Legislature(1999 - 2000)
03/08/2000 03:12 PM Senate RES
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SENATE RESOURCES COMMITTEE
March 8, 2000
3:12 p.m.
MEMBERS PRESENT
Senator Rick Halford, Chairman
Senator Robin Taylor, Vice Chairman
Senator Pete Kelly
Senator Lyda Green
MEMBERS ABSENT
Senator Jerry Mackie
Senator Sean Parnell
Senator Georgianna Lincoln
COMMITTEE CALENDAR
Briefing: Foothills Pipe Line Company
SENATE BILL NO. 249
"An Act authorizing a land exchange between the Department of
Natural Resources and Alaska Hardrock, Inc.; and providing for an
effective date."
-MOVED SB 249 OUT OF COMMITTEE
PREVIOUS SENATE COMMITTEE ACTION
SB 249 - No previous action to consider.
WITNESS REGISTER
Mr. Robert L. Pierce, Chairman
Foothills Pipe Lines Ltd.
3100-707 Eighth Avenue, S.W., Suite 3100
Calgary, Alberta T2P 3W8, Canada
POSITION STATEMENT: Testified for Foothills Pipe Lines
Mr. John Ellwood, Vice President
Engineering and Operations
Foothills Pipe Lines Ltd.
3100-707 Eighth Avenue, S.W., Suite 3100
Calgary, Alberta T2P 3W8, Canada
POSITION STATEMENT: Testified for Foothills Pipe Lines
Mr. Harry Hobbs, Vice President
Transportation and Corporate Secretary
Foothills Pipe Lines Ltd.
3100-707 Eighth Avenue, S.W., Suite 3100
Calgary, Alberta T2P 3W8, Canada
POSITION STATEMENT: Testified for Foothills Pipe Lines
Mr. Jim Stratton, Director
Division of Parks and Outdoor Recreation
Department of Natural Resources
3601 C St., Suite 1200
Anchorage, AK 99503
POSITION STATEMENT: Supported SB 249.
ACTION NARRATIVE
TAPE 00-10, SIDE A
Number 001
CHAIRMAN HALFORD called the Senate Resources Committee meeting to
order at 3:12 p.m. and announced the first order of business would
be a briefing by representatives from Foothills Pipe Line Ltd.
MR. BOB PIERCE, Chairman and CEO of Foothills Pipe Line Ltd.,
introduced Mr. John Ellwood, Vice President of Engineering, and
Mr. Harry Hobbs, Vice President of Transportation and Secretary of
Foothills Pipe Lines Ltd. Mr. Pierce gave the following
testimony.
In short we are here because, as some of you know we've
been here before and we have always said that the day
would come when Alaska gas would go by pipeline to the
Lower 48. We're here because we think that day is
getting very imminent and we want to tell you why. We
appeared yesterday before Mr. Whitaker's -
Representative Whitaker's committee and said some of
the same things and I don't think I'll say anything
contrary today to what we said then. We have always
believed the Alaska Highway Pipeline was not only cost
effective, but it was environmentally sound and
politically palatable. There is a great deal of history
about this proposal. Some of you may recall there were
originally three different proposals to move Alaska gas
to market in the 1970's: the El Paso Project, which was
LNG to California; theArctic Gas Project, which would
pipeline gas across the North Slope to the MacKenzie
Valley and Canada and then through Canada to the U.S.
market; and the Alaska Highway project, an overland
pipeline along the Dalton and Alaska Highways through
Alaska and Canada to the Lower 48. The history is that
both the United States and Canada agreed that, when
all things were considered, the Alaska Highway route
was the best option.
Accordingly, certificates were issued, international
agreements were signed by the President and Prime
Minister. The agreements were ratified by Congress in
the U.S. and by Parliament in Canada and the decision,
the agreement, and the legislation selecting the route
have the force and effect of a treaty between our two
countries.
There is now a new proposal being floated whose central
premise is to move Alaska gas east to the MacKenzie
Delta and then down the valley to join the Canadian
pipeline grid. This only differs from the earlier
Arctic Gas project that was rejected in that the
pipeline is going to be laid in the ocean under the
ice. This is not a new concept. We and others
selected similar options before and we predict this
proposal will fail for the same reasons, namely
economics, environment and politics.
But, clearly, there is a renewed interest in building a
pipeline from Alaska to the Lower 48 states. The U.S.
demand and price for natural gas continues to escalate,
driven primarily by the demand for new gas-fired
electrical generation. Most analysts predict a 30 TCF
U.S. market and up to a $3.00/MCF price by the second
half of this decade. Indeed it could happen before the
second half of this decade.
There is a need to connect new sources of supply. Many
believe that the U.S. demand will be met with increased
exports of Canadian natural gas. We believe this
assumption is too optimistic. Recently, the chairman
of the National Energy Board warned about the potential
of a $2/BCF per day shortfall in deliverability from
Canada by 2001. This winter we are seeing surplus
pipeline capacity and the 1.5BCF per day Alliance
pipeline will be put in service later this fall. That
capacity will be vacant when the new pipeline comes in
because it won't be filled with Canadian gas.
And finally, and the most important thing from your
standpoint, is that the North Slope is the largest
unconnected gas reserve in North America. It may
basically be the largest gas reserve. We've been in
the gas business for some time and, as an Albertan, we
have a particular perspective on this issue because at
one time, much of Alberta's natural gas was stranded,
not unlike your current situation. Industry and
government took up a challenge as to how they were
going to put it to use and the strategy is not
different from what we now understand Alaskans are now
thinking of, namely you look for increased market
opportunities in the Lower 48 but you must look for
ways to use and further process the gas within the
state. That provides the jobs that you need for your
people.
There was enough gas in Alberta for both purposes. The
Alberta strategy was to process some of its gas within
and find new markets for the rest and it succeeded, in
part, because of the policies of government and the
development plans of industry but also because Alberta
was in the right place at the right time. We believe
you are in the right place and that the right time is
very near.
Alberta's strategy was to develop a petrochemical
industry in the province and aggressively pursue
increased exports to the U.S., including new markets in
the U.S. Northeast and it was very successful.
Capital investments in the petrochemical industry in
Alberta are approaching $7 billion Canadian. Over 400
construction jobs are created for each $1 billion
investment and a single $200 million petrochemical
derivative plant in Alberta pays cumulative taxes of
$300 million Canadian over a 20-year period.
At the same time, natural gas exports to the U.S. have
increased dramatically in the past two decades. The
question from here, of course, is can the distance
factor be overcome. Will the Chicago gas price allow
for the profitable movement of Alaska gas south? We
believe that the answer is yes and we believe that the
best way to transport your gas to market is along the
Alaska Highway pipeline.
The current projected capital cost for the pipeline is
around U.S. $6 billion in order to get to what BP Amoco
calls the Alberta gas hub, which would be the point at
which Alaska gas would reach the various pipelines
serving North America out of both Canada and the United
States - out of Alberta. And you, in moving your gas,
would have a choice as to which of those you use.
It is necessary that there be spare pipeline capacity
or otherwise your price goes down so you have to be
able to move it on to the eventual market and therefore
will have to connect into areas where you have more
than one choice.
We now believe that the appropriate design for the pipe
would involve using a high-pressure pipe that has the
capability of moving gas liquids that might otherwise
be left stranded on the North Slope. We anticipate
throughput volumes in the range of 2.5 to 3 BCF per
day. The distance would be about 1,700 miles commencing
at the North Slope with roughly one-half of the new
pipeline being built in Alaska and the other half in
Canada.
MR. PIERCE continued.
Because we have many of the key approvals in hand, we
believe our pipeline could be in service by as early as
2006. This is an ambitious plan, but we believe it to
be a realistic one. Some ask how is it that this
pipeline is so much cheaper than previous estimates.
There are several reasons. A sizeable section of the
pipeline has been built but a higher strength steel
exists, higher operating pressures enable us to use
smaller diameter pipe to move the same volume of gas.
New welding techniques enable us to achieve higher
productivity in pipeline construction. And there are
many other improvements, which were not there when we
were originally certified 20 years ago.
To give you an idea of how much things have changed,
when we originally estimated this project we had in
excess of $1 billion for northern communications and
now you can get all the northern communications you
want by renting a telephone today. We have done all
kinds of studies on permafrost. We thought we would
have to truck in gravel to make berms but we don't have
to any more. We can electronically check what's
happening to the pipe every hour of the day and if it
is starting to move, we can go in and adjust it. So
there have been many changes on the technical side.
There are currently, of course, key sensitivities to
this project. Two of the most important are the cost
of gas in the market and the pipeline throughput
volumes. Ultimately, for any project to succeed, there
must be something in it for the producers, the
pipelines, the major suppliers and unions, the in-state
gas users and clearly the governments and people of the
state where the gas originates. Naturally, the higher
the price of gas in the Lower 48 states, the more money
there will be to go around. We believe that a Chicago
gas price in the range of $3.00/MCF could provide a
sufficient profit margin for everyone to sign on.
Number 529
Turning to the question of throughput, as a rule of
thumb, larger pipeline capacities equal lower per mile
transportation totals. But, of course, pipeline designs
must also be cognizant of the Lower 48 marketplace.
Overbuilding the pipeline in the beginning could defeat
the purpose of the exercise.
There are obvious synergies if we can harmonize
pipeline designs so as to serve both the Lower 48 and
the in-state growth in gas demand. This should be a
win-win for Alaska economic development and the Alaska
Highway pipeline, not to mention the consumer advantage
for Alaskans that will result from the opportunity to
use natural gas for home heating.
Foothills is a partner in the ANS LNG project and is
the second largest participant with ARCO. We have been
actively investigating these synergies and believe that
we could save several hundred million dollars if the
two projects could be brought together.
Let me now return to those three fundamental factors of
any pipeline proposal: 1) economics, 2) environment,
and 3) politics. Can an alternative proposal move the
gas cheaper?
One alternative currently being investigated in some
circles is the proposal to build a pipeline under the
ice of the Beaufort Sea. The promoters claim their
pipeline is shorter, will encounter fewer construction
obstacles, and, therefore, can deliver Alaskan gas into
the Canadian grid cheaper than the Alaska Highway
Pipeline. It is true that the pipeline through the
ocean may be shorter by approximately 125 miles, about
seven percent of the total project.
However, distance alone will not make the proposal more
cost efficient. Why? Because the Alaska Highway
Pipeline will be built along an existing transportation
corridor, the Dalton and the Alaska Highways. Easy
access to the right-of-way is extremely important to
low-cost, efficient pipeline construction. Without it,
the movement of personnel, materials, and equipment
would be a major undertaking in its own right. To
build a pipeline where no road currently exists often
means that the cost of a new road is included in the
capital costs of the pipeline. And as you know as well
as we, northern roads cost a lot of money to build and
maintain.
The terrain along the Alaska Highway route provides no
greater construction challenges than those now faced in
northern Canada and Alaska. Most of the geotechnical
work has been completed along the right-of-way. The
mountain pass in the Brooks Range is difficult
construction, but not long and not extraordinary by any
means.
We have many of the necessary permits in hand and most
rights-of-way have been secured. An alternative
project must begin from scratch. That effort requires
time and money and plenty of both, as we can attest.
We believe that a pipeline under the ocean will cost
more.
The second fundamental factor relates to environmental
issues. Would an offshore North Slope pipeline be more
environmentally benign? We don't think so. In fact,
environmental factors played a key role in the original
decision when the Alaska Highway Pipeline route was
chosen. Again, the fact that the pipeline follows an
existing well-used transportation corridor means that
it will be less environmentally disruptive,
particularly when compared to a pipeline through a
pristine undeveloped area. Some would scoff at such
suggestions, but they'd be well advised to study some
recent samplings of North American attitudes regarding
energy issues. The most important energy industry issue
is not cost but the effects on the environment. That
is a marked change in public sentiment and perhaps a
fundamental change.
And since we live in a part of the country far from the
centers of population, just like you do, we find that
the people who live a long way away think that they
know more about our environment than we do and, by and
large, find ways to stop us from dealing with it.
So, finally the political factor - and we say anything
about politics with some trepidation because that's
your business, not ours. But we think politics often
boil down to a debate about what benefits will flow
from any given public policy. This debate will be about
two very different pipeline proposals: the one that we
present will run through the length of your state. We
can become a catalyst for trigger development and will
provide jobs for your citizens and, in the long run,
will generate maximum tax revenues.
I began by speaking about Alberta - the jobs that were
created, the business investment that has resulted and
the taxes that have been generated. If maximizing
benefits for Alaska is the goal of energy development,
then our pipeline can help. Frequently, pipelines are
instruments of national, regional, and state economic
and social policy. They often present difficult
choices about complex economic and long-term
environmental priorities and, ultimately, they are
about politics. Our project, we believe, is
economically competitive with any alternative.
Environmentally it is far superior. We will leave it
to others to debate about the best public policy.
Our project won the day once and it's time this issue
was heard. We think we have a head start in winning
this matter again, because we're there, we've been
there, and there are a lot of things in place. Thank
you and we'd welcome your questions.
Number 850
CHAIRMAN HALFORD thanked Mr. Pierce for his testimony and asked
what the current gas price is in the Chicago market.
MR. HARRY HOBBS, Vice President, replied that the spot price today
was $2.83 in Chicago and the 12-month strip price on NYNEX today
was $2.93.
CHAIRMAN HALFORD asked if it would be to Alaska's advantage to
have the gas ownership in Prudhoe Bay in the hands of one company
or split as it is.
MR. PIERCE answered that more than one owner means more
competition. From his standpoint, the gas could still emerge with
the three companies that own it. If the merger between BP Amoco
and ARCO goes through, there will be one less company and
decisions would be made quickly. He would expect that if the gas
went back to ARCO, now that BP understands the importance of it,
things might move quickly too. He said if it was his money, he
would want to find a way to get that money back as soon as
possible.
MR. PIERCE said Foothills thinks Alaska has a particular
opportunity in time. Foothills believes the U.S. Department of
Energy's job is not to estimate the supply; its job is to talk
about the demand. With a 30 TCF per year demand, there isn't
enough gas in the Lower 48 to serve that demand and the only way
to serve it is with Alaska gas. The Department of Energy does not
disagree about the supply. Decline rates are currently 20 percent
and may be increasing. If 21 TCF of gas is the present amount and
between 4 and 5 TCF per year has to be put back in to stay whole,
a lot of new gas is needed. He indicated on a map that the gas
has already been found here and it's recyclable. There is talk
about drilling for more gas in the North. If more is found, the
infrastructure will have to be put in. Then, the companies will
have to go through all the environmental problems to get a permit
to deal with it.
MR. PIERCE added that a key point is that Congress agreed with the
Canadian government to put a system in place to move Alaska gas to
the Lower 48 and most of the permits are in place. Timing is
important. Three years ago he told the committee the time was
getting closer, but it's really close now. He and Mr. Ellwood
have built pipelines all over the world. Mr. Ellwood believes
this pipeline can be in place within five years; the construction
time will take three years, which leaves only two years to do the
other things that have to be done.
SENATOR TAYLOR asked what impediments at the legislative level
still stand in the way and what the legislature can do to expedite
this project.
MR. PIERCE answered that the legislature should allow all projects
to compete on the same basis. The legislature shouldn't put an
impediment in front of one that the others don't face, because the
market will determine whether or not it makes sense. Their view
of ARCO is that everyone in the world is trying to get into one
market and that is the Lower 48 of the United States. It's the
best market to sell the product to; it's a growing market. As the
only one with the gas, Alaska should "own the market" - that is,
set the price. No one else has that under their control. When
you establish a way for a product to go the market, all of a
sudden the place that originates the product finds more and more,
because they look for it.
MR. PIERCE explained that there are six pipelines going east out
of Alberta that move about 8 BCF per day. The last line was a 48
inch line. They are not necessarily talking about just one. They
put a petrochemical business in Red Deer, Alberta, which is the
half way point of the province. The weather there is worse than
Alaska's. Red Deer is now the largest ethane producer in North
America and the lowest cost producer. It is exporting and is as
far from tidewater as Fairbanks would be. He would think Alaska
could put a petrochemical industry here by moving the gas to it so
that it would be closer to tidewater. The industry is very
competitive in nature. The gas is bound to be cheaper here than
it is after you pay the cost of transportation to the Lower 48.
SENATOR TAYLOR said he understood Mr. Pierce's comment about
allowing all projects to compete equally. He wanted to know what
the legislature needs to do now so that the Foothills project
could move forward or so that a decision could be made on all
projects.
MR. PIERCE answered that Foothills really doesn't feel there is
anything Alaska needs to do. Foothills needs the ability to sit
down with a producer and work out the costs in final form. He
thinks BP Amoco has been trying to do that and Foothills has been
in discussions with BP. When that's done, the decision will be
made on an economic basis. There may be something the legislature
could do at that time. Clearly, they expect to receive the right-
of-way permits without any difficulty because they have always had
up-front experiences with the Alaskan government. The key at this
point is to sit down with the people who own the gas and then
proceed in a normal fashion.
SENATOR TAYLOR said he thought Alaska owns about 27 percent of the
gas.
MR. PIERCE said that is correct, but he doesn't expect that the
state would produce it separately from the other owners. He said
Alaska could use that as a means to assist the project. There are
ways the state could help the financing and, in the long run, not
go short of money. When the first pipeline was built across
Canada, the Canadian government owned, as a crown corporation, the
particular portion of it across the head of a lake. In due course
it was purchased back at full cost. The project has to be
economical so it may need help in the beginning. Foothills has
heard that BP Amoco intends to be an owner, a deliverer, and
intends to play very big in the market. Amoco is the largest gas
player in North America. Mr. Pierce said that Foothills does not
think the problem will be with the State of Alaska, it believes
the problem will be further east.
SB 249-DEPT NAT RES & AK HARDROCK LAND EXCHANGE
CHAIRMAN HALFORD thanked Mr. Pierce for his presentation and
announced SB 249 to be up for consideration.
MR. JIM STRATTON, Director of the Division of Parks and Outdoor
Recreation, said the Independent Mine State Historical Park is
located about 90 minutes from Anchorage in the Hatcher Pass area.
It's an historic mine operation that was closed down during WWII
and it came to the division from those mining interests in 1980.
Currently, about 52,000 visitors per year make their way there.
It's very accessible and it is near the proposed new ski area in
Hatcher Pass. It's a major tourist attraction in the Mat-Su
Borough and it sits on one of the few roads off the major highway
system. The main attractions are the historical mining structures
and the beginning of one of the mine tunnels in the side of the
mountain. Maintaining historical buildings is expensive. The
division held a public meeting in March of 1997 to discuss options
with the community about different ways to protect and sustain the
buildings in the Park. Everyone at the meeting acknowledged that
some kind of adaptive reuse of the structures was the only way to
ensure the buildings would remain standing.
MR. STRATTON said, in his mind, the only way to accomplish that is
to work with a private partner to develop a visitor destination
facility that would include overnight lodging, food service, a
gift shop, and tours. This is compatible with the purposes for
which the Park was established a couple of years ago but the
division learned from prospective private partners there is not
enough cash flow in lodging and food service alone to support the
investment needed to adapt and reuse the buildings.
MR. STRATTON told committee members the prospective private
partners would need another attraction, such as underground mine
tours. However, the division did not own beyond the first few
hundred feet of the tunnel. The tunnel was owned by Alaska
Hardrock, Inc., who is interested in pursuing an exchange for
property the State owned on the Willow Creek side of Hatcher Pass
that Alaska Hardrock is currently using for its mining operations.
The division got together last year with Alaska Hardrock and
signed a preliminary exchange agreement and split the costs of
doing the surveys and appraisals. In the final analysis, they
signed an agreement in which the State will receive 118 acres of
underground mine tunnel valued at $87,000 and Alaska Hardrock will
receive 107 acres of surface estate on the Willow Creek side of
Hatcher Pass valued at $66,500. Because of the unequal values of
the exchange, legislative approval is required, which is why SB
249 is before the committee today.
SENATOR TAYLOR asked how much Alaska Hardrock will pay per acre
for the State lands. He figured it to be a little over $500 per
acre.
MR. STRATTON said it calculated out to $620.
Number 1811
SENATOR TAYLOR asked if the division had to survey that land,
stake it and create a subdivision with a five-year plan before it
could be conveyed.
MR. STRATTON said the parcels had to be surveyed this summer and
Alaska Hardrock paid for that. The survey for the acreage the
State is receiving did not have to be redone.
SENATOR TAYLOR asked if the State is just receiving tunnels.
MR. STRATTON said that is correct.
SENATOR TAYLOR asked if they wouldn't need legislation if the
appraisal values had been the same.
MR. STRATTON said that is true.
SENATOR TAYLOR commented that he needs to talk to the Division of
Lands because that might be the only way an Alaskan can acquire
land in this state.
MR. STRATTON replied they try to be creative at the Division of
Parks.
SENATOR TAYLOR said he didn't want to discourage them in any way.
CHAIRMAN HALFORD asked if the division received any opposition to
this proposal.
MR. STRATTON replied that the division had a public comment period
for the month of December and the first part January and received
a couple of comments from folks, but essentially it's a non-
controversial action.
Number 1898
SENATOR TAYLOR moved SB 249 out of committee with individual
recommendations. There were no objections and it was so ordered.
With no further business to come before the committee, CHAIRMAN
HALFORD adjourned the meeting at 4:55 p.m.
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