Legislature(2007 - 2008)BUTROVICH 205
01/21/2008 03:30 PM Senate RESOURCES
| Audio | Topic |
|---|---|
| Start | |
| HB176 | |
| Mike Williams, Department of Revenue (dor) | |
| Adjourn |
* first hearing in first committee of referral
+ teleconferenced
= bill was previously heard/scheduled
+ teleconferenced
= bill was previously heard/scheduled
| + | TELECONFERENCED | ||
| + | TELECONFERENCED | ||
| = | HB 176 | ||
ALASKA STATE LEGISLATURE
SENATE RESOURCES STANDING COMMITTEE
January 21, 2008
3:40 p.m.
MEMBERS PRESENT
Senator Charlie Huggins, Chair
Senator Bert Stedman, Vice Chair
Senator Lyda Green
Senator Gary Stevens
Senator Bill Wielechowski
MEMBERS ABSENT
Senator Lesil McGuire
Senator Thomas Wagoner
OTHER LEGISLATORS PRESENT
Representative Kurt Olson
COMMITTEE CALENDAR
CS FOR HOUSE BILL NO. 176(RES)
"An Act creating the Fort Rousseau Causeway State Historical
Park."
MOVED CSHB 176(RES) OUT OF COMMITTEE
MIKE WILLIAMS, Chief Economist, Department of Revenue (DOR),
provided background information on natural gas.
PREVIOUS COMMITTEE ACTION
BILL: HB 176
SHORT TITLE: CREATE FORT ROUSSEAU CAUSEWAY PARK
SPONSOR(s): REPRESENTATIVE(s) WILSON
03/05/07 (H) READ THE FIRST TIME - REFERRALS
03/05/07 (H) RES, FIN
03/28/07 (H) RES AT 1:00 PM BARNES 124
03/28/07 (H) Scheduled But Not Heard
04/04/07 (H) RES AT 1:00 PM BARNES 124
04/04/07 (H) Moved CSHB 176(RES) Out of Committee
04/04/07 (H) MINUTE(RES)
04/10/07 (H) RES RPT CS(RES) 6DP
04/10/07 (H) DP: ROSES, SEATON, KOHRING, GUTTENBERG,
GATTO, JOHNSON
04/19/07 (H) FIN AT 1:30 PM HOUSE FINANCE 519
04/19/07 (H) Moved CSHB 176(RES) Out of Committee
04/19/07 (H) MINUTE(FIN)
04/20/07 (H) FIN RPT CS(RES) 7DP 1NR
04/20/07 (H) DP: NELSON, THOMAS, CRAWFORD, JOULE,
STOLTZE, HAWKER, MEYER
04/20/07 (H) NR: KELLY
04/30/07 (H) TRANSMITTED TO (S)
04/30/07 (H) VERSION: CSHB 176(RES)
05/02/07 (S) READ THE FIRST TIME - REFERRALS
05/02/07 (S) RES, FIN
05/09/07 (S) RES AT 4:00 PM BUTROVICH 205
05/09/07 (S) Heard & Held
05/09/07 (S) MINUTE(RES)
WITNESS REGISTER
REPRESENTATIVE PEGGY WILSON
Alaska State Capitol
Juneau, AK
POSITION STATEMENT: Sponsor of HB 176.
CLIFF STONE
Staff for Representative Wilson
Alaska State Capitol
Juneau, AK
POSITION STATEMENT: Commented on HB 176 for the sponsor.
MIKE WILLIAMS, Chief Economist
Department of Revenue (DOR)
Juneau, AK
POSITION STATEMENT: Gave presentation on natural gas issues.
ACTION NARRATIVE
CHAIR CHARLIE HUGGINS called the Senate Resources Standing
Committee meeting to order at 3:40:54 PM, Present at the call to
order were Senators Wielechowski, Stedman, Stevens and Huggins.
CSHB 176(RES)-CREATE FORT ROUSSEAU CAUSEWAY PARK
3:42:11 PM
CHAIR HUGGINS announced CSHB 176(RES) to be up for
consideration.
REPRESENTATIVE PEGGY WILSON, sponsor of HB 176, gave the
committee an overview of what the bill does. In the build up for
WWII, the Department of the Army constructed fortifications at
several locations encircling Sitka Sound. An 8,000-foot rock and
gravel road was built connecting several small islands west of
the then Navy's Sea Plane and Operating Base in Sitka. This
causeway terminated at the Army's command headquarters named
Fort Rousseau on Makhnati Island. She said some of the original
concrete structures built by the military are still in fair
condition. They include a tri-level command post, anti aircraft
gun batteries, three ammo magazines and two bunkers.
Construction of the Sitka Airport in the late 1960s eliminated
pedestrian and vehicle access. The causeway lands, most of which
belong to the State of Alaska, remain under management by the as
part of the Sitka Airport under the management of Department of
Transportation and Public Facilities (DOTPF).
REPRESENTATIVE WILSON said, Sitka Trail Works has received
federal and state grants to rehabilitate the causeway, but
cannot continue until the land is transferred to the Department
of Natural Resources. State Parks can provide the active
management with a very small fiscal note. Without this status,
there will be no authorization to move ahead with the
environmental and cultural resources assessments, planning,
interpretation, and rehabilitation of this historic site, thus
jeopardizing the considerable grant funds committed to this
effort. Since visitors are very eager to tour this WWII site, a
positive revenue stream to the general fund should be realized
in just a few years.
She said the proposed Ft. Rousseau Causeway State Historical
Park is small. It contains 58 acres of upland area with a sliver
of tidelands large enough for the footprint of a dock. It is
consistent with the purpose behind the establishment of parks
and in part promotes the growth and development and provides
opportunities and enjoyment for the citizens of Sitka as well as
visitors.
REPRESENTATIVE WILSON said this bridge couples the past with the
present. The causeway has been added to the National Register of
Historic Places and has been designated as an historical
landmark by the National Parks Service. Preservation of the
unique historical features of the Fort Rousseau area will remind
all visitors about Alaska's role in WWII and allow for a glimpse
into the life of the soldiers who stood ready to defend their
country.
CHAIR HUGGINS asked if the $16.8 thousand fiscal note was still
applicable.
REPRESENTATIVE WILSON replied that there is an updated fiscal
note of $18.1 thousand.
3:46:27 PM
SENATOR STEVENS asked if the department had any plans to install
placards with explanations.
REPRESENTATIVE WILSON replied yes; the business plan is a very
good one.
SENATOR STEVENS asked who Mr. Rousseau was.
CLIFF STONE, staff for Representative Wilson, explained that Mr.
Rousseau was a brigadier general who was commissioned by the
president of the United States to accept Alaska from the
Russians.
3:48:12 PM
SENATOR STEDMAN commented that during WW II Sitka was targeted
by the Japanese as the next invasion point in Alaska and the US
military built gun emplacements along the causeway and had radar
station on Harbor Mountain. The concept is to not only tie in
the military heritage of the park, but to also enhance marine-
based wildlife viewing.
3:51:01 PM
SENATOR STEDMAN moved to pass CSHB 176(RES) from committee with
individual recommendations and attached fiscal notes. There were
no objections and it was so ordered.
3:52:10 PM at ease 3:52:30 PM
SENATOR GREEN joined the committee.
CHAIR HUGGINS called the meeting back to order at 3:52:30 PM.
^Mike Williams, Department of Revenue (DOR)
MIKE WILLIAMS, Chief Economist, Department of Revenue (DOR),
said his purpose in visiting the committee is to provide
background information on natural gas. He read from a
publication created by the International Energy Agency (IEA)
last year named "Natural Gas Market Review 2007." It said:
Natural gas is becoming an increasingly global
commodity. Development of previously separate regional
gas markets can no longer be considered in isolation.
To 2015 investment is a more serious concern than
identified in earlier work. North America is preparing
to import LNG from both Pacific and Atlantic producers
while Pacific consumers have sharply increased LNG
imports from Atlantic markets. LNG production capacity
is growing from 240 billion cubic meters (bcm) in 2005
to a projected 360 in 2010 - that's a 50 percent
increase. But capacity increases after 2010, 2012,
depend critically on new projects being sanctioned -
and very soon, I might add. LNG importers in the
Pacific and European regions remain able to outbid the
US in order to secure incremental supplies due
primarily to differences in domestic market structure.
The US price usually indicated by the Henry Hub price,
therefore seems to be setting a floor price for price-
sensitive LNG.
Investment in the gas sector is a serious cause for
concern. Gas investments everywhere are suffering
higher costs and construction delays. A selection of
these LNG projects shows production delays averaging
almost a year with average cost overruns of more than
$2 billion US per project. Furthermore only one major
new LNG liquifaction project has been sanctioned in
more than a year and a half - a marked slow down
compared to previous years. Reports pointing towards
the formation of a gas producers association analogous
to the organization for petroleum exporting countries
will do little to improve this situation. The global
demand for raw materials and talent has pushed up
costs dramatically in some cases and reduced the
effectiveness of each investment dollar spent compared
to the situation reported last year. There is a
distinct deficit of new long-distance pipeline
investment in the period to 2015 - noting that
investments in transportation over increasing
distances show a distinct preference for LNG.
Regulatory uncertainty and NIMBY (not in my backyard)
issues continue to slow investment in downstream
pipeline and other infrastructure especially when
borders must be crossed.
MR. WILLIAMS said he would divide his presentation into two
parts - the world market and North American markets. He would
look at the common trends and forecasts from numerous sources -
Baker Hughes, BP, Ceti Gas, CNI, the Federal Energy Regulatory
Commission, the International Energy Agency, Reuters, US
Department of Energy, Wood MacKenzie. He said he did not endorse
any one forecast. He would focus them on the trends - what
happened in the past and where we are going in the future.
3:57:38 PM
He said that natural gas markets are really dynamic and changing
right now. He started with the world view covering six areas:
reserves, world-wide reserves, production, consumption,
transportation, prices and an outlook.
MR. WILLIAMS went to his chart of natural gas reserves that
indicated where the US stands in terms of trillion cubic meters
(tcm). It indicates that reserves have gone from about 156 bcf
to over 181 bcf in a seven-year period for a 16 percent
increase. Russia has the largest reserves followed by Iran,
Qatar, Saudi Arabia; Russia and Iran have about 46 percent of
the world's proven reserves. The US shares about 3.2 percent and
Alaska is well under 1 percent. Production increased by almost
18 percent between 2000 and 2006; Russia at 22 percent and the
US at 15 percent are the two largest producers. Iran had the
fastest growth, about 67 percent in that time.
3:59:19 PM
He said consumption has increased by about 3 percent a year; the
US is the largest consumer at about 22 percent; Russia is second
with about 15 percent.
3:59:56 PM
CHAIR HUGGINS asked where China and India fall in the
consumption category.
MR. WILLIAMS replied that China consumes 45 bcm; it is primarily
a coal consumer. It has signed contracts with Shell to develop
IGCC facilities. One of the eight studies undertaken about fuel
generation in the world included one of those plants. He thought
they would become a big player in gas, but when prices went up,
they backed off, but they seem to be going back into it again.
He didn't know how it was going to play out.
4:01:44 PM
SENATOR WIELECHOWSKI said he thought Alaska alone has 34 tcf of
known reserves and that doesn't match with his US figures.
MR. WILLIAMS reminded him of when Mr. Banks talked about proven
reserves being based on what's on the book when a company files
with the FCC. The US Department of Energy has Alaska down for 9
- 10 tcf, but it's a definitional issue. Proven reserves need
contracts in place.
4:03:00 PM
His world production export chart covered 10 years; it indicates
that exports are increasing faster than production, which means
more nations are beginning to export. He pointed out that while
production has increased by 3 percent/year, exports have been
increasing in excess of 7 percent/year - LNG is the fastest
growing at about 10 percent/year.
4:04:06 PM
CHAIR HUGGINS asked for a five-year update on construction of
LNG or regasification plants in the US that are operating.
MR. WILLIAMS replied that six plants are in operation; however
one of them is not on land, but in the Gulf of Mexico.
4:04:46 PM
He showed them next a chart of gas world trade routes to the
Asian and European markets. He said some cargos have started off
for the US, but have been diverted to Asia because of a better
price there.
4:05:29 PM
MR. WILLIAMS went to his next chart and said prices aren't
constant. Several things stand out; one is that US prices are
far more volatile than either German or LNG prices. In part that
is because of the isolation the US market has had from the rest
of the world by not importing much LNG. However, that is
changing. He pointed out that there is a stronger correlation
between the LNG and the pipeline prices than there is between
any one of those and the US prices. When price goes up in one,
the other goes up almost the same amount.
4:06:43 PM
Comparing oil prices to gas prices, he went to the average
annual prices in 1969 - 2005 for Japanese crude cocktail (the
average price for all the crude oils imported into Japan) and
LNG prices. In the mid-80s after oil prices crashed, LNG prices
were higher than crude prices. Starting in 2002 crude prices
started being higher than LNG prices. Around 2002 - 2004, a lot
of the contracts were renegotiated and at that time they said
when crude prices go up, LNG prices will only go up 85 percent
of what the crude price went up. He didn't know if this would
cause companies to modify their contracts in the future.
CHAIR HUGGINS asked if he agreed with that theory about the
relationship in prices.
MR. WILLIAMS replied that both prices may come down; he believed
very strongly there will be a correction.
4:09:10 PM
LNG contracts have a looser linkage to crude oil and spot
cargoes. He quoted an IEA study:
Traditional LNG projects were underpinned by long-term
sales and purchase contracts with consuming markets.
However, more recent projects have been sanctioned
with upstream stakeholders purchasing planned output
and in turn marketing by themselves either through
capacity and/or equity acquisition at regasification
terminals in consuming countries or even direct sales
to willing buyers. Those companies with regasification
capacities in multiple consuming regions are also
making free onboard (FOB) off-take commitments to fill
those capacities or to sell a higher-payer market in a
more flexible approach than previously seen.
He explained that this means that 15 years ago all of one's LNG
contract would be sold in one market. That has changed over time
because the plants were "debottlenecked" and had extra cargoes.
As price differentials started creeping up, they started selling
extra cargos to different markets not under the contract. The
renewed contracts now specify you don't have to sell all the
cargo to one market; you can diversity. This is the beginnings
of a global market for gas. For the first time in history as
much as 6 percent of the Atlantic region's 8 bcm was diverted to
the Asian market in 2006.
4:11:14 PM
MR. WILLIAMS switched to a Middle East economic survey from
November 19, 2007. The byline said "LNG market evolution to
bring producers growing off-take diversity." He urged them as
they go through AGIA to remember that the LNG market is
undergoing fundamental changes and the trend is accelerating. It
promises to drive the globalization of gas markets. The short
term and spot market accounted for about 16 percent of trade in
2000 compared to under 4 percent 10 years ago.
He read from the Economic Times out of Singapore of November 22
that said the Dubai Multi Commodity Center (DMCC) is planning to
launch a liquefied natural gas futures contract on its exchange
as soon as surging energy prices increase demand for hedging
tools. With a storage hub in place, they are in a good position
to launch the contract, the article said. DMCC along with the
company in Dubai is setting up a 40 bcf to 65 bcf LNG storage
facility at a cost of about $2 billion to offer customers the
ability to store and trade the product. He suspected that they
would see that happen with natural gas within two years and
pointed out that Qatar has already spent $200 million to set up
the exchange.
4:13:00 PM
SENATOR STEVENS asked him to explain the fundamental changes he
is talking about in the LNG market.
MR. WILLIAMS replied it's no longer one seller and one buyer or
one producer and one consumer. The producer now has the option
to sell its cargos in more than one market. To get project
financing you have to show in-place contracts to purchase the
gas. Over time as more producers have come on and more
gasification facilities have been built around the world,
companies have been able to expand their production and send
extra to the new markets (regassed facilities). "It's a very big
deal; and the fact that we're going to have spot trading in it
is also a very big deal."
SENATOR STEVENS asked if that means buyers would come to the
large storage area and buy from it without having a prior
commitment.
MR. WILLIAMS replied yes.
SENATOR STEVENS asked if that would make the market more
volatile.
MR. WILLIAMS responded, "That's a good question." He thought the
financial sector amplified the trends, rather than creating
them. He didn't know if that would make it more volatile.
4:14:51 PM
SENATOR WIELECHOWSKI said LNG provides more flexibility and that
all things considered, it's better than a fixed pipeline.
MR. WILLIAMS replied, "For a producer it might be, it might very
well be."
SENATOR WIELECHOWSKI asked, "How about for Alaska?"
4:15:54 PM
MR. WILLIAMS said he was asked a difficult question. One has to
look at all options and one of the things about a pipeline that
would head into Canada is that Alaska wouldn't have both the
liquefaction cost plus the pipeline cost. Countries that are
exporting a lot of gas, like Qatar and Australia, have
facilities on top of the gas reserves. Liquifaction in Alaska
would occur on the water's edge, but the gas has to get there.
"So, there is a difference," he emphasized. LNG does offer more
flexibility; it's not the only factor to consider - and costs
are important.
4:16:33 PM
CHAIR HUGGINS asked if shorter term contracts are the wave of
the future.
MR. WILLIAMS answered that he wouldn't say they are short term;
they're still long term, but they are not tying up the entire
production volumes.
MR. WILLIAMS said he had showed them how crude and natural gas
prices had diverted in Japan and he wanted to do the same for
the US. He used West Texas Intermediate (WTI) and prices at the
Henry Hub from 1986 - 2007. Overall the correlation coefficient
was about .87 for the entire period. That means when one goes up
the other goes up. But they start going apart at August 2005. A
closer look after August 2005 showed that gas prices dropped
below oil prices and tended to go up and down while oil prices
went up; so the correlation coefficient goes negative.
4:20:07 PM
SENATOR STEDMAN asked if oil is awash with natural gas, maybe
oil production is on the decline and wouldn't that make oil more
valuable than gas.
MR. WILLIAMS replied no, because the transportation costs for it
are going up.
4:21:05 PM
CHAIR HUGGINS recalled that the US imports the majority of its
crude oil from Canada that has the number two known reserves in
the world (tar sands).
MR. WILLIAMS replied yes and he said those tar sands would play
into the Canadian gas coming into the US later in his
presentation.
4:21:33 PM
He next presented an outlook from Ceti Gas, not because he
favors it but because it's easy to read. The trends are very
similar to those from the US Department of Energy or Wood
MacKenzie. He likes this chart because it breaks out the world
by regions and you can see the supply and the demand and also
the gap. The world total at the bottom shows that gas use is
increasing by 2 to 2.2 percent/ year, a typical forecast. North
American has a flat supply with demand increases. This
highlights the fact that the US will have to import gas and
leads to the question of how that will occur.
4:23:13 PM
His synopsis of the world overview is that gas growth has
continued; we're seeing more LNG; a spot market for LNG is
developing; and gas and oil prices are delinking (He didn't know
if they would in the future).
SENATOR STEDMAN asked if it wouldn't be the natural evolution of
a market that as the gas industry develops; a spot market price
develops along with it.
MR. WILLIAMS replied yes and that tankers have been getting
bigger. Some of the issues surrounding that are they can't get
into some of the ports.
4:24:19 PM
Moving to North America he went to supply and demand issues.
Demand has four major sectors: industrial (petro-chemical
plants), residential (heating and cooking), electric power
(generating electricity) and commercial (heating). Other uses
like plant, pipelines and transportation use smaller amounts.
4:25:05 PM
Historically industrial electricity is the fastest growing
sector over the last 15 - 20 years. This is because the
efficiency of combined cycle electric generating using gas is in
excess of 50 percent. Moving forward, however, he said the
petro-chemical industry in the US has lost market share over the
last 15 - 20 years. Employment in that sector is down 33 percent
since 1990; so it is not competitive. While there will continue
to be growth in electricity, it's reduced.
4:26:16 PM
CHAIR HUGGINS asked him to describe petrochemical subunits, like
cement, that are drifting away from production in the US.
MR. WILLIAMS replied that polypropylene is one of the biggest
units; from that you get fertilizers and a wide array of
products. The largest new petro plants are being built in the
Middle East.
CHAIR HUGGINS asked if it is not cost effective to have them
here.
MR. WILLIAMS replied that one reason those plants aren't in the
US is because the prices are lower elsewhere. But he hadn't
actually seen any of the contracts and he knows that the Middle
East has guaranteed supplies.
SENATOR WIELECHOWSKI asked for data on geographical trends in
North America that might relate to Alaska where LNG might be
shipped to the West Coast versus the Midwest.
MR. WILLIAMS replied that he had a map of all the LNG plants in
operation as well as the proposed plants. He has also had a map
of existing pipelines in North American along with all the
natural gas pipelines and LNG plants.
CHAIR HUGGINS said he had heard that most of the proposed LNG
plants will not get built at the sites proposed for lots of
reasons.
4:29:46 PM
MR. WILLIAMS agreed and added that he had heard about the NIMBY
feelings. The industry has worked around that issue, however, by
developing regasification facilities on offshore platforms with
floating pipelines to shore.
4:30:10 PM
He went to an old chart on natural gas demand in the US, but
said the data isn't much different now. One of the most
important things on it to note was that the total demand which
is 25 tcf remains stable until 2015 when it starts going up. In
2005 it actually went down due to the hurricanes in the Gulf of
Mexico because a lot of petro-chemical plants in that region
went down and so they weren't consuming.
4:31:51 PM
CHAIR HUGGINS asked him to differentiate between commercial and
industrial use.
MR. WILLIAMS answered for industrial use for them to think about
heavy industries - petro-chemical plants and things like that;
for commercial use to think in terms of large buildings that
house offices - software companies and things like that.
4:32:31 PM
SENATOR WIELECHOWSKI asked why residential, commercial and
industrial uses are all going down.
MR. WILLIAMS opined that fuel efficiency is a big deal.
Anecdotally, he has heard people with old houses have started
switching out gas because of the 2005 hurricane. Thinking in
terms of trends, he said, the hurricane of 2005 went far beyond
price. From a consumer point of view one could ask: Do you want
to have gas and is flexibility always the best thing? Pipelines
have value because they are already there.
One has to look at the big picture. The downs for gas in the
2000 - 2005 timeframe are all associated with Hurricane Katrina;
but in the 2005 - 2010 timeframe those industries that went down
for six months started coming back; most are in operation again.
One percent growth is shown in 2010 - 2015 area.
4:35:43 PM
SENATOR WIELECHOWSKI asked why those sectors are decreasing in
natural gas use long term because you don't see more coal plants
in the west, oil is diminishing and nuclear plants aren't being
built. Natural gas is clean and relatively cheap; so why is it
not on the increase?
MR. WILLIAMS replied, "Those are some of the uncertainties I'm
going to leave you to ponder when I depart today." He explained
that natural gas is generating spare electricity capacity right
now; it is the most expensive of the fossil fuels so they use it
for peaking times. Long term, though, because of the issues
surrounding Hurricane Katrina and the high cost per MMBTU North
American utilities are beginning to consider other options -
like nuclear. Two nuclear plants were proposed to the Nuclear
Regulatory Commission in September 2007 - the first two proposed
in 31 years. After the hurricanes, Texas utilities proposed 15
or 20 integrated gasification combined-cycle coal (IGCC) plants.
The environmentalists didn't like that; so they withdrew them
and proposed five or six IGCC plants and a nuclear plant. Long
term the decisions haven't been made; but utilities are
beginning to make those decisions. It's a very big deal, he
stated.
4:38:11 PM
MR. WILLIAMS explained that the issues to deal with are natural
gas regulations, hurricanes, international competition, price
effects and legislation.
He briefed them on the history of gas regulation which began for
the US in 1938; deregulation began in 1978 and was completed 14
years after that. That means the industry was regulated for
almost 60 years in this country. Natural gas prices at the
wellhead were pretty flat from 1938 to 1972/3 - since it was
government regulated, gas was cheap so plants got built using
gas. In 1973 some major things happened in the world - oil
prices quadrupled at the same time gas prices started going up.
For the first time in years those industries had to deal with
higher natural gas prices. A lot of companies went out of
business in the 80s. Because prices of oil went higher, they
could actually drill for oil, but gas was constrained.
In the mid-70s the US started having a supply crunch; that's
what prompted the 1978 Natural Gas Policy Act. They started
saying if a well was a certain age they could charge a certain
price, but the newer wells could charge a higher price because
their costs were higher. After going through that for years, it
was deregulated. After that prices went up. So industry has to
decide what it will do going forward - use a new energy source,
a different technology? Move overseas?
4:41:33 PM
He said the question of whether demand will go up is a good one.
If you're producing petro-chemicals, would you rather produce it
at half the cost in Saudi Arabia or do it here in the United
States? If you are producing in this country, you don't have
transportation charges and don't have to worry about things like
quotas that may pop up in the future. He said, "It's something
to consider and I don't know what the answer is, but regulation
has made a difference in this country in the use of natural gas
and its impact is still being felt."
He said the interruptible supply of gas is a big deal to
utilities. So, price isn't the only issue for them. He said the
US Department of Energy wrote a paper on the effects of cyclones
on natural supplies in the Gulf of Mexico.
4:42:54 PM
He said the average US ethylene plant size is about 200,000
tons/year; Saudi Arabia is 750,000 tons/year - possibly with
favorable prices, which he couldn't document. These are serious
differences in efficiencies, something that shouldn't be
underestimated. He repeated that he didn't know if demand would
continue growing.
CHAIR HUGGINS asked what ethylene is used for.
MR. WILLIAMS replied it's used as a base for a lot of plastics.
4:44:11 PM
MR. WILLIAMS said he believes gas prices will come down. Since
2000 natural gas prices has increased and stimulated the
evaluation of other fuel options. He read a medium term outlook
from Ceti Gas, an international association that just deals with
natural gas; he said Alaska joined as an associate member so he
could understand their perspective. It said that high gas prices
have stimulated competition among energies and impacted gas
demand in many OECD (Organization for Economic Cooperation and
Development) countries. In the power sector, substitution of one
energy by another can be fairly rapid. It said the price of gas
is taken seriously by the industrial sector. In the US it is
prompting the largest industrial users to turn to alternative
energies. Some US firms preferred to halt production because of
the profit squeeze due to the high price of gas in 2005.
MR. WILLIAMS asked the committee members to ask themselves if
they would put a more fuel efficient heater in their homes if
natural gas prices doubled again. "I mean just think about what
you might do. Would you switch to electricity?"
4:47:17 PM
He said that electric generation is the fastest growing sector
of gas consumption in the US. His graph of electric generation
by fuel source showed 4 trillion kilowatt hours of gross
production in 2005. Coal is almost half of that; gas is about 19
percent. He quoted from the IEA that deals with gas-fired
capacity:
So much gas fired capacity was built that it
outstripped demand for power and many combined cycle
gas turbines are now operating at less than 35 percent
load factor. Because of this, there is a substantial
latent demand for gas in the power sector without any
new investment in the capital structure. This dynamic
is a very important legacy of the 2000 - 2004
investment period.
4:48:52 PM
MR. WILLIAMS said that gas plants provide flexibility in
electrical systems; they are relatively low capital cost and are
easy to gear up and down. He displayed another chart from Wood
MacKenzie on the cost energy from different methods. The highest
cost was integrated gasification combined cycle at $90/million
watt hours; gas was somewhere between $65 and $70; nuclear had
the lowest full cycle cost.
4:51:42 PM
Natural gas has the high cost of fuel delivered to the electric
power sector; nuclear has the lowest. However, gas has the
lowest capital cost; nuclear the highest. These are the
tradeoffs utilities are looking at right now; and he didn't
think they had decided yet. All the construction for gas
capacity hasn't been completed from when it started five years
ago. He guessed 2010 - 2015 would be crunch time for those
decisions to be made and he believed there is still room for any
one of these options to come forward.
4:52:27 PM
He next showed them prices of coal delivered to a utility versus
gas for 2005 and 2006; coal provided quite a benefit. Natural
gas plants tend to be smaller, he said, maybe 50 megawatts; coal
plants are 210 -220 megawatts. So you need four natural gas
plants for one coal. So, if you think in terms of substituting a
gas plant, it will likely be larger and the implication is that
it takes out a significant amount of potential demand.
CHAIR HUGGINS asked if hydro is expanding at all.
MR. WILLIAMS replied not in the US, but in the developing world.
In areas of drought it has gone down; damns have been removed in
other areas.
4:53:46 PM
SENATOR WIELECHOWSKI asked if he had factored in the political
and environmental perspectives. He asked if he foresaw more coal
or nuclear generators being built in the next 20 years.
MR. WILLIAMS replied, "I believe change is afoot. He said the
"Energy Act of 2005" adds a dimension he hadn't discussed yet.
He read Section 13.07 as follows:
Creates an investment tax credit program for
qualifying advanced clean coal projects funded at $1.3
billion. This section also includes an additional $350
{million} for qualifying gasification projects. The
gasification credits for any taxable year is equal to
20 percent of the basis of any equipment to be used in
the gasification process that is placed in service
during the year as part of a gasification project that
has been certified by DOE.
He summarized that the federal government is offering tax
incentives right now; but he just didn't know how it would play
out. He said the environment is the third bullet - global
warming and carbon emissions. Will coal be outlawed? Some
environmentalists have positive thoughts about nuclear power,
because it has no carbon emissions associated with it. Energy
security is another thing to consider along with becoming more
energy independent.
4:58:17 PM
CHAIR HUGGINS asked if Texas is the test site for sequestering
co2 in some of its cavities.
MR. WILLIAMS replied yes. He explained that the system happens
when you convert coal to gas and sequester the carbon dioxide
and sell it to the oil companies for a miscible injectant to
enhance oil recovery. The February 26, 2007 Oil and Gas Journal
published an article on this topic called "Oil from Coal
Promising as Transport Fuel." It looked at how profitable IGCC
was and found that doing all three has a 16 percent rate of
return.
He said the IEA came up with a study that has implications for
Alaska, but he hadn't time to fully read it yet.
5:00:38 PM
CHAIR HUGGINS recognized Representative Olson.
5:00:51 PM
MR. WILLIAMS went to a 2007 US Department of Energy electric
generation by fuel chart - coal, nuclear, natural gas,
renewables and liquids. The forecast for natural gas from 2006 -
2030 goes up (remember the spare capacity and plants still being
constructed), but at some point the coal plants are built and
natural gas goes down. Nuclear plateaus and then goes up
indicating that nuclear plants won't close down. He said:
This is their outlook; this is not mine. Again, it's
pretty typical of what you're reading. Organizations
that study this in great detail realize that there's a
price effect, that there's competing fuels and there's
technology. Combine that together with legislation and
it has the impact to change the dynamics.
5:02:55 PM
The outlook to 2015 showed growth slowing for gas at about 1.3
percent per year with the industrial sector losing market share.
Some of the issues to consider, he summed up, are supply
availability, price effect and environment.
5:03:37 PM
Turning to the supply side, Mr. Williams covered indigenous
supply by type and region touching on drilling and costs. A
chart from Wood Mackenzie was pretty typical of what all the
organizations were saying and was easy to read.
5:06:01 PM
SENATOR WIELECHOWSKI asked how Wood Mackenzie determined that
Alaska natural gas would come on line by 2018.
MR. WILLIAMS replied he didn't know; it's one of their
assumptions.
SENATOR WIELECHOWSKI asked how much per day it would be.
MR. WILLIAMS replied in excess of 4 bcf/day. He then went to a
chart of the Gulf of Mexico and stated that Wood MacKenzie said
that although the Gulf of Mexico had restored all major facility
and infrastructure operations following the devastating 2005
hurricane season, production levels have fallen off
significantly to approximately 8 bcf/day. Deep water projects
are becoming more difficult to produce - remote costlier and
subject to longer lead times and cost escalations. Longer term
supplies are expected to decline and deep water volumes will not
stem the overall decline setting in from the mature shelf areas.
It said that due to the higher day rates for drilling rigs
offered in other parts of the world, many offshore gas rigs have
migrated out of the Gulf further exacerbating future supply
declines as less exploration is conducted with longer
development drilling periods as well. There is a slowdown in the
Gulf of Mexico.
5:08:40 PM
Another chart indicated that gas prices have led to record-high
drilling rates, but those had now stabilized - in part because
of the higher rates being offered in other places and because of
the higher cost of development in the Gulf of Mexico.
CHAIR HUGGINS said he still remained concerned after having been
in Alberta, that they projected having a shortage of natural gas
to make the tar sands work and yet natural gas activities,
exploration and development, there are dormant.
MR. WILLIAMS responded by asking what other options they have
besides gas. They are trying other techniques and alternative
fuel sources like coal - recently they talked about nuclear.
"So, don't think in terms of gas; think in terms of energy to
develop the oil sands."
5:11:35 PM
He went to a Wood Mackenzie chart on the Gulf of Mexico that
indicated declining production and increasing costs.
5:12:45 PM
SENATOR STEDMAN asked if this 2015 forecast was moved back to
2007 real dollars.
5:13:02 PM
MR. WILLIAMS replied yes; it has a lot of assumptions that he
didn't necessarily agree with. His point, though, is that costs
are actually increasing. He read from an IEA report to support
that. It said:
A viscous circle has started whereby the costs of
obtaining energy, raw materials, and human resources
are increasing the cost of incremental supplies of the
same basic factors of production. An increase in the
number of large-scale projects being developed at the
same time; their remoteness and greater complexity and
the increasing need for costly production enhancement
at large mature fields have added to the upward
pressure on costs.
5:14:38 PM
SENATOR STEDMAN asked if the last article was referencing North
America or worldwide.
MR. WILLIAMS replied worldwide.
SENATOR STEDMAN asked if he had any projections on cost trends
over the next four years.
MR. WILLIAMS replied no, but they are high. He said the April
2007Petroleum Economist said last year that no oil majors
approved developments to increase LNG production and the last
investment decision on an LNG scheme (Qatar Gas 3) was taking 15
months. The US contractor, Bechtel, said the cost of building
LNG plants has trebled in the last six years. One of the
industry's big three engineering procurement and construction
contractors, along with Japan's Toyota and the Japanese/US
JGCKBR Consortium, said the cost of building liquifaction plants
has risen to as much as $600/ton/year production capacity - up
from $200/ton in 2000. Two of the largest projects in the world
under construction are over-budget and behind schedule. Time
scales are becoming longer as well. The stretched contracting
market means bill times for liquifaction plants are four years
rather than three years. He stated that an 18-month delay in FID
(final investment decision) at BP led a $6 million ton/year
project to a cost increase from $400 million to $1.8 billion
after the original contract expired. The article had a quote
from someone at Wood Mackenzie that said, "If you leave
everything equal and just ramp up the cost and then some of the
economics start to look pretty miserable - not what you expect
from an LNG project."
It further said the underlying causes of rising construction
costs are escalating raw material prices in the tight
contracting market, both signs that the LNG industry is becoming
a victim of its own success. Until 2006 technological advances
and increased economies of scale pushed liquifaction plant
construction costs down below $200/ton. This made LNG costs more
competitive when measured against alternative pipeline schemes.
However last few years saw costs edge higher to the $250 - $350
range and Wood Mackenzie estimates that prices have now risen
substantially above that - between $500 and $1000/ton/year.
He said they should keep in mind that when the price of crude
oil decreased by 50 percent in 1986, one of the ways a company
could remain profitable was to merge and that's when the mergers
of the big oil companies started happening. At the same time,
the service companies started downsizing. Think about it he
said; the number of engineers graduating with petroleum degrees
decreased and so there's a shortage of manpower. Eventually that
will come around. He advised to think in terms of the next 10
years: how long does it take for someone to go to school, get a
degree and come out? Add the retiring baby boomers to that. "I
mean there's a confluence of things going on here."
SENATOR WIELECHOWSKI asked if this was limited to natural gas or
other areas, like nuclear.
MR. WILLIAMS replied it's across the board. Oil and gas is
feeling it more strongly because of the "downsizing." The
electric utility industry has been expanding; so they still have
a lot of electrical engineers. While nuclear has been relatively
stagnant in the US, it has not been stagnant around the world.
5:20:42 PM
MR. WILLIAMS hurried along and said that LNG supply global
capacity is growing rapidly. The US imported 1.4 bcf in 2006;
the IEA predicts that will increase by 80 percent this year and
be five times larger in 2015. He said they seem to be
overestimating in part because of warmer winters and because LNG
cargos are being diverted to Asia.
5:21:20 PM
He said the LNG fleet is also growing. He showed a map of all
the LNG projects in North America including gasification
facilities that he got off of the FERC website where it is easy
to stay up to date. He didn't think all of the proposed projects
would happen - maybe less than half.
5:24:23 PM
He showed a number of charts indicating among other things that
Canada exported about 9.1 bcf/d to the US in 2005, about 90
percent of US imports. However, less gas will be made available
to the US looking forward because of decreased production and
increased domestic consumption (in the tar sands).
5:25:30 PM
In summary he said US gas production is declining; new US gas
production is higher cost; Canada's role diminishes in relative
importance; the US becomes more dependent on LNG; and if there's
lower prices than natural gas, they decrease the threat from
coal and nuclear.
5:25:54 PM
He wanted to leave them with some points to ponder: there is a
lot of uncertainty surrounding environmental issues; how will
that play out? Will new legislation enhance gas or coal? The
utilities will get some standards in the US so they can have
certainty and move forward with their decision-making. Will
there be a nuclear renaissance? He didn't know, but the Nuclear
Regulatory Commission is actually gearing up to have a lot more
applications. Is IGCC feasible; will utilities start building
plants? The studies don't have commercial applications; they are
only demonstration projects. Will the crude oil/natural gas
price ratio remain the same; will they go back to historical
standards or get farther apart? He ended by saying he would take
questions.
5:28:08 PM
CHAIR HUGGINS thanked him for his very professional
presentation. There being no further business to come before the
committee, he adjourned the meeting at 5:29:16 PM.
| Document Name | Date/Time | Subjects |
|---|