Legislature(2007 - 2008)BUTROVICH 205
03/26/2007 03:30 PM Senate RESOURCES
| Audio | Topic |
|---|---|
| Start | |
| SB104 | |
| Adjourn |
* first hearing in first committee of referral
+ teleconferenced
= bill was previously heard/scheduled
+ teleconferenced
= bill was previously heard/scheduled
| += | SB 104 | TELECONFERENCED | |
| + | TELECONFERENCED | ||
| + | TELECONFERENCED |
ALASKA STATE LEGISLATURE
SENATE RESOURCES STANDING COMMITTEE
March 26, 2007
3:36 p.m.
MEMBERS PRESENT
Senator Charlie Huggins, Chair
Senator Bert Stedman, Vice Chair
Senator Lyda Green
Senator Gary Stevens
Senator Lesil McGuire
Senator Bill Wielechowski
Senator Thomas Wagoner
MEMBERS ABSENT
All members present
COMMITTEE CALENDAR
SENATE BILL NO. 104
"An Act relating to the Alaska Gasline Inducement Act;
establishing the Alaska Gasline Inducement Act matching
contribution fund; providing for an Alaska Gasline Inducement
Act coordinator; making conforming amendments; and providing for
an effective date."
HEARD AND HELD
PREVIOUS COMMITTEE ACTION
BILL: SB 104
SHORT TITLE: NATURAL GAS PIPELINE PROJECT
SPONSOR(s): RULES BY REQUEST OF THE GOVERNOR
03/05/07 (S) READ THE FIRST TIME - REFERRALS
03/05/07 (S) RES, JUD, FIN
03/14/07 (S) RES AT 3:30 PM BUTROVICH 205
03/14/07 (S) Heard & Held
03/14/07 (S) MINUTE(RES)
03/16/07 (S) RES AT 3:30 PM BUTROVICH 205
03/16/07 (S) Heard & Held
03/16/07 (S) MINUTE(RES)
03/19/07 (S) RES AT 3:30 PM BUTROVICH 205
03/19/07 (S) Heard & Held
03/19/07 (S) MINUTE(RES)
03/21/07 (S) RES AT 3:30 PM SENATE FINANCE 532
03/21/07 (S) Heard & Held
03/21/07 (S) MINUTE(RES)
03/21/07 (S) RES AT 5:30 PM SENATE FINANCE 532
03/21/07 (S) Heard & Held
03/21/07 (S) MINUTE(RES)
03/22/07 (S) RES AT 4:15 PM FAHRENKAMP 203
03/22/07 (S) Heard & Held
03/22/07 (S) MINUTE(RES)
03/23/07 (S) RES AT 1:30 PM BUTROVICH 205
03/23/07 (S) Heard & Held
03/23/07 (S) MINUTE(RES)
03/24/07 (S) RES AT 1:00 PM SENATE FINANCE 532
03/24/07 (S) Heard & Held
03/24/07 (S) MINUTE(RES)
03/24/07 (S) RES AT 3:00 PM SENATE FINANCE 532
03/24/07 (S) Heard & Held
03/24/07 (S) MINUTE(RES)
03/26/07 (S) RES AT 3:30 PM BUTROVICH 205
WITNESS REGISTER
Tony Palmer, Vice President
Alaska Business Development
TransCanada Corporation
POSITION STATEMENT: Commented on SB 104
Commissioner Tom Irwin
Department of Natural Resources
POSITION STATEMENT: Available for questions
Commissioner Patrick Galvin
Department of Revenue
POSITION STATEMENT: Available for questions
Bill Walker, General Counsel and Project Manager
Alaska Gasline Port Authority
Anchorage, Alaska
POSITION STATEMENT:
Paul Fuhs, Government Affairs
Alaska Gasline Port Authority
Anchorage, Alaska
POSITION STATEMENT:
Radoslav Shipkoff, Director
Greengate Capital, LLC
Financial Advisor, Alaska Gasline Port Authority
POSITION STATEMENT: Available for questions
ACTION NARRATIVE
CHAIR CHARLIE HUGGINS called the Senate Resources Standing
Committee meeting to order at 3:36:24 PM. All members were
present at the call to order.
SB 104-NATURAL GAS PIPELINE PROJECT
CHAIR HUGGINS announced SB 104 to be up for consideration.
TONY PALMER, Vice President, Alaska Business Development,
TransCanada Corporation, began with slide presentation showing
the company's assets all over North America; it owns 36,500
miles of pipeline. He gave examples of pipelines TransCanada has
built that are as big as the proposed project, and said that the
company moves 15 billion cubic feet (bcf) per day of gas.
3:40:33 PM
CHAIR HUGGINS asked what the company would have done differently
in retrospect rather than create six different parallel lines.
MR. PALMER explained that it turned out that Alberta produces
200 bcf yearly, not 50 bcf. As gas is developed, it is
incremented; that is the best solution over time. No one knew
where the gas was or what markets it would go to.
He said that quite often a pipeline is constructed depending on
anticipations made in the first two years; it's impossible to
build a "perfect" pipeline. It's less expensive to build a
pipeline with some basis for increment and ultimately build a
second parallel pipeline if necessary.
3:43:01 PM
CHAIR HUGGINS asked if he could tell his constituents that
Alaska would not have six parallel pipelines.
MR. PALMER replied yes. If the pipeline is constructed, he would
hope that it would be expanded quickly with compression and
looping. The expansion would mean putting a second pipe in the
same right-of-way.
3:44:13 PM
SENATOR WIELECHOWSKI said it looked like they were talking about
similarly-sized projects.
MR. PALMER replied that the pipeline would run 1,750 miles in-
state and 1,000 miles to Alberta; they are of similar scale. The
Alaska pipeline would be an incremental increase of 5 percent
over the existing network.
3:45:44 PM
He explained that TransCanada is the largest gas transmission
company in North America. It serves different parts of the US
and Canadian markets, and owns significant storage as well.
CHAIR HUGGINS asked for the diameter of the pre-build pipe.
MR. PALMER replied that it is in 36- and 42-inch sections.
3:47:01 PM
He explained that the company's cash flows are equivalent to or
larger than the equity required for the Canadian portion of the
project. The debt side of the project would be funded on a non-
recourse basis, with equity provided by the sponsors. A single
year of cash flow would cover the Canadian portion; a second
year would cover the Alaskan portion. It is financeable with
sufficient commitments.
SENATOR STEDMAN asked for a definition of TransCanada's cash
flow.
MR. PALMER said that it's the net income plus the depreciation
available from normal business.
He explained the company's experience in natural gas pipelines,
including regulatory, social, environmental, and First Nations
experience, and described the structure of the pipeline system
within Alberta.
3:50:17 PM
SENATOR WIELECHOWSKI asked Mr. Palmer to talk about rolled-in
rates in Canada and if they discouraged bids in open seasons.
MR. PALMER replied that Canada has used such rates for a long
time and they have contributed to expansion; they have not
dampened enthusiasm for bidding. As regards an initial pipeline
of 4.5 bcf per day, one needs to make assumptions about the
timing for expansions.
3:52:30 PM
He continued to explain in further detail the amounts of gas
TransCanada ships and how the tolls, compression, and looping
factors are calculated.
3:54:45 PM
SENATOR WIELECHOWSKI asked why a bigger pipe wouldn't be built
initially if there were expectations for expansion.
MR. PALMER replied that it is cheaper to expand a project when
the gas becomes available if it isn't going to happen within the
first two to five years.
3:56:42 PM
He then explained the Canadian portion of the Trans-Alaska
Pipeline project where the pipeline is in the ground and has
been expanded five times since 1981; the last increment was
added in 1998. TransCanada built it under the Canadian Northern
Pipeline Act and it met environmental standards.
He said that TransCanada's interest in the Alaskan natural gas
project totals over $2 billion and 30 years invested in bringing
Alaskan gas to market. TransCanada holds valid and exclusive
certificates issued under the Northern Pipeline Act (NPA) for
the Canadian section of the project. These certificates do not
have a sunset or expiry date, and a treaty was executed for the
project.
He mentioned that questions about taxes and Canadian access are
answered in the treaty. TransCanada has legal access to the land
all the way through the Yukon in terms of easements, and has
paid the fees for them through the years. It holds key
environmental permits in Alaska and federal rights-of-way.
TransCanada has offered to vend those assets to another partner
if they finish a project subject to one condition: that they
connect the line at the border.
SENATOR WIELECHOWSKI asked if Mr. Palmer was saying that there
are no First Nations problems.
MR. PALMER said they have legal access to the Canadian land and
have held it for 25 years, and that access has been recognized
by the government of Canada and the First Nations.
4:03:08 PM
MR. PALMER described the Mackenzie project in Canada, which was
subject to benefits negotiation and access agreements with First
Nations. He said that TransCanada has commenced discussions
regarding benefits, but they are not required for the project.
SENATOR WIELECHOWSKI said he was concerned with Canadian tariffs
and the process that will need to be gone through in Canada.
MR. PALMER replied that the treaty between the US and Canada
sets out the terms for the project. They will charge the Alaska
gas pipeline similar property tax rates as their owners, so it
won't be discriminated against. The Canadian government has
committed to equal rates for Alaskan and domestic gas shipping.
4:06:21 PM
He said that with regards to the National Environmental Policy
Act, Canada has an environmental review process and the project
was approved nearly 30 years ago; the pre-build also met the
environmental requirements. There will be issues, but the
"go/no-go" decision won't have to be revisited.
He explained how the National Energy Board held competitive
hearings and selected Foothills as the project sponsor;
TransCanada was actually initially rejected. In the last decade,
TransCanada has acquired an interest in Foothills to position
itself for the natural gas project. The opportunity has been
available to all competitors in the marketplace.
4:09:00 PM
He explained that transporting gas out of one country through
another and back into the same one is not common. Canada will
not be following the negative example of Russia and Tajikistan
in doing so; the arrangements between Canada and the U.S. are
fair, and Canada has honored that treaty for 25 years.
4:10:13 PM
He said that once National Energy Board approval is received,
the project could proceed normally. There likely wouldn't be
subsequent legislation for the project; both countries have
interest in expediting the project. The Northern Pipeline Act is
not out-dated; the pre-build has been, and the remainder of the
pipeline in Canada will be, constructed under the act. The act
also established a single-window regulator, which will be
disbanded once the construction is complete; that contrasts with
the multiple agencies constructing the MacKenzie project.
4:12:49 PM
CHAIR HUGGINS asked Mr. Palmer to describe the hurdles the
MacKenzie project had to clear that Alaska may have to address
for its pipeline.
MR. PALMER replied that TransCanada is a minor sponsor of the
MacKenzie project. It went through the traditional NEB process
seeking environmental approval; the process should be completed
later in 2007 and the project is seeking gubernatorial approval
by 2008. As regards the Alaska project, TransCanada holds the
certificate already; it has a single-window regulatory agency to
provide oversight for the project, which is a significantly
simpler process.
SENATOR WIELECHOWSKI replied that it seems there is a lot of gas
in the MacKenzie project and he thought that Canadians would
have more interest in getting its gas to market. He asked what
kind of assurances there are that Canada would support this line
or that one.
MR. PALMER replied that he can't speak for the Canadian
government, which clearly seeks to move its gas to market;
however it's not an either/or proposal for Canada. Both sources
of gas are needed in the North American market, and the
government of Canada signed the treaty with the U.S. 25 years
ago. Canada has honored it since then.
4:16:48 PM
He explained that Foothills was granted exclusive rights, and
the project was in the national interest of the US and of
Canada. The commitments were not given with the expectation that
the plan was only one of many ways to do the project. Financing
would have been impossible if a second party held the rights.
4:18:05 PM
He showed a map of the Alberta system, and explained that the
Nova Inventory Transfer (NIT) is the largest hub in North
America. NIT has a capacity of 11 bcf per day; it has peaked at
60 bcf per day. The physical flows are 11 bcf; the financial
flows are 50 to 60 bcf a day. It is the most liquid hub in North
America. TransCanada's projection of spare capacity on the
systems leaving Alberta means there will be sufficient room in
ten years' time to move the entirety of Alaskan gas with no
incremental expansions. This means there are two benefits for
Alaskans: the gas could be sold in Alberta, or could be traded
for diversification.
4:22:11 PM
CHAIR HUGGINS asked if taking gas in kind is common in Canada.
MR. PALMER answered that Alberta takes it in value principally.
4:22:46 PM
MR. PALMER showed a slide to explain how in 1990 TransCanada
constructed 7,000 miles of pipeline under budget. He showed
slides citing statistics on operating costs, the complexity of
pipelines, compression maintenance, and the company's
reliability in comparison to other parties.
4:27:20 PM
He then showed another slide regarding safety performance.
4:27:41 PM
CHAIR HUGGINS asked a question about a figure on the slide.
MR. PALMER answered that the figure was a question mark, and
said that the final slide showed statistics for inspections of
lines; TransCanada pioneered hydrostatic testing and it will
become a standard.
4:30:27 PM
SENATOR STEDMAN asked Mr. Palmer to talk about risk to pipelines
in different stages.
MR. PALMER replied that it's normal that a pipeline company
would take cost risks. If a project is successfully
certificated, the risk is shifted to the customer. The pipeline
company takes just a portion of the capital risk; if there was
zero risk, they would fund with 100 percent debt.
4:34:52 PM
SENATOR STEDMAN asked if most of the risk faced before a
successful open season could be diversified.
MR. PALMER replied that during the open season the company has
the bulk of the risk. Once the project is in service, the risk
is smaller because most of it has been spent on the project
already. He added that pipeline companies always seek long-term
contracts with credit-worthy parties. Some parties can pay the
bills, and some can't; financial circumstances often change over
time.
He then explained a FERC rule changing credit-party access which
made parties no longer able to pay the bills; everyone had to
recalibrate. Some parties now only provide a one-year letter of
credit. In the event that gas wouldn't be flowing at the end of
that one-year period, the risk would be borne by other parties.
4:38:55 PM
SENATOR STEDMAN asked for an estimate of what it would cost to
get from the current date to open season.
MR. PALMER answered that analysis has not been completed. In
terms of ball-park numbers, if gas were to be committed in an
open season and necessary engineering would be completed, the
cost would be tens of millions, but not hundreds of millions.
4:40:26 PM
CHAIR HUGGINS asked him to restate his comments on open season.
4:40:36 PM
MR. PALMER replied in explaining that if TransCanada is picked
under AGIA, it would quickly develop costs so it could put
forward the appropriate charges from the pipeline to the
customer to allow them to make a decision as to whether they are
ready to commit they gas to the pipelines. This would be done in
a period of months, not weeks or years.
4:42:00 PM
CHAIR HUGGINS mentioned the $500 million in incentives in AGIA,
and asked if TransCanada wouldn't be able to do the project
without them.
MR. PALMER replied no. The company would prefer to risk-share
with Alaska through the open season process. To date, parties
have been unwilling to commit gas, so there is significant
uncertainty going into an open season. TransCanada's proposal
would share the risk before open season; in the event the
project is successful the $500 million would not be included in
the tolls.
4:43:54 PM
CHAIR HUGGINS remarked that Mr. Palmer's prediction for costs
leading up to an open season was less than the incentives
offered, and asked if the company would not need that much money
to become involved.
MR. PALMER replied that that was correct. He continued on to
explain TransCanada's efforts to work on the pipeline project,
and how it owns certain assets. He said that the company had
responded to requests from the previous administration to come
up with alternatives under the Stranded Gas Act framework.
4:47:25 PM
SENATOR WIELECHOWSKI asked if TransCanada is not selected it
will turn over its rights to the winner.
MR. PALMER replied that TransCanada is prepared to vend its
assets in Alaska, but not through Canada; it wants to construct
the pipeline in Canada itself.
4:49:18 PM
SENATOR WIELECHOWSKI asked what it would take for another
company to get similar rights in Canada.
MR. PALMER replied that that would be assuming TransCanada
didn't try to defend its rights, because they are exclusive. A
company would have to seek to obtain a right-of-way from the
National Energy Board and the Canadian Environmental Agency,
obtain access from First Nations, decide if it would connect
with the existing system or build another line, and go through a
MacKenzie-type review process.
4:51:10 PM
He stated that to date the state and the producers have not
reached an acceptable agreement on the pipeline project;
TransCanada supports moving the project forward immediately. He
reaffirmed TransCanada's position that all stakeholders are best
served by having a large-scale pipeline project proceed
expeditiously; a compromise is required from all sides. He then
said he would be discussing concerns about AGIA, which
establishes specific application requirements.
4:54:25 PM
He said that TransCanada accepts the necessity of Alaska's need
to implement a new process. However it is concerned as regards
the proposed obligation for the licensee to proceed to obtain
FERC certification regardless of open-season outcome; if the
requirement isn't amended independent companies may not
participate.
He said that AGIA proposes cost-sharing on a 50/50 basis through
the initial open season, and up to 80/20 after certification;
TransCanada is supportive of the 50/50 sharing but is concerned
that a private developer would be reluctant to commit money if
the initial open season hasn't attracted enough commitments to
make the project viable. The time and money costs of pursuing
the FERC certificate are substantial. TransCanada recommends the
removal of the requirement of licensee continuing towards FERC
certification in the event of an open season that doesn't
attract sufficient gas commitments. At present, TransCanada
will continue to work towards an arrangement between the three
producers, Alaska, and Canada.
4:57:22 PM
SENATOR STEDMAN asked if TransCanada is not interested in going
beyond a failed open season without firm shipping commitments.
MR. PALMER replied that TransCanada is interested in pursuing
commitments, but it is not appropriate to require pursuit of a
FERC certificate; there has been a certificate for the project
for 30 years. TransCanada wants to focus on getting customers as
opposed to doing the engineering, regulatory, and legal work
needed to capture the certificate, costing maybe hundreds of
millions of dollars with no assurance at the end that the
company would get customers.
SENATOR STEADMAN said that getting to open season would cost
tens of millions, and going beyond a failed open season would
cost hundreds of millions with no insurance of customers.
MR. PALMER said that was correct; TransCanada would prefer to
continue to pursue customers and not spend FERC certification
dollars.
SENATOR STEADMAN said that AGIA proposes a significant split in
cost sharing which could put a company in an uncomfortable
position.
MR. PALMER agreed; appropriate expenditures beyond a failed open
season would be for capturing gas, as opposed to pursuing
certification.
5:01:09 PM
CHAIR HUGGINS opined that a successful open season is a critical
event.
MR. PALMER said as the project proceeds, there are a number of
important tests such as how AGIA ends up and what the actual
request for application and the costs will be. During the open
season process, TransCanada would put forth the best proposal
possible to try and attract customers. Until that time, barring
a pre-arranged collaborative agreement, open season will be the
most significant factor.
5:04:03 PM
CHAIR HUGGINS mentioned that Enbridge had said that if producers
didn't participate there would be no pipeline.
MR. PALMER answered that he didn't hear that testimony; he said
that if there are no customers and no credit there will be no
pipeline.
CHAIR HUGGINS asked a member of the administration to come
forward to address questions.
5:05:23 PM
SENATOR WAGONER referenced prior discussion regarding the length
of a pipeline and the placement of gas treatment plants, and
asked Mr. Palmer for comment.
MR. PALMER said that TransCanada is prepared to construct the
Alaska section alone or in part. Sometimes producers own
treatment plants, and TransCanada is open to that. It may be the
most logical solution for the builder of the pipeline to own the
gas treatment facilities. However, TransCanada would be willing
to own the treatment facilities.
5:07:20 PM
CHAIR HUGGINS noted that Commissioners Galvin and Irwin had
joined the hearing, and asked them to comment on the possibility
of a failed open season and TransCanada's reluctance to continue
towards FERC certification.
5:07:46 PM
COMMISSIONER GALVIN, with the Department of Revenue, replied
that different positions have been staked out over the years,
and the state has an interest in protecting those positions.
AGIA is trying to open the process up to as many participants as
possible; the bill was not crafted with any particular party in
mind.
5:10:56 PM
COMMISSIONER IRWIN, with the Department of Natural Resources,
commented that AGIA is focusing on the pipeline issue; the
process is high-centered. The state doesn't want to be held at
the mercy of something undefined. It's a credit to TransCanada
that the company is participating in the process, and it must
have a lot of faith in the Canadian side.
5:12:58 PM
SENATOR WIELECHOWSKI said he was concerned about a gap in AGIA
regarding communication between various parties.
COMMISSIONER IRWIN said that question has been asked for years,
and that communication is a two-way street. The state is
listening, but has to be told what people need.
SENATOR WIELECHOWSKI said he was worried that parties are not
communicating enough, and asked if AGIA sufficiently addresses
the issue.
5:15:05 PM
COMMISSIONER GALVIN replied that the state has experience with
the Stranded Gas Act model. There is not a shortage of
opportunity to communicate, but an imperative is needed to reach
an agreement on moving the project forward. AGIA is not a
hindrance to communication; it sets up the opportunity and
imperative to keep a high level of communication.
5:17:34 PM
CHAIR HUGGINS said he didn't recognize those qualities in AGIA,
and he is concerned about an unsuccessful open season and
resulting certificate requirements. There should be meetings
with key players to go over the importance of successful open
seasons.
5:18:21 PM
COMMISSIONER IRWIN said the state needs to hear other players
frame the issue and discuss what they need or don't need. Until
then, the state is in a precarious situation.
5:19:35 PM
CHAIR HUGGINS said that if the open season is unsuccessful
Alaska will be leveraged.
5:19:58 PM
SENATOR GREEN agreed with the chair, and said that a response to
Mr. Palmer's comments was needed.
5:21:01 PM
COMMISSIONER IRWIN replied he was paying TransCanada a
compliment by pointing out how much money and time the company
had invested.
SENATOR GREEN said that didn't answer the comments.
COMMISSIONER IRWIN replied that the state needs framing from the
other side; it is more than willing to spend the time necessary
to solve the communication problems.
SENATOR GREEN replied that the response was unhelpful.
5:22:20 PM
SENATOR MCGUIRE said that it would be giving away the state's
negotiating position to respond directly to the question and
imply that the state would be willing to finance without
required FERC certificate application.
COMMISSIONER IRWIN concurred.
SENATOR STEDMAN said he didn't agree with that explanation.
Different companies have come forward and said they want to see
state commitment besides cutting a check.
5:25:19 PM
MR. PALMER said that TransCanada recognizes the necessity for
the state to change the dynamics, and parties do need to
compromise.
The committee took an at-ease from 5:28:06 PM to 5:37:07 PM.
5:37:11 PM
MR. PALMER said that TransCanada accepts the necessity of
changing the dynamics of the project. The key issue is obtaining
customers, and AGIA is an initiative to try and do that.
TransCanada does believe that there are other initiatives beyond
the open season that can capture sufficient customers, and the
company would clearly try to do so. The state proposal has
changed the dynamic and the matter is in the hands of the
legislature. All parties are looking to advance the project, and
TransCanada has offered a compromise. It is for the state and
the three producers to decide if they will do the same.
5:40:37 PM
SENATOR STEDMAN said several years ago there was a lower gas
price and a diversion and substantial price increases that led
to a whole new set of financial considerations; one could now
make an argument that the gas is not stranded at current prices.
He asked if Mr. Palmer has seen a move to drive the project
forward regardless of political issues.
5:41:41 PM
MR. PALMER replied that it is true that price forecasts are
significantly higher than five years ago. The cost increase in
the oil and gas business been partially caused by the high price
of gas and oil; this has happened before and can happen again.
It is a cyclical business. The price of gas is better today and
it makes the project more economically feasible, but to date
stakeholders haven't been able to advance it.
5:43:53 PM
SENATOR STEDMAN said there has been discussion of window of
opportunity and of first gas coming in 10 years. He asked for
the company view on LNG and the impact relative to getting the
project on-line.
5:44:25 PM
MR. PALMER said he had some analysis of projections of natural
gas demand, and as prices rise, demand falls. Customers reduce
the demand for gas and there is also an expected increase in
supplies. The traditional basins have not been very responsive
to the higher price; the expectation is that higher prices would
drive increases in the expectation of supply, but that has not
happened. The opportunity for the Alaska project remains,
because the traditional basins in North America have not
responded. In the event that LNG continues to come ashore, the
potential remains that this project will compete against a brown
field; this is more difficult to predict than competition
against a green field. LNG and natural gas are both needed in
the marketplace, but it serves no project for competitors to
succeed.
5:47:10 PM
He said that a project needs to be in place to capture rolled-in
toll investment opportunities. Most LNG projects would have the
opportunity to reduce those costs over time. The Alaska project
would be well-served to advance when it is a green field
competing against a green field.
5:48:00 PM
COMMISSIONER GALVIN said that, regarding Senator Green's
question about FERC certification, the state is trying to set up
a sense of competition. It is not trying to shape the demand
towards any particular applicant, so the legislature should wait
until hearing from all testifiers before expecting an answer.
The AGIA deadline for an application is a sort of impetus, meant
to have the companies take the opportunities to participate
individually or jointly. The state wants to get the project to
an open season and ask to the producers if they will accept a
certain tariff rate and sell at a particular price. The state is
trying to create the best project to get to that point. If a
producer says no, one of the reasons is because the uncertainty
makes them uncomfortable. The next phase of the project is FERC
certification, which will mean different questions, parameters,
and risk components than initial open season. That is the point
at which whatever is wrong or missing needs to be acknowledged.
That's TransCanada's argument; they don't see value in the FERC
certificate requirement, and the state does.
5:52:52 PM
He said in the end everyone is trying to get to a successful
open season. If commitments aren't procured, the state must try
something else, but it isn't ready to agree to that now.
CHAIR HUGGINS said of the two pipeline companies he has talked
to, both have said the risk brought by an unsuccessful open
season is scary; his gut feeling is that he doesn't want to deal
with an unsuccessful open season. It is less risky to deal with
the issue now. The legislature owes Mr. Palmer an answer, and he
shares his concerns.
5:55:00 PM
He added that he has heard multiple positive comments on the
candor of Mr. Palmer's presentation; he looks forward to a
possible partnership with TransCanada.
The committee took an at-ease from 5:56:05 PM to 6:00:41 PM.
BILL WALKER, General Counsel and Project Manager, Alaska Gasline
Port Authority (AGPA), said he wouldn't go through the details
of the project at the time but would instead address concerns
with AGIA. He related the history of the AGPA and said that it
has an IRS ruling stating it is tax-exempt; the Yukon Pacific
Corporation (YPC) has a similar story. It is a huge advantage
for the APGA to have a warehouse full of data on the project. In
addition to acquiring YPC's rights and data, AGPA has worked
with an array of other entities and has the ability to put
together a viable project.
6:04:22 PM
He explained that the APGA has seen the economic model for and
benefits of the project; no companies have walked away from the
economics of the project. AGPA has the same goal as the
legislature, to maximize the benefits of the resources for the
people. He then described AGPA's proposal for the project,
including capacity and location. Supply to south-central Alaska
would be an important factor and gas would be made available
along the route to Fairbanks as well. AGPA views itself as a
facilitator for the project; many of the pieces have been
gathered together already and it is pleased to hear about the
producers being willing to sell gas to a third party project.
CHAIR HUGGINS asked Mr. Walker to elaborate on his concerns
about open season.
MR. WALKER said he is hoping for a successful open season, and
based on the testimony, he believes there will be one. The
initial project is small enough that it's within the limits of
what's allowed to be taken off of Prudhoe Bay. There's no
additional discovery required.
6:08:32 PM
CHAIR HUGGINS asked what Mr. Walker's thought process would be
in case of a failed open season.
MR. WALKER replied that certification would depend on how the
project was structured. AGPA wouldn't leave the project just
because of a failed open season.
CHAIR HUGGINS commented that Mr. Palmer prefers to spend money
towards guaranteed success.
6:09:58 PM
MR. WALKER said he doesn't disagree with Mr. Palmer's testimony.
AGPA has participated in the Pt. Thompson issue and is pleased
with that approach. Attracting investors after a failed open
season would be difficult; having gas is important for the
project.
He then read a prepared statement regarding AGPA's approval of
the AGIA approach and how rolled-in rates will work well for the
project. The initial shippers have the advantage of getting
their product to market earlier. AGPA is also supportive of gas
off-take points to allow for use by Alaskans. They're not a
prohibitive expense.
6:13:43 PM
He said that said AGPA did not request the $500 million in
inducements, but it believes it is appropriate; it is not an
outright grant, and the provision will help advance the project.
The previous proposed contract offered inducements only to
producers.
Industry representatives have approached the state to say they
want fiscal certainty before they will proceed with the project.
To protect the interest of Alaska, the legislature should always
retain the authority to make decisions on the tax rates. While
the APGA would be willing to submit an application under AGIA,
the bill can be improved. He then made a list of suggestions for
improvement, including adding provisions for a project in
Canada; it should include a detailed description of how gas will
get from Alberta to the Midwest.
6:16:40 PM
MR. WALKER said that applicants require an initial off-take from
the Prudhoe Bay unit greater than what's presently allowed by
the Alaska Oil and Gas Conservation Commission (AOGCC). An
increase should be considered to allow for larger projects.
SENATOR WAGONER said that AOGCC is revisiting the issue to see
if the model is correct; it may be high. During the prior
administration the AOGCC was relying on Point Thompson numbers.
6:18:30 PM
MR. WALKER said the normal way to re-examine the numbers would
be through an application; Point Thompson has a tremendous
amount of liquids and gas, so it is an important question.
CHAIR HUGGINS said that 2 to 2.5 bcf was APGA's target.
PAUL FUHS, Government Affairs, Alaska Gasline Port Authority,
said that the goal is an economy of scale. He referenced a
Canadian pipeline to show the risks of different output volumes.
6:20:15 PM
MR. WALKER said that AGIA should include a timeline for the
discovery of additional gas; the applicant should be required to
do so. An additional criterion is value-added processing, and it
would be helpful to know if the liquids would be staying in
Alaska. Timeliness of construction should be a high priority as
well; previous net present values show that an earlier project
brings more value to the state.
He added that there has been much testimony about risk,
especially regarding a line through Canada. There is a
significant risk of cost overruns and volatility in the market.
6:22:16 PM
He said that said the most important decision is choosing the
right-sized project. Some think a large project would be better,
but the size holds inherent risks; it requires participation
from all producers, who can compromise one another. AGPA would
be willing to build through Delta Junction as long as there was
no serious delay for the Canadian portion.
6:24:35 PM
He explained that a shorter pipe has a distinct advantage in
terms of cost overrun risks. LNG tanker will have smaller
degrees of uncertainty. A partner shipping company with AGPA has
eight tankers that will be available. A Canadian highway project
has the risk of unresolved First Nation claims and right-of-way
agreements; an LNG project must identify and recognize the
challenges. An all-Alaska project would be more able to move
ahead in a timely fashion. One main concern of APGA is that
Alaska might miss the market.
6:28:03 PM
He said that if Alaska misses its window of opportunity the gas
could become stranded, which it is not now. It's not the biggest
project out there, but it's viable and it'll bring tremendous
benefit to the state.
6:28:58 PM
SENATOR WIELECHOWSKI said his concern is the fear that there
will not be a successful open season; he asked what the
likelihood for a successful season for this project would be,
and what kind of revenue the project would bring to the state.
MR. WALKER said there is not enough information available to
compare to other projects.
RADOSLAV SHIPKOFF, Financial Advisor to the AGPA, said it is
difficult to compare AGPA's economics with other projects. The
lower volume is not a disadvantage; it will allow a project to
proceed and expand. As long as the economics are sustainable it
is a positive thing. AGPA deals with the first phase of the
project and uses the existing resource base, which may require
larger reserves to go forward.
6:33:04 PM
SENATOR WIELECHOWSKI said this project is less expensive, and
asked if that would result in lower tariffs and thus more money
to the state.
MR. SHIPKOFF replied that there are costs associated with moving
gas to Valdez, marine transportation, and tolls. There's no
additional strain put on the capital market, and regarding the
cost of the project AGPA can compete with any other proposed
project.
He said that he was not sure the project would make more money
for the state, but the project can fit within the existing
reserve base and it can proceed sooner rather than later.
6:35:21 PM
CHAIR HUGGINS asked for numbers regarding revenue to the state
at certain capacities.
MR. SHIPKOFF replied that he didn't have the numbers available
but could provide them later. AGPA is in the process of updating
its analysis in preparation for an application.
CHAIR HUGGINS asked about the company's relationship with Harold
Heinz [CEO of the Alaska Natural Gas Development Authority
(ANGDA)].
MR. WALKER replied that AGPA operates independently. ANGDA has a
right of way to Palmer, and AGPA has one to Valdez. It makes
sense to work together in some capacities; there is confidential
information the companies share with one another, and the boards
have talked about having joint meetings. However they are
separate entities with distinct missions.
6:37:57 PM
CHAIR HUGGINS asked for comment on possible expansion of a
portion of pipeline going to Valdez.
MR. WALKER replied that AGPA has not proposed anything like
that; their project has always been a 48-inch line. Adding
compression is cheaper than adding pipe.
MR. SHIPKOFF said the pipe is expandable to 6 bcf without any
need for looping; the 48-inch pipeline is the optimal starting
point, and the pre-build needs to account for expansion.
6:39:52 PM
CHAIR HUGGINS asked who would build the pipeline, and if there
would be an affiliation with a pipeline company.
MR. SHIPKOFF said that AGPA may or may not be owner and that
answer has not been determined. AGPA will use its role as a
catalyst to bring in reputable participants. AGPA doesn't have
the technical ability to build the pipeline, and would have to
get a contractor; it couldn't get financing without a good
contractor.
CHAIR HUGGINS asked what companies were in partnership with
AGPA.
MR. WALKER said the company has a number of partners including a
law firm in New York. The relationship with Sempra Energy is
ongoing; that company was concerned about the past
administration and thus changed its relationship with AGPA. Some
entities have looked at the project and seen a very low risk.
SENATOR WIELECHOWSKI asked if APGA needs fiscal certainty
including locking in tax rates.
6:43:57 PM
MR. WALKER said AGPA is comfortable with the statutes as they
are.
MR. SHIPKOFF said there is a distinction between needing and
wanting fiscal certainty. Companies don't want to pay higher
taxes. Many places around the world don't provide fiscal
certainty; countries with political uncertainty offer some
degree of fiscal certainty. The UK, for example, increased taxes
from the North Sea but companies still do business there. The
AGPA discussion has been tied to taxes at the upstream, where
impact variation is significantly less. AGPA could participate
without certainty where another entity would want it.
6:47:44 PM
SENATOR STEVENS asked why AGPA has an advantage.
MR. WALKER replied that the Yukon Pacific Corporation has
already spent money to bring the project together, and has a
right of way and permits that will need to be updated; the
company is starting from a more advanced position. AGPA
possesses significant data as well; it is at least a three-year
advantage.
CHAIR HUGGINS referenced a document regarding a provision that
extends the pipeline timeline, depending on financing, and asked
for Mr. Walker's comments.
6:50:42 PM
MR. WALKER said the five-year provision could be shortened to
four years.
CHAIR HUGGINS referenced a provision for project insurance, and
asked if that was important to AGPA.
MR. WALKER said that provision would not be a deal-maker or
deal-breaker. The language is helpful but AGPA will proceed
regardless.
6:52:53 PM
CHAIR HUGGINS commented that the all-Alaska gas pipeline is
popular, but critics are against Fairbanks and Valdez
controlling the pipeline.
MR. WALKER said that the North Slope, Fairbanks, and Valdez
would be the three entities controlling the line; the structure
is such that 60 percent of gas would go to the state and 40
percent would go to each municipality on a per capita basis.
AGPA would not regulate who gets the gas.
He added that AGPA is an infrastructure that allows the movement
of commodities; its rate of return is less than one percent. The
return comes in the form of using the resources in the state.
6:55:22 PM
CHAIR HUGGINS said that people have complained that Wasilla
isn't being fairly represented on the issue.
MR. WALKER said he appreciates the opportunity to clarify the
issue.
CHAIR HUGGINS said the more competitors in the process the
better.
MR. FUHS said that a smaller project will be more successful
because everyone is not required to participate and the
situation won't be compromised. Holding out for the biggest
project may mean it would never happen.
CHAIR HUGGINS said the concept of risk to the state is critical.
There being no further business to come before the committee, he
adjourned the meeting at 6:59:37 PM.
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