Legislature(2007 - 2008)ANCHORAGE
06/19/2008 09:00 AM 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
Anchorage, Alaska
June 19, 2008
9:03 a.m.
MEMBERS PRESENT
HOUSE RULES
Representative John Coghill, Chair
Representative Anna Fairclough
Representative Craig Johnson
Representative Ralph Samuels (AGIA Subcommittee)
Representative Beth Kerttula (AGIA Subcommittee)
SENATE SPECIAL COMMITTEE ON ENERGY
Senator Charlie Huggins, Chair
Senator Bert Stedman, Vice Chair
Senator Lesil McGuire
Senator Donald Olson
Senator Gary Stevens
Senator Joe Thomas
Senator Bill Wielechowski
Senator Fred Dyson
Senator Thomas Wagoner
MEMBERS ABSENT
HOUSE RULES
Representative John Harris (AGIA Subcommittee, Chair)
Representative David Guttenberg
SENATE SPECIAL COMMITTEE ON ENERGY
Senator Kim Elton
Senator Lyda Green
Senator Lyman Hoffman
OTHER LEGISLATORS PRESENT
Representative Bob Buch
Representative Harry Crawford
Representative Nancy Dahlstrom
Representative Mike Doogan
Representative Bryce Edgmon
Representative Les Gara
Representative Berta Gardner
Representative Carl Gatto
Representative Max Gruenberg
Representative Mike Hawker
Representative Lindsey Holmes
Representative Kyle Johansen
Representative Reggie Joule
Representative Wes Keller
Representative Bob Lynn
Representative Kevin Meyer
Representative Kurt Olson
Representative Jay Ramras
Representative Bob Roses
Representative Bill Stoltze
Representative Bill Thomas
Senator Con Bunde
Senator Bettye Davis
Senator Johnny Ellis
Senator Hollis French
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: HB 3001
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
06/05/08 (H) MINUTE(RLS)
06/06/08 (H) RLS AT 10:00 AM TERRY MILLER GYM
06/06/08 (H) Heard & Held
06/06/08 (H) MINUTE(RLS)
06/07/08 (H) RLS AT 10:00 AM TERRY MILLER GYM
06/07/08 (H) Heard & Held
06/07/08 (H) MINUTE(RLS)
06/08/08 (H) RLS AT 1:00 PM TERRY MILLER GYM
06/08/08 (H) Heard & Held
06/08/08 (H) MINUTE(RLS)
06/09/08 (H) RLS AT 10:00 AM TERRY MILLER GYM
06/09/08 (H) Heard & Held
06/09/08 (H) MINUTE(RLS)
06/10/08 (H) RLS AT 10:00 AM TERRY MILLER GYM
06/10/08 (H) Heard & Held
06/10/08 (H) MINUTE(RLS)
06/12/08 (H) RLS AT 10:00 AM FBX CARLSON CENTER
06/12/08 (H) Heard & Held
06/12/08 (H) MINUTE(RLS)
06/13/08 (H) RLS AT 10:00 AM FBX CARLSON CENTER
06/13/08 (H) Heard & Held
06/13/08 (H) MINUTE(RLS)
06/14/08 (H) RLS AT 10:00 AM FBX CARLSON CENTER
06/14/08 (H) Heard & Held
06/14/08 (H) MINUTE(RLS)
06/16/08 (H) RLS AT 9:00 AM ANCHORAGE
06/16/08 (H) Heard & Held
06/16/08 (H) MINUTE(RLS)
06/17/08 (H) RLS AT 9:00 AM ANCHORAGE
06/17/08 (H) Heard & Held
06/17/08 (H) MINUTE(RLS)
06/18/08 (H) RLS AT 9:00 AM ANCHORAGE
06/18/08 (H) Heard & Held
06/18/08 (H) MINUTE(RLS)
06/19/08 (H) RLS AT 9:00 AM ANCHORAGE
BILL: SB 3001
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
06/06/08 (S) MINUTE(ENR)
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
06/09/08 (S) MINUTE(ENR)
06/10/08 (S) ENR AT 10:00 AM TERRY MILLER GYM
06/10/08 (S) Heard & Held
06/10/08 (S) MINUTE(ENR)
06/12/08 (S) ENR AT 10:00 AM FBX Carlson Center
06/12/08 (S) Heard & Held
06/12/08 (S) MINUTE(ENR)
06/13/08 (S) ENR AT 10:00 AM FBX Carlson Center
06/13/08 (S) Heard & Held
06/13/08 (S) MINUTE(ENR)
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
WITNESS REGISTER
SCOTT SMITH, Vice President
Black & Veatch
Houston, Texas
POSITION STATEMENT: Provided the presentation by Black &
Veatch.
MIKE ELENBAAS, Senior Consultant
Black & Veatch
Seattle, Washington
POSITION STATEMENT: Assisted with the presentation by Black &
Veatch.
PATRICK GALVIN, Commissioner
Department of Revenue (DOR)
Juneau, Alaska
POSITION STATEMENT: Provided comments and responded to
questions during the day's presentations.
PAUL BLOOM, Vice President
Public Sector and Infrastructure Investment Banking
Goldman Sachs Group, Inc.
Seattle, Washington
POSITION STATEMENT: Responded to questions during the
presentation by Black & Veatch.
DEEPA PODUVAL, Principal Consultant
Black & Veatch
Houston, Texas
POSITION STATEMENT: Responded to a question during the
presentation by Black & Veatch.
TONY PALMER, Vice President
Alaska Business Development
TransCanada Alaska Company, LLC, ("TransCanada")
Calgary, Alberta
POSITION STATEMENT: Gave a PowerPoint presentation on
TransCanada's proposed pipeline project and answered questions.
BLYTHE CAMPBELL
Anchorage, Alaska
POSITION STATEMENT: Testified during the hearing on HB 3001 and
SB 3001.
TAMMIE SMITH
Anchorage, Alaska
POSITION STATEMENT: Testified in opposition to AGIA during the
hearing on HB 3001 and SB 3001.
CHUCK BECKER
Anchorage, Alaska
POSITION STATEMENT: Testified during the hearing on HB 3001 and
SB 3001.
JACK HAKKILA
Anchorage, Alaska
POSITION STATEMENT: Testified during the hearing on HB 3001 and
SB 3001.
PAUL D. KENDALL
Anchorage, Alaska
POSITION STATEMENT: Testified during the hearing on HB 3001 and
SB 3001.
SCOTT HAWKINS, President
Advanced Supply Chain International (ASCI);
Chair
ProsperityAlaska.org
Anchorage, Alaska
POSITION STATEMENT: Testified during the hearing on HB 3001 and
SB 3001.
HEATH HILYARD, Staff
Advanced Supply Chain International (ASCI);
Board Member
ProsperityAlaska.org
Anchorage, Alaska
POSITION STATEMENT: Testified during the hearing on HB 3001 and
SB 3001.
MIKE KENNY
Anchorage, Alaska
POSITION STATEMENT: Testified during the hearing on HB 3001 and
SB 3001.
DANIEL DeNARDO
Anchorage, Alaska
POSITION STATEMENT: Testified in opposition to AGIA during the
hearing on HB 3001 and SB 3001.
MIKE ROGERS
Anchorage, Alaska
POSITION STATEMENT: Testified during the hearing on HB 3001 and
SB 3001.
CARY CARRIGAN
Anchorage, Alaska
POSITION STATEMENT: Provided comments during the hearing on
HB 3001 and SB 3001.
RICK BARRIER, Executive Director
Commonwealth North
Anchorage, Alaska
POSITION STATEMENT: Testified during the hearing on HB 3001 and
SB 3001.
JED WHITTAKER
Anchorage, Alaska
POSITION STATEMENT: Testified during the hearing on HB 3001 and
SB 3001.
RICK CAREY
Anchorage, Alaska
POSITION STATEMENT: Testified in agreement with AGIA during the
hearing on HB 3001 and SB 3001.
FRANK BAINES
Anchorage, Alaska?
POSITION STATEMENT: Testified in opposition to AGIA during the
hearing on HB 3001 and SB 3001.
WILLIAM BASSETT
Anchorage, Alaska
POSITION STATEMENT: Testified in opposition to AGIA in its
present form during the hearing on HB 3001 and SB 3001.
CASH FAY
Anchorage, Alaska
POSITION STATEMENT: Testified during the hearing on HB 3001 and
SB 3001.
LORNE BAILEY
Anchorage, Alaska
POSITION STATEMENT: Provided comments during the hearing on HB
3001 and SB 3001.
DOMINIC LEE, Owner, Chief Executive Officer (CEO)
Little Susitna Construction Company
Anchorage, Alaska
POSITION STATEMENT: Testified in opposition to AGIA during the
hearing on HB 3001 and SB 3001.
VESTA ELLIOT, Owner
Organic Hair Design
Anchorage, Alaska
POSITION STATEMENT: Testified during the hearing on HB 3001 and
SB 3001 to promote renewable energy resources.
ANDREW HALCRO
Anchorage, Alaska
POSITION STATEMENT: Testified during the hearing on HB 3001 and
SB 3001 to express concern regarding the contractual terms of
AGIA.
TOM WALSH, Managing Partner
Petrotechnical Resources Alaska (PRA)
Anchorage, Alaska
POSITION STATEMENT: Testified during the hearing on HB 3001 and
SB 3001 in opposition to AGIA.
DAVID GOTTSTEIN, Co-chair
Backbone II
Anchorage, Alaska
POSITION STATEMENT: Testified during the hearing on HB 3001 and
SB 3001.
ERNIE STUTZER
Anchorage, Alaska
POSITION STATEMENT: Testified during the hearing on HB 3001 and
SB 3001.
KELLY WALTERS
Anchorage, Alaska
POSITION STATEMENT: Testified during the hearing on HB 3001 and
SB 3001 in support of an all-Alaska gas pipeline.
ACTION NARRATIVE
CHAIR CHARLIE HUGGINS called the joint meeting of the House
Rules Standing Committee and the Senate Special Committee on
Energy to order at 9:03:44 AM.
HB 3001 - APPROVING AGIA LICENSE
SB 3001 - APPROVING AGIA LICENSE
9:04:21 AM
CHAIR HUGGINS announced that the hearing would begin with a
presentation by Black & Veatch regarding net present value
(NPV), followed by [a review of the application by] TransCanada
Alaska Company, LLC ("TransCanada"), followed by [a review of
the delayed findings].
9:05:01 AM
SCOTT SMITH, Vice President, Black & Veatch, referencing the
fact that some information had been provided yesterday, said
that price is an important aspect of a risk assessment. He went
on to note that the Wood Mackenzie forecast of AECO Hub prices
were what his company used in its base case analysis for
understanding cash flows and net present value (NPV). Referring
to [slide 12 of] his PowerPoint presentation [titled "Net
Present Value (NPV) Analysis"], he said that the AECO Hub price
forecasted [by Wood Mackenzie and illustrated by the black line]
starts at slightly higher than $5 [per million British thermal
units (MMBtu)] in today's terms and then increases over time
into the $20-plus range due to inflation and what he termed
"real cost" growth, though prices in the [AECO Hub] market today
are right around $10 - or a little bit higher because of market
volatility. Also included [on slide 12] and illustrated by the
red line is the Energy Information Association (EIA) forecast of
AECO Hub prices. He said that one of the reasons the latter
forecast was not selected for his company's base case is because
the EIA doesn't project an AECO Hub price outright; instead, it
projects a price for south Louisiana [Henry Hub], and therefore
Black & Veatch had to make some assumptions - similar to those
used by TransCanada - of deducting $.75 in order to arrive at an
equivalent AECO Hub price, and this deduction was based on the
traditional relationships seen between AECO Hub prices and Henry
Hub prices.
MR. SMITH said that Black & Veatch also developed its own
forecast, which is illustrated by the blue line. He added,
"This is not the base case result; it's one of the sensitivity
cases that we do run, but when we talk about results, we're
always referring to the Wood Mackenzie price forecast unless we
say explicitly otherwise." Black & Veatch's price forecast is
fairly close to the Wood Mackenzie price forecast up to 2025,
and then Black & Veatch shows a lower price growth beyond that
[date] than Wood Mackenzie; the Black & Veatch forecast falls in
between the EIA forecast and the Wood Mackenzie forecast.
Generally, when developing price forecasts, one is trying to
make assumptions about different aspects of the market; for
example, one might try to predict what the gas supply will be
"in north Texas out of the Barnett Shale field", or what gas
demands will be for power generation in New York. One then adds
all those factors up, putting them together in a model and
letting that [model] balance out and generate a price. "So
we're basically forecasting the different components of the
market - supply, demand, elasticity of demand relative to those
prices - and that lends itself to generating an equilibrium
price that clears through time," he added. All who develop
price forecasts are using some fundamental economic model, all
use a fairly similar approach though with different assumptions.
9:09:10 AM
REPRESENTATIVE ROSES, offering his recollection that the Federal
Energy Regulatory Commission (FERC) had referenced an
infrastructure that's currently underway with a liquefied
natural gas (LNG) capacity of 20 billion cubic feet (Bcf) [per
day], asked whether Black & Veatch included a potential for 20
Bcf/day in its calculations.
MR. SMITH indicated that part of Black & Veatch's calculations
involved "putting in place" what the expected infrastructure
would be: what pipelines are in place to move production from
one point to another, what import terminals [are available], et
cetera. With both the Black & Veatch and Wood Mackenzie
analyses, there is an expectation that there will be
infrastructure in place - predominately in the gulf coast - to
take LNG imports. With regard to how much LNG "is showing up,"
he offered his understanding that the Wood Mackenzie import
expectation for 2020 is around 17 Bcf/day on average over the
course of the year, whereas the Black & Veatch import
expectation is 12-14 Bcf/day, and there will be some growth
thereafter depending on the scenario one looks at. Black &
Veatch, within its model, allows for the ability to add new
infrastructure if the market needs it - "We just imply some
expected capital costs for that to be built out should there be
a requirement for gas demand or gas supply for that," he added.
MR. SMITH, in response to a question regarding Black & Veatch's
disclaimer statement, explained that it's used in all of Black &
Veatch's reports. He added that Black & Veatch has clearly
stated what its assumptions were, with regard to some key
drivers such as LNG imports and demand, when developing its
price forecast.
SENATOR STEDMAN said he is trying to determine whether Black &
Veatch is providing a totally independent view or part of an
integrated team approach.
MR. SMITH said that all of Black & Veatch's assumptions
specifically around the "flex analysis" were developed
independently from the State, and that there were many different
sources for those assumptions. For example, the demand
assumption is reliant on "EIA as a base case," and the "finding
and development" costs for supply were developed independently
and were based off of reports developed several years ago by the
[National Petroleum Council (NPC)] and updated with some
analyses from [Cambridge Energy Research Associates, Inc.
(CERA)]. Black & Veatch felt it was appropriate, "as an
analysis lead," to not make [its forecast] the base case,
because of the risk that it would be viewed as biased relative
to Black & Veatch's engagement. Instead, the Wood Mackenzie
forecast is used as the base case analysis because it truly is
independent, and the State contracted with Wood Mackenzie to
acquire that forecast. One reason Black & Veatch was retained
and asked to do a price forecast had to do with the company's
ability to understand the risk associated with prices.
9:15:28 AM
SENATOR STEDMAN noted that when looking at oil prices, the
legislature has had a lot of debate over the last several years
regarding taxation structure - switching from "tax royalty" to a
production-sharing arrangement - and the discussion concentrated
on oil prices below $60, but not much on oil prices above that
amount. According to the current data, though, "most all of it
is above $60/barrel oil, going out to 2044," he added.
MR. SMITH said that the price forecast from Wood Mackenzie
starts at about $75 and increases from there through the
valuation period. So, yes, in general, the price forecast for
oil is higher than $60, with both oil and gas price [forecasts]
being lower than what their actual prices are today.
REPRESENTATIVE GATTO asked whether the prices today are within a
range that might have been forecasted five years ago.
MR. SMITH indicated that the prices today are higher than what
Black & Veatch forecasted for the State in 2005-2006. A lot of
the information used in that forecast, however, was based on the
costs of "finding and development," so what needs to be factored
in now in a current price forecast is the fact that such costs
in the "E&P sector" have increased dramatically since that time,
just as have the capital costs for a pipeline. He noted that
EIA price forecasts have similarly underestimated prices.
9:19:35 AM
REPRESENTATIVE GATTO asked whether Black & Veatch included the
demand from India and China in its forecast.
MR. SMITH said no, not directly. In response to a comment about
the unlikelihood of being able to forecast an accurate price for
30-plus years in the future, he offered, "we have to spin this
[forecast] out fairly far" because this project has such a very
long lead time, and "we tried to take a fundamental-based
approach to making those assumptions." He mentioned that there
are also other ways of forecasting cash flows and NPV, such as
using a specific price as opposed to a forecasted one.
MR. SMITH, returning attention to slide 12 of his PowerPoint
presentation, said that Black & Veatch looked at key drivers to
prices, particularly prices in the AECO Hub market: "F&D costs;
technology improvement, which would lower costs of finding and
development; power generation demand; LNG imports; industrial
demand." Black & Veatch then made separate high and low
forecasts from those [key drivers], looked at whether they have
a relationship, and then generated different scenarios in order
to understand what could happen when unexpected but not
improbable conditions occur. The solid, light blue line and the
dashed, light blue line represent scenarios created by changing
the different assumption embedded in the model with regard to
the aforementioned key drivers. Having the resulting
"distribution of prices" enables Black and Veatch to perform
more risk analyses in its report, but is just supplemental to
those analyses and helps provide some perspective with regard to
project risk and commodity-price risk.
9:24:21 AM
MIKE ELENBAAS, Senior Consultant, Black & Veatch, referring to
what he termed "the tornado diagram" that was shown yesterday,
said that "the key takeaway from that" was that commodity prices
were the largest driver of uncertainty, and that capital costs
and schedule risks were also significant drivers of uncertainty
but not as significant as commodity prices. Referring to slide
13, he explained that the chart shows models of uncertainty in
prices as illustrated by the light blue curve - which he called
a cumulative probability distribution. "We're showing the full
range of uncertainty in both prices and cost and schedule risk
to the project," he remarked, and calculated the NPV to the
different stakeholders under this range of possible prices and
costs and schedules.
MR. ELENBAAS said that the y-axis of the aforementioned chart
illustrates probability in percentiles; that the x-axis
illustrates NPV for the state; and that the light blue curve
illustrates uncertainty with regard to prices, "capital cost
scope risk," and schedule risk of the TransCanada project. This
model, once run, allows one to capture statistical results with
regard to how uncertainty changes NPV to the state. He
indicated that information provided yesterday illustrates an NPV
of approximately $60 billion; that one of the slides in the
PowerPoint presentation illustrates that NPV ranges between $10
billion and over $100 billion; and that at approximately what he
termed a "P50 level" on slide 13 - via the dashed, dark blue
line - the NPV is right around $50-$60 billion, but that is
without price uncertainty. The solid, light blue line
illustrates that when price uncertainties are included, the NPV
can be much more uncertain as well.
CHAIR HUGGINS asked whether Black & Veatch is willing to
guarantee its statement on slide 13 that its results indicate
that there is no likelihood of a negative NPV to the state.
MR. SMITH said he feels that is a correct statement given the
assumptions that were made and the variables that were looked
at. A similar chart has been created regarding the producers
that illustrates that there is a chance that the producers could
have a negative NPV.
9:30:17 AM
MR. ELENBAAS said that the chart on slide 13 "was looking at the
4.5 Bcf per day project." In contrast, slide 14 shows lower-
volume sensitivity cases: the dashed, blue line is 4.5 Bcf/day;
the gray, solid line is 4 Bcf/day; and the dashed, green line is
3.5 Bcf/day. State NPV remains largely positive, though when
there is less volume being sold through the pipeline, there is
slightly less money coming to the state. Referring to slide 14,
he noted that it illustrates producer NPV using all the same
sensitivity assumptions that were made for the state. As with
state NPV, commodity prices were the largest driver of
uncertainty, though cost escalation and upstream capital costs
also drive uncertainty. Producer NPV, using a 10 percent
discount rate, is right around $13 billion with a base case of
4.5 Bcf/day.
9:33:08 AM
REPRESENTATIVE SAMUELS asked whether the upstream capital costs
include expenditures to find gas.
MR. ELENBAAS said those are the "yet-to-find" capital costs.
MR. SMITH, in response to questions, said that the question of
whether the state should be in the business of transporting gas
isn't something he is prepared to comment on; that there is a
strong likelihood that the shippers will have a favorable
outcome by being involved in this project; that since EconOne
Research, Inc., issued its report several years ago, there has
been a dramatic increase in costs and corresponding changes in
price; and that the State has hired several different companies
and engineering firms to estimate capital costs. Given all the
data collected thus far, it appears that this will be a positive
project, and there appears to be only a 5 percent chance that
the producers will experience a negative NPV; in other words,
there is a 95 percent chance that the project will prove to be
economic for the producers, thus justifying their investment in
and commitment to the project.
MR. SMITH, in response to further questions, after acknowledging
that at issue is whether the state should commit to spending $.5
billion to incentivize the development of the [gasline],
explained that Black & Veatch is simply taking an independent
look at prices and other variables in many different ways so as
to be able to provide a representation of what other parties may
be looking at when trying to evaluate this project. He offered
his understanding that the producers and the "E&P community" are
making investment decisions today and drilling very extensive
wells in the Lower 48 that have F&D costs of $6-$8 and are doing
so with an expectation of a return; he acknowledged, though,
that that is not comparable with making commitments to
underwrite - or make transportations commitments to - a "$30
billion pipeline." However, there are companies out there
willing to take that risk, he added, given today's price
environment and F&D costs. Furthermore, a significant amount of
the gas is already known to be there, thus eliminating the need
to explore for it.
MR. SMITH surmised that the risks a shipper has to be concerned
about are whether prices are going to clear the firm
transportation (FT) costs, and whether those FT costs will come
in as estimated. Black & Veatch relied upon information
provided by the experts with regard to price and cost
uncertainties, and this is the basis of the analysis being
presented today. Another element that must be considered is
whether the yet-to-find gas and available gas can fill up the
pipe at some point down the road. Black & Veatch also looked at
the NPV benefits to the producers should yet-to-find gas not
show up, and that information will be provided later, he added.
9:43:06 AM
REPRESENTATIVE SAMUELS, referring to slide 11, sought
confirmation that as long as a [gasline] is built, then on an
NPV basis, the state can't lose because all it has to do is
recoup its proposed $.5 billion investment.
MR. SMITH said:
We effectively modeled the state physical system as
well as the royalty system as (indisc.) taking royalty
in-value [RIV], not [royalty] in-kind [RIK]. We've
obviously incorporated [the] $.5 billion investment
associated with that. And so, effectively, the
investment the state is out is the $.5 billion. That
results in a tariff deduction of approximately $.06,
which has benefit to the state in and of itself, and
then obviously they're collecting revenues and cash
flow, and those revenues ... from taxes as well the
royalty revenue doesn't create a situation, given our
analysis, that shows that they have a chance for a
negative NPV.
MR. SMITH, in response to another question, referred to one of
the slides and said it illustrates a 4.5 Bcf [per day] tariff at
the bottom and the price forecast that Black & Veatch went
through. He added:
These are all prices on a nominal basis, and
effectively what we did is obviously measure the
difference between here and the cost associated with a
commitment to the tariff. And you can see, obviously,
the base case price forecast is here, so obviously
you're looking at this as basically cash in the door
that the state's taking - either royalty revenue or,
alternatively, [Alaska's Clear and Equitable Share
(ACES)] ... tax-related revenue. The producers,
likewise, are doing that, and then spending any of
type of capital and operating costs to offset that.
So our analysis shows that given these price scenarios
that we've run, and we've ran several with the idea of
trying to understand the sensitivity to it, they all
clear that bottom element of ... paying for that
tariff.
REPRESENTATIVE SAMUELS asked whether Black & Veatch included
capital credits for exploration as part of the state's NPV.
MR. SMITH said yes.
SENATOR STEDMAN asked whether individual companies in the
industry use "the same forward-looking price scenarios" in their
models for purposes of making investment decisions. He surmised
that the state must set up a scenario similar to that which
would encourage such companies to come forward and make FT
commitments. "Regardless of what we think the profitability is,
it's what that boardroom thinks it is when they sign that FT
commitment," he added. Therefore, what does the industry look
at?
9:47:38 AM
MR. SMITH offered his understanding that other companies do have
their own internal price forecasts but aren't willing to share
them, and that most E&P companies are using the Wood Mackenzie
forecast, but he doesn't know whether they are using it as a
sensitivity case or as their base. With previous analyses that
the state has done regarding this issue over the last few years,
he observed, the tendency was to just pick a price and lock it
in when making an economic forecast. He added that Black &
Veatch tried to incorporate those analyses so as to look at the
information in as many different ways as possible in order to
determine whether there was a way to shoot holes in the project,
given what is known about costs and tariffs, and whether there
was cause for concern from the perspective of either the state
or any shippers willing to commit gas to the project.
SENATOR STEDMAN asked whether, if an oil company looking at the
project hired Black & Veatch as a consultant, it would recommend
that that company use "these prices" in its analysis, or a
lower, more conservative, price, or a higher, more aggressive
price. What would be Black & Veatch's recommendation to the
board of directors of such a company as it seeks to make a
similar multibillion-dollar decision?
MR. SMITH said that Black & Veatch would recommend that the
company "do all the sensitivity analyses that we did." He
added, "We tried, again, to do this as [impartially] as we could
by picking a non-affiliated price forecast - it turns out to be
the one that's a little bit more robust in the out years - we've
looked EIA, we've looked at ours, as well as we've looked at
flat real price forecasts to see what happens." He indicated
that that's all that could be done since no one is capable of
actually knowing what prices really will be in the future,
adding, "we tried to make our estimates based on what we think
supply:demand will be and where prices will go, but I think
you've got to look at that and ... test it with different
sensitivities ... to understand ... [the] implications it'll
have to the project economics, both to the state as well as the
producers."
9:50:56 AM
REPRESENTATIVE GATTO, referring to the graph on slide 13,
expressed disbelief in its assertion that there is a zero
probability that the state will make zero money. He said he is
therefore questioning the validity of the rest of the graph's
assertions as well as "everything else."
MR. SMITH - noting that the state, in general, is a collector of
revenue - said that because the state would be investing $.5
billion in the project, that must be considered relative to the
gain in the tariff, and it is therefore just a coincidence that
"it ends up at zero/zero." He noted that [slide 16]
illustrating similar information for the producers indicates
that there is a zero probability that the producers will realize
a negative $5 billion NPV.
REPRESENTATIVE GATTO opined, however, that there is always a
probability greater than zero that something could go wrong and
the pipeline can't get built, and thus he is uncomfortable with
slide 13's assertion.
MR. SMITH offered his understanding that all the permits will be
in hand before the pipeline is built, and thus there is an
expectation that the project will be completed. In support of
the assertion made in slide 13, he added, "It's a function of
how the regulatory process works and how permits are in hand
[and] treaties are reached with ... [other] nations ... prior to
that capital being spent, and that's essentially how we made
those assumptions." The project will happen, he posited, and so
the questions that remain will be with regard to what the tariff
is and what the prices are at that time.
9:55:20 AM
REPRESENTATIVE DOOGAN asked whether there is any company that
could give the state an absolute prediction of the future.
MR. SMITH said no.
REPRESENTATIVE DOOGAN surmised that the level of uncertainty
with this project is higher than it would be if the state were
to simply invest its $.5 billion in treasury bills, for example.
MR. SMITH concurred that the project does incorporate more
uncertainty than traditional investments with regard to what the
state's returns will be.
SENATOR FRENCH opined that there is something wrong with simply
assuming that the prices of natural gas are just going to keep
rising, and said he would be interested in seeing old Wood
Mackenzie price forecasts just to see how the assumptions about
natural gas prices have changed in the last few years. Prices
could easily go back down, he remarked, and thereby put the
state close to being underwater.
MR. SMITH offered his understanding that Dan Dickinson has
provided the legislature with historical information regarding
the price of natural gas. He went on to explain that natural
gas prices in the U.S. were regulated by the federal Natural Gas
Act until the mid-1970s and as such were very, very low, low to
the point that they caused a natural gas shortage in the 1970s
and engendered the federal Natural Gas Policy Act of 1978, which
provided new incentives - much higher prices - for drilling, and
then at that point prices started to rise again. However, by
the mid 1980s, there was too much natural gas, there were what
he termed "take-or-pay agreements" with the pipelines that
couldn't buy all the gas that they'd contracted to buy, and this
resulted in an industry restructuring for the purpose of
"getting out of those old contracts," and so there was a free-
market environment during the period when there was a surplus -
late 1980s up through 2000. That surplus was then "burnt off,"
he added, and now there is a more marginal supply:demand
[ratio]; that's why there has been an increase in prices since
then - it represents the cost of finding new oil and gas
reserves.
MR. SMITH said that although one could argue that there will be
times when prices are lower, the basic assumption is that at
some point it will become much more expensive to find and
develop this finite resource - that's a fundamental driver
behind why prices increase.
10:03:18 AM
REPRESENTATIVE ROSES asked whether Black & Veatch has created a
slide that illustrates a tariff associated with 2.5 Bcf/day, or
3 Bcf/day, or 3.5 Bcf/day.
MR. SMITH said he would provide that information. Referring to
slide 27, he said that it illustrates price forecasts that are
all "real prices" with no inflation built in, and the tariff for
"the three different projects" if the construction started
today. One can see, he posited, that at the lowest price
forecast, there are a few years where there is negative impact
relative to price relative to tariff.
REPRESENTATIVE ROSES said it appears that it could be 2030
before the profit structure starts to increase. His concern, he
relayed, is the uncertainty regarding what the volumes will
actually be. "We started out with everything being assumed at
[4.5 Bcf/day], but that was including Point Thomson, and now
we've taken that out" and are assuming that the producers are
going to [bring the amount] back up; however, there will still
be additional costs associated with exploration and development,
and uncertainty regarding price, he noted. He went on to say:
So I'm still struggling with trying to get a
confidence level in what we think we're going to have
for a volume, which affects the tariff, and balance
that out against what the cost predictions are, to
still have the same level of confidence that ... some
of my colleagues seem to have in the fact that this is
going to be wildly profitable, and coupled with that
the fact that if we agree to this ... [contract] that
we have now limited the state's options for somewhere
between 6 to 15 years as to any other options that we
have while we're waiting for this horserace to end.
... That's why I keep going back to this to try to
make this comparison so that I can, in my mind, strike
a level of confidence enough to make me say, "Yes, I'm
willing to put up $.5 billion of the state's money."
10:08:36 AM
PATRICK GALVIN, Commissioner, Department of Revenue (DOR) -
noting that there has been concern expressed that if Point
Thomson doesn't come on line, the state will lose approximately
$15 billion in NPV - said it is important to understand that
when speaking about a 4.5 Bcf/day line resulting in $66 billion
in NPV and a 3.5 Bcf/day line resulting in $51 billion in NPV,
that's assuming that that will be the volume for the entire 25
years. So even if the line is designed to handle 3.5 Bcf/day,
but more gas actually comes on line right at or near the
beginning such that with additional compressors 4.5 Bcf/day ends
up going through the pipeline, the NPV will get back up to the
level expected of a 4.5 Bcf/day pipeline. So although it is
difficult to analyze what the NPV really will be as time goes
on, it will end up being "somewhere between these two numbers."
COMMISSIONER GALVIN indicated that he is heartened by a couple
of statements made by Cathy Foerster of the Alaska Oil and Gas
Conservation Commission (AOGCC): given the current trends of
oil production, there will be sufficient gas available from
Prudhoe Bay to fill any of the pipelines that are currently
being contemplated; and once a pipeline project is actually
moving forward and gas starts being targeted, there will be more
gas than [the state] will know what to do with. The issue for
the state, therefore, is to start with the right size pipe -
which, according to information presented to the state, is the
48-inch pipe. With that size pipe, even if output goes down to
only 3.5 Bcf/day, TransCanada's project plan can be accommodated
without the pipe needing to be physically adjusted. The state's
analysis of this information indicates that even at 3.5 Bcf/day,
there will still be a positive outcome with regard to getting
financing, getting a pipeline up and running, and getting gas.
And although there would be an even greater positive outcome at
4.5 Bcf/day, and the state would prefer to have output ranging
between 4.5 Bcf/day and 6.5 Bcf/day, the 3.5 Bcf/day scenario
has been analyzed to determine whether even that amount is
enough to finance the project. The state's conclusion is that
it is enough, though the output is expected to ultimately end up
being higher than 3.5 Bcf/day.
10:13:24 AM
REPRESENTATIVE ROSES expressed concern that the producers might
not be willing to commit to 4.5 Bcf/day in the open season.
What the producers are willing to commit to is really what will
drive the project's financing and economical feasibility. It
matters not that the amount could ultimately, after a lot
exploration and development, be 7.9 Bcf/day, for example; the
real question is what will the producers commit to.
COMMISSIONER GALVIN concurred, but pointed out that at a minimum
there will be 3.5 Bcf/day of gas to commit to, and, again, that
this amount is sufficient to finance the project. The state has
analyzed, from several perspectives, the question of what the
chances are of getting an FT commitment from the producers, and
the state's conclusion is that from the producers' perspective,
committing to 3.5 Bcf/day would still constitute a reasonable
investment decision.
REPRESENTATIVE ROSES questioned, then, why the state itself
doesn't simply commit to [2 Bcf/day], particularly given that
many people have testified that they think the state should be
investing in this project, and given the estimated rate of
return.
COMMISSIONER GALVIN said that although the state might
ultimately become more involved in the project in the future, it
doesn't need to at this time - though it may want to for other
reasons - because there is a private company willing to advance
the project; furthermore, [the state] believes that at the
appropriate time, the producers will be willing to act as
reasonable commercial players and make the commitments necessary
to drive the project ahead. Getting this project started, which
is what the Alaska Gasline Inducement Act (AGIA) is all about,
is the key; the economics of the project will ultimately drive
it to fruition "if we can get it moving," he remarked, adding
that other investment opportunities related to this project will
present themselves once that occurs.
REPRESENTATIVE ROSES expressed concern that moving forward with
AGIA could potentially close off other options the state might
have 6-12 years in the future.
COMMISSIONER GALVIN, in response to comments regarding the
accuracy of past predictions, pointed out that the purpose of
the analysis isn't to predict future prices, but is instead to
look at whether the investment decision being made today will
produce positive results, and the answer, he surmised, is yes,
it will.
10:24:03 AM
SENATOR STEDMAN, offering his understanding that industry
doesn't actually use such robust price projections in its
investment decisions, suggested that [Black & Veatch's] analysis
leans more towards marketing this project to the legislature
than it does towards providing accurate data for the decision-
making process.
MR. SMITH disagreed, and reminded members that Black & Veatch
used some of the same forecasts that industry uses, and is
merely trying to highlight the cash flow implications and risks
associated with this project. Using figures arrived at by
industry experts, the Black & Veatch models illustrate that this
project has a high likelihood of success for all parties
involved.
REPRESENTATIVE GARA pointed out that in a capitalist system,
there is never a guarantee that a company will make money;
instead, the question is whether the chance of success is great
enough to warrant taking a risk that a particular endeavor might
lose money. He opined, therefore, that this project can go
forward without a guarantee that the producers or pipeline
builders will make money. He noted that yesterday, "Exxon"
stated that when it submitted its application two years ago, it
believed that there was 4.5 Bcf/day available, and that's why,
he surmised, it proposed a pipeline with that capacity even back
then. Since nothing has changed since then, won't that
historical information factor into the chances of this project's
success, he queried.
MR. SMITH explained that risk analyses tend to focus on worst-
case scenarios, rather than on best-case scenarios, in order to
determine whether one could still be comfortable making a
particular investment decision. Furthermore, the decision being
faced by the legislature today is different than what it faced a
couple of years ago because of the differences in prices, costs,
and tariffs.
REPRESENTATIVE GARA asked what will happen financially if,
during open season, some of the major producers still refuse to
commit their gas.
COMMISSIONER GALVIN said that AGIA is designed to ensure that
the project will continue to move on to the permitting process
through the FERC's regulatory process regardless of whether the
open season is unsuccessful. Furthermore, there will be
continuing efforts to acquire FT commitments and determine what
might be preventing producers from making such commitments.
10:34:04 AM
PAUL BLOOM, Vice President, Public Sector and Infrastructure
Investment Banking, Goldman Sachs Group, Inc., in response to
Representative Gara, explained that the presumption is that the
financing wouldn't occur at that point in time; instead, the
financing wouldn't occur until the FERC certificate is issued.
At open season, clearly, getting the contract signed up is one
of the conditions precedent to being able to do the financing,
but getting the FERC certificate issued and getting all the
engineering and cost estimates, et cetera, pinned down all have
to be done before the financing can occur. The open season is
critical and the contracts are critical, but that's not when the
financing occurs - the financing occurs later in the process.
REPRESENTATIVE GARA asked whether it is necessary that
TransCanada find outside financing.
MR. BLOOM explained that there are two elements to the
financing. First, the application suggests that the debt
portion of the financing will be project-financed debt - that's
debt backed by the revenues and assets of the project, not by
TransCanada. The other element of the financing pertains to the
equity, which TransCanada must come to the table with. But
whether that's done via cash flow, or via raising debt on its
own books, or via issuing more TransCanada equity to fund the
equity it must inject into the project is a separate question.
The debt component of the finance plan is not TransCanada debt -
it's debt backed by the strength of the project.
MR. BLOOM, in response to a question, explained that in this
type of project finance, the concept is that one creates an
entity - a project company - that has assets, which are the
revenue contracts and some physical assets, and obligations to
build and operate the pipeline. Investors will be given a
pledge of the revenue from the project, and the project company
will be "ring-fenced"; it will be a "bankruptcy-remote" entity,
and bond investors will have recourse to the excess revenue and
other assets of the project but not to TransCanada, and the
federal loan guarantee will be guaranteeing a portion of that
debt but not all of it. He relayed that the report his company
prepared as part of the findings contains more information about
that latter point.
CHAIR HUGGINS asked whether AGIA limits investment by the state
to only $.5 billion.
10:38:17 AM
COMMISSIONER GALVIN said that that is the extent of the state's
matching contribution requirement under AGIA.
CHAIR HUGGINS questioned whether the administration would be
coming back to the legislature asking for more money for this
project, particularly given that project financing won't be
available until a FERC certificate is issued.
COMMISSIONER GALVIN indicated that the administration would not,
and offered his understanding that TransCanada has stated that
it will be responsible for any additional costs necessary to
obtain FERC certification. The state is only committed to $.5
billion.
SENATOR STEDMAN - raising the issues of a possible failed open
season, "downstream" financing, and the $19 million spent on
analyses and documentation - asked what the likelihood is of the
"big utilities" financing "this $30 billion project" and
fulfilling the FT commitments.
COMMISSIONER GALVIN said the state did not do a probability
analysis on FT commitments being made by "the consumers" because
an analysis of the conventional "producer FT commitment"
scenario indicated that it had a sufficient likelihood of
success to warrant recommendation, and so there was no need to
perform analyses of other scenarios. However, the
administration has had continued discussions with those involved
"on the utility side in the Lower 48," and the
hope/expectation/demand for Alaska natural gas remains very
strong. For example, the administration had discussions with
the National Association of Regulatory Utility Commissioners
(NARUC) about its involvement in allowing utilities to make
long-term commitments of capacity and purchasing gas at set
prices, and the NARUC seemed very open to that, and have passed
resolutions in support of "those things." So although the
administration believes that that opportunity exists, it didn't
feel a need to analyze that possibility in detail because the
project is likely to succeed under a conventional scenario.
10:44:04 AM
SENATOR STEDMAN asked Mr. Bloom whether his firm has been asked
to look at the feasibility of financing [by] "the downstream,"
and whether "the downstream" has financed projects over $20
billion.
MR. BLOOM said his firm was not asked to look at that issue, and
that he himself has not heard of any such projects, though
typically many utilities in the Lower 48 do enter into long-term
contracts for gas supply. He surmised that there is probably a
reasonable potential for either the producers, or the state in
marketing its own gas, to layoff some of the risk of this
project by entering into such contracts, adding that he or
someone else from his firm will be able to address that point
further once the legislature returns to Juneau.
SENATOR STEDMAN offered his understanding that contracts for
delivery get shortened as the markets become more dynamic. He
clarified that his question isn't whether utilities enter into
long-term contracts for supply but rather whether utilities
finance "mega projects" and, if so, how their board of directors
deal with the risk exposure of a regulated utility to finance
such a project. He said he would also like to know what
utilities have the capability of financing, at a minimum, a $20
billion project and what utilities have done so. He indicated
that there have been discussions regarding whether to finance
the construction of the project "from the upstream" or "from the
downstream," and about the "tie-in from the downstream to the
ultimate upstream."
MR. BLOOM relayed that his firm would be prepared to address
those points when the legislature returns to Juneau.
COMMISSIONER GALVIN pointed out that the state did not include
in the findings an expectation of a utility-based financing
package - it's just not part of the basis upon which the state
is making its recommendation.
CHAIR HUGGINS expressed concern that the project won't be as
economic as the administration is suggesting it will be.
MR. SMITH explained that Black & Veatch tried to capture the
risk associated with the project with the input assumptions it
used. Nonetheless, the project appears to have a potential for
a very substantial return to the parties involved, with just a 5
percent chance of a negative return for the producers only. In
response to a question, he provided some information regarding
other clients that Black & Veatch has done work for.
CHAIR HUGGINS asked what this project's level of risk is, on a
scale of 1-10, when compared with other projects Black & Veatch
is familiar with.
10:53:14 AM
MR. SMITH said that what constitutes risk is in the eye of the
beholder; for example, a $30 billion project represents more
risk than a $1 million project, and an acceptable level of risk
for one entity might not be an acceptable level of risk for
another. This project does have a lot of associated risk, he
acknowledged, such as price and capital costs; in spite of this,
given the known factors, this project still looks to be
successful.
MR. BLOOM added that based on size, costs, and the environment,
there clearly is a tremendous amount of risk associated with
this project regardless of who builds it, though a lot of the
uncertainties related to cost, volume, shippers, reservoirs,
marketing, and prices will be substantially reduced as time goes
on, and the main point of the next few years is to reduce those
uncertainties as much as possible so that all the principal
parties - the state, the equity sponsors, and the shippers - can
feel more comfortable before the actual "go" decision is made.
CHAIR HUGGINS indicated that the economic status of the project
as time goes on is of major concern to him.
SENATOR STEDMAN indicated that pages 255-257 of the Black &
Veatch report speaks about "an integrated ownership of a line
and the upstream," and has a reference to "finance solely by
equity." He said, "A 100 percent equity stuck out, not having
an Alaska tariff portion," and asked that that issue be
addressed further when there's more time.
MR. ELENBAAS, referring to [slide 17] of the PowerPoint
presentation, indicated that the graph illustrates several "flat
real" prices - ranging from $5-$10 - with only inflation added
over time, and noted that currently AECO Hub prices are trading
above $10/MMBTU. Slide 18, containing two graphs, illustrates
producer NPVs for "real" prices ranging between $5-$10 under two
different discount rates - one at a 10 percent discount rate,
and one at a 15 percent discount rate - and under all of the
scenarios the producers earn a positive return - a positive NPV
- from the project. These graphs use a 4.5 Bcf/day pipeline,
and provide another look at what could happen in terms of NPV if
prices end up being half of what they are today. The graphs on
slide 19 illustrate what happens to the producers' returns -
shown by the dashed, black line - and NPV if the pipeline is
built with the expectation that there's some yet-to-find gas but
there never is any. These graphs use a 4 Bcf/day pipeline, and
there would be no Point Thomson gas. A decline in production,
of course, results in a decline in revenue if there is no
exploration. Nonetheless, even under this extremely
conservative scenario, producers have a positive NPV of $10
billion using a 10 percent discount rate.
11:02:25 AM
REPRESENTATIVE GARA asked whether the fuel cost for transporting
the gas is included in the tariff of $4.73.
MR. SMITH said it isn't, adding that there is a general
assumption that the fuel is provided in-kind with the right to
move the gas to the market.
REPRESENTATIVE GARA surmised that the fuel cost is factored into
the NPV calculations.
DEEPA PODUVAL, Principal Consultant, Black & Veatch, explained
that instead the fuel cost is incorporated into the revenue
number; so it's a lower volume of product that's being sold at
the AECO Hub market because some of it has been lost as fuel
along the way.
MR. SMITH explained that in Black & Veatch's base assumption, a
25-year contract was assumed for the 4.5 Bcf/day case, but a 20-
year contract was assumed for the 4 Bcf/day and 3/5 Bcf/day
cases. Slide 30, in contrast, illustrates "what happens to yet-
to-find gas required under different scenarios with similar-type
contract terms given the size of the pipeline."
COMMISSIONER GALVIN indicated that the information illustrating
the NPV to the state demonstrates, as is required by statute,
that the state will benefit from going forward with a gas
pipeline. He added:
We're going to monetize this huge resource that's
going to provide both royalty and tax benefits to the
state for a long period of time. So the fact that we
have positive NPVs on the state returns ... [isn't]
all ... that significant - it's not that earth
shattering. We provide the information with regard to
the NPV to the producers for the question of
likelihood of success, and that goes to the question
that is on everybody's mind, which is what is the ...
likelihood of having a failed open season and, if that
is a failed open season, of ultimately getting gas
committed to this line. And for that reason we looked
at it from a number of different perspectives.
COMMISSIONER GALVIN pointed out, however, that by showing that
these are positive investment opportunities for the producers,
it isn't really the case that if it weren't too good to be true
then everybody would be wanting to invest in the project.
Instead, one must recognize that this is a closed market - it is
only the producers that are in a position to take advantage of
this investment opportunity - it is not available to the regular
investment community. This means that this issue has to be
viewed from the producers' vantage point when attempting to
determine whether this project is something they should go
forward with. It is a tremendous obligation on the producers'
part if they do go forward with, but it comes with tremendous
value in return - they get to monetize their gas. In the end,
however, the question remains: is this something the producers
will take advantage of. The administration believes that in
moving the project forward in order to present this opportunity
to them, the producers, one way or the other, will take
advantage of the opportunity to monetize their gas.
COMMISSIONER GALVIN said that's why the administration is going
forward with the project, why the state needs to advance the
gasline, and why the administration believes that in the end,
giving the license to TransCanada is a good thing for the state
because it can make that decision up front in a timely manner
and force the issue in order to get to a gasline sooner.
11:08:41 AM
CHAIR HUGGINS, referring to the earlier-used term "ring-fenced,"
asked whether the state would be included in that protective
mechanism.
MR. BLOOM said no, and explained that the term "ring-fenced" is
simply a term of art used to mean that the project company
that's created is "bankruptcy remote" from TransCanada so that
the investors in the project company do not have recourse to
TransCanada if something goes wrong with the project. In
addition to protecting TransCanada and other potential equity
sponsors from having to cover the debt if something goes wrong
with the project, it also protects the investors should
something go wrong with TransCanada - conceivably the project
itself could continue. This sort of project financing is
typical in the "oil and gas world."
CHAIR HUGGINS asked what the state's status is with regard to
liability.
MR. BLOOM said he doesn't believe that under the construct in
the proposal, the state has any liability whatsoever for the
performance of the project, for the debt, or for any of the
other obligations that the private parties enter into.
CHAIR HUGGINS said that's comforting.
COMMISSIONER GALVIN relayed that the FERC ruled today on the
Trans-Alaska Pipeline System (TAPS) tariff issue, affirming the
decision of the administrative law judge which ultimately will
mean the recovery for the state of hundreds of millions of
dollars of excess tariffs.
CHAIR HUGGINS asked how long the FERC took for that ruling.
COMMISSIONER GALVIN suggested that someone else might be better
able to respond to that question.
The committees then recessed from 11:13 a.m. to 2:06 p.m.
2:06:18 PM
TONY PALMER, Vice President, Alaska Business Development,
TransCanada Alaska Company, LLC, ("TransCanada"), began his
presentation by introducing TransCanada and providing background
on its decision to participate in AGIA. He gave a brief
personal history and noted that he first started to work on an
Alaska gas pipeline project 23 years ago. During the past 7
years that the project has been back under consideration,
TransCanada has looked at many top issues and has worked hard to
present a complete and comprehensive AGIA application. In fact,
TransCanada has filed over a foot of paper in the AGIA
application and responses. He stated that comprehensive
information on the project is available to the legislature, the
public, and the administration, via the state's website.
TransCanada has 3,600 employees across North America, in all
disciplines, who are qualified to pursue and successfully
complete this project. TransCanada employees presently
administer 36,500 miles of interstate and interprovincial
natural gas pipeline. In addition, they administer 7,700
megawatts of electric generation. Each TransCanada employee is
responsible for 10 miles of pipeline and 3 megawatts of power.
TransCanada's power business includes wind, nuclear,
hydroelectric, coal, and natural gas projects.
2:10:19 PM
MR. PALMER said that TransCanada's board of directors considered
several factors in last November's decision to participate in
AGIA. The first consideration was whether the project has
strong economics and a margin to succeed. Clearly, in order to
have a successful project, the fundamentals of supply, demand,
expected price, and the cost of the project must be understood.
He pointed out the importance of the consultant's testimony
regarding expected gas prices and construction costs, and
acknowledged the skepticism about the correctness of the
projections. However, when looking at the history of natural
gas prices, there have been variations in price and cost.
Today, gas prices and projections are higher, and costs of the
project are higher. He opined that with some exceptions, price
and cost usually move in tandem. TransCanada considered what
the margin would be between the price of gas in the marketplace
and the price of this project. The projections of high price
and high cost indicate that there will be a sufficient margin
for the project to succeed. Future low price and low cost also
provide a sufficient margin for success. Any potential risk
would be the result of a period of high costs during
construction, and low gas prices afterward.
MR. PALMER encouraged the committee to look at the broad
spectrum of risk and opportunity. He continued to explain that
any large cross-country project needs the cooperation of the
public, government, and stakeholders; no commercial party can
deliver this project alone. TransCanada has worked through the
AGIA statute, and heard testimony that the government and public
are committed to the project. Furthermore, the AGIA statute
sets out the rights and responsibilities of both parties.
TransCanada, and four other parties, reviewed the requirements
of the applicants and decided to proceed with the project. He
assured the committee that TransCanada decided to make this
investment based on a number of criteria. First, this
investment is a strategic fit for TransCanada's capabilities in
that it is a gas pipeline opportunity and fits with
TransCanada's core competency, that being to construct, own,
operate, and expand long-distance natural gas pipelines. The
corporation moves one-fifth of the natural gas in North America
daily, but owns none of it. Second, the project is within
TransCanada's geographic footprint and it has rights-of-way and
legislative permits necessary for the Canadian portion.
SENATOR WIELECHOWSKI asked how the FERC will evaluate
TransCanada's proposal versus "Denali-The Alaska Gas Pipeline
project."
2:19:37 PM
MR. PALMER surmised that if the AGIA license is granted to
TransCanada, and both projects hold an open season, the FERC
will examine both applications and make a decision, which may be
to push the projects together, to choose one over the other, or
to grant certificates to both.
SENATOR WIELECHOWSKI offered his belief that if both parties
continue to the open season, the Denali project will get gas
commitments. He asked how TransCanada will overcome that.
MR. PALMER expressed his understanding that the Denali project,
at the moment, is two North Slope producers acting as a pipeline
company. There has been no public commitment of gas. He
assured the committee that TransCanada moves gas for all
producers and BP is its largest customer across North America.
SENATOR WIELECHOWSKI then asked whether TransCanada was counting
on Point Thomson gas when it prepared its application for 4.5
Bcf/day.
MR. PALMER explained that TransCanada looked at the overall
basin capability of Alaska, rather than individual pools of gas.
The corporation wants to begin moving as much gas as possible as
early as possible, and to expand over time. He stressed that
TransCanada does not have proprietary information on potential
fields; however, the materials presented by the administration
and other witnesses indicate that there will initially be enough
gas for a pipeline of 3.5 Bcf/day to 4 Bcf/day. The Point
Thomson gas was not considered when TransCanada submitted its
application, and TransCanada expects that the basin in Alaska
can produce 4.5 Bcf/day. The availability of Point Thomson may
affect the response at the open season, though; regardless, if
necessary, TransCanada can downsize the project to 3.5 Bcf/day
or increase capacity.
REPRESENTATIVE GARA asked whether Mr. Palmer had any experience
with lease holders attempting to block pipeline projects.
MR. PALMER said no.
2:26:07 PM
REPRESENTATIVE GARA stated his belief that gas commitments will
be made if the pipeline is built. However, the oil companies
have the ability to refuse to commit gas and create an
atmosphere of uncertainty. He asked, "If they don't put the gas
into a waiting pipeline, at what point do they risk losing their
leases and the future value of the gas?"
COMMISSIONER GALVIN surmised that the oil companies take
positions that maximize their commercial opportunities. He
continued:
When we talk about the lease prerogatives, [the] duty
to develop, and so forth, it's not so much that we're
stating that it is a risk on their part, that they're
going to lose billions of dollars of value by not
doing so, it's just something that is in the decision
framework ... in terms of ... whether to commit gas to
a particular line ... [at a] particular point in time.
As things unfold, we don't know how this is going to
play out, either with regard to the TransCanada TC
Alaska project going to an open season, [or] the
Denali project going to an open season. ... I think
Senator Wielechowski's comment that ... the gas will
ultimately end up at the Denali project ... is the
knee-jerk feeling. ... But as Mr. Palmer indicated,
it's not that simple - it just doesn't work that way
in the real world. ...
There are going to be a number of different
considerations that are going to play out as they make
that decision on where to commit their gas. Clearly
TransCanada, throughout North America, has attracted
gas, [has] attracted these same producers to put gas
into ... [TransCanada's] lines in instances where the
producers had just as much of an opportunity to build
the line themselves. ... There's an economic
opportunity here, there's a lot of money to be made by
all the participants that are here discussing it, and
it's just going to be a matter of how it plays out.
... We believe that for the purposes of the decision
that we have before us now, that all indications are
that ... this gas will get to market.
REPRESENTATIVE GARA gave an example of the oil producers being
willing to sell gas to their own project, but not to the project
chosen by the state. If the state still prefers the TransCanada
project, and other options have been exhausted, he asked whether
the oil companies are risking, by their refusal, the loss of
their leases in a lawsuit brought by the state.
2:30:48 PM
COMMISSIONER GALVIN indicated that the advancement of the Denali
project is an alternative to get the gas to market. The choice
of pursuing that alternative is within the producers'
prerogative, although it means there will be no additional state
concessions or changes to the system. Further, completion of
the Denali project will satisfy the requirement of the leases.
However, if the producers refuse to put their gas in any
project, that will raise the question of whether that is a
justifiable position for the producers to take.
REPRESENTATIVE GARA concluded that if the leases are violated
and the facts support the state in a lawsuit, the producers risk
losing their leases.
COMMISSIONER GALVIN said yes.
SENATOR McGUIRE recalled recent public testimony from a citizen
concerned about the legislature not doing enough to bring all of
the parties together to work as a team and move the gas pipeline
forward. She observed that TransCanada is a successful pipeline
builder and is prepared with right-of-ways, First Nation
permitting, and access to the [AECO] Hub. Further, ExxonMobil
Corporation ("Exxon"), British Petroleum ("BP"), and
ConocoPhillips Alaska, Inc. ("Conoco"), are three large and
successful corporations that own a significant amount of gas
that they want to market. She pointed out that this vote will
be a political decision made by legislators inexperienced in a
business transaction of this proportion. Senator McGuire stated
that she has misgivings even though the producers have changed
their tone under pressure. In addition, the project is
supported by an extremely popular governor. On the other hand,
there is the $500 million cost to the state and the biggest
concern is that AGIA binds the state to only support the
licensee's project.
SENATOR McGUIRE expressed concern about the possibility of an
unsuccessful open season leading to lengthy litigation. She
also mentioned that her constituents who work for Conoco and BP
feel that a vote in favor of TransCanada is a vote against them.
She informed the committee that there are very successful
mediators serving at the Consensus Building Institute at the
Massachusetts Institute of Technology; in fact, one of the
mediators there has negotiated 47 mega-projects around the
world. She suggested that the administration consider, before
the vote on the license, one more attempt, with a trained policy
mediator, to get all of the stakeholders together in executive
session. She stressed that state business is "open and
transparent"; however, the parties need to be able to
communicate directly "in order for certainty to take place."
2:40:59 PM
COMMISSIONER GALVIN observed that Senator McGuire raised the
crux of the question, that is, "How do we get from here to
there?" He opined that there is an agreement on the ultimate
goal. The question is a matter of sequencing and the tight
timeframe. "Structurally, how do we get the state, in this
commercial enterprise that we've got ourselves engaged in, to
actually participate in a meaningful way," he asked. In a
democracy, with a representational form of government, it is
very difficult to operate similarly to the business sector. The
state must make decisions on an ongoing basis and cannot be as
nimble as a business in a commercial setting. In fact, there
will be more structure and separation between decisions, and,
because of that, the state must take a position that can be
agreed upon by the legislature and the executive branch, and
AGIA sets up the sequencing that will allow the state to reach
that goal, in a certain manner.
COMMISSIONER GALVIN pointed out that interaction with the other
parties will establish what the state is willing, and unwilling,
to do. A review of the state's work over the last few years
shows that limits for what is possible are being established.
He opined that it is "absolutely critical at this juncture in
the process, for the state and the legislature and the executive
branch, together, to establish what is the framework for further
discussion, and we do that by approving this license and saying,
'These are the terms that Alaska wants to operate within.'" Any
diversion from doing just that will expand the discussion beyond
the current framework that allows for consensus, and will open
up the expectation that there is a whole realm of alternatives.
He suggested that a decision must be made on this license in
order for Alaska to state its position, and this will be a major
advancement in the ability to get the parties together.
COMMISSIONER GALVIN warned that there may be an impasse at some
point, and mediation would then be appropriate. In response to
previous testimony, he said that there are no identifiable
barriers within AGIA, and it is the best mechanism for a
democracy to use in order to provide the tools to enable the
administration to achieve its goal.
SENATOR MCGUIRE re-stated her concern that fierce positions will
be staked out and further complicated by the dispute over Point
Thomson, thus interfering with the administration's plan. In
her opinion, she relayed, the department is now faced with the
ultimate conflict of interest; to deal with the revocation of
leases [at Point Thomson] and to also review, for the same
parties, applications on the Denali project. She concluded that
these positions could become adversarial and could lead to
litigation instead of reconciliation.
2:50:32 PM
REPRESENTATIVE CRAWFORD recalled that Mr. Haymes, ExxonMobil
Alaska Production Manager, indicated that ExxonMobil would like
to own a percentage of the line commensurate to its throughput.
He asked Mr. Palmer to comment on how much of a percentage
TransCanada was considering offering to shippers.
MR. PALMER clarified that members of the legislature and others
"would like TransCanada to remain north of 50 percent, because
you're looking for an independent pipeline." Since AGIA is not
prescriptive on this point, TransCanada has offered equity to
parties who commit their gas at the initial open season in order
to improve the probability of a successful open season. He
stated that although there have not been discussions with
producers regarding the volumes of shipping or shareholding, a
producer may expect to have a volume commitment equal to its
share ownership, and TransCanada's task would be to bring a
balance that would work for all parties.
REPRESENTATIVE CRAWFORD relayed his personal experience working
on the Trans-Alaska Pipeline System (TAPS). He asked whether
TransCanada considered negotiating shares for line-workers as
part of its project labor agreement (PLA), in order to keep
costs and the tariff down.
MR. PALMER advised that TransCanada has not started to develop
its strategy and tactics for a PLA. However, at a nuclear plant
in Ontario that TransCanada is refurbishing, the workers are "a
direct partner" with TransCanada.
2:56:27 PM
REPRESENTATIVE SAMUELS said he agrees with the decision to
dissolve the unit leases of Point Thomson. As far as leverage
goes to ensure the commitment of gas, the state can use taxes,
permitting, and Point Thomson to apply pressure. However, to
think the state could take back leases at Prudhoe Bay from an
operating oil field is unreasonable. He opined that seizing the
Prudhoe Bay leases is not a realistic leverage point, although
there is real leverage at Point Thomson. Representative Samuels
then asked for Commissioner Galvin's opinion.
COMMISSIONER GALVIN observed that at issue is what the state can
do if the producers choose not to commit their gas to any
project. For example, if the producers decided to hold out for
a long-term tax break, he opined that the state would have some
recourse as the lessor. Furthermore, the situation could be
that either there is no pipeline or economic justification for a
pipeline, and the producers' refusal to commit gas is
reasonable, or it is clearly economic and the producers are
holding out to extract additional value from the state. The
situation will probably be some combination of the
aforementioned, and so any resolution must be based on the facts
of the case. Commissioner Galvin advised that the state can not
make a prediction about this. At this time, the legislature
does not have to make decisions regarding changes in taxes, or
steps to support TransCanada's project. The purpose of AGIA is
to advance the state another step, gather information, identify
the options, and take the next step. He expressed his
confidence that this is the best step for the state to take
right now, to maximize its opportunities. He warned against
forestalling legitimate options that the state may want to
pursue in the future, and said that the duty to develop is not
"off the table."
REPRESENTATIVE SAMUELS said the problem is that this is going to
be a commercial and economic decision made in Calgary, London,
and Houston, and be based on a review of the numbers, the risks,
and the economics. Legislators, in contrast, are looking at the
political world; campaign promises and changes in legislative
members and the administration. The business world must feel
frustration with decisions made through a political prism. He
opined the government is trying to become a player at a
commercial table, and cannot be successful due to potential
changes in the administration. Representative Samuels recalled
Mr. Palmer's previous testimony that TransCanada would not seek
an agreement with the producers, outside of AGIA, unless the
state agreed. The political environment could change that
position.
COMMISSIONER GALVIN acknowledged that Representative Samuels's
comments get to the heart of the discomfort and disconnect with
AGIA. With regard to resources, the state is a commercial
player as the owner of the resources. Granted, politics prevent
the state from acting in the business world, as a business,
because it is not a dictatorship. This situation creates
burdens on commercial entities regarding long-term investment
decisions or contractual commitments that can change after
election night. However, AGIA addresses these burdens by fiscal
assurances and treble damages. It acts as a mechanism to
overcome the lack of ability to provide a contractual partner,
with reassurances that agreements will not change without
penalties. Furthermore, AGIA does not bind future legislatures
or prevent changes from being made, but puts a price tag on any
such changes. This issue has been seriously considered, along
with upstream fiscal certainty, which needs to be imbedded in a
way that can be relied upon. Commissioner Galvin agreed that
there is an awkward connection between the state's commercial
interests and the inherent structure of a democratic government.
3:14:00 PM
REPRESENTATIVE FAIRCLOUGH raised the question of the potential
conflict of interest within state agencies regarding
applications coming from the Denali project and applications
from Exxon and Chevron Corporation ("Chevron") asking to advance
projects. She asked how the state would be held harmless given
that on June 6, 2008, Mr. Palmer stated his expectation that the
state will act as a partner and maintain a good working
relationship with TransCanada. She further asked how
TransCanada will view the state processing the applications for
the Denali project and for Point Thomson.
MR. PALMER referred to AGIA, AS 43.94.40, which read:
The review processing or facilitation of a permit,
right-of-way, or authorization by a state agency in
connection with a competing natural gas pipeline
project does not create an obligation on the part of
the state under this section.
MR. PALMER expressed his belief that this is a specific
provision to allow the state to process permits without a breach
of contract.
COMMISSIONER GALVIN advised that within the Department of
Natural Resources (DNR), there is an office that coordinates the
permitting for large projects. He explained that the
relationship is established through the reimbursable services
agreement (RSA) between the permittee and the DNR and, by
extension, through the other state agencies. This allows for
the applicant to contract for dedicated permitting services for
a fee. This is a usual mechanism that has been offered to the
Denali project, ENSTAR Natural Gas Company, and Alaska Natural
Gas Development Authority (ANGDA). Further, in response to
concerns, he maintained that the state will process, evaluate,
and ensure that there is a timely adjudication of applications
of any gas pipeline, regardless of their source. He stressed
that the RSA process allows an applicant a relationship with the
state very similar to what TransCanada will enjoy.
REPRESENTATIVE KERTTULA said that in terms of working in the
marketplace, the legislature has the goal of avoiding anti-trust
violations, of seeing competition and letting the market work.
She remarked that if they've learned anything from the TAPS,
it's that they should support openness and true competition,
because that's been a long time coming.
3:21:13 PM
MR. PALMER, continuing with his presentation, said that the
pipeline is a synergetic business opportunity for TransCanada
because it has spare capacity on the existing system leaving
Western Canada that it wants to refill with Alaska gas; this
would also be beneficial for Alaskans and for customers in
Western Canada. He explained that the [AECO] Hub is the 15,000
mile pipeline system in Alberta that is owned by TransCanada.
Going into this system will improve the economics for Alaskan
gas as was demonstrated by a recent independent analysis
purchased by the Legislative Budget and Audit Committee.
Netbacks will be higher as a result of going into existing
facilities that are somewhat depreciated and thus, will have
lower tolls. Additional benefits are: Alaska's gas will have
market diversity, just like Western Canada's gas has today, to
serve markets across the Lower 48; there is a liquid market,
meaning that gas on the system can be traded for free; and the
risk of capital overruns is lowered by not building a facility
to transport the gas to Chicago.
MR. PALMER said that he has heard other parties indicate that
Alaska's gas should go to a different system in Alberta. He
assured the committee that another system would provide lower
value to Alaskans on a netback basis when rationally looking for
the best economic value. Turning to the subject of whether
Alaska gas will be used in processing the Alberta oil sands, he
stated that Canada has a significant surplus of natural gas.
After exporting gas to the U. S. for forty years, Canada has a
current surplus of 9 Bcf/day, which is more than double the
capacity of the proposed pipeline. At this time, production in
Western Canadian is relatively flat and demand is increasing
because of oil sands development, heavy oil development, and
electric generation. Therefore, the present surplus is expected
to decline from 9 Bcf/day to 6 or 7 Bcf/day within the next 10
years. However, Alberta will still be exporting 6 or 7 Bcf/day
when the Alaska gas comes to market.
MR. PALMER stressed that Western Canadian gas will continue to
serve the oil sands market for the next 10 years and beyond. As
Alaskans expect the Alaska natural gas market to be served
first, so does Alberta intend to serve its local market. So, he
continued, when Alaska gas comes to market in 10 years, its 4
Bcf/day will add to Canada's export of 6 Bcf/day. He concluded
that it is inaccurate to say that Alaska's gas will go to
Alberta's oil sands. He acknowledged that the gas will be
comingled, but the net effect is that it will go to the Lower
48, refilling the pipeline, and lowering the toll.
3:28:15 PM
REPRESENTATIVE GARA asked what the anticipated use of natural
gas is for the oil sands "if they're up and running fully as an
exploration project."
MR. PALMER replied that generally, natural gas is used to
provide heat and steam. Huge amount of incremental oil sands
development is expected in the next 10 or 15 years by either an
open pit mining process, or by steam assisted gravity drainage
(SAGD) whereby the oil is collected via a horizontal well. Both
processes use natural gas, though parties are currently looking
for ways to use "bottom of the barrel" products instead. If
that is unsuccessful, oil sands and heavy oil development in
Western Canada will increase the demand for natural gas by 2
Bcf/day within the next decade, he predicted. In response to
other questions, he stated that the numbers he'd cited earlier
for Canadian exports assumes an increase in demand at the oil
sands of about 2 Bcf/day, and exports of about 6-7 Bcf/day in 10
years time - which is down from 9 Bcf/day today.
MR. PALMER, continuing with his presentation, stated that
TransCanada's objectives are highly aligned with those of the
state. Those objectives are: support basin development, both
short term and long term; and support the open competition
established under AGIA. He remarked that the legislature and
the administration decided to support an open and transparent
process rather than a contractual negotiation. TransCanada has
participated in public request for proposal (RFP) processes
around the world and understands how this process, and
negotiated contract processes, work. Furthermore, TransCanada
agrees that competition is important; in fact, there is
competition for who will build, own, and operate the pipe, and,
more importantly for the resource owner, there is competition at
the wellhead.
MR. PALMER pointed out that TransCanada began 50 years ago with
just 3 customers in Western Canada and today has 300 customers;
no one can suggest that there is less competition with 300
customers than with 3. He opined that TransCanada has no
inherent conflicts, in pursuing this project, with any of its
other business goals. In addition to its large system in
Canada, TransCanada has employees, offices, and assets across
the U. S., including 12,000 miles of natural gas pipeline,
making TransCanada "one of the largest U.S.-based pipeline
companies," he remarked, and observed that the natural gas and
oil business in North America is integrated for all parties. He
then noted that TransCanada offices are located in Houston,
Omaha, Portland, Michigan, Connecticut, and Boston; however, he
stressed that Western Canada is most similar to Alaska. In
fact, there are several areas in which TransCanada's experience
is similar to Alaska's; for example, TransCanada began in
Alberta with a small local market, 0.25 Bcf/day, and surplus gas
was then exported.
MR. PALMER said that furthermore, like Alaska, Western Canada is
far removed from major markets such as New York, California, and
Chicago. TransCanada also began with a small number of initial
customers, and now serves large and small companies. Alaska's
basin has a high potential for exploration, as did Alberta 50
years ago. He noted that there have been questions asked
concerning TransCanada's capacity and ability to build the
pipeline. He assured the committees that TransCanada is well
suited for this project as it moves 20 percent of North American
natural gas across interstate and interprovincial pipeline. The
vast majority of the natural gas pipelines are owned by third-
party pipeline companies, and TransCanada is the largest
interstate and interprovincial pipeline natural gas company with
proven technical, engineering, and operational competence. Its
operating costs, as verified by a third party, are lower than
its competitors by 25-35 percent.
MR. PALMER relayed that TransCanada's internal auditors have
determined that between 1990 and 2003, its capital costs for
large projects using 42-inch to 48-inch diameter pipe are 19
percent lower than Canadian competitors and 38 percent lower
than others in the U.S. Furthermore, during the 1990s,
TransCanada built 7,000 miles of pipe on schedule and within 0.6
percent of the budget. TransCanada built an original pipeline
across Canada 50 years ago that was longer and more difficult
than this project, competitively and with the cooperation of the
government. He relayed the importance of looking beyond
engineering and operating skills to construct and operate a
project of this nature, because it will take much more than
those to complete this business.
3:39:58 PM
SENATOR FRENCH asked Mr. Palmer to address the argument made by
some that TransCanada doesn't care if it runs over budget on
this pipeline because it will get all of its money back in a
guaranteed rate of return through the FERC and the tariff. He
asked whether TransCanada has financial motivation to bring this
project in on budget.
MR. PALMER explained that TransCanada cannot succeed as a third-
party business and expand its system if it has cost overruns;
that TransCanada has a long history of controlling costs; that
TransCanada stipulated in its AGIA application that it would
take a lower rate of return on its capital in the event of cost
overruns; and that TransCanada has proposed that there be an
allocation of the U. S. government loan guarantee to cover
capital-cost overruns. Overruns would be funded with 100
percent debt, and TransCanada would not earn additional money,
but would instead receive a lower rate of return on equity. He
pointed out that TransCanada's record of cost control on the
construction of interstate and interprovincial pipelines is
unmatched.
SENATOR FRENCH asked for an explanation of the effect of a loan
guarantee on cost overruns.
MR. PALMER explained that a cost overrun would result in more
debt, guaranteed by the U. S. government, but there would be no
incremental equity. For example, if there was an overrun of $6
billion, without the loan guarantee, the $6 billion would be
funded with 75 percent debt and 25 percent equity, which would
result in $1.5 billion of equity invested by TransCanada. He
further explained that a 40 percent cost overrun, for example -
if TransCanada's proposed cost-overrun structure was not
approved - would result in only a 7 percent return on
TransCanada's "incremental investment dollars." Mr. Palmer then
remarked:
Our proposal is to adjust the U. S. loan guarantee to
allocate a portion of it to cover overruns and that
would insure that TransCanada earned, as a
shareholder, not one penny more from a cost overrun.
3:47:10 PM
REPRESENTATIVE SAMUELS argued, though, that that 7 percent
return would come out of the pockets of the shippers of royalty
gas. With regard to the loan guarantees, if TransCanada obtains
them for cost overruns but then doesn't have any overruns, the
federal government might not allow TransCanada to use the loan
guarantees for the project's original capital costs.
MR. PALMER acknowledged that a portion of the risk would remain
with the shipper, while only a limited portion of the risk would
remain with TransCanada. That would always be the case on a
project of this scale, particularly under the capital structure
required by AGIA. He added:
You will not find a party - I can assure you, as a
pipeline company - that's going to go forward with a
75:25 percent debt equity that's going to guarantee
you that that party will take 100 percent of the
capital cost risk. ... [With regard to] the issue of
the 7 percent, it is something that is not attractive
to our corporation. You're correct that the shippers
will have to bear some of that ... risk as well. Our
structure that we propose, in the event the U. S.
government does agree to it, also has a surcharge
mechanism which would ... reduce some of the risk on
the shipper and put some of that risk on the U. S.
government. ... I will also tell you, the AGIA process
has been highly unusual in that ... we have had to
reveal our commercial secrets on this project ...
before we have won anything. And that is, if not
unique, highly unusual; I have never done that before
in my career.
The committees took an at-ease from 3:49 p.m. to 4:07 p.m.
4:08:44 PM
MR. PALMER stated that there are other critical skills, besides
engineering and operations, that are needed to obtain success in
a project of this nature. Regulatory, community, First Nation,
and environmental issues must be addressed, in addition to
commercial and financial aspects. TransCanada has begun
discussions with the government of Canada about the structure of
this project through Canada; in fact, there has been and remains
a structure in place through Canada as established between two
sovereign nations. This proposed project has a 30-year history.
Although the legislation and regulatory structure is different
than in the U. S. - for example, Canada's norm is for rolled-in
tolls - there is a valid treaty that established the rights and
responsibilities of both nations. Furthermore, Canadian
legislation - the Northern Pipeline Act - provides a "single-
window regulatory agency" for this project. Turning to the
subject of LNG alternatives, Mr. Palmer reiterated:
TransCanada provided in its application ... that when
we hold the initial open season, customers will be
able to nominate any location along the right-of-way,
in Alaska, Yukon, British Columbia, or all the way to
Alberta, or to Valdez, simultaneously. ... In the
event that there is a potential LNG project that can
go forward at that time, and they nominate gas and
meet all the standard terms and conditions - as any
customer would have to - they will have that
opportunity to nominate Valdez or Alberta or Fairbanks
or Whitehorse.
REPRESENTATIVE CRAWFORD expressed his understanding that there
are environmental groups that are unhappy with the prospect of
new gas coming to Canada to support the tar sands project. He
asked whether TransCanada would have the ability, after the open
season, to redirect the project to Valdez if the Alberta market
closed.
MR. PALMER responded that if all of the gas is committed to
Alberta at the open season, and if, while TransCanada is in the
process of obtaining approvals, there was a significant
obstruction, TransCanada would have to contact its potential
customers to see if they would make a change. He elaborated
that in the highly unusual circumstance that the project was
stopped, TransCanada would seek commercial alternatives with its
potential customers and with government.
REPRESENTATIVE SAMUELS asked whether, at the open season, the
same information about costs would be available for both the
route to Valdez and the route to the AECO Hub.
MR. PALMER said yes.
4:15:48 PM
MR. PALMER addressed the issue of what the state gets for its
$500 million investment. He estimated that TransCanada will
also be investing more than $100 million before it obtains the
first license; in fact, Alaska's return on its money will be
higher than TransCanada's, and, for its $500 million, the state
gets a reliable, world-renowned partner that is capable of
advancing the project. TransCanada will provide an open season
within two years and voluntary expansions every two years
thereafter and is committed to proposing the rolled-in toll
structure that the state has requested in AGIA. He noted that
with a mandatory expansion, the FERC indicated that the tolls
would be incremental, not rolled-in. Incremental tolls are a
substantial hurdle to new explorers because they would face
higher tolls than the existing parties and so may have to go in
front of the FERC and argue their case with no certainty with
regard to outcome.
MR. PALMER said TransCanada is committed to promoting long-term
development, to proceeding to FERC certification, to building a
pipeline to Valdez if there is a market, and to delivering gas
to Alaskans. He concluded that TransCanada has a long history
of moving gas from western Canada and is motivated to continue
major expansion. He reminded members that employment
opportunities come from pipeline expansion and exploration
drilling, not from the operation of the pipeline. The Alaska
portion of the pipeline totals about 750 miles, therefore, the
operation of the completed pipeline will require only 50 to 75
employees. In contrast, there are thousands of jobs during
construction, and long-term employment comes from further
drilling and expansion. In addition, in-state gas development
is also important to TransCanada; in fact, there are 1,100
receipt and delivery points on its system in Alberta.
4:24:29 PM
MR. PALMER began his PowerPoint presentation. He displayed maps
showing the transportation system that TransCanada has built.
Under construction is the Keystone oil pipeline that has the
potential of becoming a $13 billion project. Slide 4
illustrates TransCanada's growth from a pipeline in 1958 that
delivered 0.25 Bcf/day 250 miles. Slide 6 illustrates the
construction of "pipeline looping," which is a second piece of
pipe laid parallel in the same right-of-way. Slides 7 and 8
illustrate the AGIA requirements for an application. He opined
that the competition for AGIA, as in any RFP process, occurred
prior to the submission of the application. He reviewed
TransCanada's competitive response to AGIA and highlighted that
the proposed toll reduction of $0.09/MMBtu would mean a $150
million reduction per year for the life of the project.
MR. PALMER then pointed out that TransCanada has filed with
Canada's National Energy Board (NEB) to change the jurisdiction
of its Alberta system from provincial to federal, partially in
order to be able to structure a system wherein "the value of the
incremental Alaskan gas to Western Canadian producers" is shared
with Alaskan customers. And that structure, if acceptable,
would achieve the aforementioned toll reduction, which, over the
course of 15 years, would ship $3 billion worth of value to
Alaska producers and away from Western Canadian producers.
Slide 10 illustrates the proposed Alaska pipeline project, and
Mr. Palmer noted that 33 percent of the [AECO] Hub pipe is in
the ground. Slide 12 illustrates the capital cost of $26
billion and specified rolled-in tolls for the Canadian and
Alaska portions of the pipeline. Slide 13 illustrates the
financial parameters of the project and indicates a debt to
equity ratio of 60:40 for all expansions.
MR. PALMER remarked:
I will also assure you that 60:40 is a structure that
is not unusual in the U. S. and Canada; in fact, that
is the capital structure of our Canadian pipeline
systems that I described for you, and, for many U. S.
pipelines, that actually is a relatively low equity
structure. You heard talk over the last several days
about Rockies Express - [the] existing pipeline under
construction from the Rockies in Wyoming, going east
to the Midwest and beyond - that structure has 55
percent equity. ... And, in fact, if you take the
75:25 for [the] initial project, and 60:40 for ...
expansions, and you ... do a weighted average up
through 7 [Bcf/day], you still do not get back to
70:30. So TransCanada's made a significant step out
here.
MR. PALMER described the return on equity and the return on
equity adjustment in the event of capital-cost overruns. Slide
14 illustrates the project schedule, with the license to be
issued sometime in July or the beginning of August 2008. The
open season is scheduled for July 2010, with a completed project
scheduled for September 2018.
REPRESENTATIVE BUCH asked for the meaning of "a binding" open
season, and about the circumstances that would lead to two open
seasons.
4:35:33 PM
MR. PALMER explained that the initial open season is a binding
open season that is scheduled to be completed by July 2010.
Over the next 12 months, TransCanada will be doing the necessary
field, environmental, and engineering work in order to conduct
the open season. As in any open season, there could be
insufficient volume to proceed. In that event, AGIA requires
that TransCanada continue to pursue the FERC certification, to
seek customers, and to hold a second open season by 2012.
Clearly, the preference is for customers to nominate their gas
in 2010. Slide 15 illustrates TransCanada's offer of equity
opportunity to shippers that subscribe for a threshold volume in
the initial open season. Mr. Palmer added that his company
continues to seek a partnership alignment with the three North
Slope producers and the state. Regarding upstream fiscal terms,
Mr. Palmer said that that is a matter between the state and the
leaseholders. He stressed that TransCanada can and will
accommodate natural gas liquids (NGLs) extraction as customers'
desire, and the gas will subsequently be moved to market.
SENATOR FRENCH asked whether the extraction of NGLs affects the
price of natural gas.
MR. PALMER expressed his expectation that the liquids will be
removed either in Alaska or in Alberta, before the gas goes to
the marketplace, due to their value. Ethane, propane, and
butane are generally more valuable on a volume or Btu content
[basis] than natural gas. Furthermore, TransCanada's
calculations assume that the liquids are included in the gas
going to Alberta, and are based on a Btu content of 1,118 or
1,067. He cautioned that when the Btus go down to 1,000, the
unit tolls will increase.
SENATOR FRENCH opined that selling the liquids and the gas
separately offers more value than selling a combined product.
4:42:58 PM
MR. PALMER said, "That's correct; if you are selling 1,118 Btus
as methane, you would generically obtain less value than if you
spilt it, and that's why they're generally removed somewhere
before they hit the ultimate customer." He added that the
Alberta system is "straddled" by a number of complexes owned by
third parties that will compete for "that business."
COMMISSIONER GALVIN opined that the state wants to get maximum
value for the gas, and that will result if the state sells the
liquids as well. In addition, having the separation take place
in Alaska will encourage this industry; in fact, there is
nothing in AGIA that would discourage the development of this
industry.
MR. PALMER re-stated his description of the regulatory
structures in Alaska and Canada, and then turned to the subject
of long-term basin development. The AGIA "must-haves" promote
basin development: open season every two years; in-state
deliveries through distance-sensitive tolls and a minimum of
five delivery points; low equity ratio; and state fiscal
incentives. With regard to the value to Alaskans of long-term
basin development and expansion of the pipeline, Mr. Palmer said
that assuming an average price in nominal dollars of just under
$10.00, there is a "netback" of $350 billion over 25 years,
whereas if the pipeline is expanded to 5.9 Bcf/day after 10
years, for example, that [netback] goes up to $600 billion, and
up to $700 billion if the pipeline is expanded to 7.2 Bcf/day.
MR. PALMER, referring to a slide on his PowerPoint presentation,
noted that the basin in Western Canada grew from 180 wells in
1955 to 13,000-16,000 wells currently. He also spoke of
Alberta's available reserves; 50 years ago the potential was for
75 trillion cubic feet (Tcf), but twice that amount has already
been produced and there remains another 125 Tcf in the
reservoir. The original proven reserves in Western Canada three
years before TransCanada completed its pipeline was 15 Tcf, but
10 years after TransCanada was in service, that had grown to 55
Tcf. "If you have a basin that is similar to Alberta, and
Western Canada, that would imply your 35 Tcf of proven reserves
would be north of 100 Tcf 10 years after in-service," he
predicted.
MR. PALMER turned to the issue of rolled-in tolls and said that
the Legislative Budget and Audit Committee asked TransCanada to
"Examine a scenario where you start at 4.5, for two years, then
you expand to 5.9 and then 6.5 for two years and then 7.2
thereafter." The graph on slide 23 of the PowerPoint
presentation illustrates that the incremental cost of
constructing a 4.5 Bcf/day pipeline - just the pipeline - is
under $2; that expanding the pipeline to 5.9 Bcf/day via
compression will have lower incremental costs; that expanding
the pipeline to 6.5 Bcf/day, perhaps via partial looping, will
result in still higher costs, as would expanding the pipeline to
7.2 Bcf.
MR. PALMER then referred to slide 24 illustrating the impact of
rolled-in tolls, AGIA standards, and the FERC standards on the
previously described scenario. He explained that the pipeline
company will have to apply for rolled-in tolls under the
following structure: at 4.5 Bcf/day, $1.76; at 5.9 Bcf/day,
$1.67; at 6.5 Bcf/day, $1.76; and at 7.2 Bcf/day, approximately
$2.00. Under this structure, all customers would be paying
these rates. However, under the FERC's rules, if the
incremental costs are lower than the base, there would again be
rolled-in tolls for all customers. Furthermore, whenever the
incremental costs are higher than the base, the FERC requires
incremental tolls for new customers, and the difference is
$1.00/mmBtu. Thus, he emphasized, an explorer looking for gas
must consider paying an additional charge for 25 years.
MR. PALMER concluded that TransCanada believes that AGIA was
structured to encourage the construction of the base project,
long-run basin development, and open-access terms for initial
and future shippers, and to provide service to in-state, Lower
48, and LNG markets. TransCanada has the credentials to build,
own, operate, and expand the pipeline. Moreover, TransCanada's
objectives are aligned with AGIA and the state's objectives of
early in-service; long-run basin development; and open access
and equitable treatment of all customers, original and later,
big and small.
The committees took a recess from 4:53 p.m. to 6:01 p.m.
6:06:09 PM
BLYTHE CAMPBELL opined that $500 million is not a trivial amount
of money, and said that even after following the gas pipeline
issue pretty closely for the past several years, she cannot
figure out why the state needs to spend that money. She said
that although Mr. Palmer repeatedly used the term "commercial
decisions" in his earlier presentation, she cannot imagine that
"this process" is similar to any commercial decision-making
process Mr. Palmer ever engaged in. She opined that the state
doesn't belong in this kind of process - it's not the state's
role to manipulate markets, particularly given that historically
the state is not very good at it. She concluded:
Voting "no" on the license gets the state out of the
middle of a commercial project, and given the robust
economics and the low risk we heard about earlier
today, it's really just about time we did that. I may
be greedy, but if we can try to get TransCanada's
expertise on this project and their best commercial
decision-making without spending $500 million, I'd
really like to do that.
SENATOR BUNDE said the $500 million troubles him as well, though
he noted that the state's previous attempt [during the Murkowski
administration] at getting a gas pipeline would have cost the
state $10 billion to the producers. He asked Ms. Campbell
whether she disapproves of all subsidies.
MS. CAMPBELL replied that she respectfully disagrees with
Senator Bunde "about the $10 billion." She reiterated that she
thinks it is not at all the state's role to be "mucking around
in the market."
SENATOR BUNDE said he would not argue with that. However when
the state considered the issue of stranded gas and the
production profits tax (PPT) legislation, it was over $10
billion that the state would have been offering in tax
incentives.
6:08:34 PM
TAMMIE SMITH said there is nothing more she would like than for
Alaska to remain "a great place to live, work, and raise
families." The action that the legislature takes in regard to
the gas pipeline will greatly affect the future of all Alaskans,
she opined. She relayed that she worked for ExxonMobil
Corporation for nearly six years in the early 1980s, and her
husband took part in the cleanup of the Exxon Valdez oil spill.
She noted also that she has worked in the construction and
engineering field for the past 16 years.
MS. SMITH said she has been following the gas pipeline issue
since the AGIA request for proposal (RFP) was issued last
summer, and has studied the matter extensively in the last eight
months since the firm for which she works submitted an
application to build the gas pipeline last November with the
Chinese oil firm, Sinopec. That application was rejected by the
administration; however, Ms. Smith said that that has not
diminished the passion she has developed for the all-Alaska
gasline project to a Valdez LNG facility for shipment to any
part of the world, especially to Alaska's current largest
trading partners - the Asian market.
MS. SMITH said the testimony she has heard over the last week -
that there is plenty of gas in the Lower 48 and that the gas
market is changing - is correct. She said Alaska needs to be a
front runner in the current global economy and do what is right
for the state, its citizens, and [the rest of] the United
States. She stated that she feels AGIA has created an
atmosphere of fear, which she said is one of the factors driving
up the price of oil. She said the legislature should not award
a license to the wrong project - the pipeline into Canada - out
of fear that if that is not done there will not be any pipeline
built, because she believes another will be built. She
continued:
All of these factors - the AGIA process, the Denali
project, the devaluation of our dollar, which helped
cause the high cost of oil and gas - ... have all come
together at the right time to create the circumstances
for the right project for Alaska, and I believe that
project is the all-Alaska LNG project to Valdez, no
matter who it is built by.
MS. SMITH said the all-Alaska gasline project would provide the
best deal to Alaskans, including long-term jobs, a new
petrochemical industry and its associated jobs, and cheaper fuel
for the state's homes and businesses; that project would make it
possible for Alaska to reduce the United States' national trade
deficit with China by selling China the only thing it needs from
the United States - energy. Saying she is not in agreement with
AGIA, she added, "If you want to amend it to make it more
applicable to an all-LNG project, that would be fine, but the
way it stands now, I hope that you will not be awarding
TransCanada a license."
6:12:04 PM
SENATOR BUNDE noted that the night before, another testifier had
made a plea for an all-Alaska gasline, and he had told her that
an export license would be needed to send gas to China; however,
according to information the legislature has received from the
federal government, that that's not going to happen, at least
not until the Lower 48 is served first. He offered his
understanding that the testifier had been told by the "Port
Authority" that it had an export license but was not told was
that that license needs to be renewed. He said the people who
have spoken with those in the U.S. Department of Energy (DOE)
have been told that it is highly improbable that that license
would be renewed.
MS. SMITH remarked that there is nothing about this project that
will not be problematic, but that's not to say it's
unachievable. She said she thinks an export license could be
issued "if you get to the right people and give them the right
information."
REPRESENTATIVE RAMRAS offered his understanding that the DOE has
a concern about long-term export of energy to other countries
because of the current climate here in the U.S.; that that's why
"the Conoco export license" has to be renewed every two years;
but that obtaining a limited expansion of the export license is
in fact possible. He mentioned, however, that "some of us got
together with the director after he testified here, and he ...,
said that Alaskans ought to build their own pipeline first and
look after their own needs first." He posited that putting
together different in-state Alaskan markets and a modest
expansion of the export license is a very reasonable plan.
MS. SMITH opined that if starting with a smaller project proves
necessary, then that would be the right thing to do, because
every step taken - even if it's a little step - is a step in the
right direction, much like making payments on one's credit card
balance.
6:15:53 PM
CHUCK BECKER, noting that he's recently retired from the U.S.
Commercial Service, said he's closely followed developments in
Alaska's economy for a number of reasons, one of which is that
he and his wife want to continue to live in the state as
retirees. He then said:
I want to take this opportunity to commend Governor
Palin and her administration for spurring interest of
at least four multibillion-dollar companies that
together have the capacity to develop a transportation
system to monetize Arctic natural gas - a critical
element in the prosperous future for Alaska. I also
commend each of you for taking large amounts of your
time in studying the issues associated with a gasline
project. It appears clear that the fundamentals in
the market are such that the numbers associated with
the development of a natural gas pipeline make
economic sense. The imperative is to minimize the
enormous, varied risks that loom over the project like
the Sword of Damocles.
To achieve that end, good faith cooperation among the
companies that have expressed interest in developing
the trans-Alaska and Canadian gas pipeline must begin
immediately. Now that you and the administration have
got their attention, the next step is for the governor
to call the parties together to begin the requisite
negotiations. I believe this body should decline
adoption of the AGIA proposal with an instruction
commending the administration for their achievements
in spurring the project and urging the governor to
call for a timely gathering of the key players that
can make the project a success.
6:17:53 PM
JACK HAKKILA remarked that he taught economics at the University
of Alaska in 1969, back when oil was "somewhere in the $2-$3
range," and when the oil pipeline was built. He noted that he
has met with about 100 oil companies in Calgary over the years.
He mentioned a friend who was involved in Canada's discovery of
oil at Leduc, outside of Edmonton, in 1948; the authorities at
that time decided not to let the "Seven Sisters" [of the
petroleum industry] come in and control Alberta, and instead
formed their own company in 1948. By 1981, that company was the
largest petrochemical producer in North America, and was not
controlled by any of the major producers.
MR. HAKKILA said he does not understand why Alaska would want to
develop its oil and gas "for the benefit of the Canadians," and
suggested that Alaska should instead build its own gasline and
develop its own petrochemical industry. He offered his belief
that developing a petrochemical industry would not require a
large number of people, and Alaskans could benefit from that
industry in terms of employment and funding for future
development. He opined that the state should not "do any of
this stuff just to accumulate money into a treasury," but should
instead be doing something that benefits Alaskans rather than
Canadians.
6:21:15 PM
PAUL D. KENDALL said he is in favor "of those people who would
make the determination on AGIA." He stated his purpose in
testifying tonight is to convey his "full faith and trust."
Those involved in the process are "all well-intended," he
remarked, and "just need to focus"; regardless of what the
legislature decides, he will support that decision. He stated
that he amazed at "the historical moment of this occasion," and
that he has a great deal of respect for those contemplating a
project of this magnitude. He added, "We as [Alaskans] ... must
come together as one people in our understanding of energy; we
must understand that true free enterprise ... is the result of a
stable and viable society, not the result of an economically-
plundered, over-populated, confused, predatory, kept, or
parasitical society." All things in society - amenities,
essential services, schools, roads, utilities, taxes, banks,
sexual identities, organized religions, entertainments, values,
commerce, and governments - are "begotten from a single family
home and a rental," he opined, and characterized clean air,
clean water, and clean energy as three essential needs "that we
all owe each other." And freedom, he posited, is connected to
energy.
MR. KENDALL suggested, therefore, that Alaska should immediately
begin to make itself an all-electric-based society, and called
electricity and hydrogen harmonic fuels, fuels that live in
harmony with life's cycles. He remarked upon Alaska's vast
hydroelectric potential. He characterized large, free-
enterprise oil companies as the emperors of capitalism and
profits, and said they represent the "rim" with the Middle East
being the "hub." He said it is imperative that the legislature
question why the major oil companies have been in Alaska for 20
years but have allowed the pipeline to go two-thirds empty, and
should "suspect something unusual." If one considers energy to
be an essential need, and if "true, free enterprise" is not
applied, then that energy becomes a controlled substance.
Alaska is in a position to control that substance and thereby
generate capital immediately.
6:26:10 PM
MR. KENDALL opined that Alaska needs to be prepared for today's
"new world," wherein a nation's energy abundance will determine
its people's fate for many years to come; and that the next new
great society will be based on clean energy - energy that's
available by simply turning on a switch. Magnetic fields and
hydrogen molecules - new energy's future technology - constitute
the only viable future that society can give to its children, he
remarked. In response to a request that he clarify what his
position is regarding AGIA, he said, "I love the deal," adding
that he would like to see the oil companies immediately offer
the state a performance bond because they are now moving into
"power plant positions across the world" and so could offer the
state multiple geothermal, hydroelectric, and hydrogen projects,
and electric vehicles. He expressed concern about [how things
will stand] in five to ten years, particularly given the
rapidity with which technology is evolving. He said that even
though the legislature may be well-intended, the oil companies
have the ability to manipulate whatever market there is out
there. In conclusion, he said, "I want to bequeath my faith and
trust to you people - whatever you determine."
6:29:15 PM
SCOTT HAWKINS, President, Advanced Supply Chain International
(ASCI); Chair, ProsperityAlaska.org, explained that the latter
affiliation was formed about nine months ago to educate and
empower citizens to participate in issues affecting their
prosperity. He opined that Alaska is at a point where finally
there is a pipeline within its grasp "after many year of wishing
for one," and acknowledged the efforts of the legislature and
the administration for moving a project forward to where it is
now. However, ProsperityAlaska.org has concerns about AGIA. He
noted that the first concern is that Alaska's government does
not have a sterling track record of investing in economic
development projects such as the Healy Clean Coal Project (HCCP)
and Alaska Seafood International, LLC. He said the failed
projects have one thing in common: a certain hubris in the
public sector that projects can be legislated and funded into
existence and become successful economic entities competing in
the private sector. He said that that is a difficult
proposition, and that AGIA suffers from it as well.
MR. HAWKINS stated that years ago, when he ran the Anchorage
Economic Development Corporation (AEDC), he used three criteria
in evaluating whether or not there was a role for government in
a project. The first criterion was whether the government's
role is a minority one, not a majority role. He explained,
"Because any time you have a government taking the lead and
providing the bulk of the resources for a project, it's a red
flag." The second criterion, he noted, was whether the
investment is for legitimate government activities, such as
roads, public utilities, or even training assistance. The third
criterion was that if the benefits of the investment are not
mainly public, and the project is not successful, then
government should get some enforceable commitment to get its
money back. He said those principles served the AEDC well; for
example, the AEDC was involved in a number of significant
projects, without a single failure. He offered his belief that
AGIA fails all three of the aforementioned criteria, and so his
concern is that AGIA runs the risk of going down in history as
"another embarrassing boondoggle."
MR. HAWKINS also expressed the concern that the state policy-
makers involved in AGIA are running the risk of outdistancing
their technical expertise. For example, on the issue of rolled-
in rates, the FERC is a credible agency that has existed for a
long time, and so he is not sure that the state ought to "lay
down markers and muddy the waters on issues like that." He also
expressed concern with the treble-damages clause, and
characterized it as bad policy because it limits the state's
options to do something different, even necessary, in the
future. He said that ProsperityAlaska.org is also troubled by
the AGIA process in that the major oil producers are "getting a
tone of confrontation from state government." Characterizing
himself as a student of economic development, he said he has
watched political jurisdictions world wide succeed and fail, and
has yet to see any of them ever confront their way to
prosperity.
MR. HAWKINS, stating his belief that there is probably benefit
in having more than one competing proposal on the table at this
stage, suggested that the legislature amend AGIA such that there
is a better balance between the private and public resources
being put into the project; such that the treble-damages clause
is eliminated; such that the provisions around rolled-in rates
are toned down; and such that something is put in place so that
the major producers could join in at some point in time. Alaska
finally has an opportunity to advance this project, but he is
troubled by the approach that is being taken, he relayed.
MR. HAWKINS concluded:
I think there's a way out here; I think victory is
within our grasp. We have to be careful not to
overplay our hand, as a state. ... By making some
courageous decisions today, the odds of getting a
pipeline built can be enhanced and not diminished. We
need sound policy - not sound politics.
MR. HAWKINS, in response to questions, provided information
about ProsperityAlaska.org, and confirmed that none of the major
oil companies are members.
REPRESENTATIVE GARA pointed out that before AGIA and government
involvement, "voluntary" involvement by the producers hadn't
resulted in a pipeline; therefore, he asked Mr. Hawkins why he
would expect that if AGIA is not adopted, suddenly the major
companies would propose an acceptable pipeline plan.
MR. HAWKINS clarified that he is not saying that there is no
role for government in this process or that AGIA should be
eliminated; rather, AGIA should be made less confrontational,
and its terms should be changed so that there is less government
involvement and more private-sector involvement. TransCanada is
a solid company, and the state does have interests in this
process, interests which are generally pretty well-aligned with,
though not identical to, those of the producers.
6:38:58 PM
HEATH HILYARD, Staff, Advanced Supply Chain International
(ASCI); Board Member, ProsperityAlaska.org, stated that although
tremendous headway and advanced discussion has been made by the
administration and legislature with regard to AGIA, he does not
think a $500 million inducement is required to move a
commercially-viable project forward. In response to a question,
he stated that his position on AGIA "would be one of a qualified
opposition."
REPRESENTATIVE GRUENBERG said "It seems to me whether you
provide cash to somebody or you allow them to keep money in
their pocket by giving them a tax break, the bottom line is
pretty much the same."
MR. HILYARD concurred.
6:41:53 PM
MIKE KENNY, after expressing a preference for an all-Alaska
gasline route, said that although he welcomes the transparency
of the AGIA process, he still believes it resulted in only one
applicant who filled out the application correctly and "went
through the process." He continued:
I don't know that the almost unanimous vote for AGIA
would necessarily mean that this would be a rubber
stamp for the result of this first round of AGIA, or,
maybe, it'll turn out to be the final round. There
are many reasons that I think AGIA has produced a
result that will not be in the best interests of the
citizens. Number one is the time: 2020. We can't
wait that long; ... that's beyond the pale.
MR. KENNY noted that he had passed out a report, including an
interview with Peter Lougheed, the Alberta premier from 1971-
1985 and father of that province's petrochemical industry. Mr.
Kenny said former Premier Lougheed was completely shaken after a
helicopter ride over the Alberta "tar sands," during which he
saw the worst devastation he has seen. Former Premier Lougheed,
Mr. Kenny relayed, predicted that there would be a decades-long
fight in Canada between Alberta's right to development its
resource and the Canadian's right to control the amount of
greenhouse emissions in the air. Mr. Kenny said there are
several indications that no one had any idea that the
devastation that they're now seeing would be the end result, and
mentioned that an abnormal number of cancer cases are presenting
in Canadian villages.
MR. KENNY, with regard to the tar sands, said it makes no
economic sense for any of the producers to send their gas down
to Chicago when just 1 Bcf of gas is going to produce 800,000
barrels of oil a day at whatever the price a barrel of oil is.
He offered his belief that environmentalists and First Nations
people are going to preclude development of the gas pipeline on
the proposed route anyway, and that the need for oil in the
Lower 48 - particularly given "the deterioration of our
relationship with Venezuela and what's happening in Iraq" - far
outweighs the need for natural gas. That oil is going to come
from Canada's tar sands.
MR. KENNY said he does not have anything against monetizing the
tar sands in Canada, but suggested that if that is going to be
done, "why not save ourselves 1,700 miles of pipe and monetize
West Sak, Schrader Bluff, and Ugnu, and get our heavy oil to
market, and put that in our pipeline" in stead of building a gas
pipeline. In response to an inquiry regarding his stance on
AGIA, Mr. Kenny stated, "I'm not supporting the result of AGIA."
6:47:41 PM
DANIEL DeNARDO testified in opposition to AGIA. He told members
that he was Alaska's first petroleum revenue auditor and handled
all the petroleum audits of the oil companies, as well as all
the royalty and production tax payments. Referring to the
Alaska Petrochemical Company (Alpetco) project, he characterized
it as a financial and political fraud, and indicated that he
views AGIA similarly. Acknowledging that legislators will vote
as each sees fit, he noted that the first paragraph of Article
I, Section 10, of the Constitution of the United States of
America reads:
No state shall enter into any Treaty, Alliance, or
Confederation; grant Letters of Marque and Reprisal;
coin Money; emit Bills of Credit; make any Thing but
gold and silver Coin a Tender in Payment of Debts;
pass any Bill of Attainder, ex post facto Law, or Law
impairing the Obligation of Contracts, or grant any
Title of Nobility.
MR. DeNARDO referred to Sinopec and characterized it as "a
communist-controlled facility in a corporation," and opined that
"the decisions you're being asked to make in this situation are
decisions that nations make, not corporate controlled states."
He concluded that it is Alaska's destiny to develop a gasline
for in-state use only, not for transport outside of state
boundaries. He asked legislators to look out for the integrity
of their constituencies when making their decision.
6:54:18 PM
MIKE ROGERS offered his understanding that U.S. domestic markets
will have the ability to obtain Alaska natural gas after some is
used in [the Canadian] oil sands. He said he questions whether
those oil sands would be uneconomical or wasted if Alaska's
natural gas is not at some point dedicated to extracting that
problematic resource. On the issue of exporting LNG to markets
in Japan, Korea, and Taiwan, he noted that although some people
would suggest that "American gas needs to go to Americans,"
Alaska's molecules of methane fetch top dollar in Asian markets,
and so Alaska should advocate for extending an LNG export
license to Asia, including China. The U.S. must find something
to sell to Asian bond holders in order to preserve its financial
system, he warned, because not doing so might result in a
precipitous drop in the U.S. dollar, or devastation of the
Social Security and Medicare systems. In conclusion, he offered
his belief that a "nay" vote on TransCanada's license will
result in huge opportunities for Alaska. In response to a
question from the chair, he clarified that he does not support
AGIA at this time "in this form."
7:01:05 PM
CARY CARRIGAN said he doesn't really support AGIA in its current
form because he doesn't think that the state needs to spend $500
million to get a pipeline. Legislators should consider what
AGIA actually represents and what its costs will be. The
process encompassed in AGIA, he offered, is a good one, but what
AGIA gives away is too great. In conclusion, he offered his
understanding that the producers are currently trying to put
together parts of a pipeline, and expressed support for an all-
Alaska gas pipeline.
7:03:27 PM
RICK BARRIER, Executive Director, Commonwealth North, stated
that Commonwealth North has been in existence for about 30
years, has studied gas pipelines for probably 25 of those years,
and has issued a report on TransCanada's proposal under AGIA.
Although neither for or against that proposal, Commonwealth
North would like the legislature to consider certain points:
getting gas to market as soon as possible; having a competitive
oil and gas exploration business in Alaska; pricing energy as
low as possible for Alaskans; knowing what the cost of this
proposal will be to the state in terms of infrastructure and
other state responsibilities; and developing some sort of value-
added processes in state for commercializing petroleum products.
MR. BARRIER relayed that Commonwealth North would also like the
legislature to consider the following questions. Why would the
state's contribution of $500 million not entitle the state to
some equity position or return on its investment? Should the
state have an equity position? How can the shippers or
TransCanada produce an informed estimate of project
profitability without knowing what tax regime might be in place
during the life of the project? What would the potential impact
on the project be if Point Thomson gas is not available? Would
granting an AGIA license put up a barrier to some other types of
projects that might be successful and that would include all the
various parties? Why wouldn't the state want to lead an effort
to bring these parties together, which could possibly result in
a more efficient product and lower tariff? And, if the state
decides it does want to do that, would it still face treble
damages?
MR. BARRIER indicated that Commonwealth North would also like
the legislature to consider the following questions related to
TransCanada's proposal. Why is it necessary for TransCanada to
receive $500 million from the state if "the other project that's
been under way" can proceed without support from the state? Why
would TransCanada only spend approximately one-fifth of what the
producers said they were going to spend to reach open season and
FERC certification? If TransCanada reaches open season and
"it's not successful," why would the state want to support that
with a $500 million infusion to get the FERC certification?
Would any new participants that joined TransCanada be bound to
the same "must-haves" as TransCanada? Could the state somehow
compel lease holders to make firm shipping commitments on the
TransCanada pipeline? If the ANGDA, ENSTAR Natural Gas Company,
and the Alaska Gasline Port Authority (AGPA), or some other
entity were able to secure commitments to build a pipeline in
open season that exceeded 500 million cubic feet (MMcf) per day,
would this trigger AGIA's treble-damages clause?
7:08:22 PM
MR. BARRIER indicated that Commonwealth North would also like
the legislature to consider the following questions related to
both the Denali project and TransCanada's proposal. What
assurance do the people of Alaska have that the Denali project
would proceed in a timely fashion should the TransCanada project
not move ahead? Since AGIA limits equity financing, how would
the tariff structure be impacted by a differential in the cost
of borrowing for the Denali project versus the cost of borrowing
for TransCanada? Will Alaska be better off if oil companies,
rather than TransCanada, own the gas pipeline? How would it be
better for the pipeline to be owned only by a pipeline company?
How will TransCanada's proposal and the Denali project ensure
that there would be open access to gas development, expansion,
and shipping, as well as fair and reasonable tariffs for new gas
developers? How does the Denali project ensure that the state
can pursue both meeting its in-state needs and using natural gas
and gas liquid to develop the petrochemical industry in Alaska?
And how would future possibilities for LNG be accommodated under
either the Denali project or TransCanada's proposal?
7:09:57 PM
SENATOR BUNDE said he has heard that the real economic impact
for jobs for Alaska won't necessarily be in the building of the
gas pipeline - though that will result in a short-term
construction boom - but rather in the development of multiple
wells due to rolled-in rates; for example, "In Canada, when they
built the first line," there were a 100 wells, and that's since
grown to 13,000 wells. He asked whether Commonwealth North has
considered this, and if, in its view, that would likely be the
scenario in Alaska - that the major impact for jobs and economic
growth in the state would be from continued exploration rather
than from the initial construction of the pipeline.
MR. BARRIER answered that he has heard that as well, but pointed
out that "you can't have any jobs until you have a gasline."
The questions of what then happens in terms of exploration, and
how fast and how much the basin will be developed are unknown
and depend on who is doing the developing. He reminded the
legislature that there is a limited supply of gas.
JED WHITTAKER noted that the $500 million proposed for
TransCanada's proposal and the $1.2 billion in energy relief
proposed by Governor Palin adds up to 6.6 percent of a $30
billion pipeline. He said agrees with former Governor Walter
Hickel that the state should build and own its own natural gas
pipeline, because that will be the quickest and most profitable
way of "accomplishing this goal." Furthermore, in doing so, the
state would not be reliant on a corporation's possibly disparate
goals. He concluded by saying that if the goal is to manage the
state's natural resources according to the [Alaska State
Constitution] - in other words, for the maximum benefit of the
people - one has to consider future generations, and owning a
gas pipeline would be highly profitable for many years to come.
7:15:41 PM
RICK CAREY stated his belief that "AGIA is the right way to go"
based upon what little he has read in the newspaper and upon the
United State's participation in the North American Free Trade
Agreement (NAFTA), adding, "If you agree with ... NAFTA and you
want to deal with the world, this is the way it is." He offered
his understanding that originally a gas pipeline was to be
constructed in order to take care of in-state needs only. If,
after those needs are met, there is any extra natural gas, it
should be offered to the rest of U.S. first and then perhaps to
other countries. He said he has heard some legislators express
interest in selling Alaska's gas to those who can offer the
highest price even if that means not selling to the Lower 48.
He expressed disfavor with that concept, but clarified that he
is not saying that the state shouldn't sell its gas to China,
for example. In conclusion, he expressed a concern that the
terms being used by the various parties are not clearly defined.
7:18:53 PM
FRANK BAINES said he opposes AGIA. He stated that he would like
to see an all-Alaska gas pipeline built because that would
provide the most jobs for Alaskans and would solve the problem
of what will happen to the gas once it crosses the border. He
said he thinks the gasline should "benefit Alaskans the most" by
helping bring the [cost] of energy down. An LNG plant, perhaps
in Valdez, could provide LNG to both the Lower 48 and the Asian
Pacific theatre. He indicated that it should be possible to
provide a product for consumers all over the world.
7:21:13 PM
WILLIAM BASSETT testified that oil has put food on his table for
the last 49 years, both as a direct employee of oil companies
and via contract services to oil companies. He remarked upon
other ventures that the state has attempted to undertake but
failed at, and offered his understanding that at a presentation
by BP after the AGIA legislation was introduced, the company
said it could not [apply for a license under AGIA] because doing
so would violate federal laws, and that Conoco and Exxon were
taking a similar stance. And if such laws don't actually exist,
he queried, why then didn't the oil companies make an
application under AGIA. He noted that under TransCanada's
proposal, TransCanada will get $500 million just to start the
initial certification paperwork, and that that money won't be
used to actually build any of the pipeline. He suggested,
therefore, that the state could make better use of its money in
other ways such as by building a bridge, or fighting the
environmental organizations that stop oil exploration and the
development of off-shore oil, ANWR, geothermal power,
hydroelectric dams, coal bed methane (CBM), and road
construction.
MR. BASSETT expressed disappointment that some legislators
indicated that holding hearings across the state was a waste of
time. He offered his understanding that Point Thomson has oil
and high-pressure gas, and asked how any gas could be delivered
to market without a gasline. He offered his belief that the
reason North Slope producers have not built [a gas pipeline]
already is because the cost of doing so far outweighs any
expected returns; unless the price of gas goes up, a gasline is
not practical. He opined that the state needs to stand aside
and let the "professionals" do the job; for example, if the
owners of the proposed Denali project want to hire TransCanada,
then let them do that - let them make that decision - because he
has no faith that the state can do any better than it has in the
past. If nothing else, he remarked, build a smaller pipeline to
the coast and supply gas to Alaskans and industry. He expressed
disfavor with AGIA as it currently stands, and indicated that
supporting the Denali project is currently the only viable
approach to take.
7:25:00 PM
CASH FAY, after noting that he has worked for an oil and gas
company for over 17 years, characterized TransCanada as a good,
reputable company, but opined that "the process" - not AGIA
itself - has failed because it did not foster competition as it
was touted to do. Characterizing the $500 million as a subsidy,
he offered his understanding that the treble-damages clause
could result in a loss to the state of up to $1.7 billion; that
TransCanada might be risking only about $111 million in
comparison; and that even before AGIA was signed into law, the
producers had indicated that they wouldn't be requiring any
subsidies to build a gas pipeline, and thus he doesn't
understand the need for providing TransCanada with $500 million.
He said it is important to note that neither the Denali proposal
nor the TransCanada proposal can or will guarantee that a
pipeline will ever be built - instead, economics will drive that
decision.
MR. FAY, regarding hydrocarbon leases, expressed concern that
litigation will hold up the building of a gasline, and offered
his understanding that the producers have lived up to their
lease requirements, to which the AOGCC has testified repeatedly.
Gas reinjection has produced an additional 3 billion barrels of
oil on the North Slope, and "oil is still king," he remarked.
On the issue of Point Thomson, he said the state is just as
culpable of the lack of development there, and surmised the
question of how to proceed with Point Thomson needs to be
addressed. Last year the legislature was told that Point
Thomson is needed for major gas sales, while in the last few
weeks, the legislature has been told it isn't needed. He said
he has heard on the news that the producers are not trying to
commercialize Alaska's gas, but he thinks that the opposite is
true. For example, from 2000-2002, the producers invested over
$125 million, "and now we have Denali today," he added. He then
listed some Henry Hub prices [for natural gas]: $1.49 in 1991;
$3.33 in 2002; $5.85 in 2004; $8.79 in 2005; and $13.07 today,
in 2008. Mr. Fay said, "It's about economics and
commercialization."
7:29:50 PM
MR. FAY suggested that the real issue is fiscal certainty, and
offered his belief that the producers are committed to staying
in Alaska. He opined that when one is entering into ship-and-
pay commitments for 25-plus years, one doesn't need a "Trust me,
we'll help you out with the taxes later" approach. Instead a
fiscal framework is necessary. Alaska's oil and gas taxes were
changed at least three times over a four-year period - once by
the previous administration, once through PPT, and once through
ACES. At today's West Coast price for oil - $1.3118 a barrel -
and with the progressivity provided for via ACES, the marginal
tax rate is the highest in North America, possibly the highest
in the world. Furthermore, that's a retroactive tax. He asked,
"Would you like it if the federal government came in and
retroactively looked at your income taxes?"
MR. FAY offered his belief that the immediate effect of that tax
rate was the loss of $400 million dollars in investment by the
producers. The producers take all the risks, yet the state
wants to reap four times the profitability, he remarked, and
indicated that he doesn't support that approach. He then noted
that the TAPS, at its peak, produced approximately 2.2 billion
barrels a day; now it's around 700,000 barrels a day, with a 6
percent decrease per year. He stated that he would like to see
both the administration and the legislature work with the
producers because they own the leases and are living up to their
lease commitments. He concluded: "You want to spend $500
million? Hire the best negotiators out there and come to fiscal
terms with the producers. I bet it won't cost $500 million, and
maybe we'll get a pipeline."
7:32:24 PM
LORNE BAILEY offered his understanding that much of the gas and
oil used to operate vehicles in the U.S. comes from the Middle
East. It doesn't make sense that Alaska should be extracting
oil and natural gas and then sending it overseas before having
the chance to sell it locally. He stated support for AGIA, with
the understanding that the gas be locally produced, with
anything left over after that sent via Canada to the Lower 48.
He said that although he does not want a decision to be made
hastily, he also does not want the process delayed. Mr. Bailey
opined that the state should also be looking into alternative
energy sources.
7:36:01 PM
DOMINIC LEE, Owner, Chief Executive Officer (CEO), Little
Susitna Construction Company, offered his understanding that
Sinopec proposed building a 48-inch pipeline from Prudhoe Bay to
Valdez in the existing corridor, as well as a petrochemical
plant and LNG plant in Valdez. Once gas is in that pipeline, he
suggested, then a certain amount could be provided to all the
cities in Alaska that can use natural gas, and that those
communities and cities that could not get gas directly from that
pipeline could instead be provided with LNG or "propane auto
gas" so that everybody can have real cheap energy. Under this
scenario, for example, the cost per kilowatt hour for generating
electricity and home heating would be lower - perhaps even less
than $100 per month per family. Additionally, the excess
pentene, which, he proffered, is equal to gasoline, could be
sold to all the gas stations for $.30 a gallon, so that
everybody can buy cheap gas.
MR. LEE surmised that what is not used in Alaska, would then be
turned into LNG for sale to Japan, China, Hawaii, South Korea,
Taipei, and Taiwan. Under Sinopec's proposal, the product would
not be sent to the Lower 48 because of the belief that it will
instead end up in Canadian "thin oil" operations, which are
already condemned by "the Canadian EPA" because they are the
biggest source of pollution in the world and thus will
eventually get shut down by the people of Canada. He offered
some comparison prices and calculated that selling the product
to China over the lifetime of the pipeline - even at today's
prices - will result in $1.1 trillion, and more than double what
the state would receive by sending the product through Canada.
He reminded members that once the product is gone, it is gone
for good, and so the state should try to receive the best price
it can while it can. After surmising that China would also buy
LNG from other locations around the world, he said he is against
AGIA because of economic reasons; although he thinks that
TransCanada is a good company, it doesn't deserve triple
damages.
MR. LEE indicated that another advantage to the Sinopec proposal
is that China would not need Alaska's $500 million, and in fact
could simply loan Alaska the money to build the pipeline and do
so at 6 percent, compared to the 14.5 percent that TransCanada
would charge. On the issue of export licensing, he opined that
it would be entirely possible for Alaska to obtain an export
license to Taiwan or to South Korea or to Japan, for example,
and offered his understanding that such a license would be good
for 25 years from the day Alaska starts exporting. In
conclusion, Mr. Lee said his heart is here in Alaska - having
lived here for 30-some years and having raised his family here -
and he wants what's best for the state, such as keeping the
state's economy strong. He posited that selling gas to China is
not an issue of patriotism because it will help the U.S. finance
its trade deficit, particularly given that the U.S. dollar is
losing buying power compared to the Chinese currency.
7:45:12 PM
VESTA ELLIOT, Owner, Organic Hair Design, surmised that a
serious energy crisis is approaching, with no foreseeable
resolution. She stated, "I believe that this inflation is the
oil industry's agenda of praying upon our fears," and predicted
that either allowing the oil industry to continue to have
complete control or changing lifestyles will prove to be a
financial challenge. She offered her understanding that there
has been successful development of renewable energy resources in
Iceland, and noted that there has been little discussion
regarding the environment and how the proposed gas pipeline may
potentially affect it. She said that she does not believe there
are enough facts available to Alaska's citizens regarding this
issue, and that that the oil industry has been relatively inured
to the damages it causes to the environment - both globally and
locally. Little has been heard about the preventative
maintenance that has not be undertaken with respect to the oil
pipeline and the clean up currently going on "up on the tundra."
MS. ELLIOTT stated her firm belief that the $500 million would
be better invested in moving towards renewable energy, such as
geothermal energy. She indicated agreement with earlier
comments that practical solutions and money can be made from
renewable energy sources, and stated her belief that Alaska
needs to stay beautiful. She offered her understanding that
although it will take $500 million just for the paperwork, there
may only be five years' worth of gas available. With regard to
monetizing the tar sands in Canada, she commented on the
environmental damage caused by producing even just the small
amount of oil available there; for example, scarecrows have been
erected to keep the migratory birds from landing in the toxic
waste. Ms. Elliott concluded by stating that at this point in
time, she is opposed to AGIA. She said she thinks there are
environmentally friendly alternatives, and Alaska has the
opportunity to join other parts of the world in utilizing these
[alternative energy sources].
7:48:30 PM
ANDREW HALCRO opined that the testimony that's important to
listen to is that of the regulators and those who will actually
"write the checks and bear the risk for this project." He said
that for a year or more he has heard two phrases, "the
likelihood of success," and "reasonable players," and opined
that the likelihood of successfully getting a gas pipeline rests
solely on the shoulders of those "reasonable players," who have
testified that without Point Thomson, there won't be any
financing for a gasline, and that the state needs to offer
fiscal certainty on this project. Furthermore, representatives
from BP and Conoco, he noted, have testified that AGIA is so
commercially unviable that they're going to proceed with a
project of their own [outside of the constraints of AGIA]. He
said he thinks TransCanada communicated a clear message last
year when its representatives testified that without customers,
there will be no credit and thus no pipeline, and opined that
although he thinks TransCanada is a fine company, the AGIA
process sets it up to fail.
MR. HALCRO spoke of the proposed $500 million investment by the
state, and expressed doubt that without the promise of that
funding, TransCanada would still be seeking a license. Noting
that he served in the legislature when oil was $9 a barrel, he
relayed that that $500 million is not what concerns him the most
about the proposal; instead, what alarms him the most are the
contractual terms of AGIA. By assigning exclusive rights to
TransCanada, the state will be precluding both itself and
TransCanada from pursuing any future alternatives. He then
referred to testimony provided by [a former] FERC employee that
the FERC has never granted a certificate to an applicant who
showed up without credit and customers, and that AGIA engendered
special federal legislation regarding FERC certificate. Mr.
Halcro told legislators that if they think [AGIA] is an
insurance policy keeping the producers honest, then they should
also think about the terms to which they would be committing the
state. He reiterated that those terms are contractual and lock
the state into one plan only. In conclusion, he suggested to
legislators that they echo his concerns to their constituents.
7:55:09 PM
TOM WALSH, Managing Partner, Petrotechnical Resources Alaska
(PRA) - after relaying that PRA is an oil and gas consulting
company that employs approximately 70 oil and gas professionals,
and that PRA's clients include major oil companies, independent
oil companies, the State of Alaska, the federal government, and
Native corporations - said PRA supports projects that can stand
on their own and produce money for Alaska. He said he doesn't
believe that it is in the best interest of the state to provide
TransCanada with $.5 billion for a project he doesn't think has
a chance of success, and suggested to members that they vote
against granting TransCanada a license.
MR. WALSH relayed his hope that future open seasons will result
in the producers nominating their gas for shipment. He asked
members to consider the negative impact that granting
TransCanada a license could have on the other, what he termed
"far more sensible," gas pipeline project, and warned that
endorsing and financially backing the TransCanada project would
in effect align the state against the Denali project. Such an
alignment would be a big mistake, he remarked; although it could
be healthy to have two projects competing for the opportunity to
move North Slope gas to market, the state shouldn't be backing
what he considers to be the weaker of the two projects.
MR. WALSH characterized the treble-damages clause as dangerous,
and said he is convinced that it will have an unintended,
catastrophic impact on getting a gas pipeline built, because it
precludes the state from helping any other project go forward.
At a minimum, the state needs to be able to support all projects
equally in order to increase the probability of success. And if
the Denali project is able to stand on its own, then supporting
TransCanada's pipeline is a waste of money and time,
particularly if no shippers nominate their gas during the open
season. Mr. Walsh offered his belief that despite what Mr.
Palmer claims, TransCanada also has $9 billion worth of
liability to its former partners, and characterized
TransCanada's proposed project as "a horse with at least two bad
legs."
7:59:30 PM
DAVID GOTTSTEIN, Co-chair, Backbone II, said the state is facing
critical, short-term decisions that will have profound
intermediate and long-term impacts, the most important decision
of which is how to proceed in developing the state's North Slope
gas. He opined that AGIA has done a good job in jumpstarting a
process that has the potential of creating huge opportunities
for Alaska now and long into the future, and that the state can
prioritize its goals in obtaining the maximum benefit for
Alaska. The first goal, he suggested, is for the gas pipeline
to not be producer-owned, because as such it would generate a
monopoly position on the part of the major producers in
controlling the state's future gas development and production; a
non-producer-owned pipeline would be in alignment with the
state's desire for vibrant exploration, production, and
marketing. The second goal is for an economic pipeline to get
built; if that goal is not met, then the state will have failed.
MR. GOTTSTEIN said the third goal is for the state to use its
vast gas resources to help solve the state's energy crisis, for
example, by getting the state's gas to Alaskans as soon as
possible in economic quantities that result in real savings for
the majority of Alaska. The fourth and final goal is to use the
route that would supply the maximum benefit to the state
treasury. However, he warned, the state must not sacrifice the
local benefit in order to achieve its maximum export model
because that would be a bad tradeoff. He relayed that he has
been told by the governor's representatives that it would be
possible to get Alaska's gas to Alaskans in as little as five
years if the state first completes that portion of a pipeline
necessary to just do that. He emphasized that if done right, it
could generate many tens of billions of dollars of state
revenue.
MR. GOTTSTEIN said the state should drive the process, including
the necessary investment, to pre-build an excess-capacity and
expandable line to the Interior, opening the markets to an open
season that could include local distribution, Canadian routing,
and an LNG option. That would produce the best of all worlds in
that it would solve in-state needs and grant the state the
option and the opportunity to maximize market conditions. He
said the state should work with TransCanada, and possibly the
ANGDA and the Alaska Gasline Port Authority (AGPA), on a
combination of ownership, financing, marketing, governance,
design, construction, management, maintenance, and profit-
sharing responsibilities that achieve that result while still
leaving all other options open. By keeping the first-phase
application and project to an in-state routing that could start
with an over-capacity line to the Interior, with at least one
spur line to feed all population centers, then the FERC and all
Canadian obstacles could be avoided, and the job could get done
much more quickly, bringing the first phase of the project to
completion in as little as five years - as opposed to ten or
twelve years - with a very high certainty of success for more
ambitious export options. If AGIA has to be adjusted to
accomplish these goals, so be it, though it might take one or
two more steps to get there.
MR. GOTTSTEIN said that with the state likely to receive tens of
billions of dollars in revenue in the next few years, beyond
what was forecasted even a few months ago, it would be a shame
if the state didn't set aside at least a $1 billion a year away
in these good times in order to ensure long-term energy cost-
savings and certainty-of-supply benefits for almost all
Alaskans. He strongly urged the legislature to pursue a
strategy that forces the development of a monopoly-breaking,
independent pipeline that first serves Alaskans and then the
rest of the market as it fully develops. Furthermore, if the
state fully pursues a strategy of harnessing other in-state,
long-term, energy solutions - such as a revitalized Susitna
project, coal gasification, wind, solar, and other [energy-
producing mechanisms] - along with using the lowest-cost, long-
term, reliable transmission and delivery methods, then for less
than the extra revenue forecasted for this year alone, the state
could perhaps solve its energy problems for 100 years. He
concluded, "That is the choice that is in front of us, and I
urge the administration and the legislature to work together in
achieving these goals."
8:04:38 PM
REPRESENTATIVE GARA expressed concern regarding Backbone II's
aligning itself with Sinopec, because he is almost certain that
Sinopec is one of the companies that many groups around the
world have identified as doing work in Sudan and being complicit
with the genocide taking place there.
MR. GOTTSTEIN clarified that he was not talking about getting
commitments in the first phase to sell gas to China, because
although China may offer long-term opportunity, it doesn't offer
any immediate opportunity. Furthermore, although China is an
important trading partner, it is not an ally with the U.S. in
the war against terror, and so he does not believe that Congress
will allow Alaska to sell its hydrocarbons to China, unless
doing so might preclude China from seeking hydrocarbons from
Iran, for example. He then offered that the way to bring low-
cost energy to Alaskans is to provide an infrastructure that
allows for the highest volumes of gas necessary in order to meet
market demand. He said, "If we think small in the beginning,
we'll never solve the problem"; for example, a 1.2 Bcf/day line
to just bring gas to Alaskans would not lower the state's long-
term cost, and it would not be any less expensive than importing
gas, because it is only when larger volumes of gas are obtained
that it is possible to generate economies of scale large enough
to reduce the tariff and thereby lower energy costs.
MR. GOTTSTEIN said that if Alaska intends to have a full export
project from the beginning, then it has to solve several
problems before providing any energy to Alaska. On the other
hand, if the state underwrites the option of meeting all market
opportunities by pre-building, taking ownership, taking return
of extra capacity to the Interior, and then has an open season,
then that open season, in part, could include delivering gas to
Alaskans in a shorter period of time. He indicated that in this
way - particularly given the demand in Asia, Hawaii and other
West Coast markets, and the interior of the United States and
Canada - the state could then provide for the expansion to meet
both a Canadian route that becomes a full project, and an LNG
project if such becomes vibrant enough. It would then simply be
a question of when the different pieces of such projects get
done. He added:
So what I'm suggesting is the low-risk way of making
sure we get lower-cost energy to Alaskans in a
foreseeable time frame - perhaps as little as five
years - while not giving up any other options. So go
have an open season. If there's only enough gas
through the TransCanada's bidding mechanism to make a
Canadian route economic, then so be it. On the other
hand, if there's enough demand that can generate
enough volumes of gas to make both projects viable,
that's okay, too. And whichever can be completed
first, that's to the maximum benefit of Alaskans.
MR. GOTTSTEIN said he does not believe that Alaskans will
support any project that does not solve its in-state energy
crisis in the foreseeable future, or that having only a
TransCanada route or just an LNG project in the short run will
address that issue. He concluded, "I think we can solve it
otherwise and be a huge profiteer of our natural resources,
giving as little as possible away in profits that are necessary
to the private sector to do our bidding for us."
8:10:06 PM
ERNIE STUTZER posited that with all the good ideas people have,
he thinks there will be a way for the state to accomplish its
goals. After noting that he is a logger who, along with his
family, realized he had a valuable resource [in the timber
located on his property], likened that resource to the natural
gas wealth that Alaska is sitting on and wishes to see exported.
He remarked that although AGIA is supposed to get Alaska a
pipeline so that its natural gas can be marketed out of state,
building a pipeline will create a lot of jobs for only a few
people, and there won't be any jobs available after the pipeline
is built.
MR. STUTZER asked legislators to instead consider providing
Alaskans with [long-term] jobs that will enable them to become
part of the middle class, which he characterized as the most
vital part of a democracy, and said that the way to do that is
by keeping the resource in Alaska. He said that although there
are a lot of reasons why the legislature should not support
AGIA, he realizes that there are two sides to the issue. He
opined that corporations and government are "chipping away at
the free market," and that the free market, in itself, creates
"the seeds for the destruction of democracy" because it creates
wealth, which in turn is used to manipulate government into
making decisions that will not foster a robust middle class. In
conclusion, he emphasized the importance of building a large,
petrochemical infrastructure within the state.
8:18:29 PM
KELLY WALTERS expressed concern with the process taking place,
and said he believes that perhaps an alternative answer exists.
He said he is not in favor of the state giving away $500
million, mentioned Governor Palin's $1.2 billion energy subsidy,
and noted that the recent high price of oil is the result of
actions taken by speculators. He recommended that Alaska
operate as if oil were still $9 a barrel like it was when former
Representative Andrew Halcro served, because it very well could
be again if the speculators "start short-selling it in the next
year or two." He characterized $500 million as a lot of money
to be throwing around. In conclusion, he said he is very much
in favor of an all-Alaska line, and would like to see an
alternative in which TransCanada builds an all-Alaska gas line
to serve the interest of Alaskans. Such a pipeline would allow
the gas to get to market in less time and would help out the
state quite a bit.
[HB 3001 and SB 3001 were held over.]
ADJOURNMENT
There being no further business, the joint meeting of the House
Rules Standing Committee Subcommittee on AGIA and the Senate
Special Committee on Energy was adjourned at 8:21 p.m.
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