Legislature(2009 - 2010)BUTROVICH 205
03/25/2009 03:30 PM Senate RESOURCES
| Audio | Topic |
|---|---|
| Start | |
| SJR16 | |
| Overview: Status of North Slope Pipelines and Other Facilities | |
| Overview: Effect of Shale Gas Development on Prospects for an Alaska Natural Gas Pipeline. | |
| Adjourn |
* first hearing in first committee of referral
+ teleconferenced
= bill was previously heard/scheduled
+ teleconferenced
= bill was previously heard/scheduled
| *+ | SJR 16 | TELECONFERENCED | |
| + | TELECONFERENCED | ||
| + | TELECONFERENCED | ||
| + | TELECONFERENCED | ||
ALASKA STATE LEGISLATURE
SENATE RESOURCES STANDING COMMITTEE
March 25, 2009
3:38 p.m.
MEMBERS PRESENT
Senator Lesil McGuire, Co-Chair
Senator Bill Wielechowski, Co-Chair
Senator Charlie Huggins, Vice Chair
Senator Hollis French
Senator Bert Stedman
Senator Gary Stevens
Senator Thomas Wagoner
MEMBERS ABSENT
All members present
COMMITTEE CALENDAR
SENATE JOINT RESOLUTION NO. 16
Expressing support for environmentally sound and culturally
sensitive development of the oil and gas resources in federal
waters offshore of Alaska's coast as a means to ensure energy
independence, security for the nation, and jobs for Alaskans;
and urging the United States Congress to provide a means for
consistently sharing with all coastal energy-producing states,
on an ongoing basis, revenue generated from oil and gas
development on the outer continental shelf, to ensure that those
states develop, support, and maintain necessary infrastructure
and preserve environmental integrity.
HEARD AND HELD
Overview: Status of North Slope Pipelines and Other Facilities
HEARD
Overview: Effect of Shale Gas Development on Prospects for an
Alaska Natural Gas Pipeline
HEARD
PREVIOUS COMMITTEE ACTION
BILL: SJR 16
SHORT TITLE: OFFSHORE OIL & GAS REVENUE
SPONSOR(S): SENATOR(S) WIELECHOWSKI
03/20/09 (S) READ THE FIRST TIME - REFERRALS
03/20/09 (S) RES
03/25/09 (S) RES AT 3:30 PM BUTROVICH 205
WITNESS REGISTER
MICHELLE SIDEMAN, Staff
to Senator Wielechowski
Alaska Capitol Building
Juneau, AK
POSITION STATEMENT: Provided information on SJR 16.
DENNIS HINNAH, Deputy Director
Alaska Office
Pipeline and Hazardous Materials Safety Administration (PHMSA)
U.S. Department of Transportation
POSITION STATEMENT: Delivered a presentation.
ALLISON IVERSEN, Coordinator
Petroleum Systems Integrity Office (PSIO)
Division of Oil and Gas
Department of Natural Resources (DNR)
POSITION STATEMENT: Delivered a presentation.
LARRY DIETRICK, Director
Division of Spill Prevention and Response
Department of Environmental Conservation (DEC)
POSITION STATEMENT: Delivered a presentation.
IRA ROSEN, Project Manager
Alaska Risk Assessment of Oil and Gas Infrastructure
Department of Environmental Conservation (DEC)
POSITION STATEMENT: Delivered a presentation.
MARK MYERS, AGIA Coordinator
Gas Pipeline Office
Department of Natural Resources
POSITION STATEMENT: Delivered a presentation.
ACTION NARRATIVE
3:38:55 PM
CO-CHAIR LESIL MCGUIRE called the Senate Resources Standing
Committee meeting to order at 3:38 p.m. Senators French,
Stedman, Stevens, Huggins, Wagoner, Wielechowski, and McGuire
were present at the call to order.
SJR 16-OFFSHORE OIL & GAS REVENUE
3:40:07 PM
CO-CHAIR MCGUIRE announced the consideration of SJR 16.
SENATOR WIELECHOWSKI, Alaska State Legislature, sponsor of SJR
16, said that on April 14 the U.S. Department of Interior
Secretary Ken Salazar is coming to Alaska seeking input on
exploration in the Outer Continental Shelf (OCS). SJR 16 is a
timely resolution that supports responsible oil and gas
development in the OCS and asks for revenue sharing from oil and
gas leasing and development in those federal waters. A similar,
but more limited, resolution passed unanimously last year.
SENATOR STEDMAN referenced page 2, line 30, and said he is not
sure how to define environmentally sound and culturally
sensitive.
SENATOR WIELECHOWSKI said he is open to suggestion as to how
that is defined. He wants to take into account the cultural
issues that are in play on the North Slope, particularly
whaling. Environmentally sound development would protect the
environment in all of Alaska. He added that the committee
certainly could hold the resolution to flesh it out; he was
pushing for the April 14 deadline and tried to use broad terms
to appease the interests that people have.
3:41:57 PM
SENATOR HUGGINS suggested that the phrase "responsible
development" would work in both instances.
SENATOR WIELECHOWSKI said he would accept that change as a
friendly amendment.
SENATOR WAGONER referenced the next to last "Whereas" on page 2,
line 26, and said he doesn't know of any OCS oil and gas
production off the Alaska coast since it became a state. He
suggested the committee strike that "Whereas."
3:43:14 PM
MICHELLE SIDEMAN, Staff to Senator Wielechowski, said the
reference is to the money that has been collected through high
bids in the lease sale; it's not money from actual production.
SENATOR WAGONER said that is his point. He agrees that the sales
of leases have generated millions of dollars, but there hasn't
been any oil and gas development that produced anything.
SENATOR FRENCH suggested the committee strike the word
"production" on page 2, line 26, and insert "lease sales" so it
would refer to oil and gas lease sales. Also, on line 27, strike
the word "has" and insert the word "have."
CHAIR MCGUIRE recapped the suggested changes and asked for a
motion to adopt the first amendment.
SENATOR HUGGINS moved Amendment 1.
AMENDMENT 1
Page 1, line 1:
Delete "environmentally sound and culturally
sensitive"
Insert "responsible development
Page 1, line 14:
Delete "environmentally responsible and
culturally sensitive"
Insert "responsible development"
Page 2, lines 30-31:
Delete "environmentally sound and culturally
sensitive"
Insert "responsible development"
3:45:20 PM
CHAIR MCGUIRE announced that without objection Amendment 1 is
adopted.
SENATOR FRENCH moved Amendment 2.
AMENDMENT 2
Page 2, lines 26:
Delete "production"
Insert "lease sales"
Page 2, lines 27:
Delete "has"
Insert "have"
CO-CHAIR MCGUIRE announced that without objection Amendment 2 is
adopted.
SENATOR STEDMAN suggested the committee hold the resolution
until the next meeting since this is the first hearing.
3:46:59 PM
CHAIR MCGUIRE announced she would hold SJR 16 in committee.
^Overview: Status of North Slope Pipelines and Other Facilities
3:47:35 PM
CHAIR MCGUIRE announced the next order of business is an update
on the status of North Slope pipelines and other facilities.
It's been suggested that an update is a good idea given the age
of the pipeline and associated facilities.
3:48:38 PM
DENNIS HINNAH, Deputy Director, Alaska Office, Pipeline and
Hazardous Materials Safety Administration (PHMSA), U.S.
Department of Transportation, said he is pleased to discuss
PHMSA actions in overseeing safe operations of pipelines in
Alaska. This federal agency is responsible nationwide for the
development and enforcement of safety regulations for natural
gas pipelines, hazardous liquid transmission and distribution
pipelines, and liquefied natural gas (LNG) facilities. The
agency does not currently have the authority to regulate North
Slope production facilities. However, PHMSA does inspect and
regulate interstate and intrastate gas transmission pipelines,
hazardous liquid pipelines, gas distribution systems, and LNG
facilities in Alaska. Hazardous liquids subject to regulation
include crude oil and refined petroleum products.
Ensuring the safety of over two million miles of pipeline is an
enormous task. Most states partner with PHMSA to oversee 90
percent of pipeline mileage that requires operator compliance
with pipeline safety regulations. Alaska and Hawaii are
exceptions and do not participate in the state/federal safety
program. Still, PHMSA takes pipeline safety in Alaska very
seriously and has, since 2006, increased its staff in Alaska to
prepare for oversight of the proposed natural gas pipelines.
3:50:33 PM
MR. HINNAH said Alaska is part of the PHMSA Western Region with
headquarters in Denver. The Anchorage office currently has four
fulltime engineer/inspectors in addition to an assistant and
himself. PHMSA works closely with pipeline owners and operators,
the Joint Pipeline Office, the Petroleum Systems Integrity
Office, the Office of the Federal Coordinator, and other state
and federal regulators.
PHMSA uses a risk-based approach to determine which of the more
than 40 pipelines and LNG facilities it will inspect each year.
TAPS is inspected annually and all pipelines are inspected at
least ever three years. PHMSA also investigates accidents and
safety issues. As the lead federal agency to investigate the
2006 BP Alaska spills on two North Slope transit lines, PHMSA
subsequently issued a corrective action order, which led to the
replacement of the eastern and western area oil transit lines.
PHMSA conducts inspections of pipeline design, construction
standards, integrity management, operator qualifications, and
drug and alcohol requirements. These inspections include
document reviews, sealed inspections, and interviews.
Additionally, PHMSA takes a role in ensuring operator
preparedness and response to oil spills.
3:53:05 PM
PHMSA regulations require pipeline owners and operators to
report certain types of incidents. State and federal agencies
are subsequently informed of the findings. In the case of TAPS,
much of the coordination is handled through the Joint Pipeline
Office. That is a consortium of 11 federal and state agencies
that provides oversight of TAPS and shares information on other
Alaska pipelines. In some instances PHMSA follows up an
investigation with enforcement action.
Examples of recent PHMSA investigations include: the 2007 TAPS
pump station 9 fire; the January 15, 2009 incident where natural
gas was pushed into TAPS pump station 1; the January 15 2009
sinking of the M/V Monarch near the Granite Point platform; and
the March 12, 2009 residential gas explosion in Anchorage.
3:54:53 PM
MR. HINNAH said that in the last three years PHMSA actions
include corrective action orders issued to BP Alaska and notices
of probable violation issued to Aleyska and Enstar. The
corrective order requiring BP Alaska to replace the failed North
Slope oil transit lines has been closely monitored.
The PHMSA integrity management (IM) regulations require
operators to assess and mitigate the risk that their pipelines
pose to high consequence areas. TAPS, Alpine, and Endicott have
completed this process and PHMSA periodically reviews their
required IM program updates. Under the 2008 low-stress rule,
more pipeline operators are required to develop IM programs.
CHAIR MCGUIRE asked what the low-stress rule is.
MR. HINNAH explained that prior to 2006 pipelines that operated
at low pressure were exempt from PHMSA regulations. In 2004 and
2005 PHMSA was trying to bring them under regulation, and the
2006 spills on the North Slope pushed it forward. Low pressure
pipelines are no longer exempt from PHMSA regulation.
3:56:36 PM
SENATOR HUGGINS asked at what point pressure becomes high.
MR. HINNAH replied the cut off is usually 20 percent of the
maximum pressure that a line can carry.
MR. HINNAH continued the presentation saying that PHMSA is aware
of the risk assessments the state is performing and is committed
to sharing certain risk information on pipelines over which they
have safety jurisdiction. Currently PHMSA is providing data to
the Department of Environmental Conservation (DEC).
MR. HINNAH said that responsibility for safety rests with the
pipeline owners and operators. The PHMSA mission is to achieve
and maintain safe and environmentally sound operations for the
nation's pipeline system. This requires understanding the
condition of the pipelines and ensuring that operators take
appropriate action to address unsafe conditions. PHMSA takes a
risk-based systems approach to setting priorities and makes full
use of the 2002 Pipeline Safety Improvement Act and the 2006
Pipeline Inspection, Protection Enforcement, and Safety Act. The
IM program made it possible to take effective action when the BP
Alaska Prudhoe Bay low-stress oil transit lines failed in March
and August 2006.
3:58:12 PM
MR. HINNAH said that over the past eight years PHMSA has
undertaken prioritized rulemaking projects acting first on
infrastructure that posed the greatest risk to people and the
environment. Initially, PHMSA defined and mapped high
consequence areas in the National Pipeline Mapping System. This
included areas that are unusually sensitive to environmental
damage. PHMSA is in the process of implementing regulations that
provide protection for people and the environment that could be
affected by failures in high and low pressure hazardous liquid
pipelines and high pressure gas transmission pipelines.
Given the impact the 2006 incidents, PHMSA has deployed a team
to assess the risk of the other feeder line shutdowns including
those at Kuparuk, Alpine, Budami, North Star, Oliktok, and Milne
Point.
3:59:53 PM
MR. HINNAH said PHMSA has recently amended its pipeline safety
regulations to bring previously unregulated hazardous liquid
gathering and low-stress pipelines in rural areas into its
oversight program. The low-stress rule will add to PHMSA
oversight of pipelines in Prudhoe Bay, Cook Inlet, and the Kenai
Peninsula. This is a risk-based approach to protect lines that,
in the event of failure, could spill into unusually sensitive
areas. The assessment of which lines to regulate is based on how
they could impact a sensitive area, the pressure of the line,
and the volume of the product that could be spilled.
These phased-in safety regulations will provide robust
protection to areas where oil pipelines in rural areas could
affect drinking water, endangered species and other ecological
resource concerns. These regulations will enhance corrosion
protection by requiring continuous monitoring, integrity
assessments, and leak detection. Operators will be required to
follow safety rules for design, construction, testing, and
maximum operating pressure. In addition, operators will be
required to protect lines from corrosion and excavation damage;
install and maintain line markers; establish operator
qualification and damage prevention programs; provide public
education; and report accidents and safety conditions.
MR. HINNAH assured the committee of PHMSA's dedication to
improving safety, reliability and public confidence in pipeline
infrastructure.
4:02:28 PM
CHAIR MCGUIRE asked if the regulations he's referencing have
been promulgated.
MR. HINNAH replied the low-stress regulations are being phased
in right now. PHMSA is currently working with operators to
identify which ones apply in Alaska. The North Slope oil transit
lines now fall under the low-stress rule and pipelines in the
Cook Inlet area will fall under it as well.
CHAIR MCGUIRE asked if regulations related to drinking water,
endangered species, design and construction and other things are
extensions of the low-stress rule.
4:03:39 PM
MR. HINNAH replied these are part of the PHMSA Integrity
Management Program, which looks at sensitive areas like
wetlands, endangered species, and drinking water. That program
has been fully implemented and in Alaska everyone has gone
through the first improvement cycle. It is a continuous process.
4:04:35 PM
ALLISON IVERSEN, Coordinator, Petroleum Systems Integrity Office
(PSIO), Division of Oil and Gas, Department of Natural Resources
(DNR) cited a speech by a Petrobras executive on an oil platform
off the coast of Brazil to show why quality management in oil
and gas is so important. The executive talked about the
elimination of unnecessary safe jackets and the win-win bonus of
enhanced profitability. Just 18 months later that Petrobras
platform had two explosions that killed 11 of the 175 people on
board. Petrobras was fined $50.8 million for environmental
damages. Inadequate safety inspections and no quality management
were blamed.
4:07:14 PM
MS. IVERSEN said the PSIO was established in April 2007 by
administrative order. It has four primary tasks: 1) to
coordinate state, federal and local agencies; 2) to investigate
incidents or employee concerns that do not fall within other
agency jurisdiction; 3) the gap/overlap analysis; and 4) quality
management. PSIO has multiple designated liaison agencies that
it works with closely. Among others, this includes DEC, ADF&G,
DPS, DOR, DOT&PF, DOLWD, DOL, DNR, AOGCC, and the governor's
office in Washington, D.C.
Coordinating efforts among agencies that deal with oil and gas
is one of PSIO's largest tasks. This includes regular
notification of incidents and coordination of investigations;
circulation of employee and public concerns to impacted agencies
in an effort to have a unified response; regular liaison
interaction; and regular contact with local, state and federal
agencies. PSIO works closely with the local PHMSA offices.
4:08:44 PM
MS. IVERSEN said that recent incident investigations include the
September 2008 artificial lift gasline rupture at the Prudhoe
Bay Y-Pad facilities and the January 2009 Pump Station 1 pigging
incident. PSIO has been working with other agencies to
investigate those incidents.
The gap analysis was called for in the administrative order and
is currently PSIO's largest task. The goal is to provide a
comprehensive and cost-effective approach to state oversight of
oil and natural gas facilities, equipment, infrastructure, and
activities on state oil and gas leases. To accomplish this
analysis PSIO is coordinating with liaison officers to indentify
statutory and regulatory authorities; look at how these
authorities are implemented; identifying not only gaps but also
overlaps; assessing risks associated with the gaps and overlaps;
coordinating the review of gaps, overlaps, and risks; and
providing recommendations to the appropriate entities for
further action.
4:09:56 PM
MS. IVERSEN said that ARCADIS was hired to analyze the gaps and
overlaps in the statutes and regulations. Data compilation is
underway and PSIO will soon look at how agencies have
implemented their authorities. Results are expected in August
2009 with the caveat that PSIO is relying on other agencies'
timelines and availability to work on the project.
The Department of Environmental Conservation is the project
manager for the risk assessment. The risk assessment and the gap
analysis are interrelated in that they will serve as tools that
the state can use to determine how best to coordinate agency
efforts and provide comprehensive and cost-effective oversight
of oil and gas activities and facilities. Where high risks exist
in areas of little of no oversight, the gap should probably be
filled. Where low risks exist in areas of duplicative oversight,
those overlaps should probably be removed so the agencies are
more cost-effective.
4:11:31 PM
MS. IVERSEN said the administrative order also calls for the
review of quality management in the state. It requires industry
businesses to provide a comprehensive description of current
practices of quality management that they utilize. Quality
assurance focuses on the product to determine if it meets the
agreed upon characteristics for performance. It establishes the
rules and procedures to achieve the expected results and
conformity to the requirements of the plan. Quality control is
the process, procedures, and activities that are employed to
test or check the physical characteristics and performance
requirements against the predetermined criteria.
MS. IVERSEN displayed a characterization of the plan-do-check-
adjust (PDCA) cycle and said it's a common process in quality
management. She recapped the fundamentals of quality management
systems which are quality control, quality assurance,
monitoring, inspection, and other practices to ensure the
integrity and reliability of the infrastructure.
4:13:10 PM
MS. IVERSEN said PSIO is helping agencies understand quality
management systems in order that they can more knowledgeably
maintain the integrity and reliability of oil and natural gas
facilities, equipment, and infrastructure. For example, instead
of asking whether a company inspected a certain facility this
year, a more appropriate question may be to ask if they have a
procedure or policy that requires a facility inspection this
year. Ask about follow-up procedures and if they are reviewed on
a regular basis to ensure that they are appropriate.
PSIO expectations of agencies and itself includes: documented
evaluations of oil and gas facilities, equipment,
infrastructure, and work activities; effective communication of
results to industry; and to review evaluations, identify gaps,
and seek remedial action. PSIO is implementing a quality
management system for itself asking if policies and procedures
are written, if they are effective, and if they can be improved.
The PSIO expectations of the petroleum industry are to provide
evidence that their management systems or processes for quality
control, quality assurance, monitoring and inspections are
implemented, effective, and periodically reviewed by upper
management.
4:14:54 PM
SENATOR HUGGINS asked for a timeline for the gap analysis.
MS. IVERSEN said the results are expected August 2009. The
caveat is that they are at the whim of other agencies
availability to provide the data. ARCADIS is the contractor and
Black and Beach is their main engineering subcontractor.
4:16:16 PM
LARRY DIETRICK, Director, Division of Spill Prevention and
Response, Department of Environmental Conservation (DEC)
introduced himself.
IRA ROSEN, Project Manager, Alaska Risk Assessment of Oil and
Gas Infrastructure, Department of Environmental Conservation
(DEC) said he will give a snapshot of today and what remains to
be done in the project.
MR. DIETRICK said the initiative to take a comprehensive look at
the state's oil infrastructure was twofold. It was in response
to the spills in 2006 and to the business decision to continue
production on the North Slope for another 50 years. It is a
novel project that hasn't been done on this scale before.
MR. ROSEN said the risk assessment project is a three-year $5
million initiative to evaluate the operational safety of
Alaska's oil and gas infrastructure. It is the outcome of
spills, leaks, and corrosion that was discovered on the North
Slope in recent years. When complete this will be an
engineering-oriented assessment that identifies and ranks the
risks involved in operating the system for another generation.
The risks will be evaluated in terms of the consequences to
state revenue, safety, and the environment. The final report
will be published in June 2010.
A slide of the organizational structure shows that DEC will
provide management and contract administration over the project.
Overall direction comes from the state agency oversight team.
The state in June 2008 awarded the contract for the risk
assessment to Doyon Emerald, an Anchorage-based engineering firm
that is familiar with the Alaska oil and gas industry. ABS
Consulting is the main subcontractor and has expertise in large
infrastructure risk assessments.
MR. ROSEN displayed a slide that lists the state agencies that
have an oversight or regulatory role in regard to the oil and
gas industry. The state agency oversight team includes:
Department of Environmental Conservation (DEC), Department of
Labor and Workforce Development (DOLWD), Department of Law
(DOL), Department of Natural Resources (DNR), State Pipeline
Office (SPO), Petroleum Systems Integrity, Department of Public
Safety (DPS), State Fire Marshall (SFM), Department of Revenue
(DOR), and Alaska Oil & Gas Conservation Commission (AOGCC). The
Joint Pipeline Office and the University of Alaska are also on
the oversight team.
4:19:17 PM
MR. ROSEN explained the format for a risk assessment for
pipelines and facilities is to first break out individual
facilities or pieces of pipeline. The team then postulates
different types of things that could go wrong in terms of
natural or operational hazards. Next they estimate the
likelihood of the event occurring followed by the consequences
should it occur. The probability of the event occurring combined
with the significance of the consequence equals the risk.
4:21:08 PM
MR. ROSEN said the project was established in three phases. The
purpose is to develop a method that will be used to conduct the
risk assessment that responds to the public's concerns. Public
meetings were held in Anchorage, Fairbanks, Valdez, Kenai, and
Barrow to explain the project to the key stakeholders and find
areas of concern. Stakeholders include oil and gas industry,
local governments, nongovernmental organizations, and the
public.
He showed a map of the general project scope, which includes the
North Slope, TAPS, the Valdez oil corridor, and Cook Inlet. He
noted that tanker traffic was not included in the project. A
Venn diagram shows the three areas of concern, which are safety,
environment, and reliability. The highest level of concern was
water quality and subsistence impacts. Safety concerns for the
public and industry employees were next highest.
4:23:12 PM
MR. ROSEN recapped that phase 1 focused on outreach and efforts
to develop a method to conduct the risk assessment. He noted
that included crafting a description of what would be an
unacceptable consequence or significant event. Phase 2 will
consist of data collection including information about the
infrastructure, previous studies and risk assessments, spill and
corrosion reports, operating procedures, and business practices.
That information will be applied to the model and will estimate
the likelihood of an event occurring and the consequences of
natural and operational hazardous events. In phase 3 the
information will be analyzed, summarized and presented in the
final report. The first report in phase 1 summarized the
stakeholder process and all the work through December 2008. The
design and methodology report also is complete and was formally
released in a press release earlier this week. It's available on
their website.
MR. ROSEN described this as the kickoff for the public review
period. The team will return to the same locations to present
the proposed methodology and confirm that it addresses
stakeholder concerns. The state has contracted with the National
Academy of Science to examine the assumptions and industry
standards that are proposed as the basis for the methodology.
The final report will be a summary of the event scenarios
categorized for reliability, safe, and environmental impact.
Identified high risks will be listed for potential mitigation.
Recommendations may include repair or replacement if the risk
relates to physical infrastructure. Or there may be
modifications to policies or regulations or perhaps changes in
management or oversight of the facilities.
4:27:29 PM
CHAIR MCGUIRE asked if there is an economic component.
MR. ROSEN replied the report will only indentify and rank the
risks; it will not estimate the cost of addressing the risks.
The companies will make business decisions based on the risks.
For example, they may consider replacement or repair, additional
monitoring, more frequent inspections, or different business
practices.
SENATOR HUGGINS asked if the commercial operators will inform
DEC about how they intend to address the risks that are
identified.
MR. ROSEN said the final implementation is yet to be refined. He
expects it will be an interactive process. Industry will likely
step forward with a plan to mitigate the identified risks, and
if that is satisfactory they can go ahead.
SENATOR HUGGINS asked about penalties.
MR. ROSEN said the project is an engineering-based study to
identify risks; it is not intended to include regulatory or
enforcement actions. However, if the agencies are not satisfied
with the industry response, then additional regulation or
oversight would be a state option.
4:30:14 PM
SENATOR HUGGINS asked if whoever prepares the report assumes
some responsibility if an event occurs that had not been
identified as a risk.
MR. ROSEN said hundreds of risks may be identified and they'll
be considered to be high risk, moderate, or low risk. At some
point a determination will be made as to where to draw the line
for high risks, which will require action by the asset owner.
^Overview: Effect of Shale Gas Development on Prospects for an
Alaska Natural Gas Pipeline.
CO-CHAIR MCGUIRE announced the next order of business is to hear
about the effect of shale gas development on prospects for an
Alaska natural gas pipeline.
4:32:23 PM
MARK MYERS, AGIA Coordinator, Gas Pipeline Office, Department of
Natural Resources, said he wants to provide baseline
information. The first slide shows increasing energy use
worldwide coupled with a growing population. With current growth
rates, the population by mid century will be 9 billion. The
competition for resources is huge, with a lot coming from
developing areas like China and India. Increased urbanization is
requiring point-source energy supplies. Worldwide there is a
strategic shift in how energy is used, and there is an increase
in energy demand.
4:34:03 PM
SENATOR FRENCH asked for an explanation of a point-source energy
supply.
MR. MYERS said it's a supply that is highly distributable that
can be delivered to a city.
SENATOR FRENCH asked if it is any source of energy that can be
delivered or transported.
MR. MYERS said the old philosophy was that any energy that
worked was good enough, but with development and increased
population all resources are under more and more pressure.
Water, for example, is becoming a critical and limiting resource
in the production of energy because it's in increasingly short
supply. That competition for resources limits the availability
of supplies that previously were abundant and it's changing the
way energy will be used in the future. Environmental constraints
result in more limitations as to which energy supplies can be
used. It's important to see how Alaska, natural gas, and
nonconventional sources of natural gas fit in the marketplace
globally and specifically in North America, he said.
4:36:06 PM
MR. MYERS said what hasn't been fully discussed is what happens
if CO and carbon emissions are regulated. What sources of energy
2
will become preferred and how will that shift pricing and
availability of resources? In the next few years Congress and
the Obama administration will address that substantial policy
question.
MR. MYERS said that the U.S. is now about 70 percent dependent
on imported oil and in some scenarios it will be dependent on
much higher quantities of imported natural gas. Will the gas be
available and secure in terms of national security, national
policy, and the environment? Tracking energy growth over the
long-term shows increasing demand on a predictably large scale.
Worldwide, certain sources of fuel will be limited by
environmental constraints, policy direction, and scarcity of
other resources affected by energy development.
4:38:12 PM
CHAIR MCGUIRE asked if he agrees that, as a result of a 1970s
policy decision, the U.S. now relies on crude oil for less than
2 percent of its electrical generation. She further asked if
developing countries like India and China have similar policies
and how that might impact natural gas.
MR. MYERS said we'll be with existing fuels for a long time
because growth outstrips capacity to grow. He displayed pie
charts of percentage of electric power generation by fuel type
in 1975 and 2004. All fuel sources have grown except hydro.
Capacity for hydro projects is decreasing, particularly in the
west, due in large part to systematic climate change. It dropped
from 15.6 percent to just 7 percent. Natural gas has grown very
slightly due to limits in supply. Coal and nuclear supplies for
electrical generation have increased the most in that 30 year
time period. Petroleum shrank to 3 percent in 2004 and it keeps
shrinking. It's not cost effective to use oil when there are
alternative supplies. He summarized that the dynamic market is
shifting from an oil-based supply to a larger dependence on coal
and nuclear.
4:42:36 PM
CHAIR MCGUIRE asked what carrots and sticks the government used
to reduce dependence on crude oil for electrical generation.
MR. MYERS said not a lot; policies have really been market and
supply-reliability driven. Electrical generation has shifted
dynamically to coal. Nuclear isn't growing now and demand for
natural gas has stayed flat. Demands for electricity keep
increasing.
4:44:10 PM
MR. MYERS said energy sources for the future have real
constraints. Bio-fuels have seen huge growth, but water is a big
challenge. Water usage and availability will play a huge role in
future development of resources. Current policies will be
challenged. No free lunch is true with any energy, renewable or
not.
MR. MYERS highlighted some changes that have occurred since AGIA
was passed to answer whether the fundamental economics have
shifted.
· The global economic downturn has caused a decrease in
energy use, which resulted in oversupply and a dynamic
short term fall in prices. Gas prices have fallen to less
than $4/mmbtu on the major markets.
· There's been a rapid expansion of unconventional shale gas
supplies to the U.S. He noted that in the U.S. the first
shale gas well was drilled in 1820. Commercial production
began in 1926. The first Barnett shale well was drilled
1981.
· Policies on federal land really matter because much of the
available resources for fossil and renewables are on
federal land. In Alaska that's a major point. What will the
policies be? Will the Atlantic margin or the West Coast be
open for gas development? The development of
nonconventional gas is dependent on continued availability
of these areas. There's a great deal of conflict over the
use of these lands with water, grazing rights, ecological
change, endangered species, and human habitation. He
believes that with the current administration there will be
new restrictions in certain areas. How the development of
gas resources and nonconventional gas resources will be
affected in the next few decades is the question that's
relevant to the Alaska gas pipeline.
· The first authoritative Arctic oil and gas assessment was
completed by the USGS in 2008. The results are favorable to
Alaska resources.
· There's an increased likelihood of carbon regulation.
4:50:48 PM
SENATOR STEVENS said one thing you'd hope would have changed
since the AGIA license was awarded is an international
recognition that this is a global issue. He thinks the U.S.
economy would have been impacted enormously if the Kyoto treaty
had been ratified. Hopefully the current downturn will stop
folks from thinking that the U.S. should do something that the
rest to the world isn't willing to do.
MR. MYERS said his perspective is that Alaska gas is a positive
mechanism for the new administration to honor restricted carbon
loads and still have a vibrant economy. If President Obama signs
a post Kyoto treaty he has to dramatically decrease CO emissions
2
in this country and the way to get there is to increased use of
natural gas. The countries that didn't support the Kyoto treaty
are now becoming the largest carbon emitters. He believes that
the U.S. will be inclusive and try to put something together
that will work for the developed and the developing world. There
is intent in Congress and the administration to do that.
4:54:32 PM
MR. MYERS said there's need for growth line base of gas from
nonconventional as well as conventional sources. Alaska gas will
be very cost competitive with nonconventional gas and LNG. He
noted that ConocoPhillips CEO, Jim Mulva, is still bullish on
Alaska gas being a key market-driven product. Also, natural gas
helps extend oil production on North Slope oil; it allows more
barrels of oil to be recovered and it allows for better economic
development of major fields like Prudhoe Bay and Point Thomson.
A gasline becomes essential for not just gas recovery, but for
the integrated economics of oil and gas fields and lengthening
the useful service of TAPS
4:55:54 PM
MR. MYERS said that natural gas was found in the discovery
process of conventional high quality oil. Initially the gas was
flared off, but over time it became a valuable commodity and
there was deliberate exploration for natural gas. In that
process, the U.S. became a leader in the production of natural
gas. Over time the quality and size of the conventional fields
declined and more challenged reservoirs were developed. Now
nonconventional reservoirs are becoming the dominant form of
production in the U.S. Shale gas is among those sources of
nonconventional gas, but it's not the dominant source that's
produced today. Nonconventional gas requires higher technology
and is generally more expensive to produce than conventional
gas. It's the same with oil; the light hot sweet crudes were
produced first, then heavier oils were produced and now
production is from tar sands and potentially oil shales.
4:58:20 PM
MR. MYERS said that shale gas is now being produced in large
amounts because of improved technology and increased price. He
displayed a map showing shale gas plays in the U.S. and noted
that not all of it is economic. Production will be in the sweet
spots, and as prices rise and technology gets better it will be
expanded to different areas.
CO-CHAIR WIELECHOWSKI asked if [competition for] water might
limit shale gas production in the Lower-48.
MR. MYERS said yes, in some areas water will be the leading
environmental concern. Dry wells require chemically treated
water to be injected for fracturing, and then it has to be
pumped out and disposed. There is natural flow back of hydrogen
sulfate and salts associated with the shale from the wells.
Sometimes oil shale is found close to fresh water reservoirs and
that is a big issue. And regulatory structures don't yet exist
in areas where shale gas occurs in nontraditional oil and gas
areas. Those may or may not be favorable. The resource is
needed, but it isn't logical to assume that the growth from the
sweet spots will be linear.
5:01:38 PM
MR. MYERS said nonconventional gas is filling the gap as
offshore and onshore conventional gas declines. At this point
shale gas accounts for about five percent of total production;
tight sands is dominant, followed by coalbed methane. The bottom
line is that shale gas is only one component of nonconventional
gas. The AGIA probability models considered the long term growth
of nonconventional gas and recognized that over time LNG would
be put into the market place.
The history of gas production in Wyoming shows that over time
[1977-2006] nonconventional gas is becoming dominant as
conventional production declines. The largest source is tight
gas sands. Much of the production in western states is on public
lands.
5:04:00 PM
MR. MYERS said the Arctic Basin is one of the last remaining
large areas for undiscovered oil and gas development; Siberia
and Arctic Alaska are the best of the best. Alaska represents
about 36 percent of the national potential for undiscovered
conventional gas. If the current administration does not open
the Atlantic or Pacific OCS for oil and gas production, Alaska
becomes more dominant.
Nonconventional continuous gas, including coalbed methane, shows
that Alaska has 18.06 TCFG of the mean national total of 364.2
tcfg. Excluding coalbed methane, the national total is [274.9
tcfg.] The Alaska gas endowment is much bigger than the shale
gas endowment, based on USGS December 2008 data. Undiscovered
conventional gas potential shows that, for Alaska, much of the
resource is onshore.
5:07:07 PM
The real question, however, is how much of the resource is
economic to recover and at what cost. USGS data for conventional
pure gas play on the central North Slope shows the mean number
is 33.32 tcf. A probability model of the mean case shows that,
over a large portion, the gas is economic in the $4 to $6 range.
The Bank of America numbers for economic shale gas breakeven
prices vary a lot, but the resources vary as well. The mid range
was about $6.64 and the high range was $11.50. Alaska gas fits
into the lower end of the cost of production of this
nonconventional gas.
CHAIR MCGUIRE said the committee heard that some estimates are
as low as $3.
MR. MYERS said it depends on whether capital costs are included
or just the operating costs to keep the wells on line. Once
production starts there's a cash flow issue. Many small
companies developing shale gas are heavily leveraged by banks
and they're worried about their credit. So they will continue to
flow gas to make their operating costs or their pipeline tariff
commitments. The best cost estimate he could find was $800,000
for a vertical fractured well. Estimates for a horizontal multi-
phased fractured well, which is predominant, was about $4
million. The other thing is that if it was just $3 they'd still
be drilling a lot of wells. The Baker rig count between August
2008 and today is 43 percent of the oil and gas rigs have been
laid down. Most of those are gas rigs so there's a huge decline
in drilling, which over time will lead to a decline in
production. There may be shale gas that could be economic at $3
but not the kinds of figures you're seeing out there.
5:10:40 PM
SENATOR WAGONER asked, at the current rate of use and assuming
they stack 50 percent of the rigs, how long will it take to see
an effect on the price of gas?
MR. MYERS said it's a supply and demand and storage issue and it
depends on how much gas is in storage. Right now storage is
peaked out. Within about a year you could see significant
declines in production and if demand doesn't grow in that time
then prices will stay down. Also, we are not an attractive
market for LNG. European and Asian markets pay significantly
more.
5:12:29 PM
MR. MYERS said the Department of Energy view is that over half
of the conventional gas on North Slope is economically
recoverable. There aren't good numbers for recovery of
unconventional resources in shale locations. Another plug for
Alaska is that it has about 1/80 the well density that Wyoming
has. Clearly, Alaska has a lot of growth room and upside
potential. Nonconventional gas in Alaska includes gas hydrates,
over pressured basin-centered gas, and coalbed gas. The first
assessment of technically recoverable hydrates came out with 85
tcf. The number is conservative; it's just for depressurizing
the gas and does not include heating, changing the stability
zones of hydrates by thermally inducing heat or injecting COand
2
removing methane. What's positive about hydrates is that a lot
sits within the existing infrastructure.
MR. MEYERS said the last point is what happens to our plans in a
carbon constrained world. Traditional use relied on a dramatic
increase in coal production to meet future demands. It shows
modest growth in nuclear; hydro is flat; non renewables are
increasing; oil production, largely from corn sources, is
increasing; a dynamic increase in coal; and a flattening of
natural gas. If coal is taken out of the equation, you have to
fill the gap. Different climate scenarios say that based on the
models the agreement of the scientists in the international
panel is that without significant reduction of current levels of
COwe will see significant climate change and global warming.
2
This is modeled, not actual, but if the U.S. believes this it
will react and try to decrease CO. Natural gas is the only
2
readily available source to do that in the short term. To have
an effect, it needs to be done in the next few years not a
decade from now. The residual lag time of COin the atmosphere
2
and the growth of COtakes you over lip in almost all the
2
climate scenarios.
5:15:28 PM
SENATOR WAGONER said the graph shows that coal is taking an
uptick, but if the administration and Congress decide to
sequester CO a lot of coal plants will need to shut down. That
2
will have a tremendous effect on the price of natural gas in the
next three years or so.
MR. MYERS said that's the general consensus, and the way the
policy is implemented has a huge effect. Whether it's a simple
cap and trade, whether there's a value change and premium put on
natural gas, whether it's a regulatory structure that says thou
shalt not emit CO unless you can sequester it, or whether it's
2
another mechanism is crucial to whether those plants are shut
down or new plants aren't built. Right now coal plants aren't
being built because of the uncertainty of the markets. Capital
markets aren't willing to fund the coal plants nor do the
regulators appear to be willing to regulate and approve these
plants. At the same time natural gas plants have been slowed
because of high volatility and availability of the commodity.
That's why shale gas is our friend, he said. You have to build a
base capacity now if you're going to treat this problem. New gas
coming in - the fact that there was a 7 percent growth in
natural gas capacity in the country - and the moderation of
prices lead you to believe that policy will lead to gas-fired
power plants as the dominant new source of power for the next
decade or so while we increase solar, wind, and potentially
nuclear as rapidly as we can but not fast enough to meet
reasonably expected CO goals. Natural gas is the fuel you've got
2
to bridge and the way the policy is done will become crucial.
SENATOR FRENCH said it sounds like the movement to a green
economy is very promising for Alaska. He wonders whether the
downside might not be some environmental regulations regarding
Arctic areas that impact development here.
MR. MYERS said there's a lot of speculation about what future
Arctic policy will look like. Decisions by the Secretary of
Interior in the next year become a critical element. He needs
some source of energy that's environmentally preferred and
available. That gives an opportunity for Alaskans to make their
case. Also, there is the President's support for it. If you
believe that cap and trade will occur, it will incentivize more
gas demand. With Arctic policy, Alaskans have to be able make
the case of how important it is and show the environmental
balancing act that needs to occur. Recognizing that every type
of energy has full cycle costs and benefit, we need to quantify
those benefits better. He tried to show that with ethanol it was
a choice that has a poor tradeoff with respect to the
environment. Now we are making tough choices and the future will
require us to make them rationally.
5:20:42 PM
SENATOR STEVENS asked if he's saying that cap and trade could be
advantageous to Alaska.
MR. MYERS directed attention to a slide of Black & Veatch AGIA
data showing the impact of carbon regulation on natural gas
demand. It shows that demand for natural gas for power
generation under the AGIA base case increases about 14 bcf/d
under carbon managed growth. Alaska gas isn't the total
solution, but it's important and at the right time. If you
believe the figures that were generated under the many different
scenarios for what it will cost to get Alaska gas to market, it
is very competitive with nonconventional gas in the Lower-48.
From a strategic and economic perspective, the Alaska project
makes sense, even with a significant increase in LNG imports and
an increase in shale gas.
5:23:38 PM
MR. MYERS said that in the carbon managed growth case multiple
different sources of natural gas will be needed to meet Lower-48
demand growth. The Black & Veatch analysis shows that demand for
LNG will increase, nonconventional gas will increase, and
conventional gas will increase if it's available through Alaska.
A Black & Veatch chart shows that in the carbon managed growth
case, gas prices will have a higher price path than in the AGIA
base case. "Basically, the managed carbon case actually beats
all the cases we based the economics of the pipeline on," he
said.
MR. MYERS summarized that he tried to walk through a couple of
logical scenarios to provide perspective on world energy demand
and where that energy could come from, that energy use has
evolved and that shale gas is a player. He does not see shale
gas in any way negatively affecting the AGIA project. It is an
opportunity to build a greater base of natural gas production
for the generation of electricity. He didn't discuss
transportation, but the fact that natural gas is projected to
sell at a discount to oil enhances it as a transportation fuel.
SENATOR FRENCH commented that he is dismayed that there are only
30 people in the room listening because this thorough analysis
should be broadcast statewide. He committed to file a bill to
have a web camera in every committee room to stream information
live. It's long overdue.
5:26:09 PM
SENATOR HUGGINS said he wants to know the modifiers because one
perfect answer usually isn't as pure and brief as it's thought
to be.
MR. MYERS agreed that it's not a good idea to rely on a single
deterministic viewpoint. One of the powers of the AGIA analysis
is that it didn't rely on one answer; it relied on a Monte Carlo
probabilistic effect with all the outcomes modeled time and
again under different circumstances. That data set captures a
broad range of a very uncertain world in the best available
statistical method to deal with the uncertainty.
5:30:33 PM
There being nothing further to come before the committee, Co-
Chair McGuire adjourned the Senate Resources Standing Committee
meeting at 5:30 p.m.
| Document Name | Date/Time | Subjects |
|---|---|---|
| DOT - PHMSA - 03-25-09.pdf |
SRES 3/25/2009 3:30:00 PM |
|
| Mark Meyers presentation 03-25-09.pdf |
SRES 3/25/2009 3:30:00 PM |
|
| PSIO Update - 03-25-09.pdf |
SRES 3/25/2009 3:30:00 PM |
|
| Risk Assessment - DEC - 03-25-09.pdf |
SRES 3/25/2009 3:30:00 PM |