Legislature(2001 - 2002)

08/19/2002 10:15 PM NGP

Audio Topic
* first hearing in first committee of referral
+ teleconferenced
= bill was previously heard/scheduled
                        ALASKA LEGISLATURE                                                                                    
             JOINT COMMITTEE ON NATURAL GAS PIPELINES                                                                         
                          August 19, 2002                                                                                       
                            10:15 a.m.                                                                                          
                                                                                                                                
                                                                                                                                
SENATE MEMBERS PRESENT                                                                                                        
                                                                                                                                
Senator John Torgerson, Chair                                                                                                   
Senator Johnny Ellis                                                                                                            
Senator Pete Kelly                                                                                                              
Senator Don Olson (Alternate)                                                                                                   
                                                                                                                                
SENATE MEMBERS ABSENT                                                                                                         
                                                                                                                                
Senator Rick Halford                                                                                                            
                                                                                                                                
HOUSE MEMBERS PRESENT                                                                                                         
                                                                                                                                
Representative Hugh Fate                                                                                                        
Representative John Davies                                                                                                      
Representative Reggie Joule (Alternate)                                                                                         
Representative Joe Green (Alternate)                                                                                            
                                                                                                                              
HOUSE MEMBERS ABSENT                                                                                                          
                                                                                                                                
Representative Brian Porter                                                                                                     
Representative Scott Ogan                                                                                                       
                                                                                                                                
COMMITTEE CALENDAR                                                                                                            
                                                                                                                                
Committee recommendations to the 23rd Legislature                                                                               
Energy Policy Act of 2002                                                                                                       
                                                                                                                                
WITNESS REGISTER                                                                                                              
                                                                                                                              
Mr. Patrick Coughlin, Consultant                                                                                                
Senate Resources Committee                                                                                                      
Alaska State Capitol                                                                                                            
Juneau AK 99801-1182                                                                                                            
                                                                                                                                
Mr. Mark Myers, Director                                                                                                        
Division of Oil and Gas                                                                                                         
Department of Natural Resources                                                                                                 
550 W. 7th Ave. Ste 800                                                                                                         
Anchorage AK 99501-3560                                                                                                         
                                                                                                                                
Mr. Alan Sharp                                                                                                                  
Director of Northern Business Development                                                                                       
EnCana Marketing USA Inc.                                                                                                       
1200 Smith Suite 900                                                                                                            
Houston TX 77002                                                                                                                
                                                                                                                                
Mr. Mark Hanley, Public Affairs Manager                                                                                         
Anadarko Petroleum Corporation                                                                                                  
1201 Lake Robbins Dr.                                                                                                           
The Woodlands TX 77380-1045 USA                                                                                                 
                                                                                                                                
Mr. John R. Ellwood                                                                                                             
Vice President, Foothills Pipe Lines, Ltd.                                                                                      
CEO, Foothills Pipe Lines Alaska, Inc.                                                                                          
3100 707 Eighth Ave. S.W.                                                                                                       
Calgary, Alberta T2P 3W8                                                                                                        
Canada                                                                                                                          
                                                                                                                              
Mr. Joe Marushack, Vice President                                                                                               
Alaska North Slope Gas Commercialization                                                                                        
Phillips Petroleum Corporation                                                                                                  
POB 100360                                                                                                                      
Anchorage AK 99510                                                                                                              
                                                                                                                                
Mr. Dave Dingell, Manager                                                                                                       
City of Valdez, Port Authority                                                                                                  
POB 307                                                                                                                         
Valdez AK 99686                                                                                                                 
                                                                                                                                
ACTION NARRATIVE                                                                                                              
TAPE 02-7, SIDE A                                                                                                               
                                                                                                                                
CHAIRMAN  JOHN TORGERSON  called  the  Joint Natural  Gas  Pipelines                                                          
Committee meeting to order  at 10:15 a.m. and announced that Patrick                                                            
Coughlin,  consultant  to  the  Senate  Resources  Committee,  would                                                            
testify first.                                                                                                                  
                                                                                                                                
MR. PATRICK COUGHLIN, consultant  to the Senate Resources Committee,                                                            
said he  would provide the  committee with  a brief overview  of how                                                            
the federal  energy legislation came  to be, what's in the  bill and                                                            
then focus  on the bill's provisions  relating to an Alaska  natural                                                            
gas pipeline. He began:                                                                                                         
                                                                                                                                
     Shortly after assuming office,  President Bush established                                                                 
     a  National  Energy Policy  Group  to develop  a national                                                                  
     energy  policy. That  group was headed  by Vice President                                                                  
     Cheney  and they put out a report.  That report contained                                                                  
     numerous   recommendations   regarding   national  energy                                                                  
     ranging   from   electricity   deregulation   to  capping                                                                  
     standards,  but it did  contain some  focus on increasing                                                                  
     gas  supplies  and  this was  especially  true  given,  of                                                                 
     course,  what we all  know is the runup  in gas prices  in                                                                 
     the  winter of  '00 and '01.  The report  noted that  'the                                                                 
     most significant  long term challenge relating  to natural                                                                 
     gas is whether  adequate supplies can be provided  to meet                                                                 
     supply  which is sharply  projected to  increase over  the                                                                 
     next 20 years.'                                                                                                            
                                                                                                                                
     To meet this problem, the  Bush Administration recommended                                                                 
     that  we look at ways  to expedite construction  of a  gas                                                                 
     line  from Alaska and  it recommended  that the President                                                                  
     direct  the  agencies  to  work  with various  interested                                                                  
     parties including Canada  and the State of Alaska and it's                                                                 
     recommended that Congress  look at changes to ANGTA, which                                                                 
     was the existing  law providing for the construction  of a                                                                 
     pipeline from  Alaska. Following the report, the  House of                                                                 
     Representatives  took up  an energy policy  bill and  they                                                                 
     passed that  August of last year. Then the Senate  took up                                                                 
     the bill and that bill is  referred to as HR 4 and as this                                                                 
     committee  knows, that process  took place in the fall  of                                                                 
     last year and ultimately  led to the passage of the Senate                                                                 
     version  of the bill  in the April/May  timeframe of  this                                                                 
     year.                                                                                                                      
                                                                                                                                
     Both  houses  have passed  two  distinct versions  of  the                                                                 
     energy bill.  It's the first attempt by the U.S.  Congress                                                                 
     to pass a  comprehensive energy bill in the last  10 years                                                                 
     and  there are  substantial  differences between  the  two                                                                 
     bills  and, just by way of background  for members of  the                                                                 
     committee,  I included in your  packet a table, which  was                                                                 
     prepared  by  staff for  the Congress  listing  the  major                                                                 
     provisions  of the bills and  the differences. As you  can                                                                 
     see,   there's   provisions   relating   to   electricity                                                                  
     restructuring  and we're  all familiar  with ANWR and  the                                                                 
     differences  between  the Senate  and House  version.  The                                                                 
     average  fuel economy  standards are  there; there's  many                                                                 
     differences between taxation  policy and incentives in the                                                                 
     two bills  and the list goes on and on. As a result  there                                                                 
     has been a  conference committee appointed. That  was done                                                                 
     this  summer and  Representative  Tauzin is  the chair  of                                                                 
     that committee  and Senator Murkowski  and Representative                                                                  
     Young  from Alaska  are members  of that  committee  also.                                                                 
     During  the summer the committee  has done work and  tried                                                                 
     to identify issues, which  are major discrepancies between                                                                 
     the House  and the Senate version and ones that  they have                                                                 
     similarity  on. Our best information  is that they expect                                                                  
     to  get back  together  in  September  and first  take  up                                                                 
     provisions   that  there  may   not  be  any  significant                                                                  
     disagreement  between the two  bodies and then later  take                                                                 
     up the other more difficult provisions.                                                                                    
                                                                                                                                
     With that  background I wanted to focus on the  provisions                                                                 
     in the bills  related to the Alaska Natural Gas  Pipeline.                                                                 
     Both  versions, that  is the  House and  Senate versions,                                                                  
     both  contain a  provision  relating to  route selection,                                                                  
     which  is they both preclude  the over-the-top route  and,                                                                 
     in  fact, that  is basically  the  only provision  in  the                                                                 
     House  version  of the  bill that  really deals  with  the                                                                 
     issue.   The  Senate  version   provides  an  alternative                                                                  
     framework   to  ANGTA  that   allows  for  the  expedited                                                                  
     construction and operation  of a natural gas pipeline from                                                                 
     Alaska.  That bill  also reaffirms  ANGTA  and allows  the                                                                 
     ANGTA  system to be modernized.  Significantly, there  are                                                                 
     two financial  incentives contained in the Senate  version                                                                 
     of the  bill for the Alaska pipeline.  One authorizes  the                                                                 
     Department  of Energy  to provide loan  guarantees to  the                                                                 
     project  up to the amount of  $10 billion. The second  one                                                                 
     provides a tax credit at  an inflation adjusted price that                                                                 
     is, if  the gas goes below this  price, the seller of  the                                                                 
     gas will get a credit to  the extent that the price of gas                                                                 
     is below  $3.25 at a  place referred  to as the AECO  Hub,                                                                 
     which  is in Alberta, Canada.  It is this later incentive                                                                  
     that  has  caused  the  stir in  Washington  D.C.  and  in                                                                 
     Canada.                                                                                                                    
                                                                                                                                
MR.  COUGHLIN said  he  prepared a  side-by-side  comparison,  which                                                            
simply shows what the House  has done with the Senate version of the                                                            
bill with respect  to the Alaska natural  gas pipeline (in  members'                                                            
packets). He  also noted where, in  the Senate version of  the bill,                                                            
the proposals  adopted by  the committee last  fall are located.  He                                                            
explained  that HJR  44 said the  Alaska Legislature  supported  the                                                            
bill that was  pending in the Senate  as long as certain  conditions                                                            
were met. Those conditions were:                                                                                                
                                                                                                                                
    · A ban on the over-the-top route (in the Senate bill).                                                                     
    · Provisions for access to gas for Alaskans and for a role for                                                              
      the state in setting the tariffs (in the Senate bill).                                                                    
    · A fair and open process to allow explorer groups (oil and gas                                                             
      companies  without an ownership  interest in the pipeline)  to                                                            
      have  access to space  in the line and  the ability to  expand                                                            
      the  pipeline in  the future  (in  the Senate  bill). He  said                                                            
      there were  provisions for the establishment  of procedures by                                                            
      FERC  for an  open season,  a new  condition  that the  Alaska                                                            
      Legislature  asked  for. It  also allows  an  explorer or  the                                                            
      State  of  Alaska to  seek expansion  if  they  believe it  is                                                            
      justified, another unique provision.                                                                                      
    · That Congress affirm ANGTA to assure that just because an                                                                 
      alternative   framework   in  which   someone   could  get   a                                                            
      certificate  to build  a pipeline  could be  created does  not                                                            
      mean  that ANGTA would  be done away  with, but that  it could                                                            
      also be modernized (in the Senate bill).                                                                                  
    · Tax credit incentives (in the Senate bill). He explained that                                                             
      the tax credit is  given if prices go below $3.25 and the bill                                                            
      contains  a repayment provision  if prices go above  $4.87. It                                                            
      does not have accelerated  depreciation, but it does contain a                                                            
      loan guarantee provision.                                                                                                 
    · No exclusion for gas-to-liquids or for LNG. There are no                                                                  
      provisions  that prohibit that  from happening, but  it's fair                                                            
      to say  that there is  no support for  it. It maintains  Yukon                                                            
      Pacific's  permit  status,  because  as  part  of reaffirming                                                             
      ANGTA,  it  said  pervious decisions  under  ANGTA  are  still                                                            
      valid.                                                                                                                    
                                                                                                                                
MR. COUGHLIN said another  provision in the Senate bill that was not                                                            
in HJR  44, but  was put  forth in  the committee's  proposals  last                                                            
October, was  that Congress provide  for a project labor  agreement.                                                            
The Senate  version of  the bill  does not mandate  a project  labor                                                            
agreement,  but says it's the sense  of the Senate that the  project                                                            
sponsors are encouraged to enter into a project labor agreement.                                                                
                                                                                                                                
The committee  also asked that Congress provide for  Alaska hire and                                                            
Alaska contracting.  The bill has no provisions mandating  that, but                                                            
it does contain  a $20 million grant for the Department  of Labor to                                                            
conduct  a study  of training  programs  that could  be provided  in                                                            
Alaska  to train Alaskans  to get  pipeline related  jobs. Once  the                                                            
study  is completed,  those training  centers  would be established                                                             
within Alaska for that purpose.                                                                                                 
                                                                                                                                
MR. COUGHLIN  said  the bill provides  an alternative  framework  to                                                            
ANGTA  for  an  expedited  process  to  have  a pipeline   completed                                                            
quickly. For example, it  requires FERC to expedite consideration of                                                            
issuing  a  certificate  if an  application  is  filed and  it  sets                                                            
expedited  timeframes   under  which  the  EIS  process   is  to  be                                                            
completed.  It  also  designates   a  lead  agency  in  the  federal                                                            
government so  that there's no dispute among the agencies  about who                                                            
is going to be in charge  of preparing the EIS and it provides for a                                                            
federal coordinator  to oversee the  whole process and to  make sure                                                            
that any disagreements  between the agencies get resolved  promptly.                                                            
Last, it provides for a  limited judicial review and expedited court                                                            
consideration if there is a lawsuit.                                                                                            
                                                                                                                                
CHAIRMAN  TORGERSON  asked  Mr. Coughlin  if,  in his  opinion,  the                                                            
provisions   in  the  Senate  version   reflect  the  will   of  the                                                            
Legislature that was laid out in HJR 44.                                                                                        
                                                                                                                                
MR. COUGHLIN answered they do and added:                                                                                        
                                                                                                                                
     There are  many parties to this proceeding and  I wouldn't                                                                 
     say  word for word  that the Alaska  Legislature got  100%                                                                 
     what we wanted, but in general,  there are provisions that                                                                 
     deal  with  and  address  every  issue   that  the Alaska                                                                  
     Legislature wanted in the bill.                                                                                            
                                                                                                                                
REPRESENTATIVE GREEN said there has been some objection to the                                                                  
incentives and asked Mr. Coughlin if he thought they would                                                                      
remain.                                                                                                                         
                                                                                                                                
MR. COUGHLIN replied that he wasn't enough of an insider to give                                                                
a fair answer to that question. He pointed out:                                                                                 
                                                                                                                                
     They're  on the table  and I can only  tell you what  I've                                                                 
     read in the  press and that is, if the bill passes,  and I                                                                 
     think  people think there's a  likely chance that it  will                                                                 
     pass,  there will  be some  kind of incentives  - whether                                                                  
     they will be exactly the same I can't say.                                                                                 
                                                                                                                                
CHAIRMAN TORGERSON  said that is what he has been  hearing also. "It                                                            
has some  problems, but  it appears  they have the  votes for  it to                                                            
go."                                                                                                                            
                                                                                                                                
SENATOR  OLSON said  the Senate  version  of the  bill contains  $20                                                            
million to  train people throughout  Alaska. He asked why  the House                                                            
version does not contain a similar provision.                                                                                   
                                                                                                                                
MR. COUGHLIN replied that  the only provision the House included was                                                            
the ban  on the over-the-top  route.  He thought  that was due  to a                                                            
timing issue  because the producers  put forward their proposal  for                                                            
this alternative  framework in the summer of last  year. By then the                                                            
House was pretty far along in the process.                                                                                      
                                                                                                                                
SENATOR OLSON  asked if the ban on the over-the-top  route was going                                                            
to remain.                                                                                                                      
                                                                                                                                
MR.  COUGHLIN   replied  that   he  has  heard   that  it's   not  a                                                            
"conferencable"  item, because  the same provision  appears  in both                                                            
versions. He noted, "If a bill passes, it will be in the bill."                                                                 
                                                                                                                                
SENATOR OLSON  asked if he was expecting  any amendments  to reverse                                                            
that.                                                                                                                           
                                                                                                                                
MR. COUGHLIN replied that he is being told that can't be done.                                                                  
                                                                                                                                
CHAIRMAN  TORGERSON  said he  understands  that provision  could  be                                                            
changed,  however Chairman  Tauzin did not  put that on his  list of                                                            
things that were accomplishable.                                                                                                
                                                                                                                                
He said a gentleman's  agreement was made between  everyone involved                                                            
that amendments wouldn't  be offered. He thought opening up the bill                                                            
to amendments  would kill the bill  because nobody got exactly  what                                                            
they wanted. He surmised, "But overall it's not a bad bill."                                                                    
                                                                                                                                
REPRESENTATIVE  FATE asked about the  labor contract agreement  that                                                            
is in the Senate bill.                                                                                                          
                                                                                                                                
MR.  COUGHLIN  replied  that there  is  a provision  in  the  Senate                                                            
version of  the bill that deals with  two subjects: the use  of U.S.                                                            
steel and a project labor agreement. He explained:                                                                              
                                                                                                                                
     It basically  encourages the  project sponsor to use  U.S.                                                                 
     steel  to  the  extent  that  they can  [and]  to  try  to                                                                 
     negotiate   project  labor  agreements  to  expeditiously                                                                  
     construct the project.                                                                                                     
                                                                                                                                
CHAIRMAN TORGERSON noted that is a non-binding agreement.                                                                       
                                                                                                                                
MR. COUGHLIN agreed that it's not mandatory.                                                                                    
                                                                                                                                
CHAIRMAN  TORGERSON asked if  there were any  more questions  of Mr.                                                            
Coughlin  and  there were  none.  He noted  that  he had  given  the                                                            
committee  a report  (paid  for by  Phillips Petroleum)  by  Charles                                                            
River and Associates  that talks about other incentives,  the impact                                                            
on consumers  and answers  a lot  of questions.  He also included  a                                                            
paper called "The Joint  Committee on Taxation Report" dated May 23.                                                            
He hadn't received a copy of the OMB report yet.                                                                                
                                                                                                                                
MR. MARK  MYERS, Director,  Division of Oil  and Gas, Department  of                                                            
Natural Resources  (DNR), said  he was here  today to represent  the                                                            
Administration. He stated:                                                                                                      
                                                                                                                                
     I want  to, for the  Administration,  thank the committee                                                                  
     for  the work they  have done.  You have  taken on a  very                                                                 
     complex  issue  of great  importance  to the  state and  I                                                                 
     believe you  have turned over a lot of rock and  looked at                                                                 
     a lot of hard  issues and have gotten a good grasp  of the                                                                 
     complexities  and issues involving the pipeline  including                                                                 
     how the open season process  works, how access works, etc.                                                                 
     So, I just  personally and for the Administration  want to                                                                 
     thank  you guys for a job well  done in your analysis  and                                                                 
     also  thank you for  the input that  you have provided  to                                                                 
     the congressional delegation  in D.C. and I'd just like to                                                                 
     personally urge you to continue on in the good work.                                                                       
                                                                                                                                
     Here today,  you've asked a series of questions  to me and                                                                 
     I think  if I could just address  those questions and  get                                                                 
     through   them  rather  quickly  and  then  be  here   for                                                                 
     questions.   The  first  question  the  committee  wanted                                                                  
     thoughts  on - whether  the credit  provisions in Section                                                                  
     25.03 would  be beneficial or harmful to construction  and                                                                 
     operation  of an Alaska gas line  - that basically refers                                                                  
     to  the  tax credit  mechanism  that  Patrick  has talked                                                                  
     about. I think  to break that question down, basically  to                                                                 
     look at it in terms of beneficial  to Alaskans and then to                                                                 
     the  North American market,  in general  and then also  to                                                                 
     other  producers would be the  appropriate way to look  at                                                                 
     the question.                                                                                                              
                                                                                                                                
     First of all, I think if  you look at the pipeline project                                                                 
     itself and  you want to look at risks to the project,  the                                                                 
     primary  risk to the  project isn't the  fact that gas  is                                                                 
     there.  It isn't  the  technology needed  to  bring it  to                                                                 
     market,   it  isn't  the  demand  in  the  markets,   it's                                                                 
     fundamentally  a  prices issue  if you  look  at risk  and                                                                 
     commodity  price on the low end. It's a lot of  capital to                                                                 
     invest; it's  a lot of modifications to production  of oil                                                                 
     on  the North Slope  and it's  a lot of  effect on future                                                                  
     exploration  based on having this line present  and having                                                                 
     certain   baseline  economics.  So,  if  you  strip   away                                                                 
     everything  else, I  think an objective  person would  say                                                                 
     that that  tax credit gets to the core risk involved  with                                                                 
     the  project. That  is if you  would have  periods of  low                                                                 
     prices.  I think  no  one expects  the price  to maintain                                                                  
     levels of  less than $3 or so an MCF, but it certainly  is                                                                 
     possible  given the  volatility of the  market that  there                                                                 
     are short  periods of time, in which case the  price could                                                                 
     drop down below threshold markets.                                                                                         
                                                                                                                                
     My   experience   with   economists  predicting   prices,                                                                  
     forecasting,  it's  more  art  than  science  and there's                                                                  
     certainly risk - in the  predicting on a short-term period                                                                 
     for  several months  of commodity  price.  So, this  floor                                                                 
     stabilizes  that.   As mentioned,   it's  been  scored  as                                                                 
     revenue neutral. So, I think  this particular provision is                                                                 
     extremely valuable in that  it takes a lot of the risk out                                                                 
     of  the project and  it sort  of - with  the floor -  then                                                                 
     would  guarantee if you calculate  everything else giving                                                                  
     you  a guaranteed base  level of rate  of return that  you                                                                 
     could  always count  on for  the project,  again, huge  if                                                                 
     you're  investing capital,  huge if  you're exploring  for                                                                 
     new  resources for gas  in the future  - so, I think  it's                                                                 
     clearly  going to be  beneficial for  the project itself.                                                                  
     And  the project,  I think,  of course,  is beneficial  to                                                                 
     Alaskans...  producers  and the  explorers,  as well,  and                                                                 
     also for a pipeline company  - obviously, the less risk in                                                                 
     the project  in terms of the  pipeline consortium if  they                                                                 
     are   building   it.  So,   a  tremendous   mechanism   in                                                                 
     alleviating risk - again  scored as neutral - so, a lot of                                                                 
     value there.                                                                                                               
                                                                                                                                
     Now, whether it's beneficial  to the consumer in the Lower                                                                 
     48 was one of the other  questions. If you look at that, I                                                                 
     think  you really have  to look at the  gas market in  the                                                                 
     Lower  48 and in North  America in general  and then  that                                                                 
     determines  having  to calculate  out what  you think  the                                                                 
     supply  deliverability will  be in the  future as well  as                                                                 
     the demand.  So, you have to  look at both those elements                                                                  
     and I think  one of the encouraging things for  the Alaska                                                                 
     project   is  in  fact  the  projected  growth.  Everyone                                                                  
     projects  growth in the market  beyond existing capacity.                                                                  
     The EIA numbers  show by 2020 an additional 7  - 11 TCF of                                                                 
     gas needed. There are studies  that show slightly less and                                                                 
     some that  show more, but, in general, a very  significant                                                                 
     increase  in demand  in gas and  I don't  think anyone  is                                                                 
     disputing   that.  And   the  long-term   perspective   is                                                                 
     independent  of the short-term recession that  we might be                                                                 
     under.                                                                                                                     
                                                                                                                                
     The second - that is more  dear to my heart because I'm an                                                                 
     explorationist  and I look at supply issues in  particular                                                                 
     If you  look at deliverability  of gas in the system,  the                                                                 
     supply  available, I  think there are  serious questions.                                                                  
     And  if  you  look  at  it  from  more  of  a  geological                                                                  
     perspective, you reach much  higher levels of concern than                                                                 
     you might  from strictly an economic perspective.  Kind of                                                                 
     two facts  to support that is between 1990, typical  wells                                                                 
     put on line had about 40  months of production before they                                                                 
     started to decline - gas  wells. In 1999 it was down to 24                                                                 
     months.  So we're seeing about  a 50% increase in decline                                                                  
     rate.  That  typically  over  a  large  scale  looking  at                                                                 
     multiple basins  is an indication that your supply  is not                                                                 
     as  robust - that  you're finding  and developing smaller                                                                  
     gas accumulations.  So, that's one thing in the  long-term                                                                 
     supply,  even with the increased  amount of drilling  that                                                                 
     we're  seeing,   we're  not  seeing  sustained  long-term                                                                  
     success  rates.  We're seeing  gas delivered,  but again,                                                                  
     less bang  for the buck, less  return for each well  being                                                                 
     drilled.                                                                                                                   
                                                                                                                                
     The next, and more specifically  focusing in on the market                                                                 
     that this would compete  against in Alberta, look [at] the                                                                 
     western  Canadian sedimentary  basin. We're seeing almost                                                                  
     every party's projections  showing between 2010 and 2015 a                                                                 
     decline in  the availability of gas and deliverability  in                                                                 
     the basin.  That basin is a very mature sedimentary  basin                                                                 
     for the production of conventional  gas and that gas is in                                                                 
     decline.  They  expect  an increase  in  completions  from                                                                 
     3,000 - 5,000  per year, yet expect the basin  to decline.                                                                 
     So,  again, if  your  supply side  is declining  and  your                                                                 
     demand  is increasing, it's going  to be a lot of work  to                                                                 
     keep that supply level stable.                                                                                             
                                                                                                                                
     And then there's incremental  amount of demand there. That                                                                 
     would  indicate a potential  shortage  for the customers,                                                                  
     particularly  in the Midwest where this gas line  would be                                                                 
     tending to go. So, again,  from the consumer standpoint, I                                                                 
     think  there's extreme value  in North America and in  the                                                                 
     United  States  in particular.  So  we  have a  long  term                                                                 
     guaranteed  supply that will not make up for the  existing                                                                 
     supply, but  compete in the market for that new  expansion                                                                 
     capacity, which will be  needed. So, I think again the tax                                                                 
     credit,  if it  gets this  project built,  has tremendous                                                                  
     potential.                                                                                                                 
                                                                                                                                
     Another really positive  element is Alaska's gas potential                                                                 
     beyond the  known 35 TCF on the North Slope. We've  seen a                                                                 
     recent USGS  report that says technically recoverable  gas                                                                 
     - as  much as 59.7 TCF  of gas in their  mean case in  the                                                                 
     NPRA,  alone.  Then  we have  state  lands  of equivalent                                                                  
     geology just  to the east of there. We have the  known gas                                                                 
     hydrates  on  the Slope,  which  again, exceed  the  known                                                                 
     discovered  conventional   gas. So,  we're  looking  at  a                                                                 
     tremendous  amount of gas that  could provide a long  term                                                                 
     deliverability  to the  United States  for a 50-year  plus                                                                 
     period  of time  at 4.5 -  6 BCF/D. So,  again, long-term                                                                  
     stability  and  supply  for the  United  States  could  be                                                                 
     achieved by this gas line  so it's clearly in the nation's                                                                 
     interest.  So, again,  I think from  the Administration's                                                                  
     standpoint, we see the tax credit as very valuable.                                                                        
                                                                                                                                
MR. MYERS said that a letter from the Governor to the conference                                                                
committee dated May addressed several issues, one of which was the                                                              
importance of the tax credit. He explained:                                                                                     
                                                                                                                                
     The other  question is how it would affect other  existing                                                                 
     gas producers.  Certainly, you  can't argue that it  would                                                                 
     have  some market effect.  Realistically,  the success  of                                                                 
     the project  one way or the other will affect  the markets                                                                 
     there  in  Alberta  and  will  affect  deliverability   in                                                                 
     Chicago. Again,  with the supply and demand situation,  we                                                                 
     expect that  not to be a competitive thing, but  basically                                                                 
     that  multiple progress  can  go, that Canadian  coal  bed                                                                 
     methane projects  will need to go, that this project  does                                                                 
     not  threaten  the Mackenzie  Delta  area and  its upside                                                                  
     potential  and it's  deliverability  of gas.  So, I  think                                                                 
     we're in a situation from  a supplier side that's enviable                                                                 
     in that there's enough demand  or will be enough demand in                                                                 
     the  market  that  the  Alaska  gas  should  not threaten                                                                  
     Canadian production.  Therefore the floor should  not be a                                                                 
     terrible  threat  to  other producers  and  you  may  hear                                                                 
     differently today.                                                                                                         
                                                                                                                                
REPRESENTATIVE DAVIES said he thought the Bush Administration                                                                   
was on record supporting this.                                                                                                  
                                                                                                                                
MR. MYERS said he meant the Knowles Administration.                                                                             
                                                                                                                                
SENATOR OLSON said he had an optimistic point of view.                                                                          
                                                                                                                                
MR. MYERS replied:                                                                                                              
                                                                                                                                
     If you  look at the  economics they  [the producers]  have                                                                 
     presented  based on the  three price  in Chicago, and  you                                                                 
     look  at  what  an equivalent  netback  would  be  with  a                                                                 
     minimum  $3.25 floor, you can  calculate your own rate  of                                                                 
     return  and I'll let  them do  it, but it  will be a  very                                                                 
     positive  rate of return. In  addition, it does one  other                                                                 
     thing. When  companies need a higher rate of return,  it's                                                                 
     usually  associated with the  risk of the project. So,  if                                                                 
     you've  eliminated or  minimized the  commodity risk,  one                                                                 
     would believe  that a project would have better  economics                                                                 
     at a given  rate of return if  the risk is lower in  terms                                                                 
     of  lower  financing  costs,  in  terms  of  risk  to  the                                                                 
     shareholders.  So,  again, I  think the  floor  is a  very                                                                 
     positive   mechanism.   It  does   multiple   things.   It                                                                 
     eliminates risks and I think  it actually - depending on -                                                                 
     to  know  what their  projected  rate  of return  for  the                                                                 
     project  will be, you will have  to know what their  costs                                                                 
     are, which  we really don't.  We have a kind of a general                                                                  
     idea, but very crude and  you would also have to know what                                                                 
     their  internal price projections  are, which you can  ask                                                                 
     them to share if you want,  but they generally don't share                                                                 
     that  information  with us. So,  this is  being discussed                                                                  
     with  public numbers  and  the earlier  calculations  were                                                                 
     done at a  lower value price than this would provide  at a                                                                 
     base level. So, again, very positive I think…                                                                              
                                                                                                                                
SENATOR OLSON asked him to expand on the perspective that if the                                                                
trillion cubic feet of gas that's coming out of our area is                                                                     
developed, it will not affect or negatively impact the supply                                                                   
coming off the Mackenzie Delta in any way.                                                                                      
                                                                                                                                
MR. MYERS responded:                                                                                                            
                                                                                                                                
     The  way I  would  come to  that conclusion  is  not  that                                                                 
     individual  projects don't compete.  Obviously, every  oil                                                                 
     field   competes  against  every   other,  every  company                                                                  
     competes,  it's  a healthy  competition. The  question  is                                                                 
     does  it really  impede  the development.  And  to that  I                                                                 
     think  you  have to  look  at supply  and  demand issues.                                                                  
     Again, if there is a net  increase in supply of 11 TCF and                                                                 
     you're  doubtful whether  you can maintain  production  at                                                                 
     existing  levels and  [I] think  it's very  doubtful  that                                                                 
     Canada  can, in fact, unless  offshore really produces  or                                                                 
     unless  coal bed methane  just goes  hog wild, which  will                                                                 
     require  higher sustained  prices. So,  under most likely                                                                  
     producing  scenarios, the demand would be there  in Canada                                                                 
     to use  that gas for Mackenzie  and, depending on timing,                                                                  
      it might compete for the sum of the pipeline capacity.                                                                    
                                                                                                                                
     But, on  the flip side, as Canada  produces more and  more                                                                 
     of its  heavy oil  reserves, they are  requiring more  and                                                                 
     more  gas to get that  heavy oil out  of the ground.  They                                                                 
     intend  on  using  their  gas  and  have incremental   oil                                                                 
     supplies similar  to what we've already done on  the North                                                                 
     Slope by our  gas cycling and our tertiary water  recovery                                                                 
     mechanisms.  So, if you look at the demand, it  can eat up                                                                 
     1  TCF of  gas from  Mackenzie  without much  problem  and                                                                 
     still  have plenty of room in  the market for the 4.5  - 6                                                                 
     TCF of  gas coming off the North  Slope. You have to  look                                                                 
     at will there be short-term.  If you bring all that supply                                                                 
     on at  one time incrementally,  it might have some short-                                                                  
     term effects. And that's  delayed by how long and how well                                                                 
     a market  can absorb that, but  I think most people  think                                                                 
     the market  will absorb it relatively  quickly because  of                                                                 
     the interconnectability  of the  Hub system of pipelines.                                                                  
     That  gas  can  be distributed  over  a  large  number  of                                                                 
     markets,  but that's something  again the committee  might                                                                 
     want  to  look   at  in  terms  of  the  details   of  the                                                                 
     forecasting mechanism.                                                                                                     
                                                                                                                                
CHAIRMAN  TORGERSON asked  if he had  seen the  producers' model  in                                                            
terms of their netback.                                                                                                         
                                                                                                                                
MR. MYERS replied that he hadn't.                                                                                               
                                                                                                                                
REPRESENTATIVE GREEN said  that the risk has been downplayed because                                                            
of the floor  and they are  now hearing that  the cost continues  to                                                            
climb much  faster than inflation.  He asked  if his models  use the                                                            
original  costs inflated at  a reasonable rate  or whether  they use                                                            
higher inflated costs.                                                                                                          
                                                                                                                                
MR.  MYERS  replied   that  they  hadn't  costed-out   the  pipeline                                                            
independently.  They aren't really able to, because  they don't know                                                            
the exact  details of the  project, the size  of the pipe or  pipes,                                                            
the gas treatment  plan, etc. He surmised, "There's  clearly a whole                                                            
lot of data out  there that we don't have access to  and so you just                                                            
have  to  somewhat  look at  their  values...  to  see if  they  are                                                            
realistic."                                                                                                                     
                                                                                                                                
He said one of  the positive things from the state's  perspective is                                                            
that the over-the-top  route costs  are now nearly equal  to that of                                                            
the highway  route.  For the overall  costs, there  is a  tremendous                                                            
amount of variance  in the B to C route from Alberta  to Chicago and                                                            
the amount  of additional  capacity  that will add  to the  existing                                                            
capacity.  The answer lies  in the amount  of available capacity  at                                                            
the time Alaska gas is  about to enter the market. The state doesn't                                                            
have a firm idea  about it because it doesn't control  the timing of                                                            
when the gas line would start.                                                                                                  
                                                                                                                                
MR. MYERS said  question number 2 was whether DNR  supports the open                                                            
season  provision,  Section  704(e),  and whether  it  supports  the                                                            
pipeline expansion provision, Section 706(a)-(e). He clarified:                                                                 
                                                                                                                                
     Basically,  704(e)  puts  in  the ability  to  expand  the                                                                 
     pipeline for  non Point Thompson and Prudhoe Bay  gas. So,                                                                 
     in   other  words,   it  actually   puts   under  certain                                                                  
     conditions,  which  protect  the economic  rights  of  the                                                                 
     pipeliners  and  the  other  producers:  can  you  have  a                                                                 
     mandatory expansion of the line?                                                                                           
                                                                                                                                
     The Administration - again,  and the access issue - if you                                                                 
     go  back to  the  letter in  May -  clearly  the Governor                                                                  
     thought  it was very important  that that provision  be in                                                                 
     there.  I think  the  provision we  have is  a compromise                                                                  
     provision  that  is  acceptable   to the  producers,   the                                                                 
     explorers,   the pipeline   and  the  state.  So,  it's  a                                                                 
     balanced  proposal. As it is  we strongly support it.  The                                                                 
     need for it became relatively  apparent us in that we want                                                                 
     to  see expansion  of  exploration  outside  the existing                                                                  
     areas.  Along that line, I will  give the Governor a  fair                                                                 
     amount  of credit on the fact  that we got the line  south                                                                 
     of the  64-degree latitude.  And again,  I know it was  an                                                                 
     exclusive  concern and this committee  was concerned  with                                                                 
     the same issues,  but one of the issues - there  was other                                                                 
     gas than just the barrel  arch on the North Slope, not the                                                                 
     foothills,  but the  Yukon flats, the  Nenana, the Kangik                                                                  
     that  some  of  these other  basins  to  almost  south  of                                                                 
     Fairbanks had a potential  to get gas into that line under                                                                 
     the credit  mechanism. So, again we clearly recognize  the                                                                 
     need  to  expand  for gas  other  than  the  North Slope.                                                                  
     Prudhoe  and Thompson gas was  an absolute requirement  by                                                                 
     the  state  and  so  we  clearly  support   that  -  those                                                                 
     mechanisms.  And  again, if  you  look at  the Governor's                                                                  
     letter that follows through  very clearly that the access,                                                                 
     both  in the lines of  access for new,  explored for,  and                                                                 
     discovered gas, but also  the access to communities to get                                                                 
     at that gas were priorities.                                                                                               
                                                                                                                                
TAPE 02-07, SIDE B                                                                                                              
                                                                                                                              
[MR. MYERS' TESTIMONY ON QUESTION NUMBER 3 WAS NOT RECORDED.]                                                                   
                                                                                                                                
MR.  MYERS  said the  Administration  clearly  supports  the  Alaska                                                            
royalty  gas provisions  in  Sections  704(g)  and (h)  and  709(c),                                                            
recognizing that they are a compromise. He explained:                                                                           
                                                                                                                                
     The need  to have the RCA look  at in-state we think  is a                                                                 
     very  good idea. It's  consistent with  the policy on  oil                                                                 
     lines  and we think  they provided a  very valuable,  more                                                                 
     localized  perspective and also for the RCA to  have input                                                                 
     to FERC  is equally important.  Again, we value having  an                                                                 
     independent, quasi-judiciary approach intrastate....                                                                       
                                                                                                                                
MR. MYERS said the fifth  question about supporting other incentives                                                            
in the  Pipeline Act is  related to the  loan guarantee. DNR  thinks                                                            
that should lower financing  costs, which should lower their overall                                                            
number so  whatever it is,  is positive.  The combination of  events                                                            
should make the  pipeline much less risky. Anything  that lowers the                                                            
cost does multiple things.  It lowers the risk of the project on the                                                            
construction issues;  it also potentially lowers the  tariffs on the                                                            
line,  which is  very valuable.  As the  royalty owner  and for  tax                                                            
purposes, the state's netback  for gas increases, so it has a vested                                                            
interest, and  consumers have a vested interest, in  a lower tariff,                                                            
which  will ultimately  bring  a lower  price to  the market.  Those                                                            
incentives  are  very  positive  since  they add  stability  to  the                                                            
project and potentially lower the cost of tariffs.                                                                              
                                                                                                                                
CHAIRMAN TORGERSON asked if a document he showed Mr. Myers was a                                                                
public document and how he got it.                                                                                              
                                                                                                                                
MR. MYERS replied that  it was public and that three major producers                                                            
provided  the state with  information for a  discussion on  terms of                                                            
clarity and certainty of the project. He told members:                                                                          
                                                                                                                                
     Fundamentally, they had  talked about the state needing to                                                                 
     provide  a clearer,  better fiscal  understanding of  what                                                                 
     the  conditions and terms  were for  the pipeline. We  had                                                                 
     particularly asked them  primarily what they meant by that                                                                 
     -  multiple  times. We  had  a bit  of  frustration  quite                                                                 
     honestly  trying  to figure  out what  in the  world  that                                                                 
     meant.  This document,  I think, is  the first attempt  to                                                                 
     look at those  issues and to answer that question  for us.                                                                 
     So  I  very  much  appreciated,  and  the  Administration                                                                  
     appreciated,  the  producers  coming  forward  and saying                                                                  
     these are  the kinds of things we would look at  to create                                                                 
     that environment.                                                                                                          
                                                                                                                                
     So,  what   the  producers  presented   was  basically   a                                                                 
     different  way of valuing gas,  a different way of taxing                                                                  
     gas, a  different way of looking  at the royalty terms  in                                                                 
     terms  of the lease  form, basically  a total overhaul  of                                                                 
     the  current way  we value gas  on the North  Slope or  in                                                                 
     other areas. So, this document  suggests some very radical                                                                 
     changes to  our public policy. That is in a sense  a power                                                                 
     point presentation representing  their view of the perfect                                                                 
     regulatory environment.                                                                                                    
                                                                                                                                
CHAIRMAN TORGERSON  asked what the  Administration's next  move will                                                            
be with regard to the document.                                                                                                 
                                                                                                                                
MR.  MYERS  replied  that the  Administration  would  like  to  have                                                            
further discussions  with the  producers on  this point. He  said it                                                            
was clear that they would  hold discussions, not negotiations, about                                                            
fleshing out  what they mean by the  various terms. There  are eight                                                            
major royalty  terms in there  and probably  an equal number  of tax                                                            
terms.  The Administration  wants  some clarifying  discussions.  He                                                            
thought it  was a good faith  effort by the  producers to start  the                                                            
dialogue and the discussion.  The issues are complicated and need to                                                            
be looked at in terms of  are they appropriate now or later or ever.                                                            
He concluded:                                                                                                                   
                                                                                                                                
     So, again,  from our perspective  it's sort of a producer                                                                  
     wish list of the things  you would like to have. The state                                                                 
     would,  I think, not agree to  many of those as things  it                                                                 
     would  like to have... So, they  would rely ultimately  on                                                                 
     negotiations  if the new administration, whoever  that be,                                                                 
     and the legislature thought that was appropriate.                                                                          
                                                                                                                                
CHAIRMAN  TORGERSON  asked  what  inspired  the  producers  to  come                                                            
forward  now when  they had  been asking  for this  for a couple  of                                                            
years. He also asked whether  the [Administration] is initiating any                                                            
studies to work through the producers' list.                                                                                    
                                                                                                                                
MR. MYERS said that part of the issue is fully understanding what                                                               
the producers are asking for and what they mean so the state isn't                                                              
confused. He continued:                                                                                                         
                                                                                                                                
     ...then the  supporting data as to why certain  incentives                                                                 
     would  be necessary. So I think  the background data,  and                                                                 
     the  studies,  of course,  we have  some  ongoing gasline                                                                  
     studies.  I  think  you'll   see  a  CIP  request  to  the                                                                 
     legislature  this next year to  further on the issues  and                                                                 
     more attune  with the issues.  One of the issues, royalty                                                                  
     valuation,  are we going  to get involved  with trying  to                                                                 
     develop a market basket  approach like we have for oil and                                                                 
     when is  it appropriate and how  would you do it. So  it's                                                                 
     clear  that if  the legislature  asked us to  do that,  we                                                                 
     would  definitely  need  outside  resources   and outside                                                                  
     support   to  do  that.   So  that's   one  issue  -   not                                                                 
     understanding  where the gas  is going, how it's going  to                                                                 
     be valued.  To do a mechanism now, you would have  to look                                                                 
     at  a surrogate  mechanism. You  would have  to hopefully                                                                  
     know more about the project,  but also know more about how                                                                 
     gas would,  in fact, be valued so we're making  sure we're                                                                 
     getting fair market value for the gas.                                                                                     
                                                                                                                                
     The same issue with tariff  issues. A lot of issues affect                                                                 
     the lease  form. You know, do  we want to do these things                                                                  
     and  what's the  large  impact in  oil production  on  the                                                                 
     North Slope?  What's the effect of potential fallout  from                                                                 
     gas elsewhere  like Cook Inlet. So you can develop  from a                                                                 
     list like  that, a list with  a lot more questions and  we                                                                 
     clearly  would need external  support if we did it in  the                                                                 
     negotiating stage on these.  I guess the first thing is to                                                                 
     start  the dialogue and then  the second thing is, if  the                                                                 
     new   administration   and  the   legislature   deems   it                                                                 
     appropriate,  that we enter negotiations, that  we get the                                                                 
     outside  help that  we need.  Certainly,  that discussion                                                                  
     would not be limited to the Administration.                                                                                
                                                                                                                                
CHAIRMAN  TORGERSON  asked  if  the  state  needs a  bill  like  the                                                            
Stranded  Gas Act to tell  the Administration  to start negotiating                                                             
before you start negotiating.                                                                                                   
                                                                                                                                
MR. MYERS replied, "I'm on real thin ice here."  He thought the                                                                 
dialogue should go on, but the challenge would be when you enter                                                                
negotiations, which he thought would be more appropriate for the                                                                
new administration since it would be unfair to start now.                                                                       
                                                                                                                                
CHAIRMAN TORGERSON  said they are working on recommendations  to the                                                            
next legislature  and  asked if they  should put  in a timeline  for                                                            
negotiations to start on January 18 and finish on April 1.                                                                      
                                                                                                                                
MR. MYERS  said he didn't  think that was  necessary. The list  that                                                            
the state negotiates has  to be decided very clearly. Certain items,                                                            
if you're  looking  at production  in the  2008 -  2014 time  range,                                                            
there is time on many of  the issues. The question is do you want to                                                            
negotiate them now or wait until they have more data.                                                                           
                                                                                                                                
CHAIRMAN TORGERSON  said they are  waiting for Mr. Myer's  report on                                                            
potential  reserves on  the North Slope  and asked  where he  was on                                                            
that.                                                                                                                           
                                                                                                                                
MR. MYERS  replied that the  division is  frantically working  on it                                                            
and  will  try  to  get  the  committee  something  by  the  end  of                                                            
September. The  report will not contain a lot of original  work, but                                                            
will be more  of a synopsis. There  are still a lot of questions  in                                                            
the foothills so there  would be a very broad range of numbers. They                                                            
hope to  compile a report  with some positive  results as they  have                                                            
the new  NPRA numbers and  some preliminary  USGS data from  some of                                                            
the interior basins.                                                                                                            
                                                                                                                                
CHAIRMAN TORGERSON  said he intends to have one more  meeting before                                                            
this group  disbands  to finalize  its recommendations  to the  next                                                            
legislature.  He thought  that  report might  be good  to have  when                                                            
dealing with the conference  committee to show the potential reserve                                                            
on the North Slope instead  of being hypothetical. He asked what the                                                            
division is doing in Cook Inlet for an upgrade reserve analysis.                                                                
                                                                                                                                
MR.  MYERS  said the  division  has  the demand  study,  but  hasn't                                                            
focused on any  kind of new supply study. The division  is trying to                                                            
save the  state a few  dollars since  the USGS  is starting  a major                                                            
assessment of Cook Inlet.                                                                                                       
                                                                                                                                
REPRESENTATIVE  DAVIES  asked  if  he  meant  this  is  the  perfect                                                            
regulatory environment from the standpoint of the oil companies.                                                                
                                                                                                                                
MR.  MYERS  replied  that  is  correct.   The  oil  companies  might                                                            
characterize  it as a compromise  position,  but they presented  the                                                            
state with a wish list  and it is clearly not to the state's maximum                                                            
economic advantage.                                                                                                             
                                                                                                                                
REPRESENTATIVE  GREEN  said that  prior to  the startup  of  Prudhoe                                                            
there was good  cooperation between  the operators and the  state as                                                            
far as subsurface geology,  values, transmissibility, etc. and asked                                                            
if he anticipated that same degree of cooperation in the future.                                                                
                                                                                                                                
MR. MYERS replied  that he is optimistic  that will occur.  Although                                                            
there has  been a period  of time  in which there  hasn't even  been                                                            
alignment within  Prudhoe Bay with  various owners. They  are almost                                                            
there with  the producers in terms  of them "speaking off  different                                                            
sheets of music  in terms of their technical interpretation  and the                                                            
effects." He added:                                                                                                             
                                                                                                                                
     Until you  have ultimately their commercial agreements  in                                                                 
     place  and you have multiple  issues between Pt. Thompson                                                                  
     and  Prudhoe, I think  it's not  going to  be clear to  us                                                                 
     where  their  commercial  positions  are.  As far  as  the                                                                 
     exchange  of technical data,  we've had in the last  eight                                                                 
     months  a  couple  of very  very  good  meetings.  We  had                                                                 
     initially  a very slow  start in terms  of the effects  of                                                                 
     gas  sales on  Prudhoe and  the mitigation  measures  that                                                                 
     might be performed and the  same with Pt. Thompson initial                                                                 
     discussions.   Those  discussions  have  been  much   more                                                                 
     fruitful  as of recent. So, I'm  optimistic there will  be                                                                 
     good dialogue and good discussion.                                                                                         
                                                                                                                                
     The  alignment  is helping  somewhat.  The  alignment  has                                                                 
     pluses  and minuses  in terms  of data,  because when  the                                                                 
     parties  weren't aligned, you'll  hear multiple technical                                                                  
     interpretations,  which,  again,  they're all  within  the                                                                 
     legitimate  range  of  just  variable.  When  you  have  a                                                                 
     unified  front, you'll  get a single  interpretation.  So,                                                                 
     that  creates  some challenge  to  the  interpretation  of                                                                 
     basic data, but there seems  to have been more willingness                                                                 
     to  share the  effects  of gas  on oil  production,  which                                                                 
     again,  has been  very useful.  They have  some very  good                                                                 
     models  out there. They've  done a lot  of the work.  It's                                                                 
     not just us  involved with the issue; it's the  Alaska Oil                                                                 
     and  Gas  Conservation   Commission.  We  have   a strong                                                                  
     relationship  with them. They are committed to  doing this                                                                 
     reservoir  study on the effects  of Prudhoe and following                                                                  
     over  to Pt.  Thompson. I  think that's  a very important                                                                  
     piece  of work  for  the state  to do  to have  their  own                                                                 
     independent  assessment. The cost and scope of  that study                                                                 
     will  be  largely  dependent  on the  cooperation  of  the                                                                 
     transference   of  data.  So,  again,  I'd  say  that  I'm                                                                 
     cautiously optimistic…                                                                                                     
                                                                                                                                
REPRESENTATIVE  GREEN asked  if Mr. Myers was  using a USGS-type  of                                                            
approach  in that  reserves on  the Slope  would  be available  and,                                                            
assuming  there's  so  many  cubic  miles  of  sediment,  there's  a                                                            
probability and an upper and lower or would he be more specific.                                                                
                                                                                                                                
MR. MYERS replied:                                                                                                              
                                                                                                                                
     The honest  assessment is there's a wide range.  We looked                                                                 
     at  two approaches.  Initially,  we even went  in for  the                                                                 
     supply  side CIP for  the North Slope  and we asked for  a                                                                 
     lot more  money than we've got  and we scaled it back.  We                                                                 
     were going  to do a USGS-type assessment where  we ran the                                                                 
     full  risk  values. We  decided  not to  go that  way.  We                                                                 
     didn't  think  at  this point  it  gave  a lot  of value,                                                                  
     particularly with the new  data. We have folks shooting 3-                                                                 
     D seismic  in the Foothills; we have a lot of  changes; we                                                                 
     have  a lot  of  new approaches  in  terms of  the issues                                                                  
     involving the reservoir rocks.                                                                                             
                                                                                                                                
     Fundamentally, on the foothills,  the most difficult issue                                                                 
     to  get your  arms around  is  the size  and distribution                                                                  
     economics  of fields. We know the gas has been  generated;                                                                 
     we  know  the  reservoir  rocks  are  there,  but they're                                                                  
     relatively low quality -  just how low quality is the real                                                                 
     question.  Is there  enough porosity  and permeability  in                                                                 
     the rocks for large sustainable  fields? Are we looking at                                                                 
     a cluster of 200 million  barrel fields or are they larger                                                                 
     - some  of them up in  the TCF range?  How do you cluster                                                                  
     it?  I  will  say  that  there  are  also,   in  terms  of                                                                 
     development,  what the development costs, how  many fields                                                                 
     we  have to  cluster  to develop  in the  foothills.  What                                                                 
     terms are  you going to put on exploration? Are  you going                                                                 
     to  allow year-round  exploration? There  are a myriad  of                                                                 
     issues that go in that make  it very difficult to quantify                                                                 
     a meaningful economically recoverable number.                                                                              
                                                                                                                                
     So,  what  we  intend to  do  is  put a  synopsis  of  the                                                                 
     existing data  together with maps of basically  a compiled                                                                 
     version  that could  be useful. In  talking with Patrick,                                                                  
     that  is more what the  committee had  in mind - could  be                                                                 
     useful  to  policymakers  showing where  the  basins  are,                                                                 
     showing   the   current   numbers,   showing   where   the                                                                 
     transportation  route and how it might affect  it and then                                                                 
     looking  at some  of the new  technologies  that might  be                                                                 
     involved.   So,  what  we're  going  to  give   you  is  a                                                                 
     compilation  of  existing  data.  I  think  any  of  these                                                                 
     surveys give  you - it's like the ANWR issue,  any of them                                                                 
     give  you a large enough  number. The  question is, is  it                                                                 
     meaningful  to say  there's 100  TCF versus  150 TCF?  Our                                                                 
     opinion now is our crystal  ball isn't clear enough and we                                                                 
     don't  have the data to do it  properly. We probably  will                                                                 
     in a couple of years, but right now we don't.                                                                              
                                                                                                                                
CHAIRMAN TORGERSON thanked Mr. Myers and said they would next                                                                   
hear from industry and Mr. Alan Sharp.                                                                                          
                                                                                                                                
MR. ALAN SHARP,  Director of Northern  Business Development,  EnCana                                                            
Marketing USA,  Inc., said he was here today on behalf  of EnCana to                                                            
submit  testimony on  the Alaska Natural  Gas Pipeline  Act of  2002                                                            
and,  more   specifically,  the  Alaska   gas  floor  price   credit                                                            
provisions. He gave the following testimony:                                                                                    
                                                                                                                                
     I'd like  to start my testimony  by explaining who EnCana                                                                  
     is.  We are  one of North  America's  largest independent                                                                  
     natural   gas  producers  and   North  America's  largest                                                                  
     independent  gas storage  owner operator,  which includes                                                                  
     the  AECO  Hub,   which  was  earlier  mentioned   as  the                                                                 
     reference  price for  the floor price  provision. Our  oil                                                                 
     and gas production  is located in the U.S. Rocky  Mountain                                                                 
     states, western Canadian  sedimentary basin and the United                                                                 
     Kingdom's  North Sea, with recent significant  discoveries                                                                 
     in the North  Sea, the Gulf of Mexico, and off-shore  East                                                                 
     Coast  of Canada.  We are  an aggressive  explorer on  our                                                                 
     North   American  lands  focusing   on  natural  gas.   In                                                                 
     particular,  Alaska's  lands  are,  in  our  view, highly                                                                  
     prospective   and offer  potential   to  become  a future                                                                  
     production  platform   for  our  company  and  also  North                                                                 
     American.  Clearly, EnCana  has a vested  interest in  the                                                                 
     efficient  operation  of  the North  American  gas market                                                                  
     which  is  why  EnCana  appreciates  the  opportunity   to                                                                 
     testify here today.                                                                                                        
                                                                                                                                
     EnCana  has an extensive land  position of over 4 million                                                                  
     gross  acres of land  in Alaska and  we're referred to  as                                                                 
     the explorer  as we do not have proven gas reserves,  yet.                                                                 
     The earliest we expect to  have proven gas reserves in the                                                                 
     Foothills  is 2005. For this reason, access and  expansion                                                                 
     on the  Alaska gas pipeline is  critical for our success.                                                                  
     Without  future pipeline  access on  reasonable terms  and                                                                 
     conditions  and especially timing, we will not  be able to                                                                 
     'monetize'  the gas we find and,  therefore, EnCana  would                                                                 
     have to  reevaluate spending  money on gas exploration  in                                                                 
     Alaska.  The  purchase  of  leased  land  is  inexpensive                                                                  
     relative  to the cost of seismic  surveys, drilling  wells                                                                 
     and   commercial   development.    It   is   these   later                                                                 
     expenditures  that create  significant  jobs and monetary                                                                  
     benefits   within  and  for  the  State  of  Alaska.   One                                                                 
     successful  commercial gas discovery  in the foothills  is                                                                 
     estimated  to generate 3300 new  jobs and $6.4 billion  of                                                                 
     in-state benefits.                                                                                                         
                                                                                                                                
MR. SHARP said he would address the committee's questions, but he                                                               
wanted to present EnCana's overall position first. He stated:                                                                   
                                                                                                                                
     EnCana  firmly  supports  the White  House's  position  as                                                                 
     stated  by the Secretary  of Energy in  his letter to  the                                                                 
     Energy  Conference, dated June  27, 2002. It states:  'The                                                                 
     Administration   strongly  opposes  the  price  floor  tax                                                                 
     subsidy  provision  in the  Senate  bill and  any similar                                                                  
     provision  because it  would distort  markets, could  cost                                                                 
     well  over $1 billion  in annual lost  revenue, and  would                                                                 
     likely undermine Canada's  support for construction of the                                                                 
     pipeline  and  thus  set  back broader  bilateral  energy                                                                  
     integration.                                                                                                               
                                                                                                                                
     EnCana  has  publicly  stated  that the  gas  floor  price                                                                 
     subsidy is  an ill conceived and flawed proposal  and that                                                                 
     the  market  should  be allowed  to  determine  when  it's                                                                 
     economic  for  northern gas  to flow.  A gas  floor  price                                                                 
     would  provide an advantage to  an Alaska gas producer  to                                                                 
     the detriment  of all other North  American gas producers                                                                  
     and  ultimately  the  consumer.  The  flow  of subsidized                                                                  
     Alaska  natural  gas  would  distort  the  gas  price  and                                                                 
     disrupt the efficient operation of the market.'                                                                            
                                                                                                                                
MR. SHARP said he would now answer the committee's questions.                                                                   
                                                                                                                                
     The  first one  was whether  the  Alaska floor  price  tax                                                                 
     credit  provision would  be beneficial  or harmful to  the                                                                 
     construction and operation of the gas pipeline.                                                                            
                                                                                                                                
     The credit  provision may or may not be beneficial  to the                                                                 
     Alaska  gas line construction.  The credit  is payable  to                                                                 
     the shipper on the gas line,  not directly to the pipeline                                                                 
     owner.  It's the  pipeline owner  who will  construct  and                                                                 
     operate the  pipeline. The pipeline toll would  roughly be                                                                 
     around  $1.25 per  million btu  while the  floor price  is                                                                 
     $3.25 per  million btu. The credit provision is  not meant                                                                 
     to build  the pipeline,  but to insure  the producers  who                                                                 
     are  shippers are  guaranteed a  profit for  the gas  that                                                                 
     they produce.  What is important to realize is  that there                                                                 
     are three  different roles being performed: the  producer,                                                                 
     the shipper  and the pipeline owner. When these  roles are                                                                 
     performed  by one party,  the potential  for conflicts  of                                                                 
     interest  and anti-competitive  behavior  can arise.  When                                                                 
     you ask, will  the credit provision benefit the  pipeline,                                                                 
     it's  important to  note that  it will depend  on how  the                                                                 
     party   performs  these  three   specific  roles  and   if                                                                 
     conflicts  of interest  arise  that may  benefit one  role                                                                 
     over another. I think the  real question that really needs                                                                 
     to  be asked  is what  do we want  the future  Alaska  gas                                                                 
     industry  to  look like?  If there's  limited  access  and                                                                 
     capacity,  there  will be  a limited  number  of players;                                                                  
     there will be limited competition  and limited exploration                                                                 
     development.  There  will  also  be  limited  jobs.  State                                                                 
     revenue  will mainly  be from  royalties  of existing  gas                                                                 
     reserves  such  as  Prudhoe   Bay and  Pt.  Thompson   and                                                                 
     pipeline   taxes.  In  a  multi-player  competitive   free                                                                 
     market, there will be access  in capacity on the pipeline.                                                                 
     There   will   be  sustained   growth,   exploration   and                                                                 
     development.  There will  be more companies  meaning  more                                                                 
     jobs  in Alaska.  The state  revenue will  be diversified                                                                  
     with royalties  coming from new  yet-to-be-discovered  gas                                                                 
     pools and the creation of  new support industries. This is                                                                 
     what a vibrant Alaska gas industry could look like.                                                                        
                                                                                                                                
     Building  the pipeline  does not guarantee  a vibrant  gas                                                                 
     industry.  We must have a future  vision that defines  the                                                                 
     regulations   on  access,  expansion,  open  seasons   and                                                                 
     pipeline tariffs. That kind  of clarity will help create a                                                                 
     competitive and vibrant gas industry.                                                                                      
                                                                                                                                
     The second  question in the first section was  whether the                                                                 
     Alaska   floor  price  tax  credit   provision  would   be                                                                 
     beneficial or harmful to the Canadian gas industry.                                                                        
                                                                                                                                
     EnCana  does  not  agree  with Section  704(2)(b),   which                                                                 
     presumes  that  sufficient  downstream  pipeline capacity                                                                  
     will  exist to transport  Alaska gas  past Canada to  U.S.                                                                 
     markets.  The Alaska gas floor  price removes the natural                                                                  
     incentive  for  Alaska  producer  and  shipper  to insure                                                                  
     adequate  capacity  will exist.  As the  credit provision                                                                  
     stands  now,  it  will  be harmful  to  the  Canadian  gas                                                                 
     industry. There is not enough  export pipeline capacity to                                                                 
     leave  EnCana  to handle  both  Canadian gas  exports  and                                                                 
     Alaska  gas  volumes.   This  means  Alaska  gas  will  be                                                                 
     stranded  in Canada leading  to an oversupply  of gas  and                                                                 
     lower  Canadian gas  prices. Since  the Alaska  gas has  a                                                                 
     Canadian based  floor price, it has an unfair  competitive                                                                 
     advantage  over  Canadian gas  resulting in  Canadian  gas                                                                 
     being  shut in. It  will also be detrimental  to Canadian                                                                  
     gas exploration and development.  Alaska gas will continue                                                                 
     to flow while the Canadian gas industry suffers.                                                                           
                                                                                                                                
     The next question was dealing  with the Alaska floor price                                                                 
     tax  provision and would  it be beneficial  or harmful  to                                                                 
     the  Lower 48 gas  industry. It's really  broken into  two                                                                 
     sections.  During  times  when  Canadian  export pipeline                                                                  
     capacity  is restricted there  will be no incremental  gas                                                                 
     flowing  to the Lower 48, thus  there will be very little                                                                  
     impact  to the  Lower  48 gas  industry. However,  if  the                                                                 
     Canadian  export pipeline capacity  is expanded, then  the                                                                 
     Lower  48 gas  industry  will face  the  same competitive                                                                  
     disadvantage  and detrimental impacts as the Canadian  gas                                                                 
     industry.   The   risk  in   cost  will   essentially   be                                                                 
     transferred  further downstream  from Canada to the  Lower                                                                 
     48.                                                                                                                        
                                                                                                                                
     The next question was dealing  with the Alaska floor price                                                                 
     tax  provision and would  it be beneficial  or harmful  to                                                                 
     the  Lower  48 consumer.  Prior  to  the  Canadian export                                                                  
     pipeline  expansion, the incremental  gas supply will  not                                                                 
     reach  the  Lower  48  consumer.  The  consumer   will  be                                                                 
     disadvantaged in two ways  and will have to pay twice. The                                                                 
     first  is paying high  gas prices as  new incremental  gas                                                                 
     supply cannot  reach them and the second is paying  higher                                                                 
     taxes  due  to the  floor  price  credit  provisions.  The                                                                 
     incremental  gas  trapped  in Canada  will cause  low  gas                                                                 
     prices   and  trigger  the  Alaska   floor  price  credit                                                                  
     provision.   After  the   Canadian  export   pipeline   is                                                                 
     expanded,  the Lower  48 consumer  should  see a benefit.                                                                  
     However, this  is on the premise that the Canadian  export                                                                 
     pipeline  expansions are delivering  gas to an area  where                                                                 
     that gas can  reach the Lower 48 consumer. If  this is not                                                                 
     true,  then there  will  be localized  areas  of high  gas                                                                 
     prices for consumers and  low gas prices for the producer,                                                                 
     a detriment to both.                                                                                                       
                                                                                                                                
     The  last question  in Section  1 was what  there type  of                                                                 
     incentives would you support.                                                                                              
                                                                                                                                
     A key principle  that must be met is to allow  free market                                                                 
     forces to  work, provide a fair and equitable  competitive                                                                 
     environment.  EnCana  would support incentives  that  meet                                                                 
     this key principle. However,  EnCana is not convinced that                                                                 
     a subsidy  is required to support the construction  of the                                                                 
     Alaska  gas  pipeline. Prior  to  any consideration  of  a                                                                 
     subsidy  or credit,  EnCana believes  that an independent                                                                  
     study  should  be undertaken  to  establish  the economic                                                                  
     viability  of the natural  gas pipeline  and the need  for                                                                 
     such  a subsidy  or credit.  The pipeline  should also  be                                                                 
     built  all the way through  to the U.S.  market to insure                                                                  
     incremental gas supply is not trapped in Canada.                                                                           
                                                                                                                                
     The second  set of questions was, starting with  the first                                                                 
     one, do you support the  open season provisions in Section                                                                 
     704(e)?  EnCana supports the  guiding principles provided                                                                  
     for the open  season. FERC has been mandated to  establish                                                                 
     and govern  the open season regulations  based on Section                                                                  
     703(2),   which  states  'to   establish  a  process   for                                                                 
     providing  access to such transportation project  in order                                                                 
     to  promote competition  in the exploration,  development                                                                  
     and production of Alaska natural gas.'                                                                                     
                                                                                                                                
     Before  EnCana  can  fully  endorse  FERC's   open season                                                                  
     regulations  and procedures, we'd like to insure  that all                                                                 
     gas industry  players have provided their input  and their                                                                 
     interests  have been met. Some  examples of concerns  that                                                                 
     we have in  this area are the initial Alaska gas  pipeline                                                                 
     volumes  must  have  adequate  downstream  facilities   to                                                                 
     deliver  incremental  gas  to  U.S.  markets.  This  means                                                                 
     initial open season holders  should be treated the same as                                                                 
     expansion  open season holders as per Sections  706(b)(8).                                                                 
                                                                                                                                
     The  next  concern we  have  is how  competition  will  be                                                                 
     created as per the purpose  provided under Section 703(2).                                                                 
     The last concern is - is  120 days enough time for FERC to                                                                 
     create fair and equitable open season rules?                                                                               
                                                                                                                                
     The second  question in that  section was, do you support                                                                  
     the pipeline expansion provisions as per Section 706?                                                                      
                                                                                                                                
     EnCana  supports  the  guiding  principles   provided  for                                                                 
     pipeline  expansion and we would  like to insure that  the                                                                 
     expansion rules are based  on Section 703(2), which is the                                                                 
     creating  of competition and  that expansion shippers  are                                                                 
     treated  the  same as  initial  open season  shippers.  We                                                                 
     would  also like to  recommend that  expansion wording  in                                                                 
     the open season Section  704(e) [be] repeated in expansion                                                                 
     Section  706 to clarify the intent  of future expansions,                                                                  
     which  we  believe  will  help promote  competition.   The                                                                 
     wording  in this Section 704(e)  that we'd like to repeat                                                                  
     is:  'For  an open  season  for  capacity  beyond initial                                                                  
     capacity  provide the  opportunity for  transportation  of                                                                 
     natural gas  other than from Prudhoe Bay and Pt.  Thompson                                                                 
     units.                                                                                                                     
                                                                                                                                
     The  third  section  of  questions  were  do  you support                                                                  
     instate needs such as under  Section 704(g)(h) and 709(c)?                                                                 
     EnCana   supports   the  instate   needs,   instate   rate                                                                 
     coordination   and the  Alaska  royalty  gas  provisions.                                                                  
     However,  there are  some areas  the state  might want  to                                                                 
     consider  such as under  Sections 704(g)  - to insure  the                                                                 
     tie  in points  referred there  are for  both receipt  and                                                                 
     delivery points  and also under 704(h) to clarify  who has                                                                 
      jurisdiction over gathering and processing facilities.                                                                    
                                                                                                                                
     The last set of questions  dealt with do you support other                                                                 
     incentives  in  the Pipeline  Act?  EnCana  believes  that                                                                 
     incentives  should apply  to all parties  in an equitable                                                                  
     and  fair  manner, which  enhances  competition  and  free                                                                 
     market  forces. The other incentives  within the Pipeline                                                                  
     Act  that  EnCana  supports  are  the expedited  process,                                                                  
     Section  703(2), which promotes  competition, having  FERC                                                                 
     as  the leading  agency  with  the power  to  govern  open                                                                 
     seasons and expansions and  Section 710, which is the loan                                                                 
     guarantees for the pipeline.                                                                                               
                                                                                                                                
     To conclude, I will reemphasize  EnCana's position. EnCana                                                                 
     is not  convinced that  a subsidy is  required to support                                                                  
     the construction of the  Alaska gas pipeline. Prior to any                                                                 
     consideration  of  a subsidy  or credit,  EnCana believes                                                                  
     that  an  independent   study  should  be  undertaken   to                                                                 
     establish  the  economic  viability  of  the  natural  gas                                                                 
     pipeline  and the need  for such a subsidy  or credit.  If                                                                 
     the U.S. government  believes that there is a  requirement                                                                 
     to access additional gas  supplies to market intervention,                                                                 
     then EnCana  suggest that any support go directly  towards                                                                 
     the development  of transmission  infrastructure, meaning                                                                  
     the Alaska  gas pipeline and  corresponding gas pipelines                                                                  
     to  the U.S.  markets. Thank  you for inviting  EnCana  to                                                                 
     testify  today and I'd  be happy to  answer any questions                                                                  
     you may have.                                                                                                              
                                                                                                                                
CHAIRMAN TORGERSON said he was perplexed by his comments that                                                                   
this might strand Canadian gas. He explained:                                                                                   
                                                                                                                                
     Two points. The first one  is that we've sat through a lot                                                                 
     of presentations from the  Alberta government that the Hub                                                                 
     that is  currently established  in Alberta can with  a few                                                                 
     modifications, handle the  gas now. Personally, I question                                                                 
     that on  a 4.5 billion bcf/d  volume, but they have  still                                                                 
     made those presentations  and still stand by the fact that                                                                 
     there  would be very  little infrastructure  needed if  we                                                                 
     use  the existing hub.  That's one issue  that I probably                                                                  
     don't  believe  it's  stranded  gas, if  you  believe  the                                                                 
     Alberta government.                                                                                                        
                                                                                                                                
     The  second one  is that the  producers own  the plans  to                                                                 
     build the  additional line from Alberta to the  Midwest so                                                                 
     it  would be just  a flow  through except  for maybe  some                                                                 
     liquids  that may  or may  not come  out in  Alberta.  So,                                                                 
     having  those two things out  there, how could I make  the                                                                 
     assumption that we would strand Canadian gas?                                                                              
                                                                                                                                
MR. SHARP replied:                                                                                                              
                                                                                                                                
     I'll  answer  the  second  question  first  which  is  the                                                                 
     building of  the additional line. My understanding  of the                                                                 
     Act is that  it's not mandatory that they what  they refer                                                                 
     to as  the B to C line has to  be built. If that line  was                                                                 
     built,  then the gas would not  be stranded in Canada  and                                                                 
     it  would  not  impact  the  market.  So,  that  would  be                                                                 
     definitely  something we would  be in favor of, but  there                                                                 
     is nothing as far as I am  aware that actually would force                                                                 
     that to happen. If that  B to C line is not built, then it                                                                 
     really comes down to looking  at how much gas supply is in                                                                 
     Alberta, such as Alaska  gas coming in, Mackenzie gas, the                                                                 
     existing  production  from  the  western  Canadian basin,                                                                  
     subtracting   off  the  intra-Alberta   demand  and   then                                                                 
     whatever supply is left  over, is that amount greater than                                                                 
     or  less  than  the  ex-Alberta  take  away  capacity   or                                                                 
     essentially  the  export  pipeline  capacity to  the  U.S.                                                                 
     markets.  And  our projections  show  that if  4 BCF/D  of                                                                 
     Alaska gas comes down, you will strand gas in Canada.                                                                      
                                                                                                                                
REPRESENTATIVE  DAVIES  said they  have heard  statements about  the                                                            
supply and demand  in the Lower 48 U.S. market and  the numbers were                                                            
that  the market  is  expected  to grow  7  - 11  TCF  in a  20-year                                                            
timeframe  and that the supply  of gas is  pretty limited and  asked                                                            
him if he disagreed  with that characterization of  the U.S. market.                                                            
                                                                                                                                
MR. SHARP replied that  they believe the market demand will grow and                                                            
are working internally  as to whether it will be 4  BCF/D or 6 BCF/D                                                            
of incremental  gas. Their main issue  is the bottleneck  that would                                                            
be  created if  you bring  down  the incremental  gas  and the  U.S.                                                            
consumer  is expecting  to receive that  gas and  it just can't  get                                                            
there  because there's  not enough  pipeline to  take away  capacity                                                            
from Canada to  the U.S. They are working on the demand  projections                                                            
and think  that 4 BCF/D could  probably be  absorbed, but it  you go                                                            
higher than that, there could be some issues.                                                                                   
                                                                                                                                
     It's difficult when you're  forecasting supply and demand,                                                                 
     because it  really comes down to many assumptions  both on                                                                 
     the  supply side  as  well as  demand, especially  on  the                                                                 
     economic growth and we're  talking out in 2010. It's quite                                                                 
     difficult with the number  of assumptions you're making to                                                                 
     narrow that down.                                                                                                          
                                                                                                                                
REPRESENTATIVE DAVIES wanted to ask him a general question about                                                                
the issue of government subsidy of these things.                                                                                
                                                                                                                                
     On a really  big project like in any version of  an Alaska                                                                 
     gas pipeline  would certainly  be classified as among  the                                                                 
     biggest in the world, just  getting something like that to                                                                 
     happen  because of the huge risk  involved, it seems  like                                                                 
     it's  almost  going  to  have  to  involve  some  kind  of                                                                 
     assistance  beyond just  the normal  marketplace. I  guess                                                                 
     I'd just like  you to compare that to a much smaller,  but                                                                 
     closer  to  home example  and  I  think  in terms  of  the                                                                 
     Alliance Pipeline. It's  my impression that there was some                                                                 
     governmental participation  in that to begin with and then                                                                 
     they  phased it out.  Is my recollection  correct on  that                                                                 
     and could  you comment on the  appropriateness in general                                                                  
     of  governmental  assistance  in  getting  some  of  these                                                                 
     bigger projects to happen?                                                                                                 
                                                                                                                                
MR. SHARP replied:                                                                                                              
                                                                                                                                
     With   the  Alliance  Pipeline   I'm  not  aware  of   any                                                                 
     government  assistance. I can  check into that for you.  I                                                                 
     know  that  when  the  Alberta  gas  industry   was  first                                                                 
     created,  there  was governmental  support  on the trans-                                                                  
     Canada  pipeline back  in the 50s. It  was in the form  of                                                                 
     loan  guarantees  over  the  Canadian   shield  part  into                                                                 
     eastern Canada. So, that  has happened. Alliance Pipeline,                                                                 
     I'm not aware of that.                                                                                                     
                                                                                                                                
REPRESENTATIVE DAVIES asked if the government has no role in                                                                    
developing frontier gas provinces.                                                                                              
                                                                                                                                
MR. SHARP replied that he wouldn't say that. He told members:                                                                   
                                                                                                                                
     If a  subsidy or credit  is going to  be provided, then  I                                                                 
     think  all the information should  be on the table.  If we                                                                 
     specifically  talk about Alaska, the producers  had a $125                                                                 
     million  study. There's  a lot  of information  out  there                                                                 
     that has to  be shared. I think when I answered  the first                                                                 
     question  about is it beneficial  to the pipeline or  not,                                                                 
     really the  floor price is benefiting the producer  and if                                                                 
     it's really  the pipeline that you want to go  ahead, then                                                                 
     shouldn't  the subsidy or the  credit be directed towards                                                                  
     the pipeline owner and the  pipeline itself? That's really                                                                 
     where  we're  coming  from.  We  want  to  make  sure  the                                                                 
     pipeline  infrastructure  is  in place.  So,  provide  the                                                                 
     credit directly  to the pipeline if it's the pipeline  you                                                                 
     want  to proceed. If  it's having to  do with security  of                                                                 
     energy,  then  maybe  the  subsidy  should go  more  in  a                                                                 
     general sense to those that  provide energy so that you're                                                                 
     creating more supply of energy from that credit.                                                                           
                                                                                                                                
REPRESENTATIVE DAVIES followed up saying:                                                                                       
                                                                                                                                
     Obviously  those issues can't  be separated. People  can't                                                                 
     get  money  to  build  a pipeline   independent  of  being                                                                 
     assured  of some  shipment and  production  of gas.  Those                                                                 
     things are clearly tied together.                                                                                          
                                                                                                                                
MR. SHARP replied that yes, they are tied together, but he would                                                                
ask if the proposed floor price is the proper amount and is it the                                                              
proper mechanism.                                                                                                               
                                                                                                                                
     If you look at a $3.25 floor  price versus a roughly $1.25                                                                 
     toll, there's  a $2 price that goes to the producer.  What                                                                 
     is the rate of return on  that price and what is the price                                                                 
     that they need for a rate  of return? What is that minimum                                                                 
     acceptable  amount? I think that's  the question that  has                                                                 
     to be answered.                                                                                                            
                                                                                                                                
REPRESENTATIVE DAVIES agreed, but asked, assuming those numbers                                                                 
were correct, whether he would support it.                                                                                      
                                                                                                                                
MR. SHARP replied, "No, it would harm the Canadian industry. It                                                                 
really is unfair advantage that the Alaskan producer would have                                                                 
over…"                                                                                                                          
                                                                                                                                
REPRESENTATIVE DAVIES said his point of view is that it is not                                                                  
correct.                                                                                                                        
                                                                                                                                
MR. SHARP replied:                                                                                                              
                                                                                                                                
     I was  trying to answer your  question. With that type  of                                                                 
     subsidy, I think one of  the questions I would ask is what                                                                 
     type of rate of return is  the producer making with [that]                                                                 
     type of a floor price? If  you think about Prudhoe Bay, it                                                                 
     was an oil pool that basically  found all the profit - all                                                                 
     the infrastructure  has been paid off on the oil  side and                                                                 
     you're basically  going down the gas side. It  should have                                                                 
     one  of the lowest supply  costs of  gas, because you  can                                                                 
     utilize  a lot of the existing  infrastructure to produce                                                                  
     the gas cap.                                                                                                               
                                                                                                                                
REPRESENTATIVE  GREEN  asked  if  a  major  4  BCF  gas  field  were                                                            
discovered  in  the  area of  the  hub,  would that  pose  the  same                                                            
concerns to  him about a problem with  other Canadian gas  fields as                                                            
the subsidized gas coming from the North Slope.                                                                                 
                                                                                                                                
MR. SHARP asked if he meant would the 4 BCF/D compete.                                                                          
                                                                                                                                
REPRESENTATIVE GREEN replied:                                                                                                   
                                                                                                                                
     Yes, would  that create a problem  against other Canadian                                                                  
     gas entities?  That's what I  understand your concern  is.                                                                 
     When  you're saying  unfair  competition,  you're talking                                                                  
     about Canadian competition.                                                                                                
                                                                                                                                
MR. SHARP answered:                                                                                                             
                                                                                                                                
     If  someone  discovered  a  large  amount of  gas  in  the                                                                 
     western  Canadian sedimentary  basin,  kind of within  the                                                                 
     existing  supply   basin,  there  would  be  gas  and  gas                                                                 
     competition and essentially  if that large quantity of gas                                                                 
     was  discovered, it  would compete without  a floor  price                                                                 
     against  all  the other  gas.  So, then  the  free market                                                                  
     competition and environment  force is at play. So, if that                                                                 
     large  quantity of  gas had a  lower supply  cost, it  may                                                                 
     delay  other gas exploration  and development if it  had a                                                                 
     higher supply cost.                                                                                                        
                                                                                                                                
REPRESENTATIVE  GREEN said if that's the case 10 years  from now and                                                            
there is  a demand and supply  in the Lower  48 area, did  Mr. Sharp                                                            
think the free  market forces would supply additional  pipelines out                                                            
of  Canada  to  take  either  the  discovered  gas  in  the  western                                                            
sedimentary  basins or the  Alaska gas that  ends up at the  hub. He                                                            
thought this would enhance the gas situation.                                                                                   
                                                                                                                                
MR. SHARP  replied, "I would  agree if there  was no floor  price in                                                            
effect."                                                                                                                        
                                                                                                                                
He explained if the Alaska  gas is flooding the Canadian market with                                                            
gas and can't  get out of that market area, it would  share the same                                                            
price risk.  There would be a natural  incentive for the  Alaska gas                                                            
producer  and some  Canadian gas  producers to  expand the  pipeline                                                            
past capacity to move it  to the Lower 48 market. However, in regard                                                            
to an Alaska gas producer with a floor price, he asked:                                                                         
                                                                                                                                
     Why  you  would take  on  the additional  risk  to expand                                                                  
     pipelines  downstream and that long-term commitment  to do                                                                 
     so if you've already got  a floor price in the market that                                                                 
     you can dump it off into?                                                                                                  
                                                                                                                                
REPRESENTATIVE GREEN said there has to be some sales for them to                                                                
dump it off.                                                                                                                    
                                                                                                                                
TAPE 02-8, SIDE A                                                                                                               
                                                                                                                              
MR. SHARP explained that  each country keeps selling the gas and the                                                            
price  gets  lower  and  lower  until  eventually   the  Alaska  gas                                                            
displaces the Canadian gas that's being produced.                                                                               
                                                                                                                                
     It  would  be  the Alaska  gas  that  would  flow  in  the                                                                 
     existing  pipeline infrastructure  and  existing markets,                                                                  
     because  if they sold it for  a very low gas prices,  they                                                                 
     are  still guaranteed  that higher floor  price. So,  they                                                                 
     don't really care how low  the Canadian gas price goes and                                                                 
     you're  backing out  the Canadian  gas,  which would  have                                                                 
     flown on the existing pipeline infrastructure.                                                                             
                                                                                                                                
REPRESENTATIVE  GREEN said  he was talking  about 10 years  down the                                                            
road when the demand is at a significantly increased number.                                                                    
                                                                                                                                
MR.  SHARP replied  that  is  correct. They  have  projections,  but                                                            
unfortunately  they weren't ready  for this meeting. He stated,  "We                                                            
have shown  that it can absorb the  full 4BCF/D in the year  2010 so                                                            
there will be displacement."                                                                                                    
                                                                                                                                
CHAIRMAN  TORGERSON  said  he  was  assuming  that  he  opposed  the                                                            
deepwater Gulf credits  and other credits that other competition has                                                            
against the Canadian gas.                                                                                                       
                                                                                                                                
     Clearly,   we're  not  on  the  leading  edge  here   with                                                                 
     incentives  or the  downside risk protection  or whatever                                                                  
     you want  to call this. It's  happened all over the  world                                                                 
     and certainly  the Canadians have been one of  the leaders                                                                 
     in it as far  as subsidizing remote areas or oil  sands or                                                                 
     Hibernia  or some  of the  others. Now  you're saying  you                                                                 
     don't like this Alaskan  gas because it apparently impacts                                                                 
     you,  but we're okay  with all the  other incentives  that                                                                 
     are  out in the  world - just  don't like  what Alaska  is                                                                 
     doing. I'm having a hard time connecting the dots.                                                                         
                                                                                                                                
MR. SHARP replied  that he wasn't  aware of the type of the  credits                                                            
that  exist in  the  Gulf of  Mexico.  In  Canada they  use  royalty                                                            
holidays,  tax  credit  provisions,   but  those  have  mainly  been                                                            
directly  to the producer  if you  want more energy  supply  and you                                                            
apply the  credit directly  to that  source. He  used an analogy  of                                                            
what  would happen  if  there was  farmed salmon  off  the coast  of                                                            
Anchorage and  the owners, who have a subsidized price,  dump it for                                                            
what they  can get  for it  in Alaska.  It kills  the Alaska  salmon                                                            
price,  but they'll  keep dumping  their fish  into Alaska,  because                                                            
they  don't care  what the  price is  because their  government  has                                                            
guaranteed them a floor price for their salmon. He continued:                                                                   
                                                                                                                                
     But  what  it's done  to  the Alaska  salmon  industry  is                                                                 
     decimated  it, because  there's  no longer  a price  there                                                                 
     that  the  existing  infrastructure  and  existing salmon                                                                  
     industry  can survive  on. That's  kind of  the analogy  I                                                                 
     would use for the Alaska  gas coming down to Canada. If we                                                                 
     don't  insure that there's that  infrastructure to insure                                                                  
     that  it gets  out of  Canada and  to the  U.S. consumer,                                                                  
     you're  going to end up decimating  or having significant                                                                  
     negative impact to the Canadian gas industry.                                                                              
                                                                                                                                
CHAIRMAN TORGERSON  asked why they  didn't oppose all of  Section 29                                                            
credits that  are in the energy bill  [H.R. 4]. It's the  same thing                                                            
and has the same effect of subsidizing the gas price.                                                                           
                                                                                                                                
MR. SHARP replied, "I think with the floor price it only applies                                                                
to Alaskan gas."                                                                                                                
                                                                                                                                
CHAIRMAN  TORGERSON responded  that  he was making  a comparison  to                                                            
other things  that are happening  in the industry  on both  sides of                                                            
the border. It's no different  than subsidizing through a royalty or                                                            
whatever  else is going on.  He said the  producers have called  the                                                            
royalty in  kind (RIK) sale  a subsidy to  Canada and asked  him his                                                            
opinion of that.                                                                                                                
                                                                                                                                
MR. SHARP replied that  they view the RIK sale as a competitive bid.                                                            
                                                                                                                                
CHAIRMAN  TORGERSON said although  he didn't  want to go into  it at                                                            
this time, an  RIK sale is considered a subsidy to  them "in our own                                                            
back yard."                                                                                                                     
                                                                                                                                
MR. SHARP  replied,  "I guess  I don't see  it as  a subsidy in  the                                                            
sense that we competed  for the royalty in kind sale and that's at a                                                            
premium to the alternative, which would be to royalty in value."                                                                
                                                                                                                                
CHAIRMAN TORGERSON  replied, "We're competing, too,  with Section 29                                                            
of the deep water Gulf and imported LNG."                                                                                       
                                                                                                                                
SENATOR OLSON said that  EnCana is a very sizeable company and asked                                                            
how  much  energy  they are  putting  forth  to  advance  extracting                                                            
resources  off the  North  Slope compared  to their  other  holdings                                                            
throughout the world.                                                                                                           
                                                                                                                                
MR. SHARP replied:                                                                                                              
                                                                                                                                
     We're  quite serious about it.  As I mentioned, we have  4                                                                 
     million acres of land in  Alaska. Essentially, the biggest                                                                 
     issue  that we have for Alaska  gas exploration is really                                                                  
     access  to  the pipeline.  If  we can  get access  to  the                                                                 
     pipeline,  we're fully  there.  The royalty  in kind  sale                                                                 
     that  Senator Torgerson  had  mentioned, we  view that  as                                                                 
     kind of  something within the  power of ourselves and  the                                                                 
     state  to  insure that  we  actually  do have  access  and                                                                 
     capacity on  the pipeline. Failing that, we're  looking at                                                                 
     this  Pipeline  Act  through   the  open  season  and  the                                                                 
     expansion   provisions  to  provide   us  access  to   the                                                                 
     pipeline. So, we're very  serious. It's just a matter that                                                                 
     we  have to  have access  to the  pipeline to  be able  to                                                                 
     'monetized' whatever we find.                                                                                              
                                                                                                                                
REPRESENTATIVE  FATE said  the Alberta Minster  of Energy  mentioned                                                            
NAFTA  to gain  market  share  of Canadian  gas  and asked  if  they                                                            
entertained any of that in their proposals or statements here.                                                                  
                                                                                                                                
MR.  SHARP  replied  that he  hadn't  and  he wasn't  aware  of  the                                                            
Minister's comments, but he would look into that.                                                                               
                                                                                                                                
REPRESENTATIVE  FATE said they are  concerned the excess  gas coming                                                            
down is  in competition with  the North Slope  gas and he noted  the                                                            
statement was made in Washington D.C.                                                                                           
                                                                                                                                
CHAIRMAN TORGERSON said  there was an article in the Canadian Herald                                                            
a couple  of months  ago related  to Alberta  government  attorneys'                                                            
view of whether  or not the subsidy violated NAFTA.  They determined                                                            
that  it did  not on  the basis  that Americans  would  be moving  a                                                            
product from one  market to another that happened  to travel through                                                            
a foreign country.                                                                                                              
                                                                                                                                
REPRESENTATIVE  CHENAULT asked  how long  the Canadians entertained                                                             
negotiations  with  the Canadian  groups  about pipeline  costs  and                                                            
incentives from the Mackenzie down.                                                                                             
                                                                                                                                
MR. SHARP replied that  he wasn't aware of any talks of that nature.                                                            
He  thought one  of the  pipeline  owners had  been  talking to  the                                                            
government about  that. He reiterated that EnCana  is an explorer on                                                            
the Mackenzie  side as well and conversations like  that would be by                                                            
the producers or the pipeline owners with the government.                                                                       
                                                                                                                                
CHAIRMAN TORGERSON  said he heard  there was a request to  borrow $1                                                            
billion for  the aboriginal part of  the ownership and there's  some                                                            
talk about royalty relief.                                                                                                      
                                                                                                                                
REPRESENTATIVE  DAVIES said he felt  a certain amount of  tension in                                                            
his position  as an explorer and wanting  access to a pipeline  that                                                            
doesn't  exist yet.  He asked,  "Don't you  feel a  little bit  of a                                                            
tension on the  one hand testifying against some subsidy  that would                                                            
help make a pipeline  exist and on the other hand  asking for access                                                            
to the pipeline?"                                                                                                               
                                                                                                                                
MR. SHARP replied:                                                                                                              
                                                                                                                                
     I think  what it  comes down  to is we want  to make  sure                                                                 
     that  the  Alaskan gas  supply  comes  on in  basically  a                                                                 
     manner  that does  not back  out other  gas supply,  which                                                                 
     maybe  should have from  a supply cost  or kind of a  free                                                                 
     market environment  come on first because you  can kind of                                                                 
     look  at the existing  basin development.  It should  have                                                                 
     the lowest  supply cost and,  in this case, including  the                                                                 
     pipeline infrastructure  to get it to market.  And then as                                                                 
     you  progress out  to say,  coal bed methane,  deep  water                                                                 
     Gulf  of Mexico,  it could  be off shore  eastern Canada,                                                                  
     each one  of these supply areas  that could supply gas  to                                                                 
     meet  the  future  needs  of North  America  will  have  a                                                                 
     certain  supply cost  on it.  So, if you  go through  that                                                                 
     supply  cost order, if you subsidize  one over the other,                                                                  
     you're disadvantaging, I think, the market.                                                                                
                                                                                                                                
REPRESENTATIVE  DAVIES granted  him that argument,  but asked  if he                                                            
wasn't at the  same time advantaging their particular  investment on                                                            
the North Slope.                                                                                                                
                                                                                                                                
MR.  SHARP  replied that  they  would,  but they  look  at  it as  a                                                            
portfolio  of  supply  all  over  North   America,  which  will  get                                                            
developed over time.                                                                                                            
                                                                                                                                
     If one disadvantages another,  they have a vested interest                                                                 
     to insure  that it doesn't hurt  our portfolio. We'd  like                                                                 
     to see the free market forces  bring that on in an orderly                                                                 
     and cost efficient manner.                                                                                                 
                                                                                                                                
CHAIRMAN TORGERSON  thanked Mr. Sharp for his testimony  and said he                                                            
would like to  finish the industry testimony before  taking a break.                                                            
                                                                                                                                
MR. MARK HANLEY, Public  Affairs Manager, Anadarko, said Anadarko is                                                            
a very large independent  with a lot of acreage that  believes there                                                            
is  a lot  of prospectivity  in  Alaska. He  told  members, "We  are                                                            
excited to be here."                                                                                                            
                                                                                                                                
He  said Anadarko  is  comfortable with  the  proposed resolutions.                                                             
Whether the  credit provisions are  harmful or beneficial,  Anadarko                                                            
believes  that  if they  reduce  the cost  or  the risk,  they  will                                                            
improve the  economics of  construction of  a pipeline and  increase                                                            
the chances  that it will  be built. Whether  they help or  hurt the                                                            
industry  depends on  one's position  in  it and  ultimately on  the                                                            
actual price of gas when it is brought to market. He continued:                                                                 
                                                                                                                                
     Clearly  there are different  opinions on what it will  do                                                                 
     to  the market.  Some  have  scored  it that  prices  will                                                                 
     remain  above  that  level  and it  will  not  impact  the                                                                 
     market.  So,  it's  a judgment  call,  I  guess,  in  some                                                                 
     respects.  We  do think  that having  this amount  of  gas                                                                 
     coming into the market will  have some dampening effect on                                                                 
     prices  and that doesn't  mean they'll  drop, but clearly                                                                  
     not  having this gas  in the market  - it's a significant                                                                  
     amount. It's either going  to slow the growth in prices or                                                                 
     it could have a slight decline  in the prices as Mr. Myers                                                                 
     has suggested. Some reports  suggest it could decrease the                                                                 
     price  for a short  time before it  actually grows again.                                                                  
     That  could be  bad for  a gas  producer if  you have  gas                                                                 
     existing elsewhere,  because relative to everything  else,                                                                 
     you would have received  higher gas prices for your gas. I                                                                 
     think clearly  for the consumer, if it has that  dampening                                                                 
     effect,  it's a  benefit. So,  it's a matter  of what  you                                                                 
     think  the crystal ball  is going to  say out there a  few                                                                 
     years from now.                                                                                                            
                                                                                                                                
     When you evaluate the potential  impacts of the incentives                                                                 
     in this bill, it's important  to recognize that Alaska gas                                                                 
     does compete  with gas from other  regions. Those regions                                                                  
     have  other incentives;  some  are existing  and some  are                                                                 
     being  proposed and  which incentives  are  worth more  is                                                                 
     often a judgment  call, but they all affect the  economics                                                                 
     of the projects.  So, as you said, Section 29  - different                                                                 
     people have different royalty  rates; that's a straight if                                                                 
     you have a 20%, somebody  else is at 10; is one a subsidy?                                                                 
     I don't  know; it's  a difference  in relative economics,                                                                  
     but one can  make a big difference in how you  propose it.                                                                 
     So,  I think it's  important  as you have  pointed out  to                                                                 
     recognize  that there are a lot of these things  out there                                                                 
     and it's not just an apples-to-apples  comparison a lot of                                                                 
     times.                                                                                                                     
                                                                                                                                
     You've asked  about the open season provisions  as well as                                                                 
     the  expansion provisions  and I think  we've been pretty                                                                  
     adamant  about access. That's  where we've really focused                                                                  
     in  Congress,  particularly  as having  fair access  at  a                                                                 
     reasonable  price. So, we do  support those provisions...                                                                  
                                                                                                                                
     To  be brief  the in state  needs, rate  coordination  and                                                                 
     royalty gas provisions we're  supportive of those as well.                                                                 
     As  far as the  other incentives  in the  Pipeline Act,  I                                                                 
     guess  we would  say it's up  to public  policy makers  to                                                                 
     look at  those and see how much  in the way of incentives                                                                  
     are necessary to get this  project built and that's really                                                                 
     a policy call  for folks like you and people in  Congress.                                                                 
                                                                                                                                
     We  would like to  see a gas  line built  that will  allow                                                                 
     commercialization of Alaska  gas. We do believe that there                                                                 
     is  going to  be increased  demand  for gas  and that  the                                                                 
     decline  of  U.S.  production  will  create   a favorable                                                                  
     fundamental  for commercializing  both  Alaska and Arctic                                                                  
     gas in  the Canadian Arctic and  that both can be viable.                                                                  
     Consumers  are going to need this gas to prevent  possible                                                                 
     gas spikes as demand outgrows  supply and particularly the                                                                 
     administrative  portions of the bill should help  expedite                                                                 
     the  pipeline's construction  and help  insure reasonable                                                                  
     access to the pipeline.  Your letter suggests that you are                                                                 
     going to look  at things for future recommendations  and I                                                                 
     guess  we would just  continue to request  that the  state                                                                 
     insure and  encourage continued Alaska gas exploration  by                                                                 
     doing  what it can to  provide fair  pipeline access at  a                                                                 
     reasonable price to new  gas as well as already discovered                                                                 
     gas.                                                                                                                       
                                                                                                                                
CHAIRMAN TORGERSON  asked if Anadarko  was going to actively  try to                                                            
advance any amendments to the energy bill [H.R.4].                                                                              
                                                                                                                                
MR.  HANLEY  replied no.  He  said  they are  comfortable  with  the                                                            
agreements  represented  in  the  bill.  "As you  said,  the  minute                                                            
everybody tries  to push one little  work or change to that,  it can                                                            
be a free for all."                                                                                                             
                                                                                                                                
REPRESENTATIVE  GREEN  asked  if Anadarko  has  a feel  whether  the                                                            
market will be able to absorb 4 BCF of gas in 10 or 15 years.                                                                   
                                                                                                                                
MR. HANLEY replied that  his company believes that both Canadian and                                                            
Arctic gas are  going to be needed. They see a growth,  particularly                                                            
in the U.S., for demand  and an increase in the decline rate in some                                                            
of the  existing fields.  They see  the fundamentals  as being  very                                                            
strong for this kind of volume plus more.                                                                                       
                                                                                                                                
REPRESENTATIVE  GREEN said  that it may be  that concerns about  the                                                            
incentives  being a deterrent  to free market  trade might be  a bit                                                            
overplayed.                                                                                                                     
                                                                                                                                
MR. HANLEY said  he didn't want to oppose someone  else's arguments.                                                            
They  see the demand  in  the U.S. for  significant  volumes of  gas                                                            
above and beyond 4 - 5 BCF/D.                                                                                                   
                                                                                                                                
CHAIRMAN  TORGERSON thanked  him for  his testimony  and noted  that                                                            
they had written  testimony from BP  and Robbie Schilhab  with Exxon                                                            
and Yukon Pacific Corporation.                                                                                                  
                                                                                                                                
MR. ELLWOOD, Executive  Vice President and CEO, Foothills Pipe Lines                                                            
Alaska Incorporated,  said before  he responded to the questions  he                                                            
wanted  to   emphasize  the  principles   that  have  guided   their                                                            
participation in this process in Washington, Alaska and Ottawa.                                                                 
                                                                                                                                
     Foothills   and   its   shareholder   companies   believe                                                                  
     unequivocally that the North  American energy markets will                                                                 
     need  both Alaska  natural  gas reserves  as  well as  the                                                                 
     reserves  to be unlocked  in the Mackenzie  Valley in  the                                                                 
     Canadian  Northern Territories.  We have never approached                                                                  
     the  development  of these  resources  as  competitive  or                                                                 
     exclusive;  we  have devoted  resources  and  continue  to                                                                 
     devote resources  to develop the necessary transportation                                                                  
     infrastructures   to   access   both  regions.   We   have                                                                 
     consistently   advised  federal,   state  and  provincial                                                                  
     governments  to very carefully  consider how to assist  in                                                                 
     the approvals  and financing  for the infrastructure  that                                                                 
     will be needed to process  and transport these remote mass                                                                 
     resources  to the market. Beginning in the mid  1970s, all                                                                 
     levels of government in  the United States and Canada have                                                                 
     recognized  that the enormity  of the capital commitments                                                                  
     and   risks   associated   with  developing   hydrocarbon                                                                  
     resources  in these  frontier areas  require very focused                                                                  
     coordinated  efforts   to assure  prompt  and  reasonable                                                                  
     regulatory  approvals  and oversight.  ANGTA  here in  the                                                                 
     United  States, the Northern  Pipeline Act in Canada,  and                                                                 
     the agreement  on Prince of Wales  between Canada and  the                                                                 
     United  States are examples of  such coordinated efforts.                                                                  
     Attention  has been paid over  the years to understanding                                                                  
     and  resolving some  of the economic  and financial  risks                                                                 
     which   face  producers,   transporters,   marketers   and                                                                 
     ultimately  consumers  as they undertake  the investments                                                                  
     and  commitments necessary  to finally  access these  much                                                                 
     needed supplies.                                                                                                           
                                                                                                                                
     The  North Slope producers  have identified  the need  for                                                                 
     federal  enabling legislation  or some  mechanism of  risk                                                                 
     sharing  or risk mitigation.  Producer commitment to  this                                                                 
     project  is necessary  if  it is  to become  a commercial                                                                  
     reality. What  has evolve through the legislative  process                                                                 
     in  Washington  is  a  significant  degree  of  consensus                                                                  
     between all interested parties  on the types of risks that                                                                 
     face the project and the  need to address them. We believe                                                                 
     this project  is in the national interest and,  therefore,                                                                 
     we do not oppose the provisions  in the current version of                                                                 
     H.R. 4.                                                                                                                    
                                                                                                                                
Relating to the specific questions Mr. Ellwood said:                                                                            
                                                                                                                                
     Specifically  relating  to the  market risk  provision  in                                                                 
     Section  25.03,  we  certainly   respect  the  efforts  of                                                                 
     Phillips Petroleum, in particular  to think creatively and                                                                 
     to  come up with  a mechanism,  which would  be triggered                                                                  
     only  if gas prices  at the  given pricing  point were  to                                                                 
     fall below some value. If  this mechanism is sufficient to                                                                 
     obtain  shipper  commitments,   then  it will  definitely                                                                  
     assist   development   of  project  since   the  producer                                                                  
     commitment  is  what  has been  missing  for the  past  30                                                                 
     years.                                                                                                                     
                                                                                                                                
     The  provisions  of  Section   704  (e)  relating  to  the                                                                 
     regulation   of   open  seasons   for  capacity   on   any                                                                 
     transportation  system  are acceptable  to  us. Regulated                                                                  
     interstate   pipelines   in   the   United   States,   and                                                                 
     increasingly in Canada,  as well, are routinely conducting                                                                 
     open seasons  for development of new projects  and for the                                                                 
     allocation  of their  capacity. We are  familiar with  the                                                                 
     efforts  of FERC  under its  open access  regulations  and                                                                 
     those  are promulgated  pursuant to the  Natural Gas  Act.                                                                 
     [Indisc.]  those efforts to assure that adequate  pipeline                                                                 
     capacity is developed and  that such capacity is allocated                                                                 
     without  undue  discrimination.  We are  comfortable  that                                                                 
     given  this  precedent,  FERC  will  implement  these  new                                                                 
     provisions  in a manner that will not impose unreasonable                                                                  
     or  unnecessary  risks  on  the  project  nor  impair  its                                                                 
     financability.                                                                                                             
                                                                                                                                
     With  respect  to the  pipeline  expansion  provisions  of                                                                 
     Section 706(a)  - (e), it's widely known that  as pipeline                                                                 
     companies,  we  do  not  believe  these  provisions   were                                                                 
     necessary.  If a pipeline expansion is economic,  then the                                                                 
     pipeline companies  will make the investment necessary  to                                                                 
     build that infrastructure.  After all, that is how we earn                                                                 
     a return  on our investment.  However, it became clear  to                                                                 
     us that if  certain market participants, particularly  the                                                                 
     explorers,  as well as State of Alaska, wanted  additional                                                                 
     assurances  that  economic expansions  could  be ordered.                                                                  
     Such  powers  resting in  a regulatory  body  is somewhat                                                                  
     unique,  certainly  not in  our view,  a hallmark  of  the                                                                 
     pipeline industry  in the United States. But in  an effort                                                                 
     to forge a  compromise, we worked closely with  the Senate                                                                 
     Energy  Committee  staff  and  representatives   of  other                                                                 
     interested   parties   and  groups  to   hammer  out   the                                                                 
     compromise  mechanism that's  reflected in Section 706  as                                                                 
     it  presently stands.  We, therefore,  have indicated  our                                                                 
     acquiescence  to these  provisions and  we would disfavor                                                                  
     any effort to change it.                                                                                                   
                                                                                                                                
     With  respect  to  provisions  governing  instate  needs,                                                                  
     Section 704(g)  and the Alaska Royalty Gas Section  704(h)                                                                 
     and the instate rate coordination  in Section 709 (c), the                                                                 
     provisions  as written  are  consistent with  the general                                                                  
     requirements   of  ANGTA  and  the  president's  decision                                                                  
     selecting ANGTS. However,  these provisions if implemented                                                                 
     reasonably, should not impose  unnecessary burdens, risks,                                                                 
     or costs on  the project. As written, they are  acceptable                                                                 
     to us. Again, we would likely  oppose any effort to modify                                                                 
     these  provisions, which were  very carefully drafted  not                                                                 
     to impose debilitating risks  or costs on the project. And                                                                 
     with respect  to all other aspects of the bill,  Foothills                                                                 
     has previously indicated  its support for those. Thank you                                                                 
     for the opportunity and  I'm prepared to answer questions.                                                                 
                                                                                                                                
CHAIRMAN  TORGERSON asked,  based upon his  last testimony,  does he                                                            
not intend  to  advance any  amendments  on behalf  of Foothills  or                                                            
Duke. Mr. Ellwood  indicated that  was right for Foothills  and that                                                            
he couldn't  speak  for Duke,  but he  understood  that they  didn't                                                            
intend to.                                                                                                                      
                                                                                                                                
MR. JOE MARUSHACK, Phillips Petroleum, said they have a long-                                                                   
standing plan that they are going to implement to the extent they                                                               
have the ability to do so. He commented:                                                                                        
                                                                                                                                
     That  includes  continuing  to  pursue  federal  enabling                                                                  
     legislation   as   in   the   Senate   version   with   no                                                                 
     modifications.   It  includes   pursuing  federal  fiscal                                                                  
     legislation  with  a few  technical  corrections  that  we                                                                 
     could  talk   about  if  you  wish  later  on.  If   we're                                                                 
     successful there, we will  move forward and try to address                                                                 
     state  fiscal legislation similar  to that that was  in HB                                                                 
     519 last year.                                                                                                             
                                                                                                                                
     Let  me  expand on  these  points  a little  bit  in  some                                                                 
     detail.  For two years Phillips  has been working hard  to                                                                 
     commercialize  gas via  the Lower 48  pipeline. Obviously                                                                  
     there  is a lot  of benefits  to the state.  There's  huge                                                                 
     benefits to the governments;  there's a lot of benefits to                                                                 
     other  industries out  there and consumer  groups. Let  me                                                                 
     start out  by saying that I've met with a lot  of consumer                                                                 
     groups and  once they understand what we're trying  to do,                                                                 
     I've not  met a single consumer  group that has a problem                                                                  
     with the tax mechanism.  It doesn't mean they don't exist;                                                                 
     it  just means  the people I  have talked  to, after  they                                                                 
     understand  that  more  gas  is  good  for  the  Lower  48                                                                 
     consumer, they are supportive.                                                                                             
                                                                                                                                
     Last spring, Alaska's D.C.  delegation asked what it would                                                                 
     take to  progress a project.  With partners, I should  say                                                                 
     with  BP  and  Exxon  Mobil,  we developed   the enabling                                                                  
     legislation.   Separately,  we  addressed  a  federal  tax                                                                 
     mechanism   to   share   the  risk   with   the  ultimate                                                                  
     beneficiaries  and we  pointed out that  at that point  in                                                                 
     time,  if we were successful,  we would move forward  with                                                                 
     state  fiscal issues.  Assuming  there were  no more  risk                                                                 
     mandates,   the  next  step  would  be  to  initiate   the                                                                 
     permitting  process on  the southern  route. That's  where                                                                 
     we've been  and that's where we still are. We  continue to                                                                 
     favor  the southern  route. It  has fewer  unknowns;  that                                                                 
     means  lower risk. It has timing  advantages; again,  that                                                                 
     means  lower  risk.  It  has  less  opposition   and  less                                                                 
     contentious  issues in permitting overall less  commercial                                                                 
     and technical  risk, although  the risk is still high.  In                                                                 
     fact,  yesterday on the TV I  heard someone say there  was                                                                 
     no risk  with this project if  you got to take the Senate                                                                  
     tax  mechanism. That is  not true! This  is a $20 billion                                                                  
     project.  The last big  project like  that had an overrun                                                                  
     seven or eight times. We  can't afford anything like this.                                                                 
     There's huge  construction risks associated with  that and                                                                 
     I don't  think you've  met any industrial  or engineering                                                                  
     firm  up here  who has  said there  weren't,  but we  have                                                                 
     addressed   an  important   risk  and   that's  the   risk                                                                 
     associated with volatile markets.                                                                                          
                                                                                                                                
     This year  we have been focused and almost solely  focused                                                                 
     on  the legislation  that will  make the  project viable.                                                                  
     Within the enabling legislation,  I agree with most of the                                                                 
     comments  that you've  heard  before hand.  We originally                                                                  
     proposed  language that we thought  was clear and limited                                                                  
     to federal  action. Throughout  the process other parties                                                                  
     participated  in that and there was some modifications  in                                                                 
     the  Senate debate.  I don't  think anyone  is completely                                                                  
     happy  with the  Senate version,  but we  have a delicate                                                                  
     compromise  and we don't  think that  it's appropriate  at                                                                 
     this  point in time  to try  to be making  changes no  the                                                                 
     conference  floor.   In terms  of  the  federal  enabling                                                                  
     legislation,  I've heard a lot of misstatements  about it,                                                                 
     even today.                                                                                                                
                                                                                                                                
     But  let's be clear  on Phillips  with you  on this.  This                                                                 
     federal  fiscal  legislation  is  absolutely  critical  to                                                                 
     moving  a project ahead.  If we don't  have that, there's                                                                  
     really  no need in our view to  address any state issues.                                                                  
     So, we haven't attempted to address those.                                                                                 
                                                                                                                                
     The key thing to recognize,  it provides a risk mitigation                                                                 
     mechanism  to an  income tax  credit at  unexpectedly  low                                                                 
     prices.  There is not  a floor price.  The market will  be                                                                 
     what  the market  is. What  happens  is when  you hit  the                                                                 
     $3.25 AECO mechanism, you  get a federal tax credit to the                                                                 
     extent  that you are a taxpayer  in the U.S. If you  don't                                                                 
     have  sufficient income  taxes,  the credit  is not  worth                                                                 
     that  much. Hopefully,  we'll be a taxpayer  in the  Lower                                                                 
     48. The joint tax committee  did score it at no cost. That                                                                 
     means that  they had a mechanism out there, a  price score                                                                 
     cast  that they  thought  looked  reasonable that  had  no                                                                 
     associated  government revenues associated with  it. Other                                                                 
     price forecasts  may have a cost associated with  it; this                                                                 
     one does  not. The legislation  provided for repayment  in                                                                 
     high-priced  periods to  the extent you  have ever used  a                                                                 
     credit.                                                                                                                    
                                                                                                                                
     The North  America consumers will absolutely benefit  from                                                                 
     another source  of clean, stable, domestic energy.  And we                                                                 
     can talk a little bit about  what 4 BCF means and where it                                                                 
     comes  from and what kind of  commitment it takes to  make                                                                 
     that  happen to the  Lower 48 market.  The loss of supply                                                                  
     and  demand will still  set the market  price of the  gas.                                                                 
     This is not a floor on the price.                                                                                          
                                                                                                                                
     What's  needed, Phillips will  be pursuing some technical                                                                  
     corrections  to the  fiscal part of  the bill. Otherwise,                                                                  
     general  support   from  Alaska  in  the  Senate  will  be                                                                 
     helpful.  We're not  advocating any  alternatives at  this                                                                 
     point  in time. We're  advocating the  position we've  had                                                                 
     for well over  a year. We're committed to making  progress                                                                 
     on  state fiscal  issues  to the extent  that  we get  the                                                                 
     legislation  that  we need  in Washington.  Those, again,                                                                  
     would  be clear, they'd  be certain,  and regarding  state                                                                 
     incentives,  we will be seeking some modifications  on the                                                                 
     tax side.                                                                                                                  
                                                                                                                                
     Senator Torgerson,  that presentation you had  there was a                                                                 
     BP  presentation. It  was not a Phillips  presentation;  I                                                                 
     was invited  to sit in on that  and I did sit in on  that,                                                                 
     but I  do not agree necessarily  with all the points  that                                                                 
     are  in there. Clearly,  there is nothing  in there  about                                                                 
     state  fiscal  incentives,   but  we  think  we  would  be                                                                 
     pursuing those.  But there are other issues in  there that                                                                 
     we think  are probably  not our view  of how those things                                                                  
     should  be  done  in the  future.  Nonetheless,  it  is  a                                                                 
     starting  point and  there are  a lot of  things in  there                                                                 
     that  we  would agree  with.  Again,  we don't  think  the                                                                 
     timing is necessarily appropriate.                                                                                         
                                                                                                                                
     We will be  pursuing a version of something similar  to HB                                                                 
     519. We  thought that was a good  approach. We thought  it                                                                 
     made  use  of  existing  state  processes  to  enter  into                                                                 
     confidentiality   agreements  to share  information,   yet                                                                 
     there  would  still  be a  public  process  and a  way  of                                                                 
     negotiating and ultimately  bringing forward a contract or                                                                 
     some sort of mechanism that  the legislature could look at                                                                 
     and  make comments  and hopefully  approve.  And finally,                                                                  
     strategic  incentives when most needed by the  project, we                                                                 
     would be pursuing those in the future, too.                                                                                
                                                                                                                                
     So, in  conclusion, other than  a few dot points I'd  like                                                                 
     to make  at the end,  we will continue  to pursue success                                                                  
     along  these lines. There's nothing  new here. We've  been                                                                 
     here well  over a year and we've been consistent  in this.                                                                 
     We  ask the committee's  support for  this strategy.  It's                                                                 
     one that  we believe can progress  in the Alaska pipeline                                                                  
     project.                                                                                                                   
                                                                                                                                
     Just a couple points that  I may not have addressed in the                                                                 
     ultimate  dot points  here beforehand  -  cost overruns  -                                                                 
     cost overruns  are still a certainty. There is  nothing in                                                                 
     the tax  mechanisms that would  keep that from happening.                                                                  
     Representative Green, you  asked about inflated costs. The                                                                 
     cost of  the pipeline project  that we see now, including                                                                  
     gas treatment  plant, NGL facility, and a mechanism  to go                                                                 
     all  the way into the  Lower 48 is  $19.4 billion in  2001                                                                 
     dollars.  That would  be inflated for  dollars of the  day                                                                 
     and  depending  on the  timing  of that,  it's  $25 -  $27                                                                 
     billion.  It's important  to  note that  Phillips, BP  and                                                                 
     Exxon  did design a pipeline  all the way to Chicago.  The                                                                 
     idea that we're going to  strand Canadian gas is nonsense.                                                                 
     We have looked at either  building a line ourselves to get                                                                 
     it  to  market,  but a  better  solution  and  one that's                                                                  
     win/win    for   everybody,    is   that   the   Canadian                                                                  
     infrastructure,   the  pipeline  companies,  TransCanada,                                                                  
     Foothills,  Duke, Williams  - all those  companies expand                                                                  
     their  systems so  we're not  just going  to Chicago,  but                                                                 
     we're  going to other  places. That's  how we potentially                                                                  
     get the best  price for that gas. But, we're not  going to                                                                 
     strand Canadian gas.                                                                                                       
                                                                                                                                
     Furthermore,  Phillips  is  on record  as  supporting  two                                                                 
     pipelines.  We believe an Alcan pipeline needs  to happen;                                                                 
     we  believe  an Alaska  southern  route project  needs  to                                                                 
     happen. The  Mackenzie Delta line has got to be  an easier                                                                 
     thing to do than we're trying  to do. It's 900 miles; it's                                                                 
     small diameter;  it's ready-made steel; it should  be able                                                                 
     to  be  done  if  you  can  get  through  the  regulatory                                                                  
     processes  sooner than our project  simply because of  the                                                                 
     size of  the magnitude. We're  four times as big as  that.                                                                 
     In any  regard, we think there  is room in the market  for                                                                 
     both of those projects and  regardless if Alaska gas comes                                                                 
     first or if Mackenzie Delta  gas comes first, we are going                                                                 
     to have to have expansion  out of Canadian infrastructure.                                                                 
     Again,  we'll do it  if we have to;  we hope the Canadian                                                                  
     infrastructure   will  see  a  better  way  of  doing   it                                                                 
     themselves.                                                                                                                
                                                                                                                                
     I  think that's  most  of what  I wanted  to  talk to  you                                                                 
     about.  In  terms  of  the  mechanisms,  what  we've  been                                                                 
     pursuing is something similar  to a trigger mechanism such                                                                 
     as the  AECO mechanism that we've  talked about here.  The                                                                 
     other  items that  we  think are  necessary  to move  this                                                                 
     project  along from the petrol  standpoint. But actually,                                                                  
     the  idea of the tax  mechanism is you  don't want to  use                                                                 
     that tax mechanism.  It's a safety guard, if you  will; it                                                                 
     protects in  cases of a low price environment.  It doesn't                                                                 
     affect  the economics  of the  project except  if you  did                                                                 
     ever have a very low price  scenario, and then, of course,                                                                 
     it does  provide a tax  credit to the  extent you can  use                                                                 
     that  to get  up  the $3.25  AECO  price, but  this  still                                                                 
     leaves  us with  a  very, very  challenging  project.  So,                                                                 
     we'll  be  pursuing  investment  tax credits  on  the  gas                                                                 
     treatment  facility  and  seven-year  depreciation  on  at                                                                 
     least  the  U.S. portion  of  the pipes.  We'd  also  like                                                                 
     seven-year  depreciation  in  Canada.  So,  hopefully  the                                                                 
     Phillips position is clear;  it's not new and I'd be happy                                                                 
     to answer any questions you may have.                                                                                      
                                                                                                                                
CHAIRMAN TORGERSON  said he understood  that the White House  wasn't                                                            
too  keen  on  a  tax credit   and asked  BP  to  come  up  with  an                                                            
alternative.  He asked if  BP has proposed  any alternatives  to the                                                            
floor and if so, what his position is on them.                                                                                  
                                                                                                                                
MR. MARUSHACK  responded that they had been asked  for alternatives,                                                            
not only by the Administration,  but by the Senate Energy Committee,                                                            
but they stand committed to where they are right now.                                                                           
                                                                                                                                
     The reason for that is because  we have been pursuing this                                                                 
     for over a year. We've been  very clear on how to move the                                                                 
     project  forward, the tax mechanisms  that are necessary.                                                                  
     We recognize  that the more that you have confusion  about                                                                 
     what  works and  what doesn't  work, it  gives people  the                                                                 
     opportunity  to say, 'This one I can do; this  one I can't                                                                 
     do. This  one costs; this one  doesn't cost.' And we  just                                                                 
     try  to  be crystal  clear  on what  it  takes to  make  a                                                                 
     project  happen. The  worst thing  in the  world that  can                                                                 
     happen  is we throw up a bunch  of alternatives there.  In                                                                 
     conference committee, people  pick and choose a few things                                                                 
     and  Phillips  would  say if  it doesn't  meet  the  basic                                                                 
     requirements,  we're not there guys. We do have  a plan of                                                                 
     how to do it; we've been  clear on how to do it, but we're                                                                 
     concerned  about giving people the opportunity  to cut and                                                                 
     paste, pick and choose.                                                                                                    
                                                                                                                                
     So, our position  is that we do not support changes  right                                                                 
     now. We  have evaluated all the  mechanisms and frankly  I                                                                 
     can tell you  some of them probably could work  so long as                                                                 
     they are a  package that's put together that makes  sense.                                                                 
     But  the concern is  who knows what's  going to happen  on                                                                 
     the floor  out there. So, we  think the prudent course  of                                                                 
     action  is, 'You asked us what  we needed; we've told  you                                                                 
     what we've needed; we're pursuing that strategy.'                                                                          
                                                                                                                                
CHAIRMAN  TORGERSON  said he  wanted to  focus on  the BP  proposal,                                                            
which uses wellhead values.  That was originally Phillips' proposal.                                                            
                                                                                                                                
MR. MARUSHACK said it was very close to what they developed.                                                                    
                                                                                                                                
CHAIRMAN TORGERSON asked  if that ends up being the mechanism, would                                                            
he be all right using it.                                                                                                       
                                                                                                                                
MR. MARUSHACK replied:                                                                                                          
                                                                                                                                
     Senator, I  think what's important to be clear  here is we                                                                 
     have worked  this project all  the way to our most senior                                                                  
     management  levels, to  our chairman's  level. When  we've                                                                 
     said  here's a  plan on how  to move forward,  what  we're                                                                 
     also  telling you  is if all  these things  happen,  we'll                                                                 
     invest  another several  hundred million  dollars in  this                                                                 
     project.  Now, that takes a lot  of guts and takes a  firm                                                                 
     commitment  on someone's part. So, at this point  in time,                                                                 
     Senator,  I  understand  what the  BP  proposal is  and  I                                                                 
     understand  the economics  of  that. We  continue to  say,                                                                 
     'Let's stick with what we've  got; let's pursue what we've                                                                 
     got and let's be successful there.'                                                                                        
                                                                                                                                
CHAIRMAN  TORGERSON  responded that  he agreed  that  they had  been                                                            
crystal  clear about what  they needed  and he was  trying to  get a                                                            
handle on what was going  to surface at the top. He asked, "Does the                                                            
BP proposal have more votes than yours?"                                                                                        
                                                                                                                                
MR. MARUSHACK  replied that he didn't know what was  going to happen                                                            
ultimately.                                                                                                                     
                                                                                                                                
     I  think it's  going to be  a tremendous  struggle.  We're                                                                 
     going to do  everything we can to make it happen.  I don't                                                                 
     think  it's  a slam  dunk. My  hope is  that  many of  the                                                                 
     consumer  states will  understand  the value  of this  and                                                                 
     pursue  it.   I  think  it's  very,  very  dangerous   for                                                                 
     producing   states  to  be  saying  we  don't  support   a                                                                 
     mechanism  like this when we have got benefits  of royalty                                                                 
     credits in the Gulf, when  we've got Section 29 credits; I                                                                 
     think  it's  very very  difficult  in  my view  given  the                                                                 
     Hibernia  situation,   given  the  Northwest  Territories                                                                  
     situation,  given the oil sands. I think folks  need to be                                                                 
     very  careful  in saying  that  they don't  support  this,                                                                 
     because this  is not for the three big producers.  This is                                                                 
     for all Alaska  gas that comes in for a certain  period of                                                                 
     time  and  the Lower  48  wants  more gas.  They  see  the                                                                 
     benefit  of more  gas not  less gas.  To the  extent  this                                                                 
     mechanism  doesn't happen,  this project  won't happen,  I                                                                 
     believe.  So, I think  people need to  be very careful  of                                                                 
     what they say, especially producers.                                                                                       
                                                                                                                                
CHAIRMAN  TORGERSON said  he understands and  his recommendation  to                                                            
the committee is to support  the price floor, but he also knows that                                                            
they  aren't going  to  have time  to  meet again  if  the BP  thing                                                            
happens  to be  the  one that  comes  to the  top. "That's  why  I'm                                                            
pursuing this line of questioning."                                                                                             
                                                                                                                                
MR. MARUSHACK said they  had been clear with the delegation that the                                                            
AECO mechanism is where  they need to go and the reason is primarily                                                            
so they don't  get into a confusing  situation where people  cut and                                                            
paste and something  doesn't happen.  "The folks in Washington  will                                                            
be able  to tell exactly  what Phillips has  said. There is  nothing                                                            
different."                                                                                                                     
                                                                                                                                
CHAIRMAN TORGERSON said he talks to them a lot and this is for                                                                  
our record, not for their record.                                                                                               
                                                                                                                                
REPRESENTATIVE  GREEN said  he was  impressed  with Mr. Marushack's                                                             
statement  that once  the  gas gets  to the  hub there  are  several                                                            
markets that would be ready  and willing to take the additional gas.                                                            
                                                                                                                              
TAPE 02-8, SIDE B                                                                                                               
                                                                                                                              
MR. MARUSHACK said:                                                                                                             
                                                                                                                                
     This is  a once in a generation  opportunity for Canadian                                                                  
     pipeline companies.  To have 4 BCF/D is small  in terms of                                                                 
     the 76 BCF/D  that the Lower 48 needs, but in  one slug to                                                                 
     come  through  at a  specific  period  of time  is highly                                                                  
     unusual  and it's a  lot of opportunity  for the Canadian                                                                  
     infrastructure  there.  The win/win I've  long claimed  on                                                                 
     this  was  that,   yes,  through  conventional   means  of                                                                 
     expansion,  twinning, looping, whatever it is,  that there                                                                 
     be the opportunity  for a lot of companies to  participate                                                                 
     in this  in the Lower  48 infrastructure.  I believe  that                                                                 
     there's  a way of doing that  cheaper. I don't believe  at                                                                 
     the end of  the day frontier pipeline always requires  the                                                                 
     major producers to make  a commitment to make that happen.                                                                 
     But  in the  infrastructure,  I think  there's tremendous                                                                  
     win/win there, plus the market issues you addressed.                                                                       
                                                                                                                                
CHAIRMAN  TORGERSON   wanted  to  make  it  clear  that  he  had  no                                                            
regulatory  changes,  but  only  financial   changes  to  the  bill,                                                            
tweaking the floor.                                                                                                             
                                                                                                                                
MR. MARUSHACK said that was correct.                                                                                            
                                                                                                                              
12:35 p.m.                                                                                                                      
                                                                                                                                
REPRESENTATIVE  JOULE said in his  North Slope district they  strive                                                            
for  working  partnerships  and  he hopes  that  as  legislation  is                                                            
developed,  people are brought  to the table  earlier as opposed  to                                                            
being drug into the partnerships kicking and screaming:                                                                         
                                                                                                                                
     Because there  were some concerns with that in  particular                                                                 
     by the people of the North  Slope who in different aspects                                                                 
     of developing  the resources  of the North are constantly                                                                  
     looked at and asked for  their blessing on certain things.                                                                 
     I know that was not the case with HB 519…                                                                                  
                                                                                                                                
REPRESENTATIVE FATE said  his comment was also on HB 519 and how Mr.                                                            
Marushack alluded  to, if not the  necessity, certainly a  favorable                                                            
position the  state might enter into  relative to a bill  similar to                                                            
HB 519. He  asked what happens if  there is a final solution  to the                                                            
congressional  conference  committee  and  they  get  the  incentive                                                            
package  that they are  looking at.  "Is there still  going to  be a                                                            
necessary companion piece  of state legislation with an incentive in                                                            
it?"                                                                                                                            
                                                                                                                                
MR. MARUSHACK  responded to  Representative  Joule by saying  the HB                                                            
519 was  not a Phillips'  bill, but  they weighed  in on it  when it                                                            
became public.  He commented, "I agree with you. This  needs to be a                                                            
process  that's  vented  much  more  timely.  More  people  need  to                                                            
understand  that  and that  needs to  be worked  to  a much  broader                                                            
degree next time."                                                                                                              
                                                                                                                                
He  said with  regard  to  Representative  Fate  and the  state  tax                                                            
mechanism, they have a  plan, which consists of mitigating the risk.                                                            
He explained:                                                                                                                   
                                                                                                                                
     It's not a floor; it's a  tax mechanism that triggers at a                                                                 
     certain  price on  tax credits.  When we  say floor,  that                                                                 
     means  things to  people  in the Lower  48  that they  are                                                                 
     going  to have  to pay  a higher  price for  gas and  they                                                                 
     will. In any  regard, the plan is to mitigate  some of the                                                                 
     market  risk through the AECO  mechanism and then work  on                                                                 
     how  to make  the  economics  of the  project  better  and                                                                 
     there's a  number of ways we're going to make  the project                                                                 
     better. We're  willing to invest several million  dollars,                                                                 
     again,  into trying  to improve the  technical aspects  of                                                                 
     the project and I think  we can reduce that cost somewhat,                                                                 
     but  I don't  know  how  much. I  do  know it's  going  to                                                                 
     require  tens of millions of  dollars in work to do  that.                                                                 
                                                                                                                                
     The  second way we're  going to do that  is try to pursue                                                                  
     federal mechanisms that  do help the economics. That's the                                                                 
     gas   treatment   plant,   investment   tax   credit   and                                                                 
     accelerated   depreciation.  The  third  would   be  other                                                                 
     mechanisms  similar to what we see coming from  the state.                                                                 
     And  I  point out  that  in my  experience,  when  I'm  in                                                                 
     Washington that is an issue  that keeps coming up. What is                                                                 
     Alaska doing  to positively make the project happen,  too.                                                                 
     So,  what we're doing  is we're  building building-blocks                                                                  
     here  so that  ultimately we're  going to  have a project                                                                  
     that is a  reasonably competitive project and  we've got a                                                                 
     plan to do  that and the state being part of that  is part                                                                 
     of that plan, yes sir.                                                                                                     
                                                                                                                                
REPRESENTATIVE  DAVIES asked about  his comment that the  tax credit                                                            
is useful  only if you pay  taxes and wondered  to what extent  that                                                            
provides an incentive  to make sure that the gas is  marketed in the                                                            
Lower 48. Was  it his point that if  gets stranded in Canada,  taxes                                                            
won't be paid on gas in the Lower 48.                                                                                           
                                                                                                                                
MR. MARUSHACK replied:                                                                                                          
                                                                                                                                
     The  point I  was  trying to  make is  that even  the  tax                                                                 
     mechanism  itself, if it comes through, is not  foolproof.                                                                 
     You've  got  to assume  you're  in a  taxpaying position,                                                                  
     which  we are currently a U.S.  taxpayer and we expect  to                                                                 
     be a taxpayer. The only  point I'm trying to make there is                                                                 
     when  people  talk about  a  floor,  that means  that  the                                                                 
     market would  pay no less than $3.25. That's not  correct.                                                                 
     We're going  to be higher than that and we're  going to be                                                                 
     lower then that. All we're  talking about here is when you                                                                 
     get a tax credit, that kicks in.                                                                                           
                                                                                                                                
     This is unique  because other tax mechanisms like  Section                                                                 
     29  and royalty  relief, those  are an  absolute grant  of                                                                 
     credit that the government  has provided. We're not asking                                                                 
     for  that.  Actually,  the number  is  just too  big;  the                                                                 
     project is  too big. We think on a national energy  policy                                                                 
     basis,  that it makes sense to  have something that  takes                                                                 
     away that risk. The ultimate  beneficiary of low prices is                                                                 
     the Lower  48 consumer. The only point I'm trying  to make                                                                 
     here  is this particular  mechanism has  that; that's  the                                                                 
     way  it works,  but not  anything  having to  do with  the                                                                 
     market.  The gas has to land  in the Lower 48, because  it                                                                 
     can't  be accepted into Canada  and we've understood  that                                                                 
     and designed that system  from day one. There is no reason                                                                 
     for the  U.S. to do this if it  doesn't land in the  Lower                                                                 
     48 and some  national energy policy question we've  got to                                                                 
     resolve here.                                                                                                              
                                                                                                                                
CHAIRMAN TORGERSON  asked if their  merger was complete with  Conoco                                                            
yet.                                                                                                                            
                                                                                                                                
MR. MARUSHACK said it wasn't.                                                                                                   
                                                                                                                                
CHAIRMAN TORGERSON  asked if there  were rumblings among  the Conoco                                                            
Board that they're not in favor of price floors.                                                                                
                                                                                                                                
MR. MARUSHACK  said he  couldn't speak for  Conoco, because  they're                                                            
not  one company.  The  Phillips Chairman  is  going to  be the  new                                                            
senior executive  of the new company and his view  is that they need                                                            
two  pipelines.  He  has  been clear  with  everyone  that  the  tax                                                            
mechanism is necessary and it needs to happen now.                                                                              
                                                                                                                                
CHAIRMAN TORGERSON  said he didn't expect Conoco to  oppose anything                                                            
that they are working on.                                                                                                       
                                                                                                                                
MR. MARUSHACK replied that he did not.                                                                                          
                                                                                                                                
MR. DAVE  DINGELL, Manager,  City  of Valdez, said  he was  speaking                                                            
today on behalf  of the Port Authority. He didn't  have any specific                                                            
comments on the  questions that were asked on the  credit provisions                                                            
or other incentives. Their  economic model indicates that no federal                                                            
or state legislation  is needed to help their project.  But if there                                                            
are  incentives,  they  should  apply  to any  project  and  not  be                                                            
specific to a route such as the Alaska highway project.                                                                         
                                                                                                                                
REPRESENTATIVE  GREEN said  his program is  predicated on a  federal                                                            
tax free project and asked  if he didn't consider that an incentive.                                                            
                                                                                                                                
MR. DINGELL replied  that they have a letter from  the IRS that says                                                            
they are exempt from federal income tax.                                                                                        
                                                                                                                                
REPRESENTATIVE GREEN said  he had a little problem separating those.                                                            
                                                                                                                                
MR. DINGELL  reiterated if they were  going to make recommendations                                                             
to the  next state legislature  on any incentives,  they should  for                                                            
any project that commercializes Alaska gas.                                                                                     
                                                                                                                                
CHAIRMAN TORGERSON  said he thought they were broad  enough to cover                                                            
anything, but  he didn't think the  federal taxation would  ever get                                                            
there again.                                                                                                                    
                                                                                                                                
REPRESENTATIVE  DAVIES said his understanding of the  Port Authority                                                            
project is that it's a Y-line.                                                                                                  
                                                                                                                                
MR. DINGELL said that is correct.                                                                                               
                                                                                                                                
REPRESENTATIVE  DAVIES asked  if these credits  were enacted,  would                                                            
his project be benefited.                                                                                                       
                                                                                                                                
MR. DINGELL replied that  it would benefit a portion of one possible                                                            
project.                                                                                                                        
                                                                                                                                
REPRESENTATIVE  DAVIES said he understood that they  get the biggest                                                            
benefit  from the  Y-line  approach  and that  the LNG  stand  alone                                                            
doesn't work. So, it seems unlikely that that would go first.                                                                   
                                                                                                                                
MR. DINGELL  replied  that at the  present configuration,  the  Port                                                            
Authority  supports  the Y-line  concept,  but they  are looking  at                                                            
other options.  "A lot  of people  look at the  project as the  main                                                            
line is going  through Canada and  the spur is to tide water  and it                                                            
could be reversed."                                                                                                             
                                                                                                                                
CHAIRMAN  TORGERSON said  he had  been number  crunching and  didn't                                                            
know if a Y-line  would be competitive with some of  the cheaper gas                                                            
that the  companies  are bringing  into the Lower  48. He  announced                                                            
that they  would next  discuss the committee's  two recommendations                                                             
beginning with proposal 1, supporting the tax mechanism.                                                                        
                                                                                                                                
REPRESENTATIVE GREEN moved to adopt proposal 1.                                                                                 
                                                                                                                                
CHAIRMAN TORGERSON  said the justification  for adopting  proposal 1                                                            
was heard in today's testimony.                                                                                                 
                                                                                                                                
REPRESENTATIVE  DAVIES said it should  probably say the "tax  credit                                                            
mechanism"  and  specifically   refer  to  the  Alaska  Natural  Gas                                                            
Pipeline Act of 2002 or H.R. 4.                                                                                                 
                                                                                                                                
MR. MARUSHACK  recommended that they  use a general term  that would                                                            
allow  them  the ability  to  accept  things  like a  gas  treatment                                                            
facility investment  tax credit and seven-year depreciation  also to                                                            
help improve the project on a federal basis.                                                                                    
                                                                                                                                
CHAIRMAN TORGERSON  suggested: "The  Joint Committee on Natural  Gas                                                            
Pipelines  supports the  tax mechanism  in Section  25.03 of  H.R. 4                                                            
including  provisions for  accelerated depreciation  and  investment                                                            
tax credits."                                                                                                                   
                                                                                                                                
REPRESENTATIVE  GREEN  said  he thought  Mr.  Marushack  wanted  the                                                            
wording   "such  items  as"   inserted  in   front  of  accelerated                                                             
depreciation.                                                                                                                   
                                                                                                                                
REPRESENTATIVE  GREEN said  he wanted to  withdraw his prior  motion                                                            
and  start over  again.  There  were no  objections  and  it was  so                                                            
ordered.                                                                                                                        
                                                                                                                                
REPRESENTATIVE  GREEN moved proposal  2, that the Joint Natural  Gas                                                            
Pipelines  Committee  supports  federal  incentives to  promote  the                                                            
timely construction of an Alaska natural gas pipeline such as…                                                                  
                                                                                                                                
CHAIRMAN TORGERSON announced an at-ease to write up proposal 2.                                                                 
                                                                                                                                
REPRESENTATIVE DAVIES read the proposal:                                                                                        
                                                                                                                                
     The  Joint Committee  on Natural  Gas  Pipelines supports                                                                  
     federal  tax  mechanisms  to promote  construction  of  an                                                                 
     Alaska natural gas pipeline  such as the tax mechanisms in                                                                 
     Section  25.03 of  H.R. 4,  accelerated  depreciation  and                                                                 
     investment tax credits.                                                                                                    
                                                                                                                                
REPRESENTATIVE  FATE  suggested   changing  "to  promote"  to  "that                                                            
promote."                                                                                                                       
                                                                                                                                
CHAIRMAN  TORGERSON asked  if there  were any  further questions  or                                                            
debate. There were none and it was adopted.                                                                                     
                                                                                                                                
CHAIRMAN  TORGERSON  announced  the second  proposal  to  be up  for                                                            
discussion  and said it supports  the Senate  version of the  energy                                                            
bill on the regulatory  side of things. He explained  that there was                                                            
a gentlemen's agreement that there would be no amendments to it.                                                                
                                                                                                                                
REPRESENTATIVE GREEN moved to adopt proposal 2.                                                                                 
                                                                                                                                
REPRESENTATIVE  DAVIES noted  that they  didn't necessarily  support                                                            
each individual one, but collectively as written, a compromise.                                                                 
                                                                                                                                
CHAIRMAN TORGERSON  said he would like to add the  word "regulatory"                                                            
because that  is what they are quizzing  everyone on. He  said there                                                            
was an  amendment  to the  second proposal  so it  would read,  "The                                                            
Joint Committee  on Natural  Gas Pipelines  supports the  regulatory                                                            
provisions of the Alaska Pipeline Act without amendments."                                                                      
                                                                                                                                
There were no objections  to the amendment to proposal 2. There were                                                            
no objections to adopting proposal 2 and it was so ordered.                                                                     
                                                                                                                                
REPRESENTATIVE DAVIES said  he thought they should advance the other                                                            
items in the resolution.                                                                                                        
                                                                                                                                
CHAIRMAN  TORGERSON said  they could advance  those in conversation                                                             
with  individuals  with  FERC  or  others,  but if  it  requires  an                                                            
amendment, they  have just said they will not advance  anything that                                                            
requires that.                                                                                                                  
                                                                                                                                
He announced  that they  would take  about an  hour break and  would                                                            
then take up  item 7, discussion of  the lobby effort and  item 8, a                                                            
general discussion on recommendations.                                                                                          
                                                                                                                                
1:15 p.m. - 2:38 p.m. - BREAK                                                                                                   
                                                                                                                                
TAPE 02-9, SIDE A                                                                                                               
                                                                                                                              
CHAIRMAN  TORGERSON called  the meeting  back to  order at 2:38  and                                                            
said that he would  keep the committee appraised of  what his travel                                                            
plans are  for going  back to Washington  D.C.  and that they  would                                                            
work through  C.J. Zane on the issues.  He said the first  trip back                                                            
would be around September 9.                                                                                                    
                                                                                                                                
CHAIRMAN  TORGERSON   said  that   the  recommendations   were  very                                                            
preliminary.  Mr. Dingell  wanted these provisions  to apply  to oil                                                            
projects and he thought  they already did, but he has made a note to                                                            
check that in  final form. He asked the committee  members to return                                                            
their comments  to him by September 20 so he could  put it in packet                                                            
form and maybe send it out for comments from the major players.                                                                 
                                                                                                                                
RECOMMENDATIONS                                                                                                               
                                                                                                                                
1. Continue banning the over-the-top route.                                                                                     
2. Before  considering  fiscal  incentives, the  legislature  should                                                            
   require data from the producers.                                                                                             
3. The Legislature  should consider the property tax,  severance tax                                                            
   and others.                                                                                                                  
4. Have discussions with  local governments about the ad valorem tax                                                            
   instead of "cramming it down their throats."                                                                                 
5. More cohesive  communication between  the Administration  and the                                                            
   Legislature.                                                                                                                 
6. Look at the fiscal system.                                                                                                   
7.  Examine  methods  for  state  financial   participation  in  the                                                            
   project.                                                                                                                     
8.  Continue the  committee's  existence.  There should  be  another                                                            
   resolution  so that  the interim  work can  continue.  Hopefully,                                                            
   they are  finished with Congress,  but haven't started  work with                                                            
   the Canadian government or First Nations in Canada.                                                                          
9. Continue and expand  the international committee to help work out                                                            
   some of  the perceived regulatory  problems crossing borders.  He                                                            
   said they  have put together a  good team this year with  Patrick                                                            
   Coughlin and others.                                                                                                         
10. Continue to assess state needs and gas reserves                                                                             
11. Provide more access for explorers.                                                                                          
12. Keep Alaska's  royalty-in-kind in the same state  it is in right                                                            
   now.                                                                                                                         
13. Provide access to communities.                                                                                              
14. Tie local consumption in with the Right-of-way Leasing Act.                                                                 
15. Streamline permitting.                                                                                                      
16. Include Alaska hire provisions                                                                                              
17. Provide training and labor in Alaska.                                                                                       
                                                                                                                                
REPRESENTATIVE  DAVIES  asked  if  they should  consider  what  will                                                            
happen if the initiative passes.                                                                                                
                                                                                                                                
CHAIRMAN TORGERSON said  if they wait until after the election, they                                                            
would know what they are dealing with. He told members, "I envision                                                             
a couple day meeting…if we're that serious about making                                                                         
recommendations to the next legislature."                                                                                       
                                                                                                                                
CHAIRMAN TORGERSON adjourned the meeting at 2:55 p.m.                                                                           

Document Name Date/Time Subjects