Legislature(2005 - 2006)Anchorage

07/07/2006 09:00 AM Senate SPECIAL COMMITTEE ON NATURAL GAS DEV


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09:20:46 AM Start
09:21:55 AM Roundtable Discussion on the Proposed Natural Gas Pipeline Contract
09:28:02 AM Roger Marks, Department of Revenue
09:53:01 AM Wendy King, Conocophillips
10:00:14 AM Bob Loeffler, Morrison & Foerster, Counsel to the Governor
10:06:21 AM Bill Mcmahon, Exxonmobil
01:30:56 PM Roger Marks - Discussion of Proposed Reserves Tax
01:52:22 PM Dan Dickinson, Cpa, Consultant to the Governor
02:24:55 PM U.s. Senator Ted Stevens
04:04:35 PM Dan Dickinson - Discussion of Fiscal Certainty for Oil
04:24:09 PM Adjourn
* first hearing in first committee of referral
+ teleconferenced
= bill was previously heard/scheduled
-- Teleconference --
Location: Anchorage Hilton - Alaska Room
Roundtable Discussion on the Proposed
Natural Gas Pipeline Contract
If necessary meeting will continue on 7/8
-- Testimony <Invitation Only> --
                    ALASKA STATE LEGISLATURE                                                                                  
      SENATE SPECIAL COMMITTEE ON NATURAL GAS DEVELOPMENT                                                                     
                       Anchorage, Alaska                                                                                        
                          July 7, 2006                                                                                          
                           9:20 a.m.                                                                                            
                                                                                                                                
MEMBERS PRESENT                                                                                                               
                                                                                                                                
Senator Ralph Seekins, Chair                                                                                                    
Senator Bert Stedman                                                                                                            
Senator Ben Stevens                                                                                                             
Senator Donny Olson                                                                                                             
Senator Thomas Wagoner                                                                                                          
Senator Kim Elton                                                                                                               
Senator Gary Wilken (via teleconference)                                                                                        
                                                                                                                                
MEMBERS ABSENT                                                                                                                
                                                                                                                                
Senator Lyda Green                                                                                                              
Senator Con Bunde                                                                                                               
Senator Fred Dyson                                                                                                              
Senator Lyman Hoffman                                                                                                           
Senator Albert Kookesh                                                                                                          
                                                                                                                                
OTHER LEGISLATORS PRESENT                                                                                                     
                                                                                                                                
Senator Bettye Davis                                                                                                            
Senator Hollis French                                                                                                           
Senator John Cowdery                                                                                                            
Representative Norman Rokeberg                                                                                                  
Representative Paul Seaton (via teleconference)                                                                                 
Representative Ralph Samuels                                                                                                    
Representative Berta Gardner                                                                                                    
                                                                                                                                
COMMITTEE CALENDAR                                                                                                            
                                                                                                                                
Roundtable Discussion on the Proposed Natural Gas Pipeline                                                                      
Contract                                                                                                                        
                                                                                                                                
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 roundtable discussion.                                                               
                                                                                                                              
ROGER MARKS, Petroleum Economist                                                                                                
Department of Revenue                                                                                                           
PO Box 110400                                                                                                                   
Juneau, AK  99811-0400                                                                                                          
POSITION STATEMENT:  Participated in the roundtable discussion                                                                
and talked about the proposed gas reserves tax.                                                                                 
                                                                                                                                
WENDY KING, Director of External Strategies                                                                                     
ANS Gas Development Team                                                                                                        
ConocoPhillips Alaska, Inc.                                                                                                     
PO Box 100360                                                                                                                   
Anchorage, AK  99510                                                                                                            
POSITION STATEMENT:  Provided ConocoPhillips' perspective in the                                                              
roundtable discussion.                                                                                                          
                                                                                                                                
REPRESENTATIVE NORMAN ROKEBERG                                                                                                  
Alaska State Legislature                                                                                                        
Alaska State Capitol                                                                                                            
Juneau, AK  99801-1182                                                                                                          
POSITION STATEMENT:  Participated in the roundtable 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 roundtable discussion.                                                               
                                                                                                                              
DAVID VAN TUYL, Commercial Manager                                                                                              
Alaska Gas Group                                                                                                                
BP                                                                                                                              
Anchorage, AK                                                                                                                   
POSITION STATEMENT:  Provided BP's perspective in the roundtable                                                              
discussion.                                                                                                                     
                                                                                                                              
S.A. (BILL) McMAHON JR., Commercial Manager                                                                                     
Alaska Gas Development                                                                                                          
ExxonMobil Production Company                                                                                                   
Houston, TX                                                                                                                     
POSITION STATEMENT:  Provided ExxonMobil's perspective in the                                                                 
roundtable discussion.                                                                                                          
                                                                                                                                
REPRESENTATIVE PAUL SEATON                                                                                                      
Alaska State Legislature                                                                                                        
Alaska State Capitol                                                                                                            
Juneau, AK  99801-1182                                                                                                          
POSITION STATEMENT:  Participated in the roundtable discussion.                                                               
                                                                                                                              
REPRESENTATIVE RALPH SAMUELS                                                                                                    
Alaska State Legislature                                                                                                        
Alaska State Capitol                                                                                                            
Juneau, AK  99801-1182                                                                                                          
POSITION STATEMENT:  Participated in the roundtable discussion.                                                               
                                                                                                                              
KEN GRIFFIN, Deputy Commissioner                                                                                                
Department of Natural Resources                                                                                                 
400 Willoughby Avenue                                                                                                           
Juneau, AK  99801-1724                                                                                                          
POSITION STATEMENT:  Participated in the roundtable discussion.                                                               
                                                                                                                                
SENATOR JOHN COWDERY                                                                                                            
Alaska State Legislature                                                                                                        
Alaska State Capitol                                                                                                            
Juneau, AK  99801-1182                                                                                                          
POSITION STATEMENT:  Participated in the roundtable discussion.                                                               
                                                                                                                                
HAROLD HEINZE, Chief Executive Officer                                                                                          
Alaska Natural Gas Development Authority (ANGDA)                                                                                
Department of Revenue                                                                                                           
411 West 4th                                                                                                                    
Anchorage, AK  99501                                                                                                            
POSITION STATEMENT:  Provided ANGDA's perspective in the                                                                      
roundtable discussion.                                                                                                          
                                                                                                                                
SENATOR HOLLIS FRENCH                                                                                                           
Alaska State Legislature                                                                                                        
Alaska State Capitol                                                                                                            
Juneau, AK  99801-1182                                                                                                          
POSITION STATEMENT:  Participated in the roundtable discussion.                                                               
                                                                                                                                
DAN DICKINSON, CPA                                                                                                              
Consultant to the Governor                                                                                                      
Office of the Governor                                                                                                          
PO Box 110001                                                                                                                   
Juneau, AK  99811-0001                                                                                                          
POSITION STATEMENT:  Participated in the roundtable discussion.                                                               
                                                                                                                              
U.S. SENATOR TED STEVENS                                                                                                        
United States Senate                                                                                                            
522 Hare Senate Office Building                                                                                                 
Washington, DC  20510                                                                                                           
POSITION  STATEMENT:     Provided  his  perspective   during  the                                                             
roundtable discussion.                                                                                                          
                                                                                                                              
ACTION NARRATIVE                                                                                                              
                                                                                                                                
CHAIR  RALPH  SEEKINS  called the  Senate  Special  Committee  on                                                             
Natural Gas Development meeting to  order at 9:20:46 AM.  Present                                                             
were  Senators Ben  Stevens, Bert  Stedman,  Thomas Wagoner,  Kim                                                               
Elton, Gary Wilken (via teleconference)  and Chair Ralph Seekins.                                                               
Also  attending were  Senators Bettye  Davis,  Hollis French  and                                                               
John Cowdery,  and Representatives  Norman Rokeberg,  Paul Seaton                                                               
(via teleconference), Ralph Samuels and Berta Gardner.                                                                          
                                                                                                                                
  ^Roundtable discussion on the Proposed Natural Gas Pipeline                                                                 
                            Contract                                                                                          
                                                                                                                              
9:21:55 AM                                                                                                                    
CHAIR  RALPH  SEEKINS  announced  the  committee  would  continue                                                               
discussion on  the proposed  natural gas  pipeline contract.   He                                                               
asked Mr.  Clark to continue  yesterday's discussion  about basic                                                               
structure and to expand on taking gas in kind.                                                                                  
                                                                                                                                
^Jim Clark, Chief Negotiator, Office of the Governor                                                                            
JIM CLARK,  Chief Negotiator, Office  of the  Governor, explained                                                               
that the  basis on which  the administration proceeded  in taking                                                               
the mandate from  the legislature in the form  of Alaska Stranded                                                               
Gas  Development  Act  ("Stranded  Gas Act")  amendments  was  to                                                               
interpret  the  Act  as providing  direction  for  negotiating  a                                                               
business  deal.   He  noted in  October  2004 the  administration                                                               
submitted a  proposal; the producers countered  it December 2004;                                                               
workshops were  held in  winter and spring  2005; from  July 2005                                                               
until agreement on gas in  February 2006 there were negotiations;                                                               
and agreement  on fiscal certainty  on oil was  completed May 24,                                                               
2006.   Noting Dr. Pedro  van Meurs  was chief economist  on this                                                               
but couldn't  be present, Mr. Clark  commended Roger Marks  for a                                                               
terrific job as the petroleum economist during the process.                                                                     
                                                                                                                                
^Roger Marks, Department of Revenue                                                                                             
ROGER MARKS,  Petroleum Economist,  Department of  Revenue (DOR),                                                               
noted he would discuss how  the administration views the project,                                                               
views  the role  of  the  Stranded Gas  Act  and  will develop  a                                                               
contract  in light  of those.   He  identified size  as the  most                                                               
prominent factor because size magnifies  everything, good or bad.                                                               
The biggest risks are price and cost.                                                                                           
                                                                                                                                
He emphasized that prices are  unknowable over the next 35 years.                                                               
Five years ago,  forecasts by DOR and others for  2006 oil prices                                                               
were at  $17.00, whereas today's  price is  over $70.00.   Thus a                                                               
case could be  made that over the next 35  years gas prices could                                                               
be $2.00  or $45.00.  In  support of low prices  are increasingly                                                               
economic clean  coal; ever-cheaper  imports of  liquefied natural                                                               
gas (LNG)  to the Lower  48; 6,000  trillion cubic feet  (Tcf) of                                                               
stranded gas reserves worldwide that  Alaska has to compete with;                                                               
and 17  new applications  for nuclear  power plants  submitted to                                                               
the   U.S.  Department   of  Energy   because  high   prices  are                                                               
counteracting people's concerns about safety.                                                                                   
                                                                                                                                
9:28:02 AM                                                                                                                    
MR.  MARKS also  pointed out  that low-probability  events happen                                                               
throughout history that can't be  envisioned beforehand.  Turning                                                               
to cost, he cited a  presentation by Independent Project Analysis                                                               
(IPA)  about  the propensity  for  high  cost overruns  on  mega-                                                               
projects,  sometimes  by  50  percent   -  a  big  problem  on  a                                                               
$25 billion  project.    Taken  in total,  the  outcome  of  this                                                               
project could be excellent or  very bad, but shareholders tend to                                                               
have  an asymmetrical  view:   nervousness that  bad things  will                                                               
happen  outweighs optimism  about  good things.   Prudent  people                                                               
tend to  turn down a gamble  that could have a  very bad outcome,                                                               
even if a very good outcome is possible.                                                                                        
                                                                                                                                
He highlighted  fiscal stability.   Mr. Marks explained  that the                                                               
producers are willing  to take on the downside risks,  but if the                                                               
upside materializes, they aren't willing  to have that taken away                                                               
by  higher taxes.    That  destroys risk-versus-reward  symmetry.                                                               
Thus the  lack of fiscal  stability is  a problem in  addition to                                                               
risks from high costs and the size of the project.                                                                              
                                                                                                                                
He   said  the   Stranded   Gas  Act   essentially  directs   the                                                               
administration   to  negotiate   a  contract   to instill  fiscal                                                               
stability,   which  was   done,  and   to  custom-tailor   fiscal                                                               
provisions  of the  state to  the specific  project that  will be                                                               
developed.    The  administration considers  the  gas  "stranded"                                                               
under that  term's definition in  the Act 1) because  the outcome                                                               
is  unknowable and  the "size  risk" magnifies  downside effects,                                                               
and 2)  because of fiscal  instability.  Mr. Marks  indicated the                                                               
producers are  being given fiscal  stability.  Thus  the question                                                               
is what has been done to  custom-tailor the fiscal system to suit                                                               
the project per the directives in the Stranded Gas Act.                                                                         
                                                                                                                                
MR.  MARKS  offered  the  analysis   of  the  administration  and                                                               
Econ One, that  this is a low-rate-of-return  project relative to                                                               
the  producers' other  investment opportunities  because of  high                                                               
costs,  great  distance  and  long  construction  time.    It  is                                                               
believed  to have  a high  hurdle  rate, Mr.  Marks noted,  which                                                               
depends  on   how  the  producers  perceive   its  unique  risks.                                                               
Improving the rate of return makes  the project more viable.  The                                                               
main way  is to  take gas  in kind;  that is  in contrast  to the                                                               
current in-value world, taking royalty and taxes.                                                                               
                                                                                                                                
9:36:19 AM                                                                                                                    
MR. MARKS highlighted several scenarios,  concluding if the state                                                               
took its gas in kind  without ownership, the producers would want                                                               
a  firm  transportation (FT)  commitment  from  the state,  which                                                               
would  be an  asset  to  them.   While  the  producers would  pay                                                               
100 percent  of  the  costs,  that  FT  commitment  would  offset                                                               
20 percent  of  those  costs,  thereby  increasing  the  rate  of                                                               
return.   Mr. Marks  reported  that because  taking  gas in  kind                                                               
causes the state  to incur a long-term liability, it  was a small                                                               
additional step to  take 20 percent ownership of  the pipeline to                                                               
match the  state's gas share,  with the following benefits:   The                                                               
state's interests would  align with the producers,  and the state                                                               
would get  a great deal of  income from the return  on equity and                                                               
would get a  seat at the table in order  to formulate development                                                               
decisions and to know what is going on.                                                                                         
                                                                                                                                
He cited  the following  economic result to  the producers:   The                                                               
state would take  the gas in kind, alleviating  them from upfront                                                               
costs, estimated  to equate to  2.0 to 2.5  percent - which  on a                                                               
$25 billion  project   is  significant,  perhaps  a   $4  billion                                                               
reduction  in capital  costs.   It would  have the  same economic                                                               
significance to the  producers as if the state  took no severance                                                               
tax,  royalty, corporate  income tax  or property  tax under  the                                                               
status  quo.   The  state would  give up  no  revenue under  this                                                               
scenario.  But it would have an increased rate of return.                                                                       
                                                                                                                                
He  acknowledged   the  state  would   incur  risks   related  to                                                               
marketing, reserves,  depletion and  force majeure by  taking its                                                               
gas in  kind.   Mr. Marks  opined that  those risks  aren't huge,                                                               
however, but are  manageable.  What is the reward  in return?  It                                                               
is getting a gas line, with all  it entails, which he opined is a                                                               
very good  tradeoff.   He summarized that  the contract  does two                                                               
things:   1) improves  the rate  of return by  taking the  gas in                                                               
kind and 2) provides fiscal stability.                                                                                          
                                                                                                                                
MR. MARKS brought attention to  an important result of taking gas                                                               
in  kind.   The state's  20 percent  is more  than enough  gas to                                                               
satisfy all  in-state needs.   The state could develop  terms and                                                               
conditions for selling its gas  in Alaska.  Monetarily, the state                                                               
would  be  indifferent whether  its  gas  was  sold at  $5.30  in                                                               
Chicago - which  includes transportation costs - or  $2.80 on the                                                               
North  Slope.    In  addition,  the  contract  has  mileage-based                                                               
tariffs.   If shipping  costs were $0.25  to Fairbanks,  at $3.05                                                               
Fairbanks could  have the  lowest-priced gas in  the U.S.  if the                                                               
state chose  to sell at that  price.  There, 70  percent of homes                                                               
are heated with oil, now about  $18.00 per million Btu.  At $3.05                                                               
for gas,  it would cost  80 percent less.   Of course,  the state                                                               
could set a higher price - it is a matter of policy.                                                                            
                                                                                                                                
He  noted  the irony  that  North  Slope  gas  could be  sold  in                                                               
Anchorage for about $1.00 less than  Cook Inlet gas.  Or Alaska's                                                               
share  of   the  liquid  could  be   extracted,  providing  about                                                               
0.25 million gallons a day of propane.   That could be shipped to                                                               
Western  Alaska,  where residents  are  hurting  from the  energy                                                               
crisis.  Mr.  Marks emphasized the great  opportunity for selling                                                               
gas in Alaska,  under whatever terms the state deems  best, if it                                                               
takes its gas in kind.                                                                                                          
                                                                                                                                
9:44:04 AM                                                                                                                    
MR.  MARKS pointed  out an  overlooked benefit  of the  gas line:                                                               
Prudhoe  Bay  oil production  is  declining,  and at  some  point                                                               
operating costs will overwhelm the  field.  Prudhoe Bay gas could                                                               
absorb a lot of the operating  costs, however, and thus oil could                                                               
flow longer.   In addition,  there could be lots  of exploration.                                                               
As producers  find gas, they'll also  find oil.  The  lifespan of                                                               
the  North  Slope without  a  gas  line  isn't known,  but  DOR's                                                               
modeling has used the year 2030 as a guess.                                                                                     
                                                                                                                                
MR.  CLARK added  that  the extended  time  for the  Trans-Alaska                                                               
Pipeline System (TAPS)  is viewed as time  for necessary research                                                               
and development to  tap into North Slope heavy  oil, estimated at                                                               
10-13 billion barrels,  equivalent to  another Prudhoe Bay.   The                                                               
gas line  estimate of 35  Tcf is equivalent to  6 billion barrels                                                               
of oil.   He expressed  hope for at least  70 Tcf to  put through                                                               
the line,  allowing expansion to  5.9 billion cubic feet  (Bcf) a                                                               
day; the  70 Tcf  equals another 12 billion  barrels of  oil, and                                                               
there is  that amount of  heavy oil.   Because the  equivalent of                                                               
two  Prudhoe Bays  can be  monetized  for the  benefit of  future                                                               
generations,  Mr. Clark  said the  administration believes  it is                                                               
critical to the state that this gas line go forward.                                                                            
                                                                                                                                
9:47:51 AM                                                                                                                    
^Wendy King, ConocoPhillips                                                                                                     
WENDY KING, Director of External  Strategies, ANS Gas Development                                                               
Team,   ConocoPhillips    Alaska,   Inc.,   pointed    out   that                                                               
ConocoPhillips,  the  largest explorer  in  the  state, has  been                                                               
actively exploring for both oil and gas.   If gas is found on the                                                               
North Slope,  however, there is  no way to  get it to  market and                                                               
thus it is viewed  as a dry hole.  She predicted  one of the most                                                               
significant  benefits  of  a gas  pipeline  would  be  additional                                                               
exploration for both  gas and oil on the North  Slope.  In trying                                                               
to find one, a company likely would find the other.                                                                             
                                                                                                                                
MR. CLARK agreed with Mr. Marks'  point that the state, by taking                                                               
gas in kind,  is taking on capacity risk and  marketing risk.  He                                                               
suggested  addressing  this  after   discussion  of  the  general                                                               
economic underpinning of the contract.                                                                                          
                                                                                                                                
REPRESENTATIVE NORM ROKEBERG,  Alaska State Legislature, inquired                                                               
about the costs of in-state  tariffing, particularly with respect                                                               
to Cook Inlet.                                                                                                                  
                                                                                                                                
MR.  CLARK   highlighted  three   policy  choices,   outside  the                                                               
contract, for the administration and  the legislature.  The first                                                               
is how to price  the gas at any of the four  offtake points.  One                                                               
way is  to have  the netback price  plus a  transportation charge                                                               
based  on  a mileage-sensitive  rate  to  the point  of  offtake,                                                               
giving  Fairbanks cheap  gas.   Similarly, the  mileage-sensitive                                                               
rate from  Glennallen into Cook  Inlet would have charges  to it,                                                               
but not as expensive as going to the AECO Hub.                                                                                  
                                                                                                                                
He said  a second policy choice  is to combine the  netback price                                                               
plus a charge  for transportation, putting it  out to competitive                                                               
bid.  How  else can it be allocated among  the various commercial                                                               
end-users,  other than  letting them  bid  on it  and having  the                                                               
state realize  the highest  rate of  return?   Mr. Clark recalled                                                               
doing this with royalty oil when made available, for example.                                                                   
                                                                                                                                
He noted a third choice, done  currently in Cook Inlet, is to use                                                               
the  Henry Hub  price;  thus  the price  paid  in  Cook Inlet  is                                                               
similar to prices paid elsewhere in  the country.  Mr. Clark said                                                               
the administration  is leaning  toward a  mileage-sensitive rate,                                                               
the netback  and some  kind of  competitive bidding.   Obviously,                                                               
this requires  discussion with the  legislature.  He  deferred to                                                               
Mr. Marks for specific numbers.                                                                                                 
                                                                                                                                
9:53:01 AM                                                                                                                    
MR.  MARKS focused  on an  example  where the  Chicago price  was                                                               
$6.00, as  at Henry  Hub; the difference  between these  two over                                                               
the last  few years has been  pennies.  In his  example involving                                                               
ENSTAR  and   Unocal,  the  latter   argued  to   the  Regulatory                                                               
Commission  of Alaska  (RCA) that  it had  alternative investment                                                               
opportunities in Cook Inlet or the  Gulf of Mexico and would take                                                               
the higher-priced one;  this compelled RCA to let  ENSTAR get the                                                               
Henry Hub price for Cook Inlet  gas.  While some economists think                                                               
that makes  sense, Mr. Marks  said others don't.   Companies such                                                               
as  Marathon are  trying to  get the  same deal  from RCA.   Thus                                                               
prices in Chicago, at Henry Hub and in Cook Inlet are all $6.00.                                                                
                                                                                                                                
MR.  MARKS further  explained that  if the  tariff to  Chicago is                                                               
$2.50, the  netback price is $3.50.   There are a  lot of numbers                                                               
out there  for the cost  of getting gas  from the North  Slope to                                                               
Southcentral Alaska.   It depends  on the  amount of gas  and the                                                               
pipeline size:   the bigger it  is, the lower the  per-unit cost.                                                               
It also depends on whether there  is offtake in Delta Junction or                                                               
Fairbanks.   If the number were  $1.50, the netback price  at the                                                               
North Slope  would be $3.50, and  there'd be a $1.50  tariff from                                                               
the North  Slope to  Southcentral.   That would  give a  price of                                                               
$5.00  price -  a  dollar  less than  the  Henry  Hub price  that                                                               
consumers currently pay.                                                                                                        
                                                                                                                                
REPRESENTATIVE ROKEBERG  offered his  understanding that  RCA had                                                               
approved the  contract, but  not Henry  Hub prices  in Anchorage.                                                               
He  highlighted   the  policy  choices  on   how  to  incentivize                                                               
development of  this spur  line.   He recalled  hearing estimates                                                               
between  $300 million  and $500  million, surmising  most players                                                               
don't  have balance  sheets that  allow financing  it.   Thus the                                                               
state may have to take a more active role in developing this.                                                                   
                                                                                                                                
9:57:46 AM                                                                                                                    
^Bob Loeffler, Morrison & Foerster, Counsel to the Governor                                                                     
BOB  LOEFFLER,  Morrison &  Foerster,  Counsel  to the  Governor,                                                               
added that  a recent  U.S. Department  of Energy  study indicates                                                               
what tariff costs  would be - at various pipe  sizes, volumes and                                                               
flow rates  - from  Fairbanks to Southcentral  Alaska.   It shows                                                               
flow rates  from 100 to 1,200  in 18-, 20-, 24-  and 30-inch pipe                                                               
that might  illuminate the  discussion.   He emphasized  that the                                                               
state is  proposing to make  available, for some  bidding process                                                               
or otherwise,  a portion  of the state-owned  gas to  satisfy in-                                                               
state needs.  The precise mechanism is being worked on.                                                                         
                                                                                                                                
10:00:14 AM                                                                                                                   
^Dave Van Tuyl, BP                                                                                                              
DAVID VAN  TUYL, Commercial Manager,  Alaska Gas Group,  noted BP                                                               
said yesterday  in Fairbanks that  it would  love to sell  gas to                                                               
Alaskans, rather than  having to transport it  thousands of miles                                                               
to  Chicago.    In  competing  for that  market,  he  noted,  one                                                               
competitive challenge is  that the State of  Alaska isn't subject                                                               
to federal income tax.                                                                                                          
                                                                                                                                
^Bill McMahon, ExxonMobil                                                                                                       
S.A.  (BILL)   McMAHON  JR.,   Commercial  Manager,   Alaska  Gas                                                               
Development,  ExxonMobil Production  Company, agreed.   He  added                                                               
that competition among suppliers benefits the buyers.                                                                           
                                                                                                                                
CHAIR  SEEKINS  noted later  Mr.  Heinze  would discuss  in-state                                                               
consumption and  transportation.  He related  his impression that                                                               
there'll be competition to supply  that market from the state and                                                               
perhaps from  the producers.   It will be  looked at in  the free                                                               
market.  People would like to  heat their homes at a savings, and                                                               
this will respond to it.                                                                                                        
                                                                                                                                
MR. VAN TUYL  added that Article 9 of the  contract addresses in-                                                               
state  use,  including  four  offtake  points.    The  state  has                                                               
identified  where three  are  likely:   on  the  Yukon River,  in                                                               
Fairbanks  and in  Delta Junction.   The  contract also  requires                                                               
mileage-sensitive  service   for  in-state   use.     Those  will                                                               
facilitate getting gas to in-state consumers.                                                                                   
                                                                                                                                
He highlighted  two other  things that  the mainline  entity, the                                                               
pipeline, is obligated to do during  the first couple of years of                                                               
the  project:    1) complete  a study  of  in-state  consumption,                                                               
characterizing  what  the  market   might  be  in  Fairbanks  and                                                               
Southcentral Alaska, for example; and  2) complete a study of the                                                               
potential for  siting the natural  gas liquids  (NGLs) extraction                                                               
facility  in  Alaska, and  the  business  opportunity this  might                                                               
create.   Clearly, Mr. Van Tuyl  said, there is a  recognition of                                                               
the  business  potential  for  in-state   sales,  and  there  are                                                               
specific commitments in the contract to address those.                                                                          
                                                                                                                                
REPRESENTATIVE  PAUL SEATON,  Alaska State  Legislature, returned                                                               
to Mr. Marks'  scenario of $5.30 in Chicago,  subtracting a $2.50                                                               
tariff,  leaving $2.80  as  if sold  in Chicago;  if  it went  to                                                               
Fairbanks, $0.25 would be added, for  a price of $3.05.  However,                                                               
there was nothing about having to  pay for the FT commitment, the                                                               
$2.50 tariff.   If  that were subtracted  because the  gas wasn't                                                               
shipped, it would be sold at $0.55 to the state.                                                                                
                                                                                                                                
He asked:   Is the basic assumption just that  before we sell any                                                               
in-state gas,  we will meet our  shipping commitment?  Or  are we                                                               
just  going to  ignore that  $2.50 price  that we've  guaranteed,                                                               
even  if we  don't ship  the gas,  or if  other gas  doesn't come                                                               
available at the beginning there?                                                                                               
                                                                                                                                
MR.  LOEFFLER  answered that  the  open  season on  the  mainline                                                               
provides two different  bidding opportunities.  The  first is for                                                               
in-state  service,  calculated  on  the cost  of  providing  that                                                               
service, not costs  downstream.  There would be  an FT commitment                                                               
for that,  separate from the  rest of  the state's share.   There                                                               
are two  different bidding tracks,  by Federal  Energy Regulatory                                                               
Commission (FERC)  order.   A commitment in  the open  season for                                                               
in-state use isn't a commitment for the long haul.                                                                              
                                                                                                                                
10:06:21 AM                                                                                                                   
MR.  CLARK  listed   needed  actions:    1)   Obtain  the  report                                                               
mentioned;  2) get  the state's  house in  order with  respect to                                                               
policy decisions on pricing that  he'd mentioned; and 3) get this                                                               
information out to deal with  Alaskan companies that want to take                                                               
gas,  prior to  the  first open  season.   The  planning must  be                                                               
arranged in time to do this.   The producers will design the line                                                               
based on  the state's offtake before  it moves to Canada  and the                                                               
Lower  48.   The administration  is eager  to get  a contract  in                                                               
order to have  something to work from, Mr. Clark  added, and then                                                               
to  get the  other  pieces in  place in  order  to address  these                                                               
policy decisions in a systematic and orderly way.                                                                               
                                                                                                                                
MR. LOEFFLER  referred to  discussion of  balance sheets  and the                                                               
ability to  bid in  an open  season.  He  emphasized no  money is                                                               
paid for in-state FT commitments  until perhaps five years later,                                                               
when  it  is  up  and  running.     This  provides  time  to  get                                                               
arrangements in  place, although  the commitment to  reserve that                                                               
capacity in the open season must be made.                                                                                       
                                                                                                                                
10:08:35 AM                                                                                                                   
REPRESENTATIVE SEATON noted FT  commitments increase the internal                                                               
rate of return;  it is a FT commitment of  20 percent to Chicago.                                                               
He asked how it works if there is offtake for in-state use.                                                                     
                                                                                                                                
MR. VAN TUYL  replied the purpose of the open  season is twofold:                                                               
1) to demonstrate the need  for public convenience and necessity,                                                               
the basis for  the permit, and 2) to establish  the design of the                                                               
system, demonstrated by  what customers want at  the open season.                                                               
If the state or the producers  chose to take gas off in Fairbanks                                                               
to  serve   Fairbanks  and  Southcentral  Alaska,   the  pipeline                                                               
downstream of  that offtake point would  be designed differently.                                                               
Since there  wouldn't be  the need  for that  additional capacity                                                               
downstream of  Fairbanks, the  state wouldn't  be taking  out the                                                               
full share of the FT commitment to Chicago.                                                                                     
                                                                                                                                
MR. MARKS  elaborated, posing an  extreme situation in  which the                                                               
entire state share is taken off  in Fairbanks, both for use there                                                               
and  to disseminate  via spur  lines.   The state  would have  no                                                               
FT commitment  south of  Fairbanks.   While  the producers  would                                                               
have 100  percent of that  commitment, everything going  down the                                                               
line would  be theirs;  thus the rate  of return  would increase.                                                               
While the  contract says  the state  will own  20 percent  of the                                                               
pipeline, Mr.  Marks said it would  make sense at that  point for                                                               
the State  of Alaska  to divest  that share  of the  pipeline; it                                                               
would make sense  for everyone to have about  the same percentage                                                               
share of both the pipeline and the gas itself.                                                                                  
                                                                                                                                
10:12:21 AM                                                                                                                   
MS.  KING   added  that   Article  10,   the  capacity-management                                                               
provisions   and  specifically   Article  10.1,   envisioned  the                                                               
scenario  Representative Seaton  had  mentioned, and  a term  was                                                               
defined  for "state  export gas."    During its  initial-capacity                                                               
notice, the  state could  send notice that  it wanted  to deliver                                                               
300  million a  day within  Alaska from  its total  850 million a                                                               
day.    She  indicated  the  company  then  would  get  long-haul                                                               
capacity to  Alberta, Canada, consistent  with the 550  million a                                                               
day that the state wanted to take to the Lower 48 market.                                                                       
                                                                                                                                
REPRESENTATIVE RALPH  SAMUELS, Alaska State  Legislature, pointed                                                               
out  if  ConocoPhillips' LNG  plant  and  the Agrium  plant  were                                                               
discounted, the actual amount of  gas that Fairbanks or Anchorage                                                               
would use is small compared with the total gas contemplated.                                                                    
                                                                                                                                
MR. MARKS concurred,  adding if the state's share  of in-kind gas                                                               
were  to meet  all  in-state  needs, there  still  would be  some                                                               
shipped to Alberta.                                                                                                             
                                                                                                                                
SENATOR  BEN STEVENS  reported yesterday  he'd called  ENSTAR for                                                               
estimates on in-state consumption.   Including commercial use, it                                                               
is 200 Bcf a year, though it varies  by season.  If every home in                                                               
Fairbanks changes to  gas, it might add 10  Bcf; power generation                                                               
could  add  15 Bcf.   Thus  it  might rise  to  225  Bcf a  year.                                                               
Multiplying  900 million  cubic feet  a day  - the  amount to  be                                                               
shipped - by 365 days equals 325 Bcf a year for state gas.                                                                      
                                                                                                                                
He said the largest consumer  is utilities, but Municipal Light &                                                               
Power  (ML&P) owns  its  own gas  and won't  buy  from the  North                                                               
Slope.    He  opined  that  satisfying  in-state  demand  doesn't                                                               
justify transporting  gas to the  Southcentral market,  but would                                                               
only work if there were  additional commercial use through export                                                               
or large  industrial operations.  Highlighting  the complexities,                                                               
Senator Ben  Stevens suggested  in-state gas  doesn't need  to be                                                               
addressed unless it  is certain that gas will flow  to an offtake                                                               
point.                                                                                                                          
                                                                                                                                
10:17:24 AM                                                                                                                   
Ken   Griffin,  Deputy   Commissioner,   Department  of   Natural                                                               
Resources                                                                                                                       
KEN   GRIFFIN,  Deputy   Commissioner,   Department  of   Natural                                                               
Resources (DNR),  said in-state use  has been a priority  for the                                                               
state  negotiating team  throughout, balanced  with getting  this                                                               
project  built.   He  proposed  that  four  pieces need  to  come                                                               
together  to  meet in-state  needs.    The  first  two are:    1)                                                               
contract terms, including a commitment  on the part of the Alaska                                                               
gas  pipeline to  cooperate with  respect to  downstream in-state                                                               
projects once  they are  viable; and 2)  policy calls  beyond the                                                               
contract,  which include  a) ensuring this  pipeline is  built as                                                               
soon as  possible, on  time and on  budget, b) issues  related to                                                               
pricing  such  as the  netback-pricing  concept  talked about  by                                                               
Mr. Marks and c) how the state  will deal with issues relating to                                                               
credit support.                                                                                                                 
                                                                                                                                
He  cited  the  third  and  fourth  pieces:    3) infrastructure,                                                               
including  a) offtake  points  and spur  lines  to Anchorage  and                                                               
Fairbanks,  b)  NGL processing  for  export  or to  provide  fuel                                                               
supplies to  remote locations  and c)  FERC requirements  such as                                                               
regulations  and rules  the  state  must work  with,  as well  as                                                               
FT commitments and  the credit requirements  that go  with those;                                                               
and  4)  in-state  commercial  interests,  including  public  and                                                               
private utilities  of various capabilities as  well as commercial                                                               
and industrial users.  Mr. Griffin  said all these issues need to                                                               
be dovetailed., and  the interests must work  together to produce                                                               
an  overall strategy  for moving  forward.   However, the  burden                                                               
cannot be  carried entirely  in the contract  or entirely  by the                                                               
state.                                                                                                                          
                                                                                                                                
10:22:04 AM                                                                                                                   
SENATOR  BEN STEVENS  encouraged  reading  the executive  summary                                                               
from the  federal Minerals Management Service  (MMS), provided by                                                               
Mr. Griffin, about a  royalty in kind (RIK)  program initiated by                                                               
the federal  government in 2004.   Managed by bid, it  applies to                                                               
perhaps 13,000 leases.   He referred to part  4.1, suggesting the                                                               
state could do something similar under an open-bid process.                                                                     
                                                                                                                                
MR. GRIFFIN emphasized  the MMS experience:  There  hasn't been a                                                               
net  cost to  taking royalty  in kind,  whether for  gas or  oil;                                                               
rather,  MMS has  seen a  benefit.   He  highlighted the  state's                                                               
contrasting assumption,  when converting  from the status  quo to                                                               
taking gas  in kind, of  significant marketing costs built  in to                                                               
the economics.   Also, MMS has  rather small gas volumes  for its                                                               
program,  distributed in  different areas;  nevertheless, it  has                                                               
seen rather high  demand for its gas, with multiple  bidders.  He                                                               
highlighted the potential  for added value for  the state because                                                               
of the significant position it will have in its markets.                                                                        
                                                                                                                                
10:27:46 AM                                                                                                                   
SENATOR  JOHN   COWDERY,  Alaska  State  Legislature,   gave  his                                                               
understanding  that offtake  shunts  are proposed  for the  Yukon                                                               
River,  Fairbanks,   perhaps  Delta  Junction  and   two  in  the                                                               
Glennallen area.   He asked  about tariffs for those  and whether                                                               
such tariffs are set by FERC.                                                                                                   
                                                                                                                                
MR. LOEFFLER  responded that FERC's open-season  orders say there                                                               
will be  a separate tariff for  service in Alaska, based  only on                                                               
the cost  of delivering that  service.  It  is mileage-sensitive.                                                               
Unlike  for TAPS,  FERC  sets  the rates  on  the  main line  for                                                               
offtake in  Alaska to  the point  where it  joins a  "lateral" to                                                               
Cook Inlet.  Thus the main  line is all federal jurisdiction.  If                                                               
done  in  the open  season,  it  won't be  paid  all  the way  to                                                               
Chicago, but will be paid to Delta, for example.                                                                                
                                                                                                                                
SENATOR COWDERY  asked what effect  there would be on  tariffs or                                                               
the  cost of  gas to  Alaskans if  the governor's  proposed 20/20                                                               
system [20  percent tax on  oil, with  a 20 percent  credit] were                                                               
changed to a gross-based system.                                                                                                
                                                                                                                                
MR. LOEFFLER deferred to the production tax (PPT) team.                                                                         
                                                                                                                                
MR.  GRIFFIN surmised  once the  infrastructure is  together, the                                                               
price  will  tie  to  the  North  American  market  prices  minus                                                               
netbacks and so  forth, and thus the PPT will  have little effect                                                               
on Alaskan  gas prices off  the main line.   In this  scenario he                                                               
predicted there'd  be a pricing  mechanism that nets back  to the                                                               
North Slope  and then adds  the actual tariff  - the cost  to get                                                               
the gas to  Fairbanks, Anchorage or wherever it is  going.  "So I                                                               
would think the answer would be none," he concluded.                                                                            
                                                                                                                                
SENATOR ELTON asked how far upstream MMS takes its RIK gas.                                                                     
                                                                                                                                
MR.  GRIFFIN  replied  in  most  cases MMS  appears  to  take  it                                                               
upstream and  sell it  there.   He agreed it  isn't clear  in the                                                               
document he'd provided.                                                                                                         
                                                                                                                                
MR. VAN TUYL  gave his understanding that the  federal lease form                                                               
is  substantially similar  to  the State  of  Alaska form,  which                                                               
would imply the point of taking.                                                                                                
                                                                                                                                
SENATOR BEN  STEVENS noted page  3 says 19 purchasers  bought gas                                                               
in 2005,  with sales supported  by 43  transportation, processing                                                               
and  miscellaneous service  contracts.   He interpreted  it as  a                                                               
combination of all points.                                                                                                      
                                                                                                                                
MS.  KING  conveyed her  understanding  that  until recently  the                                                               
federal  government  didn't  authorize   MMS  to  take  long-term                                                               
shipping commitments.   Thus she surmised MMS  wouldn't have been                                                               
the full  transporter on  the pipeline  and would  have delivered                                                               
the  gas upstream  of  the  pipeline system.    With the  Rockies                                                               
Express line,  the new  pipeline from  Wyoming to  Ohio, however,                                                               
MMS just  took out a FT  commitment for more than  ten years; she                                                               
didn't know where the delivery on that pipeline would be.                                                                       
                                                                                                                                
The committee took an at-ease from 10:34:36 AM to 10:46:31 AM.                                                              
                                                                                                                                
Harold Heinze, CEO, Alaska Natural Gas Development Authority                                                                    
HAROLD  HEINZE,  Chief  Executive  Officer,  Alaska  Natural  Gas                                                               
Development Authority  (ANGDA), Department  of Revenue,  gave his                                                               
background as  a petroleum engineering graduate,  in Alaska since                                                               
1969, who participated  in developing the Prudhoe  Bay field; was                                                               
chief of  staff in 1975-1977  for ARCO's negotiating team  in the                                                               
Prudhoe Bay Unit operating agreement;  was an ARCO executive; and                                                               
was the DNR commissioner.                                                                                                       
                                                                                                                                
He explained that  ANGDA, a public corporation of  the state, has                                                               
a  mission to  do anything  it can  to bring  North Slope  gas to                                                               
market  and to  ensure  benefits  to Alaskans.    Thus ANGDA  has                                                               
looked at  issues of delivering  gas to a  spur line to  the Cook                                                               
Inlet area,  while not insensitive  to Fairbanks.   His knowledge                                                               
of the  contract began  May 10, before which  he was  outside the                                                               
confidentiality fence.   Since the state may live with  it a long                                                               
time,  Mr.  Heinze  suggested   thinking  about  possible  future                                                               
problems when reading the contract.                                                                                             
                                                                                                                                
MR.  HEINZE recalled  testimony that  perhaps four  items are  in                                                               
play for in-state use; the contract  is just one.  Not having the                                                               
limited liability  company (LLC)  agreement creates  a difficulty                                                               
because it will discuss longer-term  management and so on.  While                                                               
there are  past state policies,  a new direction may  be desired.                                                               
He acknowledged  the aforementioned will be  addressed.  Although                                                               
Mr. Heinze said he'd like less  concern about industrial users in                                                               
Alaska, they  help pay the bills  and are important.   And though                                                               
ANGDA has participated  in the FERC process, it  has interacted a                                                               
lot with RCA, an important part of the process as well.                                                                         
                                                                                                                                
He emphasized making  in-state use of gas a reality.   Mr. Heinze                                                               
assured listeners that whatever he  describes in the contract, he                                                               
believes  it is  fixable.    Without the  contract  and the  main                                                               
pipeline, a  lot of other  things cannot  happen.  Thus  he would                                                               
talk about how to make it work.                                                                                                 
                                                                                                                                
10:51:52 AM                                                                                                                   
MR. HEINZE  noted this  is more complicated  than what  exists in                                                               
the  contract.   For  example, the  commitment  of consumers  and                                                               
utilities is significant, perhaps  $40,000 per household.  Boards                                                               
of  directors will  make "bet  your company"  types of  decisions                                                               
with  less-than-perfect information,  in  short  timeframes.   He                                                               
suggested  that carrying  forward  with only  the contract  makes                                                               
this process difficult  if not impossible.  The state  can play a                                                               
major role  in solving this, as  can the contract.   For example,                                                               
the contract should  recite all items in FERC's  rulings that are                                                               
important to  the state.   In  portions dealing  with regulation,                                                               
RCA needs  to be  involved, placed  up front;  it is  an integral                                                               
part  of  the  process,  and  the pledge  of  the  utilities  and                                                               
customers cannot occur without RCA approval.                                                                                    
                                                                                                                                
10:55:19 AM                                                                                                                   
MR. HEINZE expressed concern about  how "state" is defined in the                                                               
definitions  section,  since there  are  items  he wouldn't  want                                                               
ANGDA to  be bound  by.   He asked  whether the  Alaska Permanent                                                               
Fund  Corporation  or  the Department  of  Law's  public  utility                                                               
advocacy section would  similarly want to be  bound, for example.                                                               
Assuming  no  intention  by  the  parties  for  the  contract  to                                                               
discourage   the   in-state   process,  he   nevertheless   urged                                                               
eliminating unintended consequences to the extent possible.                                                                     
                                                                                                                                
He  highlighted disagreement  about  how quickly  an open  season                                                               
might  happen.    Mr.  Heinze  pointed  to  the  sponsor  group's                                                               
application and the state's fiscal  interest finding (FIF), which                                                               
have an open-season  process starting six months after  a deal is                                                               
struck.   However, a  number of  things in  the contract  must be                                                               
done  before an  open  season  is begun;  these  have very  short                                                               
timeframes.   Mr.  Heinze  suggested further  efforts  by all  to                                                               
determine what is needed to make this work.                                                                                     
                                                                                                                                
He mentioned threshold issues, reporting  ANGDA has done its best                                                               
to  get utilities  involved and  interested.   If in-state  users                                                               
don't  come  forward  aggressively with  commitments  during  the                                                               
open-season  process, they  may lose  current advantages  through                                                               
FERC rules  and so  forth.   This also  would make  the situation                                                               
difficult  for the  state  as a  manager of  both  its sales  and                                                               
capacity  in the  pipeline.   Someone  who waits  to enter  won't                                                               
necessarily receive the  same treatment as if  there were initial                                                               
participation, Mr. Heinze cautioned.                                                                                            
                                                                                                                                
MR. HEINZE  noted of the 200 Bcf  a day used in  Alaska now, over                                                               
half  is by  industrial  customers.   One  is ConocoPhillips  and                                                               
Marathon's  Kenai LNG  plant; nothing  on  record indicates  what                                                               
they  want  to do  with  that,  although  it's half  the  volume.                                                               
Agrium, a major player, has a  project under study but may not be                                                               
interested.  That leaves the "power and heat people".                                                                           
                                                                                                                                
He referred to testimony that ML&P  may not be interested and has                                                               
gas.   Mr. Heinze said he'd  like to  talk to ML&P's  board about                                                               
fiduciary  responsibility, since  he'll be  upset if  that supply                                                               
runs out  in 2018  and his  lights go  out.   Also, he  asked who                                                               
would speak  up in Fairbanks or  on the Yukon River,  where ANGDA                                                               
believes  extraction  of  propane   is  extremely  important  and                                                               
practical - although  he wasn't sure how it would  work under the                                                               
contract.  He asked:  Will the state provide that voice somehow?                                                                
                                                                                                                                
11:00:42 AM                                                                                                                   
MR. HEINZE suggested  state and U.S. policy makers  need to think                                                               
about long-run  concerns.   He mentioned  tax agreements  and the                                                               
contract,  which speaks  to incentives  and  support for  certain                                                               
portions of  the project, for instance,  on the North Slope.   He                                                               
recommended they  look at extending  such support  and incentives                                                               
to the  distribution system  within Alaska  as a  fairness issue.                                                               
Those will have  a bigger impact on delivery  costs than anything                                                               
else, Mr. Heinze predicted.                                                                                                     
                                                                                                                                
He cautioned that  ANGDA considers studies of  in-state needs and                                                               
NGL processing highly important,  and has participated and funded                                                               
them.   Mr. Heinze  expressed concern that  the contract  has the                                                               
state giving up  a major portion of its say  on this, in contrast                                                               
to the  current situation.   Referring to discussion  of possibly                                                               
extracting  all NGLs  from  the  state's 20  percent  of the  gas                                                               
stream, Mr. Heinze  gave his "cold read" of the  contract that it                                                               
might be difficult to  do - although it is a  great idea and that                                                               
flexibility is  needed.  He  emphasized retaining the  ability to                                                               
actually make that happen.                                                                                                      
                                                                                                                                
MR. HEINZE closed by recommending  looking at some bigger aspects                                                               
of the contract  - recognizing there are  implementation issues -                                                               
and giving it a chance to  be straightened out.  He suggested the                                                               
legislature doesn't  need to make  a decision on this  right now,                                                               
but it  is something  to acknowledge  while interacting  with the                                                               
administration on bigger  issues.  Mr. Heinze added  he would try                                                               
to work in a positive way.                                                                                                      
                                                                                                                                
11:03:52 AM                                                                                                                   
CHAIR SEEKINS asked about the $40,000-per-household commitment.                                                                 
                                                                                                                                
MR. HEINZE  replied if  Chugach Electric  wants North  Slope gas,                                                               
for instance, it would pay a  price at the wellhead; would pay to                                                               
transport it  through the  big pipe to  somewhere in  Alaska; and                                                               
then would  pay to  transport it via  smaller pipe  to Anchorage.                                                               
The total, based  on numbers in the FIF, would  be $5.50 per Mcf,                                                               
which Chugach  Electric would execute  a take-or-pay  or ship-or-                                                               
pay contract; he  mentioned 75 percent of the  gas needed, noting                                                               
it would  be for  15 years,  a term chosen  because it  seemed to                                                               
strike the right balance.                                                                                                       
                                                                                                                                
He predicted total commitments for  all utilities in Alaska would                                                               
exceed  $6 billion.   Many  companies  don't need  75 percent  of                                                               
their  volumes on  day one.   There  are issues  in crossing  the                                                               
threshold.    If  volumes  aren't  up to  a  certain  point,  the                                                               
Fairbanks  hookup might  not happen  or  the spur  line or  Yukon                                                               
River facility  might not get built.   When the math  is done for                                                               
both  ENSTAR,  the  gas-heating  supplier,  and  for  the  area's                                                               
electric utilities, it totals $40,000 per  meter.  If only one of                                                               
those is  used, it is  $20,000 to $25,000.   Mr. Heinze indicated                                                               
ANGDA is developing a related table for all the companies.                                                                      
                                                                                                                                
11:06:43 AM                                                                                                                   
MR.  HEINZE, in  response to  Representative Rokeberg,  clarified                                                               
that  the 200  Bcf a  day  is for  all Alaska  now; projected  is                                                               
900 million cubic feet a day times  365 days, more than 300 Bcf a                                                               
year.    He estimated  one-quarter  of  the state's  share  would                                                               
satisfy  in-state  utility-type  companies,  but  not  industrial                                                               
users.   While those  are big enough  companies to  probably take                                                               
care of  themselves, individual utilities aren't  necessarily big                                                               
enough to make the deal work.                                                                                                   
                                                                                                                                
REPRESENTATIVE  ROKEBERG  mentioned  alternative  energy  sources                                                               
such  as wind  generation in  the Cook  Inlet region.   He  asked                                                               
about the need  to reach a critical mass of  consumption in order                                                               
to put together a project such as this.                                                                                         
                                                                                                                                
MR.  HEINZE affirmed  that,  but said  more  fundamental is  that                                                               
people need  to make decisions  about alternatives.   There isn't                                                               
always control of  timing.  For example, people  may install wind                                                               
power over  a short period of  time, which won't solve  the whole                                                               
problem but  likely is  a reasonable  step.   Furthermore, higher                                                               
prices are forcing conservation to  happen already and will cause                                                               
explorers in this area to be more active.                                                                                       
                                                                                                                                
He  highlighted  a  cautionary  book  title:    "Hope  is  Not  a                                                               
Strategy."  Mr. Heinze noted in  the intermediate term, coal will                                                               
be a consideration in this area  that some may opt for.  However,                                                               
ENSTAR needs gas  in its system and Chugach has  a huge gas-fired                                                               
power plant  that likely won't go  away; thus gas will  be needed                                                               
in the  area.   He expressed great  concern that  companies won't                                                               
make the  aggressive commitment  required to  build a  spur line.                                                               
If the threshold isn't crossed, the opportunity may be lost.                                                                    
                                                                                                                                
11:11:05 AM                                                                                                                   
MR. HEINZE, in further reply,  said the Yukon River crossing will                                                               
be right on  the pipeline and will depend  on wholesalers, others                                                               
who move propane up and down  the river system.  He predicted the                                                               
state won't have much of a  role there, other than trying to help                                                               
it come into  being, since it might be a  chancy investment for a                                                               
company.   If  the state  wants  it to  happen, it  will need  to                                                               
provide a line of credit or something else will need to happen.                                                                 
                                                                                                                                
He  also  noted  Fairbanks  is   well  located  along  the  line.                                                               
However,  Golden   Valley  would  have  to   make  a  substantial                                                               
investment  to bring  gas to  the new  power-generation facility,                                                               
for  example.    Mr.  Heinze  surmised  that  would  be  a  solid                                                               
investment, better  than using oil associated  with the refinery.                                                               
It  would be  a  major commitment,  though.   As  for gas  piping                                                               
within Fairbanks, how  it is done will be up  to people.  Whether                                                               
in  Fairbanks or  Delta  Junction, it's  hundreds  of miles  from                                                               
there to Cook Inlet, with a price tag estimated at $.75 billion.                                                                
                                                                                                                                
11:13:49 AM                                                                                                                   
CHAIR SEEKINS  remarked that there'll  be no spur line  without a                                                               
main line.                                                                                                                      
                                                                                                                                
MR.  HEINZE said  that's  why  he supports  moving  forward.   He                                                               
expressed appreciation  for the time the  participants are taking                                                               
to understand the  difficulties of making this work,  and he said                                                               
the state must  be a player.  In further  reply to Representative                                                               
Rokeberg, he  said ANGDA has  looked at the "rule  of aggregate."                                                               
He mentioned pooling, for instance,  and whether a line of credit                                                               
could be provided  to back up financial  guarantees if necessary.                                                               
Many roles could  be played.  Mr. Heinze also  indicated a right-                                                               
of-way is the  key to the physical step of  building a spur line,                                                               
but  other things  can be  done, financially  or with  respect to                                                               
FERC in Washington, D.C. and so forth.                                                                                          
                                                                                                                                
11:15:56 AM                                                                                                                   
SENATOR STEDMAN  surmised whenever the gas  industry penetrates a                                                               
new  area the  infrastructure must  be  built from  scratch.   He                                                               
asked whether there is a model to replicate or modify somewhat.                                                                 
                                                                                                                                
MR. HEINZE  answered that part of  the difficulty is the  size of                                                               
the market in  Alaska.  A lot  of stranded gas was  found in Cook                                                               
Inlet when  looking for  oil, providing  a generation's  worth of                                                               
plentiful and cheap  gas.  Unfortunately, it is running  out.  If                                                               
there were  industrialization, fed by gas  through this pipeline,                                                               
it could be  fairly attractive.  But there  isn't that commitment                                                               
or  announced intentions.   The  market is  small for  people who                                                               
just want home use, compared with the size of the undertaking.                                                                  
                                                                                                                                
SENATOR STEDMAN  asked how much  flexibility there is  within the                                                               
industry for modifying the length of FT commitments.                                                                            
                                                                                                                                
MR. HEINZE  replied that actual  day-to-day workings  differ from                                                               
the  upfront commitment  during  the open-season  process.   That                                                               
process is like a sealed-bid auction;  the bid can be rejected if                                                               
it is believed  it isn't backed up.  In  addition, whatever comes                                                               
out of  the open season  becomes a  major factor in  the pipeline                                                               
design.  He noted the FERC  order says if nobody comes forward in                                                               
Alaska,  it is  under no  obligation  to design  the pipeline  to                                                               
permit that  to happen.   "In other words, if  we don't bid  - we                                                               
come up  with a zero bid  - we're done," Mr.  Heinze said, noting                                                               
this doesn't preclude  trying to negotiate a deal  in the future.                                                               
There wouldn't  be a  deal under  the favorable  terms associated                                                               
with the initial open season, however.                                                                                          
                                                                                                                                
11:20:57 AM                                                                                                                   
MR.  LOEFFLER   referred  to  his  own   testimony  in  Fairbanks                                                               
yesterday.  He  concurred with Mr. Heinze that  it's critical for                                                               
in-state users to prepare to make  commitments by the time of the                                                               
open  season.    While  there are  some  modifications  possible,                                                               
someone   would  be   in  a   much   worse  position   otherwise.                                                               
Mr. Loeffler   predicted  timing   would  be   much  later   than                                                               
Mr. Heinze had indicated, though.                                                                                               
                                                                                                                                
He highlighted October 2004 federal  legislation, saying there is                                                               
no question RCA  would regulate the spur line;  it isn't affected                                                               
by the  proposed contract.   However,  the spur  line conceivably                                                               
could be financed like the main  line, meaning there'd be an open                                                               
season for it.   An in-state user would have  to bid for capacity                                                               
on  the  main  line  to  the   offtake  point  and  then  have  a                                                               
coordinated, smaller  bid for  the spur  line.   As for  how long                                                               
those commitments  would be,  Mr. Loeffler  said it  wasn't known                                                               
yet.     Nor  did  he   know  whether  RCA  had   established  or                                                               
contemplated  an  open-season  process   for  an  in-state  line.                                                               
Regardless, RCA would have to accomplish  its part of the job and                                                               
be lined  up with FERC;  otherwise, there could be  capacity that                                                               
connects to nowhere within the state.                                                                                           
                                                                                                                                
11:23:28 AM                                                                                                                   
SENATOR  STEDMAN clarified  his concern.   The  obstacles are  so                                                               
large, Alaskans could be without gas  while it goes out of state.                                                               
He asked  how to work together  with the state, the  industry and                                                               
small utilities to  give them the opportunity.  He'd  like to see                                                               
a gas-based petrochemical industry in Alaska, for instance.                                                                     
                                                                                                                                
MR. CLARK  drew a  distinction between what  is addressed  in the                                                               
contract  and what  isn't.   The contract  minimizes the  state's                                                               
risk from being an owner.   Citing Article 10, he noted the state                                                               
will ride  the producers' coattails  on such things  as capacity.                                                               
The state is partners with them  in a business, and is minimizing                                                               
and mitigating  its risk because  the producers won't want  to do                                                               
something stupid.   Thus the state's 20 percent  is safer because                                                               
the capacity  article gets the gas  to market and then  the state                                                               
can hire  aggregators who  are experienced in  this area  to sell                                                               
the gas on its behalf.  In each  case, the state is riding on the                                                               
producers' coattails.                                                                                                           
                                                                                                                                
He contrasted that  with issues outside the contract.   The state                                                               
could  enter into  business  by  itself to  get  gas to  in-state                                                               
utilities; that policy discussion needs  to occur.  Pricing needs                                                               
to be figured out, as well  as other issues raised by Mr. Heinze.                                                               
The  contract leaves  flexibility to  the state  to address  such                                                               
policy issues  as it  sees fit, Mr.  Clark noted;  that decision-                                                               
making  ability is  part of  the virtue  of taking  gas in  kind.                                                               
Because  of  the  importance  of  bringing  gas  to  Southcentral                                                               
Alaska, the state  might want to provide  financing, for example,                                                               
so other distributors don't have to take FT commitment risks.                                                                   
                                                                                                                                
MR. CLARK  clarified that the  intention is to have  these policy                                                               
decisions  enhanced,  not  hindered,   by  the  contract.    Such                                                               
decisions need  to be made  by the legislature and  the executive                                                               
branch, working together, as a whole  set of other policies.  But                                                               
the contract  isn't intended to  be the mechanism by  which these                                                               
policies are addressed.                                                                                                         
                                                                                                                                
He agreed  with Mr. Heinze and  Mr. Loeffler that the  state must                                                               
figure out the order in which  to make these decisions, trying to                                                               
get it  done prior  to the  open season.   Mr. Clark  also agreed                                                               
with Mr. Loeffler  on timing, predicting the open  season will be                                                               
perhaps two  or two-and-a-half  years down the  road.   While the                                                               
state is retaining  the ability to take on  those decisions, it's                                                               
a different deal  if the state wants to take  the risk of running                                                               
a business that doesn't ride on the coattails of the producers.                                                                 
                                                                                                                                
11:28:42 AM                                                                                                                   
MR.  VAN TUYL  followed up  on  timing of  the open  season.   He                                                               
indicated  BP's application  and Project  Summary both  contain a                                                               
Gantt  chart   that  simplifies   the  open-season   process;  he                                                               
mentioned a  starting time about  six months after the  ink dries                                                               
on the  contract, continuing about  two years.  The  actual open-                                                               
season event described  by Mr. Heinze is at the tail  end of that                                                               
process.  He noted there is  much planning and development of the                                                               
actual tariff and  cost of service, for example,  before the open                                                               
season.  People don't have to  make a decision within six months,                                                               
he emphasized.  It could be two years or more.                                                                                  
                                                                                                                                
MR. HEINZE reported that ANGDA has  worked with RCA and sent in a                                                               
series of  statutory changes  intended to  make the  process work                                                               
better.    However, his  experience  is  that such  consideration                                                               
takes up to  a year.  While  it might help to open  a docket with                                                               
RCA well in advance, the problem  is this:  On the in-state part,                                                               
it has  to be  brought to folks  without knowing  whether they'll                                                               
pay  $0.75 or  $2.50, or  if  it will  cost $1.00  or $3.00  from                                                               
Glennallen  to  Anchorage.    Boards  have  to  make  responsible                                                               
fiduciary decisions, but  there is a large  range of uncertainty;                                                               
this will present  a doubly difficult problem for  RCA to approve                                                               
these  charges as  a direct  pass-through to  the customers  - an                                                               
essential step for any cooperative or board.                                                                                    
                                                                                                                                
11:31:32 AM                                                                                                                   
REPRESENTATIVE  SAMUELS  asked:    If  there  is  no  main  line,                                                               
assuming Cook  Inlet's decline continues,  have you  modeled what                                                               
it  would cost  Southcentral  consumers to  import LNG,  provided                                                               
ConocoPhillips could turn its Nikiski facility around?                                                                          
                                                                                                                                
MR.  HEINZE  indicated  ANGDA had  published  a  study  exploring                                                               
options for the Kenai LNG plant in  the long run.  It shows there                                                               
probably  are  good  economics  in terms  of  turning  the  plant                                                               
around.   The  charge associated  with a  regasification facility                                                               
would likely  be in the  normal range  for that type  of service,                                                               
perhaps $0.75  plus or minus;  this would  be added to  the price                                                               
for bringing  in gas from  Indonesia, for example.   Though there                                                               
would be some challenge in moving  the gas to Anchorage under the                                                               
existing system, it likely could  be done with some investment in                                                               
the long  term.  He emphasized  that the problem is  being at the                                                               
mercy  of the  LNG source  and a  transportation system  "that we                                                               
ought to feel uncomfortable about."                                                                                             
                                                                                                                                
CHAIR  SEEKINS acknowledged  there may  be conflicting  interests                                                               
among communities,  but cautioned against arguing  about these so                                                               
hard that the main objective -  building the project in the first                                                               
place and providing gas to those lines - is forgotten.                                                                          
                                                                                                                                
11:37:41 AM                                                                                                                   
MR. MARKS pointed  out that the FT commitment  faced by utilities                                                               
on a  gas-purchase contract is  profoundly different from  that a                                                               
producer  faces in  building a  pipeline.   For  the latter,  all                                                               
costs are laid  out up front.  On a  purchase agreement, however,                                                               
costs are  streamed out over a  number of years.   The $5 billion                                                               
reflects the  purchase price  for gas  as if  bought on  day one.                                                               
Timing  is   everything  financially.    If   those  gas-purchase                                                               
agreements were  put on a  net-present-value basis, as  a credit-                                                               
rating agency would do, it would be much less than that.                                                                        
                                                                                                                                
He  noted  as  soon  as  a utility  enters  into  a  gas-purchase                                                               
agreement, it has a liability plus  a tremendous asset.  The main                                                               
risk is from buying  too little or too much gas.   In Cook Inlet,                                                               
that risk will  be alleviated to the degree there  is an increase                                                               
in storage facilities.   Mr. Marks also noted  Lower 48 utilities                                                               
have  such challenges  all  the  time, and  the  market seems  to                                                               
figure it  out just  fine.   If this  is a  big concern  here, he                                                               
recommended inviting the utilities for a discussion.                                                                            
                                                                                                                                
MR. CLARK  opined that the place  to begin this discussion  is in                                                               
the FIF.  It isn't a  contract issue.  The administration doesn't                                                               
believe it is  appropriate to pledge to have  this contract enter                                                               
into  new  business.    Some   decisions  must  be  left  to  the                                                               
legislature.    He  said  the   contract  doesn't  preclude  such                                                               
decisions, but enhances them and moves them forward.                                                                            
                                                                                                                                
11:41:15 AM                                                                                                                   
MR. HEINZE  reported hearing from  people in relation to  the gas                                                               
line  that they  want jobs,  a  better economy  and gas,  whereas                                                               
management of  the resource appropriately focuses  on revenues to                                                               
the State  of Alaska.  He  emphasized he wants his  discussion to                                                               
be viewed  as reassurance that  some people are  honestly worried                                                               
about this  but believe it can  be made to work.   He highlighted                                                               
getting the contract into a public-acceptance mode.                                                                             
                                                                                                                                
MR. CLARK  emphasized that the project  - the gas line  overall -                                                               
has a number of steps  including this fiscal contract, which sets                                                               
fiscal terms between  the State of Alaska and the  producers.  He                                                               
indicated the  administration's findings  have been in  line with                                                               
ANGDA's,  that  in-state use  is  a  key  element.   However,  it                                                               
involves  legislative decisions  that the  administration doesn't                                                               
have authority to make in this contract.                                                                                        
                                                                                                                                
SENATOR BEN STEVENS posed a  positive hypothetical situation of a                                                               
gas-processing facility  being placed at  the Yukon River  to put                                                               
condensed  gas  into the  pipeline  from  the Chulitna  Basin  or                                                               
Nenana Basin.   Fairbanks  would have the  cheapest gas  in North                                                               
America.      He   emphasized  the   tremendous   potential   for                                                               
hydrocarbons  in Alaska  that won't  be  marketable or  monetized                                                               
without  a  market  destination   with  capacity  to  absorb  the                                                               
supplies.                                                                                                                       
                                                                                                                                
The committee took an at-ease from  11:45:24 AM to 1:21:00 PM and                                                             
another brief at-ease until 1:23:41 PM.                                                                                       
                                                                                                                                
^Roger Marks - Discussion of proposed reserves tax                                                                              
MR. MARKS discussed  the proposed gas reserves  tax (GRT), noting                                                               
his  analysis encompasses  several  contexts.   He provided  some                                                               
history showing  why North Slope  gas hasn't  been commercialized                                                               
and thus  why the gas line  hasn't been built, and  whether it is                                                               
appropriate for  the GRT to be  used to punish the  producers for                                                               
not having built it yet.                                                                                                        
                                                                                                                                
He began  by saying Prudhoe  Bay was  discovered in 1967,  when a                                                               
large gas  cap was found  on top of the  oil - about  26 trillion                                                               
Tcf.   It  started up  in 1977.   Ever  since, the  producers and                                                               
Alaska's citizens  have been looking  at a way to   commercialize                                                               
it,  either  in Asia  or  the  Lower 48.   In  particular,  Yukon                                                               
Pacific Corporation  (YPC) had been  interested in the  Asian LNG                                                               
market, using a  pipeline to Valdez, and was active  in the 1980s                                                               
and until a few years ago.                                                                                                      
                                                                                                                                
He recalled that Asia initially  made sense as a possible market,                                                               
since prices were  higher than in North America.   It didn't work                                                               
out  for  two  reasons.    First,  Asia's  gas  market  works  on                                                               
contracts, rather than an open  market; generally, the low bidder                                                               
wins.   Alaska,  which  required an  800-mile pipeline,  couldn't                                                               
compete with  closer jurisdictions or  those with gas  sitting at                                                               
tidewater.   Second, large economies  of scale are needed  for an                                                               
Alaska pipeline  to work -  large enough to  ship 4 Bcf a  day in                                                               
order to lower  the per-unit price.  However, gas  demand in Asia                                                               
was growing  slowly, averaging about 0.4  Bcf a day from  1977 to                                                               
present.    Even if  Alaska  had  captured  100 percent  of  that                                                               
market,  it would  have taken  ten  years to  fill the  pipeline.                                                               
Mr. Marks offered his belief that those problems still exist.                                                                   
                                                                                                                                
MR.  MARKS explained  that until  year 2000,  North American  gas                                                               
prices were  too low - between  $1.50 and $2.50 -  to justify the                                                               
cost of  a pipeline.  Noting  a handout contains a  graph showing                                                               
North American  gas prices, Mr.  Marks said with a  $2.50 tariff,                                                               
money would  be lost in shipping  gas to North America.   Thus it                                                               
didn't  make  sense  to  consider  it as  viable.    Since  then,                                                               
however, prices have shot up due to market conditions.                                                                          
                                                                                                                                
He  reported in  1998 the  sponsors formed  an LNG  sponsor group                                                               
consisting  of  ARCO;  Phillips; Marubeni;  Foothills;  and  YPC,                                                               
which  withdrew because  the group  wanted  to study  Kenai as  a                                                               
terminus as well as Valdez, when  YPC only had permits to Valdez.                                                               
After YPC left, BP joined.   In 1998, the group spent $12 million                                                               
studying  the Asian  market.   However, the  basic landscape  was                                                               
unchanged.  In 1998 the Stranded  Gas Act was structured for LNG.                                                               
Modified a few  years ago to include a pipeline  project, it sets                                                               
out a process to try to commercialize the gas.                                                                                  
                                                                                                                                
MR. MARKS noted the gas reserves  tax has been characterized as a                                                               
way  to take  a 2x4  to  the producers  to  get them  to build  a                                                               
pipeline, with  the assumption they're not  interested.  However,                                                               
the producers  have done quite  a bit  since 2000.   In 2000-2001                                                               
they put  together a  $125 million  engineering study.   Primary,                                                               
however, has been setting  up government frameworks, establishing                                                               
the rules so those are known  when they spend $25 billion.  Since                                                               
2000  the producers  have obtained  federal enabling  legislation                                                               
from Congress,  which set out  a regulatory regime;  secured FERC                                                               
regulations;   received  significant   tax  breaks;   gotten  the                                                               
Stranded  Gas  Act reauthorized;  put  in  the Stranded  Gas  Act                                                               
application; and  negotiated the Stranded  Gas Act over  the last                                                               
two years.  Thus they've done quite a bit.                                                                                      
                                                                                                                                
1:30:56 PM                                                                                                                    
MR. MARKS explained that meanwhile,  since 1977, the gas has been                                                               
hard at work  at Prudhoe Bay.  The Alaska  Oil & Gas Conservation                                                               
Commission  (AOGCC)  estimates use  of  gas  in Prudhoe  Bay  has                                                               
resulted in recovering  another 3-5 billion barrels  of oil; thus                                                               
25-50  percent of  oil there  is directly  attributable to  using                                                               
gas.  If 4  Bcf of gas a day had been  vacated beginning in 1977,                                                               
much  less oil  would have  been produced.   He  opined that  the                                                               
project didn't begin to make sense  until 2000.  Thus a GRT would                                                               
punish the  producers for  a "crime" they  didn't commit  or that                                                               
doesn't even exist.                                                                                                             
                                                                                                                                
He discussed  how the GRT may  affect the project and  why it was                                                               
addressed as it  was in the contract.  Starting  January 1, 2007,                                                               
any lease or unit with more than  1 Tcf of gas - in a state unit,                                                               
on a lease in existence for at  least ten years - would pay about                                                               
$0.03 per Mcf.   Leases  that qualify are  Prudhoe Bay  and Point                                                               
Thomson, and  Kuparuk and  Lisburne also have  about 1  Tcf each.                                                               
It is  predicted to cost  the producers  $1 billion a year.   The                                                               
tax  would stay  in place  until  gas starts  flowing into  North                                                               
America, perhaps  2016, after which  there would be a  credit for                                                               
past  reserves-tax   payments,  capped  at  50   percent  of  the                                                               
production  tax; that  goes until  2030, at  which time  about 45                                                               
percent of the reserves tax would have been recovered.                                                                          
                                                                                                                                
He  pointed out  if  the project  were  delayed, that  percentage                                                               
would be much  less.  The GRT would be  front-end loaded, whereas                                                               
recovery of the credit would be  back-end loaded.  Mr. Marks said                                                               
even if  the producers  guaranteed 100  percent they'd  build the                                                               
pipeline  -  which  it  doesn't  make  sense  to  do  because  of                                                               
contingencies  relating to  prices or  costs -  the GRT  would be                                                               
unavoidable.  They'd even pay it while laying pipe.                                                                             
                                                                                                                                
1:35:19 PM                                                                                                                    
MR. MARKS  focused on how the  gas reserves tax would  affect the                                                               
producers.  If oil  pays for it and prices go back  down to $15 a                                                               
barrel, they'd pay $1 billion in  addition to the PPT tax that he                                                               
expressed  hope would  pass  soon.   What if  gas  pays the  tax?                                                               
Taxes would  be paid up front  and, at most, 45  percent would be                                                               
recovered later.   Financially, the GRT would reduce  the rate of                                                               
return and  the net present  value of  the project by  about one-                                                               
third.    Financially,  it   equals  a  $2-per-million-Btu  price                                                               
reduction or a $14-billion cost increase for the project.                                                                       
                                                                                                                                
He  turned  to how  this  would  affect the  investment  climate.                                                               
Leases  in  effect less  than  ten  years  wouldn't pay  the  gas                                                               
reserves tax.   But until gas actually starts  flowing, when that                                                               
would happen isn't  known.  There is a risk  that an explorer for                                                               
gas might find it  and then be subject to the  GRT if the project                                                               
were delayed.   Accordingly, Mr. Marks put forth  the belief that                                                               
exploration for gas would cease.   The project needs about 50 Tcf                                                               
to be  viable, and about  35 Tcf has  been discovered.   If there                                                               
cannot be exploration  for the additional 15 Tcf  before the open                                                               
season,  the  pipeline might  need  to  be scaled  back,  thereby                                                               
increasing the unit  costs.  Thus Mr. Marks  predicted there'd be                                                               
no exploration for gas until the pipeline started.                                                                              
                                                                                                                                
He  also asked  who'd look  for oil,  since gas  might be  found.                                                               
Mr. Marks predicted  a good chance  that exploration  would cease                                                               
entirely if  the GRT passed.   He also warned if  voters likewise                                                               
imposed a  reserves tax  on heavy oil,  investors could  react to                                                               
this; it would punish companies if  gas prices were very low, for                                                               
example.   It also would create  a disincentive for the  gas line                                                               
if the state  could just sit back and collect  $1 billion a year.                                                               
Furthermore, it  could force the  producers to rush  the project,                                                               
with the incumbent risks of quality and cost control.                                                                           
                                                                                                                                
MR.  MARKS referred  to  testimony  by Dr.  Pedro  van Meurs  and                                                               
Econ One  that no  other jurisdiction  has had  a structure  like                                                               
this   proposed  reserves   tax,  which   will  send   a  message                                                               
internationally and  hence could cut investment  drastically.  He                                                               
said  there  are  constitutional  questions  as  well,  which  he                                                               
wouldn't go into because he wasn't a constitutional attorney.                                                                   
                                                                                                                                
He  highlighted  the Stranded  Gas  Act,  reporting the  contract                                                               
immunizes the producers  from paying it because of  the effect on                                                               
the  project's forward  movement  as well  as  the necessity  for                                                               
fiscal  certainty  for this  project  -  the correct  balance  of                                                               
downside and upside  risk and potential.  If the  upside is taken                                                               
away with higher  taxes, the symmetry is thrown off  balance.  If                                                               
ballot  measures can  come in  and  raise taxes  after the  fact,                                                               
Mr. Marks said, there isn't fiscal  stability; that is why it was                                                               
treated as it was in the contract.                                                                                              
                                                                                                                                
1:40:30 PM                                                                                                                    
SENATOR COWDERY surmised  a GRT would result in a  long delay and                                                               
lawsuits.   He also asked  what the price  of gas would  be after                                                               
the pipeline  opens in  eight or  ten years  and it  brings large                                                               
amounts of gas to the Midwest market.                                                                                           
                                                                                                                                
MR. VAN TUYL responded that the  price is unknowable, even a year                                                               
from  now.   The  focus  is  on  managing risks  where  possible,                                                               
including capital costs.  However,  the biggest cost to investors                                                               
like  the producers  is  the government  take,  which requires  a                                                               
fiscal contract  to manage.   He recalled that was  recognized by                                                               
the  legislature   in  passing   the  Stranded  Gas   Act,  which                                                               
establishes a stable framework on  which those investments can be                                                               
made.                                                                                                                           
                                                                                                                                
He predicted  this Alaska  gas pipeline project  will come  as no                                                               
surprise;   folks  will   manage   their  gas   purchase-and-sale                                                               
contracts to anticipate this gas,  as when the last big pipeline,                                                               
the  Alliance pipeline,  came to  the upper  Midwest a  few years                                                               
ago.   He noted the North  American market is the  biggest in the                                                               
world and growing.                                                                                                              
                                                                                                                                
He turned  to the proposed  reserves tax.   Saying BP  is serious                                                               
about  going forward  with  an Alaska  gas  pipeline project,  he                                                               
highlighted BP's activities,  mentioned by Mr. Marks,  as well as                                                               
attempts  relating  to  LNG  in  the  1980s.    He  also  brought                                                               
attention to  comments by BP  chief executive office  John Browne                                                               
in the Wall  Street Journal in May.   Mr. Van Tuyl  agreed it was                                                             
good that BP  wasn't selling gas when the market  price was $2.00                                                               
or  $2.50 but  the cost  to move  it to  market was  greater than                                                               
that.  Only since about 2000 have those conditions changed.                                                                     
                                                                                                                                
MR.  VAN TUYL  opined that  a  GRT is  fundamentally bad  policy,                                                               
contrary to the spirit of  the Stranded Gas Act, which recognized                                                               
the  need  for  fiscal  stability  to  attract  investment.    It                                                               
circumvents the process to modify  lease contract; would penalize                                                               
investors even  when performing exactly  as the state  would want                                                               
them to, advancing  the project and spending  billions of dollars                                                               
to bring  this gas to  market; is unprecedented  worldwide; would                                                               
send a  real chill to  investors; would signal  an unpredictable,                                                               
unstable  regime  for investment;  and  may  result in  an  early                                                               
impairment  of Alaskan  assets.   Mr.  Van  Tuyl reported  having                                                               
figured it  would provide 40 percent  possible recoupment, fairly                                                               
close to  what Mr. Marks came  up with.  He  cautioned this could                                                               
cripple the entire industry.                                                                                                    
                                                                                                                                
1:48:36 PM                                                                                                                    
SENATOR  HOLLIS FRENCH,  Alaska  State  Legislature, asked  about                                                               
indemnification provisions  in the  contract with respect  to the                                                               
GRT.   He surmised the state  would be the guarantor  or payor if                                                               
such a reserves tax were instituted.                                                                                            
                                                                                                                                
^Dan Dickinson, CPA, Consultant to the Governor                                                                                 
DAN  DICKINSON,  CPA,  Consultant   to  the  Governor,  suggested                                                               
starting with the  definitions in the contract.   Noting "tax" is                                                               
defined in  the May  24 version  of the contract  on page  60, he                                                               
said  under (c)  it  is  established to  include  a  tax from  an                                                               
initiative, and  under (i) it  includes a reserves tax.   Article                                                               
11.2(c), page  214, talks about payment  obligations, saying each                                                               
participant accepts  all taxes  levied by the  state on  its oil-                                                               
and-gas-related business  activities in Alaska, except  for those                                                               
six  taxes identified  in Article  11.2(a).   It  further says  a                                                               
participant may  exercise its  exemptions under  Articles 11.2(a)                                                               
by withholding  payment to the  state, or  by paying the  tax and                                                               
obtaining reimbursement from the state under Article 22.                                                                        
                                                                                                                                
1:52:22 PM                                                                                                                    
MR.  CLARK asked  whether  Senator French  was  asking about  the                                                               
policy behind it, as well as the mechanism.                                                                                     
                                                                                                                                
SENATOR  FRENCH  answered  it  seems  the  contract  exempts  the                                                               
participants from a  GRT.  But if one is  imposed, it allows them                                                               
to either not pay  it or to ask the state to pay  it instead.  He                                                               
remembered presentations indicating the  GRT would take money out                                                               
of the industry's pocket and put it in the state's.                                                                             
                                                                                                                                
MR.  DICKINSON recalled  that Mr.  Marks'  discussion related  to                                                               
what happens  if there is a  reserves tax but no  contract.  This                                                               
would be a tax, but with an exemption under the contract.                                                                       
                                                                                                                                
SENATOR FRENCH asked whether the  contract is viewed as providing                                                               
an indemnification or nullification.                                                                                            
                                                                                                                                
MR. CLARK  replied the  administration sees  it as  an exemption.                                                               
He noted Mr. Marks had described  what will happen to the project                                                               
if the GRT  is in place.  The contract  protects the project from                                                               
that  result.   The reason  relates to  timing.   Once this  gets                                                               
unleashed, a long  period of litigation is  envisioned about what                                                               
a reserves  tax is  or isn't,  and the  project would  be harmed,                                                               
including the economics and the investment climate.                                                                             
                                                                                                                                
He specified  if the  contract is completed  and the  GRT passes,                                                               
the effect is  this:  If the producers don't  advance the project                                                               
diligently,  as  prudent  under the  circumstances,  and  if  the                                                               
project is  terminated, then  the GRT can  go into  effect, since                                                               
that  exemption  will  no  longer   apply.    The  administration                                                               
believes  this  project  is  so critical  to  Alaska's  future  -                                                               
because  a  gas line  would  extend  TAPS  another 20  years,  in                                                               
addition  to  the gas  provided  -  that  exempting it  from  the                                                               
devastating  effects  of the  GRT  is  appropriate state  policy.                                                               
Mr. Clark  surmised  the  producers  would  cite  the  exemption,                                                               
rather than pay the tax and get reimbursed.                                                                                     
                                                                                                                                
1:57:07 PM                                                                                                                    
CHAIR SEEKINS  expressed grave  concern about  the GRT,  that the                                                               
gas won't get  to market but the reserves will  be taxed forever.                                                               
He asked  what an additional  $6.5 billion  in costs would  do to                                                               
the economics of the project.                                                                                                   
                                                                                                                                
MR. MARKS  answered it would  reduce the  net present value  by a                                                               
third - a massive impact.                                                                                                       
                                                                                                                                
MR. CLARK  mentioned an analysis  that the state would  make more                                                               
with a reserves tax  than a gas line, $1 billion  a year with the                                                               
former and $400-500 million a year with the latter.                                                                             
                                                                                                                                
2:01:58 PM                                                                                                                    
MS. KING  noted many believe  a reserves  tax will help  make the                                                               
gas pipeline  happen.   She countered this  by saying  the fiscal                                                               
contract, Article  5, is the  mechanism by which all  the parties                                                               
have agreed to diligently advance  the project.  Also disagreeing                                                               
the gas  has been  warehoused, she  said gas  at Prudhoe  Bay has                                                               
been put to valuable use over  the years.  Prudhoe Bay produces a                                                               
lot of  gas right now,  as well as water.   It is  reinjected for                                                               
pressure-maintenance purposes, which  allows more oil production,                                                               
and  some is  converted  to NGLs  and  shipped south,  generating                                                               
revenue  for  the  state.    Prudhoe  Bay  owners  have  invested                                                               
billions  of dollars  in gas  handling over  the years  to enable                                                               
additional oil.  ConocoPhillips  believes the GRT is unnecessary,                                                               
is unfair and would likely lead to litigation.                                                                                  
                                                                                                                                
CHAIR  SEEKINS  opined  that many  legislators  could  support  a                                                               
reserves  tax that  stacked up  over time  if a  gas line  wasn't                                                               
built but that would be  deferred if reasonable progress was made                                                               
and  would  disappear once  gas  flowed.   This  particular  GRT,                                                               
however, as structured, would make  it almost impossible to build                                                               
a delivery system so the tax could then be discontinued.                                                                        
                                                                                                                                
2:06:28 PM                                                                                                                    
MR.   VAN  TYLE,   in  response   to  Representative   Rokeberg's                                                               
recollection  of  Dr.  Pedro van  Meurs'  testimony,  agreed  the                                                               
proposed GRT  could be tantamount  to nationalization,  a taking.                                                               
Mr.  Van Tuyl  cautioned that  it  not only  jeopardizes the  gas                                                               
pipeline  project, but  also sends  the message  that this  is an                                                               
unstable regime.   He predicted  "forever" would be a  very short                                                               
time.  The  industry wants to keep oil flowing  down the pipe, as                                                               
does the state; it is important  to stem the decline.  A reserves                                                               
tax creates  an environment  with so  much uncertainty  that even                                                               
the base investment, year in and year out, would become suspect.                                                                
                                                                                                                                
SENATOR  BEN  STEVENS  directed  Mr.  Marks to  page  13  of  the                                                               
document presented  this morning,  which speaks  about unintended                                                               
consequences of a  GRT, including the halting  of oil exploration                                                               
because an explorer who found gas would be subject to the tax.                                                                  
                                                                                                                                
MR. MARKS  replied he isn't  a geologist, but  believes explorers                                                               
for  hydrocarbons often  don't know  whether a  prospect contains                                                               
oil or  gas.   Someone drilling  for oil who  finds gas  might be                                                               
subject  to this  reserves tax.    He surmised  a prudent  person                                                               
wouldn't take that chance.                                                                                                      
                                                                                                                                
SENATOR BEN STEVENS  suggested asking those who  explore for oil,                                                               
noting  there'd  be  AOGCC  regulations  about  when  a  well  is                                                               
delineated, for instance.                                                                                                       
                                                                                                                                
2:10:17 PM                                                                                                                    
MS. KING  agreed sometime  explorers get a  good view  of whether                                                               
there is gas, but sometimes it  isn't known.  Clearly, there is a                                                               
risk.   Now if someone finds  gas while exploring for  oil, it is                                                               
effectively a  dry hole.   The  GRT would  create a  liability in                                                               
that  instance, putting  additional risk  on exploration.   While                                                               
noting she couldn't  comment with respect to the  AOGCC rules for                                                               
exploration, Ms. King  said Prudhoe Bay and  Point Thomson owners                                                               
are conversing  now with AOGCC  to start the process  for getting                                                               
approved gas-offtake  rates, in  preparation for a  potential gas                                                               
pipeline project.  That process needs to be worked through.                                                                     
                                                                                                                                
SENATOR BEN STEVENS  remarked this is the first time  he has seen                                                               
documentation that  a GRT would penalize  further exploration for                                                               
oil.    The  state  is  so dependent  on  oil  for  revenues  and                                                               
employment, it is important for people to understand.                                                                           
                                                                                                                                
MR. CLARK  agreed with a  previous characterization from  Dr. van                                                               
Meurs, that  a GRT would  be a self-inflicted  wound, considering                                                               
what it would do to oil production.                                                                                             
                                                                                                                                
MR.  GRIFFIN corroborated  Mr. Marks'  testimony, noting  his own                                                               
background includes  25 years in  Alaska's oil and  gas industry,                                                               
much  spent in  exploration  and exploration  analysis trying  to                                                               
find prospects  and bring them to  the drawing board.   He agreed                                                               
that with a GRT in place,  explorers would be much less likely to                                                               
drill  gas-prone prospects.    The effect  on  oil would  cascade                                                               
backwards to when a lease was first put on the table.                                                                           
                                                                                                                                
CHAIR SEEKINS welcomed U.S. Senator Ted Stevens.                                                                                
                                                                                                                                
2:15:21 PM                                                                                                                    
^U.S. Senator Ted Stevens                                                                                                       
U.S.  SENATOR TED  STEVENS began  with an  historical perspective                                                               
and  then  highlighted  the enormous  gas  potential  in  Alaska,                                                               
including gas concentrates beneath  the permafrost in the Prudhoe                                                               
Bay  area and  well as  exploration in  other areas  such as  the                                                               
National Petroleum Reserve-Alaska (NPR-A).   He cautioned against                                                               
delays, saying the  question is whether Alaska's gas  gets to the                                                               
Midwest first with long-term contracts, ahead of imported LNG.                                                                  
                                                                                                                                
U.S.  SENATOR  TED  STEVENS  questioned  how  many  people  would                                                               
consider investing in  Alaska if the climate  for investment were                                                               
further confused by  issues before the legislature now.   He said                                                               
there is a national energy  crisis, and the basic economic future                                                               
is related to  the availability of gas for increasing  needs.  At                                                               
the national level,  the Alaska Natural Gas Pipeline  Act of 2004                                                               
(ANGPA) was  passed.  Noting  the federal government  has studied                                                               
the feasibility  of building that  pipeline, he said the  bulk of                                                               
gas to be produced will be on federal lands.                                                                                    
                                                                                                                                
2:24:55 PM                                                                                                                    
U.S.  SENATOR TED  STEVENS recalled  when  ANGPA passed,  federal                                                               
agencies contacted  him about  a 44-month  pre-permitting period;                                                               
added to the 18 months, it  would be five years before they could                                                               
finish with  an application for interstate  transportation of the                                                               
gas.   Until  the owner  of  the property  is willing  to have  a                                                               
transportation  mechanism, the  federal  government doesn't  have                                                               
jurisdiction;  it  has  jurisdiction  over  interstate  movement.                                                               
Thus a group  was convened and a memorandum  of agreement drafted                                                               
to  coordinate  activities  and substantially  reduce  the  time,                                                               
although the actual time hasn't been determined yet.                                                                            
                                                                                                                                
He added  if the legislature  doesn't act  this year, it  will be                                                               
another two years  before that period can start,  and seven years                                                               
after  that to  build  the pipeline.    At 83  years  of age,  he                                                               
expressed  hope  of  seeing  the   pipeline  constructed  in  his                                                               
lifetime.  He proposed commercializing  gas concentrates as well,                                                               
but  predicted unwillingness  to put  money into  that without  a                                                               
pipeline.                                                                                                                       
                                                                                                                                
U.S. SENATOR  TED STEVENS  reported Qatar  has the  largest known                                                               
supply of gas close to tidewater,  and Russia has a great deal as                                                               
well;  he'd hate  to  see the  U.S. rely  on  Russia because  its                                                               
pipeline was shut off in  the Ukraine during a political dispute.                                                               
A supply  of energy from  Alaska is the safest  for the U.S.   He                                                               
predicted  if Alaska  doesn't act,  the federal  government might                                                               
someday, with Congress taking over  and telling the state how the                                                               
gas  will be  produced  and delivered.   He  urged  the state  to                                                               
finish its work on the pipeline.                                                                                                
                                                                                                                                
U.S.  SENATOR TED  STEVENS suggested  putting aside  politics and                                                               
deciding what's  best for the  state.   Although the state  has a                                                               
role  beyond all  others in  terms of  energy, he  cautioned that                                                               
there is  a timeframe for resources.   They won't be  as valuable                                                               
someday.   The future for Alaska's  energy is the next  50 years,                                                               
he predicted,  urging legislators to  come together now  for this                                                               
project.   He  again proposed  that the  federal government  will                                                               
take action if this doesn't happen.                                                                                             
                                                                                                                                
2:36:47 PM                                                                                                                    
CHAIR SEEKINS recapped today's discussion  of the GRT initiative.                                                               
He   requested  an   opinion  on   its  effect   on  exploration,                                                               
development and the potential for building a pipeline.                                                                          
                                                                                                                                
U.S SENATOR TED  STEVENS questioned how realistic  the $1 billion                                                               
is.   He agreed there  would be extended  litigation.  Why  add a                                                               
delay?  And  why do it now, when the  producers say they're ready                                                               
to  move forward?    He again  expressed  concern that  investors                                                               
might leave if burdens are  added.  He also recalled California's                                                               
gas had  been flared, whereas in  Alaska a law was  passed and so                                                               
the gas  was put  back into the  ground and stored.   As  for the                                                               
state's building the pipeline by  itself, it would cost more than                                                               
the permanent fund.  Why do that  if others are willing to put up                                                               
capital?   He acknowledged  this should  be regulated  to protect                                                               
the environment and assure a fair  rate of return.  He reiterated                                                               
that the future is mainly on federal lands, not state lands.                                                                    
                                                                                                                                
2:40:28 PM                                                                                                                    
REPRESENTATIVE  SAMUELS  reported  having received  figures  that                                                               
show the  following:   All other things  equal, a  two-year delay                                                               
requires  a  tax rate  of  9.25  percent,  25 percent  above  the                                                               
7.25 percent Governor  Murkowski negotiated,  to obtain  the same                                                               
amount  of money.    A three-year  delay  requires an  11 percent                                                               
rate, almost  50 percent more.   This is the  cost of delay  on a                                                               
net-present-value basis.                                                                                                        
                                                                                                                                
U.S. SENATOR  TED STEVENS responded  that one thing in  the works                                                               
would  allow  states   a  portion  of  revenue   from  the  Outer                                                               
Continental  Shelf (OCS).   That  hasn't  been the  case so  far,                                                               
although  Alaska gets  a  portion of  royalties  from some  lease                                                               
bonuses.   The  bulk of  future revenue  will be  from royalties.                                                               
The sooner  that starts, the  more it accumulates.   He expressed                                                               
commitment  to  reducing  the federal-related  time  as  much  as                                                               
possible, as was done with TAPS for oil.                                                                                        
                                                                                                                                
2:44:02 PM                                                                                                                    
SENATOR  BEN STEVENS  reported having  recently learned  FERC has                                                               
issued permits for  two new LNG terminals  and the reconstruction                                                               
of  three more,  and there  are  other applications.   He  asked:                                                               
What  does Congress  anticipate  with respect  to additional  LNG                                                               
terminals?   And with increasing  movement of LNG  using tankers,                                                               
will Congress seek to modify  the Jones Act or provide exemptions                                                               
to allow the carrying of LNG?                                                                                                   
                                                                                                                                
U.S. SENATOR TED STEVENS answered  that the Jones Act was perhaps                                                               
the second  Act ever  passed by  Congress.   He didn't  foresee a                                                               
permanent  waiver for  anyone, although  he recalled  a temporary                                                               
one.  The basis  of the Jones Act was to  ensure that the country                                                               
can build  its own  ships as  a matter of  defense.   He surmised                                                               
that Act would  be maintained.  As for problems  relating to LNG,                                                               
he  said  those have  been  acute,  and  an offshore  super  port                                                               
concept had been proposed.                                                                                                      
                                                                                                                                
He highlighted  problems with locating  regasification facilities                                                               
onshore and construction  of cryogenic tankers.  He  said LNG can                                                               
come in easily  from other countries on  foreign-built ships, but                                                               
cannot be  transported within  the country on  such ships.   Thus                                                               
LNG from  other countries will  come in easily and  won't require                                                               
cryogenic tankers.                                                                                                              
                                                                                                                                
2:48:30 PM                                                                                                                    
CHAIR SEEKINS  asked whether the federal  government had concerns                                                               
about its taking gas in kind.                                                                                                   
                                                                                                                                
U.S. SENATOR  TED STEVENS  noted taxes cannot  be taken  in kind,                                                               
whereas  royalties can.   It  is a  good option  that enhances  a                                                               
state's ability  to ensure development  of facilities  within the                                                               
state that  could utilize  the gas.   He predicted  with Alaska's                                                               
gas potential there will be  a substantial industrial base in the                                                               
state.  Current markets are  for consumption and agriculture, for                                                               
example.   It is  a very good  market.  He  said gas  prices will                                                               
follow oil prices, which he surmised would continue to rise.                                                                    
                                                                                                                                
2:51:03 PM                                                                                                                    
SENATOR BEN  STEVENS asked how  Congress views an "over  the top"                                                               
pipeline  route  that  could  tie in  with  the  Mackenzie  Delta                                                               
project in Canada.                                                                                                              
                                                                                                                                
U.S. SENATOR TED STEVENS recalled  having commented that building                                                               
a pipeline  across ANWR  would be  like putting  something across                                                               
the Mona Lisa - it wouldn't  be allowed unless offshore, which he                                                               
believed was explored once.   He reported having talked last week                                                               
to  Canadians, including  officials  and  members of  parliament,                                                               
who'd assured him they were  ready to build a connective pipeline                                                               
to  Alaska,  although  they  were  having  some  difficulty  with                                                               
respect to  the Mackenzie line.   He  noted it still  hasn't been                                                               
resolved  as to  whether  the Mackenzie  pipeline  will be  built                                                               
before Alaska's.                                                                                                                
                                                                                                                                
He concluded that he didn't see  any reason for using that route.                                                               
With Alaska's  gas potential, he  opined a line should  come down                                                               
near the Railbelt, and ultimately there  should be a line to this                                                               
area.   Furthermore,  he predicted  a  gas line  would turn  some                                                               
community into  an industrial community.   Urging  legislators to                                                               
consider the tremendous volume of  gas, he highlighted developing                                                               
the technology to commercialize it.                                                                                             
                                                                                                                                
2:54:10 PM                                                                                                                    
REPRESENTATIVE  SAMUELS  asked:   If  there  is  a delay  by  the                                                               
legislature,  how  will  that affect  support  on  other  Alaskan                                                               
issues  relating  to  fish  and  game  or  ANWR  when  Midwestern                                                               
Senators have  to talk to  their constituents about the  price of                                                               
fertilizer, for instance?                                                                                                       
                                                                                                                                
U.S. SENATOR TED STEVENS replied  the feeling already exists that                                                               
there  is a  delay.   He  surmised there'd  be substantial  money                                                               
received for  developing oil and gas  in the next 50 years.   Now                                                               
that  prices are  good, he  surmised the  state will  be held  to                                                               
answer  if there  is delay.   He  also surmised  any federal  Act                                                               
proposed to take control  of this gas would end up  in court.  He                                                               
pointed  out that  this gas  has already  been produced  and then                                                               
stored.   It's  only  stranded because  there  isn't a  pipeline.                                                               
Thus it isn't  the same question normally faced by  Congress.  He                                                               
reiterated his belief  that the federal government  has the power                                                               
to demand that this gas be moved in the national interest.                                                                      
                                                                                                                                
2:57:42 PM                                                                                                                    
MR. CLARK agreed.   Recapping discussion of the  proposed GRT, he                                                               
said developing the  gas line is the single  most important thing                                                               
to do  for the state, since  it allows extending the  life of the                                                               
oil field,  giving time  to develop technology  for heavy  oil as                                                               
well as fill the gas line.                                                                                                      
                                                                                                                                
U.S. SENATOR TED STEVENS characterized the  GRT as a fine that is                                                               
unconstitutional and unsound,  since the gas has  been stored and                                                               
this would put a penalty on it because it hasn't been moved.                                                                    
                                                                                                                                
MR. CLARK said  the administration has a signable deal  as far as                                                               
the producers  and the state  are concerned, except  for possible                                                               
adjustments  because of  concerns raised  by the  public and  the                                                               
legislature.  There  needs to be legislative  approval to realize                                                               
that  deal.    He  said  the  prize  is  so  big,  equivalent  to                                                               
25 billion barrels of oil.  He  agreed with the need to set aside                                                               
other considerations and realize this is for the future.                                                                        
                                                                                                                                
3:02:06 PM                                                                                                                    
U.S.  SENATOR TED  STEVENS highlighted  the state  constitutional                                                               
question  of contract  approval  by the  legislature.   He  noted                                                               
Congress, according  to Supreme  Court opinion,  cannot interfere                                                               
with signing  of a  contract by  the executive  branch.   He said                                                               
he'd rather  there be  compliance with current  law than  have it                                                               
challenged,  however.    He  cautioned that  in  a  climate  like                                                               
Alaska's, where  costs are high  and unpredictable,  the ultimate                                                               
cost  of   the  gas  pipeline   isn't  known.     Whether  future                                                               
development  involves NPR-A,  ANWR, gas  concentrates, the  total                                                               
OCS  and so  on, it  will require  a tremendous  investment.   If                                                               
actions   cool  the   investment  climate,   he  predicted   such                                                               
development won't be seen in legislators' lifetimes.                                                                            
                                                                                                                                
3:04:39 PM                                                                                                                    
CHAIR SEEKINS indicated the  Senate Judiciary Standing Committee,                                                               
which   he  chairs,   had  targeted   the  constitutionality   of                                                               
legislative  approval  of  the contract,  and  nothing  could  be                                                               
determined with respect to the state law.  The question remains.                                                                
                                                                                                                                
SENATOR COWDERY  related a conversation with  someone in Kentucky                                                               
who'd said much  of the pipe for  TAPS came from there.   He also                                                               
recalled discussions about a shortage of steel.                                                                                 
                                                                                                                                
U.S.   SENATOR  TED   STEVENS   highlighted  planned   pipelines,                                                               
including  one from  Russia  to China.   As  for  flat steel,  he                                                               
opined  that rolling  the  pipe  in Alaska  is  being looked  at.                                                               
Furthermore, while it is possible to  get in line now for pipe in                                                               
eight years,  a two-year  delay might  preclude it,  since nobody                                                               
will put money down for  pipe until the administrative process is                                                               
over,  federally  and in  Alaska.    He  reiterated the  need  to                                                               
shorten that time, adding he isn't  critical of the delay so far.                                                               
He  noted Congress  will  demand the  same  kinds of  information                                                               
demanded thus far by legislators.                                                                                               
                                                                                                                                
SENATOR  BEN  STEVENS asked  if  the  Canadians are  waiting  for                                                               
execution  of the  contract so  negotiations  between Canada  and                                                               
Alaska can begin.                                                                                                               
                                                                                                                                
U.S. SENATOR  TED STEVENS  said he'd  interpreted the  message as                                                               
readiness and willingness to make  the commitments necessary, and                                                               
that, barring  a delay, its pipeline  would be ready to  take the                                                               
gas whenever Alaska's pipeline reached the border.                                                                              
                                                                                                                                
SENATOR BEN  STEVENS asked the  producers if the next  step after                                                               
execution of the contract is negotiations with Canada.                                                                          
                                                                                                                                
MR.  McMAHON, ExxonMobil,  responded that  the next  step is  the                                                               
beginning of the project plan,  which will have myriad activities                                                               
such  as engineering  and access  to lands,  including regulatory                                                               
permits for  Canada and Alaska.   Interfacing with  the Canadians                                                               
will begin  soon after the contract  is executed.  They  will get                                                               
the applications  to FERC and  to Canada's National  Energy Board                                                               
(NEB) ready at the same time.                                                                                                   
                                                                                                                                
U.S. SENATOR TED  STEVENS said the Canadians are  willing to talk                                                               
about timeframes and specific dates for completion.                                                                             
                                                                                                                                
3:10:54 PM                                                                                                                    
SENATOR  BEN   STEVENS  suggested  differentiating   between  the                                                               
Canadian officials  or regulatory  agencies just discussed  and a                                                               
Canadian  partner.   For instance,  TransCanada had  submitted an                                                               
application and stated readiness to begin negotiations.                                                                         
                                                                                                                                
MR. McMAHON  noted the  current proposal  is for  ExxonMobil, BP,                                                               
ConocoPhillips  and  the  State   of  Alaska  to  construct  this                                                               
pipeline  in Alaska  and  Canada.   It  will  go  from Alaska  to                                                               
Alberta and as  far as needed to  get to a petroleum  market.  He                                                               
expressed openness  to talking with  TransCanada if  that company                                                               
can demonstrate it will add value to the process.                                                                               
                                                                                                                                
SENATOR  BEN STEVENS  summarized that  negotiations need  to take                                                               
place  between the  governments  and  their regulatory  agencies.                                                               
But if a commercial Canadian proposal  will add value, it will be                                                               
entertained but isn't necessary for FERC sanctioning.                                                                           
                                                                                                                                
MR.  McMAHON agreed,  stating his  belief that  NEB's process  is                                                               
open and available to all who want to propose a pipeline.                                                                       
                                                                                                                                
3:14:40 PM                                                                                                                    
SENATOR WAGONER recalled that TransCanada claimed it has rights-                                                                
of-way, except  in a few  areas, through  the First Nations.   He                                                               
asked  whether  the line  would  be  built without  TransCanada's                                                               
cooperation or if the rights would be purchased from them.                                                                      
                                                                                                                                
MR. VAN  TUYL replied  under the  NEB process  it's market-based.                                                               
Any  project   sponsor  that  can  demonstrate   public  need  of                                                               
convenience  and necessity  can permit  a project.   He  noted BP                                                               
meets  regularly with  TransCanada.   He  agreed  any party  that                                                               
could  add value  and  assume  its share  of  the  risk would  be                                                               
welcome.   He  opined that  in the  NEB regulatory  process there                                                               
isn't  a problem  with obtaining  a right-of-way.   The  Canadian                                                               
government has formed a federal  working group to coordinate with                                                               
various entities; NEB  is part of that, along  with First Nations                                                               
representatives, to  ensure the  process can be  completed within                                                               
the same window - about 20 months - as the U.S. federal process.                                                                
                                                                                                                                
3:16:43 PM                                                                                                                    
CHAIR   SEEKINS   highlighted   discussions  about   whether   an                                                               
independent  owner  of  the gas  pipeline  would  provide  better                                                               
access  to  independent  companies,   and  the  possibility  that                                                               
producer-and-state ownership lends itself to "basin control."                                                                   
                                                                                                                                
U.S.  SENATOR  TED  STEVENS  replied  there  are  no  independent                                                               
producers right now.   Some are exploring.  As  for the charge to                                                               
transport  gas  from another  source  through  that pipeline,  he                                                               
opined that  during the period when  the cost of the  pipeline is                                                               
being  repaid, the  difficulty is  giving  up a  portion of  that                                                               
capacity and getting  payment for transporting gas  that won't be                                                               
contributing to the  repayment of the cost.  Surmising  this is a                                                               
subject for negotiation, he reported  having had discussions with                                                               
independents  and the  producers  about  it.   He  opined that  a                                                               
contract  provision   discusses  this,  but  doesn't   solve  the                                                               
question if  an independent  producer has  substantial quantities                                                               
of gas  that come  on board.   Noting it will  have to  be worked                                                               
out, he  said there is a  FERC mechanism; he surmised  FERC would                                                               
have  jurisdiction  to determine  that.    This isn't  a  common-                                                               
carrier pipeline  per se, but  there would have to  be provisions                                                               
for transporting gas that was available.                                                                                        
                                                                                                                                
MR.  CLARK  agreed.    He  added  at  an  appropriate  point  the                                                               
administration wants  to put before  the legislature  an upstream                                                               
contract  which provides  that  any explorer  who  finds gas  and                                                               
takes an FT  commitment in any open season -  and thus is willing                                                               
to take a reserve charge to get  the gas to market - will get the                                                               
same  fiscal  stability terms  as  the  producers.   Furthermore,                                                               
legislation that  the administration proposes would  offer fiscal                                                               
certainty, so there'd be the  same certainty about upstream costs                                                               
or  taxes  as  the  producers  would  get.    This  is  what  the                                                               
administration  is proposing  to address  the point  U.S. Senator                                                               
Ted Stevens just made.                                                                                                          
                                                                                                                                
U.S.  SENATOR TED  STEVENS concluded  by  saying time  is of  the                                                               
essence.  He  suggested reading the U.S.  Vice President's letter                                                               
to the  House and  Senate, especially  the last  paragraph, which                                                               
talks about  securing cooperation from Canadian  counterparts and                                                               
conveys the urgency;  he said this reflects  the feeling received                                                               
from everyone  he has dealt with  at the federal level.   He then                                                               
read  a note  from  his own  assistant that  said  FERC has  been                                                               
meeting with NEB, and that the  producers are pushing to use NEB,                                                               
since Canada wants  the process under the  Northern Pipeline Act.                                                               
The concern is whether there'd be  a delay under the NEB process.                                                               
He surmised the  federal agencies would work this  out along with                                                               
the producers as the pipeline  moves through Canada.  He surmised                                                               
the interest shown by the  Canadian parliament in taking the trip                                                               
last week indicates a sense of urgency in Canada as well.                                                                       
                                                                                                                                
The committee took an at-ease from 3:23:29 PM to 3:52:07 PM.                                                                
                                                                                                                                
^Dan Dickinson - Discussion of fiscal certainty for oil                                                                         
MR. DICKINSON discussed  fiscal certainty for oil.   He suggested                                                               
looking  at 1973-1981,  when Alaska's  oil  economy changed  from                                                               
being  based  in Cook  Inlet  to  the North  Slope.    In 1973  a                                                               
statewide  property tax  was enacted  for oil  and gas  property.                                                               
For the oil and gas production  tax, in 1977 the maximum rate was                                                               
12.25 percent,  raised to 15  percent in  1981.  For  income tax,                                                               
Alaska  switched in  1978 to  become a  separate-accounting state                                                               
and in  1981 switched  back.   In 1980  Alaska also  repealed the                                                               
personal income tax.  Thus the  main source of revenue within the                                                               
state's fiscal system was changed to be oil and gas.                                                                            
                                                                                                                                
He  addressed  the  question  of   a  30-year  period  of  fiscal                                                               
stability  for  oil,  the time  agreed  to  during  negotiations.                                                               
Mr. Dickinson explained that 30  years approximates the first two                                                               
phases  of the  gas project:   1)  the time  to put  the pipeline                                                               
together  before  commercial  operations  commence;  and  2)  the                                                               
period of the first FT  commitments, which underwrite the project                                                               
and could be as  short as 15-20 years.  While in  1988 oil was at                                                               
200 million barrels, today it is  about 875,000 barrels a day and                                                               
may decline to  half that in 30  years.  The desire  was to avoid                                                               
having oil-related  rules changed later  on.  The first  30 years                                                               
of the gas project would be the most crucial for this stability.                                                                
                                                                                                                                
MR.  DICKINSON highlighted  compounding interest,  giving details                                                               
on the calculations  and saying the number of  years is critical.                                                               
One legislative  directive in the  Stranded Gas Act was  to back-                                                               
end load when  possible, moving payments from the  front years to                                                               
the end.   A shorter fiscal-stability period  changes the effects                                                               
of this.   Production facilities would produce both  gas and oil,                                                               
with the same fiscal-stability period  as the gas line, 35 years.                                                               
For  an  oil  facility  like  TAPS,  fiscal  stability  has  been                                                               
proposed at 30 years, with an inflator built in.                                                                                
                                                                                                                                
He  recalled when  he  asked to  become  the division's  director                                                               
eight years ago, the emphasis  was that conflicts shouldn't build                                                               
to the  size they had.   Mr.  Dickinson said the  fiscal contract                                                               
tries to  resolve problems  up front, recognizing  some conflicts                                                               
may be arbitrated.  He emphasized  that the state will be getting                                                               
the percentage  it believes it  should get; opined  that 30 years                                                               
is appropriate; expressed the  administration's commitment to the                                                               
fiscal terms negotiated;  and conveyed the intention  not only to                                                               
educate  the public  about the  30 years,  but also  to hear  the                                                               
public's concerns, which requires a lot of back and forth.                                                                      
                                                                                                                                
4:04:35 PM                                                                                                                    
MR.  DICKINSON  referred to  yesterday's  discussion  of a  state                                                               
Senate proposal  during the  first special session.   It  sets up                                                               
three  periods.   The  first  is  prior to  project  sanctioning,                                                               
during which  the rule  of law remains  and the  contract doesn't                                                               
dictate the fiscal  terms, but just refers to  the PPT, AS 43.55.                                                               
There is no overriding fiscal stability.   The second is from the                                                               
start  of sanctioning,  14 years  during  which the  gas line  is                                                               
built as well as early years  of shipping gas.  During this time,                                                               
the  contract dictates  terms for  oil  under AS  43.56 and  more                                                               
general terms for the gas line.                                                                                                 
                                                                                                                                
He  noted the  third  period  still has  stability  for oil,  but                                                               
focuses on  the outcome.  The  purpose isn't to allow  changes in                                                               
the  tax system  to derail  the  project.   If a  change in  this                                                               
period  alters the  economic value,  arbitration can  be used  to                                                               
renegotiate.   As long as  the original deal is  preserved, other                                                               
changes can  occur within the  fiscal structure.   Thus it  is an                                                               
alternative suggestion for providing fiscal stability.                                                                          
                                                                                                                                
MR.  DICKINSON highlighted  the issue  of  a payment  in lieu  of                                                               
taxes (PILT)  to replace the  corporate income  tax.  He  said it                                                               
seems there  are areas where  the state could get  aggressive and                                                               
that  lots of  money could  turn on  it.   Providing details,  he                                                               
characterized  this   as  a  new   way  of   interpreting  fiscal                                                               
stability, using different tools to achieve the same result.                                                                    
                                                                                                                                
4:10:56 PM                                                                                                                    
MR.  VAN  TUYL  agreed  fiscal   stability  is  critical  to  the                                                               
contract.  It's  the core principle behind the  Stranded Gas Act,                                                               
and BP  believes it extends  to both oil  and gas, from  not only                                                               
the Act,  but the nature  of business  on the North  Slope, given                                                               
that oil  and gas are inextricably  linked.  Commitment to  a gas                                                               
pipeline  project necessarily  means committing  to maintain  all                                                               
those facilities  and to produce  oil and  gas for decades.   His                                                               
company is keen to do that,  but knowing the rules.  This concept                                                               
of long-term  fiscal stability  on both  oil and  gas is  used in                                                               
agreements worldwide to support  mega-projects.  Thus BP believes                                                               
the contract language  is appropriate and essential  to allow the                                                               
project to move forward and to attract the investment.                                                                          
                                                                                                                                
4:12:41 PM                                                                                                                    
SENATOR STEDMAN  noted page 73  of the  FIF shows cash  flows for                                                               
oil and  gas, with oil seemingly  favored in terms of  value.  He                                                               
said he  could understand  wanting a stable  tax regime  for oil,                                                               
even though the objective is a gas line.                                                                                        
                                                                                                                                
AN UNIDENTIFIED SPEAKER predicted gas  revenues will be more than                                                               
oil revenues on a discounted basis.                                                                                             
                                                                                                                                
SENATOR STEDMAN suggested  someday people will look  at huge cash                                                               
flows from  the gas line,  wondering about the  government share.                                                               
Similarly,  today's government  take  from Prudhoe  Bay might  be                                                               
thought too low, whereas in the late 1960s there would have been                                                                
a whole different risk profile.                                                                                                 
                                                                                                                                
CHAIR SEEKINS  confirmed that Donald  Shepler and Jim  Eason, who                                                               
were on  teleconference, had no comments  to add.  He  noted Rick                                                               
Harper and Steve  Porter had been on teleconference as  well.  He                                                               
discussed the committee's schedule and thanked participants.                                                                    
                                                                                                                                
There being no further business to come before the committee,                                                                   
Chair Seekins adjourned the Senate Special Committee on Natural                                                                 
Gas Development meeting at 4:24:09 PM.                                                                                        

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