multiplying [the Alaska pipeline percentage of] 14 times 25
equals 3 1/2. He concluded that FERC has a lot of leeway.
2:40:25
VICE CHAIR STEDMAN asked whether AGIA requires the state and
TransCanada to support the 14 percent proposed to FERC.
MR. PALMER replied no, TransCanada would submit its request to
FERC with or without the state's support.
2:30:55
MR. PALMER returned to his presentation and indicated that
TransCanada's risk could be up to 200 basis point in the event
of capital cost overruns. This would be a two percent
reduction; therefore, a capital cost overrun in the amount of
forty percent would result in earnings of twelve percent for
five years instead of fourteen percent. Referring back to slide
13, he emphasized that the fuel component is 7.9 percent,
including the gas treatment plant, which consumes the bulk of
the fuel, and the pipeline proposed would have a fuel ratio of
just under 2.2 percent from Prudhoe Bay to the Alberta Hub. He
opined that that is a highly efficient fuel ratio that fits with
concerns related to climate change issues, emissions, and cost
efficiencies.
2:42:17
The committees took an at-ease from 2:42 p.m. to 2:55 p.m.
2:55:30 PM
VICE CHAIR STEDMAN called the meeting back to order at 2:55 p.m.
MR. PALMER called the members' attention to slide 14, titled,
"Project Schedule." He recalled that TransCanada's original
expectation was that the license would be granted in April.
Therefore, there is a loss of four calendar months and ten
months of construction time. The revised schedule completes the
initial open season in July 2010; the first FERC filing in 2012;
the certificate issued in 2014; and construction completed in
2018. Slide 15, titled "Partnership Opportunity," indicated
that TransCanada would offer equity opportunity to shippers in
the initial open season that subscribe for a threshold volume.
Slide 16, titled "Upstream Fiscal Terms," indicated that
TransCanada's AGIA obligations are not conditional on a review
of Alaska's upstream fiscal terms with the natural gas
producers.
2:58:19 PM
VICE CHAIR STEDMAN asked for clarification of TransCanada's
position on this issue.
MR. PALMER explained that the level of taxes assessed by the
state would affect the profitability of the producers, if they
are also shippers. TransCanada is not directly impacted, and
would not be involved in discussions between the producers and
the state.
2:59:23 PM
MR. PALMER turned to the issue of the extraction of natural gas
liquids (NGLs) that was illustrated on slide 17 titled, "Other
Project Components." He stated that NGLs include propane,
ethane, and butane, and that North Slope gas is very rich in
these liquids. On a volumetric basis, propane, ethane, and
butane are more valuable than methane, which is the natural gas
alone. The normal procedure is to remove liquids before the
natural gas reaches its final destination and where these
liquids are removed would be decided by the pipeline customers;
TransCanada can accommodate the removal of liquids within Alaska
or downstream on the Alberta system. He added that once the
liquids are removed, most gas streams retain 1,000 Btu per mcf;
however, Prudhoe Bay gas has the potential to retain 1,067 or
1,118 Btu per mcf. "Six to eleven percent of the actual volume
could be liquids like ethane and propane and butane; the
majority of that would be ethane, of course," he said.
3:01:23 PM
SENATOR WAGONER asked whether the liquids can be stripped after
the gas gets to the hub, since the "molecules are mixed with the
other gas, so how would they specifically measure what liquids
are in that gas as they're put through the hub?"
MR. PALMER explained that if the liquids are not removed in
Alaska, there are third party-owned complexes that straddle the
pipeline system and that can remove the liquids downstream of
the Alberta Hub. Currently, the ownership of the liquids goes
to the party that owns the gas as it leaves the province of
Alberta; however, TransCanada has proposed to the Canadian
regulators that as the gas is received into the system, Alaska
would receive credit for the value of the liquids, wherever they
are stripped.
3:03:47 PM
MR. PALMER, addressing the subject of the "LNG Alternative,"
reiterated that in the event there is sufficient gas committed
to go both to Canada and to Valdez, TransCanada would build a Y-
line with a section of pipeline going east to Canada and a
section going south to Valdez. In the event that gas is only
committed to Alberta, the gas would be moved there. In the
event that gas is committed only to Valdez, the pipeline would
be built to Valdez.
3:04:44 PM
MR. PALMER said that he has already discussed the regulatory
structure illustrated on slide 18, including the Alaska Natural
Gas Pipeline Act of 2004, the Canadian Northern Pipeline Act,
and the Canada/U. S. Treaty. On slide 19 titled, "AGIA 'Must-
haves' Promote Basin Development," he pointed out that rolled-
in tolls would "average in" the cost of expansion with the base
cost, similar to the way property taxes increase with the
addition of improvements such as street lights. AGIA requires
rolled-in rates up to 115 percent of the initial rates. In
addition, AGIA requires the pipeline company to hold an open
season every two years and thereby, solicit new customers and
expand the pipeline in engineering increments. The pipeline
company is also required to provide in-state delivery with
distance-sensitive tolls that are based on the average of the
distance to move the gas within the state. Further, AGIA
specifies a minimum of five delivery points on the pipeline
system. Other "must-haves" include a low equity ratio
requirement for pipeline sponsors and state fiscal incentives,
if any, targeted to AIGA pipeline shippers.
3:07:26 PM
REPRESENTATIVE HOLMES asked, "Who would bid, on behalf of
Alaskan consumers, how it works when a consumer group actually
bids in an open season, what happens in the event that there
might be more bids than there's actual gas capacity available?"
3:08:23 PM
MR. PALMER responded that in-state users can bid in the initial
open season if a market develops in an area such as Fairbanks or
Delta Junction. The residential customers would decide how to
group themselves; for example, under a marketing company or a
local distribution company. Also, large industrial in-state
customers can become a direct customer of the pipeline or can
buy the gas from a shipper at one of the off-take points. The
purchase of gas at the inlet at Prudhoe Bay or at off-take
points is open to in-state users at the initial open season or
later. He said, "It's also true that you would expect that
Alaskan's in-state demand would grow over time. So, having
initial open season, as well as opportunities in the future,
would be valuable to the in-state customers as they accumulate
growth ... it would be expected that there will be incremental
volumes coming forward." Mr. Palmer further explained that in
the event that the initial project were actually completed for
4.5 bcf per day to Alberta, TransCanada has sufficient
flexibility to provide "another 100,000 million a day to
Fairbanks, strictly by the way we would operate the pipeline ...
because it's a relatively short distance and we could, in
effect, squeeze more gas through the pipe for that short
distance." In the event that there were more demand at the
initial open season than expected, more compression would be put
on the pipe.
3:12:03 PM
MR. PALMER returned to his PowerPoint slide 20 titled, "Long-run
Basin Development - Pipeline Expansions" and addressed the
following points: Value to Producers/Governments; Does Alaska
have enough gas; Drilling impacts; and Impact of rolled-in
tolls. The first point was illustrated by slide 21 titled,
"Value of Potential Expansions ($Billions)." He noted that the
projections are based on the administration's estimate of an
annual average netback of $6.89/mmBtu, and a gas price of
slightly under $10 in future dollars. Mr. Palmer reminded the
members that the producers and governments would share the
netback, based on the producer's costs and the taxes paid to the
governments. Using these projections, a base project of 4.5 bcf
per day running for 25 years would produce net revenue of $350
billion shared by the producers and governments. He further
provided projections based on various levels of expansion of the
pipeline. Regarding the second point about whether Alaska's
basin holds enough gas for future expansion, he offered a
comparison to Western Canada, illustrated on slide 22 titled,
"Basin Development - Western Canada Example," that displayed the
growth of the Alberta basin from 1955 to 2006.
3:18:17 PM
MR. PALMER addressed the third point; the subject of rolled-in
tolls. He recalled testimony from FERC representatives stating
that any pipeline system would be an open access system. He
agreed, but pointed out "the question is degrees of open access
and what would happen with the tolls." In 2004, with the
passage of the U. S. pipeline act, powers were granted to the
FERC allowing it to require expansion of the pipeline, but not
allowing "existing shippers to subsidize expansion shippers".
AGIA also requires the pipeline company to expand; however, this
would be voluntary expansions and would include the automatic,
or rebuttable, assumption of rolled-in tolls. He emphasized
that "in the event that a non-AGIA pipeline is advanced, you
should ask them whether or not they will voluntarily expand for
third parties, or if they are going to go under the FERC
mandatory requirement." Slide 23 illustrated the incremental
costs of mandatory expansions with a variety of assumed volumes.
3:23:12 PM
MR. PALMER presented slide 24 that further illustrated the
increased costs to expansion customers. He opined that
mandatory expansions and the resulting incremental tolls to
expansion customers would impede the potential exploration of
the basin.
3:25:30 PM
MR. PALMER, in summary, reviewed the following: AGIA was
established as Alaska's transparent and competitive process to
advance a gas pipeline project as opposed to participating in
commercial negotiations for a contract; AGIA was structured to
encourage the construction of the base project, long-run basin
development, open access for initial and future shippers, and
in-state, Lower 48, and LNG markets; TransCanada has the
credentials and capacity to build, own, operate, and expand the
project; and TransCanada's objectives are aligned with those of
the state and AGIA to provide early in-service, long-run basin
development, open access, including rolled-in tolls, and
equitable treatment for all customers.
3:26:37 PM
SENATOR WAGONER asked whether financial arrangements have been
made for the right-of-way through the two First Nation's lands
that have not yet settled their aboriginal claims.
MR. PALMER answered that TransCanada holds a valid right-of-way
through the entire Yukon, which includes the territory of all
eight First Nations. He observed that he could not say what
political action may be taken by any group or individual.
3:28:33 PM
REPRESENTATIVE OLSON asked whether the preceding answer included
land in British Columbia.
MR. PALMER clarified that his answer applied to Yukon; however,
British Columbia is traditional pipelining territory, similar to
Alberta, and a process is in place to obtain regulatory
approvals for rights-of-way. In fact, the Northern Pipeline Act
includes treaties with the provinces to expedite the "normal"
process.
REPRESENTATIVE OLSON recalled that three years ago, First Nation
representatives from British Columbia indicated their
requirements of employment, royalties, and ownership in the
pipeline prior to their participation in right-of-way
negotiations.
MR. PALMER assured the members that the TransCanada pipeline
route does not pass through reserves land in British Columbia;
furthermore, there is a long-standing treaty for that land. He
expressed his understanding of parties who wish to get value
from this project.
3:30:26 PM
SENATOR WIELECHOWSKI mentioned press reports from Canadian and
U. S. newspapers speculating that the Canadian government may
use the Canadian portion of the pipeline as leverage against the
U. S. to further tar sands development. He asked for assurance
from Mr. Palmer that this is not the case.
MR. PALMER observed that he can control neither the press nor
the politicians in Canada or the U. S. However, he assured the
members that Canada and the U. S. have a treaty to expedite this
project; in fact, TransCanada is the main Canadian sponsor in
the treaty.
The committee took an at-ease from to 3:32:19 PM to 3:38:57 PM.
3:39:03 PM
VICE CHAIR STEDMAN called the meeting back to order. He
introduced the next presenter, Commissioner Galvin.
3:39:59 PM
PATRICK GALVIN, Commissioner, Department of Revenue, reviewed
the purpose and the development of the AGIA legislation for the
benefit of the public. He concluded that AGIA allows the state
to move ahead with a pipeline that would meet Alaska's need in
the long term and expressed his confidence that the project is
proved viable with the present economic and market conditions.
AGIA, by design, was intended get competition going relative to
who would move the project ahead with sense of urgency.
3:45:04 PM
COMMISSIONER GALVIN explained that AGIA, with the inducement of
an initial "burst of money" from the state, mobilized the
private sector to move the project forward and the competition
began. In order to qualify for upfront money for design, market
testing, and the Federal Energy Regulatory Commission (FERC)
certification, proposed projects were required to have a
financial structure of low tariff, low cost, high netback value,
and future expansion. Commissioner Galvin stated that the
competition garnered five bids and the TransCanada application
met the requirements of AGIA. After thorough analysis, that
included looking at the project not only to determine that
TransCanada's proposal was best for Alaskans, but the broader
scheme of the state's other options, it was concluded by the
state and outside experts that issuing TransCanada the license
sufficiently maximizes the benefits of the project to Alaskans.
3:50:33 PM
COMMISSIONER GALVIN further explained that the TransCanada
application was compared to the Denali project and to LNG
project options. Referring to PowerPoint slide three titled,
"Maximizing Benefits to Alaskans," he noted that the state
looked at four goals: get a pipeline; create jobs and long term
careers for Alaskans; create opportunity for affordable energy
for Alaskans; and maximize state revenue and create opportunity
for future growth of the state economy. The first goal is
comprised of two sets of analyses; the feasibility of the
project plan and the capability of the builder, and the
underlying economics of the project.
3:52:27 PM
COMMISSIONER GALVIN turned to the subject of jobs and long term
careers and opined that any large pipeline project would create
jobs during the construction phase; however, long term jobs
would be created only if the pipeline company pledges future
expansion of the pipeline, thereby encouraging the exploration
and development of new gas resources. A pipeline with "true
open access provisions," such as soliciting new customers,
committing to expansion, and the use of rolled-in rates, is
going to be key to maximizing long term job opportunities.
Regarding the issue of in-state gas, he advised that there needs
to be physical access to the pipeline, a reasonable price for
the gas; and the availability for expansion opportunities along
the pipeline.
3:57:45 PM
VICE CHAIR STEDMAN asked Commissioner Galvin to review the FERC
orders for the benefit of the public.
COMMISSIONER GALVIN observed that FERC is the regulatory agency
that governs the business practices of the pipeline. In fact,
Congress passed a law indicating that the Alaska gas pipeline is
unique and its construction is in the national interest. In
order to connect the supply of Alaska's gas to the Lower 48,
there are provisions providing for pipeline expansion and
rolled-in rates. For example, under the FERC rule, if the
pipeline company voluntarily expands by compression or looping,
there is a presumption of rolled-in rates unless rolled-in rates
would create a subsidy for the new shippers. The result would
be that rates for new shippers would be much higher then rates
for the initial shippers, and exploration for new sources of gas
would be discouraged. The second issue is that if a pipeline
company is motivated to resist expansion because a competitor
wants to ship gas on that line, FERC can force a mandatory
expansion. In that case, rates can be raised on an incremental
basis, again with the result of higher rates for new shippers.
He opined that an explorer looking to invest in wells on the
North Slope must predict the risk of finding gas and the risk of
high shipping tolls. This additional risk of high shipping
tolls may well prevent exploration from taking place, at a
tremendous cost to Alaska.
4:05:04 PM
VICE CHAIR STEDMAN asked if FERC considers the special handling
of the Arctic basin a "basin opening exercise."
COMMISSIONER GALVIN responded that the initial Alaska gas
pipeline is the basin opening line.
VICE CHAIR STEDMAN disagreed. He stated that his recollection
of the FERC testimony is that the reason the Alaskan Arctic is
being treated differently [by FERC] is because of the potential
monopoly of a producer-owned line. These actions are put in
place to mitigate opening the basin to more exploration and
development.
COMMISSIONER GALVIN clarified that the line, once it's in, is no
longer basin opening, but it is a potential monopoly. The FERC
provisions would ensure that it would have an opportunity to
look at the issues of monopoly control. However, FERC is a
passive player and would not tell a pipeline company it has to
expand unless there is a dispute. He advised that the
possibility that an explorer decides not to drill a well in
order to avoid a dispute and the subsequent ruling by FERC, can
be reduced by Alaska's confidence in open access to the
pipeline.
4:08:47 PM
VICE CHAIR STEDMAN asked, "Who has ultimate decision capability
here, AGIA or FERC?"
COMMISSIONER GALVIN answered FERC.
VICE CHAIR STEDMAN stressed that, no matter what is done under
AGIA, FERC is the ultimate decision maker, and it would take
into account the viewpoints of the producers, the state, the
explorers, the environmental groups, and other organizations in
the state.
COMMISSIONER GALVIN agreed and added that the markets in the
Lower 48 are also a part of FERC's obligations. He stressed the
importance of agreement between the state and the applicant for
certification [TransCanada].
4:10:51 PM
VICE CHAIR STEDMAN observed that when the gas crosses to Canada,
Alaska would no longer have regulatory control.
COMMISSIONER GALVIN disagreed. He related that on the Canadian
side the regulatory body, like FERC, must consider the interests
of all the involved parties.
4:12:14 PM
COMMISSIONER GALVIN returned to his final point: maximizing
state revenue. He said that this is achieved by having the
highest wellhead or netback value; in fact, this value is used
to calculate the state's royalty and tax revenue. Additionally,
through AGIA, there are efforts to keep the tariff low, which
would increase the netback. Furthermore, financing the
pipeline with equity has a higher return than financing with
debt; thus, the higher percentage paid with debt, the lower the
tariff would be.
4:15:00 PM
REPRESENTATIVE FAIRCLOUGH asked whether all of the economic
models presented to the legislators and the public were based on
a tariff that concluded at the Alberta Hub.
COMMISSIONER GALVIN said yes.
REPRESENTATIVE FAIRCLOUGH further asked whether the additional
tariff assessed by Canada on the gas going from the hub to the
U. S. market would be included in the economic model presented
to FERC.
COMMISSIONER GALVIN confirmed that the price in the U. S. market
would take into account the tariff through Alberta. In fact the
prices would be based on a benchmark, most likely the benchmark
would be [the Canadian natural gas exchange] AECO.
REPRESENTATIVE FAIRCLOUGH clarified that the economics are all
based on the export of gas through the Alberta Hub. She then
asked whether the gas crossing the border into Canada is an
export from a U. S. market to a Canadian market, as far as the
trade deficit goes.
COMMISSIONER GALVIN expressed his understanding that the gas
going into Alberta would be imported to the U. S. markets.
REPRESENTATIVE FAIRCLOUGH remarked:
That's an assumption that's actually going down in
figures because Alberta, or the Canadian market, is
increasing and so, we've talked about seven bcf ... or
nine bcf being reduced down, too. So, more where I'm
going is that we're ... I'm not sure that we're
getting the trade balance that we want here as it goes
into an Alberta Hub finish line. ... When we're at
FERC, and we're saying we're going to take our gas
into a U. S. market, and that's not clear. ... As we
go into that Canadian market, we have just exported
all of Alaska's gas.
COMMISSIONER GALVIN advised that in the market today Canada is a
net exporter to the U. S. Therefore, in today's market, if
Alaska added gas to the Canadian supply, most of it would likely
continue on to the U. S. Looking forward ten years, he opined
that Canadian consumption is likely to grow, but its production
would decline; thus there would be less gas exported to the U.
S. However, all expectations are that Canada would continue to
be a net exporter in 2018; the ultimate destination for Alaska's
gas would be the U. S. Commissioner Galvin stated that the U.
S. Department of Energy ("US DOE"), not FERC, is involved in the
consumption of U. S. energy and the interaction with foreign
governments regarding energy. In fact, the state has been
informed that the US DOE sees the North American market as a
single market and the influx of Alaska's gas is a net positive
to the U. S. because it is getting gas from Canada. There is no
concern about Alaska's gas going into Canada because it would
ultimately increase the supply available to the U. S. In
addition, export licenses may not be a factor because the North
American Free Trade Agreement allows free exchange between the
U.S. and Canada. He acknowledged that there are issues
associated with market price, with making sure that
Alaska has a good relationship on the downstream end of the
pipeline, and that there is a good system in place at the
downstream end to get the gas from the Alberta system into the
Lower 48. Commissioner Galvin said, "But frankly, the market
forces are there, to drive that, regardless of what we do, and
it's going to take care of itself."
4:22:44 PM
REPRESENTATIVE SAMUELS informed the audience that the regulatory
agencies of Canada have declined to testify at these hearings.
He asked the Commissioner whether 15 to 20 years from now, he
would choose to sell the gas in Alberta if the choice was
between selling gas for $3 in Alberta or for $3, less the
tariff, in Chicago.
COMMISSIONER GALVIN responded that the decision would be tied to
the netback value and maximizing revenue. In further response,
he said that after the gas leaves the state, it is most likely
that the state would not be the entity selling the gas.
4:23:46 PM
REPRESENTATIVE DOLL observed that Alaska gas would become
Canadian gas sold to the U. S. market.
COMMISSIONER GALVIN remarked:
Once it's produced, it becomes owned by the lessee.
They own it, other than our royalty ... they take
possession of it, they transport it down the line. It
crosses the border, they still have possession of the
gas, it doesn't change hands, they just are selling it
on a system that's regulated by a different
government. It gets down to the Alberta system and
they sell it to somebody else. The Canadian
government never owns any of it. It's owned by
private companies ... most likely it's going to [be]
sold by five or six other companies before it
ultimately gets consumed and burned by somebody.
REPRESENTATIVE DOLL indicated that it is not an import export
issue.
COMMISSIONER GALVIN clarified that it is an import export issue
because private companies are moving goods across borders. He
said, "Is Alaska gas ultimately adding to a net import balance
with Canadians or export balance? And that's going to be
decided by the market on a daily basis and would probably change
daily, in terms of how much of that gas ultimately crossed the
border, and you probably won't even necessarily know. What I
think I can say is that if it gets on an LNG tanker and goes to
Japan we know that that's a hundred percent export. ... If it
goes to Canada ... we just don't know, we won't track it."
4:26:26 PM
REPRESENTATIVE LEDOUX asked how this project would get gas to
Alaska, now.
COMMISSIONER GALVIN opined that getting gas now is a separate
issue that should be pursued. He noted that the license to
TransCanada for the big project does not preclude the state from
working to advance a separate line that would bring gas to
Alaskans, as long as the capacity of that line falls below the
500 mcf a day limit provided in AGIA.
4:29:24 PM
REPRESENTATIVE FAIRCLOUGH referred to Mr. Palmer's discussion of
TransCanada's proposal to the Canadian regulatory body. She
asked, "Is it the state that would receive the benefit from the
off-take of the liquids, the increased value, is that what he
was referring to and that's what we are lobbying for?"
COMMISSIONER GALVIN said yes. He added that through the
royalty, the state owns one-eighth of the liquids being
produced. However, under the current Canadian system the state
would lose its credit for those liquids when the gas enters the
Canadian pipeline system.
REPRESENTATIVE FAIRCLOUGH then asked if under the current system
the Canadian government earns a royalty payment on the liquids
or whether the shippers or the pipeline company benefit.
COMMISSIONER GALVIN answered that the shipper takes it on the
outflow from the system; it is an inequity of the [Canadian]
system.
4:33:03 PM
REPRESENTATIVE JOHNSON noted that an in-state pipeline designed
for 0.4 bcf per day could easily be overbuilt to exceed 0.5 bcf
per day. He asked whether AGIA would prevent the state from
financially assisting a pipeline project that is designed for
more than 0.5 bcf.
COMMISSIONER GALVIN interpreted the law to mean that the
capacity of the project through the commencement of operations
of the big line is the arbitrator. In order to receive state
financing, the [smaller diameter] project can be designed to
flow 400 mcf per day initially, with the potential of adding
compressors after the commencement of commercial operations of
the licensed project.
4:35:37 PM
REPRESENTATIVE JOHNSON further asked whether a subdivision of
the state, such as a municipality, would be allowed to
financially assist [the smaller diameter project].
COMMISSIONER GALVIN opined that a subdivision of the state is
not bound by the terms of the AGIA license. In further
response, he said that the state would have to provide a tax or
royalty treatment that is designed to advance the pipeline
project. This interpretation of the law has been recognized by
"the judiciary committee," the Department of Law (DOL), and
TransCanada.
REPRESENTATIVE JOHNSON disagreed.
COMMISSIONER GALVIN said, "We feel confident that the
interpretation has been fairly clear."
4:38:30 PM
REPRESENTATIVE COGHILL expressed his interest in the projects
competing for the larger pipeline. He remarked:
Though we have a [Department of Natural Resources]
coordinator especially designed under AGIA, the
resources are still going to be available ... should
the competing project require resources of whatever
department. And I want you to re-state that. ... In
the AGIA, we also give, under section 300, inducements
both for royalty and for tax. ... Should the Denali
project ... come to the state asking for some tax
consideration, does that stop us, under this plan,
from coming up with a congruent system, a tax scheme,
would we be forbidden, under this law, to even talk to
them about it?
COMMISSIONER GALVIN answered that the project assurance is
intended to provide to the licensee [assurance] that the state
would not provide preferential tax or royalty treatment to
competing projects. It would be a violation to provide the same
tax treatment to the licensee and to a competing project; the
state would be liable for treble damages to the licensee.
However, he opined that a discussion of a tax scheme among
legislators would not qualify TransCanada for treble damages.
Further, AGIA allows the state to provide the permitting, right-
of-way, and authorization personnel that are needed to complete
the work generated by the competing projects through the usual
reimbursable services agreement (RSA) process.
4:43:57 PM
REPRESENTATIVE LEDOUX expressed her belief that there is a
certain amount of ambiguity. She asked whether a contract could
be structured so there is none.
COMMISSIONER GALVIN clarified that the real issue is the
interpretation of the AGIA statute by the DOL and by
TransCanada. He pointed out that there is concurrence between
the state and the licensee on the statutes of AGIA. In further
response to Representative LeDoux, he said that the hearing
process is "getting on the record the position of both the state
and TransCanada to ensure that if there's ever a question down
the line where somebody thinks that there's an ambiguity, we
have the record ... "
REPRESENTATIVE LEDOUX encouraged the specification of all
matters in a contract.
COMMISSIONER GALVIN maintained his belief that 60 people in a
room would all have different interpretations of an agreement.
He discussed how contracts are written.
4:49:13 PM
REPRESENTATIVE SAMUELS asked, "If the state chose to offer the
same tax, both in length and amount ... to all pipelines ... is
that a violation?"
COMMISSIONER GALVIN reiterated that the language of the statute
refers to the purpose of the tax treatment, such that the tax
treatment must facilitate the construction of a competing
project in order to be a violation.
REPRESENTATIVE SAMUELS remarked:
We have control over permits and taxes, one hundred
percent, that's up to us. ... [TransCanada's]
attorneys, five years from now, are going to look out
for their shareholder's best interest. ... Two
pipeline projects, that both go forward, and they both
have gas bid to them, contingent on X, Y, and Z, and
if you change X, Y, and Z, you know which one's going
to get the gas, the ones that own it, then we're going
to end up getting sued by our partner. ... If I offer
tax terms, to any pipeline, LNG, producer owned,
TransCanada owned, a consortium of all three or any
... if I say I'm going to lock in taxes for seventeen
and a half years and at this rate ... whatever it is
... the minute you do that it's not going to be
TransCanada that gets the gas, TransCanada is going to
sue us for treble damages.
COMMISSIONER GALVIN agreed that in the example described by
Representative Samuels, the state would be liable for treble
damages. He continued to say:
But we did not put this in place, you did not pass
this in order to put this offer out on the table and
bring somebody in, and then get cute about trying to
walk up to this line, where there's treble damages,
and say, "we're just short of the line, we didn't
quite cross it." The point is, we are not going to
try to advance a competing project. We're going to
operate in good faith. We brought them into this
process and we're going to stick by them, or we're
going to pay them treble damages. And if the idea
that legislators have [is] that we're going to pass
this thing ... and then we're going to pass a law
that's sort of going to make Denali go forward, but
we're not going to say it publically, and we're going
to be able to somehow avoid treble damages; don't go
there. Just recognize that we are ... accepting this
relationship on the basis that if we want to get out
of it we will pay the price: treble damages.
4:53:36 PM
REPRESENTATIVE LEDOUX envisioned a future legislature that
decides to lower taxes, thereby encouraging producers to begin a
competing project. She opined that this scenario would lead to
[treble] damages assessed against the state.
COMMISSIONER GALVIN assured the members that the language of
the statute is very clear; if the state is going to offer
favorable tax terms in order to advance a competing project, it
would be liable for treble damages. Favorable tax terms include
passing a tax regime that favors the Denali project, he opined.
He suggested that there would be many options open to the state
during the development of the licensed and the competing
projects; in fact, treble damages are the price the state would
pay if it withdraws from its agreement with the licensee.
4:57:59 PM
VICE CHAIR STEDMAN noted that there has been some discussion in
the Senate that the Senate Resources Standing Committee would be
reviewing the gas tax in January 2209. He continued, "The [oil
and gas] industry would like to have more time to do some
analysis on costs and so on and so forth, dealing with
construction of this line before they're too excited about
coming forward. ... This mechanism for review is definitely
underway, its just a matter ... of when the time is right. ...
Also, getting the administration a longer time to take a look at
Alaska's Clear and Equitable Share (ACES) and see how that is
working."
COMMISSIONER GALVIN agreed. He acknowledged that AGIA would
need to be considered when changing the [tax] system. "We'll
probably have TransCanada talking about their perception of
whether or not this is problematic or not. We'll have the
opportunity to direct a tax benefit one way or another," he
said. He reminded the members that if the license is granted,
the state must accept that it is engaged in a contractual
relationship that must be part of the conversation in a future
discussion about changes to the oil and gas tax system.
5:00:30 PM
VICE CHAIR STEDMAN reminded members of the public to sign up for
testimony from 6:00 p.m. to 8:00 p.m., and that there would be a
time limit of three minutes per person. He announced that the
meeting was recessed until 6:00 p.m.
5:59:30 PM
VICE CHAIR STEDMAN called the meeting back to order at 5:59 p.m.
Members and presenters present introduced themselves.
6:02:02 PM
VICE CHAIR STEDMAN explained the purpose and importance of the
joint hearings on AGIA and announced the schedule for the
remaining hearings. He informed the audience that public
testimony would be limited to three minutes per participant and
invited speakers to queue up.
6:05:29 PM
ALLAN ULEN remarked:
It looks to me like we are trying to build a mountain
out of what should really be just a molehill. We
already have a pipeline corridor that goes from
Prudhoe Bay all the way to Valdez, and the first thing
we should be doing is running a line down there, and I
know there's plenty of room along that pipeline
corridor if you don't put it right close to the
existing pad. ... I've been in the oil business for 40
years and 31 of those have been here in Alaska. I
shipped Alaska oil by tanker truck ... and
subsequently shipped that first oil out of Kenai
pipeline Nikiski dock to Richmond, California ... in
1960. Now the first thing that you do, you put that
pipeline down to tidewater, and at the same time you
are doing that, you build a LNG plant right there, or
you can bring it over here to ... the existing LNG
plant right there which would be expandable, and you
also get Agrium going again. ... Then you can go
ahead and take your time and get your FERC approvals
and all this kind of stuff that you need to go through
Canada, down to the Alberta Hub and on through to
Chicago.
6:08:58 PM
JOHN WILLIAMS, Mayor, Kenai Peninsula Borough, remarked
[original punctuation provided]:
Mr. Chairman and all of the members of the legislative
committee that's here today, welcome to the beautiful
Kenai Peninsula. I want to thank you for bringing
your special session deliberations to the residents of
Alaska, and particularly to those of the Kenai
Peninsula. From Homer to Hope, from Seward to Tyonek,
From Nikiski to Kenai to Soldotna, and all points in
between. You all have a difficult choice, one of
historical importance for the State of Alaska and all
of its residents. As in other places on your journey
here, you have heard from local communities and what
their needs are. We are no different. You all know
that Southcentral Alaska is currently faced with
declining natural gas reserves from the Cook Inlet
basin. Without any new discoveries, we are currently
staring at an eight to nine year supply of natural gas
for over 60 percent of Alaska's population. I am here
to tell you that we have to get gas to Southcentral
and we want the jobs that come with getting that gas
here. A line to Cook Inlet satisfies the
constitutional obligation of maximizing the benefit of
the people of Alaska. Why is Cook Inlet the ideal
destination for a spur line? As I have said, over 60
percent of Alaska's population will be running out of
gas in the not to distant future. This includes the
Mat-Su Valley, the entire Municipality of Anchorage,
our local military bases, and the entire Kenai
Peninsula. In addition to the needs of the
Southcentral population, our local industrial
facilities and our economy is heavily dependent on
natural gas. As you are well aware, Agrium is sitting
a few miles out the road and is nearing a complete
mothball state. Since 2003, we have lost 264 high-
paying jobs. The average salary for Agrium's
employees was in excess of $80,000 per year. An
additional 317 indirect jobs are estimated to have
been lost over the same time period. Agrium's
facility alone could handle over 50 bcf a year and
restore the seven to ten percent export market they
once enjoyed. The LNG plant next door to Agrium was
issued a two year LNG export license this month.
Normally, this would be a five year license. The LNG
plant averages around 70 bcf a year. Who knows if
they'll get another license in 2011? Finally, why do
we want to ship our NGLs to market in Alberta? I want
the State of Alaska to make a commitment and get
behind the marketing of NGL processing right here.
This will launch a petrochemical industry at home, in
Alaska. I read in TransCanada's plan that their
project is premised on NGL processing taking place in
Alberta. It goes on to state that two of the three
plants in Alberta are ready to expand to handle
Alaska's [NGLs]. I want Alaskans to process our NGLs.
The Cook Inlet stands ready to fight for those jobs
instead of shipping them down a pipeline to Alberta.
The Cook Inlet has existing industrial structures that
are expandable, a quality trained workforce, training
programs for additional workers, developable land, and
a broad waterway to get products to the marketplace.
Nobody can make a better argument for maximizing the
benefits to Alaska's citizens that Cook Inlet can. An
up or down vote for granting TransCanada an AGIA
license is a difficult choice because it is not just
about an AGIA license. As we all know, the Denali
pipeline has already started preliminary field work
and pre-filed with FERC for their gas line project.
This is a horse race, and at some point a winner will
emerge. I will leave the handicapping and betting up
to you, as you and the administration have invested
the time, energy, and money to acquire the best
information available. I and the entire Kenai
Peninsula Borough stand ready to assist you in any way
I can. I will leave you with this, NGL processing and
petrochemicals are huge business not only in the
number of jobs but dollars to our state. Don't ship
any of those jobs or dollars down a pipeline to
Alberta. We'll gladly take all the jobs and money
right here in Cook Inlet. Thank you very much for
your time.
6:14:07 PM
DEBBIE BROWN remarked:
I am here today to lock arms with people across this
state ... who would ask you to have the political
strength and will to vote "no" on the TransCanada
application. There are aspects of the AGIA that I
support one hundred percent. There is some language
in the AGIA statutes that I have serious concern over.
I feel that it's important for the State of Alaska to
be able to have free and open communications about
other pipeline projects that would bring about and
assist the needs of Alaskans to have affordable
sources of energy. It's critical. I beg you, not to
be the first legislature to throw this state into
dramatically in the direction of becoming an
impoverished state. ... I recognize the amount of
data, information, legal considerations, that you all
are involved in, getting opinions, listening to
Commissioner Galvin ... answering questions. ... About
the language, it's very intimidating to a lot of
people. But I stand here today to speak to you to try
to help encourage you to say no to the TransCanada
application and move ahead and begin to move into
uncharted territory as this Alaska legislature, to
bring about for Alaskans energy that we control. We
need more that 0.5 bcf per day very soon. ... We've
put in our 30, 35 years and we've brought the state in
a lot of ways, where we are today, based on the family
members that were here before us. ... Let's use our
constitution and become strong. ... We have all the
intellectual capabilities that any Arabian small
nation has. ... Have TransCanada build it for us. But
let's have control, if we go with TransCanada we are
going to be faced with delays, complicated language,
litigation issues. ... What I believe and I supported
the governor ... but what we've ended up with in the
AGIA process, in my opinion, is not what Governor
Palin expected to happen. ... We didn't expect to just
have one proposal. ... We come up with a different
plan that would move ahead with producing energy needs
for our state, we need them sooner than what we could
ever hope to dream of getting with this proposal.
6:19:32 PM
PAT HAWKINS remarked:
I've been a resident of Alaska since 1966. My sign
basically says it all, "In-state gas now, Alaska is
first." You know, in reality, I believe in the AGIA
process. The AGIA process basically has proved to be
successful, in that we're talking about a gas line.
I've been up here since 1966, I support the AGIA
process, I support the AGIA gas line. It made the oil
companies, had an opportunity to bid on the AGIA
process, plus other people, they didn't submit their
bid. So, my basic concern is well that's their
problem. ... So we have TransCanada, very reputable
company, they built pipelines. The big thing I'm
looking at here is the approval of the AGIA license
for TransCanada but the most important thing, besides
that, is we need to take care of our in-state needs
now. Right here on the Kenai Peninsula, throughout the
State of Alaska. It is completely ridiculous that we
have resources up in Prudhoe Bay that can not go into
Fairbanks. And our elected leaders and our governors
have sat by and done nothing. We need to do something
now, this is critical. ... We need to bring jobs to
the peninsula, we need to bring jobs to Fairbanks. We
need to build the pipeline and we need to build it
now. ... We have excess money, we can build that line
tomorrow and supply the energy needs for all of
Alaska. Propane plants, re-opening Agrium, having
jobs here on the Kenai Peninsula ... working at Wal-
Mart, Sears, K-Mart, is not jobs, we need good paying
jobs, in Alaska and here on the Kenai Peninsula. ...
I'd like to thank all of you legislators for coming
down here to the Kenai Peninsula and taking time ...
and I want to thank you for your service to the State
of Alaska.
6:22:44 PM
TOM PATMOR remarked:
Remember the Manhattan Project back in '68 where one
of the oil companies got an old oil tanker and they
put an ice breaking bow on it? And they took it
across the top of the Northwest Passage with a couple
of ice breakers, well they were thinking about getting
oil out of Prudhoe via the Northwest Passage back in
those days, and there was a lot of ice up there in
those days. ... But anyway, there was a story in the
paper this past winter that said that EXXON is gonna
build a small LNG plant up there and they're gonna
ship gas by tanker trucks to Fairbanks from there.
What's to keep EXXON from building a big plant and
just loading it on tankers right up there and shipping
it either way across the top of the continent? I
mean that would be a lot cheaper than building a $40
some billion pipeline. As Mr. Palmer said ...
TransCanada doesn't have nothing to do with the LNG
plants, just the pipeline. So, if EXXON wants to go
ahead and build a bigger LNG plant up there and load
it on to tankers and take it either way, they could be
shipping gas out within three years from now, whereas
TransCanada and Denali Project both say it's gonna
take them at least three years to even start at
construction. ... But you can't trust EXXON, as you
know. ... With all the shipping hazards in Prince
William Sound right now, what would it do if they had
LNG tankers going in and out of there too? ... I asked
Mr. Palmer this afternoon ... if they had studied the
concept of building a pipeline, a spur line from
Whitehorse over to Skagway, you've already got the
railroad and the road, so it would be easy to
transport the materials and everything along there.
He said they hadn't and he asked me if that's a deep
water port there. ... But I think that's quite a bit
shorter than going from Glennallen to Valdez.
MR. PATMOR related a personal story about the Exxon Valdez oil
spill.
6:27:02 PM
BILL WARREN remarked:
I want to thank all of you for being here on the road
show, and I'm glad you put it together, because we are
at a historic point here on what we're going to do.
As far as AGIA, I'm for and for the process for good
reasons. ... I want to see the pipeline built by a
pipeline company because of a monopoly situation,
control, competition, access, many reasons that I want
the pipeline to be built by the pipeline company and
not the producers.
MR. WARREN stated that he worked on the Trans-Alaska Pipeline
System and wished that more of the work, such as the NGL
industry, was going to be in Alaska. He observed that this area
was a rust belt now, and was going downhill. "I hope all of you
go out north and see it's beautiful in the summer, but the mom
and pop business that are out of business ... we need to be
revitalized, now," he said. Mr. Warren warned that it was
apparent that the area was headed for poverty this winter. He
opined that natural gas is clean, in fact, other states are
using compressed natural gas extensively for personal transport
at a ratio of 4:1. He concluded:
I know that you've got to move forward on this
megaproject, and there's many obstacles, and we've
just got to persevere and go forward and in the
interim, we need in-state gas now, we need a bullet
line started yesterday. The state needs to reach in
their back pocket and pay for it. ... And it's for my
granddaughter.
6:31:43 PM
STEVE MAPES informed the members that he was thinking of his
three boys and future grandkids. He envisioned the pipeline as
a big hose running to Canada with just a small amount coming to
Alaska. He remarked:
I think it would be better if the big pipe was kinda
of stopped in Alaska. I think it would be more jobs,
there would be more industry. ... The product would
last longer if we didn't all flush it out in some big
pipe down over to Canada and let them pump it in the
ground so they can push gas out.
MR. MAPES agreed with the previous speaker that there are no mom
and pop stores left in Kenai, and residents must travel 30 miles
for necessities. He concluded that the State of Alaska would be
better off if the product from the slope was used for the
betterment of Alaskans, not for the betterment of Chicago or
Canada.
6:36:09 PM
JIM KAUFFMAN informed the members that he heard the testimony
and supports the process of AGIA and a "yes" vote. He remarked:
Having a pipeline company, and listening to their
presentation, I think they're capable, and I think
the State of Alaska has benefits working with
TransCanada. I think, as far as Denali and the
producers, all of these parties know FERC pretty well
... and I think FERC will take care of that pretty
well. ... [TransCanada] has the option of a Valdez
terminal, LNG, and I trust that our state corporation,
ANGDA, would be at the table, with them, encouraging
that project. ... My problem with the big line is that
it primarily services the state and the state's budget
... we have forgotten the constitution requirement to
supply the people. ... The in-state ... bullet line
needs to be down here soon, very soon. ... It's hard
to believe that a state with this kind of resource, in
terms of energy, has any kind of energy problem.
6:39:44 PM
JIM COOPER stated that he "is all for AGIA, too." However, AGIA
is a little premature. He opined that there are two ways to
maximize the value of Alaska's gas; the governor's way which is
to ship it out and sell it, or to use the gas in Alaska to
create jobs and industry. The jobs and industry would not come
with the Canada line for many years. Mr. Cooper said that he
supports the ANGDA process and its organization, but they are
being ignored and are underfunded. He advised that the quickest
plan is a gas line from Prudhoe to a natural gas plant at
Valdez, with spur lines to points in Alaska. Otherwise, "We'd
be dead in the water for years to come, still fighting over that
deal," he said.
6:41:42 PM
BOB PENNEY reminded the members of the situation in 1976, when
there were three proposals: a route over the top of Alaska; a
route along the all-Alaska Highway; and a route to an LNG plant
at Point Kravina (ph). Mr. Penney recalled the two years he
spent working for the unsuccessful LNG project. Subsequently,
Foothills Pipe Lines Ltd. obtained federal, state, and Canadian
rights of way all the way down the highway. He estimated the
value of the those rights of way to be $3 billion. Mr. Penney
remarked:
The thing that flawed the LNG line, flaws it today.
There's no place to put the nozzle. There's no place
to unload the gas, on the West Coast of the United
States; not California, not Washington, not Oregon.
One spot in Canada. People come to you and talk about
LNG, they've got to be able to deliver the gas, and I
don't think you going to find they have a place to
deliver it.
MR. PENNEY compared AGIA the "the state of matrimony," with the
state looking for the "right spouse, and would kick in a half of
a billion bucks to try and make this work." He opined that the
other party would do its best but the "prenuptial deal is, you
have to pay treble damages if you don't like this wedding."
There is also a proposal from [Denali-The Alaska Gas Pipeline],
and since they have the gas, he suggested that they get together
with the pipeline builder. Mr. Penney said:
[Neither] the State of Alaska nor the federal
government is going to force Exxon, BP, and Conoco-
Phillips to build a gas line, until it's economically
viable. You can pass all the laws you want to. Until
it works, it isn't going to happen, so I suggest to
you rather than passing AGIA now, taking that golden
band and eloping with it. Why don't you consider
going into a two or three year, long term engagement,
and then see if you can't get both of these parties
put together?
6:45:35 PM
JIM GILBERT, President, Udelhoven Oilfield System Services,
Incorporated, remarked [original punctuation provided]:
Thank you for the opportunity to testify on the AGIA
bill. My name is Jim Gilbert, and I'm President and
testifying on behalf of my company, Udenhoven Oilfield
System Services.
Our 500-plus employees provide technical expertise to
the oil and gas industry in Alaska, the Gulf of
Mexico, Tbilisi, Georgia, and Bohai Bay, China. We
work all over the state of Alaska, building schools,
improving airports and making this a better place to
live.
First and foremost, we want a gas project ... sooner
rather than later, and with the greatest long term
benefits for the State of Alaska, Alaskan workers,
Alaskan businesses and all Alaskans. North Slope gas
commercialization holds the key to Alaska's future.
We understand the importance and urgency of
transforming our gas potential into a gas project.
The opportunity to market our gas won't last
indefinitely, and there's a very real risk of losing
it altogether if we don't act quickly.
Both the state and shippers need to be involved in and
have oversight of a project execution plan that
provides the greatest netbacks at the wellhead.
A third-party pipeline builder with no production
interests will have no incentive to reduce costs and
no ability to "guarantee" the tariff in advance. The
market should be allowed to work with no interference
from the state.
You don't have to go too far into the past to recall
the Delta Barley project, the Mat-Su Dairy Project or
the Anchorage Seafood Processing Plant Project. All
failed, all had state money and state interference.
Do not give away five hundred million of Alaska's
dollars with the chance of incurring treble damages.
Denali is the project that will give us a pipeline.
6:48:03 PM
JAMES E. FISHER spoke of the difficulty of forcing oil and gas
companies to release information. He asked:
How much effort and consideration has been focused on
potential contract provisions to prevent [TransCanada]
from claiming any information that can't be released
because it is proprietary in nature? Using of course,
the "proprietary" as a screen to stop any information.
I realize we've had lots of representations about
"open" discussion, and information available. But how
much has actually been incorporated into the
provisions that would insist upon that?"
6:49:44 PM
VICE CHAIR STEDMAN asked Mr. Fisher to submit his question to
the committees in writing.
6:50:13 PM
JACK BOWEN informed the members that he came to Alaska in 1966
and has worked on oil rigs throughout the state. He noted that
the amount of oil and gas in the world is limited. He remarked:
If you've got gas and you pull it out and ship it off,
and you sell it, pretty soon it's going to run out.
Like I said, I tested that well up there and I know
how much pressure there is. It will go downhill, and
it will run out. So, we better conserve, for
ourselves, and let everybody else kindly take care of
[themselves]. I am all for keeping the oil in Alaska,
and I echo Mr. Williams, our mayor.
6:52:41 PM
JOHN BOWEN stated that he came to Alaska in 1966 and has worked
on the North Slope since 1975. He remarked:
Basically, ... when you produce a field you have three
products, obviously we're after the oil, after that we
get gas, and after that comes produced water. What my
facility does is, we take the gas and we re-inject it
back into the top of the formation at about 4,000 psi.
We're currently doing about seven to eight billion
cubic feet a day. ... [That] allows the wells to flow
naturally, it's enhanced recovery we call it, or
artificial lift. ... You start pulling that gas off of
there, the pressure in that zone is going to go down.
... Any oil that's left in that reservoir is just
going to be there.
MR. JOHN BOWEN stressed that Alaskans come first. He suggested
that instead of giving away $500 million, the state should build
a railroad between Fairbanks to Prudhoe Bay. A railroad is more
economical than trucks and could supply natural gas for
converted vehicles throughout the Anchorage, Fairbanks,
Glennallen, Mat-Su, and Kenai Peninsula areas.
6:55:54 PM
GORDON SPAULDING informed the members that he supported the
testimony of the mayor of Kenai, Mr. John Williams.
6:56:48 PM
LEN MALMQUIST stated his belief that Alaska's resources belong
to Alaskans. He referred to the Constitution of the State of
Alaska, Article 1, section 23, and read:
This Constitution does not prohibit the State from
granting preferences, on the basis of Alaska
residence, to residents of the State over non-
residents to the extent permitted by the Constitution
of the United States.
MR. MALMQUIST pointed out that Article 8, section 2, requires
the state legislature to maximize resources to the greatest
extent possible. He opined that the state must insure that
Alaskan's needs for energy are met first, before any resources
leave the state. In addition, natural gas must be available to
Alaskans at a cost less than elsewhere. At this time, customers
are charged according to the hub price, and not what it actually
costs to produce. Secondly he expressed his desire for Alaskans
to get a fair deal, in as short a period of time as possible, no
matter who builds the pipeline. He remarked:
I generally do not trust big oil's word unless there
is a significant penalty provision built into the
final approval process. I personally think that the
best interest of Alaskans would be met if all three
players would be forced into merging together. ...
Lacking that, we should find out who can guarantee
getting the line built first, and our gas flowing.
VICE CHAIR STEDMAN acknowledged the presence of Patrick Galvin,
Commissioner of Revenue and Tom Irwin, Commissioner of Natural
Resources.
6:59:49 PM
MARK HALL stated that he came to Alaska in 1952 and worked on
the North Slope and in other industries. He opined that the
town is going out of business. He asked, "If state's in charge
of transportation, why can't we build this line our self, why do
we have to add a corporate in here? ... These corporates are
more powerful than the state is." Mr. Hall said that as a power
lineman, he worked all over the state; in fact, all of the
utilities went together to build transmission lines. That same
idea would work for a pipeline that is owned by the state with
input and output measured by a meter. He related a personal
story of his experience with Exxon.
7:04:42 PM
FRANCES DANIEL PRIOR stated that he would like to retire on the
peninsula. He remarked:
The way things are going now, I don't know where our
money's going to come from. I'm in my seventies and
when my wife and I go to work it costs over $100 a
week for two of us just to have fuel to go back and
forth to work; that's $400 a month coming out of our
paycheck. If you're dead-set on building this Alaska
pipeline ... what is wrong with going to the border of
Canada, put a valve on that, charge whatever you think
the State of Alaska needs and let Canada, Chicago, and
whoever else, work out their own deal? ... If we're
going to stay in Alaska as citizens of the Kenai
Peninsula and Valdez, areas like that, Fairbanks, we
possibly, would love to see you work hard on getting
us a pipeline to our peninsula.
7:06:29 PM
GREG DYER stated that he has worked in the oil and gas industry
for 35 years. He related his experience in building a 46 inch
oil pipeline and a 42 inch gas pipeline near the Caspian Sea.
He remarked:
The plan ultimately has to be a combination of a joint
venture with TransCanada and the majors, to make it
work. And it makes the most sense ... in the long
term, for Alaska's future and your kids and grandkids,
for the economic future of Alaska, to take that gas to
Canada and sell it. ... That's where the market is, in
the Lower 48. ... Once you get this thing up, and
pressured up, and you start that pay meter on our end,
... this state is going to get paid for every cubic
meter, wherever it goes. ... I don't think the state
outta be in the business of subsidies. ... I'm opposed
to a bullet pipeline, because nobody I've heard can
tell me how much is a bullet pipeline. ... If it's
three million, if it's three billion, or three and a
half billion, it's likely going to be seven billion.
... Of course, [the pipeline] will have tie-ins ...
that will supply, I think, all the gas this state
needs ... we can start supplying this state before
that pipeline is finished. ... There's where the
state's effort outta be, in a pipeline, gas,
distribution network.
7:10:15 PM
VICE CHAIR STEDMAN said that it was nice for the legislators to
come to the peninsula and Homer. He recalled discussions with
Representatives Chenault and Olson, and Senator Wagoner, about
the need for gas from the Cook Inlet, or from the Arctic, to be
brought to the Kenai Peninsula. It is evident that 12 or 15
years is too long for the peninsula to wait for gas. Vice Chair
Stedman stated that the legislature would continue to work on
this issue. He opined that the governor's energy bill would be
discussed in July and that the conversation would broaden to
include the issues of getting gas to the different regions of
the state and a long term energy plan for the entire state. He
thanked the members of the public for their informative and
respectful testimony.
[HB 3001 and SB 3001 were held over.]
ADJOURNMENT
There being no further business before the committees, the Joint
meeting of the House Rules Standing Committee and the Senate
Special Committee on Energy was adjourned at 7:14:15 PM.
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