Legislature(2001 - 2002)

11/07/2001 10:00 AM NGP

Audio Topic
* first hearing in first committee of referral
+ teleconferenced
= bill was previously heard/scheduled
                        ALASKA LEGISLATURE                                                                                    
             JOINT COMMITTEE ON NATURAL GAS PIPELINES                                                                         
                         November 7, 2001                                                                                       
                            10:00 a.m.                                                                                          
                                                                                                                                
SENATE MEMBERS PRESENT                                                                                                        
                                                                                                                                
Senator John Torgerson, Chair                                                                                                   
Senator Johnny Ellis                                                                                                            
Senator Donald Olson                                                                                                            
                                                                                                                                
SENATE MEMBERS ABSENT                                                                                                         
                                                                                                                                
Senator Rick Halford                                                                                                            
Senator Pete Kelly                                                                                                              
                                                                                                                                
HOUSE MEMBERS PRESENT                                                                                                         
                                                                                                                                
Representative Joe Green, Vice Chair                                                                                            
Representative Scott Ogan                                                                                                       
Representative John Davies                                                                                                      
Representative Hugh Fate                                                                                                        
                                                                                                                                
HOUSE MEMBERS ABSENT                                                                                                          
                                                                                                                                
Representative Brian Porter                                                                                                     
Representative Reggie Joule                                                                                                     
                                                                                                                                
OTHER LEGISLATORS PRESENT                                                                                                     
                                                                                                                              
Representative Jim Whitaker                                                                                                     
                                                                                                                                
COMMITTEE CALENDAR                                                                                                            
                                                                                                                                
10:00 - 12:00 Washington D.C. update:                                                                                           
John Katz, Director, State/Federal  Relations and Special Counsel to                                                            
the Governor; Duncan Smith  and C.J. Zane, Legislative Advisors with                                                            
Dyer,  Ellis  and  Joseph;  Update  on  Senator  Murkowski's  energy                                                            
legislation                                                                                                                     
                                                                                                                                
12:00 - 1:00 Lunch                                                                                                              
                                                                                                                                
1:00 - 3:45 Department of Revenue                                                                                               
                                                                                                                                
1:00 - 3:00  Roger Marks, Economist, Department of Revenue                                                                      
3:00 - 3:15  Ed Small, Cambridge Energy Research Associates                                                                     
3:15 - 3:45 Larry Persily, Deputy Commissioner, Joint Pipeline                                                                  
Office, Bill Britt, State Gas Pipeline Coordinator                                                                              
4:15 - 4:45 U.S. Mineral Management Service                                                                                     
     John Goll, Regional Director                                                                                               
     John Larson, Geologist                                                                                                     
                                                                                                                                
PREVIOUS MEETINGS                                                                                                             
                                                                                                                                
July 17 & 18, August 14 & 15, September 19,2001                                                                                 
                                                                                                                                
ACTION NARRATIVE                                                                                                              
                                                                                                                                
TAPE 01-21, SIDE A                                                                                                            
                                                                                                                                
Number 001                                                                                                                      
                                                                                                                                
CHAIRMAN JOHN  TORGERSON called the  Joint Senate and House  Natural                                                          
Gas Pipelines Committee meeting to order at 10:00 a.m.                                                                          
                                                                                                                                
MR. JOHN  WILLIAMS, Mayor  of Kenai, commented  briefly, but  due to                                                            
transmission  difficulties,  his  testimony is  not  audible on  the                                                            
tape.                                                                                                                           
                                                                                                                                
CHAIRMAN  TORGERSON recapped  the Mayor's  comments saying  that the                                                            
main emphasis  of the meeting was  to spend a substantial  amount of                                                            
time on the  resources in Cook Inlet,  existing industry,  and other                                                            
industry  that  has  looked  at Cook  Inlet  to  either  supply  the                                                            
resource or build their own industry. He continued:                                                                             
                                                                                                                                
     This is  very important to this  community, since part  of                                                                 
     our  deliberations is  how we can [we]  give them gas,  if                                                                 
     and  when we need  gas, to the Southcentral  Basin.  We've                                                                 
     heard some exciting news  about discoveries that have been                                                                 
     bylines  in the press. We hope  to elevate those to  guide                                                                 
     us  over the  next couple  of days  to see  what actually                                                                  
     might  be there and  what we can count  on for additional                                                                  
     resources.                                                                                                                 
                                                                                                                                
MR.  JOHN  KATZ,  Director,  State/Federal   Relations  and  Special                                                            
Counsel to Governor Tony Knowles, testified:                                                                                    
                                                                                                                                
     Let  me start  by  briefly describing  the  public policy                                                                  
     arena here in terms of five specific factors.                                                                              
                                                                                                                                
     1. In terms of national  energy legislation, I think it is                                                                 
     pretty clear now that we  will not see that legislation on                                                                 
     the Senate floor before  the Thanksgiving recess. Majority                                                                 
     Leader,  Senator Daschle,  has indicated  five priorities                                                                  
     for  Senate  action in  the immediate  future  and energy                                                                  
     legislation  is not  one of  them. It  seems increasingly                                                                  
     likely, though  not certain, that there will be  a session                                                                 
     of  the Senate  of  the period  between  Thanksgiving  and                                                                 
     Christmas.  If  that  is the  case,  it is  possible  that                                                                 
     energy legislation will  be introduced and perhaps brought                                                                 
     to the Senate floor for debate and voting.                                                                                 
                                                                                                                                
     2.  The second  factor  that  I wanted  to bring  to  your                                                                 
     attention  is that in a very rare parliamentary  maneuver,                                                                 
     the Majority  Leader of the Senate  has basically brought                                                                  
     the development  of energy legislation under his  personal                                                                 
     aegis. In  essence, he has instructed the chairmen  of the                                                                 
     various  committees  that have  jurisdiction  over energy                                                                  
     issues  to make recommendations  to him. He and his  staff                                                                 
     have taken  the responsibility  for putting those various                                                                  
     provisions  into  final  form  for debate  on  the Senate                                                                  
     floor.  In  the case  of  the natural  gas  pipeline,  the                                                                 
     Senate  Energy Committee  has discontinued  its markup  of                                                                 
     energy  legislation. Those  markups began  in August.  Now                                                                 
     the chairman  of the committee, Senator Bingaman,  and his                                                                 
     staff are in the process  of developing recommendations to                                                                 
     provide  to  the majority  leader.  We've been  told  that                                                                 
     their  goal  is  to  make  those recommendations   to  the                                                                 
     Majority  Leader in  the form of legislative  language  by                                                                 
     this Friday. I'll come back to that later.                                                                                 
                                                                                                                                
     3.  The  third  point  that I  wanted  to  bring  to  your                                                                 
     attention  is  that the  Republicans  in the  Senate  have                                                                 
     grown  increasingly  impatient  with  the pace  of energy                                                                  
     legislation  in the Senate and at various times  they have                                                                 
     indicated  their intention to develop an alternative  bill                                                                 
     of their  own to bring  to the Senate  floor. That effort                                                                  
     has not been  totally successful so far. It has  foundered                                                                 
     perhaps   on  provisions  relating   to  ethanol  and   to                                                                 
     electrical   energy  restructuring,   not  anything   that                                                                 
     relates specifically to  the natural gas pipeline. Another                                                                 
     possibility in this scenario  might be for the Republicans                                                                 
     to  take  the  House  bill, HR  4,  and  propose  that  as                                                                 
     amendments  on  the  Senate floor  to  other  fast moving                                                                  
     legislative  vehicles. As many of you will remember,  HR 4                                                                 
     contains a  specific prohibition against the over-the-top                                                                  
     route  for the  natural  gas pipeline  and  also includes                                                                  
     provisions, which would  authorize oil and gas exploration                                                                 
     and  development  in  the  Coastal  Plain  of  the Arctic                                                                  
     National Wildlife Refuge.                                                                                                  
                                                                                                                                
     Another  factor that  I think  is quite  relevant in  this                                                                 
     period  is  the  relationship  between   the  natural  gas                                                                 
     pipeline and ANWR, itself.  I think it is safe to say that                                                                 
     in the Senate,  there's broad bi-partisan support  for the                                                                 
     proposition  of  developing  and  commercializing  Alaska                                                                  
     North   Slope  natural  gas.   There  are  key  questions                                                                  
     concerning  the legislation  to accomplish  that purpose,                                                                  
     but  the basic proposition  is not  in question. However,                                                                  
     there  are members of the Senate,  including the Majority                                                                  
     Leader,  and the Chairman of  the Senate Energy Committee                                                                  
     who would  like in essence to remove ANWR from  the Senate                                                                 
     debate  and substitute  in lieu  thereof  the natural  gas                                                                 
     provisions,  perhaps   some provisions   relating  to  tax                                                                 
     incentives  for heavy  oil, treatment  of stripper wells,                                                                  
     and  other provisions  relating  to oil and  gas, but  not                                                                 
     ANWR. The  Senate Majority Leader in floor statements  and                                                                 
     in press  briefings has indicated  his strong support  for                                                                 
     the  natural gas  pipeline  as a hydrocarbon  alternative                                                                  
     along with  other provisions for ANWR. He talks  about the                                                                 
     jobs  that would be  created with the  gas line and  other                                                                 
     advantages  to the  country. Conversely,  there are  other                                                                 
     members  of the  Senate who want  to make  sure that  that                                                                 
     linkage  doesn't  occur and  the parliamentary  scenarios                                                                  
     that  they envision  would ensure  that the  gas line  and                                                                 
     ANWR are  considered separately  and are both voted  on in                                                                 
     the Senate.                                                                                                                
                                                                                                                                
     The final  factor, which is relevant  to the specifics  of                                                                 
     the natural  gas pipeline is  the position of the federal                                                                  
     administration.  I think it's safe to say that  the formal                                                                 
     position  of the federal administration  is to be project                                                                  
     and route neutral and not  to propose legislation relating                                                                 
     to the gas line at this  time. I believe that there's also                                                                 
     a great deference  to the political leadership  of Alaska,                                                                 
     the  Congressional  delegation,  the Governor,  the  state                                                                 
     legislature  in terms  of what  we think and  how that  is                                                                 
     factored  in by  the President  and Vice  President.  They                                                                 
     also support the commercialization  of North Slope natural                                                                 
     gas, but  their principle focus,  I think is safe to  say,                                                                 
     has been on ANWR.                                                                                                          
                                                                                                                                
     There  are,  I  believe,  three pivots  in  the  Senate  -                                                                 
     Senator Murkowski, Senator  Bingaman, and Senator Daschle,                                                                 
     as  we consider natural  gas pipeline  legislation.  There                                                                 
     are several factors, I think  to look at, as those parties                                                                 
     consider  the issue. The first  is whether to include  the                                                                 
     producers'  enabling   legislation  in  the  energy  bill,                                                                 
     itself. I  won't elaborate on that legislation  now unless                                                                 
     you want me to since we've  discussed it previously or the                                                                 
     alternative  to  rely  on  the  ANGTA  regime,  which  was                                                                 
     enacted and  decided in 1976 and 1977 by Congress  and the                                                                 
     President.                                                                                                                 
                                                                                                                                
     Another  factor of chief  determinant  is whether the  gas                                                                 
     pipeline  should  be  considered  within  the  context  of                                                                 
     national  energy legislation  or perhaps as free-standing                                                                  
     legislation.  A fourth factor  is should that legislation                                                                  
     be  route and  project  neutral or  should it  prohibit  a                                                                 
     particular  route, for  example, the  over-the-top route.                                                                  
     Finally,  another very  important determinant  is whether                                                                  
     there  will be  tax incentives  in  the final  package  in                                                                 
     order  to promote  commercialization  of North  Slope  gas                                                                 
     generally  or to influence the choice of route  by perhaps                                                                 
     providing  tax incentives  to only  one route  and not  to                                                                 
     others.  You've  just  heard the  chairman's  comments  on                                                                 
     Senator Murkowski's work  with respect to the gas pipeline                                                                 
     and  I  would  not  presume  to  add  very  much  to  that                                                                 
     description.  Senator Murkowski is clearly looking  at the                                                                 
     advisability  of introducing legislation and,  if so, what                                                                 
     the components  of that legislation should be,  whether it                                                                 
     should rely  on the matrix of the enabling legislation  or                                                                 
     in the alternative on the  ANGTA regime. I think it's best                                                                 
     to leave  that at that junction  pending anything further                                                                  
     from Senator  Murkowski or his staff that they  would want                                                                 
     to share with the committee later on.                                                                                      
                                                                                                                                
     The  second  determinant  that  I  mentioned  earlier,  is                                                                 
     Senator  Bingaman.  Even  though  markups  are  no longer                                                                  
     occurring  on  energy  legislation  in the  Senate Energy                                                                  
     Committee,  he and his staff  are working very diligently                                                                  
     on  several  different  provisions  including  provisions                                                                  
     concerning  the natural gas pipeline  and I believe  it is                                                                 
     their goal  to make their recommendations to the  Majority                                                                 
     Leader  at  the  end  of  this  week,  if  that's  at  all                                                                 
     possible.                                                                                                                  
                                                                                                                                
     My  guess,  and  it  is  only   a guess,   and  I  may  be                                                                 
     contradicted  by what  actually comes  out later, is  that                                                                 
     that legislation will rely  very heavily on the producers'                                                                 
     enabling  legislation and  that it will  at this juncture                                                                  
     stipulate  a particular  route.  I believe  that Chairman                                                                  
     Bingaman  is  also  very  interested  in developing   some                                                                 
     economic  incentives  or tax incentives  to commercialize                                                                  
     North Slope gas. I know  that he and his staff are looking                                                                 
     at a spectrum  of possibilities which include  accelerated                                                                 
     depreciation  on  construction;  secondly,   reducing  the                                                                 
     commodity  risk by establishing  some sort of floor  price                                                                 
     and;  third, even  the possibility  of an  investment  tax                                                                 
     credit, but those matters  are not within the jurisdiction                                                                 
     of  the  Senate  Energy  Committee.  They  are,  in  fact,                                                                 
     province of the Senate Finance  Committee, Senator Baucus'                                                                 
     Committee.  It is by no means clear at this point  whether                                                                 
     there will be any of these  tax incentives in the Majority                                                                 
     Leader's  final  bill and,  if  so, what  provisions  they                                                                 
     might be.                                                                                                                  
                                                                                                                                
     The  third pivot  is the Majority  Leader.  He is pivotal                                                                  
     obviously   in   two  respects.   One  is   within   broad                                                                 
     parameters,  he will  control  the Senate  floor; he  will                                                                 
     control  the  timing  of  Senate  consideration.  He  will                                                                 
     decide when  to introduce legislation and then  later when                                                                 
     the debate  will occur. Of course,  those decisions  could                                                                 
     be overridden in various  parliamentary ways on the Senate                                                                 
     floor, but it is not usual that that would occur.                                                                          
                                                                                                                                
     The  second place where  he will be  very important is  on                                                                 
     the  substance  of natural  gas  legislation,  itself.  In                                                                 
     various contexts,  he has indicated his strong  preference                                                                 
     for the southern  route. He has not yet, to my  knowledge,                                                                 
     indicated  publicly  whether he  would support  the  ANGTA                                                                 
     regime or  the producers' enabling legislation,  but he is                                                                 
     clearly knowledgeable on  this subject and, as I indicated                                                                 
     earlier,  would actually like  to substitute the gas  line                                                                 
     and some other  oil and gas provisions for ANWR.  He wants                                                                 
     to  give  a  broad  deference  to  his various  committee                                                                  
     chairmen  as  they formulate  different  elements  of  the                                                                 
     energy  package, but  he has reserved  to himself some  of                                                                 
     the final  decisions on what that package will  look like.                                                                 
     There are  other members of the Senate who have  expressed                                                                 
     an  interest  in natural  gas legislation,  some  for  the                                                                 
     enabling  legislation and some  for the ANGTA regime,  and                                                                 
     specifically  for the southern route and they  are part of                                                                 
     the  dialogue  now  with  Senator  Bingaman   and Senator                                                                  
     Daschle about how this will ultimately proceed.                                                                            
                                                                                                                                
     In terms of  the various advocates in the process  who are                                                                 
     treating  the Senate  on the  gas pipeline  issue I  think                                                                 
     you're going to be hearing  from various proponents and so                                                                 
     I  will only  briefly for  the purpose  of this testimony                                                                  
     characterize  what I understand to be the position  of the                                                                 
     parties as they continue  to advocate those positions. The                                                                 
     North  Slope  natural  gas producers  have  remained  very                                                                 
     strong  advocates for  their enabling  legislation,  which                                                                 
     they allege to be route  and project neutral and simply to                                                                 
     present  an alternative  to the  ANGTA regime.  They  have                                                                 
     also  indicated   that  that  legislation  is  absolutely                                                                  
     crucial  in  their  deliberations   about  whether  to  go                                                                 
     forward  in  the  effort  to  commercialize   North  Slope                                                                 
     natural gas.                                                                                                               
                                                                                                                                
     Foothills  and some of the other previous partners  in the                                                                 
     Foothills  project have indicated their strong  preference                                                                 
     for  the   ANGTA  regime  perhaps   as  amended  by   some                                                                 
     legislative  language  that  they  proposed,  which  would                                                                 
     focus  on  the  environmental  process   and  confirm  the                                                                 
     decisions  made  by the  executive  branch in  1977.  They                                                                 
     believe  that  that legislation  is  the quickest  way  to                                                                 
     commercialize  North Slope  gas and to  generate jobs  and                                                                 
     they also  feel that if there's  any alternative to  that,                                                                 
     the calendar may then become  free to adopt an alternative                                                                 
     to the ANGTA regime and  the international agreements that                                                                 
     form  part of that  regime. The State  Administration  has                                                                 
     continued  to advocate  the  Governor's 10  principles  as                                                                 
     described in his testimony  to the Senate Energy Committee                                                                 
     in October.  We continue  to place heavy  emphasis on  the                                                                 
     ANGTA  regime and particularly  on the  southern route.  I                                                                 
     think  in  those respects  our  advocacy  has  been  quite                                                                 
     similar to  that of Chairman Torgerson and the  principles                                                                 
     that   the  Joint  Committee   has  adopted.  We've   also                                                                 
     emphasized  the  other  principles   in  that  package  or                                                                 
     policy. Recently, we have  felt that for the most part our                                                                 
     position  and the  position of  the legislature  are  well                                                                 
     understood  by members of the  Senate and so the Governor                                                                  
     has shifted  some of our focus to the commercial  world. I                                                                 
     should  mention that  when the  Governor was  here we  met                                                                 
     with  many  members  of the  Senate  Energy  Committee  to                                                                 
     express  our support  for the  pipeline  for the southern                                                                  
     route and also for ANWR.  We've since followed up on that.                                                                 
                                                                                                                                
     In  terms of  the commercial  situation you  will hear  in                                                                 
     greater  detail from the pipeline  companies, themselves,                                                                  
     but I think they would tell  you that they are on track to                                                                 
     reconstitute  their partnership and to deal with  the very                                                                 
     important  issue  of the contingent  liability,  the  $4.2                                                                 
     billion  matter that we've discussed  previously and  that                                                                 
     sometime  in  the not  too  distant  future they  will  be                                                                 
     prepared to  discuss more formally with the producers  how                                                                 
     they   might  jointly  proceed,   but  I'll  leave   those                                                                 
     commercial presentations to others.                                                                                        
                                                                                                                                
     Finally,  I  would  say  that  I  think  I've  accurately                                                                  
     described  what  the situation  is  today, but  it's  very                                                                 
     fluid.   It  could   be  influenced   by  any  number   of                                                                 
     permutations  and combinations in the Senate,  itself, and                                                                 
      it also could be influenced by external events relating                                                                   
     to supply price and possible supply dislocations.                                                                          
                                                                                                                                
10:24 a.m.                                                                                                                      
                                                                                                                                
REPRESENTATIVE  GREEEN asked  if the switch  in leadership  was good                                                            
news or  bad news in terms  of getting this  issue to the  floor and                                                            
not be bottled up in committee.                                                                                                 
                                                                                                                                
MR. KATZ replied  that is a good question and that  this is only the                                                            
second  time  that  anyone  could  recall  that  this parliamentary                                                             
maneuver  has occurred. He  thought it was  a setback. He said  that                                                            
Senator Daschle  is on record as supporting  the southern  route and                                                            
he  thought Senator  Bingaman  was  inclined  toward a  more  route-                                                            
neutral approach.  He didn't know how that would be  resolved. Also,                                                            
the  Majority  Leader  felt  that  the  pace  of  activity  in  that                                                            
committee and other committees  with relevant jurisdiction was quite                                                            
slow and maybe the best  place to speed it up would be in his office                                                            
inviting  all  the  relevant  committee  chairmen  to  submit  their                                                            
recommendations  to  him. He  commented,  "It's not  a particularly                                                             
democratic  process at this  point, but I think  it is an effort  to                                                            
get a comprehensive bill done."                                                                                                 
                                                                                                                                
MR. KATZ  said it was a  setback for everyone  who supports  opening                                                            
ANWR,  because  they  thought  they  had the  votes  in  the  Energy                                                            
Committee.  However, the Majority  Leader who  opposes ANWR  did not                                                            
want to see a bill come out of that committee with ANWR in it.                                                                  
                                                                                                                                
He guessed  that there  wasn't sufficient  time  in this session  of                                                            
Congress  to both introduce  a bill  and debate  it. He thought  the                                                            
best that would happen  is that a bill will be introduced that would                                                            
be debated  some time next year unless  the Senate adopts  the House                                                            
bill, which  is highly unlikely, and  then there would have  to be a                                                            
conference  committee. There are a  lot of factors that bear  on the                                                            
answer to this question.                                                                                                        
                                                                                                                                
CHAIRMAN  TORGERSON   asked  if  he  had  heard  anything  from  the                                                            
environmental community about routes.                                                                                           
                                                                                                                                
MR. KATZ replied  that they had commented, but not  with great vigor                                                            
yet. They  are very much  into the ANWR  gas pipeline dynamic.  They                                                            
object to the  northern route, some  support the southern  route and                                                            
some  simply  don't  oppose   it.  He thought   it  would  help  the                                                            
democratic majority if they voiced their opinions.                                                                              
                                                                                                                                
CHAIRMAN  TORGERSON   said  he  asked  that  question   because  the                                                            
producers' legislation  mirrors many provisions in ANGTA. One is the                                                            
limited   judicial  review   process  for   challenges,  which   the                                                            
environmental   community  is  not   very  enthusiastic   about.  He                                                            
questioned,  "…is it just  something  that we don't  have a  bill in                                                            
front of us where  they're holding back in the weeds  until they see                                                            
something actually in writing?"                                                                                                 
                                                                                                                                
MR. KATZ said it might  be more of the later and he hadn't seen them                                                            
get to the level of detail that is suggested by his question.                                                                   
                                                                                                                                
     For the most  part they're focusing on ANWR to  the extent                                                                 
     that  they're  focusing mainly  on  the choice  of route.                                                                  
     Although, when the details  of the legislation come out, I                                                                 
     would  not be at all  surprised to see  them focus on  the                                                                 
     expedited  judicial review issue.  But it is in ANGTA  and                                                                 
     it is  in enabling  legislation. It's  a principle that  I                                                                 
     think a lot of people endorse at this point.                                                                               
                                                                                                                                
CHAIRMAN  TORGERSON  asked   where  the  legislation  was  that  the                                                            
Governor said  he was going to have Mr. Katz draft  and introduce to                                                            
Congress as a guideline.                                                                                                        
                                                                                                                                
MR. KATZ  replied that it  is drafted, but  it hadn't been  given to                                                            
anyone.  He said  it  wouldn't be  productive  for them  to  propose                                                            
actual legislative language  at this point. If circumstances change,                                                            
they can do it.                                                                                                                 
                                                                                                                                
10:32                                                                                                                           
                                                                                                                                
MR.  DUNCAN  SMITH,  Dyer,  Ellis  and  Joseph,  Washington,   D.C.,                                                            
(testifying  via teleconference) said  he placed the call,  but C.J.                                                            
Zane would comment.                                                                                                             
                                                                                                                                
MR.  C.J ZANE  reported  that,  from their  perspective,  people  in                                                            
Washington D.C.  are trying to figure out how to deal  with ANWR. He                                                            
noted, "There  are lots of  moving parts here."  He said the  energy                                                            
bill could move  quickly to the floor if ANWR were  to be dealt with                                                            
in some  other way. He said  that Senator  Daschle was going  to put                                                            
some kind of energy bill  on the Senate calendar, so it is available                                                            
if favorable  circumstances arise.  He thought that Foothills  would                                                            
have more political  momentum going  if it could have the  withdrawn                                                            
partners issue  resolved and it has been working diligently  to pull                                                            
the deal together.                                                                                                              
                                                                                                                                
MR. ZANE said that Senator  Murkowski had draft legislation "that he                                                            
wants to keep  in his hip pocket,  but my latest 'intel'  is that it                                                            
is not  being laid  on the table  in any official  capacity  at this                                                            
point."                                                                                                                         
                                                                                                                                
MR. SMITH  added that the  last time a Majority  Leader took  a bill                                                            
out of committee  and took control of it was in 1960.  The situation                                                            
is  very fluid  and it's  all  within the  control  of the  Majority                                                            
Leader.                                                                                                                         
                                                                                                                                
REPRESENTATIVE  GREEN asked  if he foresaw  sort of  a quid  pro quo                                                            
that could pull ANWR out of the loop.                                                                                           
                                                                                                                                
MR. ZANE said that the  delegation is taking the position that, "You                                                            
don't get our gas in exchange  for us giving up ANWR. You'll get our                                                            
gas, which you've already  said you need, if we get ANWR. In the end                                                            
ANWR will help  continue the potential  for even more gas  delivered                                                            
to the Lower 48."                                                                                                               
                                                                                                                                
He said that  Senator Daschle would  like to use this as  a quid pro                                                            
quo and the delegation  is aware of that and is working very hard to                                                            
see that that doesn't happen.   They are considering attaching it to                                                            
the economic stimulus package  that the President really wants or by                                                            
attaching  HR 4, the House  bill that contains  ANWR, to one  of the                                                            
packages.                                                                                                                       
                                                                                                                                
MR. ZANE said further that:                                                                                                     
                                                                                                                                
     All  of these  moves  and counter  moves  in the  end  are                                                                 
     interrelated so that you  could end up with an energy bill                                                                 
     with ANWR  and a gas line provision in it, but  only after                                                                 
     Daschle agrees  to some parliamentary procedure  that lets                                                                 
     ANWR  have its  day on the  floor. Some  of the Democrats                                                                  
     will make  the argument that  we'll vote against ANWR  and                                                                 
     vote for the gas line. I  think that efforts will continue                                                                 
     to separate  the issues  and I think  that our delegation                                                                  
     will not be  comfortable with a gas line bill  where there                                                                 
     hasn't  been  some accommodation  made  on ANWR.  If  that                                                                 
     combination  and  deal gets  made,  it could  happen  this                                                                 
     year. If it doesn't get  made, then the idea is to go into                                                                 
     next year.                                                                                                                 
                                                                                                                                
TAPE 01-21, SIDE B                                                                                                            
                                                                                                                              
10:26 a.m.                                                                                                                      
                                                                                                                                
REPRESENTATIVE  GREEN asked  what the  chances are  of it  happening                                                            
this year.                                                                                                                      
                                                                                                                                
MR. ZANE said  there is about a 20 - 25% chance that  the ANWR issue                                                            
gets resolved  satisfactorily  so that  we also  get an energy  bill                                                            
this year.                                                                                                                      
                                                                                                                                
REPRESENTATIVE  DAVIES  asked  what  the  chances  are that  we  get                                                            
neither this session.                                                                                                           
                                                                                                                                
MR. ZANE replied:                                                                                                               
                                                                                                                                
     It's  too simple to  say it's the reverse  of what I  just                                                                 
     said  -  that it's  a  75% chance  that  we  get neither,                                                                  
     because I actually think  that we have a little bit better                                                                 
     than  a 75%  - I  would say  that we  have about  a  50/50                                                                 
     chance of getting ANWR dealt  with this year on some other                                                                 
     vehicle,  some  other  legislative  package.  I  say  that                                                                 
     because the delegation wants  it; the White House wants to                                                                 
     see  it happen,  in my  view. We  have a  50/50 chance  of                                                                 
     getting  ANWR, but it doesn't  necessarily translate  then                                                                 
     that we  have a 50/50 chance  of getting both. I do  think                                                                 
     our chances of getting both  are much better once you have                                                                 
     ANWR dealt with.                                                                                                           
                                                                                                                                
CHAIRMAN TORGERSON said:                                                                                                        
                                                                                                                                
     Well,  C.J., you  know our  position is  just to reaffirm                                                                  
     ANGTA.  So we're not really pushing  for gas legislation.                                                                  
     I've  heard two  different  stories on  what  might be  in                                                                 
     Senator Murkowski's legislation.  One is starting with the                                                                 
     producers'  legislation   and then  three  or  four  other                                                                 
     provisions.  The other one reaffirming  ANGTA, well  first                                                                 
     the producers  would have to [indisc.] Foothills  and have                                                                 
     to get their  act together within a certain timeframe.  So                                                                 
     they   would  have   the  first  right   of  refusal.   My                                                                 
     understanding  is  under  the  producers'  legislation  it                                                                 
     would transfer  to Foothills to do that and the  other one                                                                 
     that I heard  is actually from Mr. Katz and it's  just the                                                                 
     opposite of that. It reaffirms  ANGTA for a period of time                                                                 
     and then  if they didn't perform  under ANGTA, they  would                                                                 
     revert to  the Natural Gas Act and approve the  producers'                                                                 
     legislation.                                                                                                               
                                                                                                                                
CHAIRMAN TORGERSON asked them to chase down the answer to that                                                                  
question. He said:                                                                                                              
                                                                                                                                
     This  committee  has voted  to  uphold the  provisions  of                                                                 
     ANGTA,  but if it's  the wisdom of Congress  to adopt  the                                                                 
     producers'  legislation  under the Natural  Gas Act,  then                                                                 
     we've  got several  hundred pages  of amendments  that  we                                                                 
     want them to consider along with that.                                                                                     
                                                                                                                                
MR. ZANE responded they understand and they have passed that on.                                                                
                                                                                                                                
10:52 - 11:03 a.m. Break                                                                                                        
                                                                                                                                
MR.  ZANE   continued  to   say  that   Senator  Murkowski's   draft                                                            
legislation  was never  something  he was  committed  to; he  wanted                                                            
staff to  put concepts  down on a  piece of paper  to see what  they                                                            
would look  like. He has heard from  several people on that,  but he                                                            
is in  no way ready  to move.  It would bar  over-the-top; it  would                                                            
give  prominence  to  the  existing  ANGTA  law  and  the  Foothills                                                            
project, but only  for a period of time, like a couple  of years. He                                                            
continued:                                                                                                                      
                                                                                                                                
     If an agency, like FERC,  were to certify that an official                                                                 
     application  had not  been filed by  a certain date,  then                                                                 
     after  that date, certain other  provisions in this  draft                                                                 
     language would become effective,  like the ability to file                                                                 
     for  a second  southern route  under the  Natural Gas  Act                                                                 
     with  its own  set of judicial  and  environmental review                                                                  
     provisions  in  it  that  are  different  than  the  ANGTA                                                                 
     provisions.  In other words,  the environmental [indisc.]                                                                  
     and  expedited review  provisions in  ANGTA would stay  in                                                                 
     effect  through the time where  the FERC conditions  would                                                                 
     kick in  if nothing gets going  on the Foothills project.                                                                  
                                                                                                                                
CHAIRMAN  TORGERSON said  he thought  there were  a couple of  other                                                            
provisions; one was access  by non-producers into the line. He said:                                                            
                                                                                                                                
     I'm not too sure this committee  would oppose that as long                                                                 
     as we do it in sequence  of reaffirming ANGTA for a period                                                                 
     of time, giving  that period of time to the owners  of the                                                                 
     franchise,  Foothills or whoever  ends up gobbling up  all                                                                 
     of Foothills, Duke or West  Coast or TransCanada, and give                                                                 
     them  a  reasonable  length of  time  to  formulate  their                                                                 
     proposals,  which we know they're working on now  and then                                                                 
     if  that  all  boils  up  so  that  the  project  doesn't                                                                  
     completely go away, then  it would revert to the same sort                                                                 
     of  conditions  to  the  producers.  We  haven't  taken  a                                                                 
     position on  that as this committee, but my guess  is that                                                                 
     isn't too far from our original point.                                                                                     
                                                                                                                                
MR.  ZANE said  the  important  thing  about  the language  is  that                                                            
Senator Murkowski  is looking for  a way to lock ANGTA in,  at least                                                            
for some period of time after which they get sunsetted out.                                                                     
                                                                                                                                
CHAIRMAN TORGERSON  reiterated that they didn't oppose  that as long                                                            
as the timelines are right.                                                                                                     
                                                                                                                                
REPRESENTATIVE   DAVIES  asked  if  after  the  FERC  certification                                                             
happened,  were the other  provisions substantially  similar  to the                                                            
producers' legislation that the committee has seen so far.                                                                      
                                                                                                                                
MR. ZANE  said he  thought it  was more  likely to  be what  Senator                                                            
Bingaman  proposes rather  than the producers.  He wasn't sure  that                                                            
the  producers   liked   this.  He   knows  they   don't  like   the                                                            
reauthorization of ANGTA.                                                                                                       
                                                                                                                                
REPRESENTATIVE  DAVIES asked if it wouldn't be hard  to actually put                                                            
a project together under  ANGTA if the producers were dragging their                                                            
feet. "It still puts the  producers' bill in the drivers' seat in my                                                            
opinion. Could you comment on that?"                                                                                            
                                                                                                                                
MR. ZANE  replied, "I think  you have to  ask Senator Murkowski  and                                                            
his staff those questions."                                                                                                     
                                                                                                                                
He assumed  if the  Foothills project  can really  get going,  major                                                            
U.S.  companies   would  be  involved  who  on  their   own  can  be                                                            
significant  in  terms of  capital  for the  project  and  political                                                            
clout.  It's  possible  the  producers   would  see  that  it's  not                                                            
beneficial to drag their feet.                                                                                                  
                                                                                                                                
CHAIRMAN TORGERSON said  they should remember that the producers are                                                            
authorized to  be partners, also. They are the ones  who are pushing                                                            
for  the  82  amendments.   He  asked  if  there  were  any  further                                                            
questions for Mr. Zane  or Mr. Smith. There were none and he thanked                                                            
them for keeping the committee informed.                                                                                        
                                                                                                                                
[END OF TAPE]                                                                                                                   
                                                                                                                                
11:19 a.m. - 1:08 p.m. Lunch Break                                                                                              
                                                                                                                                
TAPE 01-22, SIDE A                                                                                                            
                                                                                                                                
MR. ROGER  MARKS,  Economist, Department  of Revenue,  was the  next                                                            
speaker.  Chairman  Torgerson had  asked him  to  put together  some                                                            
models on netback and different aspects of the economics.                                                                       
                                                                                                                                
MR. MARKS said that he  had presented the committee with an economic                                                            
model in  July and  was asked to  come back and  present it  in more                                                            
detail. He said  when looking at the models the focus  is on what it                                                            
means for something to be economically feasible. He explained:                                                                  
                                                                                                                                
     One  of  the  crucial   issues  that  determine  economic                                                                  
     feasibility  is how risky a project is and how  that comes                                                                 
     in to determining feasibility.  That's why I really wanted                                                                 
     to spend some  time discussing how risk and especially  in                                                                 
     the  context of this  project, how  commodity price  risk,                                                                 
     that is the price of gas  and how it affects the riskiness                                                                 
     of  the  project  and  the  economic  feasibility  of  the                                                                 
     project.                                                                                                                   
                                                                                                                                
     We're going  to talk about the commodity price  risk. It's                                                                 
     useful  to just  pause for a  second and  discuss how  the                                                                 
     price  of gas is established.  Getting  away from gas  and                                                                 
     just talking about any commodity,  the price in the market                                                                 
     for any  commodity will equal  the lowest cost to produce                                                                  
     new supplies.                                                                                                              
                                                                                                                                
     What does  that mean? If we take  an example of something                                                                  
     that has nothing  to do with gas, let's just say  I invent                                                                 
     a robot  that will change  the oil in  your car and  let's                                                                 
     say  I can produce that  robot for $100.  I figure people                                                                  
     will  pay $500  for this  robot,  so I  manufacture  these                                                                 
     robots for  $100 and sell them for $500 and make  a lot of                                                                 
     money. Well, pretty soon  someone will come along and say,                                                                 
     'Gee, this  guy is spending $100 to produce something  and                                                                 
     selling  it for $500. I can produce  that thing for  $100,                                                                 
     too, and I'll  sell if for $400 and take all his  business                                                                 
     away.  Pretty soon,  someone else  will come  in and  say,                                                                 
     'Well,  I can sell if  for $300 and  eventually the  price                                                                 
     will come down to the cost.  In economic terms it's called                                                                 
     the marginal  cost and the marginal revenue. The  marginal                                                                 
     cost  is the cost  to produce  the unit  and the marginal                                                                  
     revenue  is the price. Basically,  in markets, if they're                                                                  
     operating  properly, the price of that commodity  will for                                                                 
     the lowest cost to produce new supplies.                                                                                   
                                                                                                                                
     How  might this  come  into affect  for North  Slope  gas?                                                                 
     Let's say the price in the  Midwest in the Chicago area is                                                                 
     $3.00  - the  market  price for  natural gas,  whether  it                                                                 
     comes  from Alaska  or whether  it comes  from Louisiana.                                                                  
     Let's  say that  people  figure out  they can  make  money                                                                 
     building  a North Slope gas line  if the price in Chicago                                                                  
     is $3.00.  Then all  of a sudden, Venezuela  looks up  and                                                                 
     says,  'Gee,  we  have   a lot  of  gas  here   and  we're                                                                 
     interested  in selling  LNG in  the United  States and  we                                                                 
     think  we can bring LNG into  the United States at a  cost                                                                 
     of  $2.00 and make  money selling  it for  $2.00. So  what                                                                 
     happens is at that point,  if you have power plants in the                                                                 
     United  States or a local distribution  company, you  say,                                                                 
     'Gee, I can buy gas in Louisiana  or Alaska for $3.00 or I                                                                 
     can buy gas  from Venezuela for $2.00. At that  point, the                                                                 
     same  process that happened  with the  robot would happen                                                                  
     with gas and  eventually the price of gas would  come down                                                                 
     to $2.00. With that sort  of help the price is established                                                                 
     and  since   if  you're  someone   who's  thinking   about                                                                 
     producing  gas  and building  a  pipeline to  bring  North                                                                 
     Slope gas  to market, you have to be concerned  about what                                                                 
     the  price of gas is  going to be in  the future. Because                                                                  
     the price  of gas is so volatile and so unknown,  there is                                                                 
     significant  gas price risk facing someone who  decides to                                                                 
     build a project.                                                                                                           
                                                                                                                                
     The question  then becomes who will assume this  gas price                                                                 
     risk  and how will they  assume it. One  way, and this  is                                                                 
     how  if things are evolving  the way  I see it, I believe                                                                  
     what will happen at some  point in time is the North Slope                                                                 
     producers decide to go ahead  with this project, they will                                                                 
     have  a third  party build  and operate  the pipeline  and                                                                 
     they will pay someone to  build the pipeline and they will                                                                 
     ship the  gas, someone like Foothills,  Enron, Duke  or El                                                                 
     Paso or Williams.                                                                                                          
                                                                                                                                
     If the  project is structured  like that,  the only way  a                                                                 
     pipeline company  will get financing to go the  project is                                                                 
     if  the  producers  make  throughput  guarantees  if  they                                                                 
     guarantee  they will pay to ship  a certain amount of  gas                                                                 
     for  a certain  amount  of time.  That way  the producers                                                                  
     would assume  the gas price risk. If the producers  assume                                                                 
     this  risk   and  let's  just  decide  Duke  Energy,   for                                                                 
     instance, is going to build  this, and they go to the bank                                                                 
     and say  we're going to build  this and their bankers  say                                                                 
     to them,  'Okay, what you have  to do is get a throughput                                                                  
     agreement.  It's going to be a 4 bcf/d line and  we figure                                                                 
     the tariff is going to be  $2.50. If the producers, Exxon,                                                                 
     Gulfs  and BP, say, 'No matter  what, they will pay  $2.50                                                                 
     for 4 bcf/d  for 20 years, if they guarantee to  pay to do                                                                 
     that, then we'll finance the project.'                                                                                     
                                                                                                                                
     Well, if that  happens, let's say the producers  commit to                                                                 
     pay  $2.50 for 4  bcf/d for  20 years and  then the  price                                                                 
     drops  to $2.00 like  we talked about  a few minutes  ago,                                                                 
     the  producers  could  loose a  lot  of money.  That's  an                                                                 
     extreme example, but if  they loose a penny on 4 bcf/d for                                                                 
     20  years, that's  $300 million  they would  lose over  20                                                                 
     years,  which is a lot  of money. If  they lost .50,  like                                                                 
     they have up here that would be $15 billion.                                                                               
                                                                                                                                
     Another way  gas price might be assumed if, for  instance,                                                                 
     these pipeline  companies instead of having the  producers                                                                 
     take the  gas price risk, the  pipeline companies come  in                                                                 
     and say,  'Okay, we'll buy the  gas from the producers  on                                                                 
     the  Slope for  .50 or  .75 or  $1.00, we'll  buy it  from                                                                 
     them,  we'll ship it and then  we'll sell it ourselves  in                                                                 
     Chicago. That way the pipeline  companies would assume the                                                                 
     gas price risk. Either way,  someone assumes the gas price                                                                 
     risk.  If  the pipeline  companies  assume  it,  then  the                                                                 
     project becomes much riskier  for them. The whole lynchpin                                                                 
     in this project is the gas  price risk and who is going to                                                                 
     assume it.                                                                                                                 
                                                                                                                                
     I've talked to several of  the pipeline companies over the                                                                 
     last  couple of  years  and from  what I  understand  them                                                                 
     saying  is they probably are  not going to assume the  gas                                                                 
     price  risk.  That's  not what  they  do. They  build  and                                                                 
     operate pipelines  and that's why I said earlier,  as this                                                                 
     project  structure  seems to  be evolving,  I believe  the                                                                 
     producers,  if it's built, will probably assume  the risk.                                                                 
     But it's possible the pipeline  companies could assume it,                                                                 
     as well.                                                                                                                   
                                                                                                                                
     While  thinking  about  the project  and  those different                                                                  
     project  structures  that I  presented, the  question  you                                                                 
     need  to ask yourself  is who  is assuming  the gas  price                                                                 
     risk. It's also very important  to understand that the gas                                                                 
     price  risk is  different than  the pipeline  risk. If  we                                                                 
     have  a project structure  where if  Duke is building  the                                                                 
     pipeline  and the  producers  are assuming  the gas  price                                                                 
     risk, the  pipeline risk is much, much different  than the                                                                 
     risk  of the producers  would take.  The pipeline company                                                                  
     would  certainly  face risk.  There's cost  overrun  risk,                                                                 
     there's   environmental  liability   contingencies,   it's                                                                 
     possible  the regulators  might not let  them recover  all                                                                 
     their costs.                                                                                                               
                                                                                                                                
     But these risks are much  different than the risks assumed                                                                 
     by someone  who is going to live or die with gas  price. I                                                                 
     believe these  risks are less, as well. It's important  to                                                                 
     understand,  though, that someone  building and operating                                                                  
     the  pipeline is going  to face a whole  different set  of                                                                 
     risks  than a  producer  who is  guaranteeing  to pay  the                                                                 
     shipped gas, no matter what the price is.                                                                                  
                                                                                                                                
     So,  if  you  think  about  this  gas  price   risk,  what                                                                 
     companies  are going  to do is  sit down  and think  about                                                                 
     what might happen to the  price of gas and even though the                                                                 
     average  price  might be  $3.00,  they might  say, 'Well,                                                                  
     there's  a 50 percent  chance prices  might be $3.00,  but                                                                 
     there might be a 40 percent  chance it's $2.00 and maybe a                                                                 
     10 percent  chance it's  $7.00. That  all averages out  to                                                                 
     $3.00.  But they'll  look  at that  and say,  'Gee,  there                                                                 
     might  be a 40 percent chance  we're going to loose  money                                                                 
     on this  and loose a  lot of money.  So, they're going  to                                                                 
     look at  what they see as their  distribution of possible                                                                  
     gas prices, look at what  the loses might be, how big they                                                                 
     might  be and how  frequently they might  loose money  and                                                                 
     that's  going to  sort of shape  how they  view the  whole                                                                 
     riskiness of this project.                                                                                                 
                                                                                                                                
     When  a  company  is  doing  a  feasibility  study  or  an                                                                 
     economic  study on  the viability  of a  project, the  way                                                                 
     they address  risk is through  what's called the discount                                                                  
     rate.  What the  discount rate  looks at is  what kind  of                                                                 
     return  do we have  to give  investors to  make them  feel                                                                 
     comfortable  investing  money in this  project. Every  new                                                                 
     project needs cash and they  get that cash from investors,                                                                 
     probably  in the form of debt  or the form of equity.  The                                                                 
     company,  when it's getting cash  for a project, is  going                                                                 
     to  compete  with  investments  from  other  projects.  An                                                                 
     investor can invest in a  gas pipeline in Alaska or he can                                                                 
     invest in  an internet startup company in Silicon  Valley.                                                                 
     All  these investments  compete  with each  other and  the                                                                 
     investors  are going  to expect a certain  rate of return                                                                  
     before  investing. The important  thing about this is  the                                                                 
     amount of return that they  expect to get for investing is                                                                 
     going to be commensurate  with the amount of risk in their                                                                 
     project.  For example, today  I can buy a one-year T-bill                                                                  
     from   the  federal   government   backed   by  the   U.S.                                                                 
     government.  There's  practically no  chance that they'll                                                                  
     default,  so I can invest $100  now and one year from  now                                                                 
     get back from  the government, I think interest  rates now                                                                 
     are  around 2 -  3 percent, and  get $102  or $103 back  a                                                                 
     year from  now. On the other hand, if I'm an investor  and                                                                 
     I'm  trying  to find  an  investment  and  I look  on  the                                                                 
     internet,  people looking for investors and suppose  I see                                                                 
     that some  is starting up a travel agency that's  going to                                                                 
     specialize  in bringing  people to  Afghanistan today  and                                                                 
     they're  going  to pay 3  percent.  It cost  them $100  to                                                                 
     bring people  over, but they'll charge $103. I'm  going to                                                                 
     look  at that and  say, 'You  know, for the  same $100,  I                                                                 
     think  it's a  lot riskier  investing in  the Afghanistan                                                                  
     project than buying a T-bill  from the federal government.                                                                 
     What  kind  of return  would  I expect  to invest  in  the                                                                 
     Afghanistan scheme? Maybe  I'd want 100 percent return. If                                                                 
     I put  $100 down, I'd  expect $200 back  because the  odds                                                                 
     are so risky.                                                                                                              
                                                                                                                                
     The question  with this project becomes what kind  of risk                                                                 
     surrounds  the price of gas. A project will generate  cash                                                                 
     flows.  In this project you'll  be selling gas in Chicago                                                                  
     and you'll  make money on that,  no matter what the  price                                                                 
     and  you'll have costs.  You'll have  your tariff, you'll                                                                  
     have  operating  costs, you'll  have  taxes to  pay.  What                                                                 
     comes  out of that are  the net cash  flows. The net  cash                                                                 
     flows  go to  both the debtors  and the  shareholders  and                                                                 
     this is  the return paid to investors  and this is called                                                                  
     the  cost  of  capital.  It  goes  to  both  debtors   and                                                                 
     shareholders.  It's sometimes called the weighted  average                                                                 
     cost of  capital or the WAC.  And the rate of return  that                                                                 
     these  investors  require  to invest  in this  project  is                                                                 
     called  the hurdle rate or it's  also called the discount                                                                  
     rate.  In modeling  projects, what  a company  will do  is                                                                 
     they'll have  their own assessment of what kind  of return                                                                 
     given the risks that investors  will expect from investing                                                                 
     in the  project and that will  become the hurdle rate  and                                                                 
     if the  cash flows don't  generate a  rate of return  that                                                                 
     exceeds  that  hurdle rate,  they  will not  consider  the                                                                 
     project economic.                                                                                                          
                                                                                                                                
     We might  ask what happens if  a project generates a  rate                                                                 
     of return  less than what the  shareholders expect.  Let's                                                                 
     say I expect a 15 percent  rate of return in a project and                                                                 
     I invest $100  and it turns out it's only going  to return                                                                 
     110  percent.  What will  then  - if  I'm still  going  to                                                                 
     expect   15  percent,   what  that  means   is  that   the                                                                 
     shareholder  will only put $95  down, if I'm going to  get                                                                 
     $110 back  rather than $100.  In essence, what that  means                                                                 
     is  that value  of the stock  goes down  and corporations                                                                  
     these  days  are  structured  to make  the  lives  of  the                                                                 
     managers  very miserable  if the value  of the stock  goes                                                                 
     down. So,  management is not going to do anything  to make                                                                 
     the value of the stock go  down, which is why they need to                                                                 
     earn  a rate  of return that  investors  expect given  the                                                                 
     risk.                                                                                                                      
                                                                                                                                
     Again, I'd  like to point out that this discount  rate, if                                                                 
     we're addressing  the project where someone like  Exxon is                                                                 
     figuring  out whether  or not  to have  someone build  the                                                                 
     project  so they can  sell gas and Exxon  is assuming  the                                                                 
     gas price  risk, the discount  rate they have is going  to                                                                 
     be  very different  from the  discount rate  someone  like                                                                 
     Duke  is going to have  to build a  project. Numbers  have                                                                 
     been thrown  around that maybe there might be  a 9 percent                                                                 
     cost of capital on the pipeline  and a 15 percent discount                                                                 
     rate for the  project. Those numbers are not inconsistent                                                                  
     at  all.  What  they  are  is  two  completely  different                                                                  
     investment decisions with different sets of risks.                                                                         
                                                                                                                                
     Now the  question is what might  be the discount rate  for                                                                 
     this project.  Generally, when  you try to figure out  the                                                                 
     discount rate  for a project, you want to figure  out what                                                                 
     the  risk or  discount rates  are of  comparable projects                                                                  
     with  similar business  risks.  It's not  difficult  these                                                                 
     days  to look  at different  companies  just  to see  what                                                                 
     their  costs of capital  are and see  what discount  rates                                                                 
     companies  use as  a whole.  One reason  is that projects                                                                  
     that have  a discount rate, not  companies. It's not  hard                                                                 
     to figure  out what Exxon's cost  of capital is. However,                                                                  
     if Exxon  decided to  go into the  airline business,  they                                                                 
     would not  use the discount rate they use for  exploration                                                                 
     and  development  for  oil and  gas.  They would  use  the                                                                 
     discount rate the airline industry uses.                                                                                   
                                                                                                                                
     This project  we're talking about here is very  unique and                                                                 
     it's difficult  to find the proper analogue business  risk                                                                 
     that  would be comparable.  For instance,  something  like                                                                 
     Enstar just has a gas distribution  system in Southcentral                                                                 
     Alaska   is  not  an   appropriate   risk  analogue.   The                                                                 
     exploration  and development  arms of these producers  are                                                                 
     really not an appropriate  dialogue. One can make the case                                                                 
     that a  well-diversified exploration  program is probably                                                                  
     not that risky. If you can  make a lot of money off of one                                                                 
     well and you're drilling  in five different places and you                                                                 
     think  one of them  is going  to come in,  that's a  whole                                                                 
     different  set of risks. Even other gas pipeline  projects                                                                 
     are  not appropriate  analogues for this  project and  the                                                                 
     main reason why is simply  their high transportation costs                                                                 
     for  gas from Alaska.  If the Prudhoe  Bay gas field  were                                                                 
     located in  Indiana right now and it was 50 mile  pipeline                                                                 
     trip to Chicago, that gas  would be commercialized by now,                                                                 
     because   it   would   be   very   unrisky.    Alaska   is                                                                 
     geographically  about  the end  of the  line  in terms  of                                                                 
     economics  on gas projects. So,  it's really difficult  to                                                                 
     say what  the discount rate is  and each company looks  at                                                                 
     it  their  own way.  Each  company will  probably  have  a                                                                 
     different  assessment about what the discount  rate is and                                                                 
     I'll  say right  up  front that  I do  not know  what  the                                                                 
     proper  discount rate  should  be for this  project.  I'll                                                                 
     also  say that this  whole presentation  has been sort  of                                                                 
     surrounded in gloom. I wanted  to represent what the risks                                                                 
     are and how  bad the risk could be. Again, this  is not to                                                                 
     say that this  couldn't be a splendid project  and there's                                                                 
     no advantage  to companies  to look  at a project through                                                                  
     more  risky  eyes  than  what it  really  is,  because  if                                                                 
     there's an  opportunity to make a lot of money,  they will                                                                 
     do that.                                                                                                                   
                                                                                                                                
     What  I'd like to  do is also  talk about  a couple  other                                                                 
     concepts before  we get going, specifically in  the model.                                                                 
     I would like to put up the model to show those ideas.                                                                      
                                                                                                                                
CHAIRMAN  TORGERSON asked if  he was going  to comment on the  press                                                            
releases where  the producers say the gas lines are  not economical,                                                            
because they make 11 percent and not 15.                                                                                        
                                                                                                                                
MR. MARKS replied:                                                                                                              
                                                                                                                                
     Basically,  my model if you put the producers  inputs into                                                                 
     them, I get the same outputs  the producers get. As I said                                                                 
     in  July, we  are certainly  not specialists  on what  the                                                                 
     capital  costs  of  the  project  are  and  that's  a  big                                                                 
     determinant about what the  answer is. So, we really don't                                                                 
     have  an opinion  on the veracity  of the  inputs. If  the                                                                 
     inputs the producers have  represented are indeed the true                                                                 
     inputs,  I believe  the outputs  they have  generated  are                                                                 
     indeed  the outputs.  When  they put  up 11  percent as  a                                                                 
     return,  that is the  return with those  inputs. Again,  I                                                                 
     have  no idea what  the right  discount rate  is. That  15                                                                 
     percent  is something the three  of them put together  for                                                                 
     presentation purposes. I  think each company has their own                                                                 
     different idea on what that number is.                                                                                     
                                                                                                                                
CHAIRMAN  TORGERSON  asked if  they  would characterize  11  percent                                                            
return as a non-profitable project.                                                                                             
                                                                                                                                
MR. MARKS replied,  "There's a difference between  profit and, again                                                            
with  my Algerian  project,  you could  earn  3 percent  and not  be                                                            
profitable. That does not necessarily make if feasible."                                                                        
                                                                                                                                
CHAIRMAN TORGERSON  asked if they could explore that  today, because                                                            
they need to  get past the news releases  saying that 11  percent is                                                            
not  a  profitable   project.  He  knows  the  regulatory   agencies                                                            
generally  give  pipelines between  8  and 12  percent  return as  a                                                            
built-in profit  in their tariff. He assumed that  they would like a                                                            
higher number because of  the risks that might be involved, but it's                                                            
an uncharacteristically   higher number  as it relates  to what  our                                                            
regulatory agency gives.                                                                                                        
                                                                                                                                
MR. MARKS replied:                                                                                                              
                                                                                                                                
     Let me  answer your second question  first. Again, if  the                                                                 
     regulatory  agency  gives the pipeline  a 9  - 12 percent                                                                  
     rate of return,  that is not inconsistent with  a producer                                                                 
     who  needs 15 percent  to make this  project work, simply                                                                  
     because they're  two different investment decisions.  One,                                                                 
     the return  a regulator would give a pipeline  company, if                                                                 
     a regulator  is going to give that return to the  pipeline                                                                 
     company based on the risk  they face, the pipeline company                                                                 
     is  only  going to  get  financing  given  the throughput                                                                  
     guarantees.  With those throughput  guarantees, the  risks                                                                 
     the  pipeline companies  face,  I believe,  wants a  lower                                                                 
     rate of return  than what the producers would  want facing                                                                 
     the  commodity  price risk.  That's not  to  say that  the                                                                 
     pipeline company  doesn't have any risk. They  do. There's                                                                 
     cost  overruns;  there's the  possibility  the regulators                                                                  
     might  not let  them recover  all their  monies and  there                                                                 
     could  be  a  gas explosion  in  the  middle  of downtown                                                                  
     Fairbanks  or  Edmonton,  for  instance.  So,  building  a                                                                 
     pipeline is not riskless,  but it's a less risky activity.                                                                 
     Again,  what  we have  here  are  two different  projects                                                                  
     facing two different profiles.  One is a decision to build                                                                 
     a pipeline  with a throughput guarantee. The other  is the                                                                 
     decision   to  make  that  guarantee  knowing  you   could                                                                 
     possibly loose a lot of money if gas prices go low.                                                                        
                                                                                                                                
     To answer  your first question,  again, I don't know  what                                                                 
     the discount  rate is. It would  be foolish for me to  try                                                                 
     and  say what that is.  I could probably  give you a  wide                                                                 
     range, but  the range would be too wide to be  meaningful.                                                                 
     What  we can do  with the model  is look  at what rate  of                                                                 
     return you get on your different  inputs and how different                                                                 
     inputs or tax regimes or  prices affect the rate of return                                                                 
     and see how close you get to a hypothetical target.                                                                        
                                                                                                                                
CHAIRMAN TORGERSON  asked if the 11 percent rate of  return includes                                                            
things such  as the  loss of oil  production, if  any, if we  take 4                                                            
bcf/d off the fields. Also,  he wanted to know if they are including                                                            
the netback of gas or is it just strictly pipe line economics.                                                                  
                                                                                                                                
MR.  MARKS responded  that  he understood  the  11 percent  rate  of                                                            
return is not  predicated on any oil  losses. He explained  with the                                                            
use of his model.                                                                                                               
                                                                                                                                
REPRESENTATIVE  GREEN asked what would happen to the  rate of return                                                            
if they  set this up at  $2.50 and they find  gas at $2.00.  He also                                                            
wanted to know  if the miscible liquids  had been considered  in the                                                            
netback value to the state.  Those liquids could be extracted before                                                            
the gas goes through the pipeline and money could be made there.                                                                
                                                                                                                                
MR. MARKS replied that  in the example he used $2.50 was the tariff.                                                            
He didn't  think it was  possible to enter  into real long-term  gas                                                            
sales contracts for significant volumes.                                                                                        
                                                                                                                                
     There  is no real market  out there.  You can't go to  the                                                                 
     New  York Mercantile  Exchange  and sort of  hedge gas  20                                                                 
     years  out. I  don't  think most  power plants  and  local                                                                 
     distribution  companies  are willing to  enter into  long-                                                                 
     term contracts on the sales side.                                                                                          
                                                                                                                                
     On the  second question,  the liquids  - this is what  the                                                                 
     producers  have told me and this  how I believe they  have                                                                 
     modeled  it and  how I've modeled  it. They  have told  me                                                                 
     that  the composition  of the  residue gas  would be  1080                                                                 
     BTUs per mcf. However, the  gas distribution system in the                                                                 
     Upper Midwest  can only take 1040. For the other  40, they                                                                 
     said the cost  of extracting the liquids would  offset the                                                                 
     value  of that  extra 40  BTUs and  it was  a wash pretty                                                                  
     much.  Some people have  said that the  residue gas  might                                                                 
     have much  higher BTUs; it's  something the Department  of                                                                 
     Revenue  is  not  an  expert  on.  But  that's   the  best                                                                 
     information we have on that right now.                                                                                     
                                                                                                                                
1:42 p.m.                                                                                                                       
                                                                                                                                
REPRESENTATIVE FATE asked  regarding the gas price risk if he or the                                                            
producers  had a constant  in the  formulas which  says that  in the                                                            
future there  may be a different process  in establishing  gas price                                                            
making  the gas  price risk  more tolerable  in  the computation  of                                                            
their return on investment.                                                                                                     
                                                                                                                                
MR. MARKS replied, "Yes,  if you could lock in $3.10 for 20 years on                                                            
4 bcf/d,  that would  reduce the risk  of a project  and the  hurdle                                                            
rate would be reduced as well."                                                                                                 
                                                                                                                                
REPRESENTATIVE  FATE asked if there  had been any constant  computed                                                            
on, at least,  the expectation that might happen.  He explained that                                                            
he has heard  people in the industry  say that some type  of pricing                                                            
mechanism is needed to  stabilize the price of gas. "If that's true,                                                            
then the  gas price  risk would  be leveled  at some  point and  the                                                            
computations  would  be more  bearable  relative  to the  return  on                                                            
investment."                                                                                                                    
                                                                                                                                
MR. MARKS  responded  that he  was not  familiar  with any  proposed                                                            
ideas to  stabilize gas prices.  Consumers  want the price to  be as                                                            
low as  possible  and there  would be  resistance if  there was  any                                                            
effort to put a floor on prices.                                                                                                
                                                                                                                                
CHAIRMAN TORGERSON  commented that  one of the producers  asked some                                                            
members of Congress to entertain a floor on pricing.                                                                            
                                                                                                                                
     If the price of gas went  down to around $1.50, then there                                                                 
     would be some  sort of royalty or dollar exchange  to give                                                                 
     them downside  protection, but  that hasn't materialized.                                                                  
     I'm  sure the answer  to your  question would  be yes,  it                                                                 
     would  be  less risky  if  they would  have  a government                                                                  
     guarantee.  That goes  without  being said.  I also  don't                                                                 
     think there's anybody entertaining  that currently, but we                                                                 
     don't know that either.                                                                                                    
                                                                                                                                
REPRESENTATIVE  FATE responded that was why he wanted  to know if it                                                            
had been introduced as a variable in any modeling.                                                                              
                                                                                                                                
CHAIRMAN TORGERSON responded  that it hadn't been introduced, but it                                                            
hadn't  been thrown out  either. He  thought it  would be an  upward                                                            
battle.                                                                                                                         
                                                                                                                                
REPRESENTATIVE  DAVIES   clarified  that  he  thought  part  of  the                                                            
question  was whether it  was a factor  in Mr.  Marks' model  and he                                                            
heard the answer to be no.                                                                                                      
                                                                                                                                
REPRESENTATIVE  OGAN asked  if it was correct  that a long  term gas                                                            
contract was for about one year.                                                                                                
                                                                                                                                
MR. MARKS  said  he wasn't  sure, but  probably not  much more  than                                                            
that.                                                                                                                           
                                                                                                                                
REPRESENTATIVE  OGAN asked if anyone had considered  what the energy                                                            
market would be in 2040.                                                                                                        
                                                                                                                                
MR. MARKS  replied  that the  reason it's  difficult  to do that  is                                                            
because for years  the gas price was $2.00 until about  a year and a                                                            
half  ago when  prices  shot  up to  $10.00.  That  happened  mainly                                                            
because inventories  were very low  and last winter was the  coldest                                                            
winter  in 100 years.  "The big  unknown is what  happens to  supply                                                            
when you go from  a $2.00 well to a $3.00 well. There's  basically a                                                            
continuous line at any time the price goes up."                                                                                 
                                                                                                                                
He explained  that all of a sudden  the gas that cost $2.50  - $3.50                                                            
to produce  that wasn't  economic  before becomes  economic. No  one                                                            
knows what  the shape of the line  would be - whether a whole  bunch                                                            
of gas  would come  on line or a  little bit.  He thought that  when                                                            
prices  shot  up,   most  analysts  underestimated   the  amount  of                                                            
additional  gas that would come in.  So, it's difficult to  forecast                                                            
what happens  10 years  from now.  "Alaska would  be just about  the                                                            
most expensive gas on the market when it comes in."                                                                             
                                                                                                                                
MR.  MARKS said  he  wanted to  further  explain the  discount  rate                                                            
issue. He said that the  discount rate represents the return to both                                                            
debtors and creditors. "It's a weighted cost of capital that's an                                                               
average of your debt and your equity."                                                                                          
                                                                                                                                
TAPE 01-21, SIDE B                                                                                                            
                                                                                                                              
1:55 p.m.                                                                                                                       
                                                                                                                                
MR. MARKS said there might be a question of why there are no                                                                    
interest payments if you are incurring debt. He answered:                                                                       
                                                                                                                                
     The way corporations do  their modeling is they assume you                                                                 
     have all equity financing  with no explicit debt payments.                                                                 
     Therefore,  your cash  flows go to pay  off both the  debt                                                                 
     and the equity.  That rate of return, the 11.1,  is called                                                                 
     the return on investment.                                                                                                  
                                                                                                                                
     The  alternative  way  to  do  this  would  have  been  to                                                                 
     actually model in the debt  payments. What happens then is                                                                 
     since you're  leveraging, since your rate of debt  is less                                                                 
     than  your rate  of equity,  what you're  left with  then,                                                                 
     your cash flows would be  greater; but, since you paid off                                                                 
     your  debt, what  you're left  over with in  the net  cash                                                                 
     flows  goes on the equity. So  your discount rate instead                                                                  
     of being  the average cost of  capital, it's your average                                                                  
     cost  of equity, which  is greater.  But, in general,  the                                                                 
     results   you  have  would  be   the  same  in  terms   of                                                                 
     feasibility  or not.  But, what corporations  do is  model                                                                 
     all equity  with an average cost of capital as  a discount                                                                 
     rate.                                                                                                                      
                                                                                                                                
     The other thing I'd like  to point out is from what people                                                                 
     say, 'Why  don't you just leverage the whole project?  Why                                                                 
     couldn't you borrow 100 percent at a low rate?'                                                                            
                                                                                                                                
     What  happens  even if  you  could get  100  percent  debt                                                                 
     financing,   which  you  couldn't,  but,  if  you  could,                                                                  
     theoretically,  what happens is that every time  you incur                                                                 
     more debt,  the next set of debt you incur is  more risky,                                                                 
     because people  who are incurring debt in the  back of the                                                                 
     line aren't in the back  of the line. They're going to get                                                                 
     paid  off after the  people in front  of the line. If  you                                                                 
     incur more debt, what that  does is make your cost of debt                                                                 
     at  the  end of  the  line  higher.  Or, if  you  do  have                                                                 
     shareholders  behind the debt  holders, what that does  is                                                                 
     make  the  shareholders'   investment  even  more  risky,                                                                  
     because  there is not only more  debt in line in front  of                                                                 
     them, but  it's higher cost debt. The finance  theory says                                                                 
     and  actually two  economists  want to help  [indisc.]  in                                                                 
     proving this  that the weighted cost of that much  capital                                                                 
     is actually indifferent  to your debt equity structure. If                                                                 
     you try  to do more debt to help  a project, what happens                                                                  
     is your cost  of equity goes up and your weighted  average                                                                 
     cost of capital is unchanged.                                                                                              
                                                                                                                                
CHAIRMAN  TORGERSON asked  how he treated  property tax (ad  velorem                                                            
tax).                                                                                                                           
                                                                                                                                
MR.  MARKS replied  that  for the  pipeline  there was  a  four-year                                                            
construction schedule and,  "each year you start paying property tax                                                            
as  soon  as  it  goes  in  the  ground  even  before  revenues  are                                                            
generated."                                                                                                                     
                                                                                                                                
He said the  model shows how things  work and answers questions.  He                                                            
again  read a  caveat  that he  had  read in  July that  says,  "The                                                            
following numbers  do not represent  what the Department  of Revenue                                                            
believes  the economics of  the project are.  They simply  represent                                                            
what  the economics  would be  and with  the specified  inputs.  The                                                            
Department  especially   claims  limited  expertise  as  to  capital                                                            
costs."                                                                                                                         
                                                                                                                                
He explained that  he just used the peak revenue year  of 2015 for a                                                            
project  that  starts in  2007  and  state revenues  would  be  $626                                                            
million. He continued to explain his slides.                                                                                    
                                                                                                                                
CHAIRMAN TORGERSON  asked if the economic limit factor  (ELF) kicked                                                            
in immediately on Prudhoe Bay gas.                                                                                              
                                                                                                                                
MR. MARKS  replied that  there is  an ELF on  Prudhoe Bay gas  right                                                            
now, although  there are  very small  volumes that  are sold  to the                                                            
refinery. The ELF gives  approximately 300 tax-free barrels of oil a                                                            
day or 3,000 MCF/D of gas.                                                                                                      
                                                                                                                                
     If oil and gas come out  of the same well, which they will                                                                 
     in this case, the tax-free  treatment is pro-rated between                                                                 
     the oil and  gas. So, with a gas sale, basically  you have                                                                 
     relatively  less tax-free oil and so the oil ELF  goes up.                                                                 
                                                                                                                                
CHAIRMAN TORGERSON  asked if he was  predicting there would  be zero                                                            
loss of oil  after they depressurize  the field. He also  asked what                                                            
they should use  for a fair comparison of projects,  like LNG Al-Can                                                            
route and the GTL project.  He asked, "Which one makes the producers                                                            
more money and which one is best for the State of Alaska?"                                                                      
                                                                                                                                
MR. MARKS replied no to the first question. He said further:                                                                    
                                                                                                                                
     If  the producers  are going  to do the  project, whether                                                                  
     it's GTLs,  LNG or a pipeline  through Canada, there's  no                                                                 
     project that they will do  if it's not economic to them. I                                                                 
     don't see  the state doing this project. If they're  doing                                                                 
     it,  it has to make  sense to them….  So, the first  thing                                                                 
     you  have to  look at  is the  rate of  return. Different                                                                  
     projects, again, are going  to face different risks and so                                                                 
     each project will not have the same discount rate.                                                                         
                                                                                                                                
CHAIRMAN TORGERSON asked how he got his rate of return.                                                                         
                                                                                                                                
MR. MARKS replied  that the rate of return was the  internal rate of                                                            
return from  [indisc.]. "The reason  it dropped from 11.11  to 10.77                                                            
is because I just put in the oil losses now.                                                                                    
                                                                                                                                
CHAIRMAN TORGERSON asked  if he compares three categories, the well-                                                            
head, the total  state revenues and the rate of return,  between the                                                            
different projects  would they have  a good feel for which  one pays                                                            
the state most and pays the producers the most.                                                                                 
                                                                                                                                
MR. MARKS  said that was  fair, but to keep  in mind that  different                                                            
projects have different discount rates.                                                                                         
                                                                                                                                
2:06 p.m.                                                                                                                       
                                                                                                                                
REPRESENTATIVE  GREEN said  the affects the  loss of oil would  have                                                            
bring to mind the questions:                                                                                                    
                                                                                                                                
     Will there be and when will  there be a loss of oil? Is it                                                                 
     going to be  immediate or is it going to be down  the road                                                                 
     a ways. If it's down the  road a ways, is the value of the                                                                 
     lost   oil  discounted  at  the   same  rate  that   we're                                                                 
     discounting these other things…                                                                                            
                                                                                                                                
He also asked  if the items in the  model could be changed  one at a                                                            
time to find the sensitivity.                                                                                                   
                                                                                                                                
MR. MARKS replied, "Absolutely…"                                                                                                
                                                                                                                                
He continued to  explain that their oil loss model  uses information                                                            
in a  document from  ARCO's oil  loss announcements  during  royalty                                                            
litigation in  1992 (with their permission). The Department  started                                                            
modeling the commercialization  of North Slope gas around 1996. ARCO                                                            
said that it would be okay  to publicly show the oil losses for this                                                            
exercise,  but that he couldn't  show the  actual model, itself.  He                                                            
has been  told by oil companies  now that  thinking has changed  and                                                            
what they  thought in  1992 for oil  losses was  too high, but  they                                                            
haven't talked about what  they think quantitatively the losses are.                                                            
                                                                                                                                
His model shows  the oil losses as a function of when  the gas sales                                                            
start,  how fast  they  ramp up,  and  how much  gas  is sold.  It's                                                            
basically  a total amount  of gas  that has been  depleted from  the                                                            
reservoir over  time and that's why  the losses start out  small and                                                            
grow.                                                                                                                           
                                                                                                                                
CHAIRMAN TORGERSON asked why there was the NGL loss.                                                                            
                                                                                                                                
MR. MARKS replied  that was because  the gas was used to  pressurize                                                            
recovery in the reservoir for the NGLs as well as the oil.                                                                      
                                                                                                                                
CHAIRMAN TORGERSON said  if we're producing more gas, we should have                                                            
more NGLs.  He continued  to discuss figures  in the model  with Mr.                                                            
Marks.                                                                                                                          
                                                                                                                                
MR. MARKS  said that the  big utilities in  Asia have traditionally                                                             
structured  their pricing  with formulas tied  to crude oil  prices,                                                            
which had nothing  to do with the  cost of producing the  commodity,                                                            
but that was changing.                                                                                                          
                                                                                                                                
     Going  forward, the whole gas  purchase structure in  Asia                                                                 
     is  being decentralized  on  a much  more profit-oriented                                                                  
     basis  where individual  power plants  and individual  gas                                                                 
     distribution  companies are going to be buying  their gas.                                                                 
     It's going  to be deregulated. It's going to be  much more                                                                 
     competitive  and I believe  a gas structure  in Asia  will                                                                 
     tend towards a structure  where a purchase price will have                                                                 
     something to do with the cost to produce it.                                                                               
                                                                                                                                
     What   that   does  is   put  Alaska   at   a  tremendous                                                                  
     disadvantage,  because there's a tremendous amount  of gas                                                                 
     in  competing   jurisdictions  in  the  Mid-East,  Qatar,                                                                  
     Abudabi  (ph),   Asia,  Malaysia,  Australia,  Indonesia,                                                                  
     Sakhalin  Island  and basically  that  gas is  sitting  at                                                                 
     tidewater  and  doesn't  have  to  bear the  burden  of  a                                                                 
     pipeline.                                                                                                                  
                                                                                                                                
     Pretty  much  you  can  liquefy  gas  for  the  same  cost                                                                 
     anywhere, ship it for the  same cost anywhere. You can say                                                                 
     that Alaska  might have some  distance advantage over  the                                                                 
     Mid-East.  The  cost of  shipping LNG  over  the last  two                                                                 
     years has  come down drastically, so even big  differences                                                                 
     in   shipping   distances   are   not   that   important.                                                                  
     Furthermore,  what  we  can tell  pretty  much is  all  of                                                                 
     Asia's LNG contracting needs,  at least to the end of this                                                                 
     decade,  have been met.  Alaska, to  bring the cost  down,                                                                 
     would  have to sell a tremendous  amount of LNG, which  is                                                                 
     far more than anyone is  going to be looking for, at least                                                                 
     in this decade.                                                                                                            
                                                                                                                                
He said using  this structure, you go for oil price  risk instead of                                                            
gas price risk  as the risk factor. He thought over  time, the price                                                            
of gas in Asia  would represent what  the cost to get it  there will                                                            
be.                                                                                                                             
                                                                                                                                
CHAIRMAN  TORGERSON  asked if  he had  included the  Port  Authority                                                            
numbers in any models.                                                                                                          
                                                                                                                                
MR. MARKS  replied that they  are selling  volumes that aren't  even                                                            
discovered, yet. Their  model uses 6 bcf/d for 30 years, which is 65                                                            
tcf, almost twice as much as has been discovered.                                                                               
                                                                                                                                
CHAIRMAN TORGERSON asked him about the GTLs.                                                                                    
                                                                                                                                
He commented  on GTLs, that  once the product  is made on the  North                                                            
Slope, you  would deliver  it to the oil  pipeline. So, there  isn't                                                            
the problem  of scale that you would  have with LNG or the  Canadian                                                            
pipeline. You  don't need a huge project to bring  the cost down. He                                                            
said:                                                                                                                           
                                                                                                                                
     The other  notable thing about  gas to liquids is the  big                                                                 
     problem with  Alaska gas that geographically,  it's pretty                                                                 
     much  at the end of  the line. In these  LNG and Canadian                                                                  
     gas  projects the transportation  costs  just chew up  the                                                                 
     value. With oil, maybe 25  percent of the value gets eaten                                                                 
     up  by transportation;  with  gas it's about  90 percent.                                                                  
     With a  GTL project using the  trans Alaska oil pipeline,                                                                  
     the variable  costs of using  the oil pipeline are fairly                                                                  
     low, in the order of maybe  20, 30 or 40 cents per barrel.                                                                 
     Once  you get  the gas  to tidewater  in Valdez,  you  can                                                                 
     compete  with  other projects  in the  world.  You get  on                                                                 
     equal footing  with other competing projects a  lot easier                                                                 
     since  you have  the oil  pipeline  to work  with and  the                                                                 
     costs  are low. Again, you don't  have the transportation                                                                  
     costs  eating up the value like  you do on the other  one.                                                                 
                                                                                                                                
     What  we modeled was  a three-train  project - each  train                                                                 
     producing  100,000  barrels  per day  of this  high  value                                                                 
     clean  gas product,  part  diesel  and naptha.  The  price                                                                 
     Exxon was  looking at two years ago was about  $35,000 per                                                                 
     barrel  capital  costs  at  peak.  I've  reduced  that  to                                                                 
     $30,000.  If  you read  the literature,  people  are  even                                                                 
     thinking  about costs as low  as 20,000 in projects  going                                                                 
     on  in Africa  now. People  think  it would  cost more  to                                                                 
     build something  in the Arctic. They put factors  up to 50                                                                 
     percent  or  so  on that.  So,  I've  used  $30,000  here.                                                                 
     There's  talk about  Shell and  [indisc.]  building up  in                                                                 
     Nigeria  now for $20,000.  So, what  that amounts to  with                                                                 
     100,000 barrels per day  peak, a total CAPEX of $3 billion                                                                 
     per train.                                                                                                                 
                                                                                                                                
     What you're  getting is about  .11 barrels of the product                                                                  
     per  thousand BTUs. These  are the price  premiums in  the                                                                 
     market today you can get  for clean car diesel on the West                                                                 
     Coast for  naptha. In Asia, you get about 30 percent  over                                                                 
     crude  oil for car diesel  and 15 percent  over crude  oil                                                                 
     for naptha.  Again, what you're  doing is playing the  oil                                                                 
     price risk roller coaster with a project like that.                                                                        
                                                                                                                                
     Pretty  much you have the same  tax structure that we  had                                                                 
     in the other projects. Looking at the cash flows…                                                                          
                                                                                                                                
CHAIRMAN TORGERSON asked how many bcf/d 100,000 barrels was or was                                                              
it all in BTUs.                                                                                                                 
                                                                                                                                
MR. MARKS 872,000 MCF going in to produce 100,000 barrels of the                                                                
product.                                                                                                                        
                                                                                                                                
CHAIRMAN TORGERSON asked what the rate of return was.                                                                           
                                                                                                                                
MR. MARKS replied that it was 8.87 percent.                                                                                     
                                                                                                                                
REPRESENTATIVE FATE asked what the equivalent was in bcf/d.                                                                     
                                                                                                                                
MR. MARKS replied, "Remember this is only a 2.6 bcf/d, so these are                                                             
no comparables in terms of volumes."                                                                                            
                                                                                                                                
CHAIRMAN TORGERSON asked if it is safe to say that the State makes                                                              
more money on GTLs in the pipeline.                                                                                             
                                                                                                                                
MR. MARKS replied:                                                                                                              
                                                                                                                                
     In general  I would say, with all things equal,  generally                                                                 
     a  product  that's tied  to  oil would  probably  be  more                                                                 
     profitable than one kind  of gas, for no other reason than                                                                 
     you  have a  cartel propping  up  the price  on oil-based                                                                  
     products.  So, if indeed  the price is  tied to oil,  that                                                                 
     will affect  the bottom line. It's just what the  price of                                                                 
     these commodities turns out to be.                                                                                         
                                                                                                                                
REPRESENTATIVE GREEN asked, when he did this model, if he reduced                                                               
the tariff on the oil, because there is more throughput.                                                                        
                                                                                                                                
MR. MARKS said that was right.                                                                                                  
                                                                                                                                
REPRESENTATIVE GREEN asked  if other considerations were involved in                                                            
his model,  for instance if there  were no new discoveries  and they                                                            
could  still have  GTLs  coming  through  the pipeline,  keeping  it                                                            
viable.                                                                                                                         
                                                                                                                                
MR. MARKS showed him a chart of oil volumes and said:                                                                           
                                                                                                                                
     Here's  an example  of  what tariff  reductions  are as  a                                                                 
     result  of the GTL volumes. It  starts at 12 percent,  but                                                                 
     after the  late years of the North Slope when  oil volumes                                                                 
     are  low, the tariff  reductions get  sizeable. Who  knows                                                                 
     what  the volumes  are  going  to be,  but just  with  the                                                                 
     inputs I have here, you  have a $4 per barrel reduction in                                                                 
     the year  2038. I'm sure it won't  turn out that way,  but                                                                 
     at least it's being considered.                                                                                            
                                                                                                                                
2:40 p.m.                                                                                                                       
                                                                                                                                
REPRESENTATIVE OGAN asked when he figured the royalties to the                                                                  
state, whether he figured on well-head price on gas or the royalty                                                              
based on a barrel by crude at processing.                                                                                       
                                                                                                                                
MR. MARKS replied that he figured it based on gas:                                                                              
                                                                                                                                
     It's 12.5  percent regardless of whether it's  oil or gas,                                                                 
     but what  you have is gas being  produced. You don't  have                                                                 
     the well-head, which is  the point of production when they                                                                 
     royalty  is assessed  and  going through  this processing                                                                  
     activity.  Your closest  value at the  end is just netted                                                                  
     back  and that  total  gross value  is divided  among  the                                                                 
     total units of gas going in.                                                                                               
                                                                                                                                
REPRESENTATIVE OGAN asked if he was saying it would basically be                                                                
awash after they [indisc.] the 40 percent of gas.                                                                               
                                                                                                                                
MR. MARKS replied:                                                                                                              
                                                                                                                                
     It doesn't  matter, you could  take the gas and you  could turn                                                            
     it into  chairs and sell the  chairs; and you have gross  value                                                            
     just divided  among the amount  of gas going in. You  recognize                                                            
     that it's  sold as an oil based  product and higher  value, but                                                            
     in terms of administering  the royalty, it's just divided among                                                            
     the gas units going in.                                                                                                    
                                                                                                                                
TAPE 01-23, SIDE A                                                                                                            
                                                                                                                              
REPRESENTATIVE  GREEN asked,  regarding the  conversion from  gas to                                                            
liquid, whether  Mr. Marks  was using conversion  estimates  back in                                                            
the late  90s or  current ones.  He thought that  ratio is  becoming                                                            
more and more favorable.                                                                                                        
                                                                                                                                
MR. MARKS said he was using what Exxon's technology was in 1999.                                                                
                                                                                                                                
CHAIRMAN  TORGERSON   thanked  Mr.  Marks  for  his  testimony   and                                                            
announced a short break.                                                                                                        
                                                                                                                                
2:43 p.m. - 3:00 p.m.- BREAK                                                                                                    
[END OF TAPE]                                                                                                                   
                                                                                                                                
[THE FOLLOWING TESTIMONY WAS NOT RECORDED]                                                                                      
                                                                                                                                
DEPARTMENT  OF REVENUE DEPUTY COMMISSIONER  LARRY PERSILY  said that                                                            
Cambridge  Energy  Research  Associates  (CERA)   consultants  would                                                            
present  an update on  their vision  of current  and short-term  gas                                                            
prices in North America.                                                                                                        
                                                                                                                                
MR. ED  SMALL, CERA,  said that one  of the most  obvious things  he                                                            
sees is overall economic  weakness, but that they expect to see some                                                            
recovery in  the mid part of next  year and certainly in  the second                                                            
half.  Until  then,  the  economic  weakness  translates  into  soft                                                            
demand.  Demand  is  down  in  all  sectors,  especially  steel  and                                                            
chemical,  but these  are  the areas  in which  they  expect to  see                                                            
recoveries  in the third quarter.  Demand losses next year  due to a                                                            
return to  normal hydrogenation  will offset  some of the return  of                                                            
demand  that was part  of the fuel  switching  that occurred  in the                                                            
first  half of  this year.  He clarified,  "In other  words, we  are                                                            
going to have offsetting factors next year to a certain extent…"                                                                
                                                                                                                                
MR. SMALL  told members  that conservation  has  been a big  factor,                                                            
especially in  the residential, but also in the commercial  sectors.                                                            
This  is most  apparent in  the West  where the  local distribution                                                             
company programs  for conservation and the higher  prices have had a                                                            
big impact.  He advised, "In fact,  in the West we expect  demand to                                                            
be  down between  1.3  and  1.5 bcf/d  through  this winter  and  on                                                            
average next year."                                                                                                             
                                                                                                                                
MR. SMALL  noted that CERA  expects to see  some demand strength  in                                                            
the area of power generation.  There is a question as to whether the                                                            
long-term demand for power  generation has been impacted, which CERA                                                            
believes  has happened. Growth  has not been  as strong as  had been                                                            
anticipated.  He stated,  "Obviously,  if you push  demand down,  it                                                            
takes longer to  get back to that point and then to  grow to a lower                                                            
point than where you had originally expected it to be."                                                                         
                                                                                                                                
MR. SMALL  said  CERA has  seen roughly  55 gigawatts  of new  power                                                            
generation  this  year,  almost   all  gas  fired,  and  another  95                                                            
gigawatts of  proposed and under-construction  generation  for 2002.                                                            
However,  about  65 gigawatts  will  be  built.  In 2003,  they  are                                                            
showing a larger number  of proposed and under-construction projects                                                            
of  110 gigawatts,  but  expect that  number  to get  closer to  60.                                                            
Certainly,  in 2002 and 2003,  there is power  generation that  will                                                            
demand natural  gas. The  bigger question is  how extensive  will be                                                            
the operation of those facilities.                                                                                              
                                                                                                                                
[END OF UNRECORDED TESTIMONY]                                                                                                   
                                                                                                                                
TAPE 01-24, SIDE A                                                                                                            
3:05 p.m.                                                                                                                       
                                                                                                                                
MR.  SMALL informed  members  if the  economy  does  not recover  as                                                            
expected,  then  those facilities  will  not  be operating  at  full                                                            
capacity and will not provide demand strength.                                                                                  
                                                                                                                                
He said  the overall  picture for  the Lower 48  for 2002 is  demand                                                            
growth  of   about  1.6  bcf/d  from   both  power  and   industrial                                                            
consumption. Again,  most of the growth is expected  to occur during                                                            
the last half  of the year. In Canada,  a similar demand  decline is                                                            
expected to couple  with a slower recovery. This is  due to the fact                                                            
that the  Canadian economy  lags the Lower  48 and because  there is                                                            
less power generation  built there to provide the  demand growth for                                                            
the up coming year.                                                                                                             
                                                                                                                                
MR. SMALL  said that because  the injection  season in the  U.S. has                                                            
ended with  almost 3.1  trillion cubic  feet (tcf)  or close  to the                                                            
absolute storage  capacity of 3.2 tcf, storage in  the Lower 48 will                                                            
be a big major  factor this winter and through 2002.  There is a net                                                            
inventory  increase  of 733  tcf this  year  over last.  An  obvious                                                            
impact of this increase  is to reduce winter prices. It will take an                                                            
extremely cold  winter to draw the  gas reserves down a significant                                                             
amount  or  to the  level  they were  at  the  end of  last  winter.                                                            
Additionally, they estimate  that it will take a decrease of about 2                                                            
bcf/d to  refill the storage  reserves to  the current level  by the                                                            
end of the 2002 injection season.                                                                                               
                                                                                                                                
The situation in Canada  is similar to the Lower 48 with record high                                                            
storage  levels in  eastern Canada  and  near record  levels in  the                                                            
west. Here too, prices will be depressed.                                                                                       
                                                                                                                                
Drilling in particular  has been affected by the lower  prices. They                                                            
estimate growth of about  400 million per day for 2001 and a decline                                                            
of about 500 million per  day in 2002 due to the decline in drilling                                                            
they have seen  over the last three months. Unless  prices rise to a                                                            
sustainable $3.00  level, they do not believe drilling  will recover                                                            
to  the early  2001 level  until  later in  2002.  However, the  500                                                            
million decline is more  than offset by the increased storage levels                                                            
outlined earlier.                                                                                                               
                                                                                                                                
MR. SMALL  explained that  the Deep Water  Gulf and the Rockies  are                                                            
still growth areas while  declines are being experienced in the more                                                            
mature  fields, the  newer fields  that  are more  expensive from  a                                                            
production perspective  and the Shallow Shelf area  in Mexico. Later                                                            
in 2002 there  should be some recovery  in drilling levels  and will                                                            
provide a better picture of supply for 2003.                                                                                    
                                                                                                                                
Canada differs  in that drilling  declines  are typical in  the fall                                                            
and increase  in the winter  for remote  and exploratory  locations.                                                            
Although it might  be expected that remote and exploratory  drilling                                                            
would decline  with lower prices, all of the deep  grades were fully                                                            
contracted  last year for two and  three year terms. Producers  will                                                            
pay for  the drilling  rigs whether  they use them  or not,  but the                                                            
odds are that they will  use them. With the forgoing in mind, prices                                                            
should  decline but  not as  much as in  the Lower  48. Next  summer                                                            
should not  see a large drop  because most  of the drilling  will be                                                            
shallow and more than economical at today's prices.                                                                             
                                                                                                                                
Because  of the decline  in Canadian  demand and  the lower  storage                                                            
injection  requirements  for  2002,  most of  the  anticipated  850-                                                            
million  supply-growth  will  be  exported  to the  Lower  48.  It's                                                            
expected  that the  decline in  Lower 48  supply will  be more  than                                                            
offset by Canadian growth next year.                                                                                            
                                                                                                                                
MR. SMALL said  the combination of  demand decline and high  storage                                                            
levels  and increase  in Canadian  imports indicate  continued  soft                                                            
prices. They have declined  from $3.25 to $2.75 and they expect them                                                            
to stay  that way through  the winter. With  oil prices being  lower                                                            
and  gas  prices  close  to  $3.00,  fuel  switching   becomes  more                                                            
attractive. Therefore,  oil will probably provide  a ceiling for gas                                                            
prices through the winter.                                                                                                      
                                                                                                                                
Spring  will bring  even lower  prices  because there  is a  typical                                                            
softening  of demand  at that time  and the  economy probably  won't                                                            
have  recovered.   This   coupled  with   lower  storage   injection                                                            
requirements for next year  will probably see prices pushed to $2.25                                                            
through  early summer.  If there  is an  economic  recovery and  the                                                            
typical summer demand for  power generation occurs, then they expect                                                            
to  see prices  strengthen  through  the  summer. A  typical  winter                                                            
season  in  conjunction  with a  Lower  48 supply  decline  and  the                                                            
expected economic  recovery should  see prices back up to  the $3.00                                                            
to $3.25  level for the  winter period. This  scenario should  bring                                                            
back fairly robust drilling activity in 2003.                                                                                   
                                                                                                                                
The price of Henry Hub  is expected to average $2.71 in 2002 but for                                                            
the longer  term there  are adequate  drivers to  keep prices  above                                                            
$2.00. Of equal importance,  there are drivers that will keep prices                                                            
from staying  much above  $3.00 for  the long  term. Although  there                                                            
will be some price  volatility, they expect prices  to range between                                                            
$2.50 and $3.50 between now and 2005.                                                                                           
                                                                                                                                
CHAIRMAN   TORGERSON   said  the   last  update   outlined   several                                                            
opportunities  for Alaska gas to enter the market  in 2008 and 2010.                                                            
He asked  for the current  projection for  opportunities for  Alaska                                                            
gas.                                                                                                                            
                                                                                                                                
MR. SMALL  thought the window  of opportunity  has shifted  by about                                                            
one year.  When demand  decreases, it  takes awhile  to get  back to                                                            
previous  levels before  you  can grow  beyond that  point.  Current                                                            
expectations  are that there  is probably  opportunity for  frontier                                                            
gas in  the 2009  to 2010  time frame.  Then in 2012  to 2014  there                                                            
should be need for additional  gas. It's the same issue of where the                                                            
frontier gas will  come from, but this is where the  opportunity may                                                            
lie for Alaska and Arctic gas.                                                                                                  
                                                                                                                                
CHAIRMAN TORGERSON  then wanted to  know how they were plugging  LNG                                                            
imports into their thought process.                                                                                             
                                                                                                                                
MR. SMALL replied they  were seeing the existing four LNG facilities                                                            
in the Lower  48 all come back on  stream. Three are active  now and                                                            
the  last  will  come  on  stream  next  year.   They  expect  those                                                            
facilities  to expand  in  2003 to  2005. They  also  expect to  see                                                            
Greenfield  LNG facilities  built in the last  half of this  decade.                                                            
They do see  that new facilities will  be built, but don't  know how                                                            
many.                                                                                                                           
                                                                                                                                
Because of the  September 11 attack, they are looking  at the global                                                            
economy.  The fragile nature  of the Middle  East could impact  both                                                            
oil exports  and LNG development from  that region. This  could have                                                            
an impact  on the entire  global LNG balance  in the latter  part of                                                            
this  decade, but  LNG is  seen as  being  an integral  part of  new                                                            
supply in the Lower 48 in that time frame.                                                                                      
                                                                                                                                
CHAIRMAN TORGERSON  commented that  he sees LNG imports rather  than                                                            
other frontier gas as Alaska's biggest competition.                                                                             
                                                                                                                                
MR. SMALL responded  that their definition of frontier  gas is Artic                                                            
gas, which is  both Alaska and Mackenzie, off shore  East Canada and                                                            
LNG. Of  those three, they  see growth in  LNG imports and  offshore                                                            
East Canada. The  questions now are what are the competitive  forces                                                            
of  LNG? Is  Arctic  gas able  to  compete  and if  so  how will  it                                                            
compete?                                                                                                                        
                                                                                                                                
CHAIRMAN  TORGERSON  then  asked  whether  CERA  tracks  the  petro-                                                            
chemical industry.                                                                                                              
                                                                                                                                
MR. SMALL said it does.                                                                                                         
                                                                                                                                
CHAIRMAN TORGERSON  asked if there is a market for  polyethylene and                                                            
the anticipated delivery date.                                                                                                  
                                                                                                                                
MR. SMALL  said there is  always the opportunity  for a market,  but                                                            
here too the question  of how the petro-chemical industry  in Alaska                                                            
would  compete  globally  must be  addressed.  Due  to the  cost  of                                                            
transportation  from the North Slope to tide water,  Alaska would be                                                            
at a disadvantage because  there are cheaper sources of stranded gas                                                            
globally.  He was  not sure  about the  window of  opportunity,  but                                                            
doubted it would be before the latter part of this decade.                                                                      
                                                                                                                                
CHAIRMAN  TORGERSON  then  asked  whether  they  were  tracking  the                                                            
fourteen  countries that  are starting  GASPEC,  which is  patterned                                                            
after OPEC  and would control  world gas prices.  He first  heard of                                                            
this organization during his last trip to Washington D.C.                                                                       
                                                                                                                                
MR. SMALL replied  that was outside his area of expertise,  but that                                                            
he would  have  someone from  CERA investigate.  He  added that  the                                                            
success  of such an  organization  would be more  tenuous than  OPEC                                                            
because it's  a smaller part of a  global market and transportation                                                             
costs  would be  more  difficult to  control.  This  said, it's  not                                                            
beyond the realm of possibility.                                                                                                
                                                                                                                                
CHAIRMAN  TORGERSON said  because energy  security  is such a  large                                                            
issue, it's of greater  concern that they are trying to do this than                                                            
the possibility that they will be successful.                                                                                   
                                                                                                                                
REPRESENTATIVE DAVIES asked  what major risk factors CERA is looking                                                            
at in terms of  economic recovery in the next six  months and if the                                                            
recovery   doesn't  occur,   what   price  sensitivities   CERA   is                                                            
forecasting.                                                                                                                    
                                                                                                                                
3:20 p.m.                                                                                                                       
                                                                                                                                
MR.  SMALL  said  consumer  confidence   and  employment  are  major                                                            
signposts and  the current stock market  malaise figures  heavily in                                                            
consumer confidence. In  general, companies [are] starting to report                                                            
positive earnings  even though they aren't the earnings  anticipated                                                            
a  year ago,  which  is a  positive sign.  Consumer  confidence  and                                                            
spending are critical in  terms of bringing back demand in steel and                                                            
petrochemical sectors.                                                                                                          
                                                                                                                                
CERA does have  a scenario that predicts  recession lasting  through                                                            
2004 and  it shows prices  of between $2.50  and $3.00 through  that                                                            
period. In the  context of Arctic gas, the window  of opportunity is                                                            
pushed well beyond 2010, possibly to 2015.                                                                                      
                                                                                                                                
CHAIRMAN  TORGERSON   thanked  Mr.  Small  for  his  testimony   and                                                            
announced the pipeline ownership study would be discussed next.                                                                 
                                                                                                                                
MR. LARRY PERSILY  explained part  of his testimony would  duplicate                                                            
part of Roger  Marks' testimony because  risk is key in determining                                                             
whether  the  state should  become  an  owner  or financier  of  the                                                            
project. He then gave the following report:                                                                                     
                                                                                                                                
     Pursuant   to  your  instructions  in  Senate   Bill  158,  the                                                            
     Department  of Revenue  and its consultants  have been  working                                                            
     for the past few months  compiling a report for the legislature                                                            
     on the merits of state  or public ownership and/or financing of                                                            
     a natural gas project.   In addition to consulting with experts                                                            
     on  debt financing  and project  financing,  we've interviewed                                                             
     more   than  30  individuals   plus  representatives   from  10                                                            
     companies in the oil  and gas industry - not just the producers                                                            
     but  the  large  and  not-so-large   players  in  the  pipeline                                                            
     business.    Our list  of  interviews  also has  included  many                                                            
     Alaskans  involved  in  banking,  the  oil  and  gas  industry,                                                            
     legislators and business leaders.                                                                                          
                                                                                                                                
     Certainly, the Alaskans  we interviewed all would like to see a                                                            
     gas  line built  to  create jobs  in  Alaska, to  generate  tax                                                            
     revenues  to  pay  for  public services,  and  to  promote  the                                                            
     economic   activity  that   would  come   with  such   a  large                                                            
     construction  project.   Obviously,  we don't  need a study  to                                                            
     tell  us that.   What we're  looking  at are the  risks to  the                                                            
     state  -  and  the benefits  -  of  becoming  a member  of  any                                                            
     partnership  that  builds and  operates  the line.   And  we're                                                            
     looking  at how - and what would  happen - if the state  wanted                                                            
     to  raise  the hundreds  of  millions  or billions  of  dollars                                                            
     needed to buy into the project.                                                                                            
                                                                                                                                
      Here are some of the questions we're trying to answer:                                                                    
                                                                                                                                
     What  if we sign  on as a  partner and there  are serious  cost                                                            
     overruns  during construction?   What  if the partners  are all                                                            
     required  to pay in more money  to cover those overruns?   Will                                                            
     the  state be  able to  come up with  the money?   It's  always                                                            
     possible  that federal  regulators - FERC  - may not allow  the                                                            
     pipeline  owners to recover 100%  of the cost of any  overruns.                                                            
     Is it smart  to commit to some possible unknown  expense in the                                                            
     future, given that  the state already is running short of cash?                                                            
     Even  worse, what  if some  unforeseen event  blocks or  stalls                                                            
     completion  of the line?  Granted, the risk is  small judged by                                                            
     the odds of it happening,  but the risk does exist.  We need to                                                            
     consider  that the  Constitutional  Budget Reserve  Fund  is at                                                            
     $2.8  billion and  falling.   We're looking  at less than  $2.5                                                            
     billion  by  the end  of  the fiscal  year  next  June 30,  and                                                            
     perhaps as  low as $1.5 billion one year later.   The Permanent                                                            
     Fund Earnings  Reserve Account,  which had $6.1 billion  just a                                                            
     couple of  years ago, is around $2.7 billion  this week after a                                                            
     bad  year  in  stocks  while  still   continuing  to  pay  full                                                            
     dividends.                                                                                                                 
                                                                                                                                
     After the  pipeline is built and the gas is flowing,  there are                                                            
     still risks to the  owners of the line and/or the owners of the                                                            
     gas.   This  is the  cost of  getting  the gas  to market,  and                                                            
     whether  the market will  be willing to  pay that cost  in full                                                            
     year after year. Whereas  the cost of moving North Slope oil to                                                            
     market  is about 25%  of the sales price  at the refinery,  the                                                            
     cost  of moving gas  to Chicago  is closer  to 80%. There  just                                                            
     isn't  that much margin  left after  paying the transportation                                                             
     tariff  on a gas pipeline.  A small swing  in the market  price                                                            
     for  gas could mean  a loss for whoever  is carrying the  risk.                                                            
     That's the central  issue in all this. Who takes the risk that,                                                            
     in any  given year, the  price for gas  in Chicago will  not be                                                            
     sufficient to cover  the tariff of moving it from Alaska to the                                                            
     Midwest,  plus  the cost  of production,  taxes  and a  profit?                                                            
     Generally, gas producers  (the shippers) take this risk, but in                                                            
     the case of the Alaska  project, because of its size, we expect                                                            
     there  may  be some  risk  sharing between  the  producers  and                                                            
     pipeline owners. Certainly,  if the producers agree to take all                                                            
     of  the  price  risk,  pipeline   ownership  could  be  a  good                                                            
     investment  for  the  state,  consistent  with  Permanent  Fund                                                            
     earnings on a risk-adjusted basis.                                                                                         
                                                                                                                                
     As I said,  we expect that the three North Slope  producers are                                                            
     hesitant  to take all the risk - the risk of  construction cost                                                            
     overruns  if they build the pipeline  and the larger  risk that                                                            
     some years the market  will not pay enough to cover the $2 plus                                                            
     pipeline tariff plus  other costs. Even if you lose just a dime                                                            
     on every  thousand cubic of gas  in a 4 billion cubic  foot per                                                            
     day line, that loss  could total $400,000 a day, or almost $150                                                            
     million over a full year.                                                                                                  
                                                                                                                                
     Of course, pipeline  companies would be happy to build the line                                                            
     if producers  agree to take all the risk, signing  "ship-or-pay                                                            
     contracts,"  committing to pay  the pipeline companies  a fixed                                                            
     tariff regardless of the market price.                                                                                     
                                                                                                                                
      The decision whether to build the gasline, and who will                                                                   
     build it, will come down to a deal over who is willing to                                                                  
     share how much of the price risk.                                                                                          
                                                                                                                                
     Also thinking about risk, does it make sense for the state,                                                                
     which is already heavily dependent on oil revenues, to take                                                                
     a large  investment in gas?   Should we instead diversify  from                                                            
     the oil and gas sector in generating state revenues?                                                                       
                                                                                                                                
     It's  one thing for  a corporation  to take  a risk that  could                                                            
     mean  no dividends to  shareholders if  it goes sour one  year.                                                            
     It's another  thing for a state  to take a risk with  providing                                                            
     essential  public  services.  Remember,  we expect  the  Budget                                                            
     Reserve to  hit empty in 2005, and the Permanent  Fund earnings                                                            
     reserve has taken a major hit in the stock market.                                                                         
                                                                                                                                
     Would  the state be  better off letting  someone else  take all                                                            
     the risk,  and we then would  do what we do best - and  that is                                                            
     tax the profits?                                                                                                           
                                                                                                                                
     Putting aside the  risk issues, we next will have to answer the                                                            
     questions:  What can the state  bring to table as a  partner in                                                            
     the project?  Would  state government involvement actually slow                                                            
     down  a commercial  operation?   Does the  state gain  anything                                                            
     worthwhile for taking a share of the risk?                                                                                 
                                                                                                                                
     In  our  research   and  analysis,  and  our  interviews   with                                                            
     producers  and pipeline companies, here is what  we've learned:                                                            
                                                                                                                                
          Project  sponsors  -  be they  gas producers  or  pipeline                                                            
          companies  - already have  access to all the capital  they                                                            
          need   if they   decide  to  build  the  project.    State                                                            
           involvement just isn't needed for financing.                                                                         
                                                                                                                                
          State  investment   doesn't  do  anything  to  lessen  the                                                            
          financial  risks  for the  other partners,  so they  don't                                                            
          gain   anything  from  having  us  as   a  partner.    The                                                            
          marketplace  dictates project  risk, and the state  has no                                                            
          control over that.                                                                                                    
                                                                                                                                
          Alaska  already has  a significant  future income  risk in                                                            
          the  energy sector.  Why would people want to compound the                                                            
          situation  by making a large, discretionary  investment in                                                            
          energy?   An executive said by investing in a project that                                                            
          will  not be cash-flow positive for a number of years, the                                                            
          state  is depriving  its  citizens of  the present-income                                                             
          value of its limited investment capital.                                                                              
                                                                                                                                
          Although  some may believe the state would gain a "seat at                                                            
          the  table"  as a  partner in  the pipeline,  we  wouldn't                                                            
          really  gain any more information than we would be able to                                                            
          get  on our own  - through the  Federal Energy  Regulatory                                                            
          Commission,  which  would regulate  pipeline tariffs,  and                                                            
          through  the state's own regulatory agencies.  We couldn't                                                            
          use  confidential, proprietary information  from the table                                                            
          against  companies in tax  cases, and we couldn't  use the                                                            
          information  to out-maneuver our partners in gas marketing                                                            
          opportunities.                                                                                                        
                                                                                                                                
          As   a  partner,  the  state  might  face  the   political                                                            
          temptation to meddle in the business operation.                                                                       
                                                                                                                                
     As one pipeline company said, the state would need to                                                                      
     recognize that board discussions are open, frank and                                                                       
     confidential.  Decisions would need to be made for the best                                                                
     interest of the project, not necessarily the state.                                                                        
     Decisions  of and debate of the  joint venture board  cannot be                                                            
     shared publicly.  This might not be compatible with state                                                                  
     ownership.                                                                                                                 
                                                                                                                                
     Another executive  explained that a seat at the table is a fine                                                            
     political  concept, but the state's  participation likely  will                                                            
     hurt  the  viability  of  the  project.   The  decision-making                                                             
     process  of the  state  on the  joint venture  governing  board                                                            
     likely will be influenced  by political, not business, concerns                                                            
     and will  be slow.  Management of any joint venture  is, by its                                                            
     very nature,  very difficult.  A governmental  entity will only                                                            
     increase the complexity  because governments are not accustomed                                                            
     to making quick, unemotional decisions.                                                                                    
                                                                                                                                
     The state  already can regulate  much of the operations  of the                                                            
     line  through  right-of-way permits  and  regulatory  oversight                                                            
     functions.                                                                                                                 
                                                                                                                                
     Being  a  partner  could  put  the state  into  a  conflict  of                                                            
     interest situation.   What would be more important to the state                                                            
     -  running  the  line at  maximum  profit,  or  following  new,                                                            
     perhaps costly environmental or safety or regulatory rules?                                                                
                                                                                                                                
     A final question is,  should the state own a piece of a project                                                            
     in a foreign country?                                                                                                      
                                                                                                                                
      If the state decided to go ahead and take the risk as a                                                                   
     partner in the project, where would we get our share of the                                                                
     cash to buy into the Gasline?                                                                                              
                                                                                                                                
     Under  existing  federal law,  the state  or  any other  public                                                            
     entity could not issue  tax-exempt debt except for a very small                                                            
     portion  of the project.  Only  those facilities available  for                                                            
     public  use, such  as a  dock or  highway or  distribution  hub                                                            
     available  for all users, would  qualify under federal  law for                                                            
     tax-exempt  financing.  Everything else would  be financed with                                                            
     taxable bonds.                                                                                                             
                                                                                                                                
     Federal law  does allow the state to issue a  limited amount of                                                            
     tax-exempt  debt for private-activity uses, but  that currently                                                            
     is set  at $187 million  a year, and  is used in full  by AHFC,                                                            
     AIDEA, the student loan corporation and others.                                                                            
                                                                                                                                
     Congress  could  change  the  tax  laws  as it  has  for  other                                                            
     projects,  but without a change in federal law,  tax-free bonds                                                            
     do not appear  to be possible for raising the  state's share of                                                            
     buying  into the project.   The same  restriction likely  would                                                            
     apply to a port authority  or other, similar public corporation                                                            
     or agency.                                                                                                                 
                                                                                                                                
     Another  issue is that we don't  believe the state could  issue                                                            
     general obligation  bonds for this project.  State ownership in                                                            
     the Gasline likely  would fail to meet the required standard of                                                            
     a capital improvement or public improvement.                                                                               
                                                                                                                                
     But  if we  could  issue GO  bonds for  our investment  in  the                                                            
     pipeline  - assuming the state  wants to preserve its  existing                                                            
     AA  credit  rating  -  a  conservative  estimate  of  our  debt                                                            
     capacity would allow  us to commit no more than 5% to 8% of our                                                            
     general fund revenue  stream to debt payments.  That's been the                                                            
     state's  target  for  years,  and  it  has served  us  well  in                                                            
     maintaining  a good credit limit.  At a limit  of 8% of general                                                            
     fund  revenue,  the state  could  issue somewhere  around  $200                                                            
     million to  $300 million in 10- or 15-year bonds  over the next                                                            
     six  years.  Those  numbers are  based on  the state's  current                                                            
     fiscal  situation, meaning the  budget gap.  If the  state were                                                            
     to  adopt  new revenue  sources,  be  it  taxes or  using  some                                                            
     Permanent  Fund earnings, we  would have the capacity  to issue                                                            
     significantly more debt by the end of the decade.                                                                          
                                                                                                                                
     But  also keep in mind  that any estimate  of Alaska's  bonding                                                            
     capacity   today  does   not  yet  account   for  bonds   under                                                            
     consideration,  such  as  the  new DEC  seafood  lab,  deferred                                                            
     maintenance  on  public  buildings,  schools and  harbors.  The                                                            
     Gasline  would have to compete  with all those other  needs for                                                            
     GO debt.                                                                                                                   
                                                                                                                                
     The state  or another public entity could issue  revenue bonds,                                                            
     pledging  the future revenue  from the Gasline to pay  back the                                                            
     debt. But there are some problems here, too.                                                                               
                                                                                                                                
     One,  if  the state  backed  the  revenue  bonds with  a  moral                                                            
     obligation,  we'd  have  to use  tax  money or  Permanent  Fund                                                            
     earnings  if gas line revenues  were insufficient in  any given                                                            
     year to cover  debt service. If we sold the bolds  based solely                                                            
     on the  gas line revenue  - with no other  assets or income  at                                                            
     risk - we'd probably  have to pay much higher interest rates to                                                            
     borrow  that money.   Much higher  than what  the producers  or                                                            
      pipeline companies would have to pay on their own debt.                                                                   
                                                                                                                                
     Two,  the state would  be at  risk if the  gas flow or  revenue                                                            
     stream were disrupted.   We would no longer have the revenue to                                                            
     pay back the debt.                                                                                                         
                                                                                                                                
     Three, even  with pledging future gas line revenues,  the state                                                            
     still  couldn't match  the excellent  credit  rating and  lower                                                            
     interest  rates that companies such as Exxon  and BP could get.                                                            
      For example, looking  at taxable bonds, the difference between                                                            
     Exxon's  AAA rating  and the state's  AA rating  - if we  could                                                            
     maintain  that  grade  -  would  be  $20  million  in  interest                                                            
     payments in the first year on a $10 billion debt.                                                                          
                                                                                                                                
     Four, we  don't believe 100% project financing  is feasible for                                                            
     this project  for any governmental entity.  Regardless  of what                                                            
     the  port  authority  is  told by  its  lawyers  and  financial                                                            
     advisers,  our research indicates it is close  to impossible to                                                            
     obtain  100%  debt  financing  for  a  project  operated  by  a                                                            
     government entity  with no experience in such projects and with                                                            
     just a single source  of revenue to repay the debt.  The answer                                                            
     might be different  if the producers were willing to absolutely                                                            
     guarantee  a high enough price for a high enough  volume of gas                                                            
     for a long  enough period of time to pay back  the debt, but if                                                            
     they're  going to  take all the  risk, why  would they  want to                                                            
     work  through the  state or a  port authority  when they  could                                                            
     issue their own debt at a lower cost?                                                                                      
                                                                                                                                
     One  other comment  I want  to make  is that back  in 1978  the                                                            
     pipeline  companies were  encouraging  state investment  in the                                                            
     project.    Federal  law  back  then  prohibited  oil  and  gas                                                            
     producers  from owning  a pipeline, so  that source of  funding                                                            
     was  not available.   The  project  was estimated  to cost  $20                                                            
     billion or more, and  that was more than the pipeline companies                                                            
     could afford.  Simply  put, they needed the state.  But the law                                                            
     has  changed  and the  producers  can own  the line.   And  the                                                            
     financial  strength  of  many  of the  companies  involved  has                                                            
     grown.   And the cost  is much lower.   No one really  needs us                                                            
     any more.                                                                                                                  
                                                                                                                                
     These  are our preliminary findings  and thoughts to  date, and                                                            
     could  change as we continue  with our work.  Our final  report                                                            
     will  be delivered in  January, and we  would be happy  to give                                                            
     you an update next month at your convenience.                                                                              
                                                                                                                                
3:39 p.m.                                                                                                                       
                                                                                                                                
CHAIRMAN  TORGERSON  commented  he  hoped  the  department  and  its                                                            
consultants would be able  to work through the concerns and list the                                                            
pros and cons for each of the points set forth.                                                                                 
                                                                                                                                
There are  additional suggestions  in SB 158  that he would  like to                                                            
have  each  addressed  individually.  One  was  the  feasibility  of                                                            
forming a public corporation  and another was whether forming a port                                                            
authority is a good idea or not.                                                                                                
                                                                                                                                
MR. PERSILY  said they would  address the  other questions  and list                                                            
the pros and cons for each and look for solutions to problems.                                                                  
                                                                                                                                
CHAIRMAN TORGERSON pointed  out this is the third report of its kind                                                            
and none  have recommended  state  ownership so  it's doubtful  that                                                            
there would be  a change but some of their questions  are different.                                                            
                                                                                                                                
The comments about "seat  at the table" were interesting but most of                                                            
the information  is confidential not public. It is  available to the                                                            
Department  of Revenue  of course but  he has not  been able  to get                                                            
much   tariff  information   on  the   oil  pipeline   due  to   the                                                            
confidentiality  requirement.  Tariff fluctuation  of one half  of a                                                            
percent could  be a determinant.  The shroud  of confidentiality  is                                                            
certainly  not good  for those  making decisions  because they  must                                                            
simply accept figures given to them.                                                                                            
                                                                                                                                
MR. PERSILY  asked if this meant they  needed to consider  making as                                                            
small an  investment as  possible in  order to  gain access  to that                                                            
confidential information.                                                                                                       
                                                                                                                                
CHAIRMAN  TORGERSON said  that has  been suggested  and perhaps  the                                                            
information  wouldn't be available  even then  but he would  like to                                                            
know. He  does look  forward to  state legislation  in the  upcoming                                                            
session to deal with some of the shroud.                                                                                        
                                                                                                                                
3:45 p.m.                                                                                                                       
                                                                                                                                
REPRESENTATIVE  GREEN said there was a strong difference  of opinion                                                            
on the tariffs on the oil  pipeline and subsequent litigation. For a                                                            
more open policy  there would need  to be some degree of  ownership.                                                            
If  this is  a  good idea  and  the accessibility  question  is  not                                                            
adequately  addressed, then by owning  12.5 percent the State  might                                                            
be able  to allow access.  On the con side,  the State usually  does                                                            
not compete with free enterprise.                                                                                               
                                                                                                                                
MR. PERSILY said the law  does not allow owners of a project to give                                                            
any  preference  to themselves  for  capacity.  If the  State  wants                                                            
capacity,  regardless of  whether it's  an owner  or partner  in the                                                            
pipeline, it would have  to bid for capacity during open season like                                                            
everyone else.  Then it is committed  to filling that capacity  just                                                            
like anyone  else. Therefore,  12.5 percent  ownership could  not be                                                            
translated to 12.5 percent capacity of a regulated pipeline.                                                                    
                                                                                                                                
CHAIRMAN TORGERSON pointed  out they have discussed owning a certain                                                            
capacity in a  certain location if they wanted to  do a large volume                                                            
user somewhere along the route.                                                                                                 
                                                                                                                                
MR. PERSILY  replied that  if the State was  a contract carrier,  it                                                            
would have to  bid for capacity, it would not get  it by owning 12.5                                                            
percent. You could  own it without having capacity  or you could pay                                                            
the capacity  like any other  shipper without  owning it. It  is his                                                            
understanding  that for a contract  carrier, capacity does  not come                                                            
with ownership.                                                                                                                 
                                                                                                                                
CHAIRMAN TORGERSON  thought that was  correct for going from  Alaska                                                            
to Alberta  but a question arises  as capacity is added interstate.                                                             
                                                                                                                                
REPRESENTATIVE  DAVIES asked whether  shared risk wasn't  a valuable                                                            
element.                                                                                                                        
                                                                                                                                
MR. PERSILY thought it  might be but if there were so much risk that                                                            
it's desirable  to dilute it, then the project probably  wouldn't be                                                            
built.  If they feel  there  is small enough  risk  to go ahead  and                                                            
build then  they might  not want to  share the  wealth by taking  in                                                            
other partners.                                                                                                                 
                                                                                                                                
The State might  bring more to the  table without taking  on risk by                                                            
working federal  angles, such as accelerated  depreciation.  Because                                                            
producers  have  talked  about fiscal  certainty,  the  State  could                                                            
certainly bring that to the table without being a partner                                                                       
                                                                                                                                
3:50 p.m.                                                                                                                       
                                                                                                                                
Tape 01-24, SIDE B                                                                                                            
                                                                                                                                
REPRESENTATIVE DAVIES then  asked whether the discount rate would be                                                            
affected  to the extent that  the State shares  risk and whether  an                                                            
investing company would be looking at this.                                                                                     
                                                                                                                                
MR. PERSILY said that is  a question for Roger Marks but the company                                                            
would be putting less of its own money at risk.                                                                                 
                                                                                                                                
REPRESENTATIVE DAVIES said  transportation costs are of concern with                                                            
the oil pipeline with companies  that both transport and distribute.                                                            
Some  suggest  that  if the  State  had  some  ownership,  it  could                                                            
insulate itself  from that concern  because it would benefit  in the                                                            
same way. He asked  if the State could shield itself  if it had some                                                            
ownership and,  if so, what percentage  ownership would be  optimal.                                                            
                                                                                                                                
MR. PERSILY replied that  if the State were absorbing 100 percent of                                                            
the transportation tariffs,  the only way to offset that would be to                                                            
get 100  percent of the profit  on the other  end owning the  entire                                                            
line. If the  State took all the risk  at the wellhead out  but only                                                            
got 12.5 percent of the  pipeline profits because it owned just 12.5                                                            
percent, it would come up short.                                                                                                
                                                                                                                                
The gas line will be different  than the oil line because it will be                                                            
regulated  at a rate of  return. No one  foresees the problems  that                                                            
were encountered  with the oil pipeline  in terms of cost  shifting.                                                            
                                                                                                                                
All Alaskans  interviewed  wanted the  State to have  a seat  at the                                                            
table for the gas line  because they thought there would be valuable                                                            
information  available and they lacked  that information  on the oil                                                            
line and likely were cheated on the oil tariffs.                                                                                
                                                                                                                                
CHAIRMAN TORGERSON said  there were also discussions about the State                                                            
owning the  oil line 25 years  ago and it  wouldn't have been  a bad                                                            
investment.  He agreed that he wants  a seat at the table  but isn't                                                            
sure what he will learn.  Older studies say that the state shouldn't                                                            
be an owner  in the line, but that  we should issue senior  debt and                                                            
he hoped their report would look at that concept.                                                                               
                                                                                                                                
     He remarked:                                                                                                               
                                                                                                                                
     The  barrier  to the  pipeline  is how  to manage  risk  -                                                                 
     whether it be fiscal [indisc.]  from the state, whether it                                                                 
     be  environmental  laws or whatever  it is.  Back to  what                                                                 
     Representative  Davies  said, if  you have  more folks  to                                                                 
     share  that risk,  your exposure  is less.  Not that  that                                                                 
     makes  it a good deal,  because I agree  with you on  that                                                                 
     statement,  but at  some point  in time,  the report  said                                                                 
     that we should  consider not owning the line,  but helping                                                                 
     control the  risk by issuing senior debt if they  had cost                                                                 
     overruns.                                                                                                                  
                                                                                                                                
CHAIRMAN TORGERSON  said the oil pipeline  started out costing  $700                                                            
million and  ended up being $10 billion.  "They had a little  bit of                                                            
cost overrun  on the pipeline, so  it was a very serious  problem on                                                            
how to manage that cost overrun."                                                                                               
                                                                                                                                
MR. PERSILY  said that taking senior  debt on this project  might be                                                            
an attractive option for the state.                                                                                             
                                                                                                                                
CHAIRMAN TORGERSON commented,  "Of course, that was before Exxon was                                                            
making $5  billion per  quarter. So,  they can pay  for this  in one                                                            
year's profit."                                                                                                                 
                                                                                                                                
MR. PERSILY said, "They owe us some of that."                                                                                   
                                                                                                                                
CHAIRMAN TORGERSON said, "About all of that."                                                                                   
                                                                                                                                
REPRESENTATIVE  GREEN said the state  has been historically  getting                                                            
about 8 percent.                                                                                                                
                                                                                                                                
MR. PERSILY responded that  8.25 percent is the long-term assumption                                                            
for the Permanent Fund.                                                                                                         
                                                                                                                                
REPRESENTATIVE GREEN asked,  "Since the state is obviously satisfied                                                            
with a much  lower rate of return,  would that make a difference  in                                                            
making an investment in a portion of the pipeline?"                                                                             
                                                                                                                                
MR. PERSILY  said  it might, but  the Permanent  Fund Corporation's                                                             
8.25  percent  long-term  [indisc.]  is  much lower  risk  than  the                                                            
assessed  base they  are working  on. The  state looks  at how  this                                                            
senior debt  would compare to other  debt the state is investing  in                                                            
as part of its  portfolio. He noted, "It might be  very attractive."                                                            
                                                                                                                                
CHAIRMAN  TORGERSON asked if  they decide to  do a state  ownership,                                                            
whether  they are considering  going through  the Alaska  Industrial                                                            
Development & Export Authority (AIDEA).                                                                                         
                                                                                                                                
MR. PERSILY replied  that they are looking at the  difference in tax                                                            
laws. He explained:                                                                                                             
                                                                                                                                
     If the  state owned shares in  a corporation, which  we do                                                                 
     through  current  [indisc.] other  investments,  we  don't                                                                 
     have  to pay any  federal income  tax, but  what if  there                                                                 
     were limited  liability company  or a limited partnership                                                                  
     in those  projects, would  any of those  projects flow  to                                                                 
     the  state?  Would they  put  us in  a  taxable situation                                                                  
     that's any different if  the state owns it or if we set up                                                                 
     a  corporation similar  to what  we do  with the Northern                                                                  
     Tobacco   Securities   Corporation,  which   is  a   dummy                                                                 
     corporation to shield the  state if there's any default on                                                                 
     the tobacco  bonds. But it really is a state corporation.                                                                  
     So, we'll be looking at those, too.                                                                                        
                                                                                                                                
REPRESENTATIVE  DAVIES  asked  if  they  were considering   possible                                                            
conflict  of  interest.  The  Alaska  Railroad   has  the  citizens'                                                            
interest  in environmental  regulation handled  by one state  agency                                                            
and  the citizens'  interest  in  efficient  economic  operation  by                                                            
another.                                                                                                                        
                                                                                                                                
MR. PERSILY replied that  was certainly possible, particularly after                                                            
all the spills on the Railroad  last year. The conflict issue is not                                                            
an insurmountable one,  such as federal laws that would prohibit tax                                                            
exempt financing.  The conflict is more of a public  policy question                                                            
to the legislature and  to the governor. Is this such a concern that                                                            
you don't walk  into it or do you  walk into it knowing the  issues,                                                            
knowing what you need to avoid with your eyes open?                                                                             
                                                                                                                                
CHAIRMAN TORGERSON  thanked Mr. Persily for his testimony  and asked                                                            
if he  could  have a  draft of  his responses  ready by  the end  of                                                            
December or early January before he released the consultants.                                                                   
                                                                                                                                
MR. PERSILY agreed to do that.                                                                                                  
                                                                                                                                
4:02 p.m.                                                                                                                       
                                                                                                                                
MR. BILL  BRITT, Director,  Pipeline Coordinator,  reported  that in                                                            
January, the  Governor signed Administrative  Order 187 that  set up                                                            
the Gas  Pipeline Office  as a division  of DNR  and he assumed  the                                                            
directorship  of that. In  July, he testified  before the  committee                                                            
and gave a summary of the  proposals that were in play. None of that                                                            
has really changed since that time. He told members:                                                                            
                                                                                                                                
     Right now  we are working with Foothills and the  producer                                                                 
     consortiums.  With Foothills  we are working on advancing                                                                  
     their  right-of-way applications.  With the producers,  it                                                                 
     continues  to be permitting for  various aspects of  their                                                                 
     feasibility  studies. Just  as an aside,  I am frequently                                                                  
     asked about  Yukon Pacific's conditional right-of-way  and                                                                 
     that's being administered  in the Joint Pipeline Office as                                                                 
     an existing lease. Should  they choose to prove that up to                                                                 
     an  unconditional  lease or  otherwise move  that forward                                                                  
     aggressively,  it  might [indisc.]  to hear,  but for  the                                                                 
     time being it's in the Joint Pipeline Office.                                                                              
                                                                                                                                
     Again,  by  way  of  background,  we  were  provided  with                                                                 
     general  funding by LBA in July.  We signed reimbursement                                                                  
     memoranda  of understanding  with  Foothills  in July  and                                                                 
     with the producers  in August. Our funding is  through the                                                                 
     ending  of  this  calendar  year and  we  are  setting  up                                                                 
     discussion  right now with our  three funding sources  for                                                                 
     November  and early  December to discuss  what happens  in                                                                 
     the second half of this year.                                                                                              
                                                                                                                                
     Staff  at  this   point  consists  of  nine  folks.   Four                                                                 
     designated  agencies have four additional people  who have                                                                 
     been  hired   and  will  report  this  month.  The   three                                                                 
     remaining  designated  agencies are  presently recruiting                                                                  
     [indisc.]  and  that  recruiting   in  some instances   is                                                                 
     proving  to be fairly challenging.  We have two assistant                                                                  
     attorney generals assigned  to assist us. We have liaisons                                                                 
     from BLM  and MMS. We are performing  work with six  other                                                                 
     divisions  of DNR - Mining, Land and Water for  land title                                                                 
     work, Land  Records Information for land status  work, the                                                                 
     Office of History and Archaeology  for permitting support,                                                                 
     DGGS for  research, Oil and Gas  for technical assistance                                                                  
     and the State  Pipeline Coordinator's Office continues  to                                                                 
     provide  us with administrative  support. We're presently                                                                  
     in the Atwood Building.  We'll be moving toward the end of                                                                 
     the year. The letter of  interest has gone out, there have                                                                 
     been I think  around a half dozen expressions  of interest                                                                 
     and formal  proposals will be received and evaluated  next                                                                 
     week.                                                                                                                      
                                                                                                                                
     The  work planning  with Foothills  is probably  the  most                                                                 
     intense effort  that we have ongoing. In July,  I received                                                                 
     from Foothills  a reconstituted  application, which  was a                                                                 
     resubmittal  of those  aspects  of the tons  of papers  we                                                                 
     received  previously   that Foothills   considered  to  be                                                                 
     applicable  to  the  existing  project and  applications.                                                                  
     We've  met and  identified high  priority  items. Some  of                                                                 
     those  are  ongoing.  A  larger  discussion  is  over  the                                                                 
     process itself  that will take place and those  things are                                                                 
     now occurring  about every other week in order  to try and                                                                 
     pin this stuff down and keep it moving.                                                                                    
                                                                                                                                
     Doing  ancillary stuff,  we're working  on our directory,                                                                  
     numbers and types of permits,  not only for the state, but                                                                 
     for  the feds and we  will soon be  moving to Canadians  -                                                                 
     [indisc.]  and  private  land  owners  as  well. Critical                                                                  
     issues  associated  with each  - we're flow  charting  out                                                                 
     these permits  and beginning the process of synchronizing                                                                  
     them. We're  outreaching federal government in  attempting                                                                 
     to  organize them since  they are  having difficulties  in                                                                 
     organizing  themselves. We've  made contact with the  EPA,                                                                 
     FAA,  Coast   Guard,  Fish  and  Wildlife  Service,   DOT,                                                                 
     National Marine Fisheries,  FERC, the FCC and the Corps of                                                                 
     Engineers and are getting  information from each. I expect                                                                 
     Canada  to be next.  Probably toward the  end of the  year                                                                 
     and  early  next year  I plan  to  travel to  Calgary  and                                                                 
     Ottawa  and  begin  to  make exactly  the  same  sorts  of                                                                 
     contacts.                                                                                                                  
                                                                                                                                
     The next step is to begin  working with local governments,                                                                 
     native corporations,  travel counsels. We need  to do work                                                                 
     with the [indisc.]  and the Railroad Corporation,  both of                                                                 
     which  we believe have  land along  the right-of-way.  The                                                                 
     University   may  as  well;  that's  now  being  checked.                                                                  
     Legislative session is coming  up and I expect there to be                                                                 
     probably  more than  one bill relating  to gas pipelines.                                                                  
     So, I'm expecting that to  take some time. And in the next                                                                 
     year  I  hope  to  begin a  reasonably  serious  outreach                                                                  
     program.                                                                                                                   
                                                                                                                                
CHAIRMAN TORGERSON  asked what was going on with YPC.  He heard they                                                            
had downsized their office.                                                                                                     
                                                                                                                                
MR. BRITT replied that he was meeting tomorrow with the Right-of-                                                               
way Chief of  the Joint Pipeline Office  to get a briefing  on that.                                                            
They have  submitted a request  for about  17 minor realignments  of                                                            
their rights-of-way,  which is now being processed.  He hasn't heard                                                            
that  this is  setting  off anything  large,  such as  a large  deep                                                            
evaluation over any serious reconsideration.                                                                                    
                                                                                                                                
CHAIRMAN TORGERSON  asked him to email  anything he finds  out about                                                            
that. He asked where they are at in the Foothills process.                                                                      
                                                                                                                                
MR. BRITT replied  Foothills submitted a multi-volume  collection of                                                            
exhibits  that  had  been  submitted  previously   that [Foothills]                                                             
thought was applicable  to the questions that are  asked in a right-                                                            
of-way lease application form. He is beginning the review.                                                                      
                                                                                                                                
CHAIRMAN TORGERSON  asked what they  were, stream crossing  perhaps.                                                            
                                                                                                                                
MR. BRITT replied  that some of it is engineering  work, a lot of it                                                            
is like an engineering  design criteria handbook.  The federal grant                                                            
of right-of-way  under Stipulation 161 required in  the neighborhood                                                            
of 30 separate  plans for a whole  variety of topics from  resources                                                            
in Alaska to locations  and excavations - a broad variety of topics.                                                            
Some of those plans were mothballed.                                                                                            
                                                                                                                                
CHAIRMAN  TORGERSON asked  if they  were reviewing  the engineering                                                             
studies to see what needed to be repeated.                                                                                      
                                                                                                                                
MR. BRITT  replied that  they need  to critique  them and  determine                                                            
whether they  are adequate and, if  they are not, why. Perhaps  they                                                            
are out  of date  or more  information is  needed or  the world  has                                                            
changed.                                                                                                                        
                                                                                                                                
CHAIRMAN  TORGERSON   asked  why  they  have  more  attorneys   than                                                            
engineers.                                                                                                                      
                                                                                                                                
MR. BRITT replied that attorneys are easier to find.                                                                            
                                                                                                                                
CHAIRMAN  TORGERSON thanked  Mr. Britt for  his testimony and  asked                                                            
him to keep the committee informed.                                                                                             
                                                                                                                                
4:09 - 4:19 - BREAK                                                                                                             
                                                                                                                                
MR. JOHN LARSON, Geologist,  U.S. Minerals Management Service (MMS),                                                            
said they have  two off shore leases  sales in Cook Inlet  scheduled                                                            
for 2004 and 2006.  Existing reserves in the Cook  Inlet region have                                                            
been explored  and are 2.564 TCF of gas, about a 12  year reserve if                                                            
gas  in the  area.  There  are  about  6.6 years  of  oil  reserves.                                                            
Further,   exploration  shows   that  the   Cook  Inlet  Basin   has                                                            
significant untapped natural gas resources.                                                                                     
                                                                                                                                
Very few structures  in the perspective  OCS lease acreages  involve                                                            
tertiary  age formations that  are so productive  in the Upper  Cook                                                            
Inlet. There are  potential oil traps that can be  seen on data, but                                                            
they don't  have reservoir  characteristics.  Hypothetical coal  bed                                                            
methane resources  depend on the tertiary  formations in  Upper Cook                                                            
Inlet. He had  projections done by  the U.S. Geological survey  that                                                            
he presented in a slide to the committee.                                                                                       
                                                                                                                                
REPRESENTATIVE  GREEN asked how they  estimated their calculations.                                                             
                                                                                                                                
MR.  LARSON   said  they  tried  to   use  mean  levels   for  their                                                            
calculations.                                                                                                                   
                                                                                                                                
REPRESENTATIVE  GREEN said that they seemed to be  specific numbers,                                                            
but were still "guesstimates."                                                                                                  
                                                                                                                                
MR.  LARSON concluded  that  the Cook  Inlet basin  has significant                                                             
untapped  natural gas  resources and  the MMS is  proposing two  gas                                                            
lease sales in the area in 2004 and 2006.                                                                                       
                                                                                                                                
CHAIRMAN TORGERSON  asked what their  responsibilities were  for the                                                            
state and whether they  just guess at the resources from oil and gas                                                            
numbers or do research.                                                                                                         
                                                                                                                                
MR. LARSON replied  that the estimates on his slides  were generated                                                            
by the U.S. Geological survey, which has done some research.                                                                    
                                                                                                                                
CHAIRMAN TORGERSON asked about Phillips' drilling.                                                                              
                                                                                                                                
MR. LARSON replied that  their target depth as a vertical concern is                                                            
not that  deep.  "It's just  that they're  having to  drill from  on                                                            
shore a long distance off shore in order to get to it."                                                                         
                                                                                                                                
REPRESENTATIVE GREEN asked  if the estimates were primary reservoirs                                                            
or oil associated.                                                                                                              
                                                                                                                                
MR.  RANCE  WALL,   Regional  Supervisor,  MMS,  replied   that  his                                                            
estimates  were the  oil  and gas  plays they  had  analyzed in  the                                                            
northern part  of the basin. It consisted  of an interlude  of a lot                                                            
of oil; those have very  little associated gas with them. There is a                                                            
gas play in an interval  above that which is nearly all gas. In that                                                            
case,   one  wouldn't   think   about   using   the  gas   for   oil                                                            
pressurization.                                                                                                                 
                                                                                                                                
REPRESENTATIVE GREEN asked  if the gas would be available soon after                                                            
development.                                                                                                                    
                                                                                                                                
MR. LARSON  said that is  correct and that  "Some of the deeper  oil                                                            
would have associated gas with it dissolved in the oil."                                                                        
                                                                                                                                
REPRESENTATIVE  DAVIES said he thought the Inlet resources  would be                                                            
all used up in 17 years.                                                                                                        
                                                                                                                                
CHAIRMAN TORGERSON  asked how close their Cook Inlet  estimates were                                                            
in the past.                                                                                                                    
                                                                                                                                
MR. WALL  responded that  they started out  being a lot bigger  than                                                            
they are now.                                                                                                                   
                                                                                                                                
CHAIRMAN  TORGERSON  asked  if they  were  sure  that the  10  holes                                                            
drilled in  the OCS area were uneconomic  so the chances  of leasing                                                            
in Shelikof Straits are probably slim.                                                                                          
                                                                                                                                
MR. WALL responded that  is correct. He also said the five-year plan                                                            
is not official, it's just proposed.                                                                                            
                                                                                                                                
REPRESENTATIVE  DAVIES asked if there were any estimates  that might                                                            
significantly alter the numbers.                                                                                                
                                                                                                                                
MR. WALL responded  that it depended on what decisions  were made on                                                            
what to offer  as they go through  the NEPA process. One  of the key                                                            
issues will be what the State wants them to do.                                                                                 
                                                                                                                                
CHAIRMAN  TORGERSON   said  the  tri-borough   commission   (Kodiak,                                                            
[indisc.] and  the Kenai Borough) met in the early  '90s on how they                                                            
wanted to see  development go forward. He thought  that most of that                                                            
information  would be  the same,  like restrictions  in the  fishing                                                            
areas and that kind of thing.                                                                                                   
                                                                                                                                
SENATOR OLSON  asked if there were known reserves  on federal lands.                                                            
                                                                                                                                
MR. WALL  responded that  he thought there  were, but they  don't do                                                            
assessments for that area.  He suspected there would be potential in                                                            
some areas if they were offered.                                                                                                
                                                                                                                                
CHAIRMAN TORGERSON said he thought they did the work for BLM.                                                                   
                                                                                                                                
MR. WALL responded that they work with them.                                                                                    
                                                                                                                                
CHAIRMAN  TORGERSON asked  if there were  any further questions  and                                                            
there were none. He adjourned the meeting at 4:45 p.m.                                                                          

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