Legislature(2013 - 2014)SENATE FINANCE 532
02/20/2014 05:00 PM Senate FINANCE
| Audio | Topic |
|---|---|
| Start | |
| State of Alaska Background and History as Related to Current Gas Trends | |
| Adjourn |
* first hearing in first committee of referral
+ teleconferenced
= bill was previously heard/scheduled
+ teleconferenced
= bill was previously heard/scheduled
SENATE FINANCE COMMITTEE
February 20, 2014
5:07 p.m.
5:07:28 PM
CALL TO ORDER
Co-Chair Kelly called the Senate Finance Committee meeting
to order at 5:07 p.m.
MEMBERS PRESENT
Senator Pete Kelly, Co-Chair
Senator Kevin Meyer, Co-Chair
Senator Anna Fairclough, Vice-Chair
Senator Click Bishop
Senator Mike Dunleavy
Senator Lyman Hoffman
Senator Donny Olson
MEMBERS ABSENT
None
ALSO PRESENT
Joe Balash, Commissioner, Department of Natural Resources.
SUMMARY
STATE OF ALASKA BACKGROUND and HISTORY AS RELATED TO
CURRENT GAS TRENDS
Co-Chair Kelly stated that the discussion would be related
to SB 138, which was not yet in committee.
5:08:36 PM
^STATE OF ALASKA BACKGROUND and HISTORY AS RELATED TO
CURRENT GAS TRENDS
5:08:38 PM
JOE BALASH, COMMISSIONER, DEPARTMENT OF NATURAL RESOURCES,
(DNR) discussed the PowerPoint presentation, "Alaska North
Slope Gas Commercialization" (copy on file). He stated that
his presentation would address the history of Alaska North
Slope liquid natural gas (AKLNG) commercialization. He felt
that he had a unique perspective, because he was the
incoming committee aide for the Legislative Budget and
Audit Committee in 2004. He signed a confidentiality
agreement that gave him access to the materials and
documents that were being exchanged between the
administration and various applicants under the Stranded
Gas Development Act. He stressed that he did not have a
seat at the table during those negotiations, but he had a
"front row seat." In 2006, he left the legislative branch
and joined the governors' office. At that time, he joined
the team that put together the Alaska Gasline Inducement
Act (AGIA) statute and framework that has since been
instituted. In 2010, he joined DNR, so he has had a very
close view of the transition during the previous 10 years.
He stressed that he had his own biases, and what he witness
affected his perspective. He hoped that his presentation
would help contextualize the information and history.
Commissioner Balash displayed slide 2, "Alaska North Slope
Gas Commercialization."
Commercializing Alaska North Slope Gas:
Where we have been
Where we are
Where we hope to be
Key principles for any project
Gas to address Alaska's in-state needs for
abundant supplies of low-cost energy and economic
growth
Gas that will maximize the value of the state's
massive resource base through high-volume and
export markets
A project that incentivizes exploration and
investment in continued oil and gas development
5:12:15 PM
Commissioner Balash looked at slide 3, "North Slope Gas
Commercialization: Benefits to the State."
In-State Gas: opportunity for competitively priced,
reliable in-state gas supply
Commercialization of Alaska North Slope gas resources
through sale of large quantities of natural gas beyond
in-state needs
Additional revenues to the State
Creates jobs for Alaskans in the exploration,
development, production, and transportation of natural
gas
Increased opportunities for Alaskan based contractors
and businesses
Infrastructure for development of additional gas
resources to enhance further oil and gas
exploration/production opportunities
Commissioner Balash highlighted slide 4, "North Slope Gas
Commercialization: State Interests."
Alaska has world-class unconventional resources,
including tens of billions of barrels of heavy oil,
shale oil, and viscous oil, and hundreds of trillions
of cubic feet of shale gas, tight gas, and gas
hydrates.
The mean estimated onshore gas hydrate resource is 590
TCF of gas-in-place, with a mean of 85.4 TCF
potentially recoverable with current technology (USGS,
2008).
Commissioner Balash spoke to slide 5, "North Slope Gas
Commercialization: AGIA Background, Purpose, and Terms."
Alaska Gasline Inducement Act (AGIA) resulted from the
aftermath of the failed Stranded Gas Development Act
(SGDA)
Relied on private sector project sponsor
-Utilized reimbursement to de-risk development
costs
-Also secured an option to purchase
information/assets if project did not advance
Established terms designed to maximize state benefits
-Low tariffs - through high debt/equity capital
structure
-Favorable expansion policy
Expectation was long lead time on development could
proceed in parallel with commercial/fiscal
negotiations
5:17:13 PM
Commissioner Balash discussed slide 6, "North Slope Gas
Commercialization: History and Timelines."
2007:
AGIA process set out in statute
Applications received December 1, 2007
2008:
April: Denali announced by BP and COP
July: Enstar-ANGDA Plan announced
August: AGIA license approved by Legislature
2009:
February: In-State Project Manager is named
Built on work started by Enstar and Anadarko
June: ExxonMobil aligns with TC to form the
Alaska Pipeline Project (APP)
Co-Chair Kelly handed the gavel to Co-Chair Meyer.
5:24:00 PM
Commissioner Balash looked at slide 7, "North Slope Gas
Commercialization: History and Timelines."
2010:
April: Legislature passes HB 369
July: Open Season held for APP - conditioned bids
received
October: Open Season held for Denali -
conditioned bids received
Shift to LNG in 2011:
May: BP and Conoco abandon Denali
July: AGDC/ASAP project plan released
October: Governor Parnell calls on parties to
move forward on large-diameter pipeline to
tidewater in Alaska in an AGIA framework
Co-Chair Meyer handed the gavel to Co-Chair Kelly.
5:30:56 PM
Co-Chair Meyer wondered if the condition bids were
confidential. Commissioner Balash replied in the
affirmative.
Co-Chair Meyer asked if there were positive results during
the open season. Commissioner Balash replied that both
projects had announced that they had successfully achieved
or attracted bids, but were conditioned.
Vice-Chair Fairclough queried the number of bids.
Commissioner Balash responded that the administration did
not receive the specific details of the bids, but briefings
had indicated a sufficient capacity bid for the Alberta
project to warrant continued development costs associated
with the project. He stressed that the work on the
Richardson Highway leg to Valdez was halted in order to
focus exclusively on the Alberta leg.
Vice-Chair Fairclough wondered whether the administration
had knowledge of other conditions beside financially
certainty that were received on those conditional bids.
Commissioner Balash replied that he was not able to speak
of it publicly.
Vice-Chair Fairclough wondered why the discussion of
financial certainty was allowed, but the discussion of
other conditions could not be addressed.
Co-Chair Kelly felt that there may be a miscommunication,
and asked Vice-Chair Fairclough to restate her question.
Vice-Chair Fairclough understood that conditional bids were
under confidentiality agreements, but stated that
Commissioner Balash had shared that one of the conditional
bids was related to fiscal terms. She wondered why other
conditions could not be shared, if it was known that
financial terms were one of the conditions. Co-Chair Kelly
felt there may be another opportunity to address those
concerns. He stressed that Commissioner Balash should not
be made to feel like he was breaching any confidentiality
agreements.
Commissioner Balash stated that he would seek further
understanding, if he were able to speak to the details
publicly.
5:35:22 PM
Commissioner Balash discussed slide 8, "North Slope Gas
Commercialization: 2012 State of the State and Benchmarks."
Governor's Roadmap to Gasline
1. Resolve Point Thomson
2. Align during the first quarter of 2012 under
an AGIA framework on a large diameter gasline to
tidewater
3. Two projects-under AGIA and AGDC-complete
discussions by third quarter of 2012 determining
what potential exists to consolidate projects
4. Harden numbers on an Alaska LNG project by the
third quarter of 2012, and identify a pipeline
project and associated work schedule
5. If milestones are met, the 2013 Legislature
can take up gas tax legislation designed to move
the project forward
January 2012: Three CEOs meet with the Governor
"Currently, Alaska is pursuing parallel tracks to get
a gasline. The State financially supports two
different projects - one under the Alaska Gasline
Inducement Act, and the other under the Alaska Gasline
Development Corporation. While both are making
progress, neither can finish the job." -Governor Sean
Parnell, 2012 State of the State
Co-Chair Kelly asked how the project would apply to the
AGIA framework, because the projects were so different.
Commissioner Balash responded that there were project plan
amendments that were submitted by the licensee to the
commissioners of DOR and DNR that were approved, which
allowed TransCanada to conduct certain planning activities
that would support the AKLNG project. He announced that
information had been gathered for reimbursement, and then
used by the parties to continue their discussions in
exploring whether or not and LNG project could provide the
market opportunity that an Alberta project did not provide.
He stressed that all parties had not signed on to AGIA;
however they were all working together with the state's
licensee to continue to discuss the mission of AGIA.
5:41:49 PM
Co-Chair Kelly surmised that TransCanada was a licensee
under AGIA.
Commissioner Balash highlighted slide 9, "North Slope Gas
Commercialization: Point Thompson Settlement."
March 30, 2012: Point Thomson Settlement Agreement
filed with the Alaska Supreme Court
Premised on requirement to perform work, start
production
Working Interest Owners must earn the acreage
Sanction of Major Gas Sale pipeline project (in
2016 or 2019) secures entire unit
Senator Dunleavy asked for an explanation of the Pt.
Thompson dispute. Commissioner Balash stated that, for
several years the resources at Pt. Thompson were thought to
include both oil and gas. The understanding was that Pt.
Thompson was considered a "retrograde condensate
reservoir", which meant that that gas was under such
enormous pressure that the other hydrocarbons in the field
were in a gaseous state. When the gas was brought to the
surface, there were certain hydrocarbon liquids that fell
out. It was possible to recover those liquids, and push the
gas back into the reservoir, which was considered a cycle.
The question in the dispute was how much of the liquid
could be discovered, and did the field need to be developed
with liquids recovery as the primary means of production
and commercial activity, before gas recovery.
Senator Dunleavy surmised that the dispute was related to
whether or not Pt. Thompson was considered an oil or gas
field. Commissioner Balash agreed.
Senator Dunleavy wondered how long the dispute occurred.
Commissioner Balash replied that the unit was terminated by
in 2006, and the litigation carried on through 2012. The
settlement occurred on March 30, 2012.
5:46:37 PM
Senator Dunleavy asked what Pt. Thompson was currently
considered. Commissioner Balash replied that Pt. Thompson
was considered a hydrocarbon field.
Senator Dunleavy felt that it was a circular conclusion.
Commissioner Balash agreed. He stated that the purpose of
the initial production system was to test the methods that
were in dispute between the state and the working interest
owners. The initial production system that would go into
operation in 2016 was expected to yield approximately
10,000 barrels per day. He stressed that there was concern
regarding yield sustainment. The result of the yield would
determine expansion of the cycling program to recover all
of the condensate before blowing down the gas.
Co-Chair Kelly wondered if that oil and/or gas would be
taxed. Commissioner Balash replied that the ownership
interest would be recovered in the form of royalties. The
royalties at Pt. Thompson were slightly higher than the
royalties at Prudhoe Bay, but the production tax was done
through the oil and gas production tax. The produced
hydrocarbon would be valued and taxed at 35 percent. Oil
would qualify for the production tax credit available under
43.55. Gas would not get a production tax credit. He
stressed that SB 21 allowed Pt. Thompson to qualify for the
gross value reduction, because of the timing of its
commercial activity.
Co-Chair Kelly asked for a definition of the term "blow
down." Commissioner Balash replied that the term "blow
down" referred to the release of the gas from the
reservoir. Gas was trapped under the earth in a hard
formation, and was typically under pressure. The pressure
of the oil and gas that pushes the hydrocarbons into the
well bores that were drilled into the fields, but the
pressure declined as the fields was produced. When the gas
pressure was relieved, there was less energy in the field.
The oil did not flow as well, inhibiting oil recovery. He
explained that the Alaska Oil and Gas Conservation
Commission (AOGCC) paid close attention to the way in which
any given field is managed and produced.
5:51:14 PM
Vice-Chair Fairclough wondered if the "ring" was around the
field or at the bottom of the field. Commissioner Balash
replied that in the course of the Pt. Thompson settlement
discussions, DNR gained access to additional geological
information that helped informed DNR of the likely state of
affairs at the bottom of the field. He stressed that it was
a key factor that lead DNR to pursue the settlement as
outlined in the terms.
Commissioner Balash displayed slide 10, "North Slope Gas
Commercialization: 2013 Milestones: Governor's State of the
State."
1. By February 15, private parties involved in APP
must select a concept on an all-Alaska project; they
must describe and detail the project and pipeline
specifications. To include:
the size of the pipe and the daily volume of gas
the location of the gas treatment plant and
detailing the number of compressor stations to
move the gas along
the size and scope of the liquefaction plant and
LNG storage tanks
the number of off-take points to ensure that
Alaskans can utilize our gas for our needs
2. Spring 2013: Companies finalize an agreement to
advance to Pre-FEED (front-end engineering design)
Pre-Feed - hundreds of millions of private-sector
dollars
3. Producers ensure a full summer field season (Summer
2013)
5:56:18 PM
Commissioner Balash highlighted slide 11, "North Slope
Commercialization: 2013 Milestones."
April:
HB 4 and More Alaska Production Act (MAPA/SB21)
passed by Legislature June:
Last milestone of 2013 not met - no special
session on gas tax legislation October:
Nikiski named as preferred location for pipeline
terminus
Commissioner Balash displayed slide 12, "North Slope
Commercialization: Fiscal Discussions."
Early Breakthrough on Take vs. Stability
Set take terms now, provide stability later
Commensurate commitments by parties as project
moves forward
Fundamental differences between SOA and Producers -
stemming from our misalignment of interests
State interests driven by lowest transportation
charges/highest netback
Lack of regulation at LNG plant/terminal
(ownership of pipeline only does not solve the
problem)
Integrated companies are not driven by the
capital structure/netback
Key to Resolution: equity participation by SOA
(project in a project)
Allows each party to structure their financing as
they see fit
Enables any party to initiate an expansion on a
sole-risk/keep-whole basis
6:01:49 PM
Co-Chair Kelly queried the definition of the phrase "rolled
in." Commissioner Balash replied that there was an
additional cost, when a cost was expanded. Sometimes those
expansions were cheap, which meant that the expansion was
efficient and the per unit cost decreased overall.
Sometimes the expansions were so costly that the per unit
costs increase. There was a methodology called "rolled in"
rate making, which blended the per unit costs resulting in
everyone's tariff to increase. Allowing expansions to occur
on a soul risk keep hold basis would result if the state
deciding to take equity participation in the project. The
original parties on the project would have their own
separate tariff, and if an expansion occurred by one party,
the other three parties were not required to participate.
Senator Bishop asked what would happen if the other parties
took advantage of the expansion that was paid for by
another party. Commissioner Balash replied that the other
parties would be required to pay for the second expansion,
under the principles outlined in Appendix A of the HOA.
Vice-Chair Fairclough asked for information regarding the
traditional forms of gas expansion. She remarked that there
was some concern regarding the Trans-Alaska Pipeline
Service (TAPS), and the accessibility to that line by the
smaller producers. She wondered how the TAPS pipeline model
was different than the current proposal. She specifically
queried the traditional choices in how gas moved in most
pipelines in the world. Co-Chair Kelly also wondered if the
word "expansion" in this context only referred to volume of
gas through the pipeline. Commissioner Balash responded
that a given pipeline could carry so much gas depending on
the compressors that were able to push the gas through the
pipeline. More compression must be added in order to move
more gas through the pipeline. He stressed that more fuel
is consumed, when more compression is added. He remarked
that it was often cheaper to lay more pipe at a certain
point, than simply move more gas.
6:07:34 PM
In response to a question from Vice-Chair Fairclough
Commissioner Balash stated that many of the challenges that
were faced by third-parties or independent producers with
regard to TAPS was a product of problems that the state
faced 15 to 20 years prior. During the mid-1980s to the
early 2000s, the tariffs on TAPS were charged on the basis
of a settlement. The tariffs were not at a fully
adjudicated tariff, so there were parties who felt that the
settlement produced tariffs that were too high. He stated
that TAPS was considered a "common carrier", meaning anyone
who was able to pay the tariff was able to use TAPS. The
current participants would be pro-rated down to make room
for the new party, if the pipe was already full. He
stressed that the party must be able to afford the tariff.
The high cost of the tariff during that time created some
competitive disadvantages for non-TAPS owners. He remarked
that there was currently a just and reasonable tariff,
which was adjudicated by the Federal Energy Regulatory
Commission (FERC).
Commissioner Balash announced that most pipelines in North
America were regulated and their business was conducted in
a unique way. Those pipelines were typically operated as
contract carriers, rather than being considered common
carriers. Being a contract carrier meant that space in the
pipeline was reserved by those who had space in the pipe.
The contract entitled them to the capacity day to day. He
stated that if a party wanted to participate in the pipe, a
change in the pipe must be made. The change would consist
of either the addition of compression, or looping. The new
party would be required to pay for the expansion. He
explained that the history of rate regulation and rate
making in the U.S. was varied. He explained that there was
a point in time when all pipelines in North America were
governed by a rolled in methodology. As part of the
deregulation and efforts to promote competition in the
1970s and 1980s, the U.S. moved to an incremental pricing
methodology for the expansions. That change led to the
construction of more pipelines in more parts of the
country, which he felt was good for the U.S. He explained
that Canada continued to rely on rolled in rate making for
expansion services, and they had fewer pipeline companies.
6:14:41 PM
Vice-Chair Fairclough stressed that Alaska was paying
attention to access, and whether new production could make
it into a pipeline. She queried the likelihood of the state
covering the cost of a possible expansion. She felt that a
pipeline operator would want to participate in the
expansion, because the capital investment would give a rate
of return based on that expansion for thirty years or more.
Commissioner Balash responded that he felt that the
agreement with TransCanada was in Alaska's long term
interest. He stressed that the state may not be the party
involved in expansion. He remarked that there would be a
contract with TransCanada for capacity to ensure that the
gas gets to the liquefaction terminal and Alaskans. He
stressed that a discovery of gas on federal land would not
result in a royalty volume for that gas. He stressed that
the contract with TransCanada needed to be structured on
terms that work for the state over the life of the
contract, which was stated in the MOU as 25 years. He
explained that there were some past issues related strictly
to pipelines, because the pipeline was going to provide the
means to market. Currently, the new component of the
liquefaction terminal was going to be the primary hurdle
for third parties to get their gas to market.
Vice-Chair Fairclough queried the definition of "train."
Commissioner Balash explained that a "train" was a unit of
the processing component either on the North Slope to
remove the carbon dioxide, or at the other under end of the
pipeline at the liquefaction unit. He stated that a train
was a piece of equipment that reduced the temperature and
increases the pressure on the gas to convert it to a liquid
state. He stated that the trains were modular. There were
three trains in the proposed project: three trains for GTP
and three trains for liquefaction. There will mostly likely
be an additional train, in order to expand the capacity of
the facility to make more LNG. He remarked that without the
addition of more LNG, expansion of the project was
pointless.
6:22:05 PM
Commissioner Balash discussed slide 13, "North Slope
Commercialization: What's Different This Time?"
Pt. Thomson resolved
All the necessary parties have aligned to make an
Alaska gasline project go - three producers, a pre-
eminent pipeline builder, and AGDC
Commercial issues being resolved by parties
Gas-oil ratio (GOR) reaching a tipping point in 2020s
Clear articulation of all parties' commitments
Agencies asking the Legislature to provide term sheet-
level approach
Papering of Definitive Agreements only occurs after
Legislature grants authority
Definitive Agreements not binding unless/until
Legislature ratifies - at next stage of commitment by
Producers
Commissioner Balash addressed slide 14, "Long-Term North
Slope Oil and gas Revenues are Driven by AKLNG Project
Success." He stated that the slide was from the
presentation from the previous evening's meeting. He
explained that the slide showed the state's revenue
picture, which showed an oil-only world and an oil plus gas
world. He stressed that the development of the gas resource
was in the state's interest, in order to support the public
services that were provided in state business.
6:30:48 PM
Senator Dunleavy wondered if the 2020 was the year that the
GOR lines would cross, and the focus would be on gas
revenue. He asked if production was declining. Commissioner
Balash responded with slide 15, "Producer (Upstream +
Midstream) Status Quo Annual Cash Flows." He announced that
the issue was related to the production of the gas and the
removing of the gas from the field caused a negative
consequence on oil production. He stressed that a negative
consequence on oil production would affect a business
decision regarding gas production. He remarked that the DNR
models predicted that sometime in the 2020s, the oil
impacts at Prudhoe Bay would be negligible. That impact
would then force the Prudhoe Bay companies to evaluate gas
production as a revenue generator, rather than also taking
into account the oil losses.
Senator Dunleavy explained that there was a similar
conversation related to different kinds of Prudhoe Bay
business. He wondered what Commissioner Balash was
referring to in his comments. Commissioner Balash replied
that he was referring to the initial production area at
Prudhoe Bay in the Sadlerochit Reservoir. He was referring
to the portion of Prudhoe Bay that contained both oil and
gas in one horizon. There are additional horizons above and
below the IPA that can produce oil and gas, because of the
extraordinary complexity and richness of the Prudhoe Bay
hydrocarbons. He stressed that it was possible to develop
additional oil resources, once the blow down of the Prudhoe
Bay gas cap begins.
Senator Dunleavy wondered if there was a still plan to
arrest the degree of oil production decline. Commissioner
Balash responded that there was absolutely a plan to reduce
oil production decline.
Senator Dunleavy asked if the use of gas would affect the
effort to increase oil production. Commissioner Balash
stated that the gas should not affect that effort, but it
requires approval from the AOGCC to ensure that the efforts
are not affected. He remarked that cleaning up the gas from
Prudhoe Bay will require pulling carbon dioxide out of the
gas stream, and that carbon dioxide could then be used for
enhanced oil recovery to improve recovery at Prudhoe Bay or
other nearby fields.
Senator Bishop remarked that there had been previous
testimony in previous years about other proposed pipelines
that had also been as optimistic as this proposal.
ADJOURNMENT
6:37:31 PM
The meeting was adjourned at 6:37 p.m.
| Document Name | Date/Time | Subjects |
|---|---|---|
| 022014 SFIN Alaska North Slope Gas Commercialization.pdf |
SFIN 2/20/2014 5:00:00 PM |
Alaska Natural Gas |
| 022014 - 01 10 2014-Meet Alaska Conference.docx |
SFIN 2/20/2014 5:00:00 PM |
Alaska Natural Gas |