Legislature(2007 - 2008)MAT-SU
06/24/2008 01:00 PM House RULES
| Audio | Topic |
|---|---|
| Start | |
| HB3001|| SB3001 | |
| Adjourn |
* first hearing in first committee of referral
+ teleconferenced
= bill was previously heard/scheduled
+ teleconferenced
= bill was previously heard/scheduled
| + | HB3001 | TELECONFERENCED | |
HB 3001-APPROVING AGIA LICENSE
SB 3001-APPROVING AGIA LICENSE
CHAIR SENATOR CHARLIE HUGGINS called the joint meeting of
the House Rules Standing Committee and the Senate Special
Committee on Energy to order at 1:06:40 PM.
1:09:05 PM
PAT GALVIN, COMMISSIONER, DEPARTMENT OF REVENUE, observed
that the intent of AGIA was to engage the power of the free
market to spur the project ahead. He observed that AGIA
provides competition in the form of projects that would
contend for state value. The state believes that the project
is economical and the market would drive the project to
completion.
1:10:57 PM
[NOTE: Audio missing from 1:11 PM to 1:16 PM; minutes taken
from Gavel to Gavel]
COMMISSIONER GALVIN spoke to the TransCanada application and
the conclusion that going forward with TransCanada maximizes
the benefits for Alaskans. He explained that there is
always a counterweight for comparison. Jobs, affordable in-
state gas, and revenue must be considered in making the
choice. He believed TransCanada's application maximizes the
state's resources and merits issuance of an AGIA license.
COMMISSIONER GALVIN thought that issuing the license to
TransCanada would be more beneficial to Alaskans than
pursuing an LNG (liquid natural gas) project or the
producer's project.
1:14:29 PM
COMMISSIONER GALVIN stressed that the state's interest is
primary. Getting a pipeline requires a feasible project
plan, sponsored by a capable pipeline company. It is a long
term project. He thought TransCanada was proposing an
economic project that was likely to attract firm
transportation commitments and secure finances.
1:18:03 PM
COMMISSIONER GALVIN spoke to jobs and affordable gas to
Alaskans. He observed that any pipeline would result in a
spike in employment associated with construction, but the
real prize would be new jobs and long-term careers created
by the exploration and development of new gas resources. The
structure of the proposal of the gas pipeline will affect
the amount of future exploration.
COMMISSIONER GALVIN said there was focus on two different
time frames. The most cost effective transportation will be
based on volume. The second issue is timing. Alaskans want
gas as soon as possible. It is important to move the big
pipeline forward in a way that allows Alaskans to pursue gas
in a timely manner.
1:20:16 PM
SENATOR HUGGINS asked when Alaskans on the road network and
the Railbelt could expect to have in-state gas.
COMMISSIONER GALVIN clarified that gas could be available in
five to seven years. The economic issues could be addressed
by through-put, increasing the amount of gas traveling
through the pipeline in order to share the costs of that
line, which would take time, or by having the state front
the money to allow quicker distribution. The decision before
the legislature is whether to advance the TransCanada
application. Nothing in that license would hinder the
state's pursuit of in-state gas.
1:22:35 PM
SENATOR HUGGINS referred to modifications requiring the
volume of gas that could be transferred in the state.
COMMISSIONER GALVIN answered that the issuance of the
license would require the state to not support a competing
gasline project during the TransCanada project. "Competing
project" is defined in statute as a pipeline larger than 500
Mmcf/d. For comparison, he discussed the size of the market
in the Southcentral region, which is currently 252 Mmcf/d.
In addition, approximately 190 Mmcf/d was exported out of
the Nikiski plant. The Agrium plant was consuming about 150
Mmcf/d. That is the total market in the Cook Inlet region.
Cook Inlet is still a producing basin with a significant
amount of gas potential. Therefore, the entire demand of the
Cook Inlet area would have to be doubled to exceed the
amount allowed. He concluded that the capacity is unlikely
to exceed the demand.
1:26:36 PM
COMMISSIONER GALVIN looked at the TransCanada license in
comparison to the Denali project and other options to the
state. He stated that the Denali project has no commitment
to move forward under any particular timeline and no
commitment to structure tariff and expansion terms in a way
that will protect the state's long-term interests. In
addition, proponents of the Denali project require
additional state concessions in regards to taxes and a
fiscal framework. The extent of the additional requirements
is unknown. It is not in the state's interest to close its
options. He concluded that the TransCanada project is in the
state's long-term interests, is economically viable, and is
sponsored by a very attractive pipeline company.
1:29:55 PM
COMMISSIONER GALVIN discussed the TransCanada license
related to LNG projects the state could pursue. He reviewed
different LNG project designs and considered economics to
the state and producers. He referred to barriers to an LNG
project. He concluded that LNG projects are economic, but
not as attractive as an overland project. He maintained that
Alaska's long-term goal is to have both, but that it would
be best to start with the overland project since it would
help the LNG project succeed.
1:33:26 PM
COMMISSIONER GALVIN reiterated that the pipeline project
proposed by TransCanada's application merits issuance of an
AGIA license. Issuing the license to TransCanada maximizes
benefits to Alaskans more than pursuing an LNG project or
the producer's project.
1:34:28 PM
COMMISSIONER GALVIN introduced his PowerPoint presentation,
"AGIA: Summary of Commissioners Findings and Determination"
(Copy on File). He asserted that getting a pipeline is a
priority, but emphasized the need for a feasible project
plan sponsored by a capable pipeline company and an economic
project likely to attract firm transportation commitments
and secure financing. In terms of jobs and long-term
careers, the pipeline should maximize competitive
exploration and development on the North Slope. This would
require a true open access pipeline.
COMMISSIONER GALVIN defined open access pipeline. He
explained that under AGIA the licensee is obligated to:
· Solicit for additional demand for gas to go into the
pipe on a regular basis, at least every two years.
· If there is sufficient demand, they have to commit now
that they will expand the pipeline when that gas is
ready to get into the line.
· When they charge the rate to those who want to expand
and get gas into the line, they will do so on the basis
of rolled-in rates. This means they will spread the
cost of expansion across all shippers, and not just
across the newcomers.
1:37:11 PM
COMMISSIONER GALVIN pointed out that the opportunity for
Alaskans to enjoy affordable gas comes down to access. Gas
must be able to come off the line, with rates that are
appropriate for the distance the gas travels. There must be
true open access, because Alaska's ability to use gas will
change over time. Expansion provisions are crucial. Any
large project will take time to build; Alaskans may want to
pursue a smaller, quicker line. AGIA provides for that.
COMMISSIONER GALVIN described Alaska as a resource
development state; its primary source of revenue is from oil
and gas development. The revenue derives from a high net-
back value on oil and gas. Net-back is the market price less
transportation cost. The state cannot control the market
price, but it can control the transportation cost. AGIA is
designed to provide the lowest transportation rate or
tariff.
COMMISSIONER GALVIN stressed the enormity of Alaska's gas
reserves. There is more than 30 trillion cubic feet of known
gas reserves on the North Slope, plus 5 trillion in Point
Thomson. There are a couple hundred trillion cubic feet of
expected gas resources that would be economic to produce if
there were a gas pipeline.
1:41:39 PM
REPRESENTATIVE FAIRCLOUGH questioned how distance sensitive
rates under FERC will affect tariffs in Canada.
TONY PALMER, VICE PRESIDENT, ALASKA BUSINESS DEVELOPMENT,
TRANSCANADA, explained that there are two significant and
separate components of the pipeline: the Alaska portion and
Canada portion. Both will collect through their own tolls.
In the Alaska component, there will be some gas that goes to
the border or to Valdez, and some gas that will be consumed
within Alaska. He maintained that the Canadian toll would
not be affected by Alaska's distance sensitive tariff.
REPRESENTATIVE FAIRCLOUGH asked for information regarding
the through-put and how it would affect the tariff.
MR. PALMER answered that until there was an open season
where customers were solicited, it would not be known how
much gas would use the Alberta destination on the way to the
lower 48, how much would go to Valdez, and how much would be
consumed in Alaska. As one possible scenario, in the event
that 4 bcf/d goes to Alberta, and 2 to 4 Mmcf/d is consumed
within Alaska, then the pipeline in Alaska would be
constructed in order to transport 4.2 bcf/d down to the
location where Alaskans wanted to take off their portion.
The capacity beyond that point would have 4 bcf/d all the
way to the destination. The amount of compression on the
pipe would be adjusted accordingly. If additional volume
were required in the future for Alaska or elsewhere,
compression would be added to the pipe.
SENATOR HUGGINS added that the Canadian National Energy
Board and other governmental agencies had been invited to
testify, but they had declined to participate.
1:46:48 PM
COMMISSIONER GALVIN observed that under AGIA, the state
looked at the TransCanada application using two primary sets
of criteria: net present value (NPV) to the state, and
likelihood of success. He summarized that NPV reduces
payments to the value of current dollars in order to compare
the value of different projects. The NPV to the state was
looked at, and the NPV to the producers, which is a measure
of the likelihood of success in terms of attracting gas
commitments in order to finance a project. In addition, many
factors that would affect the project were reviewed to
measure likelihood of success, some specific to TransCanada
and their parent company. Included were technical abilities,
track record in completing large projects, financial
stability, and potential hurdles such as permitting.
1:51:25 PM
REPRESENTATIVE NEUMAN referred to issues brought up by Econ
One, particularly TransCanada's expectations of the state
persuading ANS producers to commit gas and dedicating state
resources to the project. He stressed that a specific plan
needs to be in place to address these issues.
COMMISSIONER GALVIN replied that the TransCanada
expectations referenced are not obligations on the part of
the state. TransCanada has requested these things from the
state. The gas pipeline process is composed of a series of
gates that the state must go through. More information will
be available as the process progresses. The issues can be
considered in the future, though the state can identify the
decision junctures. For instance, on the issue of gas
commitments: What if there is an unsuccessful open season?
The state can anticipate such issues and expect the parties
to think about them.
1:56:48 PM
SENATOR NEUMAN observed that it would be better to have
specific ideas of how the state moves forward, perhaps in
the form of a contract.
SENATOR HUGGINS explained that the contract would
incorporate the legislation of AGIA, the request for
proposal, and TransCanada's application. Some are concerned
about voting without knowing if any of those components has
precedence. He said there would be a round table with legal
counsel to walk through those issues.
SENATOR STEDMAN asked for an explanation of the gates or
decision junctures. He understood that AGIA does not require
that the pipeline be built and then open to first gas; it
consists of earlier gates to accomplish first gas, such as
permitting.
COMMISSIONER GALVIN responded that AGIA focuses on an open
season, which is an opportunity the pipeline provides to the
market to make commitments to ship gas through the line.
Financing would be based on those commitments. In addition,
the permitting process under the federal regulating
commission FERC is a drawn out process, aimed at getting the
certificate. There is a similar agency and process on the
Canadian side. These two permitting processes are the
primary gates on which AGIA is premised. He concluded that
the project needs to get going through those particular
gates, in order for the market to pick the project up and
ultimately get it in operation. Within those parameters,
there are a number of junctures where decisions will need to
be made.
2:01:16 PM
COMMISSIONER GALVIN continued that in the application,
TransCanada says the state may want to consider other paths.
He spoke to problems that could occur if the open season is
not successful. The federal government has stated that they
are interested in the project; they have threatened that
they could take the project over and build it themselves if
it did not advance quickly enough. TransCanada said that
perhaps the offer to the federal government should be that
they don't have to build it themselves, but could allow the
project to move past that hurdle. This has been called the
bridge shipper proposal. The TransCanada application also
mentions that the state may want to look at the possibility
of allowing TransCanada to enter into commitments with
others for the project to be feasible. Those kinds of ideas
were solicited in the application.
2:03:40 PM
SENATOR HUGGINS spoke to the $500 million and asked for more
information.
COMMISSIONER GALVIN observed that the key to AGIA is the
motivation to drive the project forward to an open season.
The state will match up to $500 million of the cost to do
that. In return, the state receives a commitment for a
viable project with true open access to go forward in a
timely manner.
2:05:29 PM
SENATOR STEDMAN clarified that AGIA is tasked with getting
the pipeline project through its initial gates, not
completion.
COMMISSIONER GALVIN agreed.
SENATOR STEDMAN stressed the difference between what is
available under FERC and what is added by AGIA. He thought
it made sense to deal with federal requirements first as
FERC is the ultimate decider on many of the issues, not the
state.
COMMISSIONER GALVIN pointed out that AGIA would result in a
proposal to FERC in the state's interests, which is of
tremendous value to the state. He emphasized that open
access is a key component. The state has tried to get as
much out of FERC as possible in terms of pipeline expansion
and rolled-in rates as the primary method of establishing
the tariff. FERC regulations and AGIA are significantly
different. The administration feels strongly that the
commitments included in AGIA by TransCanada will give the
state a greater likelihood of achieving an open access
pipeline than FERC would provide through an adjudication
process. The ultimate decision makers on the value will be
the explorers, who need the confidence that they will
receive a return on investment.
2:12:14 PM
REPRESENTATIVE SAMUELS questioned statements made by
Commissioner Galvin. First, he maintained that FERC has
already testified that the project would be open access.
Second, he said that the project is ten times the size of
any previous project taken on by TransCanada, so they have
no track record on projects of this size. Lastly, he
contested remarks by the Commissioner related to the bullet
line needing AGIA to go forward.
2:14:40 PM
COMMISSIONER GALVIN responded that regarding open access,
the explorer will ultimately have to make a decision whether
to invest. The FERC process could discourage them. He
believed that was the ultimate determinate of whether it was
open access. The administration believes that what they get
under AGIA is more valuable than what they could expect
under FERC. Regarding the comment on "projects of this
size," he said he was talking about track record on the
technical aspects of building a pipeline and bringing it in
on budget. In that regard, TransCanada's track record can be
analyzed and projected. Finally, he agreed that the bullet
line issue would not be improved or disadvantaged by a
decision on AGIA.
2:17:40 PM
SENATOR GREEN asked for clarification regarding the $500
million. She pointed out that the state would not be
matching dollar for dollar but TransCanada would put in $111
million to match the state's $500 million.
2:18:25 PM
COMMISSIONER GALVIN concurred; it is dollar for dollar up to
open season, and the state bears the larger share after
that, up to 90 percent if the project is within the budget,
and less than that if they go over budget. The cap is $500
million.
SENATOR GREEN asked for clarification regarding the amount.
2:19:12 PM
SENATOR STEDMAN asked for elaboration regarding the players
involved before FERC.
COMMISSIONER GALVIN replied that FERC makes a decision on
the public interest and would define public broadly to
include consumers in the Lower 48, producers if the subject
is initial shippers, existing shippers and expansion
shippers if the subject is expansion, the pipeline, the
state, and the federal government itself.
SENATOR STEDMAN asked if FERC had testified that they would
weigh the state's concerns.
COMMISSIONER GALVIN thought that they had. He explained that
under AGIA the state would gain an applicant who would
forward the state's interest, as opposed to FERC injecting
it into an applicant's proposal. That has value.
SENATOR STEDMAN reiterated that he wanted a balance. He
stated that there would be a multitude of interests in front
of FERC, each arguing their own case. The state may or may
not prevail. FERC will make the call.
COMMISSIONER GALVIN pointed out that it was beneficial to
have allies.
2:22:57 PM
SENATOR THERRIAULT addressed confusions surrounding the $500
million figure. He asked if the lowering of the tariff
resulted in a $1.2 billion future revenue stream to the
state that is discounted to get $500 million back plus $200
million.
COMMISSIONER GALVIN answered in the affirmative.
2:23:56 PM
SENATOR THERRIAULT reiterated that the state would get back
the $500 million plus another $200 million, in discounted
dollars.
COMMISSIONER GALVIN explained that the overall value of the
project to the state is up to $200 million.
SENATOR THERRIAULT referred to water and sewer issues. He
understood that when the government contributes in that
manner it is called a transparent asset. There is no debt,
so debt service cannot be built into the rate base. It is
not equity money. He asked if TransCanada would benefit from
the state's investment of the public's money.
MR. PALMER answered that the amount would not be included in
TransCanada's assets. It would be a deduction from the total
value of the project. TransCanada receives value because the
state is sharing risk during the development period.
2:25:32 PM
SENATOR THERRIAULT asked if development costs are subtracted
off the total if TransCanada applied for a tariff.
MR. PALMER answered yes, although TransCanada would not
apply for that from the FERC, because they are required by
AGIA to exclude it from the cost.
SENATOR STEDMAN asked for a break out of the numbers
including the benefit to the producers and TransCanada.
2:26:45 PM
COMMISSIONER GALVIN continued with his presentation. One of
the complications of the economic analysis is that AGIA
would allow TransCanada to provide alternate designs based
upon certain events that they cannot anticipate. TransCanada
has provided a design that will accommodate a pipeline that
could be anywhere from 3.5 bcf/d capacity up through 5.5 to
5.9 bcf/d.
COMMISSIONER GALVIN stated that their report tried to focus
on two primary base cases. The first is the proposal based
case, which has the assumptions that TransCanada made in its
analysis in their application. The other is a more
conservative based case, based on less gas being available
at the initial open season. He emphasized this was an
important starting point to understand the economic
analysis. The RFP asked for two different types. The first
one asked for a project specific economic profile, a
planning effort for a project with expected costs. The
applicant was to provide input about cost expectations. The
state then took those numbers and did a sensitivity risk
assessment analysis. Rather than assuming a particular price
and have technical experts make price estimates, the state
gave probabilities for various factors. Each of the cost
components had a high and low case. From this a mid point
was established and then various scenarios considered,
resulting in a range of potential project costs. The state
was interested in assessing risk within a large variety of
scenarios.
COMMISSIONER GALVIN explained that presenting such an array
of information was a challenge. The report is detailed and
specific and reflects a wide range of analyses. The finding
is narrower than that and considers primarily the base
cases.
2:32:49 PM
REPRESENTATIVE FAIRCLOUGH referred to the proposed base and
conservative base cases in Slide 10. She pointed out that
neither proven reserves nor allowable off-take would fill a
4.5 bcf/d pipe or a 4.0 bcf/d one.
2:33:46 PM
COMMISSIONER GALVIN acknowledged that the issue of allowable
off-take causes confusion. He explained that typically the
off-take would be established by the operator of the field
making a request to the Alaska Oil and Gas Conservation
Commission (AOGCC). The commission will look at the
proposal, analyze the impact it would have on ultimate gas
recovery, and make a determination whether they agree to the
amount of gas to take off at that time. At this point, the
standing order for Prudhoe Bay is to off-take 2.7 bcf/d.
None is taken off for marketing or selling the gas; about
700 Mmcf/d is taken off for energy consumption within the
field itself and the pump station.
COMMISSIONER GALVIN admitted that the question remains
regarding how much gas would be available when the time
comes to take gas off for a gas pipeline. The AOGCC
commissioner, Kathy Forester, provided her own assessment in
the Anchorage presentation. Based on current trends of
production of oil, she expects there to be sufficient gas
available to fill the pipelines under consideration by
Denali or TransCanada. He pointed out that the producers for
the Denali project have been referring to the same range of
4 to 4.5 bcf/d. He was comfortable that there would be
enough gas. The 3.5 bcf/d scenario was also considered and
found economic. He emphasized the picture he was providing
was not an actual picture of what would happen, but a window
into sensitivities.
2:38:16 PM
REPRESENTATIVE FAIRCLOUGH appreciated how difficult it was
to know. She opined that TransCanada is a good, financially
stable and capable company, but she thought the cost should
decide if the project was economic. Construction costs are
at historical highs. She agreed there were many reserves and
great potential for discovering more. She asked when
TransCanada appropriately sized the pipeline for potential
shippers.
2:40:08 PM
MR. PALMER stated that he had not to date heard that parties
would only expect 2.0 bcf/d committed for the project. He
acknowledged that AOGCC had not put a definitive number
forward, but the expectations were that there would be
sufficient capacity for 3.5 to 4 or more per day.
TransCanada would be pleased to build a larger pipe but the
tolls will be high. Neither the volume nor the destination
of the gas is known. He pointed out that this is normal in
the business; those answers always come during the open
season. He did not expect there to be a restriction to 2.0
bcf/d off the North Slope.
2:42:00 PM
REPRESENTATIVE FAIRCLOUGH said she was pushing the 2.0 bcf/d
to prepare Alaskans for a failed open season. She wanted to
assess the risks of the TransCanada proposal, the NPV
calculations and how to make it cost effective. She stated
concerns about the unexposed liability for treble damages.
She asked if that could be limited. She said Alaskans she
had talked to believe the state's liability cannot exceed
$500 million. She worried that the liability could be
greater. She wanted it on the record that the liability was
limited to $1.5 billion.
2:43:28 PM
COMMISSIONER GALVIN commented that the off-take is unknown,
but he proposed that 2.0 bcf/d is of no more value as a data
point than 4.0 bcf/d. Producers would ultimately propose an
amount to AOGCC.
2:44:26 PM
REPRESENTATIVE NEUMAN referred to sensitivity risk analyses
and cost overruns with the gasline. He asked if there were a
30 percent overrun on construction. He also asked the effect
on tariffs with different sized pipes.
2:45:36 PM
COMMISSIONER GALVIN clarified that REPRESENTATIVE FAIRCLOUGH
was talking about cost escalation factor on an annual basis,
not the cost overrun that could be the ultimate end of the
project. He said pipeline cost escalation at 30 percent a
year for ten years would not be sustainable. If costs go up
higher than the projected $30 billion, he thought that first
the question would be what drove that. The costs could go up
parallel to the price of oil, which would not have a
significant overall effect. The second scenario is if the
cost goes up but the price does not, then the project may
not be economic. That raises the question of whether to
approve this project. However, the same challenges would be
in place for other companies. He emphasized the primary goal
of getting the pipeline moving.
2:49:10 PM
MR. PALMER added that a 30 percent escalation was not
sustainable in any industry. At that rate, costs would
double every two and a half years, which would make the
costs 10 times higher than projection. Oil and gas prices
would also have to increase by that amount. If that were to
occur, every possible substitute energy would become
economic. That would not happen.
2:50:14 PM
REPRESENTATIVE NEUMAN pointed out the projection of $1
billion for Trans-Alaska Pipeline System, but the cost was
$9 billion. He stated concerns that costs were going up
faster than prices.
COMMISSIONER GALVIN said that costs had to be looked at from
a variety of vantage points. For instance, were all costs
going up or has the project been underestimated. The
analysis tries to separate out factors. The risk of the cost
of materials going up is a significant factor. He did not
believe it made the project unworkable. The design was a
lower risk with lower impact to the state.
COMMISSIONER GALVIN turned to the two base cases for
TransCanada's project outlined on Slide 10, "Two Base Cases
Reported for TransCanada's Project":
· "Proposal Base Case"
o 4.5 Bcf/d (including 0.9 Bcf/d from Pt. Thomson)
o 75/25 debt to equity
o 14% return on equity
o 25 year shipping contracts
· "Conservative Base Case"
o 4.0 Bcf/d (No gas from Pt. Thomson)
o 75/25 debt to equity
o 14% return on equity
o 20 year shipping contracts
COMMISSIONER GALVIN stated that the risk of finding
sufficient gas to finance the project is one of the reasons
they are analyzing the smaller pipe. The analysis considers
a shorter contract to spread the costs, and so reviews a 20
year shipping contract as opposed to the 25 year contract
in the proposal based case.
RECESS: 2:53:24 PM
RECONVENE: 3:22:04 PM
COMMISSIONER GALVIN discussed NPV. The analysis projected
out 35 years. He covered several NPV factors:
· Gas prices. The market price for gas will be the
starting point for cash flow analysis.
· Transportation costs. The tariff figured will take
into account cost escalation rates and be spread over
the initial through-put. The debt-to-equity, the
financing and how that financing is captured in the
tariff affects how much will be recovered by the
pipeline from the shippers. That will establish the
NPV and revenue stream to the state.
· Schedule. The cash flow starts when the gas starts
flowing.
· Gas production costs.
COMMISSIONER GALVIN addressed gas prices (Slide 12):
· Gas Price Models
o Separate price forecasts obtained from:
ƒUS DOE's Energy Information Administration
(EIA)
ƒWood Mackenzie
ƒGas Strategies Consulting
ƒBlack and Veatch
COMMISSIONER GALVIN turned to Slide 13, covering the
technical team, which included:
· Westney Consulting
· Energy Project Consultants
· Pingo International
· AMEC Paragon
· Colt Engineering
· Mustang Management
· Energy Operations Consulting
· Black and Veatch
· Merlin Associates
3:26:07 PM
COMMISSIONER GALVIN stated that the analysis resulted in a
mid-case, probability 50/50, on costs and on schedule
(Slide 14).
· Project Cost Estimates - MidRange
o Proposal Base Case
ƒ$31 Billion in today's dollars
· $3.19 tariff
ƒ$45 Billion in dollars spent
· $4.73 tariff
o Conservative Base Case
ƒ$29 Billion in today's dollars
· $3.59 tariff
ƒ$42 Billion in dollars spent
· $5.33 tariff
COMMISSIONER GALVIN explained the importance of
understanding why these numbers are different from
TransCanada's estimates. TransCanada went through a project
planning exercise. They looked at the project point of a
proponent. They used assumptions for cost escalation for
the exchange rate between U.S. and Canada that the state
gave them. They used other numbers given by the state. The
big difference between the two prices is the result of
taking the state's technical team's approach, which was to
assume neutral competence and mid-range costs. TransCanada
went through a project planning effort. They had to come up
with a realistic target.
COMMISSIONER GALVIN said there were differences in how the
project was seen to play out, delineated on Slide 15:
· Project Cost Estimates: Why Higher than TC Alaska's?
o Different Purposes - Project Planning vs. Risk
Assessment
o TC Alaska's Cost Estimates are "realistically
aggressive"and appropriate for project planning
ƒAnalytical team tested sensitivity of
estimates to changed circumstances
o Difference Between Assumptions Mandated in the
RFA and the final analysis assumptions
ƒExchange rate, cost escalation rate
o Assumed "Neutral Competence" of Operator
o Cost of the GTP
ƒOne vs. Two seasons of sealift
3:28:49 PM
COMMISSIONER GALVIN addressed the project schedule (Slide
16):
· Project Schedule
o Midrange probability put first gas in 2020
o State's Canadian counsel advised on expected
regulatory timeline in Canada, including First
Nation issues
COMMISSIONER GALVIN discussed (Slide 17):
· Reporting NPV Results -Proposal Base Case
o Gas Prices (using Wood Mackenzie)
o Transportation Costs
ƒPipeline Project Capital Costs ($13.5
billion
ƒCost Escalation Rates (4%)
ƒInitial Pipeline Throughput (4.5 Bcf/d)
ƒTariff Terms (e.g. debt to equity
ratio[75/25])
o Pipeline Construction Schedule (2020)
o Gas Production Costs
COMMISSIONER GALVIN emphasized that they had focused on
the first 25 years of pipeline operation. In that time
frame, the state could bring in an additional $261
billion, in today's dollars. The proposal base case
results (Slide 18) and conservative base case results
(Slide 19):
· Proposal Base Case Results
o The State of Alaska would realize
an estimated cash flow of $261.5 billion, and
an estimated NPV of approximately $66.1 billion
at a discount rate of 5%.
o The Major North Slope Producers would realize an
estimated cash flow of $147.4 billion, and an
estimated NPV of approximately $13.5 billion at a
discount rate of 10%.
· Conservative Base Case Results
o The State's NPV decreases by 8% from the
Proposal Base Case to $60.7 billion.
o The major North Slope producers NPV decreases by
9% to $12.3 billion.
3:31:52 PM
COMMISSIONER GALVIN noted that all the numbers are based
on no expansion, with no additional gas. He continued with
Slide 21, which acknowledges that the project economics
are extremely robust:
· It would take a "perfect storm" of worst
case scenarios of multiple factors for the
Project to be uneconomic to the Producers.
· Indeed, a "perfect storm" of low gas prices and
high construction costs together are not enough to
generate a negative NPV for the state.
3:33:01 PM
COMMISSIONER GALVIN explained that when the $500 million
matching contribution is factored in as a lowering of the
project costs, the tariff is reduced, which ultimately
reduces the cost to ship the gas. This increases the NPV
to the state by $200 million (Slide 22).
COMMISSIONER GALVIN turned to the subject of the
likelihood of success (Slide 23):
· TransCanada has submitted a plan for its project that
is technically feasible, reasonable, and specific.
· TransCanada has demonstrated the technical and
financial ability to construct the project.
· TransCanada has submitted a reasonable commercial
plan which, coupled with economic and political
factors, should help to encourage firm shipping
commitments.
3:34:29 PM
COMMISSIONER GALVIN stressed the importance of looking at
getting gas commitments, which will ensure success of the
project. It will also provide the state with opportunities
to enhance the likelihood of getting the gas. Producers are
looking for an attractive project to put their gas in, one
that will make them money. His analysis shows that this
project will do that. He also thought TransCanada was a
company that would attract producers to the pipeline. He
thought AGIA provided additional value to the producers if
they commit to the project. Inducements include the ten
year tax certainty and royalty valuation. He described
things that the state is considering that will become
relevant if gas is not committed: lease requirements, anti-
trust issues, congressional attention, and answers for
shareholders.
3:38:47 PM
SENATOR HUGGINS asked for a brief overview of what would
happen if producers committed gas to the Denali project.
COMMISSIONER GALVIN described a scenario: an open season for
the TransCanada project where the producers don't commit the
gas because they'd rather put it in their own pipeline
without state concessions, and that project moves forward.
He said this was a possibility and he thought the state was
better off if the TransCanada project moved forward.
3:39:52 PM
SENATOR HUGGINS asked what would happen to TransCanada if
the producers did not go with them.
COMMISSIONER GALVIN answered that the issue would be if the
producers see a potential role and the state wants to form
a project outside of AGIA.
3:40:24 PM
COMMISSIONER GALVIN raised the issue of contingent
liability on the part of TransCanada towards former
partners. The risk has two components (Slide 25). If the
liability is pursued and recognized by a court, tariff
costs will increase. The second concern is that an
outstanding liability will keep partners away for fear of
assuming the liability themselves. Legal and financial
experts have analyzed that risk and concluded that the
tariff will not be affected under rules currently in place.
Regarding the second concern, experts concluded that it
should not be a barrier to the project. The risk of
litigation and potential exposure is very small.
3:43:39 PM
SENATOR GREEN asked if under those circumstances the state
would be willing to indemnify producers. She wondered if
the state would be willing to ensure it would not be a
problem.
COMMISSIONER GALVIN thought the issue could be looked at.
If producers came forward and expressed willingness to join
the project if the state took a particular action relating
to the liability, the state would consider it.
3:44:41 PM
REPRESENTATIVE SAMUELS asked if TransCanada would ensure
against liability, knowing that could not be rolled into the
tariff.
3:45:18 PM
MR. PALMER answered that would be discussed with partners as
appropriate, and not in a public forum. TransCanada has had
ongoing discussions with all producers for years on this and
other matters. TransCanada's position has been put on the
record. They are taking action to dissolve the partnership.
TransCanada has committed that any costs to TransCanada for
that process will not affect the tolls.
3:46:12 PM
REPRESENTATIVE DOOGAN conjectured that if AGIA passed, in
order to get people to put gas into the pipeline, either
TransCanada or the state might be negotiating with producers
to offer them a deal different than anything on paper now.
3:47:31 PM
COMMISSIONER GALVIN stated that TransCanada has seen
opportunity for the state to analyze what can be done to
enhance the attractiveness of the licensed open season. Any
such discussion would be public and would be subject to
public, legislative approval through a cost benefit analysis
of what is being gained and what is given up. The
cornerstone of AGIA is providing transparent benefits
through a transparent process. An AGIA licensed project
would enhance that process.
3:48:49 PM
MR. PALMER added that the issue of an equity offer is
already on table in the AGIA application. TransCanada
understands that customers may negotiate for improved terms.
Any further concessions by TransCanada would only improve
the economics for the state. He stated TransCanada is not in
a position to go higher as they would have committed under
AGIA to do so.
3:49:52 PM
COMMISSIONER GALVIN continued with his presentation,
pointing out that the analysis did comparisons with the
Denali project and LNG option. Slide 27 lists reasons why
the Denali project is more risky for the state:
· Lack of commitments create risks for the state
· No certainty on project schedule
o Likely Antitrust Challenges
· Undefined tariff terms
o Example, 50/50 debt to equity increases the
tariff by $1 compared to 75/25, costing the
state over $8 billion in NPV
· Undefined state fiscal concessions needed for Denali
o SGDA concessions worth over $10 billion
· No Certainty on Expansion Provisions
o Producer Incentives to exercise basin control
o Stifles North Slope basin development
o Loss of longterm jobs and careers
o Loss of potential LNG development
COMMISSIONER GALVIN emphasized the importance getting the
project moving. He said there are significant differences
between the two projects.
3:53:00 PM
SENATOR HUGGINS pointed out that the risks of the Denali
project have been outlined. He asked for an update regarding
what Denali has done.
COMMISSIONER GALVIN answered that Denali has publicly stated
that they will commit to $600 million to get to an open
season in two and a half years. They have begun field work
on some of the right of way issues near the Alaska- Canadian
border. They opened a field office in Tok and named a
president of the joint venture.
3:54:09 PM
SENATOR HUGGINS asked what they had done related to FERC.
COMMISSIONER GALVIN said Denali had sent a letter to FERC
beginning the pre-filing process to establish what is needed
for the full application. In this process they communicate
what kind of studies will be needed and how to flesh out the
whole application. He said they indicated that while they
were announcing that they were beginning the pre-filing
process, they were still gathering the information needed.
3:55:11 PM
REPRESENTATIVE FAIRCLOUGH referred to undefined fiscal
concessions from a third party. She described how low
bidders secure positions and asked for needs later for cost
overruns. She asked if TransCanada would come back to state
for additional money or terms.
MR. PALMER answered that in the event the state decided to
review upstream tax, TransCanada would not lobby to
participate.
REPRESENTATIVE FAIRCLOUGH asked if anyone [at a hearing they
had gone to] had argued in favor of progressivity.
3:58:06 PM
SENATOR HUGGINS answered no.
REPRESENTATIVE FAIRCLOUGH asked, regarding the procurement
process, if the administration would propose any new tax
structures for gas once a project is chosen.
3:59:18 PM
COMMISSIONER GALVIN reported that Denali had stated that
they would ask for concessions. He said there would be a
number of procurement processes. In this case, the state's
obligation is limited to $500 million. TransCanada's
obligations remain the same if project costs go up.
Regarding potential changes to the state's upstream tax
structure, he acknowledged there may be interest in
transferring some of the value to producers to get their
commitments to the TransCanada project. He could imagine
that discussion taking place because there is so much at
stake in getting the gas committed.
4:01:53 PM
REPRESENTATIVE FAIRCLOUGH referred to her experience with
government cost overruns, with low bidders coming to the
state.
COMMISSIONER GALVIN clarified that the contract depends on
the rights of the various parties. In situations where there
are contracts and costs go up, the contractor has to absorb
those costs.
REPRESENTATIVE FAIRCLOUGH stated for the record that she
heard that the administration would consider reviewing the
tax structure for upstream gas. She did not want other
projects to be criticized for being upfront about similar
intentions.
4:03:50 PM
COMMISSIONER GALVIN said there was a clear distinction
between a project that says they want concessions for the
project to be economically viable and the state's interest
in changing the structure to attract gas to a project that
is in the state's best interest. He did not think Denali
could be considered without referring to experience the
state had with them connected to the Stranded Gas
Development Act. The same parties said they needed certain
changes in the state system across the board, from taxes to
royalties to judicial systems, in order to move forward.
Nothing has changed in their public discussion to
acknowledge that they had overshot; the state has to review
the situation carefully.
REPRESENTATIVE FAIRCLOUGH asked if FERC had stated that the
state would need to revisit gas taxing policies.
4:06:10 PM
SENATOR HUGGINS reported that he did not recall that. He
understood that under AGIA, after the $500 million had been
spent, the state was precluded from additional investment.
COMMISSIONER GALVIN said that the state is not precluded.
The state is not obligated.
SENATOR HUGGINS asked if the state, after spending the $500
million, could offer additional money to TransCanada if they
asked for it.
4:07:53 PM
COMMISSIONER GALVIN answered that the AGIA license, like any
contract, spells out the obligations of both parties. The
state is obligated to match up to $500 million. TransCanada
is obligated to move the project through the open season and
complete the FERC certification process. If the costs end up
being significantly higher than what TransCanada expected,
they remain obligated to complete the certification process.
The state has no obligations to provide them with additional
funds. The state is not precluded from deciding that, absent
any obligation, the state wants to add more money. The state
would take into consideration the fact that they have no
obligation to do it and TransCanada is obligated.
SENATOR HUGGINS asked how many years the FERC certificate
would take.
COMMISSIONER GALVIN answered approximately six years under
the current timeline.
4:09:28 PM
SENATOR STEDMAN asked for an explanation of why TransCanada
is not concerned about Alaska's tax structure.
4:10:10 PM
MR. PALMER answered that TransCanada is interested but will
not participate in the review. They see both the
leaseholders and the state as capable of deciding.
SENATOR STEDMAN asked the Commissioner to help the public
understand TransCanada's stance.
COMMISSIONER GALVIN stated that regarding the gas production
tax, there is no tax liability on the pipeline; from a
business standpoint, TransCanada is not affected by the tax.
They are interested in the sense of attracting gas. Alaska's
current tax structure allows the project to be economic. If
that changes, if corporate taxes or property taxes were
considered, TransCanada would be interested. The current
discussion is not about that.
SENATOR STEDMAN wondered if part of the reason was that
TransCanada was in a regulated rate of return environment.
COMMISSIONER GALVIN replied that was part of the reason but
not the whole.
4:13:24 PM
SENATOR STEDMAN clarified that Alaska is not 100 percent
aligned with TransCanada.
COMMISSIONER GALVIN replied that on gas production tax,
where progressivity is a component, TransCanada is a
somewhat neutral player in terms of the distribution of
money between the state and producers.
4:14:07 PM
REPRESENTATIVE KERTTULA pointed out that an independent
pipeline does not have as much interest in terms of tariff
rates, because they don't hold the leases.
COMMISSIONER GALVIN agreed. With regard to the expansion
provisions, an integrated pipeline like the Denali project
would have different incentives. Expansion folks are
competitors. They are incentivized to create barriers.
4:15:44 PM
SENATOR GREEN referred to a list of the 20 "must haves" that
TransCanada agreed to and the request from the state
regarding shippers. She wondered why TransCanada was allowed
to say what it wanted considered in the future but shippers
were not allowed to do the same.
4:17:25 PM
COMMISSIONER GALVIN clarified that the primary difference is
in TransCanada's expectations. They are not obligations on
the part of the state or preconditions being placed on the
state for the project to be successful or be completed. They
are things for the state to consider as the project moves
forward. The difference is that the proponents of the Denali
project have indicated that there will be preconditions in
order for their project to advance. On the one hand, it is
in the state's interest to have TransCanada do the project.
The producers hold leases and may decide to commit gas to
their own project. The question becomes what the price to
the state will be. The state has more options with
TransCanada.
4:19:51 PM
SENATOR GREEN asked how Alaska can be assured of what they
are approving.
COMMISSIONER GALVIN explained that the language of license
clearly spells out obligations to the state. Mr. Palmer has
also stated on the record on behalf of TransCanada that the
state does not have those obligations.
SENATOR HUGGINS reminded the members that one objective in
Juneau is to go through TransCanada's application, which is
part of the contract, to determine what is legally binding.
4:21:52 PM
SENATOR THERRIAULT addressed the risk of selecting a low
bidder that ends up asking for more money. AGIA was written
to give the administration an out. He asked if the
TransCanada bid could have been rejected if it had been
unrealistically low.
COMMISSIONER GALVIN replied in the affirmative. Part of
their analysis was to determine if the bid was too low.
SENATOR THERRIAULT asked if independent evaluation had
determined if the project could be successful.
COMMISSIONER GALVIN answered yes.
4:23:26 PM
SENATOR THERRIAULT wondered if part of the risk of the
Denali project was the lack of economic and technical
detail.
COMMISSIONER GALVIN said that was a big part of the risk.
SENATOR THERRIAULT queried if it would be difficult to
evaluate whether requests from producers for reductions in
taxation were legitimate or necessary.
COMMISSIONER GALVIN agreed it would be difficult to evaluate
the economic impact to the state or the producers without
the information.
SENATOR THERRIAULT asked if the administration would be
better equipped to evaluate the necessity of changes to the
tax structure with TransCanada.
COMMISSIONER GALVIN answered that TransCanada's work to
establish costs was a large part of the administration's
consideration of their bid.
4:24:44 PM
SENATOR THERRIAULT spoke to Denali's request to start the
pre-filing process. He observed that in a copy of that
document nearly every paragraph indicated they were not yet
prepared. He assumed that Denali did not need the
administration's permission to start that process and
wondered if the company would have to ask permission to
stop.
COMMISSIONER GALVIN answered that they could stop at any
time.
SENATOR THERRIAULT asked if TransCanada was obligated to
everything up through FERC certification once they had the
license.
COMMISSIONER GALVIN answered yes.
4:25:53 PM
SENATOR THERRIAULT asked if TransCanada had not started the
process because they did not yet have the license.
4:26:01 PM
MR. PALMER acknowledged that TransCanada is seeking the
license and has gone through two stage of the process. The
third stage consists of the legislature making a decision.
If the license is granted to TransCanada, they have an
established schedule which they have already provided. They
anticipate a comprehensive pre-filing by 2011 or earlier,
before going on to FERC filing. He thought it was early to
pre-file, though they were happy to start discussions with
FERC. They would not act on that until the license as
granted.
4:26:58 PM
REPRESENTATIVE SAMUELS referred to risks of the contractor
going over budget. He wanted to make sure the public
understands that in this project, everything goes to the
shippers. If there are cost overruns or increases, the
tariff goes up to ship the gas. The risk goes on the
shipper.
REPRESENTATIVE SAMUELS took issue with several provisions on
a slide. He asserted that Congress had spoken on several of
the provisions and that AGIA would not over-ride those
regulations.
REPRESENTATIVE SAMUELS asked how TransCanada felt about
being used to "keep our options open."
4:28:51 PM
MR. PALMER stated that they would take a component of the
risk, which is significant and unusual in the pipeline
industry. He said that TransCanada understands AGIA. They
believe the state of Alaska is committed to advancing a
project. In the event that a license is granted, they expect
to meet their obligations, and they expect the state to do
the same. They understand there are competitors. If a
license is granted, they expect the state to be a good
partner. TransCanada is confident they can be a good partner
as well, and attract customers and move gas as they have for
fifty years across North America.
4:31:36 PM
SENATOR STEDMAN asked if there was anything precluding
TransCanada starting the pre-application process to a FERC
certificate. He referred to the risk exposure of the mid-
stream player.
MR. PALMER agreed that TransCanada could make a pre-filing,
but noted that it would not be prudent. They would like to
see what happens with AGIA.
SENATOR STEDMAN proposed that it was out of the ordinary
for mid-stream players to go to FERC without commitments
from shippers. He referred to the state's high percentage
of reimbursement and wondered how it affected the number of
applicants.
MR. PALMER agreed that it was unusual for a pipeline
company to go forward to a FERC application if they were
not successful in getting sufficient volumes committed in
an initial open season. The state under AGIA decided that
was an important factor and put forward an overall proposal
that included the $500 million contribution under certain
circumstances. That played a role in TransCanada's decision
regarding the filing. They looked at the overall value as
well as obligations to TransCanada.
4:35:16 PM
SENATOR STEDMAN pointed out that during the initial AGIA
process, at 80 percent there was concern that there would
be no applicants; 90 percent was implemented to entice
participation. He asked if TransCanada would have been
interested at 80 percent.
MR. PALMER noted that even at 90 percent, TransCanada hit
the $500 million cap. They estimated the cost would be $600
million.
4:36:41 PM
SENATOR HUGGINS added that the original bill contained 50
percent reimbursement prior to open season, and 80 percent
after open season. The 80 percent was changed to 90 percent
at TransCanada's request.
MR. PALMER clarified that TransCanada did not want the
provision that they would be required to go forward after
an initial open season. They did not want the 80 to 90
percent change.
4:38:01 PM
COMMISSIONER GALVIN addressed the issue raised regarding
treble damages. Slide 34 depicts a chart showing how the
damage exposure to the state evolves over the course of the
project. He observed that calculation is based on the open
season split annually minus the state's $500 million and
the amount spent by TransCanada without state
reimbursement. If at that point in time, the state were to
end up supporting a competing project, damages would be
three times the amount. The expenditure is based on
TransCanada's calculated annual spend. 2009 is split
between pre- and post-open season time frames because that
differentiates the amount of state versus TransCanada
spend. At open season, the state's exposure is $166 even if
the state decided to move out. The chart shows that in the
longer term, the total exposure could be $874, which
includes the $500 million initial matching contribution.
Damages could be higher if TransCanada spent more than $625
million.
4:41:56 PM
REPRESENTATIVE FAIRCLOUGH asked if there was an escalator
for interest on invested money.
COMMISSIONER GALVIN replied no.
REPRESENTATIVE FAIRCLOUGH asked if Alaska was locked in for
five open seasons, whether TransCanada needs to go to open
season every two years after a failed season.
COMMISSIONER GALVIN said that TransCanada would go to an
open season every two years but their obligation would end
once they had the FERC certificate. Then they would have a
certain amount of time to decide whether to sanction the
project.
REPRESENTATIVE FAIRCLOUGH questioned if the state should
prepare for a failed first open season.
COMMISSIONER GALVIN noted that the first open season would
be 2009. TransCanada has an obligation for an initial open
season and an obligation to solicit additional demand every
two years after that. He estimated that open seasons would
be more frequent if they failed. The timeline for the
license will be driven not by how many open seasons they
have to have, but by how long it takes for them to get a
FERC certificate. That starts the final clock. The
anticipated time to get to the certificate is 2014. Then
TransCanada would have up to two more years to sanction the
project. He did not anticipate more work would occur beyond
attracting customers. The money will be spent by the time
they have the certificate.
4:44:51 PM
REPRESENTATIVE FAIRCLOUGH queried if there is risk beyond
2013. She observed that the state's review has delayed the
timeframe. She estimated that costs, and therefore
liability, would continue to rise. She wondered about a cap
to liability.
COMMISSIONER GALVIN explained that the spend on the graph
represents the work necessary to get the FERC certificate.
There is no obligation to spend once the FERC certificate
is achieved. He acknowledged a risk that the number is
wrong, but he did not think it would double. TransCanada is
motivated to control costs. He did not feel there was a
great risk that TransCanada would continue to spend after
achieving the FERC certificate.
4:48:51 PM
SENATOR HUGGINS queried the latest TransCanada could make
their decision on sanctioning the project.
COMMISSIONER GALVIN estimated 2015 to 2016 would be the
sanction deadline.
4:50:23 PM
REPRESENTATIVE FAIRCLOUGH referred to the Denali proposal.
She observed they estimate costs of $1 billion to FERC
certification and $600 million to open season. She
questioned the state's potential liability, using these
numbers.
COMMISSIONER GALVIN responded that if TransCanada spent the
$1 billion to FERC with $500 million from the state, treble
damages would be based on the $1.5 billion range. It is not
directly comparable to what the producers would spend to
get to the same place.
REPRESENTATIVE FAIRCLOUGH asked how TransCanada assets
would reduce the costs.
4:54:31 PM
MR. PALMER acknowledged concern about the state's risk
exposure, but said that exposure would only occur if the
state breaches the agreement and decides to fiscally support
another project. He observed that the only number he has
heard from the producers is $600 million to reach the open
season. He has not personally heard a number beyond that to
go to a FERC certification. If TransCanada were to expend
that money, the exposure rests with them, if the state keeps
the agreement. TransCanada's numbers are affected by the
fact that they have significant assets in Canada that other
parties do not. They hold the right-a-way to the Yukon, have
legislation in place, and have thirty years of engineering
and geotechnical work, all of which would reduce costs.
REPRESENTATIVE FAIRCLOUGH asked if the assets would be
charged against the project.
MR. PALMER stated that TransCanada holds assets that no
other party holds.
4:57:18 PM
REPRESENTATIVE DOOGAN asked for clarification regarding
treble damages.
COMMISSIONER GALVIN explained that the treble damages apply
if the state changes its mind in the middle of the process
and decides to put financial support towards a competing
project. Financial support means providing targeted tax,
royalty, or grant towards a project that is competing
towards the same gas as TransCanada. The definition of
competing project excludes projects less than 500 Mmcf/d,
which represents the upper limit of in-state demand. The
state can do that without incurring the treble damages. They
cannot put financial support for projects like the Denali
project. The damages would apply to that.
4:59:15 PM
REPRESENTATIVE SAMUELS asked if the funds already invested
would be rolled into the tariff.
MR. PALMER could not respond precisely, but stated the
amounts are not large and TransCanada is not seeking to
recover huge amounts expended in the past. He emphasized
that the assets have value.
SENATOR HUGGINS asked for those numbers.
RECESSED: 5:02:06 PM
RECONVENED: 5:26:02 PM
TONY PALMER provided an opening statement explaining that
TransCanada believes in the economics of AGIA. The project
is a good fit for TransCanada. They have been in the
business for 50 years and are the largest natural gas
pipeline company in North America, moving 20 percent of the
continent's gas. They do not own the gas; they are strictly
a transporter.
MR. PALMER pointed out that Alaska wants to promote long
term basin development, beyond the pipeline, and TransCanada
has experience with that. TransCanada is confident their
application is strong. They expect to spend around $600
million to get to FERC certification.
MR. PALMER addressed concerns that TransCanada is "just a
Canadian pipeline company." TransCanada owns 12,000 miles of
pipe in the U.S. and have offices across the U.S. Their
business is integrated.
5:30:41 PM
MR. PALMER maintained that the Canadian example is the best
for Alaska. Canada started its gas business 50 years ago
with a small local market. Canada was the furthest from
major markets, just like Alaska. They started with three
customers; now they have 300. They started with a high
potential basin, like Alaska. TransCanada numbers have been
lower than all competitors, both in Canada and the U.S.
5:32:43 PM
MR. PALMER spoke to the initial open season and observed
that some parties want the gas to go to the Lower 48
directly through Canada and others want an LNG project at
Valdez that will deliver to the Lower 48 or to Asia.
TransCanada has committed that when they hold an open season
by the summer of 2010, customers will have the opportunity
to commit gas throughout Alaska, to Valdez, or on to
Alberta. TransCanada will build a pipe to Valdez if
customers commit there.
5:34:32 PM
MR. PALMER referred to Slide 3 depicting North America with
TransCanada's extensive pipeline infrastructure,
demonstrating their ability to move gas ("TransCanada AGIA
Application, Statewide Legislative Hearings," Copy on File).
He stated that the existing infrastructure would be
invaluable to Alaskans. He also pointed out the largeness of
TransCanada projects. The pipe built across Canada was
23,000 miles; the Prudhoe Bay to Alberta pipe will be 17,000
miles.
5:36:50 PM
MR. PALMER highlighted TransCanada's experience in Western
Canada. There are two components to the Alaska project: what
happens in Alaska and what happens with the line away from
Alaska to market. He split the Canadian system into the same
two components, depicted on Slides 4 to 6. A series of maps
illustrate the growth of the Alberta system over 50 years,
starting with three customers and moving .25 bcf/d, about
1/18 of the size of the proposed Alaskan project. There are
1100 points within Alberta where gas can be received or
delivered. He thought the situation in Alaska was similar.
5:38:38 PM
MR. PALMER spoke to employment opportunities. TransCanada
has 3600 employees. Each employee is indirectly responsible
for some ten miles of pipe. When the Alaska pipe is
completed, there will be about 750 miles of pipe, implying
50-100 employees. Running the pipeline is highly efficient
and done with a low number of staff. The employment
opportunities come from expansion and drilling.
5:39:52 PM
MR. PALMER described TransCanada's pipeline system. He
observed that there are now six parallel pipes heading east.
He pointed out that the maintenance record is very good.
They are converting pipe that is 50 years old into a future
asset.
5:41:33 PM
MR. PALMER turned to Slide 10, and discussed a Canadian
pipeline schedule. He showed Slide 14 and discussed the
updated project timeline. The schedule highlights:
· An open season to be completed by the summer of 2010
· Go forward to FERC certification in 2012
· FERC approval by 2014
· In service around ten years from now
5:43:30 PM
MR. PALMER moved ahead to Slides 20 to 21 regarding long-run
basin development and project expansions. He defined "rolled
in tolls" as averaging the cost of expansions with the
original costs, just as many cities do with property taxes.
He explained the process of taking the price of selling the
gas in Alberta and removing the cost of transporting the gas
from Prudhoe Bay to Alberta, which leaves the "net back,"
the revenue in the market less the transportation cost of
getting the gas to market. The net back for the base
project, built at 4.5 bcf/d and run for 25 years, is $350
billion. That value will be shared by the producers who own
the leases and governments: Alaska and the federal
governments of U.S. and Canada. The producers will pay
production costs and then pay taxes, royalties, property and
income taxes; the remainder will be their profits.
MR. PALMER covered the value of expanding the pipeline. If
the base volume is run for ten years, and then there is a 30
percent expansion up to 5.9 bcf/d for 25 years, the value
over the 35 years goes from $350 to $600 billion, $250
billion of extra value to be shared between the producers
and Alaska. These are direct revenues from selling the gas
only. These are not the multiplier effects of all the extra
drilling that will come or the extra service industry. If
the pipe is expanded by 60 percent, to 7.2 bcf/d, the value
nearly doubles. TransCanada's experience in Alberta shows
the expansion numbers are realistic.
5:48:05 PM
MR. PALMER turned to Slide 22, depicting two graphs. One
shows the results of natural gas wells completed in Western
Canada from 1955. At that time there were 180 gas wells
completed. In the last five years, that has increased to
13,000 to 16,000 gas wells completed per year. A similar
increase in Alaska would have significant impact. Currently,
few people are looking for gas in Alaska because of the lack
of infrastructure.
MR. PALMER indicated the second graph which shows that
Alberta produced double to triple the amount of gas they had
estimated fifty years ago. There is huge potential in
Alaska.
5:51:03 PM
MR. PALMER gave an overview of what is required to build a
gas pipeline. The actual pipe is buried four feet beneath
the earth. The second component costs less and consists of
compressor stations, which are like pump stations on an oil
pipeline. The project will require 1700 miles of pipe from
Prudhoe Bay to Alberta, but there will be very few
compressor stations. When the pipe can be expanded with
compression, costs are lowered. Putting up to 5.9 bcf/d of
gas through the line takes more compression, not more pipe.
Higher volumes require more pipe as well.
5:53:50 PM
MR. PALMER turned to Slide 24 and what FERC will provide in
terms of protection for Alaska and future explorers,
relative to AGIA. AGIA requires a company to propose
rolled-in tolls up to 115 percent of the base, depicted by
the red horizontal line on the first graph. The base cost
is around $1.76; adding 15 percent brings it just above $2.
AGIA requires a licensee to propose that to the FERC. FERC
has an expectation of rolled-in tolls; any party that
opposes that has to overcome a pre-conceived FERC
expectation that expansion will be rolled in. The second
graph shows the effect of that. FERC can require an
expansion. In the event that the pipeline sponsor does not
propose a voluntarily expansion, FERC requires only rolled-
in tolls for new customers in the event that the costs do
not increase.
MR. PALMER explained incremental costs, a standard for a
mandatory expansion. Costs could increase for expansion
customers an additional $1 to $1.50. He asserted that any
explorer outside of AGIA would be concerned about that.
MR. PALMER summarized that TransCanada believes AGIA was
structured to encourage construction of the project, long
run basin development, open access terms for in-state gas,
and gas to the Lower 48 or an LNG. TransCanada believes
they could succeed at the project.
RECESSED: 5:58:32 PM
RECONVENED: 6:07:12 PM
GENERAL SUBJECT(S):
The following portion of statewide testimony was taken in
log note format.
TIME SPEAKER DISCUSSION
PALMER STATEWIDE PUBLIC TESTIMONY
6:07:12 PM April Moore, Stressed the need for in-state
April Moore gas and a maximum return to
for State the people of Alaska. She did
House not feel the TransCanada
proposal would bring that. She
maintained an in-state route
to Valdez would bring jobs,
along with other advantages
including fuel.
6:12:34 PM Donald Benson, Pointed out that there were
Board Member, five applications for AGIA. He
Alaska Natural felt AGIA would move the
Gas project forward and bring
Development long-term energy relief. He
Authority, testified in support of
Palmer TransCanada's application.
6:15:12 PM Jean Woods Questioned what the state is
asking Mr. Palmer to do that
TransCanada would not do
without the state's support
[$500 million]. She referred
to a letter from TransCanada
to the administration and
questioned why their position
had changed.
6:16:16 PM David Cheezem, Discussed the function of free
Candidate for enterprise. Producers believe
State House, free enterprise is about
business owner certainty, and want state
money. He thought free
enterprise was about stability
and creativity, and free of
back-room deals. He spoke
against the state's $500
million inducement. He
observed that Alaska owns the
rights to the gas and oil.
6:21:14 PM Noel Woods Spoke in support of the
committee. He stated concerns
about producers not showing up
in open season because of
administration expectation of
profit.
6:23:03 PM Bert Cottle, Testified in support of AGIA,
Mayor, City of but stressed the need for gas
Valdez; for Alaska first and soon. He
Chairman discussed the positive effect
Alaska Gasline of the oil industry on the
Port Authority state and referred to the cost
of energy in Alaska. He
suggested two open seasons. He
pointed out that under AGIA
TransCanada can wait up to 10
years to make a decision
whether to build an Alaskan
line.
6:29:21 PM Jim Sykes, Acknowledge the good work of
Alaska Public the AGIA process. He expressed
Interest concern that some of the
Research Group modeling has not been made
public. He emphasized the need
to work with the FERC
regulators. He felt that a
project that all Alaskans can
support will be achieved.
6:33:28 PM Nikki Campbell Stressed the importance of the
project, but questioned the
amount which would be given to
TransCanada [$500 million].
She thought information was
being kept from the public and
urged the public to ask
questions. She was not
convinced that AGIA was the
perfect method and referred to
issues surrounding procurement
and Point Thomson.
6:35:43 PM James A. Spoke in support of comments
Harpsen made by Former Governor
Hickel. He spoke against
TransCanada's involvement.
6:38:17 PM Annette Testified in opposition to
Harpsen AGIA. Questioned the good
faith of the Department of
Natural Resources. She
referred to an article that
questioned the $500 million
dollar allowance under AGIA.
6:40:01 PM Lucille Frey Testified in opposition to
AGIA. She questioned that the
commitments for the gas would
occur.
6:42:50 PM Curt Maynard, Testified in support of AGIA.
Mayor, MatSu He felt the details of the
Borough project could be negotiated
but stressed the need for in-
state gas.
6:45:10 PM Tom Lakosh Felt that there were billions
of dollars being lost in Point
Thomson and other places. He
maintained that producers
should be showing movement
toward production or the POD's
should be amended to reflect
commercialization of natural
gas.
6:50:53 PM Ralph Buzard, Testified in opposition to the
Houston Canadian line.
6:52:47 PM Mark Richards, Questioned how current mining
M.R. Ducks operations would be affected
Mining by the gas line. He wondered
if his operations would be
shut down to build the line.
6:55:35 PM Darrel Nelson, Expressed concern that
Chugiak producers sat on top of Point
Thomson for over 30 years. He
thought Alaska should own its
own refinery, and that oil
employees should work for the
state and not oil companies.
6:57:56 PM Bonnie Nelson, Testified in opposition to a
Chugiak producer owned pipeline. She
wants competition. She
suggested a blend between
TransCanada and the Port
Authority. She supported
development of infrastructure
including a refinery and
railroad.
7:02:41 PM Andrei Testified in opposition of
Buckareff TransCanada, especially sale
of gas to Canada. He felt that
the pipeline should be built
by Alaskans for Alaskans.
7:04:08 PM Gabrielle Questioned how AGIA would
LoRusso, affect her future employment.
Palmer
7:05:20 PM Stew Graham, Questioned the government's
Palmer role in deciding who
participates in the project.
He maintained Alaskan
businesses and the economy
should drive the decisions
with government support. He
spoke against AGIA.
7:08:36 PM SENATOR Referred to the $20 million
HUGGINS worth of data compiled by the
administration. He spoke to a
survey supporting in-state
gas. He noted that the
legislature is going to
communities to directly hear
the voice of the people. He
acknowledged the complexities
of the issues and encouraged
participation.
[HB 3001 and SB 3001 were heard and held.]
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