Legislature(2001 - 2002)
07/18/2001 09:06 AM Senate NGP
| Audio | Topic |
|---|
* first hearing in first committee of referral
+ teleconferenced
= bill was previously heard/scheduled
+ teleconferenced
= bill was previously heard/scheduled
ALASKA STATE LEGISLATURE
JOINT COMMITTEE ON NATURAL GAS PIPELINES
Anchorage, Alaska
July 18, 2001
9:06 a.m.
SENATE MEMBERS PRESENT
Senator John Torgerson, Chair
Senator Rick Halford
Senator Pete Kelly
Senator Donald Olson, alternate
SENATE MEMBERS ABSENT
Senator Johnny Ellis
HOUSE MEMBERS PRESENT
Representative Joe Green, Vice-Chair
Representative Brian Porter
Representative Scott Ogan
Representative John Davies
Representative Hugh Fate, alternate
HOUSE MEMBERS ABSENT
Representative Mike Chenault, alternate
Representative Reggie Joule, alternate
COMMITTEE CALENDAR
PRESENTATIONS BY GAS LINE GROUPS
Alaska Gas Producers Pipeline Team
Yukon Pacific Corporation
Foothills Pipe Lines
Alaska North Slope LNG Sponsor Group
Alaska Gasline Port Authority
Kenai Peninsula Borough
Williams Energy Services
WITNESS REGISTER
Mr. Joseph Marushack
Vice President
ANS Gas Commercialization
Phillips Alaska, Inc.
P.O. Box 100360
Anchorage AK 99510
Mr. Ken Konrad
Senior Vice President
Business Unit Leader - Alaska Gas
BP Exploration Alaska Inc.
119 Second Street, #B
Juneau AK 99801
Mr. Jeff Lowenfels
President and Chief Executive Officer (CEO)
Yukon Pacific Corporation
1049 West Fifth Avenue
Anchorage AK 99501-1930
Mr. Wayne Lewis
Executive Vice President
Yukon Pacific Corporation
1049 West Fifth Avenue
Anchorage AK 99501-1930
Mr. John R. Ellwood
Vice President
Engineering and Operations
Foothills Pipe Lines Ltd.
3100 707 Eighth Avenue S.W.
Calgary, Alberta T2P 3W8
Canada
Mr. Steve Alleman
Commercial Manager
Alaska North Slope LNG Project
Phillips Petroleum Company
P.O. Box 100360
Anchorage AK 99510
Mr. Charles E. Cole
Vice Chairman
Alaska Gasline Port Authority
406 Cushman Street
Fairbanks AK 99701
Mr. Rigdon Boykin
Senior Partner
O'Melveny & Myers, LLP
(on behalf of the Alaska Gasline Port Authority)
151 East 53rd Street
New York NY
Mr. Dale Bagley
Mayor
Kenai Peninsula Borough
144 North Binkley Street
Soldotna AK 99669
Mr. Jeff Cook
Vice President, External Affairs
Williams Energy Services
2800 Post Oak Blvd.
Houston TX 77056
Mr. Cavan Carlton
Williams Energy Services
2800 Post Oak Blvd.
Houston TX 77056
Senator Robin Taylor
Alaska State Legislature
Capitol Building, Room 30
Juneau Alaska 99801
Ms. Ronda Thompson
International Trade Office
Alaska State Legislature
716 West 4th Avenue, Suite 660
Anchorage AK 99501-2133
Mr. Scott Heyworth
Director
Our Gas, Our Future
P.O. Box 100531
Anchorage AK 99501
Mr. Jerry McCutcheon
PO Box 101838
Anchorage AK 99510
Ms. Theresa Obermeyer
3000 Dartmouth
Anchorage AK 99508
ACTION NARRATIVE
TAPE 01-5, SIDE A
9:06 a.m.
CHAIRMAN JOHN TORGERSON called the Joint Committee on Natural Gas
Pipelines meeting to order at 9:06 a.m. Members present during
the meeting were Senators Torgerson, Kelly, and Olson, and
Representatives Green, Porter, Ogan, Davies, and Fate
(alternate).
PRESENTATIONS BY GAS LINE GROUPS
Alaska Gas Producers Pipeline Team
9:07 a.m.
MR. JOSEPH MARUSHACK, Vice President, ANS [Alaska North Slope]
Gas Commercialization, Phillips Alaska, Inc., came forward,
noting that with him was Ken Konrad of BP Exploration (Alaska)
Inc. He informed members that along with Robbie Schilhab of
ExxonMobil Production Company, who was not present that day, they
comprise the Management Committee of the Alaska Gas Producers
Pipeline Team. [In packets was a handout titled "Overview &
Status" dated July 18, 2001, which accompanied a PowerPoint
presentation.]
MR. MARUSHACK informed listeners that there hadn't been much
change in the team's overall objectives [since the presentations
before the House Special Committee on Oil and Gas]. The first
two months were spent developing a team, now about 100 strong in
[Alaska]; Calgary, Alberta; and the Lower 48. The team is trying
to determine the major problems, and first has worked on
technical aspects. Clearly, costs and environmental
considerations are important, as is timing. The team is working
on permitting issues, and is believed to be on-track in putting
together route-related information in order to make a decision.
Mr. Marushack said he is increasingly spending time addressing
political and government-related issues, among others.
MR. MARUSHACK explained that the original goal was to have the
permitting defined by the end of the year; although it has been
pushed back some, he believes the timetable is still within three
months of that. He noted that the team will spend more than the
$75 million projected this year because of the complexity and
other factors.
MR. MARUSHACK addressed a slide called "Overall Project Scope."
The gas treatment facility [at Prudhoe Bay] will be the largest
in the world; Natchiq Parsons is the lead contractor. The focus
has been on what technology will be most appropriate to use. The
facility, the largest of its kind in the world, will require more
than 100,000 tons of steel and a huge amount of work in Alaska;
that is where most of the long-term jobs will come from.
MR. MARUSHACK continued, addressing "Alaska to Alberta Pipeline
System (A-B)." He noted that Fluor Veco - the contractor
headquartered in Houston, Texas - is working in a number of
locations. The big issues are pressure; diameter; volumes;
expandability; and logistics, including procurement, a key timing
item. He emphasized the need to find materials and build new
equipment to do this, which will require significant effort.
MR. MARUSHACK continued with the same slide, addressing "Alberta
to Market Pipeline System (B-C)." He indicated the team is
working with The AlasCan Group, of which Natchiq is a part. The
issues are a little different: there are routing decisions to
make on "A-B," but on "B-C" the decision is whether new pipeline
is needed and whether there can be expansion. He stated the
belief that it will require some new pipeline, but said expansion
is part of it. The technical aspects of "B-C" therefore are
probably not as difficult as for "A-B."
MR. MARUSHACK turned attention briefly to the "NGL [natural gas
liquid] Extraction Facility" section of the slide, noting that
Fluor Veco is assisting the team with that as well. He then
turned the presentation over to Mr. Konrad to talk about the
technical aspects.
9:10 a.m.
MR. KEN KONRAD, Senior Vice President, Business Unit Leader
Alaska Gas, BP Exploration (Alaska) Inc., emphasized that the
team is looking in a "macro sense" at whether it can develop an
economic project, and within that, determining the route-
selection criteria. He noted that previously the team addressed
the "seven lenses" of evaluation [economics, environment, gas
access, jobs, revenues, safety, and timing] required for
regulatory applications. He said this is also important to the
governments and stakeholders with which the team has consulted to
date.
MR. KONRAD first addressed economics, noting that the scale of
investment will be $15 billion to $20 billion to get the gas to
market. A major project like this brings not only high costs,
but also a number of risks. It is clear after six months of work
that there will be economic challenges, and it isn't clear
whether it will be an economic project. At this point, it
appears the northern route has some cost advantage over the
southern route, and the team is trying to quantify that.
MR. KONRAD touched on environmental impacts. He expressed a high
degree of confidence, based on the work to date, that whatever
route is selected, the project can be done in an environmentally
sound manner and will meet all environmental regulations. The
southern route follows an existing corridor, and only about 200
miles are undisturbed; the northern route is shorter, but crosses
300-400 miles of undisturbed corridor, principally the Beaufort
Sea. There are a number of other issues that the team is trying
to fully understand, including whale migration on the northern
route and compressor station citing, especially on the southern
route, which will require more compression facilities than will a
northern route.
MR. KONRAD addressed gas access, another key issue. He said the
team is doing analysis of what sorts of gas demand could develop,
in order to have enough flexibility to address it. To date, the
team's work doesn't show any significant large demand within the
state, although clearly there is a small amount of demand in
Fairbanks and potential demand in Southcentral Alaska; it has
been hard to pin that down as a finite number, however, and no
one has come forward to date with a specific call on the gas in
transit. The team is trying to determine how to structure an
open season to address those potential needs in terms of how
capacity might be allocated. On the northern route, the team is
trying to look at innovative ideas for getting gas into Alaska in
order to make sure those needs are met.
MR. KONRAD turned attention to jobs. Noting the enormity of the
project, he said in terms of construction jobs within Alaska,
there are more jobs than skilled people, regardless of the route.
"We'll need to work to train Alaskans, and irrespective of route,
there will be an in-migration of workers [just because of the]
scale of the project," he told listeners. "Indeed, it will
actually stretch North American resources in terms of finding
enough craft and enough industrial capacity to do a project of
this magnitude."
MR. KONRAD noted that much of the construction will occur in the
wintertime in the northern sections, whereas line in the Lower 48
could be built year-round or in the summer. Therefore, crews
from the northern section could be used in the southern section
[at that point], which would allow Alaskans an opportunity to
work on southern segments of the line. He pointed out that
longer-term jobs, not involving construction, appear comparable
for both routes. The pipeline itself will provide a very small
portion of the overall job market. The pipe will be buried along
its length and monitored by "smart" compressor stations that
won't normally be manned. Most long-term jobs will be associated
with people in an office, in a control room, or operating the gas
treatment plant on the North Slope.
MR. KONRAD acknowledged the importance of revenue to the State of
Alaska. Clearly, if there is an economic project that goes
ahead, it will likely generate tens of billions of dollars for
the state over the project's life. To the extent the initial
analysis shows the northern route to be somewhat more cost-
effective, it would result in somewhat higher revenues for the
state. He emphasized the need to do more engineering and
"costing" before it can be understood and quantified, however.
MR. KONRAD expressed confidence that this line will be built to
the highest standards and will be safe, operating with the
highest levels of technology, automation, and control equipment.
He mentioned unique issues for either route. The southern route
needs to be designed to withstand seismic activity and frost
heave, for example. The northern route needs to be designed to
withstand ice forces and frost heave. He restated his confidence
that it can be engineered, but noted that there is a lot of work
in actually doing so. The southern route has more proximity to
human populations, but the public should have confidence in the
high level of integrity and safety.
MR. KONRAD addressed timing. He reported that one big
uncertainty around the project involves the timing of the
regulatory process. The team is working with regulators to
streamline the process. Given the issues around the northern
route, [the team] perceives that it would take longer to permit;
however, that isn't certain. The other timing aspect is how the
Mackenzie Valley line, if it goes ahead, will impact this. He
said the idea of doing two such "megaprojects" with limited
industrial capacity in North America "feels like a challenge."
He expressed the need to look at the logistics; if the Mackenzie
Valley project gets a "jump," it would be hard to find enough
welders, machinery, and equipment to do the two projects
simultaneously, and [Alaska's] would have to "dovetail" behind
the Mackenzie Valley project. Mr. Konrad emphasized that the
evaluations will mature as the team goes through its work
program.
MR. KONRAD noted that in addition to the 100 team members,
contractors are gearing up, responding to the sense of urgency
conveyed by the team. At this point, 500-600 people are working
on the project. He cited examples of activities such as
surveying. He also noted that technical and regulatory work are
proceeding, which he would address later.
MR. KONRAD reported that the team is defining several issues
beyond whether the project is economic, including the following:
laying groundwork for creating whatever legal entities would be
required to construct the pipeline; working on how to shape an
open season and determining tariff structures in relation to
regulators; and having hundreds of meetings with communities,
stakeholders, pipeline companies, governments, regulators, and so
forth, in order to give people a sense of what is coming.
MR. KONRAD told members a good portion of the team's activity
revolves around technical studies that relate to the economics of
the project. For the carbon dioxide plants, to be placed on the
North Slope, the team is looking at three technologies to remove
carbon dioxide from the gas stream; the effort is to narrow it
down to the preferred technology, from both cost and
environmental perspectives. Some pending developments, if
successful, could result in a real [indisc.]. The team is also
looking at NGL removal processes; those are more conventional
technologies, but still involve designing a plant as efficiently
as possible in order to get the economics right.
MR. KONRAD noted that there is a lot of work around pipeline
hydraulic simulations, looking at various pressures,
temperatures, diameters, and compression configurations to design
an optimum system that is both cost-effective and expandable.
Team members are active in the exploration arena, and would like
to know that the system could be expandable. The nature of
pipelines is such that the more volume that is moved, the lower
the unit costs are. There is an incentive, therefore, if there
is success in finding more gas, to cost-effectively put it into
the line so tariffs are lower for everybody. Mr. Konrad said he
wouldn't go into an engineering discussion, but told listeners
these are the types of simulations that the team is trying to run
in order to optimize the pipeline system.
MR. KONRAD directed attention to a graph and talked about the
volumes cited, mentioning 4 BCF/D [billion cubic feet a day] as a
"base case" and saying the desire is to optimize around that and
then, with expandability, get it up to perhaps 6 BCF/D. He noted
that pipeline diameters on the graph ranged from 44 to 56 inches.
The smaller the line, the more compression is needed, as well as
more compression stations, which affects environmental and cost
factors. The larger the diameter and the less the pressure, the
fewer are needed, but it costs more for steel. Those tradeoffs
are being looked at in order to have the economics be
competitive.
MR. KONRAD reported that in addition to hydraulic studies, the
team has 13 fairly significant technical studies underway. A big
one is looking at the feasibility of using even higher-strength
steel than that used in the industry now; this would lessen the
pipe-wall thickness, hopefully translating into cost savings; it
gets into what mills are capable of producing, for example. He
also touched on the logistics in having 3,500 miles of pipeline,
including staging facilities and potential fabrication sites.
The carbon dioxide facility, the largest of its kind in the
world, will likely need to be fabricated at multiple sites; the
team is trying to figure out how and where to do that. He also
mentioned the thousands of truckloads needed to haul pipe for the
project, as well as rail and sea transportation; sealifts
potentially will be the largest in the history of the North
Slope. These are all big logistical challenges.
MR. KONRAD turned attention to construction technology, noting
that over the past ten years or so the industry has migrated
towards using drilled river crossings for environmental reasons;
that presents real challenges in terms of the pipe size, which
will likely be 48-inch heavy-walled pipe; special studies will be
required to take the industry another step from where it is now.
As for trenching technology - the ability to put big, deep
trenches in permafrost - the team is looking at innovative
technology so that blasting is not necessary; that could offer
significant cost savings. Another consideration is whether
existing construction equipment in the industry can be modified
to handle the sorts of pipe necessary; studies are going on in
that regard as well.
MR. KONRAD brought attention to the regulatory front, noting that
a lot of work is going on by folks in the field, both in Alaska
and Canada, looking at river crossings, population centers, or
where the rights-of-way need to go, for example. In addition,
for the FERC [Federal Energy Regulatory Commission] application,
it must be known that there are no cultural resources or, if some
are identified, how those can be avoided. He noted that there is
much landowner discussion, especially in the lower-48 segment.
Furthermore, this weekend the team will begin Beaufort Sea sonar
surveys of the sea bottom, to get more definition about how the
northern route can be engineered; the team has a conflict-
avoidance agreement in place with the North Slope Borough, and
permits should be coming shortly from Washington, D.C.
MR. KONRAD concluded by saying there are a lot of "moving parts,"
all moving in the right direction; he expressed confidence that
the technical work would be done by the end of the year, and that
there would be enough information to know whether the project is
economic and to file the permits. He turned the presentation
back over to Mr. Marushack.
9:28 a.m.
MR. MARUSHACK pointed out that when talking about the technical
work, the team is talking about feasibility; the design work will
come later and will cost hundreds of millions of dollars.
MR. MARUSHACK informed members that he would address three main
aspects of government engagement. The team has been in
discussions with "almost every agency you can think of, both on
the U.S., Alaska, and Canadian levels." In the U.S., he and Mr.
Konrad, in particular, have met with the Alaska [congressional]
delegation and all key agencies to try to obtain an idea of what
is possible; members have met with key agencies in Alaska and
with the legislature. They've also met with the Canadian cabinet
and some key agencies there. There are weekly discussions, at
minimum, among team members, and some people are talking almost
daily with FERC to determine what must be in the application, for
example.
MR. MARUSHACK noted that putting a FERC application together in
less than a year is unheard-of. He stressed the importance of
putting in front of FERC or NEB an application that is complete
enough that it isn't rejected outright. An incomplete filing is
worse than no filing at all, and yet the team still tries to make
these deadlines.
MR. MARUSHACK reported that the team hasn't held as many detailed
discussions in Canada with the territorial and provincial
governments, or with First Nations people, as are needed. He
emphasized that much work has been done on getting started on the
technical aspects, and that the team is now getting to the
governmental and political aspects as members are freed up to do
so.
MR. MARUSHACK countered newspaper reports from Canada that
indicate this project can't be done; he said the problems aren't
insurmountable but are difficult and complicated.
MR. MARUSHACK turned attention to "State Engagement Issues." He
said the team just started that process in the last few weeks.
He stressed the importance of having dialogue between the
producers and the State of Alaska regarding "fiscal stability
uncertainty." As the team has tried to identify the key problem
areas, there is an increasing awareness that the uncertainty of
risk is a chief problem. He remarked, "None of us have spent
this kind of money on a nonsanctioned project before, so we're
trying to eliminate risk where we can."
MR. MARUSHACK pointed out that one area of risk involves what the
"deal" will be with the state; there needs to be discussion in
that regard. The objective is to have the key terms understood
prior to the January legislative session. The idea would be to
work with the state, trying to "line out" the various aspects so
that legislators would have a starting point. Key discussion
items include valuation clarity on severance and royalties.
MR. MARUSHACK noted that a number of issues are not pipeline
issues, but producer issues. Ad valorem tax certainty is an area
involving a lot of cost. One issue with this project is that it
will take so much time to develop before the first gas [goes
through the line]. To do a present-value analysis creates a big
problem; therefore, the team would like to talk about ad valorem
issues, a major cost during the initial development phases of the
project.
MR. MARUSHACK continued with key items for discussion. Referring
to the item "Gas take-in-kind and nomination process" on the
"State Engagement Issues" slide, he explained that this gets into
what amount of gas is available in Alaska over the long term. So
far, the team has seen that the amount of gas at startup in
Alaska would be very small when compared to the [ultimate] volume
being talked about, perhaps 20 to 30 million cubic feet a day in
Fairbanks versus a 4-BCF/D pipeline. The pipeline will require
long-term commitments. He asked how that can come together with
"growth opportunities" for the State of Alaska. He said [the
team] thinks the answer is expandability, but it requires
dialogue and understanding of what the opportunities are.
Addressing the final key item for discussion, "Project risk and
long-term certainty," he noted the need to talk to the state to
ensure there is common footing on those issues.
MR. MARUSHACK turned attention to a slide titled "Simplification
of State Royalty, Severance Valuation." He expressed the desire
to have a common royalty and severance methodology, with the
pricing simple and clear. [The team] believes the wellhead price
for royalty and severance should be linked to the Lower 48 [with
a transportation differential]. He said it should not be that
difficult where there is a defined market in the Lower 48. [The
slide showed the following components, alluded to in the oral
presentation: "Define market price; Agreement on gas valuation
terms; Concurrence with FERC/NEB tariff terms; Processing fees."]
He suggested that using those components, clarity could be
provided regarding the wellhead value.
MR. MARUSHACK told members two issues are of major concern:
economics and politics. The team is working hard on the
economics, which it doesn't control but influences through
choices about how and where the pipe is purchased, for example,
or how to deal with tariff [indisc.] in order to make it as low
as possible. However, the team has very little influence on
politics, which could kill the project. Those two issues will
ultimately decide whether there is a project.
MR. MARUSHACK addressed items on the final slide, titled "Wrap-
up," which read:
We are fully engaged in a joint program to evaluate and
progress a large, modern pipeline from Alaska to Canada
and the lower-48 states
There is a growing market for Alaskan gas, but we most
be cost-competitive to be a viable project
It is not yet clear that we can develop an economic
project
It is premature to preclude any options at this point
Still targeting completion of engineering and route
studies by year end
MR. MARUSHACK finished the presentation by emphasizing that
competition in the Lower 48 includes LNG [liquefied natural gas]
imports, coal-bed methane, and other gas. This is a strategic
project for which it doesn't matter what prices are this year; it
matters what will happen eight years from now and for the next
twenty years. The team is trying to identify all hurdles in
order to figure out how to do a project. He again emphasized
that it is not clear whether there is an economic project at this
point, and stressed the importance of having a thorough,
methodical way of looking at the two route options without
precluding any options at this time.
9:37 a.m.
REPRESENTATIVE GREEN noted that during the previous day's
hearing, it was asked whether gas could be sold by the producers
without modifying the lease agreements [which allow for the gas
to be used to lift oil].
MR. MARUSHACK or MR. KONRAD replied that they think so; they have
gone through the lease agreements, which they believe allow for
major gas sales up to 1.75 BCF/D.
REPRESENTATIVE GREEN responded that according to testimony the
previous day, this is one of the big questions - some lease
agreements may or may not allow that. He asked whether the
team's understanding is that sale is allowed up to 1.75 BCF/D,
with negotiations above that amount.
MR. MARUSHACK or MR. KONRAD replied, "We haven't seen that as an
issue to date." He offered to get back to the committee on that.
REPRESENTATIVE GREEN asked: If the agreements don't all provide
for that, or if there is a big question in somebody's mind, will
this hold up the project while that is being determined? Or can
the project go ahead while that is being resolved?
MR. MARUSHACK and MR. KONRAD indicated [the team] would keep
doing all the work it is doing, and offered the impression that
the state wants the producers to move forward.
REPRESENTATIVE GREEN responded affirmatively. He noted that in
the newspaper there has been mention of extracting the gas
liquids downstream in Alberta, Canada. He asked how that would
affect the royalties due the state.
MR. KONRAD replied that it is one of the severance [and royalty]
issues that Mr. Marushack was talking about; the team will work
through that with the state, over the next several months, to
come up with an agreed-upon valuation methodology.
REPRESENTATIVE GREEN asked whether the team has started those
negotiations.
MR. MARUSHACK or MR. KONRAD answered that there has been one
general meeting and one "a little more detailed meeting," so that
the people who "work the issues" can start working with the
state. That hasn't happened yet, though, except for general
conversations; there has been no detailed exchange of
information.
REPRESENTATIVE GREEN said the legislative body wouldn't want to
come into session in January with that either unresolved or not
resolved to the approval of the legislature. The legislators
will want to see how those negotiations are going before actually
reconvening.
MR. MARUSHACK and MR. KONRAD indicated understanding.
9:42 a.m.
REPRESENTATIVE DAVIES referred to NGL and asked whether there are
possibilities for multiple locations for that "takeoff."
MR. MARUSHACK or MR. KONRAD answered probably not, although it
may depend on how gas is taken out in Alberta, through one
pipeline or multiple pipelines. [Indisc.]
AN UNIDENTIFIED SPEAKER asked whether it can be done on smaller
scales.
MR. MARUSHACK or MR. KONRAD suggested NGLs could be taken out and
sent to California or Chicago, for example, but wouldn't be taken
out along the route. [Indisc.]
REPRESENTATIVE DAVIES said it sounds as if the discussions with
the state executive branch are just beginning. He asked whether,
in those discussions, state ownership or partial state ownership
has been discussed as an option.
MR. MARUSHACK or MR. KONRAD replied no, it hadn't come up, but
surmised that it would.
REPRESENTATIVE DAVIES asked whether the team is willing to
entertain state ownership as an option.
MR. MARUSHACK or MR. KONRAD said, "The State of Alaska's our
partner." He said his personal concern is only a matter of
timing and being able to work efficiently on all those issues
[indisc.]. He stated willingness to consider the idea of state
ownership.
REPRESENTATIVE DAVIES referred to the FERC application. He asked
whether it is necessary to have the open season begin in January
or right away, or whether the team could do the application and
contemplate a later open season.
MR. MARUSHACK or MR. KONRAD replied, "You need to have an open-
season process in place to have a complete application."
REPRESENTATIVE DAVIES asked whether the process requires that it
start right away.
MR. MARUSHACK or MR. KONRAD replied that he supposed it could be
started anytime, but it needs to be done before putting the
application in. [Indisc.] Expansion of open seasons also
occurs.
AN UNIDENTIFIED SPEAKER noted that at the previous day's hearing,
the committee had heard that FERC can extend the open season to
keep an application alive "without extending that timeline for
that open season."
AN UNIDENTIFIED SPEAKER said it will be a major issue - access or
the lack thereof. Just to say "we can expand the line anytime we
want is not the correct answer," he added. "It's one of them,
but it's not the only answer."
9:46 a.m.
SENATOR OLSON asked what the general sense is, from the
producers' standpoint, of state involvement, at whatever level,
for this project.
MR. MARUSHACK or MR. KONRAD said from a small businessperson's
standpoint, he wasn't sure he would like to see any type of
government entity as his partner. [Indisc.]
MR. MARUSHACK or MR. KONRAD added:
We've talked to a lot of prospective partners -
pipeline companies, et cetera - and I think our desire
would be that, to the extent there are other companies
... or entities involved in this project, that they're
bringing value to the project. And if the state can
bring value to the project, that's a good thing. If
they're going to take value from the project in terms
of not being able to make decisions or not being able
to be responsive to decisions that need to be made
every day in terms of building and operating a
pipeline, then that would be a bad thing, and that
would be bad for all of us, probably.
MR. MARUSHACK or MR. KONRAD said it isn't a question of needing
equity from the state, but of whether it helps to move the
project along.
9:48 a.m.
SENATOR OLSON noted that up North there are economic and
political issues. He asked about support for the northern route.
MR. MARUSHACK and MR. KONRAD replied that they haven't seen much
support [indisc.] the northern route yet. There have been
surveys, and the dialogue is started, but they don't have all the
answers yet. The reaction is somewhat emotionally based on the
perception that there will be more jobs and access to gas from
the southern route, as well as being better for the state
[indisc.]. There needs to be more dialogue in terms of actual
facts around the decision to be made.
9:50 a.m.
CHAIRMAN TORGERSON asked how the group plans to engage the
legislature between now and January. He mentioned the issues of
taxes and certainty regarding tariffs, for example.
MR. MARUSHACK or MR. KONRAD expressed the need to discuss how to
put something together that moves the project along, without a
backlash in the legislature.
MR. MARUSHACK or MR. KONRAD added that they would make the
request that the legislature and the administration talk as well.
9:50 a.m.
REPRESENTATIVE DAVIES asked what having terms "understood" means.
MR. MARUSHACK or MR. KONRAD answered that ideally there would be
a set of possible answers. He said he is thinking of it in terms
of corporations, as opposed to the state. He likened it to
worker bees' getting together to work out what they believe the
proper answers are, and then moving up the line for approval.
CHAIRMAN TORGERSON noted that Mr. Bill Corbus was present from
the administration and could address tax issues.
9:51 a.m.
REPRESENTATIVE OGAN referred to the [legislative Majority's]
previous fiscal policy of reducing the budget for five years -
approximately $250 million. Now the budget is being increased by
$130-$140 million in general fund (GF) spending. He asked
whether that is having any chilling effect on decisions and
concerns about future taxation, for example. He asked Mr.
Marushack and Mr. Konrad to respond, as individuals, about any
chilling effect on oil and gas development as a whole in Alaska.
MR. KONRAD replied:
Fiscal stability is of great interest to us, both in
terms of the rules which Mr. Marushack has talked about
and in terms, in a macro sense, that the state is on a
steady path. ... As an industry, I think we'd love to
see a balanced budget. And we understand it's not that
easy, but the general sense of stability would help a
lot, and instability doesn't help a lot.
MR. MARUSHACK added that the idea of heading down a path and then
having part of the economics taken away is pretty frightening.
That is why there is a desire to start engaging in [dialogue
with] the state.
REPRESENTATIVE OGAN said his concern is that there are
legislators who want to impose an income tax, for example, but he
has been hearing, from the industry, concerns about the change in
direction. On another issue, he remarked that the Department of
Revenue has said the fluctuations in gas prices have a much
greater effect on the netback than, say, possibly increased costs
of the southern route. He asked whether that was addressed in
the presentation yesterday, and whether there is a sense that
"what the long-term price is going to be will have a much greater
effect." [There was no audible answer.] Representative Ogan
then asked: What can we expect by January: Route selection?
Project sanction?
MR. KONRAD answered that route selection by the end of 2001 is
an aspiration, as is the decision whether or not there is an
economic project.
REPRESENTATIVE OGAN asked whether the appropriate entities "or
whoever controls the purse strings" will make a decision on route
selection or a project sanction by the first of the year.
MR. KONRAD replied that he thought this was discussing
applications, rather than project sanction. As Mr. Marushack
mentioned earlier, there are hundreds of millions of dollars for
engineering and cost-estimating to do after this phase, to
actually go out and get "real bids for real work." The final
decision to construct the project will be contingent upon getting
an approved application and what it looks like in terms of
stipulations that are tolerable or intolerable, as well as the
actual cost at that point. Therefore, he expects sanction for
the project to be down the road some years. Typically, one
doesn't sanction a project until knowing it has been approved and
until there is an actual cost.
MR. MARUSHACK agreed that the actual time of sanctioning would
come some time after receiving the permits. However, the group
will be spending additional amounts of money [indisc.].
9:56 a.m.
REPRESENTATIVE GREEN referred to the assertion that if the
Mackenzie line gets ahead of this project, there wouldn't be
enough workforce to do both simultaneously. He said if that is
still a viable route, there will need to be some sort of size or
volume determined for the Mackenzie portion of this. He asked
whether the Mackenzie line is that far ahead of this project; if
so, is the Mackenzie project anticipating going "over the top"
with gas coming down, or just building for the Mackenzie delta
gas?
MR. MARUSHACK or MR. KONRAD answered that he believes Mackenzie
is designing for its own project, and he doesn't know whether
that project is ahead or not, although it began earlier. He
added, "We're working awfully fast, and I don't know whether
they'll go ahead or not."
REPRESENTATIVE GREEN said his concern isn't the size of the line
that Mackenzie is thinking about building.
MR. MARUSHACK or MR. KONRAD responded that if the Mackenzie
project does it alone, it will be a 1-BCF/D line. "Their gas is
coming," he added.
REPRESENTATIVE GREEN followed up on Representative Ogan's
concerns. He commenting on the volatility of gas prices, and he
asked how long the group estimates a gas contract will be for.
He asked whether stability is being looked at from the standpoint
of "take or pay" for longer periods of time again, as there used
to be.
MR. MARUSHACK or MR. KONRAD answered that those are independent
company decisions, and the companies aren't working together in
terms of how to market their gas or whether it is short-term,
medium-term, or long-term.
MR. MARUSHACK or MR. KONRAD added that the producers will have to
commit that "they'll make the gas flow," but as to where it goes
and whether it is sold "long term, fixed, or spot" is up to the
individual company.
9:59 a.m.
REPRESENTATIVE GREEN remarked that other companies have come
forward saying they would like to build the line. He asked, "Is
that in your crystal ball, that some other company would build a
line, transmit it - like you do in the Lower 48 quite commonly -
and you would provide gas for another company to sell, or sell it
through another company's transmission?"
MR. MARUSHACK or MR. KONRAD answered:
If someone builds a better mousetrap and then designs a
more efficient system than we can design ourselves,
we're all for it. They'd take the associated risks.
That would be a great thing. So far, no one has
stepped forward to do that.
REPRESENTATIVE GREEN asked whether he is hearing, then, that
there is no objection to someone else's transporting the gas.
MR. MARUSHACK or MR. KONRAD replied, "No objection, provided it's
cost-effective."
10:00 a.m.
REPRESENTATIVE FATE asked how much input the group has on the
Mackenzie project. He surmised that it isn't a race. [The reply
was indiscernible.] Noting that the group is studying two
routes, he then asked whether the group has had discussions about
route preferences with FERC.
MR. KONRAD answered that the environmental and regulatory groups
are talking with FERC about general concepts relating to how to
file permits, although there may have been discussions about
route specifics.
REPRESENTATIVE FATE asked whether there is any idea how many
[long-term] jobs there would be in maintenance, security, and so
forth along the length of either pipeline route.
MR. KONRAD replied that with today's technologies and the buried
pipeline, those jobs would be much fewer than for Alyeska [TAPS].
10:02 a.m.
CHAIRMAN TORGERSON thanked Mr. Marushack and Mr. Konrad, noting
that he would put additional questions in the form of a letter.
He said he'd personally put hundreds of hours into severance
taxes, for example. As for the ad valorem tax, he said, "We
probably won't engage much of that until we know what your
project is." He surmised that "a holiday on that property tax"
would be deferred until gas is actually flowing, which he
suggested is an incentive to make the line more economical.
CHAIRMAN TORGERSON called a short recess at 10:04 a.m. He called
the meeting back to order at 10:08 a.m.
Yukon Pacific Corporation
10:08 a.m.
MR. JEFF LOWENFELS, President and Chief Executive Officer (CEO),
Yukon Pacific Corporation (YPC), came forward to discuss YPC's
right-of-way and LNG project. He noted that with him was
executive vice president [Wayne] Lewis. [Provided to committee
members were four items: A TAGS Conditional Right-of-Way Lease
dated December 1988; a letter from Mr. Lowenfels to the Highway
Gas Policy Council dated April 10, 2001, with a seven-page
attachment marked "confidential"; a letter from Mr. Lowenfels to
the Joint Pipeline Office dated July 2, 2001, with attachments;
and a handout paralleling a slide presentation.]
MR. LOWENFELS called attention to page 3 of the last handout,
noting that it depicts an 800-mile pipeline to Valdez, from which
markets in the Pacific Rim will be served, specifically in Japan,
Korea, and Taiwan, as well as potential markets in Mexico and
western North America, including California. The project is
"virtually permitted," with all major permits obtained. He
indicated there would potentially be a spur line from Glennallen
into the Wasilla area, which would provide gas to the entire
Southcentral area and to the Kenai Peninsula. Although a
potential leg could go from the Fairbanks area down into Canada,
that isn't the project as designed today.
MR. LOWENFELS referred to Prudhoe Bay, noting that page 4 shows a
picture of the conditioning plant that would be built to
condition the gas and take out the carbon dioxide and impurities.
The gas would then be transported to Valdez in the existing
pipeline corridor, using chilled pipe. Port Valdez would be the
terminus and Anderson Bay the site for construction and operation
relating to shipping from an LNG facility.
MR. LOWENFELS noted that the project would require a number of
LNG tankers, which are state-of-the-art already. Tankers from
Valdez could serve markets not only in Asia, but also in Mexico
and North America.
10:11 a.m.
MR. LOWENFELS pointed out that page 9 [unmarked in packets] lists
TAGS permits and authorizations. Noting that Mr. Bill Britt
[Department of Natural Resources (DNR)] had testified the
previous day about the quality of the various projects, Mr.
Lowenfels stated, "We feel that our project permits are at the
highest level." He said YPC is continuing a wetlands program
this summer that will continue for another two summers, with the
information collected during the summer being processed in the
wintertime.
MR. LOWENFELS explained that the permits allow the ability to
come down to the detail required. Page 11 shows a construction
index for a series of map filings in the next couple of weeks
with the State of Alaska on the state rights-of-way; the index
shows the quantity of information contained on each map YPC is
submitting, and page 12 depicts one of the maps, with a detail of
1 inch = 1,000 feet. "We know exactly where we're going," he
commented, "and we know where we're going in great detail." Not
provided was the technical index. He went on to say the maps are
part of YPC's graphic information system, and are highly
effective and useful in computerized form so the state and
federal agencies can know exactly what is going on above and
below ground, as well as what is being impacted, for example.
This is the highest detail, to his knowledge, of any submissions
made to state and federal governments [indisc.].
10:13 a.m.
MR. WAYNE LEWIS, Executive Vice President, Yukon Pacific
Corporation, noted that this series and the supporting data will
be filed within the next couple of weeks. It follows the filing
in early July that is 1 inch = 1 mile. He mentioned a
construction series as well as a full geotechnical series, noting
that it will be 141 maps.
MR. LOWENFELS said as a result of that detail, shown on page 14,
YPC has been able to develop accurate cost estimates of the
project. The chart begins at 9.2 million tons a year for
startup, expanding to 13.8, and then having a second expansion to
18.4. He pointed out that 9.2 million tons a year equals about
1.2 billion cubic feet a day; at 18.4 million tons a year, that
is 2.5 BCF/D.
MR. LOWENFELS noted cost estimates on the chart, and informed
members that the pipeline estimate was done in conjunction with
Willbros Engineering and Michael Baker Jr.; the LNG facility was
"costed" by Kellogg Brown & Root and by Air Products and
Chemicals, Inc. Those are the vendor licensees and licensor of
the process for making LNG, and these are extremely accurate
estimates, the best possible. The estimate at startup is $6
billion, expanding up to $8.3 billion [for the second level of
expansion]. It doesn't include the cost of the ship, which will
be owned by third parties. He explained that he was trying to
make an apples-to-apples comparison between an LNG project and an
overland project in order to provide some clarity.
MR. LOWENFELS reported that YPC has learned that developing gas
is a challenge - perhaps one of the state's greatest challenges.
He noted that many people in the room had been in the business
for 25 years or more. He referred to the list of "characters"
from 1970 to 2001 on page 17, which included the following:
"Arctic Gas, El Paso, Northwest/Foothills, ACETS, MACPORC,
Kivalina/Wainwright, GTL, ARC, LNG Sponsor Group, YPC/TAGS." He
pointed out several attempts to bring gas to market, emphasizing
how complicated and difficult it is.
MR. LOWENFELS referred to page 18, noting that in the 1970s
Congress considered three project options [to supply North Slope
gas to the Lower 48]. The same options remain today: Arctic Gas
of 25 years ago is now the "over-the-top" project; the El Paso
LNG project was similar to the YPC project of today; and the
Northwest/Foothills project is now the Alaska Highway (Alcan)
project.
MR. LOWENFELS reported that the changes are these: First, today
Alaskan gas can serve more than one market, whereas 25 years ago
each market was potentially a single-market project, taking the
gas to Asia or to the Lower 48. Not only has the market to the
Lower 48 changed, but the Asian market for LNG has matured,
developed, and become clear regarding its demand needs; by
contrast, 25 years ago the potential demand by 2000 was projected
to be 7 million tons of LNG to Asia, so the change to perhaps 30
or 40 million tons is a good one. Second, 2 BCF/D previously was
the biggest LNG project anyone had heard of; by contrast, now
people routinely talk about taking 4 BCF/D of gas from the North
Slope - and sometimes up to 6 BCF/D.
10:19 a.m.
MR. LOWENFELS addressed the "apples-to-apples" comparison chart,
noting four basic configurations. The first would be a 4-BCF/D
TAGS LNG project that would serve just North America. He
indicated the chart overlays the YPC project on a potential
overland project to Calgary, Alberta, and pointed out that the
costs are relatively the same. He emphasized that these are
YPC's cost numbers, based on 13.6 BCF/D, which differ from those
of Mr. Konrad relating to 15 to 20 BCF/D. He said for an apples-
to-apples comparison, "the numbers would be 12.8 versus the
13.6." He explained a related page that read:
Capital cost of TAGS and ALCAN project to Alberta
differ by less than 6 percent (cost-of-service is about
the same)
Pipeline tariff from Alberta to Canadian/US border with
Lower 48 is about the same as the LNG tanker tariff
(about $0.50/mmbtu)
Fuel consumption is about the same
Cost of NGL removal for ALCAN ([about] $2 billion)
assumed the same as cost of LNG receiving terminals
MR. LOWENFELS pointed out that the conclusion on page 26 is that
the cost to deliver 4 BCF/D of North Slope gas to the West Coast
of North America is about the same as the cost to deliver 4 BCF/D
of gas in Canada to the Lower 48 via an Alcan pipeline.
MR. LOWENFELS highlighted one very important difference: The
reason people talk about 4 BCF/D for an overland pipeline is that
it is needed for economies of scale, "just as we needed somewhere
between 1.8 and 2 billion cubic feet a day for our economies of
scale for an LNG project." That means there must be 4 BCF/D of
that market in North American. He elaborated:
For the LNG project, we are predicated on going to
Asia. The meat and potatoes of the project overland is
the market in the lower-48 states. For our LNG
project, that meat and potatoes becomes just gravy. We
don't need all of that 4-billion-cubic-feet-a-day
market, competing in the United States.
10:22 a.m.
CHAIRMAN TORGERSON asked whether Mr. Lowenfels could make that
comparison without including the tankers.
MR. LOWENFELS answered that he would show it later, because the
cost of service includes the tanker tariff. The tanker portion
of the project can be taken into account by either owning the
tankers and including them in the cost of service as an ownership
item, along with maintenance and operations, or by taking a cost
of service that a tankering company would charge for the tariff.
Mr. Lowenfels added that the tanker transportation is "out of our
original cost number of 8.2." He suggested perhaps it would be
clarified as he continued.
10:23 a.m.
MR. LOWENFELS said there is no question ANGTA [Alaska Natural Gas
Transportation Act] benefits are restricted to that Alcan route.
Alaska LNG to North America may involve some ANGTA issues;
clearly, the "over-the-top" route has the same ANGTA issues. He
noted that FERC may have jurisdiction over the pipeline that goes
through Canada, but doesn't currently have jurisdiction over the
TAGS project - which is entirely within Alaska - except for the
export site [at Valdez] and the safety of the LNG facility.
AN UNIDENTIFIED SPEAKER offered that if there is delivery to the
West Coast, there may be FERC involvement.
MR. LOWENFELS said there would have to be some tweaking to the
permits, but the framework is there. He continued with his
presentation, saying it isn't limited to a 4 BCF/D market in the
U.S. There are international markets as well. He referred to
testimony before a committee the previous year that YPC was
looking at Mexican markets and potentially bringing gas from
Mexico over the border into California. Today, he noted, there
are seven proposed new LNG terminals under discussion. Four very
large companies, including El Paso and Enron, have announced they
are going to build LNG receiving facilities in Mexico [indisc.]
United States.
MR. LOWENFELS said the numbers range from a new demand of about
22 BCF/D up to 30 BCF/D needed in the Lower 48, with 8 new BCF/D
needed between now and the year 2010. Clearly, the LNG potential
for serving a good portion of that market has been put in place,
and is in play right now by these large companies. He noted that
many of these companies are involved in Alaskan gas today.
MR. LOWENFELS told members that similar to the overland pipeline
options, increasing the size of the TAGS project to a 4-BCF/D
project only improves the economies of scale. He added, "We
think our economies of scale work at less than 2 billion cubic
feet a day." Furthermore, similar to the overland project,
taking gas by LNG maintains the security of a supply of gas to
the U.S. and from the U.S. to [indisc.].
10:27 a.m.
MR. LOWENFELS noted that the second LNG market obviously is Asia.
Included in the packet were the actual slides from [Shiguru] Sam
Muraki, the buyer of LNG from Tokyo Gas Company Ltd. who spoke to
the legislature [at a joint hearing February 15, 2001, before the
Senate Resources Standing Committee, the House Resources Standing
Committee, and the House Special Committee on Oil and Gas]. Mr.
Lowenfels pointed out that the pages in the packet show the
existing LNG trade; various prospects for new LNG demand in
Japan, Korea, and Taiwan; and the demand out of Asia and the
Pacific in general, including "a little bit of India and China,"
of 25-50 MTA (million tons per annum). He noted that these
numbers come from the second-largest buyer of LNG in Asia.
MR. LOWENFELS pointed out that [YPC's] numbers are not that much
different "because, frankly, we take our numbers from the buyers
in Asia." He recalled that Mr. Muraki had indicated the future
natural gas trade, as far as he was concerned, involved Alaska.
Mr. Lowenfels noted that the page in the packet shows gas coming
from Prudhoe Bay to the Asian market. He also noted that Mr.
Muraki had indicated Tokyo Gas has contracted for new
construction of two LNG tankers, which are being constructed
"even within our borders." Mr. Lowenfels said new Asian demand
for LNG by the year 2010 is projected to be 50 billion tons a
year. That is a big change from discussions 25 years ago.
MR. LOWENFELS reported that one thing that hasn't changed in
those 25 years is that Asia is still [Alaska's] largest trading
partner. He listed seafood, timber, coal, and LNG since 1969; he
stated the belief that more LNG will cement that relationship and
that [Asia] will continue to be [Alaska's] largest trading
partner.
10:29 a.m.
MR. LOWENFELS addressed page 40, which shows LNG prices as of
January 2001. He said one of the great ironies is that the LNG
price in Asia "during the life of our project has always been
sustained high enough to be able to handle our project." He
elaborated:
The only reason, it seems to me, why we're talking
about an overland project is because last year the
prices went up, and all of a sudden the prices looked
like they were going to be high enough to be able to
afford an overland project. And so we got interested
in the overland project.
But the prices have been high enough in Asia throughout
the history of Yukon Pacific. And if you take a look,
in January they paid $4.88 average for their LNG;
Alaska, $4.54 for the LNG. And the prices are reported
on a lag-time basis. The last prices I saw, I think,
were April prices - very, very similar, if not just a
little bit higher.
MR. LOWENFELS asked, "Well, what does that mean in terms of our
being able to serve that market?" Noting that the [TAGS] cost of
service to Asia is depicted on page 41, he suggested the cost of
service to California could be determined by looking at that page
as well. He stated:
We believe that we can deliver that gas, without a
wellhead price - so we don't have a fuel cost price
included, and we don't have the wellhead price - but
our cost of service to Asia ranges between $2.69 and
$2.91. Going back one page, to page 40, you see that
they're paying $4.88. There is an awful lot of room
there, it seems to me, for some negotiation with regard
to a wellhead value that is attractive not only to the
producers but also attractive to the State of Alaska.
And that sensitivity that [Commissioner] Condon was
talking about yesterday is grossly amplified when
you're talking about the difference between $3 and
$3.10. But it has less of a difference if your cost of
service ... is $2.91 and the price that people are
willing to pay is $4.88. There is a lot of room in
here for value for the state and for the producers, and
for [indisc.] some project.
The future LNG market? Well, there's no question that
the LNG demand in Asia, as indicated by Sam Muraki, is
going to be about 50 million tons per year. TAGS is
commercial at 13.8 million tons per year. The cost of
service is $2.69 to $2.91 per MMBTU. The price they're
paying today is $4.88. I think we've got the economics
of a good project.
10:31 a.m.
MR. LOWENFELS turned attention to the third LNG market: in-state
use. He noted that Commissioner Condon or perhaps another state
official had indicated the previous day that "they are in fact
doing some studies on what potential in-state use would be." Mr.
Lowenfels said:
We've looked at it. The state's looked at it before.
We've heard numbers anywhere from 200 to 500 million
cubic feet a day under existing circumstances. If
there were to turn out to be some changes in the Cook
Inlet with regard to a [indisc.] facility or the urea
facility, those numbers would change. If there was an
entity such as Netricity or one of these groups that's
... up from California - they're talking about the
potential of using Alaskan gas ... in order to help the
"tech" industry - those numbers, again, would change.
But there's no question, gas is needed in Fairbanks.
There's no question, gas is needed in Valdez. And
there is becoming a very serious question that that gas
is needed here in [indisc.] area.
MR. LOWENFELS noted that the [Cook Inlet] gas resource is in
decline. He said TAGS can still deliver North Slope gas in time
to offset any decline that is projected with regard to Cook
Inlet, at a price competitive with the current Cook Inlet price.
He returned attention briefly to the cost-of-service numbers on
page 40.
10:33 a.m.
MR. LOWENFELS discussed potential configurations of a Valdez-
based LNG project, listed on a page that read:
Potential configurations of the TAGS project
1. Stand alone at Valdez with LNG export only to
Asia (current TAGS configuration)
2. Stand alone at Valdez with LNG only to North
America (4 bifid option just discussed)
3. In combination with an ALCAN pipeline project via
a Y-line to Valdez from Delta Junction
4. Stand alone at Valdez with LNG delivery to both
North America and Asia (LNG supply hub in Valdez)
MR. LOWENFELS said he doesn't like the term "hub," but likes the
idea of a supply area that can serve multiple markets. That is
what Valdez will become with an LNG project. He noted that the
third listed option would be to Canada, and emphasized that these
options didn't exist 25 years ago, nor did the [indisc.].
MR. LOWENFELS told members an LNG "Y" or hub at Valdez clearly
has intriguing advantages. First, it is "basically ready to go."
It doesn't require waiting for a lot more permits to make a
corporate decision that the project makes sense and so forth. A
smaller Asian project and a larger lower-48 project than
previously contemplated are among the possibilities. For
example, a 4-BCF/D [LNG] project could provide 1 BCF/D to Asia
and 3 BCF/D to North America, or 2 BCF/D to each. There are any
number of changes. He went on to say, "The bottom line is, our
budget ... needs about 2 billion cubic feet of gas a day to be a
very good economic project. Anything over that makes these things
even better. Multiple markets give us an opportunity."
MR. LOWENFELS explained that the project infrastructure would be
entirely within Alaska. He remarked, "We're anticipating 12 to
15 thousand [indisc.] constructing this project in ... Alaska.
And we expect that there would be 600-700 people working directly
with the project once it was completed. And you add on from the
potential spin-offs, spur lines, et cetera, and I think you're
talking about a much higher potential."
MR. LOWENFELS told members the international politics revolving
around the TAGS project versus an overland project are minimized.
He stated:
We do not have to worry about Canada. We might even be
able to induce the Mackenzie delta people to bring
their gas to Alaska, which is [indisc.], not the other
way around.
And certainly the flexibility to accommodate changing
markets - in Asia, we have a sustained price; in North
American markets, we do not. One might develop, and if
it does, we've got a system that can serve that
particular [indisc.]. So it's a very, very intriguing
change. We have become a multiple-market location, as
opposed to a single-market location.
10:36 a.m.
MR. LOWENFELS turned attention to a handout titled "LNG
Positives." He noted that LNG is portable and can serve multiple
markets. Alaska LNG offers diversity of supply from the world's
most stable supplier to the Asian markets, which are quite
concerned about stability. Mr. Muraki had come before the
legislature and insisted that the governor was wrong, and that in
fact Asia does want Alaska's gas. Asia's long-term supply
projects are backed by 20-year contracts with the world's largest
utilities, for example, whereas yesterday the CERA [Cambridge
Energy Research Associates] consultant indicated a long-term
contract in the Lower 48 is about a year. Alaska has been an
extremely reliable supplier to Japan for 32 years. Finally, all
potential TAGS configurations can use [YPC's existing] permits.
MR. LOWENFELS emphasized that YPC would willingly work with the
state, and would consider state ownership of a project. "We like
the idea of a port authority," he added. "We like the idea of
transparency. We want the state to be involved in ownership of
this project [indisc.]."
10:37 a.m.
MR. LOWENFELS concluded his visual presentation, saying the
following:
We believe that when you compare the economics of
projects, you need to start with the same daily volume.
That's why we talked about 4 billion cubic feet of gas.
You have to make apples-to-apples comparisons, not only
in costs but in permitting timelines and engineering
timelines ....
2005 to 2010, the Asian LNG demand is easily large
enough to enable TAGS ... to reach its [indisc.] scale,
and the Asian LNG market is not based upon a
speculative commodity pricing like the lower-48-state
[indisc.] are. Instead, they [indisc.] long-term
contracts. These are the standard.
And, again, the TAGS project does not necessarily have
to rely upon the riskiest of the markets, which is the
lower-48 states. Again, with our project, any gas sold
to the lower-48 states is gravy. For an overland
project, it's the actual meat and potatoes - it's the
whole deal.
So, in summary, we think that development of the North
Slope gas [has been and will be] challenging. We've
got to take a look at project size [indisc.] economics
of shipping large amounts of gas to the West Coast, of
LNG, are about the same as the economics of ...
shipping that same amount of gas to the lower-48
states.
An LNG project to the West Coast has to address the
issues of ANGTA, no question about it. An LNG project
is compatible with [an] Alcan Highway project, with the
Foothills project. I don't think you'd want to
necessarily get to [indisc.] with a brand-new highway
project; one's already been permitted, and we have very
strong feelings that, in fact, that particular project
has advantages which should be taken advantage of.
And an LNG hub in Valdez allows Alaska gas to serve
multiple markets including the lower-48 states, Mexico,
Asia, and possibly more.
10:39 a.m.
MR. LOWENFELS turned attention to his letter in packets to the
Highway Gas Policy Council, dated April 10, 2001. He explained
that it had been sent to all the council's members. He stated:
This letter is an explanation of [an] analysis we did
of the Purvin & Gertz report which was submitted to the
State of Alaska and relied upon [indisc.]. We looked
at the Purvin & Gertz report, and we ... could not
believe that the numbers they used for the LNG project
were the numbers they used. They used generic numbers
for an LNG project that was to be located on the
equator, where the efficiency is very bad, versus our
numbers for an LNG project located in a very cold
climate, where the efficiency is extremely high.
They ... used generic cost numbers, instead of the
exact cost numbers which we have developed. They used
the wrong number for the price of LNG from Asia. There
are any number of things they did which, when we used
... their methodology and went back in and corrected
the numbers, we came out with a complete reversal of
the value of this project to the State of Alaska. And,
in fact, we came out with a wellhead netback price for
an LNG project of over a dollar.
Now, I'm not suggesting that that's what ... the
wellhead price ought to be. But I am suggesting that
the Purvin & Gertz report was flawed. We've asked the
highway council to ask Purvin & Gertz to come back and
comment on our numbers [indisc.].
We've asked Purvin & Gertz to comment. We showed them
what we were going to submit to everybody. They
thought, for a little while, we were going to be a
client, and we had a little bit of cooperation. And
when it became clear we were not interested in becoming
a client until we knew that the work that could be done
would be reliable, communication [indisc.].
We would urge you, as part of your comparison, as part
of your analysis, to contact Purvin & Gertz and to ask
them to comment on our analysis of their report,
because we believe their report is extremely flawed.
And they, in fact, have created a lot of the hubbub
about this particular ability to bring gas down to the
lower-48 states.
We're not concerned about the fact that 40 large
companies - oil companies, pipeline companies - are
subscribers to this report. We are concerned that the
governor of the State of Alaska indicated at one point
that this report was influential in his deciding to
back the highway [route] over an LNG project. And if
that's true, then we'd better make sure that what's in
this report [indisc.]; that's why we included our
analysis, and I would urge you - I would request, ask
you - to ask Purvin & Gertz [indisc.].
MR. LOWENFELS thanked the committee.
10:42 a.m.
REPRESENTATIVE GREEN mentioned the flexibility to go to markets
in Asia and the Lower 48, as well as "off-take" in California.
He asked about the Northwest.
MR. LOWENFELS answered that YPC would look at Mexico, California,
Oregon, and Washington. Currently, two sites are being promoted
by Outside companies in Mexico that have capabilities of serving
California. There is quite a bit of interest in serving the West
Coast either directly or [indisc.]. He said they are all
feasible to some degree. There are obviously problems in
California with citing, as well as [indisc.] problems with moving
gas to the West Coast of the United States. [Indisc.]
CHAIRMAN TORGERSON asked Mr. Lowenfels to comment on the Russian
gas to Japan and what influence that would have on the market.
MR. LOWENFELS answered that it nibbles away at the Alaskan
market, just as LNG projects coming into the East Coast of the
U.S., for example, nibble away at that market.
TAPE 01-6, SIDE A
MR. LOWENFELS said [YPC's] conversations with Tokyo Gas indicate
"they're not all that pleased with the idea of having a pipeline
come through Canada." He added that there are still some
international treaty problems and Japan is "still at war" with
Russia. That is, therefore, not a "slam-dunk" project. It will
challenge the ability of Alaska to get as large a share as
possible.
CHAIRMAN TORGERSON clarified that he was referring to Sakhalin
LNG.
MR. LOWENFELS responded, "We kind of include that in our numbers;
we think that's a 'go.'"
CHAIRMAN TORGERSON commented, "They've upped their reserves to
something like 86 trillion feet there in that basin. ... It's
comparable to Alaska, I suppose."
MR. LOWENFELS concurred, adding that it's another indication "as
to why we need to get into that marketplace." He remarked that
the Sakhalin project has phenomenal problems relating to ice and
the location of the fields to be connected, "not to mention the
geopolitical stability of the area."
CHAIRMAN TORGERSON asked what YPC's major barrier is to a
project's going forward and whether that barrier is getting the
gas from the producers.
MR. LOWENFELS answered that once the producers conclude it is an
economic project, "they'll let somebody else transport their
gas." He noted that there are questions about Prudhoe Bay that
need to be followed up on.
CHAIRMAN TORGERSON remarked, "Our royalty isn't enough to sustain
your project."
MR. LOWENFELS responded:
Unfortunately, it is not. Now, I understand that there
are some problems with [the] price ... we're able to
charge from our royalty gas, as well. [Indisc.] And
we keep hearing these secret numbers. But it's kind of
important, I think, for people who want to try to buy
the gas to know what the state can sell it for.
10:45 a.m.
REPRESENTATIVE DAVIES asked whether Mr. Lowenfels has an estimate
of the long-term price of gas on the West Coast.
MR. LOWENFELS said he did not; it is very hard to predict. He
added that in his office, there is a folder with ten statements
made by gas executives in the Lower 48 about desperately needing
the gas in Alaska to come to the Lower 48, and that the prices
will be high enough to support that; at the bottom of those
statements are the names of the individuals, [with the date]
1979. He said it takes 12 to 18 months for new gas supplies
[indisc.] to come online.
CHAIRMAN TORGERSON asked whether there were further questions;
none were offered. He called an at-ease at 10:47 a.m. and called
the meeting back to order at 10:51 a.m.
Foothills Pipe Lines
10:51 a.m.
CHAIRMAN TORGERSON introduced Mr. John Ellwood. He stated his
understanding that Foothills Pipe Lines Ltd. ("Foothills") is
owned 50-50 by TransCanada PipeLines Limited ("TransCanada") and
Westcoast Energy Ltd. ("Westcoast"). The chief executive
officers of both companies were present.
MR. JOHN R. ELLWOOD, Vice President, Engineering and Operations,
Foothills Pipe Lines Ltd., informed the committee that with him
were Mr. Dennis McConaghy, Executive Vice President [Gas
Development] of TransCanada and Co-Chief Executive of Foothills;
and Mr. Mike Stewart, Executive Vice President [Business
Development] of Westcoast and Co-Chief Executive of Foothills.
MR. ELLWOOD offered a presentation based on a PowerPoint packet
distributed to members [titled "Alaska Highway Pipeline Project
Update; original punctuation and capitalization is provided
unless bracketed.] [Much of Mr. Ellwood's testimony was
difficult to discern because of the sound quality.] He discussed
the agenda on page 2, which read:
Review ANGTS Advantages
Overview of Alaskan Benefits of ANGTS
Current Status
Withdrawn Partners Issue
Open Access
Potential State Participation
Potential Gas Delivery to Southcentral Alaska
Path Forward to ANGST
Questions and Answers
MR. ELLWOOD next referred to a page titled "Alaskan Northwest
Natural Gas Transportation Company Corporate Ownership," and
mentioned a corporate entity point of view. He pointed out that
TransCanada and Westcoast would own Foothills; Foothills and
TransCanada would jointly own the Alaska Northwest Natural Gas
Transportation Company (ANNGTC), which holds the certificates to
build the Alaska portion of this project, whereas Foothills would
hold the Canadian certificates.
MR. ELLWOOD turned attention to pages that listed the "ANGTS
Advantages." He addressed the first listed advantage, "Earliest
Timing," which read:
ANNGTC/Foothills was selected by the United States and
Canada to construct and operate the ANGTS and have
secured the following:
Federal Lands ROW [rights-of-way]
Federal ROW on State lands
FERC Certificate
NEB Certificate
US Corps 404 permits
Yukon ROW
British Columbia Map Reserve
Each of these components could be expected to require
18 to 36 months to secure after a green field
application is submitted.
10:55 a.m.
MR. ELLWOOD turned attention to the second ANGTS advantage,
"Flexible Framework," which read:
The ANGTS framework provides an existing, tested and
accepted framework for expediting the delivery of ANS
gas to the Lower 48
Canada has repeatedly reaffirmed its intention to
fulfill its commitments reflected in the ANGTS
framework
The ANGTS framework allows for updates to the existing
U.S. and Canadian regulatory framework to modify the
project, including initial required shipping capacity,
the use of updated technology, environmental review,
open access and negotiated rate structure
The ANGTS sponsors are committed to working with the
State, ANS producers and other potential shippers to
develop a project that achieves the commercial and
economic objectives of all parties
MR. ELLWOOD, referring to updates, explained that in Canada
[Foothills] has expanded its pipeline facilities five times since
the original part of the project was completed. Each was under
the [ANGST] regime, and each time [indisc.] up to modern
standards.
10:56 a.m.
MR. ELLWOOD discussed the third ANGTS advantage, "Land Tenure."
[The packet contained a map and sections addressing Alaska, the
Yukon, and North B.C.] He noted that in Alaska, there are 434
miles of right-of-way declared, both on federal and state lands.
Approximately 200 miles are under active application at this
time. In the Yukon Territory, [Foothills] has declared a right-
of-way across the entire territory. And in northern B.C.,
Foothills holds "map reserves" in British Columbia [indisc.].
MR. ELLWOOD discussed the fourth ANGTS advantage, "Land Tenure,"
which read:
Best alternative for delivering Alaskan gas to the
Lower 48
Can be constructed with proven technology
Has been extensively reviewed
Relies on existing infrastructure
Will minimize adverse environmental effects
Delivers gas to Alaskan consumers
MR. ELLWOOD noted that the extensive review has included
environmental and technical review. Regarding the existing
infrastructure, this project doesn't require constructing major
new roads, for example.
10:58 a.m.
MR. ELLWOOD addressed the final ANGTS advantage, "Best Access to
North American Pipeline Grid," which read:
Access to the North American grid enhances the success
of the Alaska Highway Pipeline
Foothills, TransCanada and Westcoast have built and
operate most of the gas pipelines in Canada
Offers expanded market opportunities for Alaska Gas
Foothills, TransCanada and Westcoast recognized as
experienced, reliable and cost effective pipe builders
and operators.
MR. ELLWOOD noted that "expanded market opportunities for Alaska
gas" includes reaching all North American market centers by going
through facilities that "ourselves or our shareholders own or
participate in."
10:59
MR. ELLWOOD turned attention to "Alaskan Benefits," noting that
[the companies] had commissioned a study some time ago under a
joint venture between a Calgary company and an Anchorage company
to look at economic impacts and benefits; their results indicate
the following [provided in packet]:
Based on $3 to $5 mmbtu gas price range over 25 years
Increase in Gross State Product $55 to $122 billion
Increase in employment 26,000 person years
Increase in state and local gov't
revenues $12 to $29 billion
Increase in gross revenues for
Alaskan Producers $36 to $103 billion
Gross revenue gains to Gas
Producers through earlier
(3 years) connection $4 to $12 billion
MR. ELLWOOD paraphrased from the next page, "Current Status,
ANGTS Update," which read:
Finalizing state lands right-of-way [in Alaska]
Negotiating a Memorandum of Understanding with Joint
Pipeline Office
Continuing dialogue with:
Government officials in Ottawa and Washington
Aboriginal Communities
ANS Producers
ANNGTC Withdrawn Partners
11:00 a.m.
MR. ELLWOOD turned attention to "Current Status, Discussions with
Gas Producers/Shippers," which read:
Ongoing discussions with North Slope Producers
Contact with other interested parties such as
exploration and development companies [active on the
North Slope but which don't yet hold any reserves],
power generators and power marketers
MR. ELLWOOD next discussed the page titled "Current Status,
Discussions With Aboriginal Communities," which read:
Continuing to build upon positive relationships
Foothills has developed over two decades
Building support through discussion of the community
benefits of pipeline development
MR. ELLWOOD paraphrased from the page titled "Withdrawn Partners
Issue," which read:
ANNGTC Withdrawn Partners have right to recover monies
under certain circumstances
It is recognized that the Withdrawn partners issue
needs to be addressed in the overall commercial
resolution of this pipeline development.
This is an issue between ourselves and the Withdrawn
partners
The process to re-enlist Withdrawn Partners has begun
and although in the early stages, so far we have seen
some encouraging signs.
MR. ELLWOOD explained that originally there were 11 partners in
the Alaska Northwest Consortium, but the only two remaining are
Foothills and TransCanada. Those [withdrawn] partners have a
right to recover some money.
11:02 a.m.
MR. ELLWOOD next addressed "Open Access," which read:
Alaska's interests best served by continued gas
exploration and development
Access to pipeline vital to E&P activity
Financing for the initial pipeline will require long-
term shipping contracts
Additional future capacity provided by:
Additional compression
Looping
Combination of both
Additional capacity will be available to all [shippers
and second-generation producers] on an open access
basis
As a pure pipeline service provider, it is in
[Foothills'] interests to provide expanded capacity to
meet demand
11:04 a.m.
MR. ELLWOOD addressed "Potential State Participation," which
read:
We understand the State is looking at ways to directly
participate in a pipeline development
There are several ways the State could participate in
the ANGTS
As a lender or guarantor
As a shipper
As an equity partner
ANNGTC/Foothills would consider discussion of these or
other matters of interest to the State
Gas to Southcentral Alaska
Current gas demand in Southcentral is approximately 220
Bcf per year
This volume could be delivered via a 16-inch spur line
connected to the ANGTS near Fairbanks
As a pure pipeline service provider, it is in Foothills
interests to serve additional supply and market areas
whenever it is economic to do so
MR. ELLWOOD clarified that there is no particular point chosen
for a connection to the ANGTS near Fairbanks.
11:05 a.m.
MR. ELLWOOD addressed "Path Forward for ANGTS," which read:
Foothills
Continuing to work toward goal of commercial alignment
with Producers and potential Shippers
Finalizing state lands ROW
Building support in Canada for two stand alone arctic
pipelines
Recommendations to Joint Committee
Publicly encourage gas producers and pipeliners to
bring collective strengths to the table and accelerate
development of the ANGTS
Support the conclusion that only ANGTS meets the
Governor's goal of earliest possible start for the
pipeline project
MR. ELLWOOD thanked the committee and offered to answer
questions.
CHAIRMAN TORGERSON asked the presenters to talk further about the
discussions with the producers, including what barriers they see
right now regarding [ANNGTC/Foothills] "coming together with the
terms."
AN UNIDENTIFIED SPEAKER, apparently on teleconference, mentioned
endeavoring to have collaboration in order to have them better
understand the merits of the ANGTS [indisc.].
CHAIRMAN TORGERSON asked whether the withdrawn partners are an
issue to them also, and whether that is a barrier.
THE SAME UNIDENTIFIED SPEAKER answered that it is an issue
[indisc.].
CHAIRMAN TORGERSON asked the speaker to briefly mention Mackenzie
Valley. He requested verification of his understanding that the
speaker is involved in at least a proposal to build a pipeline
out of there.
THE SAME UNIDENTIFIED SPEAKER said Foothills itself is not
[indisc.] engage in a line from the delta to [indisc.] for a
pipeline. Both TransCanada and Westcoast separately are looking
at the possibility [indisc.].
11:08 a.m.
CHAIRMAN TORGERSON noted that "almost everyone's had their
opinion of which route goes first and the impact to the other
route." He requested comment on that.
AN UNIDENTIFIED SPEAKER said he'd heard with interest some of the
questions and comments about what is going on in Canada,
including a suggestion that FERC regulate the pipeline in Canada.
"I don't see that happening," he said. He added that there is a
dynamic going on here: Canadians, including the government and
certain commercial proponents, are actively looking at the
development of the Mackenzie delta [indisc.]. When looking at
that development, probably three or four things will drive it.
One is "producibility." In Alaska, 7 BCF/D today is being
reinjected back into Prudhoe Bay; that is ready to go, under the
right economic conditions. By contrast, that doesn't exist in
the Mackenzie delta. He stated:
Probably - in our opinion - two to perhaps upwards of
five years of exploration and development activity ...
is going to define both the scope and timing of that
development.
The second large issue is the regulatory process.
There are 13 or 14 overlapping regulatory
jurisdictions. There are required permits [indisc.]
development up the Mackenzie Valley [indisc.]. By our
count, somewhere in the neighborhood of 425 individual
permits in the group are [indisc.]. That regulatory
process needs to be permanent. But the good news is
that the regulatory agencies are starting discussions
about harmonizing that regulatory process. But the
reality is that you [indisc.]. Sometimes you get that
clarified, and that's absolutely the key to anybody
proceeding down a path of trying to permit a pipeline.
Then I think the third issue is that it's very well
known and well reported in the media what the
aboriginal groups' aspirations to participate and
perhaps even legally own and operate a pipeline up the
Mackenzie Valley. ... From our perspective, we ...
recognize that First Nations participation will be a
part of [indisc.]. How that is actually achieved is
going to take some time, and I think you've seen that
the groups are not completely aligned. ... That's going
to take timing, and I think that's ... one of the risk
elements to the combined "over the top/up the Mackenzie
Valley" concept, if you will, that really underscores
what I would view as a compounding [indisc.]. It's
very much ... timing and economics.
11:11 a.m.
AN UNIDENTIFIED SPEAKER said [indisc.]. The two resources both
have to come to market and [indisc.] be thought of as crowding
each other out. The only other observation is that Mackenzie
Valley [indisc.] is largely self-contained. He said he believes
there is an opportunity for them to "get their act together" over
the next 12 to 18 months. He mentioned Alaska and being as
expeditious as possible.
11:12 a.m.
REPRESENTATIVE GREEN referred to testimony the day before,
mentioned in the newspaper that morning, that there could be some
resistance in Canada to this sort of pipeline. He asked what the
feeling is about that either being the case generally or being
any kind of obstruction.
AN UNIDENTIFIED SPEAKER asked whether that was to a highway
pipeline. [There was no audible response.] He said he believes
there are some parts to that. No doubt, the federal government
in Ottawa hopes it [indisc.]. There is a potential of "regional
development implication and benefits, [indisc.] developing
reserves in the Mackenzie [delta] area."
THE SAME UNIDENTIFIED SPEAKER continued, saying he believes it is
also pretty clear in Ottawa that energy has not been an issue for
perhaps 15 years. However, the price has gone up in the past 12
months; although it has subsided a bit, it has rekindled energy
as an issue on the "political stage" in Ottawa, which is just
"getting mobile" in this regard.
THE SAME UNIDENTIFIED SPEAKER pointed out that there is a treaty
in place between the two countries, but the [U.S.] government
hasn't yet asked [Canada's] federal government about it. He
stated:
[It is] my view - it would be a very strong one - that
if asked, the Canadian government is going to live up
to the treaty that exists. Now, in terms of
resistance, you could ... look at that ... in a
regulatory permitting sense. Clearly, starting and
using what we have, the existing approval, is going to
mitigate against resistance that could arise in a green
field application, from an environmental side and from
a competitors' [indisc.].
ANOTHER UNIDENTIFIED SPEAKER mentioned using the ANGTS [indisc.]
and getting [indisc.] to market. By contrast, there are other
formulations wherein all the issues about how Canada will respond
to bringing Alaskan gas across [indisc.]. That's a much more
formidable undertaking. He said the treaty isn't going to assign
the various conditions involved in [indisc.] lived up to by the
Canadian government.
CHAIRMAN TORGERSON noted that the previous day there was a
presentation by a representative from Cambridge Energy Research
Associates, who was talking about potential political conflicts
between the State of Alaska and the Canadian government - to his
own understanding, mainly because of "our" opposition to the
"over-the-top" route. Chairman Torgerson said that
representative had no response to his question about "the premier
of Alberta saying 'no pipeline unless I steal all the liquids.'"
He said that is the same thing. All the governments have
responsibility to constituents to get the highest and best use.
Chairman Torgerson went on to say:
So when we exercise our rights, then we're considered
to be - in his view - counterproductive to what's
happening in Canada. But we also know there [are]
other premiers that tried to block the Alaska route and
went to Ottawa to ask for legislation to block the
Alaska route until the Mackenzie delta [project] was
built. And that's also public knowledge. ...
He was referring to that, and I think that's what
Representative Green was talking about, the perceived -
at least in his thoughts - conflict between the State
of Alaska and ... the Canadian government. ... Again, I
don't see that; I see us as doing things that we think
[are] right for Alaska, no more than all the rest of
them are, and it's part of the mix when you sit down
and try to work these things out.
AN UNIDENTIFIED SPEAKER responded:
When I get confronted with that, that there's no doubt
that there is some sentiment in Ottawa that disagrees
with the legislative approach that [indisc.] have taken
here in Alaska, [indisc.], that, to me, is just kind of
bristle and background noise that I think ultimately
... is irrelevant.
When I say to the people in Ottawa, about the debate
over the routing - and I [indisc.] this to the energy
ministry - is just go up to Alaska and talk to a few
[indisc.]. You'll find out what people think about
routing. And I know, Senator, you were in Alberta ten
days ago. And you've seen the benefits of what
development of the natural gas industry and value-added
industry [indisc.] in that and do to an economy over a
period of time. And I think it's pretty simple, in my
mind, how to counter that. ...
In terms of Premier Klein, I think Premier Klein's
statements about having to say about where the liquids
are processed - and [indisc.] saying "extracting my
fair share on the way" or something like that? - I view
that as a way of engaging in the issue and staking a
claim that he wants to be part of the debate.
I think the analysis isn't that the Alberta government
has [indisc.] at stake, in an ownership sense .... The
Alberta government wasn't in interested in seeing
[indisc.] getting access to those liquids in a market
sense to make better use of the existing infrastructure
that's in Alberta. And I think he ... could have been
perhaps more judicious in his choice of words; but
that's what that was about.
11:18 a.m.
ANOTHER UNIDENTIFIED SPEAKER added (indisc). He mentioned
including optimizing the existing ability in Alberta and in the
infrastructure that takes gas from Alberta to the Lower 48. He
said the advent of Alaska gas will be "useful and synergistic to
how that infrastructure is currently being used." He offered
that regarding the interests of Alberta on the liquids issue,
"the alignment will let the market decide." He added:
They do have a fundamental alignment that I think can
be built on. Again, that goes to the issue of
[indisc.]. And some of our companies have had a long
... experience with extraction issues, and although the
Alberta government [indisc.], I think they fully
understand the notion of [indisc.] and how those
decisions are going to be made.
CHAIRMAN TORGERSON clarified that he doesn't blame the premier
for what he did. He then said:
He has certain avenues available to raise red flags
when he wants more value added in his -- as well as the
State of Alaska and the Yukon ... the Northwest
Territories, and all four are using whatever tools they
have ... to make the highest and best use for ... their
particular constituents. ... I made that clear through
his chief of staff at the meeting that you folks set up
for me, that ... came by and visited with us there. So
we'll have more business with [them] a little later on.
11:21 a.m.
REPRESENTATIVE DAVIES referred to a comment made earlier by the
producers that the simultaneous construction of a [Mackenzie]
Valley and highway pipeline would tax North American resources
and perhaps world resources. He asked, "Do you concur with that?
Is that a substantial issue?"
AN UNIDENTIFIED SPEAKER concurred that simultaneous construction
of two such projects would be very difficult to achieve, given
the capabilities of the pipeline construction industry in North
America. He said it would be far better to sequence the two, one
behind the other.
REPRESENTATIVE DAVIES referred to the state ownership issue. He
asked, "Do you see any real opportunities for the state to add
value to your proposal? Or is that just something that you are
willing to consider for political reasons?"
THE SAME UNIDENTIFIED SPEAKER responded:
I think we've said in our presentation ... we are
willing to consider it. I think both of our respective
companies would come from ... the view that government
ownership is not the preferred way to go. But if that
was what was required to actually make something go
[indisc.], that would be considered.
Our experience, ... and the company of Westcoast, is
that we don't want to have government involvement make
an uneconomic project economic. This project has to be
economic to start with. [Indisc.]
AN UNIDENTIFIED SPEAKER said the state has a legitimate interest
in how the final [indisc.], but other dimensions of equity
ownership are available to the state [indisc.].
11:24 a.m.
REPRESENTATIVE GREEN returned to the topic of gas liquids. He
noted that the producers are talking about a significant pressure
to keep the gas liquids in a gaseous phase. He asked, "If that
weren't required - for example, if we were to withdraw those in
the state and ship dry gas - we wouldn't need that high a
pressure; therefore, we wouldn't need ... the technology for
steel. Would that significantly reduce the cost and ultimately
the netback to the state?"
AN UNIDENTIFIED SPEAKER answered that it certainly could change
the capital costs of a project. Lower pressure would require a
reduced wall thickness of the pipe, which is cheaper to buy.
Whether it changes the total, however, is not so clear because it
also reduces the volume that can be put through the pipe.
[Indisc.]
REPRESENTATIVE GREEN replied that he certainly subscribes to
that. However, the concern he'd heard expressed was not knowing
where the kind of steel needed [for higher pressures] can be
obtained, or what kind of mill would be necessary. He said he is
thinking there is another way around it, which may be to reduce
the pressure.
11:26 a.m.
REPRESENTATIVE GREEN noted that in the U.S., FERC and other
agencies limit the amount of transportation or pipeline tariff to
be paid. He commented that "tariff" is a sensitive term in
Alaska because of the TAPS line, and added:
There wasn't a garden-variety-type determination; it
was depending on arm's-length-type of sales. ... You
have a producer that [transmits] and then it goes to
his refinery. So "tariff" was a real difficult thing
to determine [and] has always been a point of
conjecture. It hasn't been so with gas lines. And I'm
wondering if Canada has that same sort of a regulatory
regime that would limit the amount of tariff that would
be charged - a percentage.
AN UNIDENTIFIED SPEAKER commented on gas liquids:
Our analysis would indicate that more modest pressures
will still carry a significant quantity of liquids off
the North Slope. ... [Indisc.] probably get us into the
range where we're carrying very large quantities of
liquids off the North Slope [indisc.]. Cooling the
liquids may be able to be stopped; you could argue it
can be done [indisc.].
ANOTHER UNIDENTIFIED SPEAKER said on the tariff side they fully
expect this would be a negotiated tariff between equity owners
and shippers. [Indisc.] "We do have experience with how this
works," he added, citing a project that went into operation last
fall between northwestern British Columbia and Chicago, which to
date is probably the largest natural gas pipeline project built
in North America; it has a negotiated toll structure. He
suggested that when pipeline companies own pipelines, there is a
natural balance of commercial interests from a financial
perspective. Although not having exact terms in mind, they
expect it would be some negotiated toll structure based on long-
term shipping agreements to provide appropriate balance between
risk and [indisc.].
[ANOTHER UNIDENTIFIED SPEAKER added some indiscernible comments
about interests in the pipeline.]
REPRESENTATIVE OGAN referred to comment that they don't foresee
FERC regulating Canada. He asked whether that is addressed by
the treaty, for example. He asked what the presenters envision
and how the treaty fits in.
AN UNIDENTIFIED SPEAKER replied that the Northern Pipeline
Agency in Canada would regulate construction of the Canadian
portion of it. When it goes into operation, NEB would regulate
the ongoing operation, and FERC would do the same in Alaska.
ANOTHER UNIDENTIFIED SPEAKER expressed confusion regarding
comments made about ANGTA by the FERC representative the previous
day. The unidentified speaker said the ANNGTC - of which
Foothills and TransCanada are the active partners - has a
conditional FERC certificate under ANGTA. And to suggest that
there is no application in front of FERC with respect to ANGTA,
he believes goes contrary to fact.
11:31 a.m.
CHAIRMAN TORGERSON asked, "If the producers file under the
[Natural] Gas Act for a right-of-way, are you folks going to
proceed to represent your interests at court or through legal
action?"
AN UNIDENTIFIED SPEAKER answered by first referring to the
companies before the committee that day. They have been at this
since the mid-1970s, have spent a fair bit of money, and have
waited a long time, he said. Not only do they believe they have
something worth some commercial value, but they truly believe
that if the desire is to expedite construction of a pipeline from
Alaska, using the ANGTA framework and building on what is in
place [indisc.]. He said there are commercial interests to
protect. He added:
We have very strong legal views, ... from our
perspective, of what rights we enjoy under the
decisions and approvals that were rendered in the late
1970s. We have a view about whether or not an
application could be heard under the Natural Gas Act.
We have a very strong view as to whether or not anybody
else can get past us to the ANGTA framework. And ...
our view would be ... that we don't want to go down
that road. We think it's in the interests of everybody
to collaborate and build on what we have.
ANOTHER UNIDENTIFIED SPEAKER mentioned collaboration and people
holding the keys to an expedited regulatory treatment, saying he
believes there is an inevitability about it. He also mentioned
timing, as well as regulatory and legal forums under the ANGTA
regime. [Indisc.]
CHAIRMAN TORGERSON suggested it is to nobody's benefit to take
this to court, which would delay it. He asked whether there is
any way to expedite a decision from FERC. He noted that there
may not be an application until March or April. He asked: Is
there a process through which FERC can formally be asked some of
the questions on the routing, for example, or does it just
require waiting and seeing?
AN UNIDENTIFIED SPEAKER answered that with respect to the
development of ANGTS, no decision is needed. It is authorized.
"They have issued their certificate to us," he added. Noting
that there potentially will be amendments, he said those can only
come after the commercial deal is pulled together, and after the
full project scope is understood. "Nothing is needed from FERC
at this point," he reiterated.
REPRESENTATIVE DAVIES first requested elaboration about the
relationship between FERC and [indisc.]. He asked how they will
coordinate once things are up and running. Second, he asked what
the presenters' stance is now with respect to their discussions
with the producers. He asked, "Have you made an offer to them,
or ... are you waiting for them to do their due-diligence process
they're going through, and then see where that shoe lands?"
TAPE 01-6, SIDE B
AN UNIDENTIFIED SPEAKER mentioned all the things necessary to
make this happen, saying a mechanism relating to the treaty will
help to achieve that.
ANOTHER UNIDENTIFIED SPEAKER added [indisc.], mentioning the due-
diligence process of finding alternatives, the need for more
collaboration, and the need to have a better understanding of the
relative merits "of our alternative" in order to help them
expedite their coming to terms with the routing selection.
CHAIRMAN TORGERSON thanked the presenters and announced that
there would be a short at-ease.
Alaska North Slope LNG Sponsor Group
11:40 a.m.
CHAIRMAN TORGERSON announced that next the committee would hear
from the [Alaska North Slope] LNG Sponsor Group ("Sponsor
Group"), composed of Phillips Alaska, Inc., BP Exploration
(Alaska) Inc., Foothills, and Marubeni Corporation.
MR. STEVE ALLEMAN, Commercial Manager, Alaska North Slope LNG
Project, noted that present was Mr. George Findling. He informed
members that both he and Mr. Findling are residents of Anchorage,
employed by Phillips Petroleum Company; however, he himself was
speaking as the commercial manager for the Alaska North Slope LNG
Project.
MR. ALLEMAN referred to presentations to the House Special
Committee on Oil and Gas on February 27, 2001, and to the Senate
Resources Standing Committee on April 7, 2001. He noted that the
Sponsor Group had indicated it is in the midst of Stage 2
activities, scheduled for completion by the end of this year.
Although most of those activities are still works in progress, he
would offer an overview of ongoing LNG efforts. He stated:
The Sponsor Group ... began working in October of 1998
to try to make an Alaskan LNG project economically
viable and cost-competitive in the market. Phillips,
BP, Foothills, and Marubeni ... are the current and
ongoing sponsors in this LNG effort.
From the very beginning, we have maintained a strong
market focus. Most of our sponsors have personnel
living and working in East Asia. We have longstanding
LNG market relationships that allow us insight into
what the marketplace is saying.
For example, early in Stage 1 we challenged the
conventional wisdom that an Alaskan LNG project has to
be sized at 14 or more million tons per year. Our
market evaluation indicated that we needed a smaller
project to give us the best chance of getting a toehold
in this fiercely competitive LNG marketplace.
So the focus of the Stage 1 technical work was to
innovatively redesign a smaller market-entry project
where costs could be deferred and overall risks reduced
and yet still be expandable later as ... demand
[grows]. The result was a 7-8 million tons per ... year
design, which we currently estimate would cost about $5
billion without ships. This market-entry project is
the basis for our point-forward work. ...
Through our ... personnel in East Asia, we are quite
aware that the East Asian market is very interested in
Alaska LNG. There is no myth or mystery about the
positives that the market sees in LNG from Alaska. But
we are also very aware that this is only part of the
story. The more crucial question is: Under what
conditions would the market move from interest in
Alaska LNG to commitment to purchase?
11:43 a.m.
There is significant East Asian LNG competition in the
form of potential and in-progress large expansions and
new grassroots LNG plants. As we detailed in our
presentations during the session, there are over 60-80
million tons per year of potential LNG projects
fiercely competing for 20-40 million tons of East Asian
LNG demand that is projected to be needed by the end of
the decade.
Unfortunately, Alaska is not yet cost-competitive with
the majority of these other LNG projects on a unit-cost
basis. Further, we cannot yet demonstrate an
economically attractive capital payback project with
assumptions that are reasonably saleable to the market
[or] to the investors. This all comes back to Alaska's
unique competitive disadvantage: the 800-mile gas
pipeline to tidewater.
As to where we are today, the LNG Sponsor Group is in
the last half of its Stage 2 work program. In Stage 2,
we are using the Stage 1 market-entry project design
and working on primarily commercial - but also
technical - ways to reduce costs and risks. ... We
expect to complete these deliverables on schedule, by
the end of this year and within our $3 million budget.
These efforts include continued engineering design and
cost optimizations that have already identified over
$400 million of additional capital-cost reductions in
this stage.
The LNG Sponsor Group is currently evaluating synergies
around sharing facilities with a southern-route lower-
48 pipeline. There are cost-savings opportunities in
the gas-treating plant and the pipeline transportation
and compression from Prudhoe to the takeoff point.
We should also keep in mind that while sharing
infrastructure will reduce costs, it will not eliminate
[them]. The costs for treating and transporting would
be realized either as capital or as fees [indisc.] We
are in the middle of that evaluation, but intuitively
we don't expect sharing alone to eliminate the
competitive disadvantage of the pipeline.
We mentioned during session that we have already looked
at the potential value of a joint public-private entity
in Stage 2 and have found no compelling advantage to
such a joint project at this time. We have
communicated this as part of our ongoing discussions
with the [Alaska] Gasline Port Authority, expressing to
them, in part, that any benefits .... passed to private
enterprise will then also be [taxable].
Further, public borrowing rates are unlikely to offset
private entities' potential tax deduction of interest
and depreciation. I would hasten to point out that
does not preclude a public entity from developing a
competitive [project] on its own.
Also ongoing is an evaluation of key risks and
mitigation strategies for this project. While this
work is not finished, there have been no ... big
surprises to date. Risk items such as price, price and
cost escalation, cost overruns, and other expected risk
factors that are typical for any project of this size
and magnitude are also very much a part of this LNG
project.
While much of our Stage 1 focus was on East Asian
markets, we are currently exploring the potential for
alternate markets in the Lower 48 and Mexico. That
effort is also in mid-cycle review and is on schedule
for timely completion. We expect to find that the
California[-Mexico] market is subject to the same
market forces and that all other gas sources, including
LNG import projects, will do their part to make ...
this market fiercely competitive.
With this California-Mexico market focus, we have not
forgotten about East Asian markets in our Stage 2
efforts. Marubeni continues to staff our Market
Liaison Office out of Tokyo to gather feedback and
respond to market questions. We are also in the
process of analyzing other competing ... LNG projects
into East Asia and how these projects are estimated to
compare to our efforts on a cost-of-service basis.
That evaluation is on schedule for completion by the
end of the year.
However, as we presented during session, Alaskan LNG
has a long way to go to be cost-competitive,
particularly on a unit-cost basis, into East Asia,
primarily because of the 400- to 800-mile buried Arctic
pipeline. The industry benchmark for capital cost per
million tons per annum (MTPA), excluding ships, is
reportedly around $250 million per million tons per
annum (per MTPA). Because of the pipeline, unit costs
for our Alaska LNG stand-alone project are above [$600
million per MTPA].
Finally, an externally generated environmental
assessment for permitting the Nikiski route is nearing
completion. Once that work is done, we will develop an
overall permitting strategy for expeditiously moving
forward with either the Nikiski or the Anderson Bay
route and site, if market conditions and cost
competitiveness improve to the point of initiating a
project. While that external work has slipped about a
month behind our schedule, it is still expected to be
complete [prior to the end of Stage 2].
I tried to be quick, but hopefully this overview will
give you a flavor for our past and ongoing efforts with
the Sponsor Group. As stated, we fully expect to
complete our Stage 2 work on time and within budget
before the end of this year. Once we have all of our
results, we will then be in a much better position to
determine what, if any, next steps make the most sense
for LNG.
11:48 a.m.
REPRESENTATIVE GREEN asked whether Mr. Alleman or Mr. Findling
was present during the YPC presentation. [There was no audible
answer.] He asked why there are such divergent views regarding
LNG.
AN UNIDENTIFIED SPEAKER answered that it relates to different
views of the marketplace. [Indisc.]
REPRESENTATIVE GREEN said YPC had shown a rather stable price.
He asked whether, in Mr. Alleman's estimation, that cost will
start to subside because of the additional supply of LNG
worldwide.
AN UNIDENTIFIED SPEAKER replied, "We're not discouraged by what
we're seeing ... in the LNG marketplace [indisc.]." He
acknowledged that it is competitive, there are a lot of different
projects, and it could be expected to have some pressure on
[indisc.].
ANOTHER UNIDENTIFIED SPEAKER explained what he believes is the
fundamental difference:
We see an [indisc.] oversupply in marketing to Asia,
and that oversupply looks more cost-competitive than we
are. We just don't think the market, the buyers, are
going to opt for a higher cost abroad until that lower-
cost [LNG] has been cleared out.
11:50 a.m.
REPRESENTATIVE PORTER asked Mr. Alleman to expand on the idea
that port authority or state ownership didn't seem to pencil out
because of an offset in depreciation, for example. He said he'd
thought the tax break and benefit would be substantial, whereas
it sounds as though it is not.
AN UNIDENTIFIED SPEAKER restated the question, asking how it is
that a public entity, which has a tax exemption, would not add
value to a project.
ANOTHER UNIDENTIFIED SPEAKER answered:
The reason is, is that what we were looking at was a
collaborative project between an entity like the port
authority - or some other governmental authority that
had tax exemptions - and a private entity like
ourselves.
And the ... inability to have benefits comes from the
following: Even if the revenues from the project are
exempt from the income taxes [indisc.], when they try
to pass benefits for that to us, in some form or
fashion, it becomes taxable income to us. So what they
were saving on one side may end up being an income tax
on the other. So when you take the whole enterprise
together, the tax savings here turn into tax [indisc.]
there, and the overall project isn't [indisc.].
Now, what Steve [Alleman] mentioned in his testimony,
that doesn't address the issue of where the public
entity does the whole thing [itself]. It keeps those
tax benefits for [itself] and doesn't try to pass them
on to private entities. So we were looking at a narrow
case of a ... cooperative project, and that's where the
tax benefit can be [indisc.], tax relief.
AN UNIDENTIFIED SPEAKER said that doesn't include any other
combinations or some type of averages.
ANOTHER UNIDENTIFIED SPEAKER replied that [indisc.] a tax ruling
that the tax exemption goes because of the fundamental
governmental [indisc.].
11:53 a.m.
CHAIRMAN TORGERSON asked whether the partners in the study also
will be partners in the project, and whether that decision had
been made.
AN UNIDENTIFIED SPEAKER answered:
The way we have our project defined right now is that
we buy gas from the producers, build and own a gas-
treating facility, own the gas pipeline, own the LNG
facility and the ships. There's several different ways
to do that, ... but [indisc.] come in and own the
pipeline - as you heard the question today, about "that
may be a more effective way to do it." So that hasn't
been settled to date, exactly how that ownership
[indisc.].
CHAIRMAN TORGERSON, for scheduling purposes, noted that Mr.
Alleman had said the Sponsor Group wouldn't have much more data
until the end of the year to share with the committee. He asked
whether that is accurate.
AN UNIDENTIFIED SPEAKER said he would be glad to let Chairman
Torgerson know if something became available.
11:54 a.m.
REPRESENTATIVE DAVIES asked: Suppose there were a 50-50 equity
partnership [indisc.]. Wouldn't the 50 percent of the equity
that came to the state be subject to that tax advantage and, in
fact, bring the overall cost of the project down?
AN UNIDENTIFIED SPEAKER responded that Representative Davies was
correct. He added that the piece [the Sponsor Group] was looking
at was where the port authority would provide a financing vehicle
and, by doing so, [indisc.] some tax advantages to "us." The
fundamental theory wasn't that [indisc.]. The idea was "to try
to pass as much benefit, to make the project more attractive to
us, and to [indisc.]." He added, "But you're correct: the
expenses that a governmental entity [indisc.] the equity, those
revenues that are derived from that [indisc.]."
11:55 a.m.
CHAIRMAN TORGERSON asked whether there were further questions;
none were offered. He thanked the presenters, then announced
that the committee would take a lunch break until 1:15 p.m.
Alaska Gasline Port Authority
TAPE 01-7, SIDE A
1:15 p.m.
CHAIRMAN TORGERSON noted that there was only a half hour for the
following presentation; he suggested it may be necessary to
continue it during the Fairbanks meeting [in August]. He
reported that interesting discussions during the break with
members had changed some of his own thoughts on "what their
authority was."
AN UNIDENTIFIED SPEAKER noted that a member of the Alaska Gasline
Port Authority group is the mayor of Fairbanks, Rhonda Boyles.
MR. CHARLES E. COLE, Vice Chairman, Alaska Gasline Port Authority
(AGPA), came forward, noting that he was speaking at the request
of George Ahmaogak, Sr., mayor of the North Slope Borough
[chairman of AGPA]. He introduced the following people: Rigdon
Boykin, senior partner in the national and international law firm
of O'Melveny & Myers, LLP; and Brent Surpy (ph), senior vice
president of Bechtel Corporation.
1:16 p.m.
MR. COLE informed members that AGPA, formed pursuant to Alaska
Statutes in October 1999, is composed of the North Slope Borough,
the Fairbanks North Star Borough, and the City of Valdez; it was
ratified by the electorate of each of those communities in
October 1999.
MR. COLE explained that AGPA's initial ordinance provided for
ownership and construction of the gas line; that was the
principal idea, with the premise of distributing the net revenues
of the ownership of the gas line as follows: 60 percent to the
State of Alaska; 30 percent to all communities throughout Alaska,
with a minimum contribution annually of $50,000; and 10 percent
remaining with AGPA. Under its present concept, AGPA would use
that 10 percent to reduce the cost of energy to outlying rural
districts in Alaska.
MR. COLE addressed AGPA's mission. Beyond the previous
description, the fundamental mission is to enable the development
of ANS gas to the maximum benefit of all Alaskans. Ownership of
the pipeline by AGPA offers the possibility - and likelihood - of
substantially lowering the effective costs of transporting gas
from the North Slope to the market, as well as improving the
economics to a degree necessary to make development of that gas
financially viable.
MR. COLE reported that the group retained by AGPA consists of
Bill Walker of Walker Walker and Associates, general legal
counsel; Rigdon Boykin of O'Melveny & Meyers, LLP - "the brains
behind the operation"; and expert organizations retained to help
AGPA develop the economics of the project. He noted that AGPA
has entered into a memorandum [of understanding] with Bechtel
Corporation to develop cost estimates for the conditioning plant,
pipeline, and LNG facilities at Valdez. Furthermore, the
internationally known firm, Taylor-DeJongh, Inc., as well as
Merrill Lynch, will perform financial modeling and act as
financial advisors.
MR. COLE lauded Mr. Boykin, O'Melveny & Meyers, and Bechtel
Corporation for their work. He noted that following [the
presentation], AGPA would furnish "hard" numbers about the cost
of the construction of the conditioning plant, pipeline, and LNG
facilities in Valdez. Bechtel Corporation has put in 55,000 man-
hours into the development of those numbers, he pointed out, and
has provided a remarkable work product. Taylor-DeJongh has done
the same, he added, noting that that firm has run numbers and
continued to refine them for the past two years; those numbers
also would be provided, along with the sensitivity analysis that
firm has done based upon a number of variables.
1:22 p.m.
MR. COLE reported that the focus has changed a little over time,
as AGPA has learned more about the project from work done by
Bechtel, Mr. Boykin, and Taylor-DeJongh. The original premise
was that [AGPA] would build and own the project, take the natural
gas from the North Slope to Valdez, make LNG there, and sell it
to the Far East. In order to do so, it was decided to make a
comprehensive model that includes conservative costs - an
estimate for all aspects of the line, including construction,
financing, and operations. The costs would include development
costs, permitting costs, and various financing fees and interest
during construction.
MR. COLE mentioned working capital, six months of debt service
reserves, and interest. He also noted that construction costs
were to be all-inclusive: equipment; "capital spares";
construction; freight; catalysts and chemicals for the initial
fill; commissioning and startup costs; engineering services;
escalation of 8 to 10 percent, depending upon the facility; a 10
percent contingency; insurance; licensing fees and contractor
risk; overhead; and fees.
MR. COLE told members AGPA was able to develop those hard
numbers. In May 2000, Bechtel Corporation completed its [indisc.]
cost study, based upon all the factors just mentioned. Then
Taylor-DeJongh performed its economic modeling. The initial base
case provided a new cost estimate for the gas processing facility
at the North Slope, the pipeline, and the LNG facility. That
data served as a base for development of various alternatives.
It also provided a realistic and fiscally conservative
methodology for looking at solutions to improving the economics
of the project.
1:25 p.m.
MR. COLE asked: Guess what we found? The answer: It didn't
work. Out of these hard numbers, therefore, and by taking a hard
look, AGPA reached two basic conclusions. First, the economics
of the project clearly are affected by the amount of liquids,
both as natural gas liquids (NGL) separated out on the Slope and
inserted into the pipeline, and as propane separated out as
liquid propane gas (LPG) in Valdez. The value of these liquids,
as shown in the financial report, is substantial. Second, the
project needs to be combined with other potential projects in
order to share the cost of the pipeline and the gas conditioning
facilities. Furthermore, since June 2000 the economics have
changed substantially in the East, Mexico, and the Lower 48.
MR. COLE reported that based upon the cost information put
together by Bechtel Corporation and the financial modeling of
Taylor-DeJongh, AGPA now believes the most economic and
beneficial project - for both Alaska and the producers - is a
two-project "Y" line, with one branch to the Lower 48 along the
highway, split at "Big D," and the other branch going down to
Valdez along the Alyeska pipeline route. In addition, there
would be a spur line from Glennallen to Anchorage.
MR. COLE explained that AGPA believes using one or both of these
routes would substantially reduce the potential for
"environmental assaults" on the project and related delays. In
addition, the economies of scale would be improved by combining
these two projects, reducing the pipeline cost for each project
from $7 billion to $4.85 billion - a savings of slightly more
than $2 billion for each project, for a total savings of $4.3
billion.
1:28 p.m.
MR. COLE listed components of the "Y" line project: a
conditioning plant on the North Slope with the capacity to
condition sufficient gas to put into a 6-BCF/D; a 550-mile, 56-
inch-diameter pipeline operating at 2,220 maximum pounds per
square inch from the North Slope to Delta Junction; a 150-mile,
44-inch-diameter branch line carrying 3 BCF/D to the [Canadian]
border along the "Foothills route"; a fractionation plant in
Calgary or the U.S. to extract the LPG from the lower-48 branch;
a 256-mile, 46-inch-diameter pipeline also carrying 3 BCF/D to
Valdez; a spur line to Anchorage from Glennallen; a fractionation
plant to extract the liquid propane in Valdez; and a 15-million-
tons-a-year LNG plant - fully ramped up - and port facilities in
Valdez.
MR. COLE provided figures for the "hard" costs: $4.2 billion for
a conditioning plant; $9.7 billion for the pipeline, including
the two branches; $450 million for the LPG fractionation plant at
Valdez; and $3.65 billion for the LNG plant and port facilities.
Therefore, the total construction cost would be $18 billion.
MR. COLE next listed the "soft" costs: nearly $5 billion for
interest during construction; $900 million for an owners'
contingency; $1 billion for debt service reserve; and $1 billion
for fees and working capital. Therefore, the "soft" costs would
total $7.8 billion, approaching 50 percent of the construction
costs.
MR. COLE noted that subtracted was preconstruction revenue of
$3.2 billion. Therefore, the total financing cost is somewhat
over $22 billion. He said these are "pretty good numbers." He
cited the vast experience of Bechtel Corporation in this area,
reiterating that Bechtel had spent more than 50,000 man-hours in
developing those numbers.
1:33 p.m.
MR. COLE acknowledged this isn't the only way it will work. He
reiterated that the thinking of AGPA has changed as the numbers
have been developed and reworked; they are prepared to make the
numbers available with the hope that further optimization of the
design will reduce costs even further. However, from their
standpoint, the project has been demonstrated to be financially
viable, and it should be attractive to producers, the state, and
Alaskans in general.
MR. COLE reiterated that when AGPA started, the mission was just
the LNG plant from the North Slope to Fairbanks and down to
Valdez. The shift in focus came because that project didn't work
economically.
MR. COLE reported that the financial results of the two-project Y
line show it would yield to the producers $2 to $3 billion per
year, and to the state $750 million. Payments in lieu of taxes
could be made, approximately $150 million. Available to
communities throughout the state would be $110 million, and for
the construction of infrastructure the cost would be $37 million.
MR. COLE listed the benefits of a port authority concept: the
income from the venture will be tax exempt; the port authority
can finance this project with nearly 100 percent debt - some of
the bonds would be tax exempt, and project financing would be
non-recourse financing; the port authority has substantial
political advantages both within and outside the state; and the
port authority would not be subject to FERC and could distribute
a lot of money in-state. Mr. Cole told listeners:
I have long felt that we in the state of Alaska must be
on guard to make sure that our residents and our
consumers don't get ripped off by the cost of energy
that we supply to the country. We people in Alaska
should realize consumer benefits to our crude oil and
to our natural gas. ... The port authority concept
would give us more control over costs of this natural
gas, which I think is very, very important.
1:38 p.m.
MR. RIGDON BOYKIN, Senior Partner, O'Melveny & Myers, LLP, said
they had prepared a slide of an economic analysis of what the
liquids do. He explained:
For example, I think you heard earlier today one of the
groups said that LNG is not economic and it would cost
$700 per ton of production versus what the norm is with
between $200 and $300 per ton of production capacity.
That's true on the surface. However, if you allocate
liquids to reduce that cost, it brings us to a
competitive position worldwide.
This slide basically does that. It basically shows you
that, where they get the $700 per ton of LNG. It
basically comes from the LNG plant [indisc.] $273. The
pipeline adds another roughly $300, and the
conditioning plant adds another $140. However, if you
take the benefit of the LPGs, the propane, that will
[be] taken out, whether it's in Calgary or in Valdez,
and offset this; it brings the cost per ton of LNG down
to $340. That's at $12.50 per barrel for the LPGs.
If you assume a $15 price, for example, for the LPGs,
which is probably closer to a historic price, it would
reduce the EPC cost per ton to $267. So, that's the
real comparison you ought to use when you're looking at
this project versus a project in Darwin or wherever.
MR. BOYKIN went through the benefits, saying he'd put in a little
more over 8 BCF into the processing facility and had taken out a
little over 2 BCF of carbon dioxide and other chemicals that can
be reinjected in the wells. He added, "So we're actually buying
a little over 6.7 BCF of gas."
MR. BOYKIN noted that they'd decided to establish a benchmark to
measure things against, and they'd posited a price of the gas at
the wellhead of 75 cents [indisc.] on a absolute off-the-top
basis and 35 cents as a subordinated payment.
AN UNIDENTIFIED SPEAKER asked how that number compared with
Chambers'.
MR. BOYKIN replied that Chambers was talking about the range of
70s in one of their studies. He used 75 cents at the wellhead
for the producers, and they decided to use extremely conservative
prices for the sale of the gas and LNG. He added that he "hoped
like the devil that Jeff's numbers and others panned out, but he
couldn't use them because they are not a good historical average
they could finance off of." He said they assumed a price of $3
for the sale of gas in Chicago and a price of $2.50 at Valdez for
LNG. This equates to roughly a price of $3.10 in Japan. They
also assumed a tariff from the Alaska-Canadian border to Chicago
of $1.20, a number derived from Canadian transporters.
MR. BOYKIN said in the slide he was presenting, the really
significant number is 120,000 barrels of propane extracted in
Valdez and 140,000 of LPG extracted somewhere in Canada or
Chicago down the line; he indicated there is a huge value to
those numbers. The benefit to producers from 75 cents per MBTUs
would be a little over $2 billion per year. The state would get
in $371 million royalty and severance tax, $81 million in royalty
and severance tax on the NGLs, and $148 million in corporate
income tax.
MR. BOYKIN reported that he assumes [indisc.], which would be
less than the customary 20 mils, of $114 million, and the $222
million for the state and the $148 million, which would go to
Alaskan municipalities ($111 million directly and $37 million to
build infrastructure to deliver gas to non-pipeline-corridor
communities). Even after doing all of that, $532 million will be
left over. That can be distributed to stakeholders in the
process, whoever they might be. It could go to increasing the 75
cents to the producers, or it could be used as a cushion. It
could also run sensitivity studies. If the price for LNG and gas
is 10 cents higher, it would generate $200 million extra per
year. So if it were $4 versus $3, basically, that amounts to $2
billion per year. He said he doesn't believe it will be $4,
however. He believes it will be closer to CERA's prediction of
$3 to $3.25.
MR. BOYKIN said in any event, the decrease in interest rates of
one-half percent will increases revenue by $120 million per year.
An increase in the sales price of the NGLs and LPGs of $2.50 per
barrel increases the revenue by $300 million per year. And a
reduction in the construction costs, for example, using existing
equipment on the Slope, increases the amount available for
distribution by $120 million per year. The AGPA has a lot more
data available in the study prepared for the committee. He noted
that if the committee wants any sensitivities run, AGPA will be
glad to do that; he offered to give the committee access to
special data as well.
CHAIRMAN TORGERSON announced that he would like to pick this
topic back up when the committee meets in Fairbanks on August 14
and 15.
MR. COLE said he could furnish the committee with a 40-page
presentation that contains very detailed data; that will give
committee members time to study the data before the next meeting.
CHAIRMAN TORGERSON noted that one of the reports is marked
confidential.
MR. COLE asked Chairman Torgerson to use his discretion about its
use. He suggested using the data to ask questions of other
parties to test the data itself.
REPRESENTATIVE FATE asked if the models will be available to
other investigators on the pipeline so that the committee can ask
questions later regarding whether the models can become
benchmarks to measure data against.
MR. BOYKIN or MR. COLE replied that the answer is yes and that
they would encourage that. He noted if people don't ask everyone
the hard questions and challenge assumptions, "we're never going
to get there." He feels AGPA will be better if challenged, as
will others, and hopefully out of that process something [better]
will be developed than any single entity has.
MR. COLE said if, after studying the data, the committee would
like AGPA to run further assumptions before the next meeting,
AGPA would be pleased to do so.
REPRESENTATIVE OGAN asked if Mr. Cole's statement, that the AGPA
is not subject to FERC, is based on the assumption that it will
be shipping to Japan. He asked what the situation would be if
AGPA shipped to the West Coast. He pointed out that the
committee has heard some conflicting viewpoints in the last few
days; for example, if one molecule goes to the West Coast, FERC
will have its fingers in the pie.
MR. COLE said that is true for a private project; however, this
is a government-owned project that is defined out of the Natural
Gas Act, so it would not be subject to FERC jurisdiction even
though a branch of the pipeline will eventually get gas to the
Lower 48.
REPRESENTATIVE OGAN asked if Mr. Cole has looked at the
possibility of AGPA owning the pipeline to that point.
MR. COLE said he believes so; however, the economics would be
maximized to the degree AGPA owns everything across the entire
state, because the return AGPA is willing to accept is much lower
than the return anyone else is willing to accept. AGPA would
basically be transporting gas across a greater distance for a
fraction of what a private entity would charge. That enables
AGPA to give a higher price to producers and give a lower price
for in-state use.
SENATOR KELLY asked whether municipal- or government-owned
pipelines anywhere else that are transporting gas for interstate
use are not regulated by FERC.
MR. COLE said there are a couple of small lines in the South, to
his knowledge.
SENATOR KELLY asked if that gas is utility gas.
MR. COLE replied that it is hooked in to make the pipeline, so it
would be in interstate use. He noted that if it were owned by a
private entity, it would be subject to FERC jurisdiction;
however, FERC has explicitly disclaimed jurisdiction on it.
1:53 p.m.
REPRESENTATIVE DAVIES asked what AGPA's assumption is regarding
when the pipeline gets to the Canadian border. He asked if the
economic model is based on the pipeline to the state boundary or
whether the analysis is based on the pipeline to Henry Hub.
MR. COLE said AGPA talked to producers in Canada regarding what
the cost would be for them to do it from the Canadian border down
to Alberta and from Alberta to Chicago. Those studies have been
done, so it didn't make sense for AGPA to duplicate that. The
number reported was that the charge from there would be $1.20.
REPRESENTATIVE DAVIES asked what his assumption is about
ownership.
MR. COLE said AGPA is assuming it would not own it.
The committee took a brief at-ease from 1:55 p.m. to 2:05 p.m.
Kenai Peninsula Borough
MR. DALE BAGLEY, Mayor, Kenai Peninsula Borough, said their group
includes representatives from the Mat-Su as well. The Cook Inlet
Pipeline Terminus Group's main goal is to promote a Cook Inlet
route that provides the most benefit to Alaska. He told the
committee:
We're not proposing to build the pipeline, but if there
is going to be an LNG pipeline to tidewater, we are
advocating that it should be a Cook Inlet route instead
of a Valdez route. ...
Thirty-five TCF of natural gas has been discovered on
the North Slope, and no one has been looking. When a
pipeline is built, search for natural gas will begin.
There are some predictions that 100 TCF will be
discovered on the North Slope. To put this in
perspective, EnStar provides for the natural gas needs
of 100,000 consumers in the Mat-Su, Anchorage, and the
Kenai Peninsula. They use approximately 50 BCF of
natural gas per year. Thirty-five TCF ... would last
prime EnStar consumers for 700 years. Actual reserves
could actually last consumers for over 2,000 years.
The bottom line is that there is plenty of natural gas
for in-state use as well as export use. There is
enough natural gas on the Slope for an LNG export
pipeline, gas-to-liquids production, and a pipeline to
the Midwest.
BP is currently constructing an $86 million gas-to-
liquids pilot plant in Nikiski. The Midwest Canadian
gas pipeline is becoming more likely every day. If the
in-state LNG pipeline is filled along with the Midwest
pipeline, both projects can share costs from the North
Slope to Fairbanks, making both projects more
economically feasible. Both groups that are proposing
an LNG line are looking to share costs with the Midwest
line to Fairbanks. The important point is these
projects are not in competition with each other. There
is enough gas for one LNG export pipeline, gas-to-
liquids production, and a Midwest pipeline.
Phillips has been producing, shipping, and marketing
LNG from Nikiski for 32 years. Since acquiring ARCO,
Phillips now has a 44 percent ownership in the Sponsor
Group. Foothills Pipeline, a Canadian firm, has Arctic
natural gas pipeline construction expertise and
experience. Foothills is also looking at the Midwest
pipeline. Marubeni Corporation, a Japanese Company
with Asian market experience, has opened a Sponsor
Group office in Japan. BP is a recent addition to the
Sponsor Group. BP would like to see natural gas and a
gas-to-liquids pilot plant in Nikiski. They are also
looking at the Midwest pipeline.
These are the right players. They have the natural gas
reserves. They have the expertise and experience that
comes from decades of producing natural gas. They have
worldwide natural gas marketing experience. They have
successfully permitted and built projects throughout
the world.
The Sponsor Group has successfully permitted and built
projects throughout the world. The Sponsor Group has
finished phase one of their feasibility study. They
spent $20 million on their first phase and are now in
phase 2. During the first phase they considered routes
all across Alaska. They narrowed their choice to a
Cook Inlet route and a Valdez route. Soon they'll make
a decision between the two routes. On the map you'll
see the proposed Cook Inlet pipeline follow the oil
pipeline from the North Slope to Fairbanks. From
Fairbanks, the proposed pipeline would branch off to
Cook Inlet.
The port authority group is proposing a line to Valdez
with consumers in the Southcentral area paying for
residential lines to Southcentral. If the over-the-top
route happens, it may be even longer before a stand-
alone LNG North-Slope-to-tidewater pipeline will be
economically feasible.
The Cook Inlet LNG line will be a $7 billion
construction project. In addition to the pipeline,
there will be a conditioning plant on the North Slope
and a billion dollar LNG plant. There will be jobs
during the engineering phase and during pipeline
construction. There will [be] jobs along the route and
at the LNG plant located at the pipeline terminus.
There will be jobs from support industries that will
develop throughout the state. These will be quality
jobs that will promote growth in Alaska and will create
many more jobs throughout our economy. Consumer needs,
industry needs and space for new industry - these are
the three main reasons for a Cook Inlet LNG line.
On consumer needs, the gas reserves in Cook Inlet are
declining and are not estimated to last longer than 20-
30 years. Locating the terminus on Cook Inlet is the
only option that serves the majority of Alaskan
consumers. Seventy percent of all Alaskans live along
the route or in the Cook Inlet area. There are
consumers along the route including Fairbanks, Nenana,
Healy, Denali, and Talkeetna. Anchorage has many
residential and business consumers.
Mat-Su is the fastest-growing area in Alaska. This
growth needs natural gas. The Point MacKenzie project
would use this gas to expand their industrial area near
a port. Natural gas could be used to make electricity,
fertilizer, fuel cells, and things that we haven't even
thought of yet. Nenana could use barges to ship
compressed gas or LNG to villages in the Bush. This
pipeline should benefit the majority of Alaskans.
MR. BAGLEY showed the committee photos to illustrate his
testimony. He said Anchor End is the biggest taxpayer and
largest employer on the Kenai Peninsula ($30 million annual
payroll). It is the largest fertilizer producer in the world; it
recently bought this plant, has plans to expand the facility, and
needs plenty of gas.
MR. BAGLEY said Phillips has been producing LNG for 32 years,
with their tankers coming into Cook Inlet every 10 days. Their
LNG facility in Cook Inlet is known across the world as a premier
plant and serves as a prototype for new facilities. Furthermore,
Southcentral Alaska has thousands of residents who work for
natural-gas-dependent industries; if their needs continue to
grow, there will be less gas available for industry use. The
Alaska natural gas pipeline would protect these jobs.
MR. BAGLEY told members Cook Inlet has space for a large LNG
facility and new industry. Industry has looked there, but there
wasn't a guaranteed supply of natural gas. Having a guaranteed
supply of natural gas opens up possibilities for communities
along the Cook Inlet route. He reiterated that the three main
reasons for the Cook Inlet LNG pipeline are: to provide for in-
state consumers, [to provide for] industry, and because they have
the space for the LNG plant and new industry. He told members:
Every August, we have an industry appreciation day to
thank the oil and gas industry, as well as commercial
fishing and tourism industries. You are all invited to
join us this year, Saturday, August 25, Kenai Green
strip, for the Industry Appreciation Day Celebration.
...
Cook Inlet is wide and safe. The narrowest part is 12
miles wide. The natural geology of upper Cook Inlet
protects from tsunami damage. Last year 1,000
shiploads of natural gas was safely shipped through
Cook Inlet.
MR. BAGLEY continued to say that Cook Inlet has a close
relationship with the natural gas industry. The regulatory
agencies are in place and are familiar with Cook Inlet natural
gas production and transport. Cook Inlet has a trained work force
and the infrastructure to support expanding the natural gas
industry. He added that in-state gas needs should not be
ignored.
MR. BAGLEY reported that the Kenai Peninsula Borough has
discussed the port authority concept; if it is needed to make an
LNG line economically feasible, they are prepared to team up with
other municipalities and make it work for them too. He remarked,
"At this time we are in the wait-and-see mode on that."
REPRESENTATIVE OGAN said there was no doubt in his mind that as
far as the total benefit to Alaskans, LNG is probably going to
provide more benefits to Alaskans than any other project. He
asked what Mr. Bagley thought.
MR. BAGLEY replied that he thought an LNG facility and terminus
at tidewater were very important. He didn't have a problem with
a Midwest line either. He hoped the economics would change
enough for the Sponsor Group to consider an LNG line to tidewater
in Cook Inlet for the reasons he'd outlined.
REPRESENTATIVE GREEN asked if the attitude in the Nikiski or
Kenai areas is that if the energy was there, that community would
still welcome the spin-off types of industries.
MR. BAGLEY responded that they would be very receptive to new
industry.
AN UNIDENTIFIED SPEAKER said he was on the assembly of Nikiski
for 14 years, and they had been inundated with a lot of ideas
about new industry. He said they have repeatedly been told they
have less than a decade of natural gas reserves. They would
support at least a spur coming down to serve Anchorage and Mat-
Su.
CHAIRMAN TORGERSON announced an at-ease from 2:17 to 2:19.
Williams Energy Services
MR. JEFF COOK, Vice President, External Affairs, Williams Energy
Services, introduced the new president, Diane Prier, who
previously served as Vice President of Operations at their Rocky
Mountain mid-stream operations. Williams is forming a dedicated
team to study the commercialization opportunities with Alaska
natural gas. It has 10 members and is called the Williams Arctic
Project Team. One of the members is Wayne Buck, lead for the
Regulatory Government and Community Affairs. He most recently
lived in Kentucky and now lives in Tulsa. To make the
presentation today was Mr. Caven Carlton, who has been serving as
director of Business Development, but is now the project team
director.
MR. CAVEN CARLTON told the committee, "We're not here pitching
our own project, even though we have a lot of economic interest
in participating in a natural gas project and the associated
opportunities." He offered a slide presentation, noting that
Williams has about 14,000 employees nationwide and 500 in Alaska.
Their energy assets stand across North America, and they are
currently the second-largest natural gas pipeline company in
North America, behind El Paso, which took the lead from them two
years ago. On an average day, they move about 20 percent of all
natural gas that moves in North America. They have probably the
largest natural gas-to-liquids gathering process of any pipeline
network in North American, and that gives them the opportunity to
add value to this project.
MR. CARLTON reported that in Alaska, Williams has a 200,000-
barrel-per-day refinery at North Pole and an almost billion
barrel terminal in Anchorage, as well as a minority interest in
the TAPS line. They currently market the royalty oil for Alaska
and pay about $12 million in taxes to the state.
MR. CARLTON explained that his sixth slide highlighted their core
values and beliefs. They have commitment to communities. Cuba
Waddlington, their president this year, serves as the National
Chairman for United Way of America and won the Spirit of America
award, which is given to the best corporate citizen for United
Way.
MR. CARLTON highlighted the four major points about their view of
an Arctic pipeline project. First, they believe Arctic gas is
necessary to meet North American demand growth. Second, they
think it is essential that opportunities within Alaska be
analyzed, which goes to the heart of their petrochemical
feasibility study. Third, they are in strong support of the
Alaska Highway route as being the best and fastest way to get gas
to market. And fourth, they think this project will benefit
significantly by participation of more strong pipeline members.
MR. CARLTON addressed the first point. A compilation of studies
on natural gas forecasts say by 2010 there will be about 19 BCF/D
of natural gas demand growth in North America. They believe
conventional supply sources, including the western Canadian
sedentary basin, will generate about 10-15 BCF/D of supply growth
during that period. That makes a 4-9 BCF/D shortfall that will
be needed by 2010 in order to get to the 30 BCF/D. He commented,
"Arctic gas would certainly fill that hole."
MR. CARLTON summarized the next four slides, saying they are a
detailed study of how they believe the gas will flow through the
North American market once it hits the Chicago line. They don't
believe all of the gas will go to Chicago, although a large part
of it would. They are a 14 percent minority-owner of the line
going there; on the West Coast portion they own 24 percent. The
Northwest Pipeline System that serves the Pacific Northwest also
has significant expandability and can accommodate some of the gas
going there.
MR. CARLTON reported that one area that needs to be sufficiently
addressed is how to minimize risk associated with this project.
He remarked, "It is a several-billion-dollar project, and that
level of risk and the long lead time [have] a tremendous ability
to push back or potentially prevent this project from happening."
He pointed out that the Energy Marketing and Trading business has
been set up to mitigate those risks and to look at how they could
help with the state's royalty gas to minimize that risk to the
state. He said certain fixed-pricing arrangements they could
enter into would allow that to happen.
MR. CARLTON noted that Slide 15 illustrates that a collar is a
combination of a cap and a floor. A "swation" is a combination
of a swap and an option, which gives the state an option, at some
point in the future, to enter into a swap arrangement. This is
where Williams sets a predetermined price, for instance $3 for
the gas; if the price realized for that gas is lower than $3, "we
essentially bear that risk." If it's higher than $3, it's
essentially trading risk and giving certainty and guarantees
going forward. He said this is not unique to Williams. He
added, "There are a number of other strong energy marketing and
trading companies .... We're certainly very proud of our own
trading and marketing outfit, but there's a very health marketing
and trading industry in North America."
MR. CARLTON skipped to Slide 18, "Opportunities Within Alaska."
Williams is initiating a feasibility study for in-state gas use
and an in-state petrochemical industry. Their team is assembled
and is putting together a detailed action plan. There are 100-
150 separate bullet items they have identified that need to be
researched and analyzed before they can conclusively say whether
it's feasible to have a petrochemical industry in Alaska and what
investment opportunities there are. He didn't have any answers
today.
MR. CARLTON explained that there are a lot of complexities
involved with in-state uses, like moving a high-pressure in-state
pipeline system and wanting to have a small delivery off of it;
it's challenging economically to make that work. He added, "Not
to say that it can't work, but that is an avenue that has to be
explored."
Mr. CARLTON said second, they are looking at whether there is an
opportunity to do things like natural gas power generation, which
is exploding all across the Lower 48. The latest statistic he
heard is that every other day, for the next two years, a new
natural gas-powered generation facility will come online.
Williams wants to build power generation facilities along with
their gas pipeline facilities. He added, "We've been extremely
successful in accomplishing that. ... I think right now our
portfolio is about 15,000 megawatts of natural gas power
generation."
MR. CARLTON said they are looking at petrochemical opportunities
in the state. First, one must look at removing the natural gas
liquids. There are ethane and propane and C4/plus, which is
probably less likely to play a part in a petrochemical business
in the state. He highlighted that the volume of natural gas
liquids that might be needed to have a viable petrochemical
industry in the state would be minimal if the economics work.
They would not need all of the natural gas liquids in the state.
For example, he said, "If you were to build a world-scale ethane
cracker in Alaska, you would use approximately 8-10 percent of
the ethane in the gas line. This could give Alaska a large
foothold for the petrochemical industry."
MR. CARLTON said a key point is that if the industry does make
sense here, the infrastructure issue will have to be addressed.
Williams has significant infrastructure in Alaska today, with a
200,000-barrel-per-day North Pole refinery; it is situated on 600
acres and is uniquely situated best for other opportunities if
they work economically. He emphasized that they have significant
amounts of "pet-chem" experience across North America, providing
200,000 barrels per day in NGL food stock and producing ethylene
and propane at a refinery in Memphis and two different locations
in Louisiana. They also currently have a project going in Red
Water Facility.
MR. CARLTON explained that Slide 21 provides an idea of what
their facility is capable of. Yesterday it produced 42,000
barrels of jet fuel, and it is one of the major suppliers of jet
fuel in North America.
2:38 p.m.
MR. CARLTON told members, "The Alaska Highway route is the
preferred route for this pipeline." First, the belief is that
this route can be placed in service considerably earlier than any
other route by at least a few years; he thought it could be in
this decade. Second, they feel it is essential that the
regulatory, environmental, political, and technical hurdles
associated with an over-the-top route not be underestimated.
Third, a stand-alone Mackenzie Valley pipeline can be built when
those supplies are ready, but they are not ready now. He added,
"There are still several years of exploration and production work
that need to take place ... before they could finance a pipeline
of that magnitude."
MR. CARLTON noted that the next point Williams makes is that
pipeline participation is extremely important in this project.
He said:
I'm referring to a company like Williams or major
pipeline companies in North America. One of the things
that accompanies a large, capital-intensive, long
pipeline project is delay and the numerous amount of
hurdles ... that must be achieved. ... It is an
extremely complex, time-consuming process. This is
something that over the last 90 years has become what
we do.
MR. CARLTON explained that they think it's important that healthy
working relationships be formed with key stakeholders along the
right-of-way, and that there be a significant amount of
consulting. They have already consulted in the Yukon Territory
with key aboriginal groups along the pipeline right-of-way for
the Alaska Highway route there. He remarked, "That was extremely
well received."
MR. CARLTON made a further point: in North American all long-
haul natural gas pipeline companies are owned and operated by
natural gas pipeline companies. There are probably one or two
exceptions of a short-haul offshore type where producers own
their systems. He said, "Pipelines can add value if you get this
project happening." This would be their highest priority. He
added, "Currently, Williams has about $30 billion in assets and
estimates have been made of $20 billion for the potential cost of
this project. That gives you and idea of just how large this
project is."
MR. CARLTON referred to Slide 25 and said Williams had been
involved with this project since the 1970s and was the project
director for the Alaska portion of things. In 1994 they had 750
employees and contractors, at their peak. They were extremely
involved in selecting the routes.
MR. CARLTON turned his attention to Slide 27, pointing out that
those were their expansion projects. They have approximately $4
million - $5 million of gas pipeline expansion projects that are
lined with steel today.
MR. CARLTON next addressed Slide 28, which shows a 900-mile
large-diameter pipeline scheduled to deliver Rockies gas to
southern California. In 1985 this idea first came up. They were
successful in getting numerous stakeholders onboard to get it
built, getting it in service in 1992. They have just started
expanding it from 700 MCF/D to 2 BCF/D, which should be completed
by 2003. It's the largest expansion in a pipeline ever, showing
Williams' experience in building complicated pipeline projects
over a long period of time.
MR. CARLTON said their Gulf Stream pipeline project is $1.6
million project and they partner with Duke Energy. It is the
only undersea long-haul pipeline in North America. They broke
ground on June 1, 2001. Slide 31 shows that Williams purchased
the largest LNG import terminal in North America, about an hour
south of Washington, D.C. They are reacclimatizing that facility
to go into service next year. Slide 32 shows that they have
established the 10-member team to pursue Arctic development.
MR. CARLTON urged anyone to call with questions and offered to
answer questions from the committee.
REPRESENTATIVE DAVIES asked if Williams is one of the [indisc.]
partners.
MR. CARLTON replied that Williams is a partner. He added, "Most
of the key players that are out today are [indisc.] partners.
So, we're not unique." He said he thought this project would
need at least one strong U.S. pipeline company and at least one
strong Canadian pipeline company in order to capitalize on their
knowledge and experience, both technical and regulatory.
[AN UNIDENTIFIED SPEAKER asked a question about developing a
smaller scale project in Alaska; the answer was indiscernible.]
2:49 p.m.
MR. CARLTON said he'd heard that it is not technically possible
or attractive to take out natural gas liquids in the state, and
that the primary processing would be in Alberta.
REPRESENTATIVE GREEN referenced the slides showing anticipated
growth that stopped with the Ohio-West Virginia area. He asked
if that was because they don't serve the Eastern Seaboard states
or is because of some other reason.
MR. CARLTON replied that Williams' largest market is the Mid-
Atlantic. He has tried to approximate existing natural gas
pipeline corridors.
REPRESENTATIVE GREEN asked why long-haul pipeline are operated by
pipeline companies rather than owner-transporters.
MR. CARLTON replied that historically all expansions of all
natural gas long-haul pipelines are built, owned, and operated by
pipeline companies. He said there is no decided advantage.
Natural gas pipelines have been looked at as a lower-term
investment than other opportunities. Williams is eager to invest
capital in it.
REPRESENTATIVE GREEN said Slide 27 shows a significant expansion
($5 billion) going on right now. He asked, if Williams became
heavily involved in a gas transportation line, whether that would
be a significant amount of their total worth. He also asked if
the company was in a position to take another expansion like
that.
MR. CARLTON responded that they had no uncertainty whatsoever.
He added:
We are extremely eager to take a key role in an Arctic
pipeline project .... What I want you take home from
this slide is not that we're stretched and don't have
any more resources; it's that we're gathering more
experience today in building pipeline than anyone else.
... Most of our growth has happened on expansions to
our systems.
REPRESENTATIVE GREEN said they have an anticipated growth of $700
million to $2 billion, almost a 300 percent increase. He asked
how they accomplished that fantastic growth.
MR. CARLTON replied that commercially the capacity was set up for
700 MCF/D. This is the only pipeline that takes Rockies gas to
southern California. It provides direct access; they don't have
to go through a local distribution company. "It is a very
premium pipeline," he added. He said at the time it was built,
they knew it would be expanded. So it was planned and done at or
below the existing toll. With the California situation, there
has been huge demand to get new natural gas supplies into the
state. In March of this year, he said, "we approached the FERC
and said, 'We have the ability in three months' time to add 135
MCF/D to the system, and we need your help.'"
MR. CARLTON said it usually takes one or two years to get a
pipeline project certificated. He added, "I think it took us
three weeks that FERC approved our project. It's the fastest
it's ever happened in the history of FERC."
2:57 p.m.
REPRESENTATIVE FATE asked what he meant that economies of scale
are difficult, yet along some of their pipeline they have created
power generation at a very minimal cost. He asked if they had
determined the cost of the small power generation along that
pipeline.
MR. CARLTON answered [most of his answer was indiscernible], "I
think if [it] can have loads on the order of 100 or 200 MCF/S, it
becomes much more feasible. It's whenever you look at your 5 to
10 MCF/D that it becomes more of a challenge economically,
especially on an high-pressure system."
REPRESENTATIVE FATE said they wanted to review some of the
assumptions to see if they could outlet the gas at high pressure
to a liquefied natural gas plant, for example, where it crosses
the Yukon River.
MR. CARLTON offered assistance on that, saying they have four LNG
production facilities on their pipeline system today.
REPRESENTATIVE OGAN asked how Williams overcomes the hurdle of
wanting to build a pipeline without owning any gas.
MR. CARLTON said that was a good question. He added, "It's very
clear to everyone including us that the producers hold the
cards." He said their goal was to find a way to work with the
producers. They are not trying to compete with them, but want to
position themselves to add significant value to this project.
CHAIRMAN TORGERSON said he looked forward to getting an update in
Fairbanks.
3:03 p.m.
SENATOR ROBIN TAYLOR, Alaska State Legislature, sponsor of SB
221, first thanked the committee for taking the amount of time
they have on this issue. He then brought attention to SB 221,
which provides for an all-Alaskan pipeline and is the only
legislation pending that would do so. His primary concern in
introducing it is jobs for Alaska, and following that, "Alaskans
need to be on the construction of any future pipeline, a partial
owner, if not a total owner of the project, so that Alaska, for
the first time, receives a true fair share of the project."
SENATOR TAYLOR noted that many have said producers and owners
have to be in agreement before any gas goes down a pipeline. He
commented, "Well, Alaska happens to be one of those owners, and
it's high time that gas was no longer locked and frozen on the
North Slope, but was freed up. And it has to get to at least a
deep water port before it can be provided to world markets."
SENATOR TAYLOR said an all-Alaskan pipeline to Valdez is not only
possible, but the permits exist today, and YPC has pledged to
contribute their permits to this project should the legislature
pass it. He commented that he was disturbed by the remarks of
Mr. Small [of Cambridge Energy Research Associates (CERA)], who
indicated that if in the future Alaska wishes to build a pipeline
to the Midwest, Alaska will have to have to be "more
conciliatory"' towards the Canadians. He stated:
The idea of having Alaska's heritage and future held
hostage by foreign governments and foreign politicos is
disturbing to me. I am comforted by the fact that we
have sufficient gas on the Slope of known reserves
today - to say nothing of what the potential reserves
are for our future - that Alaska can easily develop
both pipeline projects. That is, we can first develop
an all-Alaska pipeline following the existing corridor
and branching off probably at Glennallen and going to
the Anchorage bowl. If there's anything that will
provide long-term jobs and security for the people of
Alaska in the development of its gas resources, it is
[an] all-Alaska pipeline.
SENATOR TAYLOR said there is significant support throughout the
Alaskan community for this proposition. He also mentioned that
the liberal government in British Columbia is going to move
forward in developing gas resources off the coast of British
Columbia. Furthermore, Bolivia announced yesterday it would be
building a $5 billion, 5,000-mile natural gas pipeline and tanker
route, taking landlocked gas out of Bolivia and shipping it into
Mexico and then to California. He stated:
The rest of the world is trying to take advantage. If
we have to wait for the owners to get onboard for the
producers to be happy, for us to sucre enough support
from the Canadians that they're willing to now talk to
us about how many jobs they're going to develop, if we
wait for all those things to occur, I firmly believe
the markets are going to filled and the window of
opportunity will be lost.
SENATOR TAYLOR concluded by saying he looked forward to
discussing the all-Alaskan gas pipeline project with the
committee. [End of discussion of SB 221.]
3:09 p.m.
The committee took an at-ease.
3:40 p.m.
CHAIRMAN TORGERSON announced that the Joint Natural Gas Pipeline
Committee meeting had begun for the purpose of discussing
committee business. He noted that the next meeting will be held
in Fairbanks on August 14 and 15. He will work on the agenda.
Representative Davies will be requesting that the committee meet
at the conference room at the University of Alaska. He noted
that the September meeting will be held in Kenai but the dates
have not been set yet. The October meeting will be held in
Anchorage.
REPRESENTATIVE OGAN asked about the sound system at the Fairbanks
facilities because he has been getting reports that the current
meeting has been difficult to hear in Juneau. He also reminded
Chairman Torgerson that the Council of State Governments and the
Community Council will meet.
CHAIRMAN TORGERSON said he is not aware of the sound system in
Fairbanks, but he added that the Anchorage LIO meeting room has
never been used before; they know now to add a microphone for the
testifiers.
REPRESENTATIVE DAVIES said he hopes to secure the Board of
Regents' conference room in Fairbanks because it has a good sound
system.
CHAIRMAN TORGERSON asked members to contact him about any
particular items they want placed on the agenda for the next
meeting. He plans to finalize that agenda around August 1, and
he plans to schedule a presentation from the port authority
groups and from the expert on state ownership. He hopes to have
an update from the administration on sharing some of its ongoing
studies. He also plans to ask the FERC to send a representative
and to ask Nan Thompson from the RCA to attend so that the two
can discuss who has the authority. He found the presentations
by the FERC and RCA representatives to be confusing and
contradictory. He will send letters to them with questions to be
answered.
CHAIRMAN TORGERSON informed the committee that the second item of
business pertains to approval of committee travel to Whitehorse,
Yellowknife, Vancouver, and Edmonton to visit with their
legislative counterparts to establish a better line of
communication. He has been in contact with all of them. He just
left Calgary and set up good contacts there. He noted that Ronda
Thompson has created a preliminary schedule.
MS. RONDA THOMPSON, Staff, International Trade Office, Alaska
State Legislature, informed the committee that because they will
be traveling during the summer months, they have a better chance
to use ERA airlines and fly directly from Anchorage to
Whitehorse. Direct flights are available on Monday, Wednesday
and Friday. She suggested leaving on July 30 or August 1.
MS. THOMPSON informed members that to accomplish the goals of the
committee, they will need to spend a couple of hours in the
Yukon. It is also most important that the committee spend a fair
amount of time in Yellowknife with Ministers Kim Antoine and
Roger Allen; they have visited the Alaska legislature many, many
times. Ms. Thompson noted that elections were recently held in
Alberta; the new cabinet is very anxious to meet with the
committee and Premier Klein in Edmonton. Ms. Thompson also
mentioned arrangements made to visit with Minister Pearl
Calahasen. She said she has heard that several members of the
NEB would be agreeable to meeting as well. The new cabinet in
Victoria is only one month old, she noted. The cabinet, the new
Prime Minister of British Columbia, Gordon Campbell, and the
Minister of Energy are a lot more amenable to mending fences and
to getting to know the committee members. The airfare will cost
about $2,000 per person. Pickup and delivery from the airports
will be handled by the Canadian government.
CHAIRMAN TORGERSON clarified that the total cost per person will
run about $3,000. He pointed out that the Joint Natural Gas
Pipeline Committee has no budget, so travel costs are to be
submitted to the presiding officers upon return. He has spoken
with both presiding officers, who said they would not disapprove
travel reimbursement. He commented that he would like the North
Slope legislators to accompany the committee on the Yellowknife
portion of the trip, particularly Representative Joule and
Senator Olson. He asked committee members to let him know
whether they plan to go and then the timeline will be arranged.
The committee discussed possible dates for departure. Chairman
Torgerson tentatively set the departure date on August 6 and
asked Ms. Thompson to poll all members.
3:53 p.m.
CHAIRMAN TORGERSON said the third item of business before the
committee is the contract with a firm to monitor activities in
the U.S. House and the U.S. Senate. He proposed to
Representative Green, in his capacity as chairman of the
Legislative Council, that the committee enter into a small
contract with a firm to monitor the activities of the national
energy policy in Washington, D.C. The firm would advise the
committee when hearings will be held so that a committee member
could attend the hearings. He has selected C.J. Zane, who works
for Dyer, Ellis and Joseph, a law firm in Washington, D.C. Mr.
Zane has submitted a proposal to monitor activities at a cost of
about $5,000 per month from July through December.
Representative Green has agreed to sign the contract.
CHAIRMAN TORGERSON announced that the next issue is whether the
committee should hire a lobbying firm for activities in Ottawa
and in Washington, D.C., to represent the legislature's interests
if, and when, an energy bill starts moving. He suggested the
committee needs to take the time to go to Washington, D.C., or
else hire a lobbyist. He said he does not have a proposal
prepared, but any proposal would have to be approved by the
Legislative Council.
REPRESENTATIVE OGAN said he feels the Alaska legislature is
fairly well represented in Washington, D.C., since [former
Senator] Drue Pearce is a top advisor to the Secretary of the
Interior and Alaska's congressional delegation is in agreement
with the legislature on this issue. He questioned how much
additional money should be spent to hire consultants and
lobbyists.
CHAIRMAN TORGERSON asked Representative Ogan, or any committee
member, how many calls he got from those folks notifying him the
energy bill was being worked on during the last week. [No one
responded.] Chairman Torgerson said that was his point. He said
he is not sure whether the legislature needs anyone to lobby, but
if it did, and no committee member was available to do so, the
legislature could be in a weird position. He repeated that he
doesn't have a proposal to hire anyone. He pointed out that C.J.
Zane was chief of staff for Congressman Young. He said in a
perfect world, someone would call a committee member, but he is
concerned that no one will call.
REPRESENTATIVE OGAN said he would be happy to assign his staff to
monitor the congressional committee schedules.
3:58 p.m.
CHAIRMAN TORGERSON said he believes all staff should be
monitoring that, but his concern is that the information is not
flowing freely from Washington, D.C., to this committee. He told
members these issues need to be discussed and placed before the
Legislative Council for funding. He thought the next Legislative
Council meeting could be at least one month away, and a request-
for-proposals process would take awhile, so it could be as late
as September or October before anyone is onboard.
CHAIRMAN TORGERSON said, regarding the fiscal regime, the
committee will need a legislative number "cruncher" regarding
whether or not any money is given to the administration. He said
from what he has seen, he does not trust the administration's
numbers and would want someone to go over them. He feels the
Division of Legislative Finance could do some of the work, but he
believes the committee should hire an expert. He noted that the
producers have expressed interest in entering into that kind of
discussion, and it will be hard to do unless someone with
international status can put it together. He pointed out that
Pedro van Meurs was on contract with the administration. The
administration had requested $75,000 for fiscal regimes, he
noted, but pulled the request.
CHAIRMAN TORGERSON referred to open-season access, saying he
thought it might be settled when FERC and RCA representatives
come to Fairbanks, but he doubts it. He said this is a major
issue and DNR is a little bit squeamish about making a legal
opinion public. He surmised that the committee will have to hire
someone to take that issue on.
REPRESENTATIVE OGAN expressed interest in dovetailing the open-
season issue with the hub concept, and finding some way to
delineate complete state authority to points on the hub. That
way, if it gets to Delta, the state would have control of any new
gas sales or open seasons. He suggested there may be a way to
legally construct something along those lines to bypass FERC
authority.
CHAIRMAN TORGERSON said he isn't sure that is exactly the same;
it is similar to the FERC-versus-RCA issues. He repeated that he
was confused by the testimony from the team.
REPRESENTATIVE FATE said he thinks it is a matter of determining
whether FERC is ready to determine, for tariff principles,
whether they consider the wellhead to be literally at the
wellhead or, if they move down and have the wellhead as a new
setup, it could be called a hub and would be exempt from FERC.
He personally feels that is a stretch, but he believes the
committee should get a legal opinion on it.
4:03 p.m.
CHAIRMAN TORGERSON said he does not disagree. He noted that the
next item, ANGTA versus the Alaska [Natural] Gas Act, is also an
issue; at best, there are several opinions on how that is to be
applied. The committee probably needs some legal advice on that
also.
REPRESENTATIVE FATE commented that the committee did hear
conflicting opinions.
CHAIRMAN TORGERSON noted that it is difficult for the committee
to take formal action before the Legislative Council if it does
not have firm dates.
REPRESENTATIVE OGAN suggested asking Jack Chenoweth [of the
Division of Legal Services] to look into some of these issues.
CHAIRMAN TORGERSON said he could, but he is not an expert. He
informed the committee that Mr. Chenoweth wrote the opinions on
[SB] 164, which the Office of the Attorney General disagreed
with. He said regarding FERC issues, he would guess the
committee would need to hire a Washington, D.C., firm that
watches that committee all of the time.
REPRESENTATIVE DAVIES asked Chairman Torgerson if he has been in
communication with FERC staff.
CHAIRMAN TORGERSON said he visited with FERC department heads
when he was in Washington, D.C. They are willing to sit down and
work through the questions so the committee understands them, but
the testimony yesterday made the answers more confusing.
REPRESENTATIVE DAVIES suggested making that attempt first.
REPRESENTATIVE DAVIES asked Chairman Torgerson if he has a
strategy for evaluating the question of whether the state should
take an equity interest in any of this.
CHAIRMAN TORGERSON said, other than what Commissioner [Pourchot]
talked about, he sponsored a bill that the legislature passed, a
bill that had a fiscal note.
REPRESENTATIVE DAVIES asked Chairman Torgerson if he would rely
on that.
CHAIRMAN TORGERSON said the law required DNR to report and share
the data with the committee every 30 days. All of the data was
supposed to come to the committee. One of the problems the
committee is having with the reports is that the committee is
given a summary, but it is not being told how the conclusions
were made. He explained that is the problem with the fiscal
regime: the committee does not know the underlying methodology
or components of DNR's decision making. He noted the report is
due back to the legislature on January 31. DNR has hired CH2M
Hill to do the risk assessment portion, as well as a New York
financial firm that does a lot of consulting on pipelines.
4:07 p.m.
REPRESENTATIVE GREEN noted the key is to get a monthly update
because January 31 will be a late date for the legislature to be
getting information.
CHAIRMAN TORGERSON said he believes the committee should request
that the Legislative Council at least go forward on fiscal
regimes and the open season access issues. He noted he missed
the model on GTL, LNG and Alcan and over-the-top pipeline routes.
When the Department of Revenue made their presentation, they
actually had another one, which he thought the committee would
see, which was all four modeled out and netbacks on all four of
those. He suggested the committee could ask the Department of
Revenue to show it that model. He stated that his guess is that
the committee will eventually end up hiring an economist to
advise the legislature on the numbers so that the legislature can
look at this from its perspective.
REPRESENTATIVE OGAN commented the committee is running a parallel
course with the administration.
CHAIRMAN TORGERSON said unfortunately, that is probably true.
REPRESENTATIVE FATE felt it is true and is caused by the fact
that the administration is not communicating its findings to the
legislature. The Legislative Budget & Audit (LBA) Committee
broke loose a good portion of the funds the administration
requested, $1.5 million, $923,000 plus $180,000. It is very
clear that the Pipeline Coordinators' Office will be doing some
of the things the committee is discussing: trying to get
information.
CHAIRMAN TORGERSON said that his recommendation to LBA is to fund
studies through the committee, rather than the administration.
However, the CERA study is a little different. CERA offered all
legislators the password at one time so that they could access
daily reports. He said that LBA turned down the rest of the
requests for the labor study and for hiring lawyers [to monitor
activities in] Washington, D.C., and Ottawa. So, essentially,
the committee and the administration will run parallel courses
because the administration will find the money to do those
things.
CHAIRMAN TORGERSON continued, saying the governor has a $.5
million contingency fund for these sorts of expenses. He had the
CERA contract; instead of paying it out, however, he pumped
$180,000 over to the Department of Revenue, so that gave him
another $180,000. Again, if the administration wants a study
done, it will find the money, but he doesn't believe LBA should
fund it and then have to beg for the information. He noted that
most of the money LBA dealt with the previous evening was pre-
application money, and it is the legislature's match, the 95:5
portion. As much as he doesn't like to give them anything, they
do need desks, telephones, and so forth.
REPRESENTATIVE GREEN remarked, having served on the merger
committee, that he finds the amount of information missing to be
incredible. Although he opposes this duplication of efforts, he
believes it is necessary because the legislature is not getting
information from the administration; he believes the legislature
could be duped into the wrong decision. If the legislature gets
the information six or seven months from now and is expected to
make a decision, he believes the legislature would be doing it
blindfolded. The studies will be costly, but the project will be
extremely important to the state for 50 years.
CHAIRMAN TORGERSON agreed this project will involve billions and
billions of dollars, so if the legislature has to spend a couple
of millions of dollars, he will not oppose it. He pointed out
that the administration will have to spend a lot more than that;
it spent $1.5 million on the merger. He stated that it doesn't
bother him to say he doesn't know the answer and that they should
hire an expert. The open-season and open-access issues are huge
and recently surfaced. He said he has spent a lot of time on the
fiscal regimes, but it has not been in relation to the gas side.
Chairman Torgerson said since a Legislative Council meeting is
not planned, he will not ask for a motion, but if this comes up
before the Fairbanks meeting and the Legislative Council meets,
he will notify members and set up a teleconference.
REPRESENTATIVE GREEN said, should the committee decide that one
or more of these issues needs a special study, it goes beyond his
signatory authority and he fears the committee will not find
problems until the middle of September.
CHAIRMAN TORGERSON remarked that the committee will need its own
fiscal analysis of the severance tax. The producers have said
they would like to have that cleared up by the end of the year.
At any rate, the committee should have the models. Initially,
the committee can get that from the Department of Revenue, but
the larger question on Alaska's severance tax or fiscal regime is
one that only five or six people in the world can answer. The
committee needs to hire one of those experts to compare Alaska's
situation to this.
CHAIRMAN TORGERSON went on to say he is sure the recommendation
will be that Alaska needs to have a more progressive system in
which price is added as a component to the formula. In that way,
if there is 3 million cubic feet per day, for example, it
wouldn't be charged per well, but anything above that should be
price-sensitive. So at $5 per barrel, instead of making $500
million, the state would make $800 million; at $2, the state
would make nothing. That same recommendation has been made
whenever anyone has looked at Alaska's fiscal regime.
4:17 p.m.
CHAIRMAN TORGERSON announced that the committee would take a
recess until the public testimony period.
4:26 p.m.
CHAIRMAN TORGERSON called the meeting back to order for the
purpose of taking public testimony.
MR. SCOTT HEYWORTH, Director, Our Gas, Our Future, said he is so
impressed with the hard-hitting questions the committee has been
asking. He offered his sincere appreciation for the committee's
efforts. He noted that he had three points to make. First, he
has not heard any good news from the industry or about anything
during the last two days. However, he has heard two things that
concern him. He heard Mr. Marushack discuss how the state will
make tens of billions, which tells him that the oil industry will
make hundreds of billions.
MR. HEYWORTH said second, the newspapers, specifically the
Anchorage Daily News and the Journal of Commerce, have been
reporting a price of $10 billion for the Canadian highway
pipeline. Yesterday, when Commissioner Pourchot made his report,
he set the cost at $15 billion [according to page 10 of his
report]. This morning, Mr. Conrad testified that the cost of
this project is $15 to $20 billion. In 48 hours, the price of
the pipeline doubled. Backbone estimated six months ago a cost
of $16 to $20 billion. His group has been talking about $15 to
$20 billion for the entire nine months of its existence.
Everyone denied it could cost that much, yet today that amount is
on the record. He surmised that the cost will be closer to $25
billion six or eight years from now.
MR. HEYWORTH noted that YPC has estimated $6 billion. He further
noted that Mr. Jeff Lowenfels has never changed his number; he
stays with good, hard facts, while the industry, and sometimes
the administration, has been making the argument that LNG to
Valdez is uneconomical because it will cost too much. He
questioned how - if at $6 billion it was uneconomical - it will
be economical at $20 billion.
MR. HEYWORTH stated that his third point is the most critical.
Mr. John Ellwood of Foothills said the U.S. and Canadian
governments have not sat down and talked yet. But Mr. Ellwood
emphasized that he believes the Canadian government will abide by
the ANGTA treaty. He noted that is significant because the
Canadians in the early 1980s built the Southern pre-built as part
of the ANGTS agreement. They built their part of the pipeline
for 2.6 BCF, [under] ANGTA treaty law. Now, the governor and
industry are suggesting 5 BCF, according to Mr. Roger Marks.
That is illegal. Canada is going to abide by the treaty. He
questioned why Canada would want 4 BCF of Alaska gas coming down
through their field when they have Canadian gas to explore. He
said he understands their point.
MR. HEYWORTH said he'd polled residents of Anchorage three weeks
ago. The poll results show 65 percent favor Valdez, 26 percent
favor the highway, and 10 percent are undecided. He noted that
40 percent of the voters reside in Anchorage. Alaskans do not
favor the highway project, and it will take an incredible
turnaround for anyone to be behind the Canadian route.
MR. HEYWORTH concluded by saying he supports LNG to Valdez. He
asked the committee to work together with the administration to
get a best interest finding for the citizens of Alaska to
determine the best project. He noted that this project will
bring revenues to Alaska for 50 to 70 years; this project is a
very important responsibility.
CHAIRMAN TORGERSON asked the next witness to testify.
MR. JERRY McCUTCHEON, representing himself, said none of the
proposed gas lines are feasible. The situation is worse today
than 20 years ago. Inflation does not work in reverse - there
may be better plants, but it will not be much cheaper to put the
pipe in the ground. He suggested the committee get the Van
Coolin (ph) report from 1974. In that report, the author
projects various gas withdrawals and the effects on the
reservoir. Mr. McCutcheon said:
The interesting part to that is about as much oil that
you recovered out of that - Prudhoe Bay - Van Coolin
predicted it could be recovered in the first place; so
what the effects will be [indisc.]. So [indisc.] round
about public document 95-73, on page 570, said Prudhoe
Bay [is] producing 15 billion barrels - and this was
1977 - while they were telling us 9.6 billion. They
told Congress 15. Well, that's not real [indisc.] back
in those days. Well, we are headed for the 15, and
it's just not 15 because the OOYP has grown a bit.
The producibility of Prudhoe Bay, if we don't take the
gas on it, is about 20 billion, so we are a little more
than halfway there [indisc.]. Projections of what
would happen to the reservoir when the high amounts of
gas that you can take out of it: remember one thing -
it is absolute, everybody in the oil patch - the
highest recovery from any oil reservoir occurs when it
is produced at or above a bubble point [indisc.]
discovery pressure. Prudhoe Bay was at 4,400 pounds;
we're less than 3,400 pounds now. It wasn't supposed
to get below 36, I think something like that - it's
just going on because there is no control over it.
[Indisc.] raise the proportionate amount of pressure.
The money is in the oil.
If you really wanted to do something, build a stupid
gas line from MacKenzie delta to Prudhoe Bay and shove
20 TCF of gas down Prudhoe Bay. That will get you your
oil. Then, following that, gather up all of the field
fuel, the power plants and the rest of the stuff at
Prudhoe Bay and stuff it down there. For every volume
of gas that you [indisc.] in a power plant, you produce
9 volumes of injectable gas. That will help the
pressure and stop the critical pressure decline and may
even reverse it.
I've heard some of the numbers up there, but it's hard
to find out what it [indisc.] fuel catch the exhaust
gases from and shove them back down in Prudhoe Bay. No
one can get a gross number of how much of the fuel is
being burned up there.
That's all. Go get yourselves a [indisc.] and consider
repressurizing Prudhoe Bay. Remember, on the Kenai
Peninsula they had absolutely no use for gas and they
had Swanson River, so they decided to go for gas
injection and then they decided they didn't want to do
a water [indisc.], but they did one anyway. Anyway,
the main thing that they did is that they went over to
the Kenai gas field and they leased gas from Union
Marathon to stuff down there. They leased it for 10
cents an MCF.
About ten years ago, with Chevron, I think, or maybe
it's longer now, Chevron was still running it - Union
Marathon came to Chevron and said when are we going to
get our gas back? We in our wildest dreams never
thought that you would [indisc.]. Well, we don't see
any; we're done with it. In order for Union Marathon
to get their gas back, they had to buy the damn
[indisc.]. Think about it: we've lucked out twice.
There was no use for the gas when the Swanson River was
found. There was no use for the gas for Prudhoe Bay.
Everything else [indisc.].
MS. THERESA OBERMEYER, representing herself, expressed concern
about the nomination of Ben Stevens to the legislature and
testified on other matters unrelated to the gas line.
There being no further testimony or business to come before the
committee, CHAIRMAN TORGERSON thanked participants for attending
and adjourned the meeting at 4:40 p.m.
| Document Name | Date/Time | Subjects |
|---|