Legislature(2005 - 2006)SENATE FINANCE 532
06/08/2006 08:00 AM Senate SPECIAL COMMITTEE ON NATURAL GAS DEV
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| Roundtable Question and Answer Session - Legislators, Consultants, Producers, Administration | |
| Adjourn |
* first hearing in first committee of referral
+ teleconferenced
= bill was previously heard/scheduled
+ teleconferenced
= bill was previously heard/scheduled
ALASKA STATE LEGISLATURE
SENATE SPECIAL COMMITTEE ON NATURAL GAS DEVELOPMENT
June 8, 2006
8:17 a.m.
MEMBERS PRESENT
Senator Ralph Seekins, Chair
Senator Kim Elton
Senator Lyda Green
Senator Gary Wilken
Senator Fred Dyson
Senator Lyman Hoffman
Senator Thomas Wagoner
Senator Ben Stevens
MEMBERS ABSENT
Senator Con Bunde
Senator Bert Stedman
Senator Donny Olson
Senator Albert Kookesh
OTHER LEGISLATORS PRESENT
Senator Gene Therriault
Senator Gary Stevens
Senator Johnny Ellis
Senator Hollis French
Representative John Coghill
Representative Ralph Samuels
Representative David Guttenberg
Representative Les Gara
Representative Berta Gardner
Representative Kurt Olson
COMMITTEE CALENDAR
Roundtable Question and Answer Session - Legislators,
Consultants, Producers, Administration
PREVIOUS COMMITTEE ACTION
No previous action to record
WITNESS REGISTER
JIM CLARK, Chief Negotiator
Office of the Governor
PO Box 110001
Juneau, AK 99811-0001
POSITION STATEMENT: Participated in the round table discussion
MARTIN MASSEY, Joint Interest Manager for U.S. Operations
ExxonMobil Production
Houston, TX
POSITION STATEMENT: Participated in the round table discussion
KEN KONRAD, Senior Vice President - Gas
BP Alaska
Anchorage, AK
POSITION STATEMENT: Participated in the round table discussion
WENDY KING, Director of External Strategies
ANS Gas Development Team
ConocoPhillips Alaska, Inc
PO Box 100360
Anchorage, AK 99510
POSITION STATEMENT: Participated in the round table discussion
DAVID VAN TUYL, Commercial Manager
Alaska Gas Group
BP Alaska
Anchorage, AK
POSITION STATEMENT: Participated in the round table discussion
MARK HANLEY, Public Affairs Manager
Anadarko Petroleum
Anchorage, AK
POSITION STATEMENT: Participated in the round table discussion
BOB LOEFFLER
Morrison & Foerster
Counsel to the Governor
Office of the Governor
PO Box 110001
Juneau, AK 99811-0001
POSITION STATEMENT: Participated in the round table discussion
KEN GRIFFIN, Deputy Commissioner
Department of Natural Resources
400 Willoughby Avenue
Juneau, AK 99801-1724
POSITION STATEMENT: Participated in the round table discussion
RICK HARPER
Econ One Research, Inc.
Consultant to the Legislature
Three Allen Center, Suite 2825
333 Clay Street
Houston, TX 77002
POSITION STATEMENT: Participated in the round table discussion
DONALD SHEPPLER
Greenburg Traurig, LLP
Consultant to the Legislative Budget and Audit Committee
Alaska State Capitol
Juneau, AK 99801-1182
POSITION STATEMENT: Participated in the round table discussion
KAROL LYN NEWMAN, Attorney
Morgan, Lewis & Bockius, LLP
POSITION STATEMENT: Participated in the round table discussion
JAMES EASON, Consultant
Legislative Budget and Audit Committee
Alaska State Capitol
Juneau, AK 99801
POSITION STATEMENT: Participated in the round table discussion
JAMES BARNES
Barnes & Cascio LLP
Consultant to the Legislature
POSITION STATEMENT: Participated in the round table discussion
ROGER MARKS, Economist
Department of Revenue
PO Box 110400
Juneau, AK 99811-0400
POSITION STATEMENT: Participated in the round table discussion
DAN DICKINSON, CPA
Consultant to the Governor
Office of the Governor
PO Box 110001
Juneau, AK 99811-0001
POSITION STATEMENT: Participated in the round table discussion
ACTION NARRATIVE
CHAIR RALPH SEEKINS called the Senate Special Committee on
Natural Gas Development meeting to order at 8:17:41 AM. Present
at the call to order were Senators Lyda Green, Gary Wilken, Ben
Stevens, Fred Dyson, Lyman Hoffman and Chair Ralph Seekins;
Senators Thomas Wagoner and Kim Elton joined the meeting in
progress. Also in attendance were Senators Gene Therriault, Gary
Stevens, Johnny Ellis and Hollis French, and Representatives
John Coghill, Ralph Samuels, David Guttenberg, Les Gara, Berta
Gardner and Kurt Olson.
^Roundtable Question and Answer Session - Legislators,
Consultants, Producers, Administration
CHAIR SEEKINS announced the committee would continue its
roundtable discussion among legislators, consultants, producers
and the administration.
8:19:12 AM
SENATOR LYMAN HOFFMAN advised the committee his constituents
from rural Alaska are concerned that since the gas would not get
out to the rural areas of the state, they question the benefit
of building the pipeline for those that will not even see the
product. He questioned whether Alaskans would benefit from
extraction of the gas.
JIM CLARK, Chief of Staff for Governor Frank Murkowski and Chief
Negotiator, responded the Administration assembled a Rural
Alaska Energy Task Force headed up by Nels Anderson of
Dillingham. The committee is considering that question but at
this point does not have an answer yet they are in the process
of developing a strategy. However, the Administration is
committed to drive down rural energy costs. One thing the
committee is considering is whether there is an opportunity to
use the access point north of the Yukon to serve as a
distribution point for butane or propane for villages.
8:22:16 AM
SENATOR HOFFMAN asked for a comment from the producers regarding
the commitment in the contract to hire Alaskan workers for the
project.
MARTIN MASSEY, Joint Interest Manager for U.S. Operations,
ExxonMobil, explained Alaska hire was a negotiating topic from
the beginning and was the first article to which the producers
agreed on. He assured the committee that once the project begins
there will be ample jobs for trained Alaskans. The producers are
committed to provide funds to train workers out of high school
and the State has committed $20 million dollars to build
facilities and develop training programs. He said the issue
would more likely be a shortage of Alaskans who are properly
trained and ready to work. He assured the committee that every
contractor on the job would be committed to the Alaska hire
provisions in the contract.
MR. CLARK added not only are there Alaska hire provisions in the
contract, there are also "Alaska buy" provisions so that
secondary employment and goods are stipulated.
8:25:40 AM
SENATOR FRED DYSON said some of the bargaining units would
likely be a part of the project. According to their bylaws, they
have to "clear the halls" of their Northwest affiliates before
they can hire qualified Alaskans. He asked whether the
bargaining units with internal constraints would be allowed to
be signatory to the labor agreement.
MR. CLARK agreed that was an issue to be considered. It is not
part of the current contract but would be part of the next stage
of negotiations. The Administration is committed to training for
the jobs in state and will make sure there are hiring halls even
in rural Alaska. Premier Klein of Alberta has allowed that
Alaskans would be able to work in Alberta, as there is a lack of
labor resources in that area.
8:28:45 AM
SENATOR DYSON asked for a summary of the preliminary work that
has been done from the main line through south central and
beyond.
MR. CLARK informed the committee they have taken a preliminary
look at how the lines might work. The Administrations has been
working with the Alaska Natural Gas Development Authority
(ANGDA) board, which has taken on the business of the spur line
to Cook Inlet. That has progressed further than the notion of a
line from Pump One down to Cook Inlet because the spur line off
of the main line would be more efficient and timely.
8:30:02 AM
Senator Kim Elton joined the meeting.
SENATOR DYSON asked whether the committee could have access to
the preliminary work that has been done on that topic.
MR. CLARK advised the committee he would provide them with the
work that ANGDA has done.
CHAIR SEEKINS referred to the oil pipeline construction period
of the 1970s and expressed concern about predatory hiring from
existing small businesses. He said the issue is likened to a
"two-headed snake" and will force existing employers to have to
fill the jobs left by the current employees.
MR. CLARK agreed that was an issue. The project is projected to
provide 9,300 jobs and there are not that many unemployed
Alaskans. The Administration is pursuing a strategy to deal with
the issue because they are committed to training and hiring
Alaskans for the pipeline project.
Senator Gene Therriault, Representative Ralph Samuels and
Representative John Coghill joined the meeting.
CHAIR SEEKINS asked for the producers' perspective on the
matter.
8:35:34 AM
KEN KONRAD, Senior Vice President, BP Alaska, commented they are
keenly aware that the Alaska hire issue is important to the
State and the project and BP supports it. There is adequate
funding for training, mentoring programs from federal sources,
and committed financial support from the producers.
8:37:38 AM
WENDY KING, Director of External Strategies, ConocoPhillips
Alaska, advised they are committed to Alaska hire, buy and build
and have been for a number of years. The company supports the
"front end loading" of training programs for middle and high
school students. After the project-planning phase, they plan to
meet with the Department of Labor and Workforce Development
(DOLWD) and provide them with a report highlighting all of the
jobs and skills that the project would need. She emphasized
there are more commitments than just that, such as annual
reports that list how the funds for training are being spent and
reports listing the people that are working on the pipeline
project.
8:40:37 AM
MR. CLARK added the Administration is working on strategies to
deal with the Alaska hire provision and the impact that will
have on existing businesses and state government. Regardless of
the provision, there will be an influx of people coming in from
the outside looking for employment and that will have some
impact on the state. There is also impact aid money written in
the contract that they want to disburse sensibly and that will
need to be dealt with through the Legislature.
8:45:10 AM
DAVID VAN TUYL, Commercial Manager, BP Alaska, referred to
Senator Hoffman's concern regarding rural Alaskans and how they
would benefit from Alaska gas. He said a successful project
would benefit all Alaskans through revenues that are brought in
to the general fund. He advised that for years BP has supported
programs such as the Alaska Process Industry Careers Consortium
(APICC), the Alaska Native Science and Education Program
(ANSEP), Alliance of Learning and Vision for Underrepresented
Americans (ALVA), and the youth employment service program
through the Tanana Chiefs organization. Everyone must recognize
that a trained workforce is the key to success of the project,
he stated.
Senator Hollis French joined the meeting.
8:49:52 AM
SENATOR GENE THERRIAULT commented the Legislative Budget and
Audit Committee coordinated with federal agencies, the state
administration and smaller producers when they went to FERC and
encouraged them to develop the regulations and the
transportation package so as to encourage exploration and
competition. He asked that Mark Hanley be invited to the witness
table to speak on behalf of the smaller producers.
8:52:02 AM
MARK HANLEY, Public Affairs Manager in Alaska, Anadarko
Petroleum, introduced himself. He advised the committee that as
an independent, Anadarko explores for and produces oil for the
larger producers and does not own pipelines, refineries and gas
stations. The majors are more fully integrated and that marks
the distinction between the independents and the major
producers.
CHAIR SEEKINS asked Mr. Hanley his view of how the independent
producers would gain opportunities for access into the project.
SENATOR THERRIAULT reiterated the package that came out of FERC
was advantageous to Alaskans and he expressed concern that could
be undermined by the language of the contract. He indicated
Anadarko Petroleum has had to retain outside legal counsel to
evaluate the contract so as to understand the impact the
contract would have to the smaller independent operators.
CHAIR SEEKINS said he has heard expansion could be up to 5.7 Bcf
and that any expansion would be subject to an open season. There
would be no guarantee that an independent would be able to take
advantage of an expansion if that were the case.
MR. CLARK responded that was true.
8:55:14 AM
SENATOR DYSON asked for an explanation as to why expansions of
the gas capacity are limited to 100-mile segments. He said that
seemed "startlingly bizarre."
MR. CLARK deferred the explanation to Bob Loeffler who, he said
could also address Senator Therriault's concern.
8:55:50 AM
BOB LOEFFLER, Morrison and Foerster, Counsel to the Governor,
introduced himself for the record. He said one reason the great
result at FERC was achieved is because everyone had a common
position. He pointed out it was not the intent to undermine the
result of FERC. "Expansion comes in at least three flavors," he
stated. There is the statutory mandatory expansion, which is
considered a backstop to any negotiation. It is not instant
expansion but a tool in the toolkit towards expansion. FERC open
season regulations exempt from the rolled in pricing requirement
a mandatory expansion so that is unknown territory. The
statutory language that the U.S. Congress passed allows the FERC
to treat that with either incremental or rolled in pricing. So
expansion solution number one is the mandatory expansion right.
Solution number two is voluntary expansion. The LLC agreement
will contain a set of provisions on how the LLC deals with
expansion. Under the FERC process voluntary expansion requires
that the rate treatment would be rolled in.
The Administration negotiated for a third form of expansion
identified in the contract as a state-initiated expansion and
that has limitations on looping. It met with a lot of resistance
because producers felt the Congress-backed mandatory expansion
was sufficient. The argument by the Governor's Administration
was they were particularly concerned with serving instate needs.
As far as expansion is concerned, the FERC will look at the
application to be sure it is designed to serve present needs as
well as the potential for expansion. FERC will look at the
expansion to ensure that it would serve existing shippers and
future shippers alike. In the negotiation, the Administration
sought expansion rights as part of the trade on the RCA clause.
The idea was to look at where any unsatisfied need was, such as
on an upstream pipeline. He said:
The idea of the clause is that the State on its own
behalf or at the request of any shipper could come to
the LLC to initiate expansion and the LLC would have
to respond to that. Obviously as a member of the LLC
the State always had the right to trigger the
voluntary expansion but this is sort of an external
right and there are requirements imposed. The idea,
and it's a negotiated point, was that this should deal
with the smaller sized expansions - that's where you
get the looping issue coming in. You can't loop the
entire pipeline under state-initiated expansion.
I recollect, and others might disagree, that we were
particularly sensitive to the need to serve instate
needs. So that was part of the thinking behind the
clause. But the idea is the party who is pushing the
expansion, and it could be the State or Anadarko
hypothetically, would have to advance the money for
the engineering and that money could later be
recovered in the rates of the LLC if the LLC paid
Anadarko or whoever back. The idea was to mimic the
requirements that Congress imposed on a mandatory
expansion in terms of the terms and conditions. There
is a clause in there that protects current shipper's
rates and whether those rates would go up or down is a
function of what type of expansion it is.
MR. LOEFFLER asked Mr. Clark whether he had anything to add to
his summation.
9:06:09 AM
MR. CLARK added part of what they were trying to do with the
state sponsored program was to ensure that the negotiations
would not drag out. There was concern that going through the
FERC regulatory process could slow things down for a long period
of time and the State might not get the desired access within a
reasonable period of time. By making it a contractual
requirement it would hopefully speed up the process and better
serve the needs of the independents.
MR. LOEFFLER commented one of the requirements is that the
initiated expansion request not be from one of the "big three."
This was designed as a remedy for an independent working outside
of the LLC. The starting point is with the independent but the
LLC might want to include any others who are looking for
capacity and so they would want to design an expansion that is
optimal for everyone. The other point is the expansion becomes a
project of the pipeline so that the pipeline is behind it. There
is a special provision on dispute resolution to ensure the LLC
is with the application. The clause would be triggered by an
unsatisfied request of an independent, he stated.
MR. CLARK asked Ken Griffin to address the engineering
principals involved with how the expansion application is looked
at.
9:10:02 AM
KEN GRIFFIN, Deputy Commissioner, Department of Natural
Resources (DNR), advised he has not looked at expansion for some
time but recalled when they looked at ensuring that expansion
provisions were available to the types of projects independents
might consider, the State looked at the minimum development size
on the North Slope. "There is a size of discovery on the Slope
that is just not economic to move forward on it - it's just too
small," he said.
The State came up with estimates of a minimum North Slope gas
development size that an independent would want to move forward
with. As Mr. Loeffler indicated, Article 8.7 of the contract was
drafted so that the numbers are from the perspective of a single
independent seeking capacity or expansion of the pipeline and
that independent would most likely be a partner with others. The
minimum expansion numbers were intended to approximate the
minimum gross development size that an independent might be
seeking to invest in.
SENATOR THERRIAULT asked for clarification on the minimum
expansion size.
MR. GRIFFIN responded it would be 50 million cubic feet for a
feeder line.
MR. LOEFFLER added, "It's 50,000 Mcf per day and 125,000 BTU per
day."
MR. GRIFFIN stated that would be the independent share of
production from the field. They took approximations and
converted that to a reserve size but he could not recall the
math used to convert the net rate from a total reserve size that
an independent would attempt to move forward with.
SENATOR THERRIAULT asked whether Anadarko agreed with the
minimum gross development size numbers. If the tariff is higher,
which is a concern of expansion, that means the size field that
an independent needs to find would have to be larger, which
increases the risk, he opined.
9:14:11 AM
CHAIR SEEKINS asked Mr. Hanley to delay his response until the
committee could hear from Rick Harper.
RICK HARPER, Consultant to the Legislature, referred to Article
8.7(a) and noted neither the State nor another party can request
or require an expansion prior to commencement of commercial
operations. The issue is basin control and concern that there
might be a major discovery in the foothills or elsewhere and so
there would not be a basis to go forward with any expansion
planning given the nature and intent of the language in the
contract, he suggested. He asked Mr. Hanley to comment on that
subject.
MR. CLARK interrupted to ask Mr. Harper what he meant by basin
control.
MR. HARPER stated the issue is that there is vertical
integration for the first time in the natural gas industry and
at least one of the companies is not actively engaged in
exploration in Alaska at this time. He said it was critical that
the State make expansions both timely and easy for the
independent operators but Article 8.7(a) appears to have
language that precludes both the State and other parties from
seeking an expansion prior to commercial operations. He asked
Mr. Hanley to comment with his perspective.
MR. CLARK inferred that was a very serious allegation and asked
that the Administration and the producers be allowed to respond
as well.
CHAIR SEEKINS advised that was a legitimate question and
indicated that everyone would be able to provide their response.
9:18:10 AM
DONALD SHEPLER, Greenberg and Traurig, Consultant to the
Legislative Budget and Audit Committee, said he would like to
hear Mr. Hanley's views of expansion but asked the committee at
some point to return to the discussion between Mr. Clark and Mr.
Loeffler regarding the state-initiated expansion and the
benefits of that provision.
MR. HANLEY said the short answer was that they question the
reason for limiting the expansion application to the start of
the construction period because in the meantime, Anadarko might
find something that even the producers want to explore. It seems
like a limit that does not need to be there, he said.
CHAIR SEEKINS asked for clarification whether Anadarko was
concerned about the statement, "following commencement of
commercial operations" and whether Anadarko was concerned there
could be need of expansion prior to that period.
MR. HANLEY agreed and stated, "It should just say if a person,
including the State, seeking expansion," rather than put a limit
on a certain timeline. He said it was important to note that,
"from our perspective every time we tried to do this, we have
been opposed by the producers so it creates a concern for us.
This has been a normal process but it has not been without
opposition at every step of the way." It is a competitive
process and Anadarko would prefer to rely on the FERC. Anadarko
is concerned about the lack of regulation on some of the issues
because access at a fair price and reasonable terms on the
pipeline are an area of concern to the independents.
MR. HANLEY continued it is not Anadarko's position to make a
judgment call on how the Administration negotiated the contract,
realizing that perhaps there were things that had to be given up
in order to secure the contract. Regarding the issues of whether
the pipeline could be expanded to 5.7 Bcf, he said there is an
assumption that the pipe will be 4 Bcf and easily expandable
with compression but that might not be the case. "There are red
flags out there and one of them is we don't see anything that
says how this will be built." Generally the companies will do
what they say they are going to do but he speculated, they could
also not allow FERC to tell them they do not have enough
capacity and prevent them from forcing expansion.
9:24:35 AM
MR. HANLEY continued if FERC had that authority Anadarko would
be less concerned. Another thing is that a number of their
concerns might not be addressed when the LLC agreement is
finished. Frankly, it is the LLC that will apply to FERC and
they will set the rates and tariffs and will determine who does
expansions. Mr. Shepler's memo raises concerns that the issue is
not well described, he stated. It is Anadarko's perspective that
the pipeline is easily expandable but he questioned whether it
was in the shareholders best interest to have a low tariff.
In a normal situation with an independent pipe, a pipeline will
apply for a high rate of return because of the risk factor and
the shippers would balk saying that they are the ones
shouldering the risk. He said:
That's the normal tension of a pipeline [that] wants a
high rate of return because that's how they get the
return. A shipper, on the other hand, wants to pay as
little as they can for that, so this range of
acceptable tariffs on the pipeline… our concern in
this particular instance is that as a
producer/shipper, particularly one that is totally
aligned on their capacity and ownership interest; that
may shift. And the reason that may shift is because if
it's the same company, if you pay a higher tariff,
it's coming to yourself but there are two things that
happen. It creates a competitive advantage in our view
if it's more than a reasonable tariff for third party
players, and this is where we see we're aligned with
the State as well, and it also affects the wellhead
value. As the tariff is higher, the wellhead value is
lower and the tax rates on that production is lower so
the State would see potentially a lower return and a
company would see a higher rate.
MR. HANLEY expressed concern that the pipeline entity could
demand a 15 percent rate of return on the pipe and the companies
could reject that demand. The normal market forces that work in
other arenas do not necessarily apply here, he said. He pointed
out the reason FERC stepped out and decided to be able to force
expansions is because the normal competitive forces do not work
and do not exist. Anadarko is concerned that by controlling
access to a pipe allows the companies too much control of
exploration around that pipe.
MR. HANLEY referred to Chair Seekins' question regarding the
concern that independents might not have access during an open
season expansion and said Anadarko does not mind the competition
so long as it happens on a fair basis. Generally the open season
regulations help provide a fair basis. To the extent that there
is terms and conditions within the contract that limit the
ability, they are concerned, he stated. "It seems like there is
a morphing of the commercial role and the regulatory a little
bit in here," he added. In summary, Anadarko is concerned with
the contract, particularly as it relates to access and they are
concerned with the expansion language.
9:30:55 AM
CHAIR SEEKINS said there is no doubt that the shippers would pay
for the pipe. The issue of basin control is an issue and the
public wants to know whether the intent is to limit access to
the producer's own interests. He said that was a fair question
and a public forum is the right way to address it.
MR. HARPER advised the committee he has had a lot of discussion
with the Administration in this area. He said the State
aggressively sought expansion language but received a lot of
resistance and ultimately ended up making concessions. He said
perhaps Mr. Konrad could explain the reason the companies
resisted the expansion language on the issue.
9:33:37 AM
SENATOR BEN STEVENS said he appreciated the discussion on access
but he preferred to have the discussion arise from questions
that originate from the legislators. This discussion will be
resolved somewhere other than in the legislative body, he said.
"Access issues on an interstate commerce project fall to FERC,"
he stated. He expressed concern that the committee was allowing
themselves to get diverted from actually finding out information
about the project.
9:35:25 AM
CHAIR SEEKINS asked Senator Ben Stevens whether there was
anything in the Stranded Gas Development Act (SGDA) that
addressed the issue of expansion.
SENATOR BEN STEVENS replied FERC has eight criteria on mandatory
expansion and the answers to those questions lie in that body.
"FERC is the determining body of all the concerns I've heard
raised here," he asserted.
9:38:05 AM
SENATOR ELTON said he did not disagree with Senator Ben Stevens
but pointed out that Article 8.7 provides how and when the State
can ask for expansion and so that is an important component of
the contract.
SENATOR BEN STEVENS responded the FERC has allowed under unique
circumstance of this pipeline to allow somebody who is not in
the project to request for FERC to implement a mandatory
expansion. So if an independent finds a large reserve after the
project commences, the independent can petition FERC for
expansion. The concept of saying that the contract prohibits
expansion is untrue, he stated.
CHAIR SEEKINS referred to Article 8.7 and asked whether state
expansion was the only kind of expansion available.
MR. LOEFFLER replied it is only one in the tool kit. The special
rights that Congress gave to FERC are totally separate from the
state-initiated expansion. There are two ways to petition for
expansion. One can approach the pipeline with a proposition or
one can approach FERC and invoke Section 105 of the SGDA.
CHAIR SEEKINS asked whether that could be attempted at any point
in the process of the project.
MR. LOEFFLER said yes.
MR. SHEPLER said he agreed with Mr. Loeffler but added there is
also the voluntary expansion, to which the contract is silent.
He discussed that in his memo and thought it was surprising
given that the parties with whom the State is partnering have
opposed FERC's mandatory expansion rights. They have appealed
the portion of the FERC order that allows the FERC to require
design modifications to make sure the pipe is capable of
economic expansion. So voluntary expansion is not in the
contract but is an available option, he said.
The other option is the FERC mandatory option, which
comes out of the 2004 expansion and we just received
the producers brief in the appeal of the FERC order
and in that brief they describe Section 105 as
providing elaborate protections of Alaska pipeline
sponsors from being made to expand the pipeline. As
Senator Stevens and his handout indicated, there are
eight criteria that the FERC has to find before it can
order an expansion. The third option is the state-
initiated expansion and my concern there is that the …
mandatory expansion with its elaborate protections …
has been expanded by an additional ten criteria that
have to be satisfied before the state-initiated
expansion has to go forward. It's more restrictive on
rates and limited in time and volumes.
MR. SHEPLER summarized there are three expansion options, two of
which are not in the contract and the one in the contract is
questionable.
9:46:07 AM
MR. VAN TUYL referred to the question regarding the difficulty
around Article 8.7 and said Senator Ben Stevens explained the
reason precisely. That clause was unnecessary in the contract,
he said. It is FERC that controls access to the pipe, not the
producers. Because of that, the producers felt it appropriate
that the rules of access be adjudicated by FERC. To the question
of why the producers want to limit the right to request
expansion before commencement of commercial operations, he said
that clause is associated with the contract and not with FERC.
FERC overrides everything and controls access to the system, he
stated. The rationale for the contract language is that the
anchor shippers are taking all the risk on building the project
and the focus of the contract is to ensure that the project is
successful to begin with.
The traditional open season process was supplemented by the FERC
open season regulations, which included a unique provision that
allows for consideration of bids for capacity received after the
open season. It is FERC's job to adjudicate rates for interstate
pipeline systems and they assure the rates are just and
reasonable. The rates would not be set by the LLC as earlier
testimony indicated, he stated.
9:53:08 AM
MR. LOEFFLER said he had a few points he would like to address.
He referred to his previous testimony to the Legislative Budget
and Audit Committee (LB&A) in summer of 2004 in which he studied
40 rate cases out of FERC. He said there is no difference in the
rate that FERC awards to independents versus producers. "FERC
just looks at the project," he said.
The LLC does address voluntary expansion and there is no
additional need to put it in the contract. The LLC also captures
a financing plan where the intent is to use the federal
guarantee and the intent is to achieve a highly leveraged fiscal
structure. It is too early to be able to know the fees and
conditions that the federal government will impose and so it's
impossible to lock that in at this point. "The federal
government has it's own interest," he stated.
9:56:08 AM
MR. LOEFFLER continued it is true in the oil pipeline case that
tax rates are not affected by tariffs but it is not true in the
case of the gas pipeline. Alaska is taking the payments for
taxes in gas not in cash, and so the netback affects the
wellhead for everyone else but it doesn't in the tax situation
in this contract.
On the issue of FERC looking at late bids he said that was a nod
in the direction of the independents to help the project get
built and operating. The State is aligned with Anadarko and the
LB&A in opposing the one element of the open season order that
the companies have appealed. That point is, "Can the FERC order
design changes to what is proposed to it." He said his
understanding is that is long-standing FERC law, although the
companies must have an argument.
10:00:21 AM
SENATOR GARY WILKEN posed a hypothetical situation of an oil
company that approaches FERC where FERC follows Section 105(b)
and then grants an order according to Section 105(c). The oil
company is now subject to a timeline under which they must
execute a transportation agreement. He asked Mr. Loeffler where
the rules are under which that agreement would come together.
MR. LOEFFLER replied the order that comes out of FERC would set
a number of requirements. The firm transportation (FT) agreement
that results from that has to comply with those requirements but
there could be negotiation with anything that is left open
between the pipeline and the oil company, he advised.
SENATOR BEN STEVENS added the fact that the oil company did that
work doesn't necessarily open up the pipeline. That company
still would have to negotiate a contract with the LLC.
MR. LOEFFLER agreed and said that contract would have to comply
with existing tariff and everything else. He said that is the
"put up or shut up" clause because it requires the person that
started the process to get the capacity and so it is a special
right but the person has to commit financially.
SENATOR BEN STEVENS said that phrase only applies to Alaska
because Section 105(d) says, "nothing in this section expands or
otherwise affects the authority of the commission with respect
to any other pipeline located outside of the state."
MR. CLARK announced he had a handout for committee members that
would address Representative Coghill's earlier distribution
question.
CHAIR SEEKINS announced a brief recess at 10:03:13 AM.
10:22:32 AM
CHAIR SEEKINS brought the committee back to order and advised
members they would pick up where they left off on the same topic
of conversation. He asked Mr. Hanley to comment.
MR. HANLEY pointed out the contract contemplates having an
effect on the State and clearly FERC is the decider, except in a
case where FERC issues a certificate that the producers have to
reject because of the rate. In a state-initiated expansion, a
rolled in rate would not be appropriate, he said. "While FERC
might have said it's a good way to go, the producers get the
ultimate decision and we're forced back into a FERC mandatory
process. So it does have limitations." Mr. Hanley referred to
Section 8.1 and advised that has raised issues with Anadarko. He
read the section:
The parties shall not seek additional, different, or
supplementary requirements, or regulation of, or
access to the gas transmission pipelines, GTP,
mainline, any LNG plant, or the non-Alaska project.
MR. HANLEY asserted Section 8 seeks to limit the parties from
seeking changes. The definition of "parties" appears to be the
State of Alaska and the Alaska affiliates but not the parent
companies and so it is not clear whom that section binds. He
expressed concern that the State might have "tied it's own hands
and nobody else's." He asked Chair Seekins whether the FERC
attorney could speak to that matter.
KAROL LYN NEWMAN, Attorney with Morgan, Lewis & Bockius, advised
the committee she represented Anadarko Petroleum Corporation for
years on this matter. She has practiced law on FERC-related
matters for thirty years. She addressed a comment made by Mr.
Loeffler regarding the requirements of Section 8.7 and that they
are reflective of the mandatory expansion section of the
statute. "The requirements of 8.7 are far more onerous for a
potential expansion of the pipeline than are the requirements
set out in the statute [since] FERC has yet to issue any
regulations," she stated.
MS. NEWMAN continued the next concern was whether or not the
State, through the contract, agrees that it will not support an
expansion by any explorer on ground other than those set out in
Section 8.7. That encapsulates the greatest concerns they have
with that section, she added.
CHAIR SEEKINS asked Ms. Newman whether she would prefer that
Section 8.7 not appear in the lease agreement of the fiscal
terms contract.
MS. NEWMAN said yes. It would make it far more difficult for
explorers to advocate expansion from FERC in the situation where
the pipeline is not agreeable to doing it voluntarily.
CHAIR SEEKINS asked Mr. Shepler whether Section 8.7 acts as an
impediment to gain access to other methods or whether it was a
third tool.
MR. SHEPLER replied that it is a third tool in the situation
where an expansion is initiated by the State that is
compression-based and would have the impact of a true rate-
reducing expansion. He shared the concerns of Ms. Newman and Mr.
Hanley that:
At the extreme, at the looping expansion end of the
spectrum, I find that 8.7 takes the eight criteria
that have to be satisfied under the federal statute
and adds ten more, which are really much more
restrictive. But in the one scenario where you have an
expansion, which would clearly otherwise be economic
for the pipeline, which for some reason the producer
or owners or the LLC refuse to do, and which would in
that instance actually reduce rates, then it would be
a useful tool in the toolbox.
CHAIR SEEKINS quipped, "It's a third tool but it has a few more
buttons you have to push to make it effective."
MR. SHEPLER added it wouldn't be used very much and it is not a
tool for any sort of expansion that would have any effect of
raising the rate for an existing shipper. "That's in contra-
distinction to the federal statute that Senator Stevens quoted
this morning," he said. There the criteria that the FERC has to
meet must satisfy that there be no subsidy of the new shippers
by the old shippers. It doesn't talk about a rate increase. The
federal statute is more permissive of an expansion and Section
8.7 is more restrictive because it prohibits the state-initiated
expansion if there is any rate increase. Section 8.7 appears to
have a benefit to shippers, he opined.
10:34:36 AM
CHAIR SEEKINS asked Mr. Shepler whether he would advise an
explorer to use the FERC expansion method.
MR. SHEPLER replied if it were anything other than a rate-
reducing expansion that is refused by the LLC, then Section 8.7
has little or no value.
MS. NEWMAN added she would advise an explorer not use Section
8.7 because the conditions to which they would have to agree are
far greater, far more onerous, and far more costly than FERC
would impose.
10:36:25 AM
SENATOR THERRIAULT asked Mr. Loeffler whether Section 8 was hard
fought in negotiations with the producers.
MR. LOEFFLER referred to a point made by Ms. Newman and
clarified that by having Section 8.7 it does not indicate that
the State would take a position opposing any other kind of
expansion. He responded to Senator Therriault's question and
informed that they looked at half a dozen forms of expansion and
there does exist FERC regulations. There was considerable
negotiation on Section 8 of the contract, he admitted.
SENATOR THERRIAULT asked Mr. Loeffler to advise whether the
terminology of no rate increase versus no subsidization was
highly negotiated.
MR. LOEFFLER replied no one really knows what a subsidy is but a
subsidy would be implemented in the way of fuel retention. "In
effect, we were giving a little more detail as to how FERC would
treat it," he said.
10:40:09 AM
CHAIR SEEKINS asked Mr. Hanley to air his concerns regarding
basin control.
MR. HANLEY advised the committee that he brought some discussion
papers that Anadarko compiled in 2001 that describe their issues
and concerns. The papers provide examples of identified concerns
that competitors often have. "Controlling access to
infrastructure can control the basin," he stated. Mr. Hanley
went on to quote an article from the Calgary Herald printed in
2001 - headline: Conoco Dismisses Native Demands; CEO insists on
pipeline ownership:
Archie Dunham, the Chief Executive of Conoco had a message for
aboriginal groups demanding one hundred percent ownership of a
proposed Mackenzie Valley natural gas pipeline: "No." Dunham who
gained control of 1.2 trillion cubic feet of gas in the Canadian
arctic with Conoco's blockbuster takeover of gulf Canadian
resources said his company must have a stake in the pipeline.
"We're going to have an ownership of the pipeline. We have to
have it." Dunham defended his hard-line position citing Conoco's
woes in Alaska in the early 90s when it felt it couldn't get
full value for it's resources because it did not own a stake in
the Trans-Alaska Pipeline. "The owners of the pipeline, by
adjusting the tariffs on the pipeline, could really diminish the
value of the producing properties and that's not going to happen
again," pledged the CEO of the Houston-based company.
MR. HANLEY added Anadarko as well as other producers have
concerns about companies that demand ownership as a means to
protect their ability to produce. He offered the papers to
committee members to help them understand the issues that
Anadarko has.
CHAIR SEEKINS asked Mr. Harper for his perspective on the topic.
10:44:20 AM
MR. HARPER said it was important to keep in perspective that an
interstate pipeline company is not a publicly owned utility. It
is a for-profit company aggressively promoting its interest.
They have a myriad of ways to influence the outcome of how the
system is managed, how rates are set and how access is granted
to their system. "They are profoundly skillful at that," he
stated. The FERC will not serve as an ultimate backstop
protecting all interest holders and stakeholders equally. "It
will not happen," he said. It's very important that the
contractual terms and the intent be clearly understood both in
the contract agreement and in the LLC agreement. He agreed with
Mr. Hanley that the interstate pipeline company would have an
impact on the interest of other stakeholders.
MR. HARPER continued interstate natural gas pipelines are not
common carriers; they are contract carriers. When the contracts
are negotiated, common carriage implies, "when the pipeline is
full, normally you want in, you get a cut of the action." "That
is not the way that natural gas pipelines function or operate,"
he stated. The terms of access will influence outcomes including
access to the basin. "There is absolutely no question in my mind
about that," he stated. He expressed concern over the structure
of the contract as it stands.
10:48:40 AM
MR. VAN TUYL agreed that basin control is a serious issue that
must be addressed. He emphasized that it would be FERC that
would control access in and out of the basin. Regardless of who
owns the physical pipe, access to capacity on the pipe has to be
made available on an open access basis. The process FERC uses to
determine access is the open season process, and the stigma of
the basis being locked up by the producers is false he asserted.
MR. VAN TUYL offered to speak on the issue of the rationale for
waiting for the commencement of commercial operations to allow
access to the state-initiated expansion. Their focus is on
successful delivery of the project, he said. One concern is that
entertaining such things as expansion alternatives and design
changes could require submission of a revised application to
FERC. If that happens it could result in having to submit a new
application, which would start the clock again. "We don't think
that is in anyone's interest," he stated.
10:52:46 AM
SENATOR ELTON said no one would dispute what Mr. Van Tuyl said
about open access. The fundamental question is not what happens
during the open season but what happens after the open season
and how expansion would work so that others have access to the
pipeline.
MR. VAN TUYL responded many things could happen after the open
season. One of the FERC regulations require that even a shipper
that didn't participate during the open season and comes in with
a bid after the open season; that bid must be considered by the
pipeline. In addition, there are three mechanisms that enable
access after the initial open season and any one of them would
be adjudicated by FERC.
SENATOR THERRIAULT said experience with the TAPS settlement
methodology has shown that entering into a contract can limit
the full implementation of FERC's powers. He asked whether the
current contract would not do the same thing since the State
would be bound by the contract and would aggressively look for
full utilization of FERC's powers to protect access for others.
MR. VAN TUYL responded under a Delaware LLC structure, any
member would be able to have its voice heard before FERC.
SENATOR THERRIAULT countered there are issues with the language
in the contract that specifies if FERC were to come back with
something other than what was requested, all members are bound
by the contract to reject it whereas without that language, the
State would be able to side with FERC.
10:57:59 AM
MR. VAN TUYL said Senator Therriault was referring to language
specific to Article 8.7 and state-initiated expansion. Article
8.4 expressly preserves the right for any party to petition
FERC. He said that goes back to Senator Ben Stevens' comment
that FERC would set the rates and provide regulated access to
the pipe.
SENATOR THERRIAULT asked Mr. Loeffler to clarify whether there
was a presumption of rolled in rates with the National Energy
Board (NEB) implementing its policy or whether it was given that
they use rolled in rates.
MR. LOEFFLER informed they have a rolled in rate policy but was
not sure whether that was a presumption. He offered to check
into it. He continued Article 8.4 was put in the contract
precisely so the State could pursue different tariffs with FERC.
11:00:51 AM
SENATOR THERRIAULT addressed Mr. Van Tuyl and said the reason he
mentioned the NEB was because currently with development of the
Mackenzie line by Imperial, Shell, and ConocoPhillips; British
Petroleum was advocating for NEB policy because of the rolled-in
rate presumption. It is a situation where BP is on the outside
advocating for the system that offers BP the most protection and
so there must be realism to the concern that others wouldn't be
allowed to utilize the system, he stated.
MR. VAN TUYL clarified BP supports a market-based approach to
the Canadian regulatory system and feels that the system should
allow the market to work.
SENATOR THERRIAULT asked Mr. Van Tuyl whether there was any
instance where BP has filed to support the NEB process and other
companies have asked for something that offers less protection.
MR. VAN TUYL responded BP believes the NEB process allows
parties to be heard and allows them the most efficient result to
occur.
11:03:01 AM
MR. KONRAD added BP is seeking the same thing in Canada that the
NGD contract lays out, which is that the transition lines are
regulated by FERC. "In the case of Canada we are petitioning to
do the exact same thing," he stated.
SENATOR THERRIAULT asked whether the NEB process was presumed or
whether it was built around a rolled-in rate methodology.
MR. KONRAD did not know.
11:04:15 AM
MR. HANLEY said Anadarko would encourage FERC regulation of the
main line, GTP, and transition lines so that there is an
opportunity at some venue to appeal things. After the open
season if an explorer were to approach the LLC and be turned
down, there is no other mechanism in which to gain access. The
contract is written such that if the request were outside of
FERC jurisdiction, commercial arrangements would apply. Anadarko
would prefer that there be no regulatory gap. If there is a
recognition that the elements be regulated because of the
critical nature, Anadarko would prefer there be a regulated body
to turn to.
CHAIR SEEKINS said Alaska statute states that no certificate can
be granted for a gas transmission line without it being
regulated either by FERC or by the Regulatory Commission of
Alaska (RCA). He asked Mr. Hanley to comment on that statement.
MR. HANLEY said he was unsure of the interpretation of the law
but that doesn't appear to be the intent of the contract. The
contract specifically says the pipeline will be regulated by
federal law, or if federal law does not apply, will be regulated
by the commercial agreements.
CHAIR SEEKINS asked Mr. Clark whether that was the intent.
MR. CLARK replied the intent was absolute FERC regulation of the
entire system. The Administration does not contemplate a gap in
that system.
CHAIR SEEKINS asked Mr. Loeffler whether he thought there would
be gaps in the regulation process.
MR. LOEFFLER said he did not anticipate gaps in the regulation
by FERC.
CHAIR SEEKINS asked Mr. Shepler whether he thought there would
be gaps in the regulation process.
11:09:06 AM
MR. SHEPLER said his thoughts are aligned with Mr. Loeffler's.
He noted that further upstream gets further away from FERC's
authority under the gathering presumption. Typically in the
lower 48 FERC takes the position that processing to make the gas
pipeline quality is not a jurisdiction of activity. That is an
upstream activity and their regulatory process starts at the
downstream end. So from the mainline going upstream, each step
gets slightly more tenuous in terms of certainty of FERC
jurisdiction.
MR. LOEFFLER added FERC has imposed the open season requirements
on the GTP so they must have jurisdiction over it. He informed
the committee that he spoke with FERC and as far as they are
concerned, the GTP is "just another part of the big pipe." He
said Alaska is different than the lower 48 and FERC understands
that.
11:12:10 AM
th
CHAIR SEEKINS referred to SB 305 (24 Legislative Session) and
said there was a provision that said anyone that wants to take
the credits has to agree not to oppose FERC regulation on
upstream elements. He asked whether that was a provision in the
contract.
SENATOR THERRIAULT advised that any party that takes the credit
has to go with the state government to the regulator and ask
that the benefit of that credit flow through to the benefit of
all shippers. That concept is in the contract.
11:13:22 AM
MR. HANLEY read Article 8.3 and said the parties expect the
Alaska project to be regulated by FERC or by commercial
agreements. It does not mention the RCA. He continued, "If FERC
does not assert jurisdiction, no party may seek or support the
jurisdiction of the regulatory commission of Alaska over any
aspect of the project." The contract clearly contemplates FERC
or commercial arrangements but not RCA arrangements, he
asserted. The contract contemplates a regulatory gap, which
means the commercial arrangements apply. "It doesn't appear to
take the RCA out, it just says the State has to oppose the RCA's
jurisdiction."
CHAIR SEEKINS asked whether the RCA could assert jurisdiction
under state law.
MR. HANLEY was not sure but said the actions they would have to
take would include changing state law. Anadarko would prefer the
ability to go to a regulatory agency instead of having to
approach a commercial arrangement.
11:15:45 AM
JAMES EASON, Consultant to the Legislature, agreed if there is a
regulatory gap, commercial arrangements would dictate but said
even if the State opposes the RCA assertion of jurisdiction, in
the event that there is a loss, the State is indemnifying the
producer participants.
MR. SHEPLER referred to the issue of basin control and said
certainly the FERC rules establish how pipeline capacity is
initially awarded but once a contract is entered into that
shipper holds that capacity for the length of the contract. If
the contract is for 20 years and the pipe is fully subscribed
for 20 years, open access has been accommodated. FERC
establishes contract carriage not common carriage so only the
parties that have contracts have assured rights of access. New
players have to depend on expansion capacity being built.
Page five of the project summary is a Gantt chart that shows the
open season process starting at mid 2007 to the end of 2008. It
is contemplated that at the end of the open season the LLC will
sign up firm transportation contracts, which will commit the
shipper to hundreds of millions of dollars of demand charges
over the life of the term that they bid. In order to be able to
take advantage of the initial open season, that entity must have
an exploration and development program in place or they have to
depend on expansions. The issue of expansion is critical to the
issue of basin control, he stated.
MR. SHEPLER continued typically expansions are not an issue with
an independent pipeline because that pipeline has incentives to
expand the pipeline. Since this is not an independent pipeline
the commitments to voluntary expansions or state-initiated
expansions are fundamental to the issue of basin control.
11:21:07 AM
CHAIR SEEKINS asked whether FERC regulations of expansion were
different for an independently owned pipeline.
MR. SHEPLER replied no. Producer-owned interstate pipelines are
uncommon, he added. FERC rules were developed in the context of
the independent pipeline model and the rules address how
capacity is obtained and the economic incentives drive the
expansion.
MR. HARPER said in light of the producer comments he is more
concerned than ever. He agreed with Mr. Shepler's assertion that
an independently owned pipeline is "generally expansion-happy."
The current contract is expansion-restrictive as he reads it. He
took issue with comments from the producers that say expansion
requests would be regulated by FERC, but the FERC responds to
complaints. He said:
One of the strategies that is employed by pipelines is
the utilization of time and litigation. And if
somebody has to file a complaint and somebody has to
litigate a complaint before FERC on an expansion in a
non expansion-friendly pipeline, those time delays and
those expenses are daunting. And so whether or not a
pipeline has an orientation to expand on a friendly
basis as expressed contractually in addition to
regulatory is absolutely vital and key to the issue of
basin control.
MS. KING explained the contract is a fiscal contract and does
not attempt to assert how FERC should act with respect to
expansions. On the issue of basin control she said, "Actions
speak louder than words. ConocoPhillips has been partnering with
independents in exploration activities up here for years." She
went on to say that ConocoPhillips has partnered with other
companies to bring new independents to the State of Alaska and
that proves that ConocoPhillips sees value in bringing new
parties into the fold. There are adequate protections for
expansions and FERC has spoken twice. They have passed
unprecedented provisions with respect to open season
regulations.
11:26:28 AM
MS. KING continued there are a number of provisions that will
protect and ensure access into the pipeline. ConocoPhillips
believes the pipeline needs to be flexible and needs to operate
as a commercial entity to ensure that all different expansion
scenarios can be assessed and evaluated. FERC has come out with
the 2005 open season regulations and there is a rebuttable
presumption for rolled-in rates. ConocoPhillips is not
challenging that, she said. They are specifically challenging
the one issue that FERC should decide how they would be treated
with respect to the expansions.
MS. KING asserted there have been a number of misstatements
during the last few hours of the meeting. She took issue with
allegations that the producers could change the design of the
project during construction and said that is not true. They
would have to get permission from FERC. She took issue with
allegations that the producers are not motivated to expand the
pipe. "If somebody is willing to pay for an expansion, there
will be a business opportunity for somebody to pursue," she
stated. It is also not true that the pipeline would set the
rates. Rates would be set by FERC. She took issue with
allegations that they are not motivated to have a low tariff and
said unless prices tank, ConocoPhillips will generate the
majority of their revenue from state gas sales. If the tariffs
are high, ConocoPhillips will also have to pay.
MS. KING emphasized that FERC would balance the interest of all
the parties. FERC will decide the appropriate methodology for
expansion. "ConocoPhillips will not ask existing firm holders
that have rate uncertainty to subsidize our business," she
asserted. She posed a hypothetical situation with respect to
mandated rolled-in rate treatment: An LDC might be holding firm
capacity at mileage sensitive rates to try to ensure that the
State has the best opportunity for instate gas consumption.
ConocoPhillips finds a discovery and decides to press for
expansion and it might not be advantageous to all shippers that
the expansion wouldn't be a subsidy. "If you were the holder of
instate LDC capacity, you'd be exposed that your rates could go
up," she said. Everyone should want rate certainty to secure the
ability to deliver volumes instate as well as the ability to
deliver rates for maximum value into wherever they decide to
ship that gas.
MS. KING referred to the issue of why ownership in the pipeline
is important and said the producers would make long-term
financial commitments and so ownership and alignment is
extremely important. She offered to answer questions.
11:32:31 AM
REPRESENTATIVE LES GARA said his concern centered on the policy
of expanding the pipeline and using rolled-in pricing. He asked
for confirmation as to why he should not fear that the two major
mechanisms to require an expansion would be adequate. He
expressed concern that the State would not have the right to
exercise required expansion. He expressed the additional concern
that the producers would block an expansion that FERC might
determine would cause an increase to suppliers and a subsidy to
the new shipper. He said if he does have cause for concern he
would like to hear from Mr. Hanley suggested language for the
contract that would ensure expansion with rolled-in pricing that
would be fair to everybody.
MS. KING responded there is nothing in the contract that would
preclude the State from going to FERC and requesting an
expansion.
MR. LOEFFLER agreed.
REPRESENTATIVE GARA countered, "I know we have the right to
request it, my concern is whether we'll get it."
MR. LOEFFLER asserted FERC could not be controlled. He said, "I
don't know where we're going with this discussion. You can
propose things to the FERC but if you want an absolute right
that the pipeline can expand, regardless of economics, it's not
going to get by the FERC."
11:37:26 AM
MR. HARPER reiterated his concern that the contract is not
expansion friendly and that the producers point to complaint
procedures and litigation procedures with the FERC as the
redress mechanism. That avenue is very time consuming and not
what one would face with an independent pipeline, he said.
MS. KING advised the committee that the producers have been
preparing for an open season since 2002 and explorers have had
plenty of time to pursue exploration.
REPRESENTATIVE GARA said he would still like to hear suggestions
for better language in the contract. He posed a hypothetical
situation where it ended up that the rules were not favorable
for an expansion even if the expansion would raise the tariff
for existing producers and asked whether that would
inadvertently deter production and deter future expansion. "We
have to pay for capacity whether or not the pipeline is at
capacity. So will we be risking an amount of gas that might not
only fill the expansion but an amount of gas that might help
contribute to filling existing capacity to protect the State
from the charge of having to pay for capacity even if it's not
in there," he queried. The State has an interest not only in the
expansion but also in the gas that will fill capacity in the
existing part of the pipeline, he stated.
MR. HARPER deferred the question to Mr. Shepler.
MR. SHEPLER agreed that was a good point. The expansion gas that
would come to an expansion would fill both the expansion and
solve the problem of the out-year gap. Bringing expansion gas in
would presumably help fill the out-year gap and at the same time
expand the resource base and the State's royalty share.
MR. LOEFFLER added when an explorer bids for capacity in the
open season, they examine the amount of gas they are likely to
have and for how long. The State might bid for more capacity
than it knows it has and in that event it would want to fill up
the unused capacity. However, it does not have to get into a
rolled-in situation. There are rules about the release of extra
capacity that could "bore you to death," he said. He asked the
committee to look at the issue from the perspective of the
pipeline.
The pipeline or owner of the LLC wants to secure firm
transportation (FT) commitments that will enable financing. It
does not want to cover a financial obligation that is not backed
up by the FT commitments because the pipeline has to pay for
that. If a pipeline builds too much capacity to begin with,
generally FERC would require the pipeline to bear the cost of
the unused capacity. The open season process is very complex and
there may be scenarios where there is unused capacity that
individual shippers are holding.
11:45:36 AM
MR. CLARK assured the committee that the State would not bet on
excess capacity and get into the excess capacity business.
MR. SHEPLER referred to Representative Gara's question and said
he did not understand his question to be asking about expansion
capacity in terms of the State's interest as an owner; he
understood his question was toward the State as a sovereign with
the objective to encourage exploration and maximize resources.
11:47:39 AM
CHAIR SEEKINS said it is the intent of the Legislature to
provide availability of expansion on a fair basis and not
necessarily subsidized by the owners and shippers.
MR. CLARK assured the committee that the Administration
aggressively pushed for obtaining the open season with respect
to federal law. Article 8.7 is intended to provide additional
tools for seeking expansion.
11:48:54 AM
MR. MASSEY said he believes that the producers will find a way
to expand the pipe and to move the gas down. They would not
prevent anyone from tapping in. FERC policies would not allow
them to stop expansion and they wouldn't want to do that anyhow.
He said the key reason for the reluctance toward Article 8.7 was
that it is not necessary. However it is in the contract because
the producers wanted to dissuade the perception that they could
lock up the basin.
11:51:49 AM
SENATOR THERRIAULT asked whether during the agreement to Article
8.7 it was also agreed that the RCA language would also go in.
MR. MASSEY advised that there were many compromises during the
negotiations. The parties have agreed in the contract to seek
FERC regulation but the RCA can also regulate. The only thing
that they have asked is that if the RCA does something
inconsistent with FERC policy that causes ExxonMobil a loss,
they want the opportunity of arbitration to prove their case.
SENATOR THERRIAULT reminded the committee that the producers are
not "a monolith" and not all of one mind. He said it has not
always been a position of the producers to be involved in
ownership of a pipeline. He referred to an early 1980s Senate
Energy subcommittee hearing and said Exxon's testimony was that
they were not in the pipeline business and had no interest in
getting into the pipeline business. He asked what the difference
is today.
MR. MASSEY replied ExxonMobil is not in the pipeline business,
except for in large, complex projects where they own funding.
SENATOR THERRIAULT speculated that was the dynamic with any
pipeline.
MR. MASSEY responded there is no pipeline in the lower 48 that
he is aware of that matches the magnitude of the project at hand
in terms of investment, exposure and risk.
MR. LOEFFLER said in the 1980s the structure of the lower 48
pipelines were different. Since the time of that testimony, FERC
has forced the separation of the marketing and ownership of gas
so the industry has changed considerably.
SENATOR THERRIAULT said he is not sure that explanation
sufficiently answers his question. During testimony in the
1980s, producers adamantly expressed to the U.S. Congress that
they were not interested in ownership of pipelines.
MR. MASSEY agreed with Mr. Loeffler that the industry has
changed and producers are exposed to more risk.
11:59:12 AM
MR. HARPER asked Mr. Massey to explain the reason ExxonMobil was
interested in owning the pipeline in perpetuity.
MR. MASSEY replied he did not understand the question.
CHAIR SEEKINS surmised they would want to own it forever because
it was a big investment. He announced that the committee would
break for lunch at 12:00:54 PM.
CHAIR SEEKINS called the meeting back to order at 1:31:03 PM. He
asked Mr. Hanley to summarize the concerns that he presented
earlier.
1:31:38 PM
MR. HANLEY said he wanted to put on the record that the uniform
upstream fiscal contract is how third parties would get access
to the agreement. That topic has not seen much discussion but he
added they would work with the Administration on the issue of
how that would work. The contract is drafted for the three
producers and the State but other companies will have to utilize
the terms and conditions of that contract.
1:32:28 PM
MR. CLARK asked to address that topic and said Mr. Hanley is
right. The pipeline will be financed and constructed based upon
FT commitments and they are looking for FT commitments from all
parties because they want to include as many parties as
possible. That is both the State's position and policy. This is
not the time to get into the topic but the general policy is to
create a situation that anyone who accepts FT and takes that
responsibility will get upstream fiscal certainty, he stated.
1:33:40 PM
MR. CLARK continued the idea is to level the playing field. The
purpose of the public comment period is to identify places where
the State can enhance policy with better language. The points
taken today would be addressed with receptivity.
MR. HANLEY referred to earlier comments that there has been
ample opportunity to prepare for the open season and said they
were not convinced in 2001 that they would have access to the
pipe. Now that the FERC rules have evolved there will be
exploration activity. Despite the fact that Anadarko is raising
concerns over the contract, they are supportive of the pipe.
1:37:18 PM
CHAIR SEEKINS asked Mr. Clark to summarize the State's position.
MR. CLARK deferred to Mr. Loeffler.
1:37:57 PM
MR. LOEFFLER said from the point of view of the supply of gas to
the United States and to Alaska, this project opens potentially
a very large basin. The project is pro-competitive and brings
more supply to market. The pipeline will open the basin for
everyone. Anadarko can't get its gas to market today; nor can
ExxonMobil, ConocoPhillips or anyone.
He advised committee members not to assume the project could be
built based on personal experience and what the Commissioner of
the DNR found. The Commissioner has found this is the best
opportunity to get a project. Alaska had a shot at an
independent pipeline in the late 1970s and that failed so it
appears that the producers are an inevitable part of the
pipeline project. "You need the producers to sign up and put
their financial resources behind the FT commitments," he stated.
Discussing the issue of expansion is likely putting the cart
before the horse, he asserted. The pipeline needs 15 Tcf of gas
according to the Commissioner's fiscal interest finding. The
project needs Anadarko's gas and exploration efforts,
ConocoPhillips' gas and efforts and everyone else who can
contribute. The pipeline must be full before anyone starts
talking about expansion.
The critical part of the Administration's program to develop
this pipeline was to draft a model upstream contract and there
is one at page 449. He advised committee members to review the
draft fiscal contract and the attachment to see how it
interrelates and gets the gas committed to the project. The
Administration wants the independents and the project needs more
gas, he said. The Administration has made an effort to ensure
that the fiscal benefits that apply upstream are available to
anyone who wants to commit gas to the project.
1:42:30 PM
MR. LOEFFLER continued in terms of access to lands and leases on
the North Slope; the leasing policies of the DNR and of the
federal government are pro-competition. He agreed with Mr.
Hanley that some recent legislation has addressed some of the
concerns, such as Order 2005 and 2005A. The Administration was
pro-expansion and pro-competition on its comments on those
orders and will continue to be.
1:43:50 PM
Lastly it is important to remember, the State will be a member
of the LLC and will be on the inside where all of the
information on the project will be. They will be voting on
issues and will be there when expansion requests are presented
to the LLC. The State of Alaska representative will certainly be
sensitive to competitive concerns as they fill their functions
within the LLC, he stated.
MR. LOEFFLER added one last comment: Overall the current
discussion regards the fiscal contract and the focus of the
hearings should stick to the important issues, such as the
reason the State is taking an ownership position and going into
the business of marketing gas. "That is an enormous public
policy decision for the State and I hope that we can soon move
on to address that subject as we're prepared to do," he stated.
1:45:31 PM
SENATOR ELTON asked whether any of the other applicants, such as
TransCanada, addressed expansion issues in their application.
MR. CLARK advised he would check and get back to the committee.
He added the committee should receive TransCanada's statement on
the contract today.
SENATOR DYSON said he was intrigued about the discussion of the
RCA. He asked the consultants to comment on other contracts
where FERC chooses not to have administration and whether it is
common to exclude the sovereign's regulatory body.
MR. SHEPLER advised he does not have the background to comment
on that point. He surmised that other U.S. contracts involving
state involvement to this magnitude simply don't exist.
1:48:20 PM
JAMES BARNES, Barnes and Cascio LLP, Consultant to the
Legislature, said his response is outside of the U.S. However,
his experience in large projects elsewhere is there is nowhere
near the complexity of regulations that the U.S. has.
MR. HARPER said:
This agreement is unique in my experience in this
regard in two ways. One, I perceive that the intent is
to exclude state regulation specifically. I've never
seen that. And then the reciprocal, under
indemnification if you will, of any reduction in what
the participants might receive if that were to come to
pass is also unique in my experience.
SENATOR DYSON aired his understanding that FERC was taking a
unique role in the pipeline because it is a monopoly. He said it
seems strange not to have some provision for an objective party
to regulate where FERC doesn't.
1:51:22 PM
MR. CLARK responded the reality is they expect FERC to regulate
the entire system. As one of the producers earlier testified,
their economics are driven by the FERC policies that are
applicable. The Administration does not see a situation where
the RCA would ever be involved.
1:53:21 PM
SENATOR BEN STEVENS posed a hypothetical scenario of a proposal
by the State to make a spur line for delivery somewhere within
Alaska. That spur line would be subject to shippers that could
ship their product to an in-state point. He asked who the
regulator would be.
MR. LOEFFLER advised by the federal statute, the RCA would
regulate the spur line. The RCA would set the rate and terms of
access. The rate to connect to the spur line would be set by
FERC.
MR. CLARK added RCA jurisdiction in that situation is in no way
precluded by the contract.
1:54:53 PM
SENATOR BEN STEVENS asked whether there was anything in federal
law that allows a state regulatory commission to be involved in
the ratemaking for the delivery of a product destined to market
in another state.
MR. LOEFFLER said no. Federal law is exclusive and preemptive on
a shipment of natural gas from one state to another.
MR. SHEPLER said he did not fully understand the example. In the
federal law exclusive of Alaska, delivery of gas within a state
that was received through interstate commerce was originally
held to FERC jurisdiction but was ultimately exempted by the
Henshaw Amendment. When gas originates in one state and goes to
market in another it would be interstate transportation of
natural gas and would be FERC jurisdiction.
1:56:29 PM
SENATOR BEN STEVENS announced if the product is produced in one
state and delivered in another it is FERC jurisdiction. If the
product is produced and delivered in the same state it is RCA
jurisdiction.
MR. LOEFFLER added the project described in the contract does
not include a lateral. The Administration made sure to preserve
the jurisdiction of the RCA over the rate from the takeoff
point.
1:58:40 PM
CHAIR SEEKINS asked Mr. Clark to comment on the Administration's
intent regarding the proportional tariff on natural gas from the
North Slope marketed instate.
MR. CLARK deferred to Mr. Loeffler.
MR. LOEFFLER advised in the open season rulemaking, the State
secured that the rate would be based only on the cost of
delivering that service and not on the cost outside Alaska. The
long haul rate will be based on long haul cost and the short
haul intrastate rate is to be based solely on rates inside
Alaska. Secondly, the FERC order suggested that the rates be
mileage sensitive and so that was written into the contract.
2:00:16 PM
SENATOR BEN STEVENS said he is sure this isn't the only project
set to function within the bounds of North America where a
product is produced in one state and shipped to another. He
raised the example of pipelines coming out of the Gulf of Mexico
and traveling northeast. He asked whether the State of Texas was
involved in rate setting.
MR. LOEFFLER said no. There are no cases where states own
pipelines. However, in an interstate pipeline, FERC sets the
rate.
2:01:33 PM
MR. HARPER noted the Texas Railroad Commission regulates the
transportation, gathering and processing of natural gas in Texas
on a complaint regulatory standard basis. He observed that
through interstate pipelines in North America, gathering,
treating and processing facilities that were regulated were
"spun down" systematically so that it is no longer typical for
interstate pipelines to have those facilities as a part of their
regulated assets and tariffs, even though gas moves through
those facilities. This situation envisions inclusion of those
types of assets in the regulated pipeline activity, he stated.
2:02:55 PM
MR. LOEFFLER advised since 1938 the federal government has not
had jurisdiction over gathering lines. He said he does not
regard the upstream gas pipelines as gathering lines.
2:04:20 PM
MS. NEWMAN said both points have merit but over the years there
has been a considerable amount of regulation over gathering
lines in conjunction with interstate pipelines because they were
all owned by the same entity. There has been litigation that
went to the Court of Appeals regarding FERC's ability to
regulate gathering lines and there was much dispute over what is
and what is not a gathering line. There are many cases involving
gathering lines and it is a recurring problem for FERC. She
cautioned:
The lines that are upstream here from the mainline and
any plant put in separate ownership, I cannot assure
you at all that they would be found by FERC to be
interstate pipeline, federal regulatory commission
controlled facility. In that situation, which could
occur once we know exactly how they're going to be
structured… you can make a better call on it. It is
possible that if the State of Alaska elects not to
regulate those facilities or some system is put in
place by the Legislature that takes that control away,
that they can be left to a matter of private contract.
2:06:37 PM
CHAIR SEEKINS said that is consistent with what he has been
hearing.
MR. LOEFFLER said he would have to check to see whether the RCA
has jurisdiction over gathering lines. Gathering lines are not
intended to be part of the project, he added.
2:07:25 PM
MR. EASON expressed concern about the symmetry of language and
said the producer's rights and interests are protected. "The
State's interest is taken off the table whether or not it
ultimately might be asserted," he said.
MR. LOEFFLER asserted the RCA itself is not bound by the
contract and would have the right to assert and pursue
jurisdiction.
2:09:17 PM
CHAIR SEEKINS posed a current example of what he perceives to be
an unfair business practice having to do with RCA regulation. It
has to do with the tariff question that Flint Hills Resources is
facing. If the tariff is changed, it will change retroactive and
they will be subject to a huge economic penalty. He said it is
the retroactivity that bothers him most.
MR. CLARK said as a final point the answer is that as the
Administration examined the issue, they believed it was one of
those "what ifs" that wasn't going to happen and they did not
want the State to have to pay.
2:12:28 PM
SENATOR DYSON said the discussion highlights the need for
clarification whether the RCA can have jurisdiction. That feeds
into another of his concerns that there are protections the
State now has under the lease agreements and the unit agreements
that are apparently forfeited under the contract, he said.
Regarding his question earlier, he said he was "kicking himself"
for using the term 'bizarre' to describe the 100-mile increments
on the expansion of the gas line capacity. He has been told that
no one knows of any other contract with similar language. He
said he would appreciate discussion of that in the future.
2:13:51 PM
SENATOR ELTON said on the issue of indemnification, it seems
that if the expectation is that FERC will regulate, then adding
the RCA language is far in excess of what the State needs in
order to protect its interest.
CHAIR SEEKINS noted all parties should realize that the
Legislature is after fair and equitable access, but not to the
extent of subsidy.
2:16:05 PM
REPRESENTATIVE JOHN COGHILL thanked the consultants,
representatives from the Administration, and the producers for
their participation in the round table discussion. He said for
the State of Alaska to become an owner, operator and marketer of
its gas in partnership with industry people could be the biggest
policy call in the history of Alaska. He said before he could
cast his vote he must know how all of the parties came to this
unprecedented decision. He said he is not a fan of state
ownership of anything, let alone a big pipeline.
2:18:58 PM
MR. CLARK responded the SGDA gave the Administration the
direction to negotiate the business deal. As they read through
the SGDA they saw the partnership between producers and the
State as what the Legislature intended. Litigating to assert
state's rights as owner was always there but they had to answer
the question of whether it was possible, in accordance with
direction from the SGDA, to reach a business agreement. That is
how the Administration set its policies beginning with the
application phase.
The concern was how Alaska would fit in terms of a couple of
important components in terms of the economics. That drove the
decision for taking gas in kind. By taking Alaska's gas in kind
it means the State has to handle capacity management. The
Administration believes the article on capacity management is a
strong success story in the negotiations. He asked Roger Marks
to address the economic response and asked that Ken Griffin
address capacity and marketing risks.
2:22:56 PM
ROGER MARKS, Economist for the Department of Revenue (DOR),
explained that he would provide a 20-minute presentation on the
philosophy and rationale of why the judgment of taking ownership
and gas in-kind was important to moving the project forward.
CHAIR SEEKINS announced a brief at ease in order for Mr. Marks
to set up.
2:25:19 PM
MR. MARKS advised his main points would be addressing State
ownership and taking Alaska's gas in kind and how that improves
the rate of return for the producers, which is important in
order to move the project forward. If the project were set up so
that Alaska were to take its gas in value it would have to
return 16 percent in order to pay shareholders and creditors.
Equity always has a higher cost than debt since debt is always
the first in line to be paid off. The cost of equity represents
the business risk of the enterprise. The rate of return is based
on net cash flows every year. A pipeline project that is
expected to last 30 years would incur three years of
construction before the production start, after which revenues,
costs and taxes come into the picture. Subtract the cost from
the revenues to get the net cash flow.
2:29:17 PM
MR. MARKS continued in the early years Alaska would see high
cost and no revenues so the net cash flow in the first years
would be negative. When computing the rate of return,
corporations normally assume the project will use all of the
equity without borrowing. The reason they do this is they
separate the investment decision from the financing decision.
The first decision is whether the project is profitable. If so,
the second question is how to finance it.
Corporations measure the profitability by looking at it without
regard to how the project is financed. In order to compute that,
they run the cash flows as if it is financed totally with
equity. The rate of return is the interest rate, which makes
that net present value exactly zero. Net present value is based
on the time value of money so costs that occur early on suppress
the rate of return.
In the case of state ownership where the state picks up 20
percent of the costs upfront and the state takes its gas in
value and not in kind it can not improve the rate of return
because in that situation the state would not be able to get a
firm transportation commitment from the producers.
2:33:10 PM
MR. MARKS continued the definition of debt is "future monetary
obligations as a result of past transactions" so an FT
commitment would be most certainly a liability or debt. Because
an FT commitment over a long period of time bestows much of the
rights and obligations of ownership, what generally acceptable
accounting principles (or GAP) says on the financial statements
is that on the financial statements you capitalize the
commitment.
Many people have said FT commitments don't show up on balance
sheets of the producers so they must not be important. In the
post-ENRON world, off-balance sheet debt is as important as on-
balance-sheet debt, he said. Under pure GAP standards debt shows
up when the amount of the liability is for more than 75 percent
of the life of the asset or the amount of the liability accounts
for more than 90 percent of the value of the asset. In the case
of a pipeline there are multiple subscribers and it's impossible
to satisfy those requirements, which is why FT commitments will
not show up on the balance sheet even though it is salient for
credit ratings and the ability of producers to borrow.
2:35:32 PM
The question is how to treat FT commitments in computing the
rate of return. In order to explain how to do that it's
important to explain how not to do it, he stated. He gave an
example of a corporation with a 16.5 percent hurdle rate that
came up short when the numbers were run. In order to increase
that rate of return the corporation could bring the State in and
have them pay 20 percent of the costs in exchange for 20 percent
ownership and then the corporation would pay a tariff over time
to the State. The old adage of "you can't make a bad project
good by borrowing money" is what that example just did. By
having the producers borrow money and pay it off over time, it
increased the rate of return. That is inappropriate since it
mixes up the financing decision and the investment decision, he
said.
2:42:40 PM
MR. MARKS referred to the current contract where the State takes
20 percent ownership but also takes its gas in kind. The State
owns the gas the entire way and does not require an FT
commitment from the producers. This method incurs less money up
front and increases the rate of return. Ownership raises risks,
gives Alaska benefits and income, and creates marketing risks.
"In our judgment, these risks are not monumental," he stated.
2:44:16 PM
REPRESENTATIVE COGHILL said that is consistent with what
legislators heard at the Centennial Hall meetings. The risk is
that the FT commitment will be on the State and then it would be
up to the State to sell the gas. He said the fundamental issue
for him is whether he could support that concept. He asked to
hear from industry people as to how they also arrived at the
concept of the business agreement.
2:45:23 PM
CHAIR SEEKINS clarified that Representative Coghill was speaking
about two different things; one is ownership of the pipe and
equity interest in the steel and equipment, and the other has to
do with owning pipe within the pipe to be able to transport gas,
which would be dependent for income on the transportation
commitments. He asked Representative Coghill to clarify his
question.
REPRESENTATIVE COGHILL replied the ownership of the steel was
the lesser concern. He said he has a hard time with Alaska
carrying the weight of the gas, deferring the investment in 20
percent capacity, and then having to sell the gas in order to
recoup the money. "Certainly that requires a huge partnership
with a group of people who have quite different interests in
Alaska," he stated.
CHAIR SEEKINS speculated that owning the pipe might bring about
a better return than the current investments of the Permanent
Fund.
2:47:31 PM
MR. MARKS said currently Alaska is paying for the pipeline
through the tariff deduction. Alaska would be paying
approximately 14 percent on their equity piece. Alaska would get
that money if the State owned the pipe. The fiscal interest
finding showed that the State could earn close to one billion
dollars. Currently the PF is earning eight percent.
MR. CLARK said there has been some confusion as to whether the
State has choices to what parts of the project they can own.
MR. MARKS advised the State could take the gas in kind but not
own the pipeline but it would have to make an FT commitment to
the producers to ship the gas. If Alaska upstream is shipping on
Alaska downstream pipe it's a wash but FT commitments would
still have to be made. "I don't see any difference. What we
don't get out of that is the billion dollars from pipeline
ownership and that seat at the table," he said.
MR. CLARK added as the contract was negotiated it became
apparent that the two would go together. As far as the producers
were concerned, the State would not be able to own part of the
pipeline unless the gas was taken in kind.
2:50:59 PM
CHAIR SEEKINS invited Martin Massey, Ken Konrad, and Wendy King
to the table.
MR. MASSEY said Alaska successfully negotiated to have an
ownership interest in key portions of the project and therefore
will provide an important enhancement to the sponsor group. The
State will receive gas volumes in kind for its gas royalty and
taxes and the State will transport and market its gas volumes.
The State's ownership position creates numerous advantages both
for the State and the project participants. Sponsor group
economics are improved when the producer no longer has to make
transportation arrangements for state gas. "We are no longer
making firm transportation commitments on gas for which we have
no economic interest," he stated. Consequently the pipeline
affiliates can hold a lower ownership in each of the lower
midstream elements. Moving the investment to the State will have
a positive impact on the producer's economics and will provide
the State with numerous benefits, including a stable, steady
revenue stream.
2:55:07 PM
MS. KING recalled in October 2004 Alaska announced it would like
to pursue equity participation in the project. Equity
participation in the project is comprised of three components;
state ownership, state taking its gas in kind, and the State
holding an FT commitment. There is a fundamental shift in the
economics when the State chooses to pursue the three in concert,
she said. The producers would have to employ roughly 20 percent
in actual capital for gas volumes they would not receive revenue
from.
Over the course of negotiations it was discussed how to value
gas for royalty and tax purposes. It is an historical area of
dispute. The producers saw that through state ownership, one of
the biggest areas of dispute would be eliminated. The State
would be taking custody of its gas at the exact same place that
ConocoPhillips takes custody of its gas.
2:58:02 PM
MS. KING continued her final point is there is a track record of
success for in-kind gas programs. The key factors are that the
partnership would lessen disputes, improve economics and build
on proven success.
MR. KONRAD said BP was initially surprised when Alaska
approached them with this atypical business model but they
quickly saw the potential benefits for all the reasons that the
two previous speakers alluded to.
One area the producers struggled with was the State's insistence
that the producers handle capacity management. Ultimately they
came up with a model that is in the contract where the State has
the option for producers to manage capacity for the State.
3:02:29 PM
If the State decides to manage its own capacity it removes the
middleman and minimizes the potential for disputes. The federal
government has had a lot of successes on marketing gas. This
also results in fewer disputes and lowers administrative costs.
The federal government has found they get more money by taking
gas in kind than in value. Wyoming is doing similar things and
they are confident it will work in Alaska as well.
3:04:21 PM
MR. KONRAD summarized by putting all the pieces together it
creates a win/win situation. The State gets to take direct
equity ownership in the project, the producers get the benefit
of lower costs, and it provides Alaska with a stable income
alignment and revenue stream.
3:05:12 PM
REPRESENTATIVE COGHILL said it was important for Alaskans that
he ask the essential questions so that they understand
completely and so that citizens don't reject what could be a
good deal. He clarified Alaska would make an FT commitment for
20 percent of the gas. Alaska would be responsible for selling
it and that would be how the State gets back some of the value
for its resource. He asked how the producers would ensure that
Alaska does indeed receive its share and whether this would
ultimately be a firm 20 percent commitment.
MR. KONRAD responded the producers would use the same
arrangements that they use amongst themselves. There will be
ownership established in any given unit and it will pass through
a meter. The capacity management article would force the
producers to stay in proportion. If BP has excess capacity, the
State will have the same amount.
3:08:17 PM
MR. CLARK suggested that Ken Griffin take a place at the table
and walk through that article so that the committee understands
the reason that the Administration feels the State has adequate
protection.
CHAIR SEEKINS announced a brief recess at 3:09:13 PM.
CHAIR SEEKINS called the meeting back to order at 3:20:29 PM.
MR. CLARK asked to speak about the capacity management article
in the contract and said it was the most contested article in
the contract. From a policy standpoint, the Administration was
worried about the risk. They knew the pipeline needed 50 million
Tcf and that there was 35 million Tcf available. The way to
protect against capacity risk is to keep the pipeline full, he
emphasized.
The Administration insisted that they never have more "ullage"
than ownership in the pipe. The Administration also fought long
and hard to have the balancing happen on 30-day periods even
though the producers have always operated in 6-month periods. He
asked Mr. Griffin to explain how the Administration negotiated
capacity management.
3:23:41 PM
MR. GRIFFIN advised that the capacity management negotiation was
a hard-fought discussion. It was predicated on the realization
within Alaska that at the upstream end, the State is not aligned
with the producers. They have control of the producing areas and
development schedules. They have control over where the
exploration moves and that could be federal lands or private
acreage or even offshore where the state royalty could end up
being much less than 20 percent or none. One major question is
how to manage the 20 percent commitment to capacity when the
future holds no certainty as to where development will be. The
producers believe that the State will want to take over capacity
management in the future but currently the State has secured a
commitment from the producers to ensure that the State's risks
are in parity with its share of the production.
3:26:30 PM
The contract specifies how the State will obtain capacity in the
first place. The State has the right to ask the producers to
obtain that capacity on its behalf in proportion to the share of
state gas that will be coming off of each of their properties.
Separately the State has the right to seek instate capacity and
to carve off some of the gas, exclude it from the balancing
process, and dedicate it to instate deliveries. Over time,
things will change and the State's share of gas will fluctuate.
There is a process in place to readjust and restore the balance
between the share of gas that the State should be receiving and
the capacity that the State will hold.
3:28:19 PM
The third stage provides for the scenario where there is excess
capacity. If development and production is all on state land,
the State will hold 20 percent of the excess capacity. If over
the years development and production moves off of state lands
and the pipe is not full, the State's share of the empty
capacity will be commensurate with the share of production. It
will be figured by producer and by property and summed up such
that what Alaska will be responsible for is proportionate to the
share of gas that is being received at that point in time.
There is a fourth policy issue and that is the state
marketer/shipper receives the same information in the same
timeframe that the producer marketer/shippers receive. Alaska
will have the same ability to manage its marketing operation
downstream. He offered to answer questions.
3:30:13 PM
SENATOR THERRIAULT advised the committee that Representative
Coghill had to step out of the meeting but had asked him to
address a concern for him as they represent the same
constituents. He expressed concern that since the State has no
experience in the business; perhaps they are not up to the task
of managing capacity. As far as the decision to take value as
gas molecules, a number of complications spring from that. Mr.
Harper has indicated that the capacity management agreement does
a fair job trying to deal with a potentially difficult situation
but the people in his jurisdiction continue to ask the reason
that the State should take that on. The Lukens Study indicates
that there is a risk of losing value with capacity balancing.
MR. CLARK replied the logic is that changing the economics by
taking the gas in kind was "like magic" because the State kept
the same revenue streams that they had without taking the gas in
kind. The contract sets up a system by which the State is able
to "ride the producer coattails." The other option is to employ
capacity management firms, which is not unheard of. Other
companies have hired people to manage capacity.
3:34:43 PM
MR. VAN TUYL added there was another option. He agreed that the
State doesn't currently have the expertise but the first gas is
not expected for perhaps 10 years so there is ample time for the
State to develop expertise in-house. Meantime the State can opt
to participate in the open season process or ask the producers
to participate in the open season to get the initial capacity.
Anytime in the process the State can take over capacity
management.
3:36:10 PM
MR. GRIFFIN said capacity commitments are a responsibility of
the shipper to the LLC and then marketing is how revenues are
obtained. The Lukens Study represents a scenario-based model and
what their numbers said was "if these scenarios occur, the
potential costs are in these sideboards." The Lukens Study did
not say anything about the likelihood of those scenarios
occurring. He advised the committee to read his report in the
fiscal interest finding that captures that summation.
3:38:51 PM
MR. GRIFFIN continued the PPT has credits to encourage
exploration and investment. The upstream fiscal contract levels
the playing field and encourages exploration and investment. The
contract itself encourages exploration. The DNR and the federal
leasing programs work together to minimize the risk of excess
capacity.
3:39:58 PM
MR. VAN TUYL expressed agreement with Mr. Griffin's assessment
of Article 10 as it relates to initial capacity in the pipeline
and capacity management. The contract is silent on the
possibility that the producers would be interested in that
business but BP Alaska would be interested in competing for the
business of supplying instate gas, he stated. Article 10.2
addresses both scenarios of not enough gas to fill the pipe and
also excess gas. There is a range of alternatives to address
both challenges. In any event it is the responsibility of the
producers to ensure that the State's gas moves along with the
producer's gas, he stated. He assured the committee that Article
10.2 ensures that the State would be kept whole.
Article 10.3 addresses the scenario of an empty pipe and
included in that article is the requirement to allow the State
to share in any third party purchase the producers enter into.
That is an anomaly in the business of competition because of the
business risk of sharing market information.
3:44:23 PM
MR. VAN TUYL referred to Article 10.4 and said it was a safety-
net provision. If at the end of the month the State had a
different percentage of excess capacity, Article 10.4
mathematically requires an adjustment to equalize capacity. In
the event of intra-month imbalances, Article 10.5 provides that
each of the producers would be involved in a gas balancing
arrangement.
All those things are very specific, very mechanical provisions
to ensure that the State is always proportional to the producers
in the way they deal with capacity. Thus Alaska does not need to
be in the capacity management business if it so chooses, he
said.
3:46:53 PM
MS. KING said capacity management was a difficult article to
negotiate because of the challenge to develop a relationship to
work with the State as a capacity holder and still keep the
relationship in such a way that it would not impact the
relationship between the three producers. The capacity
management provisions have found that balance. The State will
receive frequent capacity notices from the producers advising of
the exact capacity volumes on the pipeline. It will be a
transparent process, she advised. In the event that there is not
enough capacity and too much gas, the State will have a
commodity. She asserted that the State would have less risk than
the producers because they are exempt from federal income tax.
3:49:19 PM
The State has additional take terms in the contract. There are
PILTs that are independent of the price of the commodity. The
State has additional cash flow streams for its share of capital
investment that the producers don't have, she emphasized.
The FT commitment period for the pipeline is unknown at this
point. If the majority of the gas potential comes from federal
acreage such as ANWR, at the end of the initial FT period the
State can elect to reduce the amount of capacity. The FT
commitment will be a point where the State can decide how much
capacity it wants to hold for the remainder of the fiscal
contract.
MS. KING added one benefit of state ownership is that regardless
of where the gas is coming from the State will receive tariff
revenues for decades to come. Essentially, the State will have
state ownership of the pipeline beyond the term of the contract.
3:51:59 PM
SENATOR THERRIAULT asked whether the total revenue package
presented to the State included the additional revenue streams.
MS. KING nodded.
SENATOR THERRIAULT speculated that the State would be in a much
higher risk position because of capacity balancing and that the
reward would be status quo.
MR. CLARK said Dr. Pedro van Meurs' paper addresses that issue.
By taking the gas in kind Alaska would get the same amount of
money as it would in the RIV world. If Alaska wanted to be in
the RIV world, "The only way we could change the economics in
the same way was to give up every dollar of royalty, every
dollar of tax gets. We could have moved the needle in the same
way of taking the gas in kind by giving up every dollar we would
have otherwise made," he stated. What that means is if Alaska
wanted to get the gas line built it could either take the gas in
kind or stay in status quo and "give up every nickel of royalty
it would have gotten." He encouraged the committee to review Dr.
van Meurs' paper for clarification on the issue.
3:56:00 PM
MR. VAN TUYL advised the State's ownership model is robust and
is used worldwide in mega-projects. The direct government equity
ownership model reduces the risk to the investors and therefore
enables a project to go forward. He said it was worth repeating
that the State will recover, through the tariff, the costs of
overruns.
Having the State as a direct equity owner and having it take its
gas in kind aligns the State with the producers all along the
system, he said. Commercial alignment is very important to the
producers because it forces them to focus collectively on making
the project better and more efficient.
4:01:31 PM
SENATOR BEN STEVENS advised the committee that he and Mr. Clark
had another meeting to attend but that he would like the
committee to further address his concern over capacity risk
today.
4:04:59 PM
CHAIR SEEKINS advised the committee that they would address
Senator Ben Steven's question upon his arrival back to the
meeting.
4:05:27 PM
SENATOR WILKEN asked whether the producers would support the
State having a 51 percent vote with regard to any major changes
in the qualified project plan (QPP) on the route of the
pipeline. There are three things that have brought the committee
where it is today, he said. In 1999 the people of the State of
Alaska demanded there be no changes to the route. Secondly, the
contract states that it will be a steel pipe laid across Alaska.
Thirdly federal law states there cannot be a line that enters
Canada above latitude 68.
SENATOR WILKEN advised he would speak about what he believes he
knows and then would ask for a response from the producers. The
QPP has to be updated annually by the participants and the
State. When that subject comes, the people's voice in 1999 will
be squelched, he said, and that concerns the people of Alaska.
"In regard to the federal legislation, I take no comfort at all.
Federal law can be made and federal law can be changed," he
stated. He reiterated his earlier question whether the producers
would support a 51 percent voting right for the State.
4:08:57 PM
MR. GRIFFIN said the presumption that the route can be changed
within the contract is not a sound presumption. He acknowledged
that when negotiations began, the producers and the State were
not aligned on a route. The State insisted on the pipeline route
and the companies had different positions but in the end the
State prevailed in the negotiations.
Recital 2 refers to the application being approved by both
commissioners. That approval is contingent on the highway route.
"From the very beginning this thing began with highway route as
a foundation," he said. The mainline is defined as the pipeline
through Alaska that is routed generally along the TAPS pipeline
and the Alaska-Canadian Highway.
4:11:41 PM
MR. GRIFFIN continued Article 4.1 contains six components of the
QPP, two of which are potential and may or may not occur but the
mainline is a component of the QPP. The last two sentences in
Article 5.3 state that specific details of the QPP are likely to
change as the participants complete additional studies and the
mainline entity may amend the plan. That context provides fairly
narrow side rails to the scope of an amendment, particularly
given the content of Article 4, the definition of "mainline",
and the content of the recitals, he asserted.
4:15:03 PM
SENATOR WILKEN said he was concerned about the "soft words" that
Mr. Griffin used. He understood him to say there are three
places in the contract that route change is addressed and that
the issue could come up at future time. He said that is the
problem he is having - that "one day we'll wake up and this
thing will have gotten a 90 degree elbowing."
4:15:47 PM
MR. MASSEY offered what he described as the opportunity to set
the record straight. ExxonMobil's position prior to release of
the contract was that they had not selected a route. That didn't
mean they supported a northern route. They just did not have a
commercially viable project and wanted to make sure that all the
options were left open. Now that there is a "potentially
commercial project," it is defined in the contract as the
southern route. The definition cannot be changed unless all
parties agree, he stated.
4:16:59 PM
SENATOR WILKIN referred to page 31 and asked whether the
definition of the mainline was not subject to the QPP
procedures.
MR. MASSEY said that was his understanding since the definition
is part of the contract and the contract cannot be changed
without the consent of all parties.
MR. LOEFFLER said, "As counsel for the State, I agree with
that."
CHAIR SEEKINS opined "mainline" was defined in the definitions
as well as in the Article.
MR. LOEFFLER clarified, "It's defined in the definitions and
utilized in the Article."
4:17:58 PM
MR. VAN TUYL referred to page 225 and said Article 39.1 defines
the mainline and describes the southern route and states that
the contract could only be amended by written agreement and
signed by all the parties.
4:18:56 PM
MR. GRIFFIN said he would like to describe the intent of Article
5.3. "The ability of the mainline entity to amend the QQP is
simply to ensure that there is the leeway available to the LLC
to modify the project, to employ proper project management
processes as the project develops and grows." There are sure to
be necessary incremental changes in order to produce a quality
pipeline project. "That's the only intent," he stated.
4:20:10 PM
SENATOR THERRIAULT noted that idea is what leads to some concern
from the smaller producers. As the project is scoped, it might
be determined to use smaller pipe because of cost, leaving
little room for growth.
MR. LOEFFLER replied that was exactly the question FERC said it
would review when it looked at pipe size.
4:21:11 PM
SENATOR THERRIAULT referred to an earlier raised concern about
arbitration and said some long-term Alaska businessmen have also
expressed concern about that. He asked Mr. Loeffler to state his
personal opinion on the matter. He asked whether that process
would save the State time and money.
MR. LOEFFLER retorted nothing could be worse than the current
experience. There is TAPS litigation that has gone on from 1977
to 1985 then stopped and has resumed again. Royalty litigation
took 15-20 years to resolve. "It would not be hard to improve on
that record," he said. The State's experience in arbitration has
been good, he added. Arbitration is used throughout the U.S. and
the world and is widely adopted in commercial contracts for all
sorts of industries. It is thought to simplify the process and
get to a faster result.
4:25:27 PM
SENATOR THERRIAULT said the State has litigated royalty and
should not have to go through that again.
MR. LOEFFLER interjected, "Royalty should be going under the new
structure."
SENATOR THERRIAULT asserted the State has "fought those battles
and set the precedent and the proposal now is to change the
system." The State has just come through a fairly lengthy
arbitration with ExxonMobil. The three arbitrators sided with
the State and yet it is still being litigated. He said a person
in the Department of Revenue has advised him that ExxonMobil's
position that another arbitration with them "won't be any
quicker and it won't be any easier."
MR. LOEFFLER said he was not a party to that conversation. He
pointed out the arbitrated cases that Senator Therriault
referred to were oil markets and gas markets operate
differently. He indicated the royalty and tax would have to be
reestablished in terms of gas markets.
SENATOR THERRIAULT asked where the arbitration proposal
originated.
MR. LOEFFLER advised there was early discussion about the
desirability of employing a dispute resolution process different
from what was used in the past. He said his firm drafted the
dispute resolution article.
SENATOR THERRIAULT asked Mr. Loeffler whether the arbitration
system would save the State of Alaska either time or money.
MR. LOEFFLER said it "has the promise of saving time and money."
4:28:11 PM
SENATOR THERRIAULT quipped that was a tepid endorsement.
MR. LOEFFLER argued that was a lawyer's endorsement.
SENATOR THERRIAULT said his constituent in Fairbanks whose
concern that the arbitration method would be fair and balanced
would have no cause to feel differently.
MR. LOEFFLER said arbitration has to be looked at in the world
context of what kinds of disputes were likely to arise in the
contract. The Administration believes that royalty disputes
would be non-existent since Alaska would take its gas in kind.
Tariff disputes are outside the arbitration process. If the
State is unhappy with the tariff that's filed by the LLC they
pursue that process with FERC.
4:30:06 PM
DAN DICKINSON asked to contribute to the arbitration discussion.
There are tax laws that have been transformed into contract law
and the State, thinking commercially, can look at those as
commercial opportunities.
4:32:33 PM
CHAIR SEEKINS expressed support for arbitration as a viable
means to settle disputes.
4:37:13 PM
MR. BARNES informed the committee his background in
international affairs. Arbitration in neutral form is frequently
used as a means to level the playing field between a host
government and the investor. Usually the arbitration provisions
apply to the commercial function of the government and not
necessarily to the regulatory function. People have indicated
that the contract is a commercial contract but there is
provisions in the contract that have far-reaching implications
for the regulatory regime. Article 41.2 demands that leases,
rules, regulations and agreements conform to the fiscal
contract, he said.
MR. BARNES said he would like to ask the people involved in the
negotiation how they see the "far-reaching confirmation
provision" and the contract itself applying to the regulatory
regime.
4:40:58 PM
MR. LOEFFLER said he would like to start with the issue of
regulation. The contract does not touch nor does it intend to
touch criminal law, environmental regulation, health-and-safety
regulation and any customary regulations. He said he does not
think of royalty issues as regulation in the normal police-power
sense. "Royalty arises from the interest or ownership rights of
the State," he aired.
4:43:20 PM
MR. VAN TUYL pointed out arbitration is used regularly in the
oil and gas industries as an efficient means to resolve
disputes. Baseball arbitration is the method used currently to
adjudicate disputes over the vast majority of the State's
revenues. One advantage is that it encourages parties to take
reasonable positions. He advised that BP prefers the baseball
arbitration method.
4:47:06 PM
CHAIR SEEKINS asked Mr. Harper whether arbitrators generally
serve in areas where they have expertise.
MR. HARPER responded he has arbitrated solely in areas where he
has expertise.
CHAIR SEEKINS opined that was an advantage to that type of
dispute resolution.
MR. HARPER agreed but said there were instances where
arbitration is not advisable.
4:50:29 PM
MR. LOEFFLER said he had a number of points that he has been
aggregating and asked for a chance to address them. He reminded
the committee that this was a "two-way street" and that the
State could be sued under the contract, whereas in the past it
was the State that was always suing someone in order to get a
better value or increased tax revenue. One thing that people
look at to determine a hospitable state for investment is access
to fair and balanced dispute resolution but that resolution
won't always come out in favor of the State.
4:53:42 PM
MR. LOEFFLER advised the committee that he feels he has done an
inadequate job of explaining the dispute resolution clause and
it's incumbent on the Administration to do a better job. "When
people question limiting discovery they must take into
consideration the balance of the clause and the fact that there
are limitations of discovery under the Alaska Civil Rules as
they stand today," he stated. There have been three different
systems in the past ten years in an attempt to address revenue
disputes so regardless of the contract the State has been
struggling to find an impartial adjudication system.
4:56:17 PM
MR. DICKINSON offered to expand on Mr. Loeffler's comments. If
the contract goes through it will be the fourth system in less
than a decade. Very few disputes go to the superior court, they
usually get resolved at earlier levels. It is important to
remember that the statutory rules have remained the same and the
Department has retained those. The main thing is that if there
is a problem the State would go to an arbitrator.
CHAIR SEEKINS turned the gavel over to Senator Wilken.
4:58:01 PM
SENATOR THERRIAULT asked Mr. Loeffler to comment on the concept
of including the RCA language in the contract so as to close any
gaps between FERC adjudication and the committee process.
MR. LOEFFLER said his expectation and advice is that FERC will
and should regulate the whole system.
CHAIR SEEKINS returned to the meeting.
MR. LOEFFLER in regards to a regulatory gap, in the past the
Supreme Court has said the states can't step in just because
there's a gap if it is a subject area committed to interstate
commerce. The Administration believes FERC regulation is highly
likely throughout the whole system.
5:00:14 PM
MR. HARPER said it was his professional opinion that baseball
arbitration is a very significant concession.
MR. LOEFFLER added the only burden of proof that's in the
contract is the burden of proof that applies to the work
commitment clause. There is not a general burden of proof in the
dispute resolution clause.
5:01:41 PM
SENATOR BEN STEVENS advised his question was related to risk and
capacity management and the comparison of how the Administration
evaluated the applications and what the comparable capacity
risks were associated with the proposals.
MR. DICKINSON noted Roger Marks had done a number of analyses on
the Port Authority so he would speak about that.
5:02:31 PM
MR. MARKS said Alaska Gas Port Authority (AGPA) submitted a SGDA
application to the State and the SGDA has a set of standards to
determine what constitutes a qualified applicant and the Port
Authority failed to qualify. The specific qualification they did
not meet was a minimum net worth requirement. Negotiations never
commenced and so the issue of capacity requirements never came
up.
CHAIR SEEKINS said he thought the minimum net worth was $10
billion or an unused credit of $15 billion.
SENATOR BEN STEVENS said he is focusing on the sensitive risk
component of capacity management and finds it hard to believe
there was no proposal for capacity management in AGPA's
proposal.
MR. MARKS said the negotiations never commenced. The Department,
by law, could not accept the application.
SENATOR BEN STEVENS asked whether FERC could issue a certificate
of public convenience without a capacity management plan.
5:04:44 PM
MR. LOEFFLER said there would have to be gas supplies and
shipper commitments.
SENATOR BEN STEVENS wondered if AGPA would have qualified had
Alaska made 100 percent capacity commitment and had taken 100
percent of the risk.
MR. LOEFFLER said that is true.
5:06:19 PM
MR. DICKINSON advised the discussions with TransCanada focused
on the ability to get to an open season. If in that open season,
the producers had all stepped forward and taken commitment on
the pipeline, things might have proceeded and there would be
much less risk for the State. The main focus of the discussion
was what to do in the case where there wasn't a full commitment
made in the open season. Much of the discussion revolved around
the second open season and what the State and the other parties
were willing to do, and how much of an FT commitment was the
State willing to make. The discussions were never concluded.
MR. LOEFFLER said in the TransCanada negotiations, the State was
being asked to take a much higher share of the capacity than the
potentially 20 percent that is involved in the current contract.
5:09:21 PM
SENATOR BEN STEVENS said the application from TransCanada
expected Alaska to take a significant increase in shipping
capacity. He asked whether it also expected the State to buy the
gas and ship it.
MR. DICKINSON said clearly if the State took a commitment for
more than 12.5 percent of the gas, it would have to obtain it
somehow. He said the State would have to either have to be out
in the secondary market making an FT commitment and sell it or
obtain the gas. He said, "If you sign up for 20 percent or more
of the FT charges and you take your royalty in kind, you've got
a very large bill on your hands."
MR. LOEFFLER added there is no way to get equivalent terms from
TransCanada because TransCanada doesn't own gas.
5:11:04 PM
SENATOR BEN STEVENS said he was trying to comprehend the levels
of risk that the State should contemplate in moving a project
forward. The committee is continually hearing about other
options, but those might even have greater risks, he aired.
MR. GRIFFIN agreed that the magnitude of risk was an important
factor to consider but that the amount of return on that risk
would be "the best risk/return balance that is available."
5:13:59 PM
SENATOR THERRIAULT referred to Article 8.7(ii)(b) where it
contains language about the expansion shipper having to pay the
upfront costs. The following paragraph refers to reimbursement
of those costs through the tariff. He asked how a pipe company
recoups those costs through the tariff.
MR. LOEFFLER said the requirement on page 92 was intended to
ensure that the expansion shipper is serious and so he would
front the money. The costs could be placed into the rate. If the
LLC wants to recover those rates, they must be a cost actually
incurred by the LLC, so the LLC would reimburse those costs to
the expansion shipper. "They cannot in essence put those costs
into rate base and get a return on them unless it's money they
spent, so that's the incentive," he stated. He said he does not
see the intent of the provision that the applicant would get a
lower tariff as a consequence of whatever amount of upfront
engineering it had done.
5:17:14 PM
SENATOR THERRIAULT advised the committee that he recently spent
an afternoon at AOGCC in Anchorage verifying some information he
received from the DNR regarding the current recycling going on
at the North Slope. He said he had asked DNR personnel how long
is was economically viable to continue that and at what point
will the continuation of that recycling process run the risk of
destroying value to the State. At a certain point, the cost of
running the circular system is high enough to escalate costs, he
said.
The responses from the DNR advise that with the current
configuration, number of compressors, producer investment, it
would begin to destroy value by the year 2014 or 2015 if that
gas was not brought to market. He said it seemed like there was
economic necessity for the producers to build the line and get
it up and running. He asked for comment from the producer team.
There is an issue of channeling where the gas is re-injected and
as wells have to be re-drilled. He asked at what point the gas
has to be drawn off to prevent risk of trapping it in the
reservoir.
5:20:52 PM
MR. KONRAD said the producers want to get the project going
before 2015. He agreed there are complex reservoir interactions
and the AOGCC will be involved in developing field and pool
rules. "No one has the answers today," he said.
5:22:47 PM
SENATOR THERRIAULT said because of the long lead-time for
building a gas transportation system and getting the gas to
market, producers must have some idea.
MR. KONRAD responded they are ready to advance within 90 days of
legislative approval because they believe the time is now. There
will be unknown impacts on oil production but the value created
from the gas and the value created by increasing the life of the
North Slope will yield both the State and the industry much more
reserves.
5:24:46 PM
MR. GRIFFIN said Prudhoe Bay is the backbone of the gas-line
project and the backbone of North Slope production. As Prudhoe
Bay production lessens, revenues lessen. Producers have cycled
as much gas back into the reservoirs that they can. Producers
have long since passed the point where they felt it was economic
to continue to expand gas-handling capacity on the Slope. "Oil
production is essentially hostage to our gas cycling capacity
and it will continue to slide despite the best management
efforts," he stated.
The big hurdle is the $26 billion dollar investment to gain
access to market but once the producers see clear to make that
investment the LLC will. "Not only can we reduce the overhead
burden our oil production carries, we gain revenues from the gas
that suddenly has access to market - we're not going to want to
sell all that excess gas," he said. The producers will put
excess gas back into the ground and balance the effects on oil
production and maximize the gas sent to market.
5:28:22 PM
MR. GRIFFIN added the North Slope has huge fixed infrastructure
costs and the producers do not intend to take major fields
offline. The companies will keep the North Slope fields active
until the burden of that infrastructure is too much, he said and
then they will all come down together. The gas line would move
that specter 20 years into the future and would provide the
State with an enormous benefit during that time period. He
assured the committee that the producers see the benefits of the
gas market as in the collective best interests of the State, the
producers and the nation.
SENATOR THERRIAULT interjected with regard to the suggestion
that nobody else can build a line there is an economic necessity
to move gas off the North Slope in next ten years. That is a
motivator for all parties.
5:31:10 PM
CHAIR SEEKINS thanked the participants for their input and
participation in the roundtable meeting. He adjourned the
meeting at 5:35:27 PM.
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