Legislature(2001 - 2002)
04/23/2001 01:15 PM House RES
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* first hearing in first committee of referral
+ teleconferenced
= bill was previously heard/scheduled
+ teleconferenced
= bill was previously heard/scheduled
HCR 17-SALE OF NATURAL GAS TO POWER DATA CENTERS CO-CHAIR MASEK announced that the first item of business would be HOUSE CONCURRENT RESOLUTION NO. 17, Expressing the legislature's support for sale of a portion of Alaska's North Slope natural gas for electrical generation to power data centers within the North Slope Borough. Number 0150 BOB EVANS, Representative, Netricity, LLC, informed the committee that Netricity is a company that was formed to place an Internet data center on the North Slope by using Alaska natural gas to generate the power for the data center. Mr. Evans remarked that projects such as this don't come along often, but when they do it is important for the state to review the following. Firstly, do the people have the credibility to do what they say they are going to do. Secondly, do they have the finances to do what they propose. Thirdly, will they have a commitment to Alaska that will benefit Alaska. He felt that after the presentation, the committee will agree that this is an exciting opportunity for Alaska. Number 0309 JAMES DODSON, Executive Vice President, Andex Resources, LLC; Vice President, Netricity, LLC, testified via teleconference. He informed the committee that the ownership of Netricity, LLC, is currently 75 percent MDU Resources Group and 25 percent Andex Resources, LLC. Andex Resources, LLC, is a private company that is primarily engaged in natural gas exploration and production. Netricity, LLC, is interested in building a power plant on the North Slope co-located with the natural gas reserves located in or near the Prudhoe Bay unit. The purpose would be to utilize the electricity generated on the North Slope in data centers packed with computes that host websites and process data over the Internet. Those computers would be connected with the Lower 48 and Asia via fiber optics that already exists between Alaska and the Lower 48 and Asia. MR. DODSON explained that the plan would be to purchase up to 118 million cubic feet (MCF) of natural gas per day from the State of Alaska out of its royalty share of gas. That amount of gas would sufficient to power approximately a 500-megawatt facility, which amounts to more power than the City of Anchorage consumes. He noted that [Netricity, LLC] is looking at a 600,000 to 1 million server size facility in excess of 1 million square feet in size. That size facility is currently being permitted in the Silicon Valley area by US Dataport. MR. DODSON expressed the belief that Alaska is uniquely poised to take advantage of this opportunity because it has a large amount of natural gas that is underutilized on the North Slope and has a "stout" fiber-optic connection between the Lower 48 and Asia. Furthermore, the North Slope has the ambient cooling and dry weather that any data center would want. The North Slope also has tremendous physical site security because there is basically one access road. The ability to strictly control access to Internet data centers is very important. Furthermore, the reliability of power is very important because one of the largest problems faced by Internet data centers in the Lower 48 is the lack of available power. Moreover, the power being utilized in the Lower 48 is power that isn't really designed for the data centers; the power isn't clean or constant. Therefore, Mr. Dodson felt that isolating this function on the North Slope could provide a quality advantage, a cost advantage, a physical security advantage, and a cooling advantage in comparison to the Lower 48. Number 0785 MR. DODSON, in response to Representative Fate, reiterated that this data center would use approximately 118 mcf of gas a day. The current plans for moving gas off the North Slope are in the neighborhood of 4 bcf (billion cubic feet) a day pipeline and thus Netricity would be one-fortieth of that number. However, Netricity's use would be on the North Slope and wouldn't detract or displace any gas going into the pipeline. REPRESENTATIVE FATE asked if that amounts to about one-quarter of that 12.5 percent royalty. Representative Fate explained that he was basing that on 4 bcf. He also inquired as to the exact share of the 12.5 percent royalty on gas that the state currently enjoys. MR. DODSON answered that approximately 8 bcf a day is being funneled through Prudhoe Bay today. Therefore, Netricity would be looking at one-eightieth of that amount. The state's share of that 8 bcf a day amounts to roughly 1 bcf a day and thus Netricity would be looking at one-tenth of that amount. Number 0923 REPRESENTATIVE GREEN inquired as to the location of this and inquired as to what would be done with the power that is generated. MR. DODSON explained that the power would go to a data center that is located approximately 100 feet to .5 mile maximum from the power plant. The data center would use the power right there on the North Slope. Mr. Dodson related the basic theory that it doesn't make sense to push gas, for example, from Texas to New York to burn in a power plant that powers a data center in New York when the light, that data in the form of photons, could be sent [to the location of the power]. Therefore, the location of the Internet data host doesn't matter but rather it's important to be able to move the electrons to the location where the computers are being powered. So, some of Alaska's former disadvantages, its remoteness, colder climate, and large isolated gas supply, are viewed as advantages for this project. REPRESENTATIVE GREEN related his understanding that 500 megawatts would be a "mammoth" communication center. MR. DODSON agreed. Depending upon the size of the servers and processors and their individual process demands, he estimated that there would be between 600,000 to 1 million servers and computers working in this facility. In further response to Representative Green, Mr. Dodson explained that the data would arrive via a GCI system that goes from Seattle to Anchorage and round to Valdez on to the Trans-Alaska Pipeline to Fairbanks. Then there would need to be a smaller fiber-optic system that would have to be dug from Fairbanks to the Prudhoe Bay field. Another route would be the World Communications Infrastructure, Inc., (WCI) that moves from Fairbanks along the Alaska Railway system, down to Anchorage, out to sea, and down to Portland. Both the GCI and WCI lines have connections to the North Pacific cable to Asia, specifically Japan. MR. DODSON, in response to Representative Green, informed the committee that based on discussions with GCI and what Netricity views as dry land changes - merely a switching of gear - Netricity believes that there will be sufficient capacity and redundancy to handle the data traffic from the facility envisioned. REPRESENTATIVE GREEN inquired as to the royalty gas purchase price rate. MR. DODSON answered that the price has yet to be negotiated with the commissioner of the Department of Natural Resources, if the contract is finalized and approved by the legislature. Mr. Dodson said that there has been review as to when a pipeline would be installed on the North Slope and its volumes. From that, a net present value of natural gas was determined for a typical 1,000 cubic foot unit on the North Slope at a 10 percent discount. The following three scenarios were developed: 65 tcf (trillion cubic feet) moving out at 2.5 bcf a day; 65 bcf moving out at 4.0 bcf a day; 35 tcf moving out at 4.0 bcf a day. From those the highest net present value for the gas currently was determined to be $.36. When that number, $.36, was presented to the Division of Oil & Gas, the department's economist said that it has to determine what gas is worth in the natural gas market. However, Netricity doesn't see a natural gas market to tie to and thus the aforementioned scenarios were utilized. Although selling into Chicago is a different market than selling on the North Slope, it was difficult to determine how else to develop a number. Number 1355 REPRESENTATIVE GREEN referred to page 2 of HCR 17, which refers to "substantial added value to Alaska's natural gas resources". Although he wasn't sure what "substantial" is, he suggested that $.36 is somewhat low. Therefore, he asked if Netricity is prepared to move forward if the cost is higher. MR. DODSON, in response to whether the project would still be workable at $.72, said that the numbers would have to be run again. Although he said that it could probably work, he noted that other factors come into play such as the debt the company could obtain and whether the North Slope Borough would help the company underwrite some notes to lower costs. Mr. Dodson pointed out that the ability to bring the data centers to the North Slope is inversely proportionate to the cost of the electricity. Therefore, the lower the cost of the gas, the lower the cost of the electricity, which increases the likelihood of placing a data center at the North Slope. However, in the end the Internet data center market will be the determining factor. MR. DODSON pointed out that the $.36 was not an attempt to low ball the project but rather it was based on discount scenarios based on what was viewed as possible pipeline scenarios. Furthermore, Netricity would be competing with a different market [because] the gas would be used on the North Slope. Mr. Dodson informed the committee that he had attended a conference on Arctic gas at which Governor Knowles estimated that Alaska has around 70 years worth of gas to move out at 4 bcf a day. Therefore, regardless of what Netricity does or doesn't do on the North Slope, 4 bcf a day will move out. If Netricity is able to come in and create an incremental one-tenth of a bcf a day market, basically Netricity would be using gas that is cued to move forward. Since there is so much gas waiting to move down the pipeline, Netricity is saying that it can turn it into cash now while employing Alaskans, adding value to the resource, and placing Alaska in the position of being a major node on the Internet. REPRESENTATIVE GREEN reiterated that his concern is in regard to the "substantial added value". He noted that gas sales to the Mid-continent (ph) are perhaps only one of three alternative under review. Representative Green said that he merely wanted to be sure that the project wasn't hinging on a fairly low value. Number 1678 MR. DODSON, in response to Representative Stevens, estimated that there would be between 250-300 full-time jobs if the power plant can reach 500 megawatts and the data center is fully built. Those jobs will be on a schedule similar to that used by the oil industry, a two weeks on/two weeks off schedule. REPRESENTATIVE STEVENS asked if there is any commitment to train and employ Alaskans. MR. DODSON replied yes and remarked that there are two major opportunities. First, there is the opportunity to bring in Native Alaskans and allow them to train at the University of Alaska. The work would mainly be swapping out boards and power supplies when things fail. Second, if Native Alaskans can be utilized for this employment, they could have the opportunity to access both the cash economy and the subsistence economy. That is with a two weeks on/two weeks off schedule, Native Alaskans can maintain more of a Native lifestyle while still accessing a cash economy. MR. DODSON, in response to Representative Fate, answered that the 500 megawatts and the 118 mcf are peak loads. Therefore, the data center wouldn't run at that capacity all the time. Number 1834 MARK MEYERS, Director, Division of Oil & Gas, Department of Natural Resources, testified via teleconference. On the surface Netricity's proposal is "a neat idea" and the division is delighted with the possibility of selling gas on the North Slope. Although there is no initial opposition to the sale of North Slope gas, there is [a question] as to what that gas is worth. In order to provide a baseline, Mr. Meyers informed the committee that gas is sold to run utilities and to help fund TAPS [and from that the division] receives $1.12 in mcf. Therefore, the $.36 proposed by Netricity is roughly 25 percent of what is received from the current gas sales on the North Slope and is 10 percent less than the current retail value of that gas in Chicago. Mr. Meyers said that the real question is how one evaluates large, significant volumes of gas. "Certainly, if we were to value it under what we could competitively get for the gas, it would be a substantial subsidy, on the order of tens of millions of dollars potentially, which would go directly against royalty value that again, is money directed to the permanent and general fund," he said. Therefore, there is the challenge to [find] a realistic and fair valuation mechanism for this major sale of gas while [dealing] with a long-term contract. A long-term option would be difficult without having a better handle on the valuation of North Slope gas. Number 1949 KEVIN BANKS, Petroleum Market Analyst, Division of Oil & Gas, Department of Natural Resources, testified via teleconference. Mr. Banks mentioned that when he first heard of Netricity's proposal he viewed it with skepticism, which has since grown into excitement. There is real merit in what Netricity wants to do. However, "It all depends on the price," he said. At this point, there are many proposals for sales of North Slope gas and it seems that the state is in a somewhat uncertain position in regard to what will move forward. Mr. Banks informed the committee that as part of the fast track budget and the governor's initiative to commercialize natural gas on the North Slope, the division has proposed a couple of studies that will look at the in-state demand for natural gas, how royalty in-kind gas might be used to meet that demand, and the important mechanisms that should be considered when developing the value of the natural gas. Although these studies haven't begun, funding has been received for part of them. The division intends to develop an RFP and move forward on these studies soon. Mr. Banks pointed out that a best interest finding is required in any disposition of royalty oil in-kind. Therefore, these studies will support the findings that the commissioner will have to make before selling the gas. For those reasons, the division intends to move forward and will include data centers as a potential in-state demand in the study of future demand. REPRESENTATIVE McGUIRE inquired as to how long the aforementioned study would take. MR. MEYERS answered that the intent is to have the information [from the study] available in the November/December timeframe, which is when the division hopes to hear from the producers. Number 2199 PAUL FUHS, Lobbyist, Pacific Yukon Corporation, testified in support of [HCR 17]. Mr. Fuhs said that he would raise some issues that relate directly to this resolution as well as to a gas line development project. In regard to why this resolution is even necessary, Mr. Fuhs pointed out that the producers have been unwilling to sell Alaska's gas to anybody, including anyone in the area because it would establish a well-head value. However, the producers sell gas between themselves from which the state receives no royalty value. Although [the producers] testified in the House Special Committee on Oil and Gas that the gas line isn't economic, they had no well-head value on which to base [that statement]. Additionally, the House Special Committee on Oil and Gas heard testimony that the realignment on the North Slope, between the differing oil and gas ownership, hasn't taken place because a couple of companies have objected. Furthermore, there is not a gas balancing agreement between the companies that would even allow a gas sale. Therefore, all the barriers to the sale of gas on the North Slope remain. MR. FUHS then turned to the state royalty gas. He recalled testimony from the department that royalty gas is being sold on the North Slope. However, he understood that the state couldn't have any access to its royalty gas until it left the hydrologic unit. Perhaps being on the North Slope is considered to be on the hydrologic unit. Therefore, Mr. Fuhs pointed out that all the state's lease gas is locked up on the North Slope as well as all the state's royalty gas. Mr. Fuhs said, "Maybe the department could negotiate a side deal with this company for access to the gas or maybe it's considered to not be leaving the hydrologic unit." These are some the issues that will continue to be raised with other legislation. However, Mr. Fuhs clarified that he didn't believe that HCR 17 should be delayed because the legislature will have the ultimate say with a royalty gas sale. Number 2368 REPRESENTATIVE McGUIRE recalled a conversation with Mr. Dodson regarding the construction employment that this proposed project would bring to the North Slope. She requested that he provide the committee with that information. MR. DODSON informed the committee that a modular building expertise has been developed in Anchorage and Nikiski. He explained that modularization, to the extent possible, is important on the North Slope. Mr. Dodson noted that he expected the turbines to come out of the Houston Ship Channel to be shipped to the North Slope. There is also the expectation that the data centers will be built on a modular basis in either Anchorage or Nikiski or both areas. Number 2439 REPRESENTATIVE STEVENS asked if other industries beside the data centers would find it appropriate to locate at the site of the energy source. MR. BANKS answered that he thought of a gas to liquids project in which liquids can be manufactured and pumped along with the oil [on TAPS]. MR. MEYERS pointed out the long-term possibility of the efficiency in the generation and transmission of electricity. That is, superconductivity would allow electricity to be transmitted over long distances without losing power. Number 2519 REPRESENTATIVE FATE asked if the projections have built in any surplus energy for local use or for the possibility of the aforementioned break through in technology for transmission. MR. MEYER answered that [the department] is looking at that in terms of the study that is being done now. Although this Netricity idea caught the department by surprise, it is an intriguing idea. Mr. Meyer said, "The other ... thing to think on the North Slope too is we see a lot of up-side potential for additional gas other than the gas at Prudhoe." For example, in the North Slope Foothills or the Point Compton Fields. "We want to encourage additional exploration for other supplies and development of other currently known reserves. So, all this could fit in the equation," he said. However, the challenge is the proposed $.37 mcf price, a price that every community would love to have. The challenge is to have a fair methodology for supplying gas. He noted that the demand study is supposed to encompass gas at various prices. Once the value of the gas is known, then the demand can be "reverse engineered" because the cheaper the gas, the more demand is created. MR. DODSON informed the committee that Netricity's plan anticipates putting in place 14 turbines with 45 megawatts, of which 11 turbines will have 495 megawatts, which is full usage. Of the three other turbines, at least one would be turning full time, which would allow the sale of interruptible power and the ability to pick up any drop in power from the landline turbines when going offline. He indicated that the second turbine could run and service the local market, which he didn't foresee increasing above 20 megawatts. Therefore, there would be excess generating capacity on the North Slope. Number 2698 REPRESENTATIVE GREEN remarked that he didn't recall ever passing a resolution that named a specific company as in HCR 17. Therefore, he mentioned the possibility of on page 1, line 8, deleting "Netricity, L.L.C., an Alaska limited liability company is seeking to" and inserting, "there have been several expressed interests". Such a language change would eliminate the state predetermining an interest in a specific company. He asked if that would be problematic. MR. EVANS related his belief that there hasn't been other expressions of interest to place an Internet data center on the North Slope. Mr. Evans pointed out that HCR 17 is a resolution, not legislation, and as such is merely an effort to suggest to the administration that the legislature believes that this is an opportunity to negotiate with Netricity in order to determine the price. Therefore, Mr. Evans said that naming Netricity is useful because it is the only company suggesting such a use and desire to enter into negotiations with the state. MR. EVANS pointed out that the problem of Internet data centers not having enough energy in the Lower 48 is a problem begging for a solution. The solution, in the form of HCR 17, is a solution that he suggested Alaska move on relatively quickly. He informed the committee that the Tennessee Valley Association sees itself as a solution to the lack of energy for Internet data centers in the Lower 48 as do other areas in the Lower 48. Furthermore, the trapped gas in Canada is a potential solution to this problem. Therefore, failing to move quickly in this area may result in the lose of an opportunity. REPRESENTATIVE GREEN said that rushing in at a rate that is later found to be much higher would do a gross disservice to the people of Alaska. Therefore, he was nervous with the notion of grabbing it now or else it will be gone. Such a notion was heard in relation to the merger, but it was "a bag of garbage." In response to Mr. Evans' point that Netricity is the only company that has come forward with such a proposal, Representative Green suggested that his aforementioned language change on page 1, line 8, be in the singular: "has had an expressed interest". He maintained his concern with the state specifying favor of a specific [company] in a resolution. MR. EVANS turned to the price issue and pointed out that the resolution doesn't contain anything about the price. Netricity wants to negotiate with the state in order to reach an appropriate price. In regard to [Representative Green's language change], Mr. Evans left that to the committee's discretion while pointing out that Netricity has made the effort to come to Alaska in order to make this opportunity available to themselves [as well as the state]. TAPE 01-40, SIDE B MR. EVANS continued, "... to have the opportunity to at least have some ownership of this notion as we talk about it in the state." CO-CHAIR MASEK announced that she was closing the public discussion of HCR 17 and opening up committee discussion. She inquired as to Representative Green's intent with his proposed change. REPRESENTATIVE GREEN explained that he was attempting to determine whether the resolution had to include Netricity's name. Now that the public discussion has been closed, Representative Green announced that he would offer his previous language change as an amendment. CO-CHAIR MASEK announced that she is opposed to the amendment because as Mr. Evans said, this is merely a resolution that doesn't bind the legislature. Furthermore, whatever business that results from this resolution will have to be worked through the administration and the legislative body. Co-Chair Masek noted her support of HCR 17 because it brings jobs and dollars to the state and it opens new doors for the state. REPRESENTATIVE FATE suggested that the concern could be resolved by inserting "the concept of" on page 2, line 2, after "supports". CO-CHAIR MASEK, in response to Representative Stevens, clarified that [Representative Green's] amendment is before the committee to which she objected. REPRESENTATIVE GREEN clarified his amendment as follows: Page 1, line 8, Delete "Netricity, L.L.C., an Alaska limited liability company is seeking" Insert, "there has been an expressed interest" REPRESENTATIVE STEVENS said that he believes he understands Representative Green's concern, which he shares. "I think it's a little disingenuous to say we're ... going to throw this company's name in there ..., but we don't really mean it. That's not really the case. If we pass the resolution that has the company's name in it, it has significance" he remarked. Perhaps the amendment could be changed such that it uses language that says "there have been companies such as Netricity who are interested." Representative Stevens expressed the need to direct the administration to review all firms that may be interested. Number 2729 REPRESENTATIVE FATE reiterated his suggestion that on page 2, line 2, after "supports", the language "the concept of" could be inserted in order to allow more "wiggle room." REPRESENTATIVE GREEN said that still "smacks back to selling to Netricity." He reiterated that he has never seen specific companies specified in resolutions. He felt that language imparting that the "DOG" of DNR is in favor of this would strengthen this significantly and perhaps may be more important than specifying a company. MR. MEYERS remarked that he shared Representative Green's concern. He identified the challenge as which gas is sold first. When the netback from Chicago is reviewed in order to calculate how $.37 is determined, then the value of that gas has to be discounted well into the future. He used the following example to illustrate how the $.37 was determined: Suppose you were out to buy a new car and you went to the car lot and there were ten brand new cars of the same type sitting on the lot. And you negotiate with the car salesman saying, "I'm not going to buy the car that's going to sell this year. I know all those ten cars, you're not going to sell one for five years. Therefore, I'm going to give you a lot less value for that car because that car isn't going off the lot for five years." MR. MEYERS pointed out that everyone would want to be in that position, which is a challenge. He related his belief that if the gas were sold at Netricity's heavily reduced rate, many others would develop creative situations to purchase gas. Mr. Meyers reiterated that he would have concerns if [the resolution's language] is giving a clear indication that a specific project has priority over another's because the full evaluation necessary to [determine] the value hasn't been done. He posed the question: "Does this legislation [HCR 17] give them [Netricity] a competitive advantage on the North Slope in purchasing royalty gas?" Number 2365 CO-CHAIR MASEK announced that her staff would work with the sponsor of HCR 17, which will be before the committee with some positive amendments on Wednesday. This is an important issue for the state. [HCR 17 was held.]
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