Legislature(2003 - 2004)
09/11/2003 09:00 AM Senate FIN
| Audio | Topic |
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* first hearing in first committee of referral
+ teleconferenced
= bill was previously heard/scheduled
+ teleconferenced
= bill was previously heard/scheduled
JOINT HOUSE & SENATE FINANCE COMMITTEE
September 11, 2003
9:00 A.M.
TAPE HFC 03 - 110, Side A
TAPE HFC 03 - 110, Side B
TAPE HFC 03 - 111, Side A
CALL TO ORDER
Senator Lyda Green called the Joint House & Senate Finance
Committee meeting to order at 9:00 A.M.
MEMBERS PRESENT
Co-Chair Lyda Green
Senator Donny Olson
Representative Chenault
Representative Croft
Representative Hawker
Representative Stoltze
MEMBERS PRESENT VIA TELECONFERENCE
Co-Chair Bill Williams
Representative Whitaker
MEMBERS ABSENT
Co-Chair John Harris
Representative Kevin Meyer
Representative Foster
Representative Joule
Representative Moses
Co-Chair Gary Wilken
Senator Con Bunde
Senator Lyman Hoffman
Senator Ben Stevens
Senator Robin Taylor
ALSO PRESENT
Senator Gene Therriault, Speaker; Representative John
Coghill; Representative Hugh Fate; Representative Bob Lynn;
David Freer, Sempra Energy, Vice President for Federal
Affairs, Washington D.C.; Harold C. Heinze, Chief Executive
Officer, Alaska Natural Gas Development Authority (ANGDA);
Greg Bartholomew, Director, Strategic Planning and Analysis,
Sempra Energy International; Steve Porter, Deputy
Commissioner and Liaison to Alaska Natural Gas Development
Authority, Department of Revenue
SUMMARY
State Priorities for Alaska's Stranded Gas
Alaska Natural Gas Development Authority Funding request
Alaska Natural Gas Development Authority's appropriate role
SENATOR LYDA GREEN noted for the record that there were not
enough members present to form a quorum. The working group
could pass messages forward, however, no meaningful
decisions could be made. She noted that Nome, Fairbanks and
Juneau were being teleconferenced.
DAVID FREER, SEMPRA ENERGY, VICE PRESIDENT FOR FEDERAL
AFFAIRS, WASHINGTON D.C., commented that in the 1970's,
Southern California Gas Company preceded with an effort to
place a liquefied natural gas (LNG) receiving terminal near
Santa Barbara, California. The project was the result of
efforts in Alaska to bring out LNG gas. The project at Port
Conception died as has other projects designed to bring gas
out of Alaska.
At present time, a similar situation exists, with one
distinct difference: a fully permitted receiving terminal is
awaiting construction on the West Coast. Construction would
begin in 2004.
Mr. Freer discussed Sempra Energy Utilities. He noted that
the company's 2002 revenues were in excess of $6 billion,
with four thousand employees. The headquarters is located
in San Diego, California. Sempra Energy (Sempra) is the
parent company of two distinct entities:
· Sempra Energy Utilities, the regulated side
of the company, comprised of the Southern
California Gas Company, which is the largest
natural gas local distribution company in the
United States and San Diego Gas and Electric,
serving the San Diego area.
· Additionally, Sempra Energy Global
Enterprise, the umbrella company for Sempra
Energy growth businesses, including Sempra
Trading, Sempra International, Sempra Energy
Resources, Sempra Energy Solutions, and
Sempra Energy LNG Corporation.
Mr. Freer pointed out that currently, there is a facility,
which is well into the process of having necessary receipts
from the Mexican government in order to proceed with
construction. Sempra Energy is the lead company in the
process. The next step is to find a supplier, enter into an
agreement so that necessary construction can target a 2007
date.
Mr. Freer highlighted points to that timetable. He
emphasized that Sempra Enterprise wants to work on an
agreement with Alaska to be the supplier at Costa Azul, the
energy-receiving terminal. Sempra Enterprise previously,
had communicated that intent to Harold Heinze, Chief
Executive Officer, Alaska Natural Gas Development Authority
(ANGDA), at a meeting in San Diego, August 2003. Mr. Freer
stated that it makes "economical sense" for the State to
engage in that, acknowledging that there could be
constraints in an arrangement between Alaska and Sempra
Enterprise.
· Sempra Enterprise is in serious negotiations
with a number of foreign governments and
international oil and gas companies for
supply capacity for the cost of the terminal.
The negotiations have been underway for
sometime and are being conducted between
Sempra senior management and the heads of
state and senior officials of international
oil and gas companies. Negotiations are
being conducted at their requests in order to
enter into an agreement. He noted that all
these governments and companies are located
in the Pacific Rim, making them direct
competitors to Alaska.
· Sempra Enterprise intends to conclude the
negotiations in a timely fashion and fully
expects to have a contract within 30-60 days.
· When an agreement is reached between the
supplier and Sempra, the other competing
terminals will essentially fade from the
scene. When an agreement is signed, it is
unlikely that there could be capacity
elsewhere on the West Coast at another
terminal. He stressed that there is only "so
much of a market" that LNG can absorb.
· When that occurs, the market would
essentially close to the West Coast for an
additional LNG supply from any other source.
Future expansion would be incremental.
· Present time is a "critical juncture" with
respect to an agreement for LNG from Alaska
to Costa Azul. The timetable is locked-in
and the schedule to proceed is well
established. At this time, ranked in order
of priority and in terms of opportunity,
Alaska could be last. If there is to be an
opportunity between Alaska and Sempra, there
must be a strong indication from the State
that there is interest in crafting an
agreement, which entails the following:
(1) An immediate signal that Alaska will
initiate negotiations with Sempra
Enterprise; and
(2) That the negotiations would proceed in a
manner consistent with the previously
identified time frame; and
(3) That the political leadership of the
State is behind the effort and will see
that it proceeds expeditiously.
Mr. Freer reiterated that Sempra Enterprise is interested in
working with Alaska. While it is unfortunate that the
respective timetables are not parallel, Sempra Enterprise
would be interested in "sitting down" with appropriate
parties to fashion a mutual supported agreement.
Senator Lyda Green asked who the members of Alaska Natural
Gas Development Authority are.
HAROLD C. HEINZE, CHIEF EXECUTIVE OFFICER, ALASKA NATURAL
GAS DEVELOPMENT AUTHORITY (ANGDA), noted that he had placed
key exhibits around the meeting room, one of which indicates
benefits to Alaskans and also, maps of the various pipeline
routes from North to South. (Copy on File).
Mr. Heinze stated that the Authority was a creation of
Ballot Measure #3, which was passed in the November 2002
election. (Copy on File). That measure received wide
support. He noted that the Authority is benefit driven so
that they can accomplish tasks rather than being a study
group.
Mr. Heinze pointed out that the Authority is a "young
organization", provided with a minimum budget, allowing them
to come into being. The budget does not permit very much
"action" and acknowledged that he was before the Joint
Finance Committees, looking for money.
Mr. Heinze noted that ANGDA is a public corporation run by
its' Board similar to the Alaska Railroad. There is a
seven-member board of directors consisting of Andy Warwick,
Chairman, Fairbanks; Bob Favretto, Kenai; Dave Cutty; Scott
Hayworth; Dan Sullivan, Anchorage; Warren Christian, and
John Kelsey, Valdez. The Board runs the corporation and can
issue revenue bonds. The Authority is an agency of the
State and hence does not need to acquire a right-away but
can administer State lands. ANGDA does have the authority
of eminent domain. The intention is to build and operate
facilities in Alaska and to commercially buy and sell gas as
well as transport it.
Mr. Heinze added that ANGDA offers an alternative to the
State to invest and capture the rewards and that the agency
is benefit driven. The chart indicates many important
issues regarding how it will affect the economy and jobs and
how gas will affect heating and power. Coming out of Prudoe
Bay, there could be many lines spurring off and providing
gas to all population segments. That in addition to dollar
motivation is important to the Authority.
Mr. Heinze added that there is a West Coast market
opportunity now and the shorter shipping distance favors
Alaska LNG. At this time, there is no LNG delivered into
the West Coast; however, within a matter of a few years, LNG
will be delivered there. It is reasonably expected that
only one or two terminals will be built on the West Coast
and that Alaska is competing for that market. He emphasized
that Alaska should attempt to secure that market.
Mr. Heinze emphasized that the proposed numbers do not have
detailed information behind them, however, they are
reasonable for what an Alaskan LNG project could look like.
He referenced the chart on Page 3 of the handout. (Copy on
File). The chart indicates a total expense of $12 billion
dollars. To calculate a notional cost of service from that
amount, illustrates how the Authority differs from the
economics of the project. The cost of service indicates a
number of the whole transport cost of the gas. To add to
that wellhead purchase price, the number summed together is
what is compared against what the market will pay. With a
$12 billion dollar investment, wanting a high rate of
return, the party would need $2.90 dollars to transport that
gas. The Natural Gas Development Authority does not pay
income tax; consequently, an investment at $2.20 dollars
would be a "good investment". The simple elimination of
taxation lowers that number from $2.90 dollars to $2.20
dollars.
Representative Croft asked if it was anticipated that 16
million tons per year input would be received on the West
Coast. Mr. Heinze explained that at two billion cubic feet
per day, 16 million tons per year would be the amount that
could fill the West Coast marketplace. He admitted that
might not be initially achievable. He informed members that
Sempra Enterprise understands more about the market than
ANDGA does. A large amount of that could easily be placed
on the West Coast. The number is critical at 16 million
tons per year because it is possible to place one and two
million tons at a time to at least three or four other
markets. He reiterated that was a "believable" amount.
Representative Croft commented that $2.20 dollars would be a
"good rate of return" since the State is non-taxable. He
inquired the projected price of the natural gas. Mr. Heinze
understood that current prices on the West Coast were
between $4.50 & $5.00. There are projections that this
price will hold. The low range of price structure would be
between the $3.00 & $3.50 dollar range. If the State drops
from being a profit making organization, then economic
activity would still be generated and the State would be
servicing debt. As an infrastructure investment, the number
could drop to $1.65, a number that contains no profit but
adequate service for debt, the investment is returned and
ownership would result at the end.
Mr. Heinze acknowledged that the numbers appear "strong".
At $2.90 dollars, that kind of number, the producer might
calculate which is marginal. At $2.20 dollars, it would be
competitive with any other LNG project. That is a strong
number and he reiterated that no tax would be paid.
Mr. Heinze spoke to the risk element. The Authority is
immune from fiscal changes. There are ways to manage the
risk and minimize it. The beauty is that the State could
receive the awards. If the price held at a high level, the
State could pay the project off in three years. He outlined
why ANGDA is getting into the gas business:
· The Authority will work out commercial terms
with a producer-led highway pipeline for gas
delivery to maximize Alaska's benefit;
· LNG based all-Alaskan project is economic and
competitive for non-taxable Authority;
· Alaska's portfolio of other gas or LNG
projects is limited; and
· Alaska doesn't have multiple shots at a
dynamic Pacific Rim market.
Mr. Heinze commented on the anticipated strategy:
· Support producer-led highway gas line and
define compatible Alaska benefit projects;
· Keeping the wellhead price of gas high to
encourage development of new reserves and
higher current revenues; and
· Using margin to support public purposes.
The ANGDA Board requests accelerated funding of up to $3
million dollars to finish the conceptual design, make a good
cost estimate, and proceed with the marketing effort by
January 2004. Ballot Measure #3, by law, requires that by
June 2004, Alaska provide all itemized indicators with the
intention that a decision can be made as to whether to
proceed or not for major investments. He reiterated that
ANGDA recommends that time frame be brought forward. The
request, by law needs to be completed and the decision needs
to be made as to when it is to be finished and available.
To accelerate the funding request, specific issues will be
addressed. The producers have spent $125 million dollars
within the last few years to finish the design work of the
highway project. For Alaska to successfully interact with
them and provide the benefits, the technical gap needs to be
closed and Alaska needs to define the project in order to
have meaningful discussions.
Co-Chair Williams asked how the present discussion would
affect current negotiations in Washington D.C. on energy
legislation. Mr. Heinze responded that Steve Porter, a
scheduled speaker later at the meeting, would be able to
address stranded gas and concerns occurring in Washington
D.C. He advised that ANGDA's work is "neutral" regarding
what is happening in Washington D.C. because ANGDA is
attempting to work compatibly with the highway project.
Co-Chair Williams voiced concern that "Washington D.C. is
watching" and that perhaps the State should not do anything
until those negotiations are completed. He warned against
"making waves" for the Alaska Congressional delegation.
Mr. Heinze commented that the requested spending would be
focused on new concepts for Alaskan benefits. The pay-off
would be for Alaska, and not any specific company. Alaska
is currently at a point where there is significant free work
being contributed. Also, the requested money would be
focused in Alaska on contractors and design work by: ASRC
Energy Services; VECO; Peratrovich, Nottingham & Drage; Wood
Mackenzie; and Northern Economics. Because of the effort of
these companies, ANGDA has been able to provide the proposed
estimate. The intention is that with the requested money,
ANGDA would be able to convert the work and estimates into
contracts for sole-source basis.
Mr. Heinze pointed out new design elements:
· A spur line from Glennallen to Cook Inlet
area;
· A barge mounted LNG plant & LNG storage
tanks;
· LNG plant & loading berth at the old Valdez
town site; and
· LNG thermos barges.
Mr. Heinze pointed out that Page 8 indicates the actual
study.
TAPE HFC 03 - 110, Side B
Mr. Heinze detailed the costs of the elements of the study
contained on Page 8 as follows.
Design & Execution Plan
Pipelines $500 k
LNG 900 k
Marine 400 k
In-State Uses & Benefit Analysis 150 k
Marketing/Competitor Analysis 200 k
Specialized Legal Opinions 150 k
Staff & Administrative 200 k
Total $2,500 k
Mr. Heinze informed that the pipelines, LNG, and Marine
designs would be "new concepts and high benefit type
designs" that have not been considered previously and that
would add value. He stated very little if any of these funds
would be expended for existing estimates or designs.
Mr. Heinze spoke to the benefit analysis saying that all the
uses could be quantified, although have not been quantified
before.
Mr. Heinze emphasized that to be successful, "marketing is
one of the keys". He stated the funds would be utilized to
engage "one of the premier type of consultants in the world
in terms of LNG and where our competition is and how we
stack up against that competition."
Mr. Heinze qualified that a number of legal issues must be
clarified relating to taxation, bonding and to the Jones Act
and its applicability to our project. He noted these are
specialized areas and expected any "prudent investor" to
have "substantial legal opinions" on at least these three
areas.
Mr. Heinze next listed information to be included in the
study, shown on Page 8, as follows.
· Contributed Studies (Donated Information)
o Yukon Pacific
o Alaska Gasline Port Authority
o Tanker Design and Cost
o Training in Alaska and Alaska Hire
o Gas Compositions and Conservation
· State In-House Expert Consulting
o Revenue Projection and Tariff Modeling
o Social and Environmental Responsibility
o Permitting and Land Use / Planning
Mr. Heinze noted this information has been obtained at no
cost. He said this information is "available for us to build
on and look at, and use to the extent that we can in terms
of our design." He anticipated that businesses involved in
tankers would assist in the design of the ships and that the
"labor components" in Alaska would benefit from defining
issues relating to Alaska hire.
Mr. Heinze indicated five issues are identified as "Benefits
in Design Concept" on page 9, as follows.
· Spur line to Cook Inlet provides future
residential and industrial gas supply in area
· Study of barge mounted LNG plant would allow
multi-$B fabrication in Cook Inlet
· LNG thermos bottle barges can supply coastal
communities
· Expanded Kenai LNG and urea plant options
· Propane content in gas line key to Yukon River
supply and petrochemical plants
Mr. Heinze posed the question; titled "Why Proceed Now to
finish Project Concept Design" answered on pages 10 and 11,
which reads as follows.
· Market Pull - a complete conceptual design
essential to being considered a "real" project by
LNG buyers
· Producer Decisions - discussion with producers
needs to be based on the value ANGDA adds to their
product by satisfying a completely defined set of
Alaska's needs
· Project Management - timely disclosure on critical
design elements will allow focus on business
decisions
· Energy in Alaska - Major energy decisions and
commitments are being made without this project's
options and alternatives included in the framework
Mr. Heinze stressed that whether by Sempra Energy or another
producer, the market is "being defined" on the West coast of
the United States. He expressed he has made effort to
represent Alaska in "moving that forward"; however, he was
"operating from an incomplete package". He instructed that
"in marketing" "you have to have a total story to tell, and
I've got a 90 percent story right now. I need to finish that
to make this happen."
Mr. Heinze cautioned that producers could already be making
decisions related to the design of the pipeline that could
affect how they interface with Sempra Energy. He explained
that when industry is ready to proceed, the State must have
a clear understanding of its goals. He informed that this is
an opportunity to "put our schedule here in a pretty good
order" by proceeding ahead, clarifying engineering aspects
and allowing sufficient time of several months to
concentrate on the business and financial aspects.
Mr. Heinze remarked that "every day here in Alaska"
significant long-term decisions are made without
consideration of the proposed project. He was unsure how
this project would influence those decisions; however, he
stressed its importance.
Mr. Heinze related the ideal occurrences related to this
project would be favorable response from the federal
government followed by agreements between the producers and
the State of Alaska Administration to be presented to the
legislature for approval. He stressed that "tens of billions
of dollars" are "at stake" for the State. He recommended
that the legislature should determine what information it
needs to made decisions on the matter during the upcoming
legislative session.
AT EASE [Note: audio continues during break.]
GREG BARTHOLOMEW, DIRECTOR, STRATEGIC PLANNING AND ANALYSIS,
SEMPRA ENERGY INTERNATIONAL, testified to his 12 years with
this company and eight years at Exxon. He utilized a slide
presentation and the copy was not provided.
Mr. Bartholomew indicated a slide illustrating production
and demand in the Lower 48 and comparing historic
consumption. He stated that in the early 1970s the United
States had price regulation of natural gas and as a
consequence, a natural gas shortage occurred with a decline
of consumption and production. This, he said resulted in
construction of nuclear power plants. He continued that in
the middle 1980s price deregulation allowed additional
development of natural gas and subsequent increased
production. He noted that consumption increased at a greater
rate than production and as a result, natural gas was
imported from Canada, primarily from Alberta. He informed
that the imports have steadily increased to a point that
Canadian imports represent approximately 16 percent of U.S.
gas consumption.
Mr. Bartholomew relayed Sempra Energy's position that the
U.S. has "reached a peak" in gas production and is beginning
to decline. However, he remarked that consumption is
increasing because natural gas is clean and efficient. He
shared expert's predictions that gas consumption would
continue to increase as long as the U.S. economy continues
to grow. He cautioned of the ramifications of a potential
gas shortage.
Mr. Bartholomew compared this situation to that of oil
production. He reported that oil production in the Lower 48
peaked in 1970 and has since declined by over 50 percent. He
stated that "a number of frontier developments have
occurred," including shallow water activities in the Gulf of
Mexico and Alaska, and deepwater activities in the Gulf of
Mexico. He asserted that this has slowed the decline but has
not halted the decline, although consumption has continued
to increase to 60 percent of production. He predicted that
by the year 2010, the ratio could be as high as 70 percent.
Mr. Bartholomew next spoke to events affecting price, noting
that through the 1990s the equilibrium price of natural gas
has been steadily increasing at a rate of approximately five
percent annually. He stated that "price shocks" occurred in
the years 2000 and 2002. He relayed that Sempra Energy
considers these price shocks as signals as to "limits with
regard to our natural gas resource". He referenced the New
York Mercantile Exchange (NYMEX) prices for future natural
gas, showing that prices were "fairly low" in January 2002;
however, currently the price expectations for six years from
now "are quite high, in the $4.50 to $5 range." He expected
that LNG would "be setting" the price for natural gas in the
Lower 48 in the indefinite future.
Mr. Bartholomew spoke to the natural gas consumption of
western states, including Nevada and Arizona of the past 13
years. According to the California Energy Commission, he
said, natural gas consumption would continue to grow at a
rate of approximately one percent in California, which
represents two-thirds of western states' consumption. He
qualified this is not a significant rate and therefore
raises the question of why there is a need for LNG.
Mr. Bartholomew explained the demand for LNG and the reason
for the number of terminals proposed for location along the
west coast of the U.S. is because western state gas
production is declining "very rapidly." He indicated a slide
plotting the production of natural gas in California,
including off shore locations. He stated that a "spike" in
production is the result of a purchase of a field in
Bakersfield California and the harvesting of that resource.
However, he remarked that the resource at the location is
finite; production is declining at a rate of ten percent,
and would no longer provide the current 40 percent of
production in that state. He concluded that California
production is declining and that "no amount of drilling", of
which very little is occurring, could reverse the trend.
Mr. Bartholomew continued in detailing the decline of the
coal bed methane in the New Mexico/San Juan Basin at an
approximate ten percent rate. He stated that despite high
prices and high "rig counts", the decline has not stopped or
reversed.
Mr. Bartholomew noted that basins in Alberta, British
Columbia and Saskatchewan are among the most reliable
sources. He asserted, however, that production from this
area has plateaued and would begin to decline. He mentioned
a forecast that is consistent with the Canadian Potential
Gas Committee's estimates for undiscovered resources, which
illustrates that substantial future declines would occur.
Mr. Bartholomew also spoke to another Permian Basin that has
experienced no changes in production levels, and areas in
the Rocky Mountains with declining resources. He remarked
that the quality of resources in Colorado and Wyoming is
declining. He alluded to a slide showing the historic gas
production in Utah with a forecast, and natural gas sales in
Wyoming. He noted that Wyoming has been referred to as "the
Persian Gulf of natural gas"; he pointed out that much of
the gas is contained in rock "as tight as concrete" and it
was unknown whether technology would advance to allow the
gas to be recovered. He also informed that with the
exception of gas production from the Jonah field and Powder
River coal bed methane, gas production in Wyoming has been
"flat" for the past six or seven years. He therefore
disputed the assertion that Wyoming would "save North
America".
Mr. Bartholomew assured that although the gas supply in
North America is limited, significant gas exists in the rest
of the world. He stated that the U.S. represents one-quarter
of gas consumption and that a 70-year supply is held in
reserves. He qualified that most of these reserves are
located far from the continent.
Mr. Bartholomew directed attention to slide showing a map
that summarizes the "gas competition going on in the Pacific
Basin." He informed that Sempra Energy is discussing
development with all parties representing the developments
indicated on the map. He remarked, "all the developments
want to bring gas to the West Coast" over the next five to
ten years, as the West Coast is the only area with a rapidly
increasing demand for national gas. He stated demand is not
increasing rapidly in Japan, Korea or Taiwan, and that
"China has its own issues".
Mr. Bartholomew asserted that Alaska is nearest to
California and is therefore potentially "the most desirable
supply."
Mr. Bartholomew stated that a number of terminals have been
proposed for the West Coast; however, most are proprietary
terminals specifically for parties transporting "their own
gas". He explained that oil and gas companies have invested
between one-half billion to one billion dollars into each
project and "have a lot at stake," as do the governments
associated with the developments. He pointed out that Sempra
Energy is one of the few companies that are "supply
neutral," not attempting to "monetize upstream reserves."
Therefore, he surmised Sempra Energy is "an ideal party for
Alaska to work with."
Mr. Bartholomew also told of "Atlantic Basin" competition,
listing Venezuela and Trinidad as locations with the
greatest advantage due to their proximity. He stated that
Qatar contains one of the largest reserves of natural gas,
with one field containing nearly the amount of gas used in
North America today, although it is located farthest from
the western coast of the U.S. He predicted that in the long
term, Qatar would become a supplier of natural gas for North
America.
Mr. Bartholomew overviewed a "net-back" analysis" to
determine how competitive Alaska's natural gas is to the
remainder of the world. He stated that based on information
provided by the Alaska Natural Gas Development Authority,
Alaska "seems relatively competitive" with alternatives in
the Pacific Basin.
Mr. Bartholomew commented that the significant number of
proposed terminals is due to "magnitude of the problem in
terms of future natural gas supplies." He predicted that
only "a very small fraction" would be constructed.
Mr. Bartholomew showed a slide of a map of "Baja, California
and the Southwest" and pointed out the location of Sempra
Energy's proposed Costa Azul terminal, located between
Rosarita and Ensenada and proposal to transport natural gas
to market. Although other terminals were proposed for the
western coast of Mexico, he anticipated that only one would
be constructed because the cost to expand a terminal is
significantly less than constructing a separate facility. He
furthered that Sempra Energy has obtained the necessary
permits, from the federal government, the Mexican Energy
Regulatory Commission (CRE), a permit from the Mexican
Ministry of the Environment and Natural Resources
(SEMARNAT), and a local land use permit from the
Municipality of Ensenada, to construct its facility and that
the other developers have not applied to land use permits
due to "opposing local interests" and environmental permits.
He qualified that a number of additional permits are
necessary although he anticipated no difficulties in
obtaining these permits. He was aware of only one proposed
terminal site in California in which permits were applied
for with the U.S. Coast Guard. He remarked that Sempra
Energy, with the completed permits and planned construction
to begin in the first quarter of 2004, is approximately one
year to one-and-one half years ahead of other developers in
completing a terminal. He predicted "start up" would begin
in the first quarter of 2007.
Mr. Bartholomew informed that Sempra Energy would "build a
lateral" from the company's existing pipeline on the
northern Baja Peninsula to the San Diego Gas Transition
Network to transport gas to the Western markets. He also
noted an existing pipeline that runs at the
California/Arizona border would be utilized to "deliver gas
into the network".
Mr. Bartholomew next showed an illustration of the proposed
terminal. He pointed out this is "the most isolated site"
attributing Sempra Energy's success to this. He stated the
site is not visible from the highway and has no neighbors
and that the company purchased 400 acres approximately one
year prior at an estimated cost of $600 million. He
identified the location approximately one and one-half
kilometers from the most southern point of a golf course.
Mr. Bartholomew informed that the permits would allow a
capacity of 1.0 billion cubic feet per day (Bcfd) and
although two tanks would be constructed, the company could
expand 100 percent to at least 2.0 Bcfd and two additional
tanks.
Mr. Bartholomew indicated additional site illustrations in
his slide show presentation. He stated that other LNG
suppliers have conducted helicopter "flyovers" of all the
proposed sites in Mexico and agree that this site is the
only viable option to "land" gas in Mexico and potential for
the West Coast of the U.S.
Mr. Bartholomew told of another project Sempra Energy is
pursuing in Louisiana, which has recently received a final
Federal Energy Regulatory Commission (FERC) approval. He
stated that construction is planned to begin in the first
quarter of 2004 with start up expected in 2007.
Mr. Bartholomew expressed that Sempra Energy would not begin
construction without "firm commitments for supply".
Therefore, he stated the commitments must be received
immediately, reminding that the company was negotiating with
all suppliers located in the Pacific Basin. He noted that in
some cases, government funding depends upon LNG and those
governments are "extremely anxious to get their market into
the West Coast" making competition "very intense". This
project, he reiterated, has the highest probability of
occurring. He commented that Sempra Energy has been
discussion the matter with the State for two months; however
"Alaska has not been able to fully commit behind its LNG
project." He warned that as a consequence, the company
perceives that the State "lacks the intensity necessary to
win" and Sempra Energy is thus unwilling to dedicate limited
resources to Alaska. He expressed favoritism in granting the
contract to the State because of low risk and "is most
attractive from a supply standpoint."
Mr. Bartholomew instructed that if Alaska "wants to compete,
really has to commit itself to winning and pursuing that"
because of the competition. He warned that the process would
not last long and asked the State to make a commitment of
"earnestness" within the next two weeks. He stated that
Sempra Energy could not defer or delay a decision and
expected to reach a decision by the end of 2003. He spoke of
discussions that must be held between the State and the
company before that date, emphasizing the magnitude of the
issue. He assured that Sempra Energy "would do everything it
can to help Alaska but Alaska needs to first decide whether
it wants to compete."
STEVE PORTER, DEPUTY COMMISSIONER AND LIAISON TO ALASKA
NATURAL GAS DEVELOPMENT AUTHORITY, DEPARTMENT OF REVENUE,
testified to the State's priorities with regard to stranded
natural gas, a funding request from the Alaska Natural Gas
Development Authority, and the State's recommendation of the
appropriate role of the Authority.
Mr. Porter spoke to the Stranded Gas Development Act, which
was amended the previous legislative session and provides
for an applicant to propose a project to the State and
allows the State to negotiate a contract with the applicant
to provide "some certainty" to the State and to the
applicant for revenues and added value. He reported that the
Murkowski Administration was awaiting an application from
the gas producers under the Stranded Gas Development Act for
an Alaska Highway route project. While waiting, he informed
that the Administration was "preparing internally" for
negotiations of that contract.
Mr. Porter relayed that the issue is "centered around the
federal legislation". He noted that a U.S. Congress
conference committee was considering an energy bill that
includes "important provisions" to which the State has been
"an active party". He stated that a federal energy bill
could provide for development of a natural gas pipeline able
to transport 4.5 bcf per day of Alaska's stranded natural
gas to market. He expressed the Administration's commitment
to passage of this federal bill to place the State "in a
position" to develop existing gas reserves, as well as any
new reserves discovered in the future.
Mr. Porter explained the preference for the Alaska Highway
route for a pipeline. He listed the project would maximize
the value of Alaska's gas reserves as the most important
element. He informed that the 4.5-bcf capacity of the
pipeline would "commit" all of the State's gas reserves to
market, whereas the proposed LNG project presented by Sempra
Energy, would commit less than half the volume. He furthered
that the Alaska Highway pipeline proposal would provide
transport for all future reserves, which could include an
LNG project.
Mr. Porter emphasized that producers control the gas
reserves for "their preferred project".
Representative Croft interjected to request clarification of
the party that controls the gas. He understood that the
State has ownership.
Mr. Porter explained that under the terms, the producers
would be responsible to proceed with developing the oil and
gas resources. He said the leases are held for production
of the oil, but the producers also have the responsibility
to pursue the marketing of the gas. So long as the producers
actively pursue that marketing, he informed that the State
has no legal authority to take the gas from the producers.
Therefore, he stressed the State's responsibility to assist
the producers in marketing that gas. He relayed that
currently the producers' preferred project is the Alaska
Highway route to market gas to the East Coast of the U.S.,
as the most beneficial and economical use of that gas. He
commented that the Administration is in agreement with this
assessment.
Representative Croft asked if the Administration's position
is that the producers have been actively pursuing a gasline
for the past 35 years.
Mr. Porter replied it is not and clarified the
Administration position that producers are currently
actively pursuing a gas project.
Representative Croft asked if producers are actively
pursuing gas projects elsewhere in the world.
Mr. Porter responded that as oil and gas companies,
"certainly they are," as they hold many assets.
Mr. Porter resumed his presentation, listing another goal of
the Administration to maximize wellhead price to provide a
greater State return. He remarked that the Alaska Highway
project would accomplish this. Given the current gas
reserves and recognizing the requirements of the Alaska
Highway route, he stated that another project must be a
"secondary focus" until future reserves were identified.
Mr. Porter reiterated that a spur line to tidewater with the
additional benefits it would provide, would "compliment" the
Alaska Highway route gas pipeline project in the future.
Mr. Porter next addressed the Natural Gas Pipeline
Development Authority funding request. He stated that prior
to the passage of a federal energy bill, the Administration
concluded that a funding request would be "premature". He
stressed the State's focus is the passage of the federal
energy bill as well as negotiating contracts with the oil
and gas industry to provide gas to the East Coast of Alaska
through a 4.5 bcf gas pipeline. He furthered that LNG
project "is not defined" either.
Mr. Porter pointed out that the Administration and the
public had not had an opportunity to assess the risks
associated with the LNG project. He referenced Mr. Heinze's
presentation on discussing the risks. Mr. Porter stressed
the importance of evaluating the risks, saying that
expounding on the potential benefits of a project is
incomplete if the associated risks are not understood. He
stated that without an understanding of risks, investors
would not invest in a project. He encouraged the Natural Gas
Pipeline Development Authority to assess the risks of a LNG
project and relay its findings to the Administration.
Mr. Porter continued that the Administration has identified
other activities appropriate of the Authority at present and
stated that a smaller funding request could be appropriate
for consideration once the Legislature reconvenes. He listed
pursuance of "a statutory obligation", railroad tax-exempt
bonds, tariffs and cost of service, Internal Revenue Service
(IRS) "ruling", the Jones Act, and tanker issues, also
included in Mr. Heinze's presentation. Mr. Porter emphasized
that "those items that bring benefits to the State of Alaska
should be the focus of the Authority".
Mr. Porter concluded that many of the aforementioned
activities could be conducted utilizing existing State and
private resources. He stated that "a substantial amount of
research" could be complied and analyzed without additional
funds.
TAPE HFC 03 - 111, Side A
[Speakers were not identified during this portion of the
meeting. Speakers are identified when possible through voice
recognition.]
Representative Croft questioned if the project was dependent
on the passage of federal legislation.
Mr. Heinze observed that the LNG project can be viewed in
several ways. If viewed independently, the answer would be
no: it is not dependent on federal legislation. The Alaska
Natural Gas Development Authority is taking the view that
the best thing for the state of Alaska is to tie the LNG
project to the producer lead highway pipeline. In that
sense, yes it is dependent [on federal legislation]. He did
not believe that the discussions between producers and ANDGA
regarding what the interaction would look like had anything
to do with federal legislation. He observed that at some
point ANDGA is a distraction to the process that will be
taking place over the next couple of months, but are
supportive.
Representative Croft questioned the chance of a long-term
price of under $1.65 per NCS (notional cost of service). Mr.
Heinze explained that $1.65 is the cost of service number
associated with an infrastructure approach of the Gas
Authority spending $12 billion on a LNG type delivery system
and a zero wellhead price. Representative Croft clarified
that this would be without profit.
The question is: Will California prices stay below $3.00 on
a sustained basis (due to the cost of shipping and the cost
to re-gas.) He did not see prices dropping below $3.25 -
$3.50. He pointed out that the cost of drilling wells is
rapidly escalating in the "lower 48". He did not think that
gas prices would stay below $3.50 on a sustained basis.
There is not enough gas in Trinidad or Venezuela to flood
the North American market sufficiently to cause the price to
drop very low.
Mr. Porter observed that prices were around $2.00 in the
early 1990's, which has come up over time. The amount of
stranded gas in the world is close to 6,000 TCF (trillion
cubic feet). With these factors, the assumption is that
people with reserves would not bring them on to flood the
market and drop the price. The state of Alaska would like to
see an evaluation of the risk that a substantial amount
would come on to the market at a given time, which would
reduce the price.
Mr. Heinze observed that ConocoPhillips had calculated
Alaska LNG at a cost of service of $2.80. Indonesia is the
lowest on the chart at $2.27. The odds of a flood on the
market reducing the amount beyond this level are small.
Mr. Porter referred to risk factors facing the state of
Alaska: the state of Alaska must pay the producers a
negotiated wellhead price of reasonable value, and the sale
price [is of an unknown value]. He maintained that there is
more volatility to the state of Alaska than to someone who
transports the gas and then markets it through a team of
marketers throughout the world.
Senator Green questioned if the state of Alaska has turned
over the power to distribute and sell to the developer and
producer in issuing the permit for exploration and
development. The state would be the recipient of the funds,
but not the one that generates the sale of the product.
Mr. Porter observed that the question of who owns the gas is
not settled.
Mr. Heinze thought that an offer of $1.36 to the producers
by ANGDA with no risk would be attractive. The addition of
$1.65 [to $1.36] would be $3.01; the probability of the
price dropping below this level would be small.
Representative Croft stressed the importance of addressing
who owns the gas.
Representative Whitaker asked if a substantial amount of the
request for $2.5 million from Mr. Heinze pertains to risk
assessment. Mr. Heinze observed that the request identifies
money to do a benefit analysis and design to maximize the
Alaska benefit. He is happy to work with business
consultants in assessing all the risk factors.
Representative Whitaker questioned why the Administration
has taken the position that the request is premature. Mr.
Porter maintained that the risk assessment is not identified
in Mr. Heinze's chart detailing the $2.5 million.
Representative Whitaker interjected that Mr. Heinze had
identified [as part of the $2.5 million request] evaluation
of the work scoop and cost estimates with contractors, which
would amount to identifying the cost of the project and risk
assessment. He maintained that this is necessary if the
project is going to have an opportunity to proceed. He
referred to conversations with Jim Clark, Chief of Staff to
Governor Murkowski, pertaining to the project. Mr. Clark
indicated that the Administration would be in full
cooperation for an additional request by the Legislature for
funds.
Mr. Porter clarified that there are things that ANGDA needs
to move forward, which they are in the process of doing. The
premature element is not that the $2 million is
inappropriate, but that the $2 million should be dealt with
during the legislative session. There is nothing, which
would make it necessary to make the decision immediately. He
maintained that the decision should be made after federal
energy legislation has been enacted.
Mr. Whitaker questioned how the Legislature should deal with
Sempra's timeline and the Administration's position
regarding Sempra's request. Mr. Porter noted that the
Governor spoke to Sempra and the Authority [ANGDA]. The
Governor recommended that the Authority come back to him
with a specific recommendation and analysis of Sempra's
request.
Representative Whitaker maintained that there is an
inconsistency in the Administration's position. Mr. Porter
acknowledged Representative Whitaker's concerns. He noted
that there is an element of risk that must be dealt with as
the state of Alaska proceeds forward. He suggested that the
best path is for ANGDA to come to the Governor with an
explanation of Sempra's proposal, along with their
evaluation and plan for dealing with the proposal and a plan
to evaluate the risk associated with the proposal. The
Administration wants to seriously consider the issue.
In response to statements by Senator Green, Representative
Whitaker clarified that he put $1.2 million in the House
budget; the Administration said that they would not approve
more than $150 thousand. Senator Green recalled that the
Administration was talking about more than a million dollars
in early conversations. She maintained that the Legislature
is somewhat responsible for the final decision.
Representative Whitaker asked if the ANGDA had sat down with
the Administration to make clear their needs. Mr. Heinze
noted that he is a Department of Natural Resources employee
and assured Representative Whitaker that conversations occur
continuously. He stated that he is happy to work with the
Board and make a recommendation as to proceeding with
Sempra. He expressed concern that he does not have the
resources to answer the questions [that will occur as a
result of the recommendation]. He pointed out that his
thinking has changed over the last six months, due to the
dynamic situation on the West Coast. The Department of
Natural Resources' approach is entrepreneurial, which could
be helpful to the Legislature. He stated that if the
Legislature turned to him in March or April [2004] with a
direction to start work that he would not be able to meet
that timeframe. He felt that efforts were compatible.
Representative Whitaker summarized that there is no conflict
with congressional proposals; there is no conflict with the
hoped for producer proposal regarding a gas line project;
and that if progress is to be made that the risk and
benefits have to be evaluated.
Senator Green questioned if the risk assessment needs to be
project specific. Mr. Heinze stressed that each of the five
elements of risk need to be examined separately. The biggest
concerns relate to price: there is a risk of project
overruns; and there is a risk that volume won't fit into the
market. He visualized a marketer to minimize the volume risk
and felt that a basket of prices would reduce risk. All of
the supplies have to live off the same price in a basket of
prices. In a rational world prices would be more incline to
increase.
Senator Therriault spoke via teleconference. He stressed
that the ideal situation for the state of Alaska would a
project that follows the highway and serves both markets. He
questioned why Sempra's timeline is so short. He observed
that congressional change could occur in the next 30 to 60
days, which would lower Sempra's transportation cost. It was
noted that it is a competitive business.
Mr. Heinze observed that there are many competing projects,
but that Sempra's is the only one in the Baja, Mexico area
that is possible to consider. Sempra is the only match for
an entity like that state of Alaska that has supply and
doesn't want to go too far downstream. Sempra is a marketer
of consumable gas. They are also building a re-gas facility.
He pointed out that Sempra is several steps ahead of the
state of Alaska. He maintained that the state of Alaska
needs to push forward in their commitment and questioned if
the state is interested in building a LNG project, in the
long-term. He asserted that, if the intent is to build a LNG
project, then there is a timing mismatch between the
projects. He stated that he did not know how to construct an
arrangement if there is uncertainty as to the state of
Alaska's commitment to do a project.
Senator Therriault asked if the potential price benefit of
partnering with a highway project would allow for an
extended timeline of 30-60 days.
Mr. Bartholomew stated that they were not in a situation
where they could wait. Mr. Heinze emphasized that the
potential commercial arrangement is unknown. If the state of
Alaska partners, they lose the ability to be tax-free on
that portion of the project.
Senator Therriault stated that he is supportive of the
portion that would go to the tidewater. He questioned how
this [route] would impact the delivery or sale of the rest
of the product. He felt that staff could be hired and loaned
to ANGDA to help within the existing BRU. He stressed the
need for a more detailed request to the Governor regarding
what needs to be done with the other items, to see if
resources in other BRU's could be steered toward these
efforts, as opposed to a new appropriation of $2.5 million.
Mr. Heinze stated that he has extensively scoped and
estimated the cost of doing the work and it was provided in
detail to the Committee.
Representative Lynn questioned which route would bring gas
to market and revenue to the state of Alaska the most
rapidly, with the most certainty.
Mr. Porter noted that if a route to the East Coast were
developed that the majority of the North Slope reserve would
be dedicated. They would hope that subsequently, with an
aggressive exploration program, new opportunities would
discover additional gas reserves that would provide for the
next opportunity to expand to a LNG line and/or a spur line
to South Central Alaska.
Representative Fate questioned if the opportunity would rise
again if the state of Alaska did not act.
Mr. Freer responded that it is Sempra's view that there is a
onetime shot for West Coast penetration of LNG gas in the
near term. The long-term could be 10 to 15 years. It is
Sempra's view that if the state of Alaska does not act in
the next 30 - 60 days, that the opportunity would be closed.
He stressed the length of time it has taken to bring a
project forward and maintained that a receiving terminal
will be built at Costa Azul in Baja California. It is up to
Alaska to decide if it wants to be the suppler. There are
serious negotiations with other suppliers that want the
market.
Representative Lynn questioned if the Asian market was
included in Mr. Freer's assumptions. Mr. Bartholomew noted
that Japan, Taiwan and Korea are growing relatively slowly.
Sakhalin 2 and Indonesia are much closer to those markets
than Alaska; it seems likely that these suppliers would
penetrate Asian markets before Alaska. He felt that Alaska
would have a hard time getting into the Far East market.
Mr. Heinze acknowledged that small volumes may be placed,
but emphasized the importance of the West Coast location as
a true competitive advantage.
Mr. Freer noted that the Bush Administration supports the
gas pipeline, but not the tax credit mechanism. He estimated
that the opportunity to build the line through Canada is in
jeopardy.
ADJOURNMENT
The meeting was adjourned at 11:10 a.m.
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