01/21/2004 03:35 PM Senate RES
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+ teleconferenced
= bill was previously heard/scheduled
ALASKA STATE LEGISLATURE
SENATE RESOURCES STANDING COMMITTEE
January 21, 2004
3:35 p.m.
TAPE(S) 04-1, 2
MEMBERS PRESENT
Senator Scott Ogan, Chair
Senator Thomas Wagoner, Vice Chair
Senator Fred Dyson
Senator Ben Stevens
Senator Ralph Seekins
Senator Kim Elton
Senator Georgianna Lincoln
MEMBERS ABSENT
All members present
COMMITTEE CALENDAR
HOUSE CONCURRENT RESOLUTION NO. 10
"Relating to restoration of riparian habitat that is vital to
the fisheries resources of the state."
BILL HEARING POSTPONED
SENATE BILL NO. 241
"An Act making an appropriation to the Alaska Natural Gas
Development Authority; and providing for an effective date."
HEARD AND HELD
SENATE BILL NO. 247
"An Act amending the definition of 'project' in the Act
establishing the Alaska Natural Gas Development Authority; and
providing for an effective date."
HEARD AND HELD
PREVIOUS ACTION
BILL: SB 241
SHORT TITLE: APPROP: NATURAL GAS DEVELOPMENT AUTHORITY
SENATOR(s): THERRIAULT
01/12/04 (S) PREFILE RELEASED 1/2/04
01/12/04 (S) READ THE FIRST TIME - REFERRALS
01/12/04 (S) RES, FIN
01/21/04 (S) RES AT 3:30 PM BUTROVICH 205
BILL: SB 247
SHORT TITLE: AK NATURAL GAS DEV. AUTHORITY INITIATIVE
SENATOR(s): WAGONER
01/12/04 (S) PREFILE RELEASED 1/2/04
01/12/04 (S) READ THE FIRST TIME - REFERRALS
01/12/04 (S) RES, FIN
01/21/04 (S) RES AT 3:30 PM BUTROVICH 205
WITNESS REGISTER
Senator Gene Therriault
Alaska State Capitol
Juneau, AK 99801-1182
POSITION STATEMENT: Sponsor of SB 241
Mr. Harold Heinze
Alaska Natural Gas Development Authority
th
411 W. 4 Ave.
Anchorage, AK 99508
POSITION STATEMENT: Supports SB 241
Mr. Nels Anderson, Jr.
Dillingham, AK
POSITION STATEMENT: Supports SB 241
Mr. Paul Fuhs
Backbone 2
No address provided
POSITION STATEMENT: Supports SB 241
Mr. George Briggs
Dillingham Chamber of Commerce
Dillingham, AK
POSITION STATEMENT: Supports SB 241
Mr. Spud Williams
Dillingham, AK
POSITION STATEMENT: Supports SB 241
Mr. Ray Scandura
RPC Energy Services
Dillingham, AK
POSITION STATEMENT: Supports SB 241
Mr. Steve Porter
Deputy Commissioner
Department of Revenue
PO Box 110400
Juneau, AK 99811-0400
POSITION STATEMENT: Answered questions about SB 241 and SB 247
but took no position
Ms. Mary Jackson
Staff to Senator Tom Wagoner
Alaska State Capitol
Juneau, AK 99801-1182
POSITION STATEMENT: Presented SB 247 for the sponsor
ACTION NARRATIVE
TAPE 04-1, SIDE A
CHAIR SCOTT OGAN called the Senate Resources Standing Committee
meeting to order at 3:35 p.m. Senators Wagoner, Dyson, Seekins,
Ben Stevens, Lincoln Elton, and Chair Ogan were present. He then
introduced staff Linda Hay, Shosh Seligman, and Chris Fannin. He
announced the committee would take up SB 241.
SB 241-APPROP: NATURAL GAS DEVELOPMENT AUTHORITY
SENATOR GENE THERRIAULT, sponsor of SB 241, informed members
that SB 241 would appropriate the remaining $2.15 million of the
Alaska Natural Gas Development Authority (ANGDA) board's request
for $2.5 million made last year. He told the ANGDA board members
to be prepared to justify the need for the appropriation to the
legislative committees. He noted that [after ANGDA was created
by initiative] last year, the Legislature appropriated $150,000
to the ANGDA board to pull the organization together and make a
proposal for additional money. He worked with members of the
board and the administration to secure another $200,000 from the
Legislative Budget and Audit Committee to undertake a benefit
analysis of in-state use. His primary interest is to quantify
the economic benefit to Alaska citizens if North Slope natural
gas is made available through any delivery system. He believes
that information would be useful to the Legislature regardless
of the entity involved in a natural gas project. ANGDA has
entered into a contract to gather that information with Northern
Economics, Inc.
SENATOR THERRIAULT told members that if the Legislature is asked
to enact tax deferrals or relief of any kind that would cost the
citizens of the state, the Legislature should know the value
that will accrue to the state to offset that cost. He believes
the Legislature should ask ANGDA board members to be prepared to
determine how it can partner with any project to improve the
project's economics through ANGDA's tax exempt status if the
state receives a proposal to take the resource to market
overland through Canada. He would like to know whether ANGDA can
help with the economics of an overland project. He suggested
that ANGDA might own the line from the North Slope to Delta to
tidewater, thereby lowering the cost of the infrastructure. He
said several legislators from the Southcentral area of the state
are interested in accessing natural gas, which ANGDA board
members have discussed. That question could also be part of an
in-state benefits analysis.
SENATOR THERRIAULT told the committee that the ANGDA board
provided a spreadsheet, with a timeline, that describes how it
proposes to use the appropriation. He said as Senate President,
he referred the bill to the Senate Resources and Finance
Committees. He expects the Senate Finance Committee to focus on
the cost justification. He asked that the Senate Resources
Committee focus on how the ANGDA entity can be used to help with
the economics of any proposal, how it can work as a stand-alone
project and how much that will cost. He informed the committee
that he and ANGDA board members were available to answer
questions.
CHAIR OGAN announced that Senator Seekins joined the committee a
while ago. He then noted that committee members had no questions
of the sponsor and asked Mr. Heinze to testify.
MR. HAROLD HEINZE, Chief Executive Officer of ANGDA, was
testifying before the committee via teleconference from
Anchorage. He told members he has been employed by ANGDA since
July of 2003. He introduced ANGDA board members Bob Favretto,
Dan Sullivan, John Kelsey, Scott Heyworth and Andy Warwick (who
was participating via teleconference from Fairbanks). He
explained that ANGDA is a public corporation of the state,
meaning it functions in some ways as a state agency and in other
ways as a private agency. He referred to a handout that
justifies ANGDA's $2.15 million request and made the following
comments about its three main points:
...the benefits to the State of Alaska and basically
the ballot initiative that set up the Alaska Natural
Gas Development Authority passed by a very large
percentage. If you ask people what they voted for and
why they voted so strongly for it, one of the two
answers you get is that the people lack the confidence
that whatever is done with the North Slope gas - that
it would derive direct benefits to Alaska.
So, one of the first focuses of the board was to
identify those potential benefits and you should have
in front of you somewhere an exhibit that says
'Benefits to Alaskans' and ... if you look at that
chart in some detail, you will find that we have
identified ways that Alaska gas could be directly
impacting probably 99 percent of the population of the
state. We think that is an extraordinarily important
focus for whatever we do.
What we found is that, as we looked at those potential
uses of gas in the state, that there was not enough
opportunity in terms of that volume to assure that the
project or delivering that gas was economic.
Basically, while Alaska uses are important, they are
so small in volume you cannot construct any major
project that delivers them because of the small size.
We were able then to kind of look at how a project
like this, in terms of an export project, would work
with those Alaska benefits and that synergy is very
important and that was what led us to look at an
export project as our focus. Once you start to look at
that export project, then a lot of the benefits became
easy to identify and frankly become fairly easy to
deliver.
The second thing we did in the benefits area is that
we realized that the current analysis of major
projects, in particular the gas projects in Alaska,
was very limited. Generally people have talked only in
terms of investor type measures - rate of return or
return on investment or even present worth. And those
are fine for the people that are actually investors in
the project but they do not portray in anyway the
value to Alaska of a project.
So people then turned around and they started to add a
measure of wellhead value or basically revenues to the
state as a measure of the benefit. And what we found
was that that really is a very unsophisticated measure
of the total impact on Alaskans of these kinds of
major projects. So we have contracted for - and
working away already - is a contractor building a
transparent publicly usable spreadsheet model that
will integrate all of the benefits, including the
economic impacts, the job impacts, the reduced cost of
heating homes and so on, etcetera - everything we can
think of that is a potential benefit of one of these
projects and integrate it into one measure. When that
project is finished in the middle of March, then that
result will become available for use in analyzing any
and all projects.
We will certainly continue on to do further work with
the model to input, in particular, specific benefits
we think we can attribute to a group like the
Authority. For instance, the Authority has the ability
through contracting, through work rules and other
things to cause things to be built with a higher
Alaska hire percentage than maybe some other entities.
And we want to understand what the impact of that is
in terms of total benefits to Alaska. We have every
reason to believe it will be significant but as we
finish our work in June, that full result will become
available.
The second basic area that ANGDA makes a contribution
in has to do with what I call broadly the business
structure issues. This is to recognize that one of the
very powerful things we discovered very quickly, as we
started to look at how the Authority could do its
business and what powers and opportunities it was
given, was we realized in performing a public service
of transporting a public resource, was tax exempt. And
we then have looked at business structures that will
allow us to pass that tax avoidance on to lowering the
cost of service of delivering the gas. That
contribution is probably more significant than any
other single factor that has ever been discussed in
terms of making these projects work and I'll show you
some numbers in a little bit that maybe will
illustrate how much that is but I would ask you to
realize that is an extraordinarily important and
powerful tool. It is a tool that can be applied not
only to the LNG project, but it is a tool that can
influence the marketability of North Slope gas to any
market under any circumstance.
Now there is a lot we have to understand about the dos
and don'ts of how to keep that tax advantage. But I
assure you it is extraordinarily important in terms of
the totality of what the state has to contribute
towards bringing that public resource to market.
We also obviously, as part of that, will look at the
funding and a large number of other issues of who we
can relate to, how we can relate to them, and how best
to structure our business. These are issues that are
of billion dollar impact so we have tried to hire some
of the best people we can find anywhere to advise us
on the structure issues.
And then finally, we talked specifically about the
project that we are working on, which is an export
project. I have provided in the information I gave you
a table that shows the ANGDA project concept and
costs, which shows basically four different project
elements: a treatment plant on the North Slope, a
pipeline, a liquefaction plant, and the LNG tankers.
The total cost of those elements is $12 billion.
Again, this is based upon fortunately a lot of public
work that is available as a result of Yukon Pacific's
efforts and frankly because of some results that have
been released by other people. It does not represent,
at this point, any detailed engineering. There are a
lot of improvements, we believe, that can be made in
the quality of that cost estimate. However, our
opinion at this point is that the estimate is probably
high rather than low and, again, each of the
individual elements there is part of our funding
requirement to refine the quality of those estimates
and, in particular, look for the opportunities for
cost savings.
In this case, the money you'll see is barely over a
million dollars to accomplish that. You all are aware,
for instance, the producers have recently done a
study. They spent over $100 million to look at a high
quality cost estimate for their project. To even do
this estimate in a feasibility phase if I was back in
[the] private sector, I would estimate the cost to do
this at 10 or 20 or 30 times more than what I've
allowed for here. One of the reasons we can do this
for a lesser cost frankly is that there is a lot of
information available to us. Yukon Pacific has been
more than willing to share information with us. We
also get some very free expert advice from a company
called Mitsubishi and that allows us to place
confidence in some of these numbers without having
spent a lot of money.
3:55 p.m.
If you take the $12 billion as a starting point, and
you start to look at the economics of the project, the
first calculations I made are illustrations on a table
called 'NOTIONAL Cost of Service Comparison' and these
numbers are a single value expression of the cost of
moving North Slope gas ... to a port in, say, the West
Coast. The first entry in the table is $2.90. That is
the number I would calculate if I was a commercial
business investing in a high risk project such as this
kind of a transportation project and expecting to earn
a fairly high rate of return. And what I got was
$2.90.
Now the way you use these kinds of numbers is - to get
you a rough feel of where you are in terms of the
market and everything else - if, for instance, I was
to assume the market at the wellhead price was $1, I
would add $1 to the $2.90 and that would say the value
delivered or the value I've invested in getting the
gas to market in, say, Long Beach, is $3.90 - $2.90
plus $1. Well, if you looked at the marketplace in
Long Beach today, it would be something over $5. Well,
you yell Hallelujah at that point because that's a
good deal because you're getting $5 for something
that, including your return on your investment and
everything, you spent $3.90. Unfortunately the problem
is that people don't project that the price in Long
Beach will be $5 for an extended period of time. The
price they do project is much more in the range of $3
to $3.50. And, again, if you ask a lot of experts and
poll a lot of folks, very few people predict prices
below $3 but most would not predict prices over $3.50
in the long term.
So if I was a commercial company, I would conclude,
based on [those] kinds of numbers and that kind of
thinking, that the project is not economic. That is
what basically ConocoPhillips told us in July of last
year and that's what led to this calculation because I
said somehow that isn't reflecting what the Authority
would do.
That leads to the second column. As a public service
transporting the gas, we are not taxable. If you
eliminate the tax, the number $2.90 drops to $2.20.
And now if you add a $1 wellhead value to that and
it's $3.20 sitting in the port of Long Beach,
[indisc.] I'd be very happy today with $5 but I am
very resilient even in a world where prices are
ranging between $3 and $3.50. And then I did one more
calculation to try and test what at the extreme - and
I say at the extreme the Authority could do - if it
wanted to lower its cost structure to the absolute
lowest number it could visualize. And I made the
assumption that instead of building a pipeline, we're
building a highway for gas, because when we build a
highway in the state of Alaska, we don't ask ourselves
the rate of return. We believe that the economic
activities we generate by connecting A and B is worthy
of the investment and all we require is that we be
able to service the debt of the bond that we built the
highway with. And if we took that approach on the
pipeline, now our cost of service number drops to
$1.65. And that is important because when we look at
all the other projects that we would have to compete
with, $1.65 is superior to all those projects.
So that says, at the extreme, the Authority has the
ability to compete even in a highly competitive world,
even in a world where we have some disadvantages. But,
the tremendous advantage of an infrastructure approach
or approach that could not pay federal income tax is
very significant.
4:00 p.m.
CHAIR OGAN said he has listened to a lot of energy analysts at
Energy Conference meetings this year and heard that a lot of gas
is closer to tidewater with a much cheaper wellhead price. He
asked about the cost of building a liquefaction plant.
MR. HEINZE said in this case, ANGDA included a cost of $4
billion. However, a modern-designed plant would cost less.
CHAIR OGAN said he was told the cost was about $1.5 billion but
suggested the cost may be cheaper in some other foreign
countries. He then stated, "The overriding consensus of all the
talking heads in the oil industry and the analysts is that the
world is awash in LNG right now." He expressed concern that a
stand-alone project might not be as economical as a project
designed around the hub concept. He said what is most important
now is that ANGDA justify why it needs the money.
MR. HEINZE stated that ANGDA is very sensitive to the fact that
the LNG project is one that would have to compete in the market.
However, that can be said about any project that moves Alaska
gas to market. The [state] has not had any extensive discussion
about the market penetration issues related to any of the
projects. He pointed to two key slides he included in ANGDA's
briefing package. One shows the Asia-Pacific key LNG suppliers,
which proves Chair Ogan's point that a lot of gas is available.
That gas is controlled by entities such as Shell, ExxonMobil,
BP, Chevron Texaco and ConocoPhillips. He told members the five
"mega-majors" have, by merger, made it clear that they intend to
be very dominant factors in LNG. Within the last month,
ExxonMobil and ConocoPhillips announced major investments in
Qatar. In addition, BP has announced major supplies from
Indonesia to the West Coast. The market is very dynamic and
competitive.
MR. HEINZE said the basic fundamentals of what he is trying to
describe are illustrated on the next table, entitled 'Estimated
Cost of Service Comparison to the West Coast of North America,'
produced by ConocoPhillips. ConocoPhillips broadly explained how
it calculated the numbers. The table shows the prices delivered
from various countries to the West Coast vary from $2.20 at the
low end to $2.90 at the high end for Alaska LNG. He said he has
already discussed how ANGDA can very successfully compete with
any of those prices. He said he is not prepared at this moment
to prove that but the information available provides enough
insight with which to determine that ANGDA has the opportunity
to compete. The people who will ultimately make that judgment
are not in Alaska; they are most likely the bankers who will
decide whether to loan the state the money and they will provide
the test of whether the project economics are there.
4:05 p.m.
SENATOR DYSON asked Mr. Heinze to address the problems
associated with the Jones Act and the ability to build, buy or
rent tankers in this world market.
MR. HEINZE said that ANGDA has taken the view that the Jones Act
is an issue that must be dealt with. It creates a problem in
that the portion of gas shipped to the West Coast must move in
more expensive tankers. The question of how much more expensive
those tankers will be is open. The Jones Act clearly mandates
that the tanker hulls must be U.S. built; it is also clear that
the tankers' interiors could be installed at a foreign shipyard.
ANGDA has looked at ways to reflag some of the older U.S. built
tankers and at other logistical approaches to the problem. He
offered to furnish the committee with papers made available to
ANGDA by the Attorney General's Office that illustrate the range
of solutions available. He said he has not concluded which
solution is best. He pointed out:
In any case, the Jones Act impacts $2 billion of the
$12 billion investment and even when I paint the worst
case of the Jones Act, it won't add but a half billion
dollars to the cost estimate ... We don't have to have
all the tankers be from American shipyards.
He said he does not see the Jones Act issue as threatening the
economic viability of the project.
CHAIR OGAN asked Mr. Heinze if his assumption of $1 is a price
the gas producers would be willing to accept.
MR. HEINZE said he would not negotiate price in public for many
reasons. In addition, ANGDA was given the authority to buy and
sell gas if that is necessary. At this point, ANGDA has not
determined, as a matter of business structure, whether it would
be a transporter of gas or a buyer and seller of gas. He
referred to the conceptual schedule and pointed out that one of
the first things to happen when ANGDA determines feasibility is
that an open season would be declared. ANGDA will determine
whether it needs to be a buyer and seller of gas only after that
occurs. It is possible that ANGDA could propose such a great
project that all gas owners would rush forward, requiring ANGDA
to consider expanding the gas line. He said he used $1 because
of the ease of the arithmetic but he has reason to believe the
producers turned down an offer of 75 cents and, because $1.35
showed up in the national energy legislation, he believes that
is the high number an investor would consider in a risky
project. If ANGDA were to offer a price for a no-risk project,
he suspects it would be lower than $1. That is how he would
approach the problem if ANGDA were the buyer.
CHAIR OGAN said he has been hearing, "Build it and they'll sell
you the gas."
MR. HEINZE said the project schedule illustrates some of the
more project-oriented steps necessary to move through a
feasibility phase that allows one to obtain funding. The first
step involves the $2.5 million appropriation that will pay for
the feasibility study to be completed by June of 2004. That
study will provide enough information from which Governor
Murkowski, the Legislature and the public can determine whether
this project is worthwhile. If the project is deemed as such, a
series of things will happen over the subsequent 24 months.
ANGDA would sell $200 million worth of financial instruments to
investors who are willing to accept a lot of risk. The $200
million would be used to determine who wants to ship on the gas
line, the details of the design, the necessary financial
arrangements, the required permits and other information to
present to the investment banks who do not want to take risk and
would sell $10 million worth of bonds.
MR. HEINZE said if ANGDA receives this appropriation, its
milestone will be the June report because unless ANGDA, Governor
Murkowski, the Legislature, and the public see the project as
feasible and want to go forward, there will be no way to raise
money.
SENATOR LINCOLN asked Mr. Heinze if ANGDA has developed any
criteria to be used by the four groups to determine the
feasibility of the project. She also asked whether his reference
to the public means he is proposing that the question be put
before the voters.
MR. HEINZE said the bill contains a list of 11 requirements to
be addressed in the development plan. He believes the list
contains the kinds of things necessary to use as a decision-
making tool. Regarding feedback from the public, he believes the
governor and Legislature will seek feedback from their
constituents. In addition, any broad consensus shows up quickly
through the media. In addition, ANGDA has considered issuing a
grubstake bond certificate and offering Alaskans the opportunity
to participate in the high-risk investment group. He said a
recent poll conducted by a local television station revealed
that 40 percent of those polled believe the gas line is the most
important issue before the Legislature this session.
SENATOR LINCOLN asked how ANGDA proposes to get the approval of
the Legislature.
MR. HEINZE said if Governor Murkowski and the Legislature
believe this to be a very important topic, they might convene a
special session. He then said the last part of his presentation
involves the funding plan, which is broken into three major
categories. The ANGDA category represents the cost of the
Authority itself. The business contract category is comprised of
contractors who will answer the business related questions
regarding taxation, marketing, financing and the economics. The
last category represents those contractors that would be looking
at project related issues. He noted ANGDA has already spent the
$350,000 it was authorized to spend on contracts. A minimal
amount of the additional $2.15 million would go to ANGDA itself;
the vast majority will be spent on contracts, primarily for
engineering design. He said the contract money would be spent by
June of this year. The business contractors will provide advice
that is relevant to any project, any structure, and any business
aspect of ANGDA. The project contracts will be a little more
specific and will focus on the design aspect and the route to
Valdez.
4:20 p.m.
SENATOR LINCOLN said she was just notified that Governor
Murkowski will be holding a press conference tomorrow on the
natural gas pipeline. She asked if that press conference is in
conjunction with what ANGDA is doing.
MR. HEINZE said he knows no more than Senator Lincoln and
presumes the press conference is about potential sponsors of
another gas pipeline. He emphasized that ANGDA, since its
inception, has looked at ways to make its project fit with a
highway project; it sees itself as compatible and not in
competition with a gas line that follows the highway route.
TAPE 04-1, SIDE B
CHAIR OGAN announced that he expects to receive information from
the Alaska Oil and Gas Conservation Commission (AOGCC) next week
on the effect of the drawdown on gas from the Prudhoe Bay unit.
He asked committee members to review that information. He then
noted that Senator Elton joined the committee some time ago and
asked Mr. Anderson to testify.
MR. NELS ANDERSON, Jr., thanked Senators Therriault and Wagoner
for introducing SB 241 and SB 247. As a supporter of the
initiative that created ANGDA, he appreciates the fact that the
Legislature is following through on that initiative. He
expressed confidence in Mr. Heinze's ability to move this
project forward; he has diligently moved ahead despite the fact
that ANGDA has not been adequately funded. ANGDA needs all of
the support it can get as it presents an opportunity for all
Alaskans to lower their costs of energy and it will provide
jobs, especially in Bristol Bay. In addition, it will bring new
revenue to the state treasury, benefiting schools and
communities.
MR. PAUL FUHS, representing Backbone 2, told members that
Backbone 2 is a citizen organization dedicated to the
expeditious development of Alaska's North Slope gas reserves in
a way that would provide maximum benefits to Alaskans. Backbone
2 is made up of past and current political leaders, union and
municipal representatives and ordinary Alaskan citizens.
Backbone 2 will be publishing a series of full-page ads and will
be launching a website.
MR. FUHS said that Backbone 2 sees potential benefits to public
ownership of the project. Almost every other jurisdiction in the
world that controls its resources participates in similar
projects in an ownership fashion to provide more benefits to its
citizens. In Qatar, ConocoPhillips agreed to a 30 percent take
while Qatar will receive 70 percent. He said it is hard to
imagine that ConocoPhillips would not be willing to participate
in some way with one of the states in America. Backbone 2
believes one of the main benefits of the ANGDA project is that
it could actually be built. The heads of ConocoPhillips, BP and
ExxonMobil have recently stated that the Canadian highway
project is not economically feasible without price subsidies. He
asked members to take that into consideration when it decides
whether to take the stranded gas applications seriously.
MR. FUHS said a few companies have shown that the ANGDA project
could generate $1 billion per year for Alaska, based on a 12
percent rate of return. The oil companies say that is not
enough, they want a 15 to 20 percent return. He said legislators
need to decide whether $1 billion per year is enough for Alaska
in its current fiscal environment. The choices, if the state
cannot raise revenues through resource development, are taxes,
loss of permanent funds and further reduction of government
services. He said if LNG can be transported to tidewater, it
could be moved around the state. At a recent presentation in
Anchorage, Enstar said the last contract it signed resulted in a
14 percent increase in gas in Southcentral and that in five
years it will be cheaper to import LNG from Indonesia to Cook
Inlet than to buy from the producers in Cook Inlet.
MR. FUHS said it is not unusual for governments to be involved
in gas projects these days. Several countries and the states of
Wyoming and Georgia formed authorities similar to ANGDA to build
projects that the private sector would not build, especially in
the area of transportation. He said the funding for ANGDA could
also help provide some of the analysis that Senator Ogan
included in his bill, SB 271, in terms of potential financing
for a portion of the Canadian line. He pointed out ANGDA's tax
exempt status will provide a 30 percent reduction in income tax.
The ANGDA initiative was written to give ANGDA the flexibility
to partner with the private sector. He said he provided members
with the results of Proposition 3 by election district to show
how their constituents voted on the initiative. He asked members
to respect the will of their constituents and support this
legislation. He added that the highest wellhead price,
worldwide, that Backbone 2 has been able to find is 85 cents in
Trinidad so $1.35 is outrageously high. He repeated that ANGDA's
model is based on $1.
CHAIR OGAN commented the wellhead price contracts are not public
information.
MR. FUHS agreed and told members that BP complained because it
had to pay too much at the wellhead for its LNG project in
Trinidad so the information was published in a trade
publication, which is where Backbone 2 found it.
CHAIR OGAN questioned how Backbone 2 would know that the price
isn't higher elsewhere.
MR. FUHS said at the Asia Pacific Conference held in Anchorage,
a few different analysts from Asia posted wellhead prices. He
said it is his understanding that Mr. Heinze plans to contract
with Wood-Mackenzie for information on international projects.
MR. GEORGE BRIGGS, Director of the Dillingham Chamber of
Commerce, said the Dillingham business community is very
concerned about the cost of energy. West coast communities
experience a very high cost of energy, which translates to added
expenses to citizens and high energy costs make it very
difficult to attract new business. If ANGDA is funded, it can
provide information about a better energy delivery system to
communities. The Dillingham Chamber of Commerce supports this
legislation.
CHAIR OGAN asked Mr. Griggs if Dillingham is planning to ship
LNG in.
MR. BRIGGS said that would be the ultimate goal.
MR. SPUD WILLIAMS, testifying on his own behalf, told members he
believes SB 241 is appropriate in that it shows BP is serious
about developing the gas. He believes BP has held the gas
hostage so that it would not compete while it developed fields
all over the world and solidified markets in overseas markets.
He noted when ARCO began talking about developing Alaska gas, it
was taken out of the picture and all of a sudden ConocoPhillips
became a partner in the gas fields on the North Slope. He
pointed out the study ConocoPhillips did was based on natural
gas only, not on natural gas liquids. That study showed a 10
percent margin, which is considerable on a project of that size
and excluded a large potential profit margin from natural gas
liquids. The original gas line feasibility studies from Prudhoe
Bay to the coast showed that natural gas liquids and the other
resources listed by Mr. Heinze, such as the petrochemical
industry, in large part made the project feasible. Other
governments involved in a gas line would want to strip the
natural gas liquids because they know its worth.
MR. WILLIAMS indicated the petrochemical industry will provide
long-term employment. He said the state must tax the gas in
place so that it is a liability to the [producers] before they
let that gas free.
CHAIR OGAN stated, for the record, that he told the Canadian
energy minister that Canada couldn't have all of the liquids.
MR. RAY SCANDURA, representing RPC Energy Services, told members
the cost of the infrastructure for a gas line is substantial and
the marketability of the liquefied natural gas will be the
deciding factor. Alaskans pay the highest prices for their daily
energy use because Alaska is at the end of the run. This project
will give Alaskans a reliable fuel supply. He believes that
although the cost savings are difficult to calculate, the
marketability will pay for the infrastructure and the long-term
benefits to rural Alaska will be immense.
4:41 p.m.
SENATOR LINCOLN asked Deputy Commissioner Porter to respond to
Mr. Heinze's comment regarding the Governor's press conference
tomorrow that the ANGDA project will go hand-in-hand with a
highway route gas line.
MR. STEVE PORTER, Deputy Commissioner of the Department of
Revenue (DOR), said the state's position is consistent with Mr.
Heinze's response. DOR believes that ANGDA can bring many
benefits to the state, whether building the gas line or
complementing it with a spur line or another form of support.
SENATOR LINCOLN asked Deputy Commissioner Porter if he has
worked with the cost figures provided by Mr. Heinze on ANGDA's
conceptual schedule.
DEPUTY COMMISSIONER PORTER said the $200 million and $10 billion
estimates are reasonable for those stages of the project. DOR
has not concluded whether $2.5 million is necessary to fulfill
ANGDA's statutory responsibility. However, DOR supports
providing the Authority with the funds necessary to answer
questions on this or any other project so that the state can
make good decisions.
SENATOR ELTON asked Mr. Porter if he believes the role Mr.
Heinze plays would cost the amount being requested from the
general fund as a supplemental to the FY04 budget.
DEPUTY COMMISSIONER PORTER said DOR is currently evaluating that
amount and does not have a specific amount to recommend at this
time.
SENATOR ELTON stated:
Clearly, this isn't a surprise - I mean [ANGDA] began
speaking months ago about the need for an additional
amount of money. When do you anticipate that the
administration will be done with the review to make
the recommendation, whether it's less or more than the
amount requested?
DEPUTY COMMISSIONER PORTER replied DOR began to work with the
Authority last summer to get the additional $200,000 to make
sure that ANGDA maximizes what that money is used for. He said
DOR is now moving into the next phase; it would have been
helpful to have the information the Authority will collect but
DOR is going to have to make some decisions prior to getting it.
DOR will have to sit down, look at each element, identify the
cost associated with each element and make recommendations.
SENATOR ELTON said the committee is now talking about a four-
month window instead of a six-month window and noted one can
make a decision by not making a decision.
CHAIR OGAN told members he does not intend to move the bill from
committee today and asked Mr. Porter to let him know when the
administration will have a recommendation.
SENATOR BEN STEVENS asked if the committee should expect ANGDA
to ask for more money if tomorrow's press conference delivers
news that would lead ANGDA to look at alternative ways to
participate.
DEPUTY COMMISSIONER PORTER said DOR's goal, over the next few
weeks, is to look at the plan to move forward on gas and the gas
line and the associated costs in 2004 and 2005 and come to the
legislature with a package, whether that is the ANGDA project or
any other option. DOR needs a little time to evaluate the future
of the state and make a determination on the cost.
SENATOR BEN STEVENS commented the request in SB 241 is for $2.1
million for due diligence on the North Slope liquefaction
facility, to transport and to build the ships. He asked:
But what happens if there's another proposal that
comes in? Are we going to look at ANGDA doing two or
three different diligence exercises or are we going to
... how are we going to interface with a proposal that
comes forward? If that interface is perhaps at a
lesser extent, are you going to readjust that request?
MR. HEINZE told Senator Stevens the money requested by ANGDA is
to finish the charge provided for in Ballot Measure 3. That
charge is very project specific. If ANGDA were asked to be the
sponsor of an entirely different project, ANGDA would have to go
out and contract for answers to new design questions. ANGDA has
a great deal of information about the route from Prudhoe Bay to
Valdez from Yukon Pacific and others, so it has been able to
minimize the engineering cost. However, if ANGDA was asked to be
the project sponsor and had to design a pipeline from the North
Slope to the Canadian border, that would take a considerable sum
of money. One group in the state has already done that; if it
made that design available, ANGDA could do a good job at a low
cost. ANGDA does not know what the governor is going to announce
at this time. If the governor announces that another entity is
going to do the design work, he would not expect ANGDA to
require much, if any, additional money.
DEPUTY COMMISSIONER PORTER said he believes Senator Stevens is
asking if DOR is going to require ANGDA to do additional things
for other issues if the state receives other project proposals.
ANGDA will comply only with that charge unless the Legislature
changes that charge. The Legislature passed another piece of
legislation known as the Stranded Gas Development Act.
Negotiations for financial incentives with an applicant under
that Act would not involve ANGDA.
SENATOR BEN STEVENS pointed out that [SB 247] does change the
statute and again asked if the legislature should anticipate
another funding request from ANGDA if it passes SB 247.
DEPUTY COMMISSIONER PORTER said it should. If the Legislature
asks ANGDA to do more work, ANGDA would require more cash for
additional contractors.
SENATOR ELTON commented that he is ready to vote for anything
but he believes the problem is that this and the previous
administration have talked about only one way to get this
project done. He thinks the time has come for the state to give
the resources to those who are thinking outside of the box,
whether that is an LNG to tidewater project or pipeline builders
instead of producers. He said he is tired of waiting for the
producers to get this project going. He is somewhat distressed
that the [administration] does not have a response to the
appropriation bill before the committee. The appropriation
request comes as no surprise to anyone. He added that he
believes the committee should move the legislation quickly
before the four-month window becomes even shorter.
CHAIR OGAN said he concurs with some of Senator Elton's
comments; he is also tired of talking about this issue and wants
to see action. He announced the committee would take up SB 247.
SB 247-AK NATURAL GAS DEV. AUTHORITY INITIATIVE
MS. MARY JACKSON, Staff to Senator Tom Wagoner, prime sponsor of
SB 247, explained to members that SB 247 adds another route for
ANGDA to review. Senator Wagoner believes it is in the public's
best interest to study another route to provide points of
comparison. She told members she distributed copies of a
resolution unanimously passed by the Kenai Peninsula Borough
Assembly that supports this legislation. Regarding the fiscal
note, she discussed the legislation with Deputy Commissioner
Porter and Mr. Heinze and they determined that SB 247 would cost
more money. Mr. Heinze was forthcoming about the design costs
involved. She asked Deputy Commissioner Porter to compare the
fiscal note for SB 247 to the governor's bill and two
differences were apparent. The governor's bill asks for a work
plan - an outline of how to develop, which will cost less. SB
247 provides for a development plan. She said the dollar values
should be available to the committee at the next hearing of the
bill. She said that Senator Wagoner believes that due diligence
is appropriate.
5:00 p.m.
CHAIR OGAN expressed concern that he has studied this issue for
10 years. Yukon Pacific representatives testified in the past
that the route from Prudhoe Bay to Cook Inlet could not be done.
He also expressed concern that Yukon Pacific spent over $100
million on research, development and design and the committee is
now discussing reinventing the wheel. He said the clock would
have to start again for another environmental impact statement
(EIS) and permits, and that route would run alongside Denali
National Park. He speculated that the fiscal note could be huge
and the project would be delayed for years.
MS. JACKSON said, according to her conversation with Mr. Porter
and Mr. Heinze, the fiscal note is expected to be about $1
million. She repeated that the issue is one of due diligence and
to provide for a thorough discussion.
CHAIR OGAN said his district would benefit greatly from having
the route go through it.
SENATOR WAGONER said one reason he submitted this legislation is
that the Kenai Peninsula currently has the only two
petrochemical manufacturing plants in Alaska that manufacture
products other than fuels. Agrium manufactures urea and ammonia
and Phillips manufactures LNG. He believes it is well worth the
state's while to look at an expansion of this nature given the
supply problems those two manufacturers have. He added:
It doesn't have to be gas in Cook Inlet Basin in the
Kenai, just gas supplies coming into and gridding into
the system that serves the Mat Valley - Wasilla, your
area and Anchorage, would alleviate the demand on the
gas that is currently being produced on the Peninsula
and being shipped to Anchorage on both the west side
and from the Cook Inlet. There's currently pipeline
capacity that runs to Anchorage - there's two
pipelines. Their total capacity is a little over 200
mcf per day and, the other side coming across the
Inlet, if it could be put together, there could be
another 100, 150 mcf. So, the capacity is there to
bring that gas down if needed on the Peninsula or we
could stop pushing the gas through the lines up into
Anchorage by bringing a supply from the Slope to
Anchorage. That's one of the main reasons.
The other reason is, like I said, maybe the LNG plant
won't be feasible. Maybe the LNG project won't be
feasible and the one thing you have to understand,
while LNG is a very desirable fuel, LNG does not
produce a large amount of jobs and a large payroll for
Alaska.
To just give you a cost benefit of wages, the Agrium
plant throughput on the Kenai Peninsula is less than
that throughput for the gas that feeds the LNG plant
there. The LNG plant, including the platform, which
produces their gas, employs close to 50 people. Agrium
employs 250. So the value really in this gas, when you
start manufacturing with this gas, is with the jobs
produced so if we bring that gas down there and
supplement what they're getting now for Agrium and
they can run at full capacity again, that holds those
jobs in place. If we develop somewhere along that
system a method to use the liquids to provide
feedstock for the plastics industry, that also would
be much more labor intensive in those plants than an
LNG plant. So I think we should look at all aspects.
That's why I did the bill. I think the people of
Alaska should demand that we broaden the scope of the
project.
CHAIR OGAN said he finds the Kenai Peninsula Borough Assembly's
policy to be inconsistent given it has passed a resolution
asking for the buy back of other gas uses.
SENATOR WAGONER suggested asking the Assembly to explain next
week.
SENATOR SEEKINS said his understanding of the intent of SB 247
is to try to find a market for gas that can be sold for a profit
for the citizens. He said to make a profit, one not only has to
have a product, but also a willing buyer. He said in the near
future there would be a market for natural gas in the Anchorage
Bowl. If the state can meet that market by selling a resource
that belongs to the people of Alaska at a profit, he supports
that. He has never believed the state needs to support one
project over another. He informed members he was a member of the
Governor's North Slope Natural Gas Economic Advisory Committee
under Governors Hickel and Egan, which was when the state began
talking about trying to find a market for the gas and gas
liquids. At that time he was told the gas liquids could fuel
five world-class petrochemical facilities. He said he is looking
to find the value - where the gas can be sold soon for its worth
for the long run. He asked if he is correct in assuming the
liquid markets and the ANGDA project would be looking at the
same markets.
SENATOR WAGONER said he does not believe [ANGDA] has gone that
far into the project since it has only talked about LNG
production. He does not believe it has looked at markets or what
it would do with the liquids.
TAPE 04-2, SIDE A
SENATOR WAGONER continued that there are a lot of liquids and a
lot of potential, which would be accompanied by jobs and
increase the economic base.
MR. HEINZE said that ANGDA's board hasn't taken a position on SB
247, partially because ANGDA's project brings gas into the Cook
Inlet area and would be dealing with industrial, commercial and
residential uses as well as power generation. He said it is
very important to the Authority that gas is brought in via the
spur line that has been specified in the initiative, from
Glennallen to the Cook Inlet area. That reference is found not
only in the benefit analysis but also in the schedule and the
funding request. Additionally, sufficient feedback regarding
the route from Fairbanks to the Cook Inlet area indicates there
will be difficulties. He added that the hardest situation from
a project management perspective is when one is faced with
several difficult choices, and one has to choose "the least
worst."
MR. HEINZE continued that at least one company, or a group of
companies, has invested millions of dollars in studying the
direct route to Cook Inlet, and that information is not
available to the public. He said that gaining access to that
information is one of the first things he would do. That
company also operates the LNG plant and he said he has asked for
cooperation in the past but has not received it, and therefore
it's difficult for him to get excited about "working their
problem."
SENATOR ELTON asked what amount of money would be required if
ANGDA's statutory authority is expanded. He said a precise
answer would be helpful when the bill is due for passage.
5:11 p.m.
CHAIR OGAN said that an analysis of the regulatory hurdles and
inclusion of the approximate timelines would be helpful.
MS. JACKSON if Chair Ogan was requesting information for both SB
247 and SB 241.
CHAIR OGAN responded that work had been done from the North
Slope to Fairbanks but he questioned how long it would take to
get an EIS and the necessary permits, and what the approximate
timelines would be to continue on from Fairbanks.
MR. NELS ANDERSON, JR. testified from Dillingham via
teleconference and said that SB 247 makes sense if it doesn't
delay moving SB 241 as quickly as possible. If the Authority
has the available money, then the needs of Cook Inlet can be
considered. He said, "It's been said before that the oil and
gas companies have been holding 35 trillion cubic feet of gas
hostage up there in the North Slope, and we've just got to get
it moving." The $250 million that the Authority needs would
help to answer a lot of the questions that have been asked. He
said as a supporter of the initiative and of ANGDA, it is
imperative that SB 241 be enacted.
MR. HEINZE said he would contract out the additional work that
this would place on ANGDA. The additional considerations of an
alternate route, in terms of the business question, would not
add to the cost, but clearly, design considerations would cost
additional money. He said, "Don't give me any unfunded
allocations or initiatives in this case. If you want me to do
something, I'd be very happy to do it, but give me the resources
to do it with at the same time."
MR. SCOTT HEYWORTH, speaking on his own behalf, testified via
teleconference from Anchorage and provided the following
testimony:
If Senator Wagoner's SB 247 to amend ANGDA law passed,
ANGDA would be burdened with an impossible situation.
And all of this diversion is going against the law
voters passed approving the Valdez route - not the one
to Kenai. Yukon Pacific Corporation [YPC] started with
the Kenai route. It was rejected. A Kenai routing can
never be permitted. And it would only delay us
forever.
I had an expert, maybe one of the best in Alaska, even
the United States, do a complete review of the YPC
SEIS. The SEIS is bullet proof, impossible to
overturn, it would take from 5-10 years to even get to
a new EIS ruling, but you cannot possibly get past the
Congressional approval part. Then and only then can
you start the permitting process - another 10 years -
total of a 20-year delay - plus the environmental
lawsuits.
There are two main reasons it will never fly: 1) It
is physically impossible to use the railroad right-of-
way for a gas pipeline because of the physical
limitations of avalanches, geo-technical, and sloping
problems. For instance, the Alaska Railroad is just
cut right into the sloped banks of hillsides in places
- it leaves no room on either side for the siting of a
pipeline. And, 2) To date, since 1980, no one has
even tried to get a right-of-way through the ANILCA,
Title 11 statute/law. No one even knows how you go
about it. And if you can't use the ARRC right-of-way,
which you can't, you MUST then get a congressional
vote to go through Denali Park in some new right-of-
way alignment - which Congress will never ever allow
per the existing EIS law. We can't get ANWR through
folks, and somebody wants Congress to put a gas line
through Denali Park? It's not going to happen.
This is directly stated out of the EIS: 'All three
Cook Inlet alternatives are considered to be highly
unfavorable due to the project time delays that would
be involved in any attempt to secure congressional
approval when the proposed route to Anderson Bay would
avoid the Denali National Park entirely,' the EIS said
because this route to Anderson Bay [indisc.] far less
likely to meet with permitting delays. And that's
absolutely true because it took YPC 14 years to get
this permit...to sum it up, this delay would be 20
years or longer and we can't wait any longer and we
have a permitting project, and, as Mr. Heinze
explained to you, we have all the infrastructure and
with the spur line, to get all the gas Kenai will ever
need.
I'll sum it up here. Kenai will get gas quickly with
the existing infrastructure Enstar has, if we just
build a 140-mile spur line from Glennallen to Palmer.
This spur line from Glennallen comes after the main
line is built, is made economical by the huge revenues
from the main line going into LNG exportation from
Valdez. It's called economies of scale. The spur
line then hooks into the existing Enstar
infrastructure that Senator Wagoner referred to
earlier that goes right into Kenai today. Using the 2
twin gas lines - 12 inch and 16 inch - you can push
gas right into Kenai using the Enstar system by simply
reversing the flow of direction. Enstar has confirmed
this for us in front of ANGDA.
When we expect capacity from 2.2 feet per day to 3.0
the extra 800 million cubic feet per day can go down
to spur to Southcentral and into Agrium and Nikiski.
Our studies show potential cheap new gas under $3.00
delivered. New Cook Inlet gas is coming into the
basket today at over $4.00, per Tony Izzo from Enstar,
who testified here. Kenai will then have all the
cheapest, plentiful gas it wants. And all of
Southcentral gets very cheap gas forever with ANGDA.
So please, I just bring to your attention that the EIS
[indisc.] will take 10 or 20 years to have a permitted
project. We're going to help Kenai. Kenai can expand
the LNG plant, they can expand ANGDA. But Alaska
cannot wait 10 or 20 more years.
SENATOR WAGONER asked if a spur line could be built to the Cook
Inlet without a 20-year delay, why a larger line couldn't be
built over the same terrain without delay.
MR. HEYWORTH responded that it would be impossible to obtain
Kenai's export permit; the permit has already been issued to the
highway project and to the LNG project down to Valdez. He
stated that the amount of gas off the slope has already been
allocated to those two projects and permitting a third export
project won't happen.
SENATOR WAGONER said, "We already have permits to export
product."
MR. HEYWORTH replied that there is not license to export 2.2
bcf, to date.
SENATOR SEEKINS said that having flown through Windy Pass
hundreds of times in his own aircraft and knowing the lay of the
land, he asked if, by following the power line route from Healy
to Cantwell, the challenge of the Denali Park area could be
bypassed.
CHAIR OGAN remarked that there would be time for this debate
later.
SENATOR WAGONER asked if Mr. Heyworth was speaking for himself,
ANGDA, or for Yukon Pacific [Corporation].
MR. HEYWORTH responded that he was speaking for himself. He
explained that his knowledge of the EIS and the permitting
process was thorough and that he didn't write the initiative
because he knew the spur line to Kenai wouldn't be permitted and
because the large time delay of 5, 10, or 15 years didn't make
sense to him.
CHAIR OGAN asked if there was any further testimony. Hearing
none, he thanked committee members and adjourned the Senate
Resources Standing Committee meeting at 5:25 p.m.
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