01/28/2004 03:35 PM Senate RES
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ALASKA STATE LEGISLATURE
SENATE RESOURCES STANDING COMMITTEE
January 28, 2004
3:35 p.m.
TAPE(S) 04-4
MEMBERS PRESENT
Senator Scott Ogan, Chair
Senator Fred Dyson
Senator Ralph Seekins
Senator Ben Stevens
Senator Kim Elton
MEMBERS ABSENT
Senator Thomas Wagoner, Vice Chair
Senator Georgianna Lincoln
COMMITTEE CALENDAR
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
SENATE BILL NO. 241
"An Act making an appropriation to the Alaska Natural Gas
Development Authority; and providing for an effective date."
MOVED SB 241 OUT OF COMMITTEE
SENATE BILL NO. 264
"An Act repealing the time limitation on the authority of the
Department of Natural Resources to enter into agreements with a
person or persons desiring to own an oil or natural gas pipeline
proposed to be located on state land for the purposes of
providing for payment of the reasonable costs incurred in
preparing for activities before receipt of an application under
the Alaska Right-of-Way Leasing Act; and providing for an
effective date."
MOVED SB 264 OUT OF COMMITTEE
PREVIOUS COMMITTEE ACTION
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
01/21/04 (S) Heard & Held
01/21/04 (S) MINUTE(RES)
01/28/04 (S) RES AT 3:30 PM BUTROVICH 205
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
01/21/04 (S) Heard & Held
01/21/04 (S) MINUTE(RES)
01/28/04 (S) RES AT 3:30 PM BUTROVICH 205
BILL: SB 264
SHORT TITLE: REPEAL PIPELINE PREAPPLICATION DEADLINE
SENATOR(s): RULES BY REQUEST OF THE GOVERNOR
01/14/04 (S) READ THE FIRST TIME - REFERRALS
01/14/04 (S) RES
01/28/04 (S) RES AT 3:30 PM BUTROVICH 205
WITNESS REGISTER
Mr. Bill Popp
Oil and Gas Liaison
Kenai Peninsula Borough
43335 Kalifornsky Beach Road, Suite 16
Soldotna AK 99669
POSITION STATEMENT: Supported SB 247.
Mr. Harold Heinze, CEO
Alaska Natural Gas Development Authority
Department of Revenue
PO Box 110400
Juneau, AK 99811-0400
POSITION STATEMENT: Supported SB 241
Ms. Marty Rutherford, Deputy Commissioner
Department of Natural Resources
400 Willoughby Ave.
Juneau, AK 99801-1724
POSITION STATEMENT: Supported SB 264.
ACTION NARRATIVE
TAPE 04-4, SIDE A
SB 247-AK NATURAL GAS DEV. AUTHORITY INITIATIVE
CHAIR SCOTT OGAN called the Senate Resources Standing Committee
meeting to order at 3:35 p.m. Present were Senators Stevens,
Seekins, Dyson, Elton and Chair Ogan. Senators Wagoner and
Lincoln were excused. The first order of business to come before
the committee was SB 247, sponsored by Senator Wagoner and
discussed the previous week.
MR. BILL POPP, Oil and Gas Liaison, Kenai Peninsula Borough,
supported SB 247 and said, "We believe there should be a
component of due diligence in the process if the Alaska Natural
Gas Development Authority Project does, in fact, go forward."
He explained the Cook Inlet Basin accounts for 85 percent of the
power generated from natural gas within the Railbelt grid, but
proven reserves are estimated to be enough for a 10-year supply.
Additional potential reserves are questionable in terms of
bringing them to market at this point. The Borough feels that
Cook Inlet should be a component of any project, at least during
the analysis, to see if that route offers any economies of sale
that reduce the overall project cost "... because that's what
this project will be all about...."
CHAIR OGAN asked why the Assembly passed a resolution supporting
a buyback of gas leases in the Kenai Peninsula when everyone
knows about the gas reserves problem. Supporting SB 247 is
inconsistent with that position.
MR. POPP replied that a split vote of the Assembly requested
buyback of 22,000 acres of state leased properties below Anchor
Point in the Homer Bench area. The mayor chose not to veto the
resolution and let it go forward based on the fact that there
are other ways to resolve the issue. Whether the buyback happens
is another policy that state government would have to make. The
administration strongly supports new development of gas
resources in the Kenai Peninsula Borough wherever they may be
and the south peninsula is a key area.
SENATOR SEEKINS said he was confused by that vote as well and he
still isn't clear about what the Kenai Borough Assembly wants
the legislature to do. He asked if a spur line from Glennallen
to the Southcentral gas distribution grid (page 1, lines 7 - 8)
would satisfy demand on the Kenai Peninsula for both residential
and commercial uses considering the current decline in existing
fields.
MR. POPP replied that the answer is complex and the spur line in
the greater scheme of Proposition 3 is a sideshow. The $12
billion estimate is strictly for the line from the North Slope
to Valdez. No cost analysis has been done on the 160 - 190 mile
spur line from Glennallen to the Cook Inlet Basin. If the
construction from the North Slope to Valdez is successfully
completed in 5 to 7 years and on budget, the spur line may be
another 2 to 4 years behind that, because of the issues of
manpower and simultaneous construction. He did not know what
need would be left by the time the spur line was completed.
The Kenai Borough already has an industrial base that relies on
plentiful supplies of natural gas, which is now over 120 BCF
annually (between the Agrium nitrogen plant and the LNG export
plant). Also, eliminating hundreds of miles of pipe would drop
the cost of the project. Expanding an existing LNG plant, which
can be done according to Conoco Phillips would eliminate the
need for a new plant completely. Us of existing capacity, dock
and support facilities and workforce can also reduce a project's
cost. That's why the borough thinks this route should be looked
at before a final route is chosen.
SENATOR SEEKINS related that Senator Wagoner had graphically
explained to the committee how, eventually, demand for
residential gas in the Anchorage Bowl would bring the supply for
commercial prospects to zero without some additional gas supply.
He asked Mr. Popp if he agreed.
MR. POPP replied that a pattern of growth is taking place in the
gas heating utility market that is showing that market will be
taking a bigger and bigger bite out of the overall supply
situation within the Cook Inlet Basin. High demand days will
necessitate utilities shutting down supplies.
That's becoming more and more pronounced with each
passing year with our current deliverability and
supply situation in the Cook Inlet Basin.
The ongoing exploration activities will not solve problems for
the 15 - 25 year horizon and longer term supply needs will have
to be found elsewhere.
SENATOR ELTON said this committee has talked about funding for
ANGDA and Chair Ogan's bill, which expands the scope of ANGDA to
the highway route and pushes back the date for the report by six
months to January 1, 2005. He said although that proposal makes
sense, the appropriation is for $2.15 million to accomplish the
existing scope of work. He asked if the scope is expanded and
the fiscal note as well, would the borough consider providing
matching funds.
MR. POPP replied that he would have to ask the Assembly and
Mayor. He noted that between $12 million and $14 million worth
of industry research has been performed on the route that is
being added. It is available - as is the Yukon Pacific research
- for a price, probably commensurate with the amount previously
spent. If $2.15 million is sufficient to gain access to Yukon
Pacific's research about the key pieces the Valdez route
requires, he thought a proportional amount may be required for
the research generated by the previous pipeline task force. The
task force's research was based on the premise that industry
could not do it at a reasonable rate of return.
CHAIR OGAN recalled that over $100 million was spent for design
and permitting, and expressed concern that a route change will
require a new EIS, engineering studies and permits. He didn't
know why BP decided that route wasn't feasible and said,
although he would love to see it happen, he didn't really feel
that it would.
MR. POPP understood his concerns and added that any number of
permits are still outstanding for the Valdez terminus, itself.
Seven hundred million metric tons of rock must be removed to
create a flat site and a barge operation must be permitted.
Industry officials indicated that they believe the Railbelt
route is permittable. Probably an EIS would have to be done, but
that issue would arise with the Valdez terminus, as well. Those
issues must be balanced and a fair comparison of routes should
be made.
CHAIR OGAN asked if Agrium and the LNG plant currently use 60
BCF each per year.
MR. POPP replied that those are round numbers; the LNG plant
uses approximately 70 BCF per year depending on temperature
conditions and other variables. At peak efficiency and full
capacity, Agrium could use 55 BCF per year.
CHAIR OGAN said the Valdez proposal is for about 530 BCF per
year for LNG. He asked if a new plant to process that much more
gas would have to be built.
MR. POPP replied that the existing plant is operating at
capacity now, but the existing footprint and dock facilities can
be expanded for larger capacity without the removal of anything
but trees and overburden. If a new plant is necessary, a number
of sites within the Cook Inlet Basin are readily buildable.
SENATOR SEEKINS asked if the Valdez line were built, whether the
Anchorage Bowl would depend on the deliquefication plant from
Valdez for natural gas?
MR. POPP replied that is a good question. The industrial base
would be the first to go, because home utilities would take
priority over industrial uses. Hundreds of jobs would be lost.
Gas could be imported to Anchorage, maybe even from a foreign
source.
CHAIR OGAN asked Mr. Popp to relay to the Assembly his and
Senator Seekins' concerns about its mixed messages. Legislators
want a consistent message for or against gas development.
MR. POPP said that the Assembly might be entertaining the
Chinese national gas buyer who is coming to Alaska in a couple
of weeks along with the vice president of the Korean National
Gas Company.
CHAIR OGAN thanked him for his testimony and held SB 247 for
further work.
4:02 - 4:04 p.m. - at ease
SB 241-APPROP: NATURAL GAS DEVELOPMENT AUTHORITY
CHAIR SCOTT OGAN announced SB 241 to be up for consideration.
MR. HAROLD HEINZE, CEO, Alaska Natural Gas Development Authority
(ANGDA), emphasized the importance of timing right now in terms
of finishing the charge that is provided under ballot measure 3.
About four months are left in ANGDA timeline. His motives for
finishing on time have to do with the law and with the LNG
market, which is evolving dramatically. He explained:
If we're going to play, if we're going to have a
chance, we have to decide to make some movement and to
show that the project has legs.... The study in June
will provide those legs, if they are there, and then
you can look at it and make whatever judgments you
want as to whether we proceed or not. Remember, the
funding here is the funding to finish that. The rest
of the...funding would come from the financial
markets, not from the State of Alaska....If the
project is viable, we believe we can raise the money.
We are at a crucial point. Very frankly, if we don't
have funding in a matter of weeks here, our ability to
execute a quality feasibility study for you is greatly
diminished. We're up against the wall now in terms of
getting all this work done....
CHAIR SCOTT OGAN said he had worked for a gas producer and
usually gas is sold by entering into a memorandum of
understanding (MOU) or something similar. He asked Mr. Heinze
how he saw ANGDA's role in the marketplace.
MR. HEINZE replied that he has finessed ANGDA's approach to the
producers as commercial and knows he can make a deal with them.
If there is an economically viable transportation project, he
believes they would want to ship gas on it.
The first thing he would do following a determination of
feasibility is go to the open season type process where one
offers up the transportation capability. People who are
interested in it come forward. The two recent stranded gas
applications promise the exact same kind of treatment as a very
early step. It is anticipated that all three gas companies would
come forward with the stranded gas applications, but just one
company coming would make sufficient economics to make its
project work. If no one came forward during the open season, he
would offer to buy the producer's gas or work to have a down-
stream market buy it.
CHAIR OGAN asked if the Authority would be the transporter of
the gas and noted that trucking companies usually don't buy
something to sell down the line. He asked who buys and who sells
under his scenario.
MR. HEINZE replied that the ballot measure gave ANGDA broad
authority, but ideally the state would provide only a portion of
the transportation or maybe just the liquefaction plant. "We
were given a mission to help the project."
The Authority is having conversations with various down-stream
companies and hopes to continue them. On the up-stream side, the
producers have said that they would consider an offer to buy
their gas and have also said they would consider shipping it. In
fact, that would be their preference. He is not concerned about
whether they do it, but when they do it. He hadn't seen anything
from the producers' side that accelerated the timeline.
CHAIR OGAN noted that the language under "Powers of the
Authority" said "acquire natural gas supply" and asked him where
ANGDA would get the money.
MR. HEINZE replied that it is fairly normal in these types of
projects to enter into a whole series of interlinking contracts
with terms and contingencies; everything falls into place at
once.
SENATOR ELTON said he is frustrated about not getting anything
[in terms of the $2.15 million general fund appropriation from
the Department of Revenue in SB 241] and asked if removing
"ANGDA" would mitigate some of the reluctance DOR has to support
the request.
MR. HEINZE replied that is a constructive suggestion, but his
main concern is that one of the unique abilities the Authority
brings to the project is its tax-exempt status. He suggested
that putting the governor and his chief of staff in control of
the organization might neutralize that status.
SENATOR ELTON recapped that Mr. Heinze said time is of the
essence and asked if having another six months to accomplish the
job instead of three would take some of the pressure off ANGDA
and assure a better quality product.
MR. HEINZE replied that he didn't want to speak for the board,
but its members have presented themselves clearly. They would
prefer to have an answer now, even if it's the one they don't
want to hear. Second, the Authority has a broad role to play and
feel it would be best to fulfill its current mission by June so
that it could become an effective force in whatever
considerations of the other routes. He advised:
If we don't look at the LNG route through Valdez,
nobody else will and we'll never know if it offered
Alaska benefits that far exceeded the benefits of any
other project. This is the one time to look at it; the
one and only shot at it. And if we don't look, we'll
never know. If we wait until next year or the year
after to look and let the timing be driven by the
highway project, I think we will have lost the
opportunity for the LNG project to be meaningful in
that regard. There may be some things in the
Authority's structure that would fit happily with the
choice that's been made and the choice will have been
made to go down the Highway....
SENATOR ELTON asked if he plans to do a bifurcated report - one
in June and then a supplemental report on a highway route six
months later.
MR. HEINZE replied that it is his intention to meet the
statutory requirement. If [the Legislature and governor] are
undecided about whether to pursue the project by the middle of
the year, they might as well concede the LNG marketplace for an
extended period of time. Many valuable pieces of information
will be contained in the report that the Legislature may want in
front of it as it considers the Stranded Gas Act applications.
SENATOR ELTON said he is sympathetic to ANGDA's request and
wanted to know why the administration wasn't responding.
CHAIR OGAN inserted that he should ask the administration.
SENATOR ELTON retorted that he had, but had received no answer.
SENATOR SEEKINS asked if ANGDA had had any conversations with
the producers to date as to whether or not they would ship their
gas on a pipeline if it existed and was a state-owned asset.
MR. HEINZE responded that the producers had been asked that
question numerous times and have responded in the affirmative.
He has been reluctant to have that conversation with them
formally, because the Authority has not determined the
feasibility of the project and wants to be fairly certain the
answer would be yes.
SENATOR SEEKINS asked if ANGDA could at some point sell futures
to pay for construction of the line.
MR. HEINZE replied that the gas is available - about 8 bcf per
day. The only speculation would be on the cost of transport and
whether there is a market down-stream. Then ANGDA could borrow
money.
TAPE 04-4, SIDE B
4:30 p.m.
SENATOR SEEKINS asked if he would view a legislative decision to
not fund ANGDA's request now to be the will of the Legislature
to not proceed with the initiative's mandate.
MR. HEINIZE replied that he would rather hear right now if that
is the Legislature's decision. Members of the Authority could
move on, but he thought it would be a big disappointment for the
state.
You would have lost a look down a project that may
hold some very interesting benefits for Alaska that
you'll never realize any other way....You will have
lost an opportunity to look at some interactions with
another project that could represent how the states
contribute towards it with federal money rather than
state money....Very frankly, those benefits are pretty
considerable....
In June, I am not going to have spent or done the work
that the producers did with $100 million. What I would
ask you to think about is how much of the $100 million
do you know about. What do you know? I will suggest in
June; I will give probably 10 to 100 times more
information than they are going to give you. That
might be worth something to you right there to just
have the insights as to how these projects work, how
it interrelates and all those other things.
CHAIR OGAN commented that the charge of the committee is not to
necessarily see how the project fits in with all the other
finances, but whether it is necessary for the good of the people
and commercializing gas. He noted there were no further
comments.
SENATOR SEEKINS moved to pass SB 241 from committee with
individual recommendations. There were no objections and it was
so ordered.
SENATOR ELTON suggested that the Chair send a message to the
Finance Committee about Mr. Heinze's concern with timeliness.
4:30 - 4:32 p.m. - at ease
SB 264-REPEAL PIPELINE PREAPPLICATION DEADLINE
CHAIR SCOTT OGAN announced SB 264 to be up for consideration.
MS. MARTY RUTHERFORD, Deputy Commissioner, Department of Natural
Resources (DNR), said the purpose of this bill is to repeal the
sunset date in AS 38.35.145(c), the statute that allows DNR to
enter into agreements with perspective lessees to recover the
cost for preliminary work on a pipeline right-of-way lease
application. That provision ended on December 31, 2003. She
explained:
As a little background, Mr. Chairman, pipeline right-
of-way lease applicants must submit very detailed
applications that require a lot of engineering and
design work. To do that, applicants expend a great
deal of resources - just to complete that application.
The applicants have found and told us that it's very
useful to have agencies involved in the pre-
application so that they are aware of both permitting
issues at an early stage and detailed information that
we can provide them prior to getting their application
complete. We've also found that agency participation
during the pre-application phase expedites the review
and approval of the project ultimately.
This ability to enter into reimbursement agreements
has been used most recently for pre-application work
on the Pt. Thompson project before that project was
delayed and the Kenai Kachemak pipeline extension. It
might be useful for you to hear some of the types of
assistance provided at this stage. They include such
things as identification and explanation of applicable
state law and the regulatory requirements as well as
an explanation of the regulatory process,
identification of land ownership, not only state, but
federal and private. That affects who an applicant
must deal with to complete a pipeline right-of-way
lease. Another thing would be an identification of any
restrictions that exist on affected state lands which
might interfere with our authorizing a right-of-way
lease or hinder an applicant's ability to begin
construction. These things might include a third-party
interest such as a utility right-of-way or outside
influences such as archeological sights. We also
identify potential environmental issues such as
difficult stream crossings. Our assistance could
include reaching out to other affected parties. We
have done that in the past to help an applicant with
entities such as utilities that do have the right-of-
way or other landowners or even competing applicants
for the same right-of-way. We help an applicant to
understand the other party's interest and to help
resolve those conflicts.
Our assistance can be with helping an applicant to
develop an initial project application and perhaps one
of the most important aspects for a large project -
our ability to enter into reimbursement agreement for
the pre-application work allows us to staff up in a
timely fashion. So when an application does come in
the door, we can move the project through quickly.
MS. RUTHERFORD said the pre-application work is completely
applicant initiated. Without this legislation, DNR is not able
to work with the applicants until receiving an application. The
fiscal impact of passing this is zero, but the impact of not
passing it is significant. Without it, they can't enter into a
reimbursable service agreement and don't have any general funds
available to provide this type of assistance.
CHAIR OGAN asked when this bill was originally passed and about
the discussion of the sunset date in 2003.
MS. RUTHERFORD replied that she thought it was passed in 2000
and she couldn't find out why the sunset date was added.
SENATOR SEEKINS moved to pass SB 264 from committee with zero
fiscal note and individual recommendations. There were no
objections and it was so ordered.
CHAIR OGAN adjourned the meeting at 4:37 p.m.
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