Legislature(2013 - 2014)BARNES 124
03/04/2014 02:00 PM House TRANSPORTATION
| Audio | Topic |
|---|---|
| Start | |
| HB271 | |
| Adjourn |
* first hearing in first committee of referral
+ teleconferenced
= bill was previously heard/scheduled
+ teleconferenced
= bill was previously heard/scheduled
| += | HB 271 | TELECONFERENCED | |
| + | TELECONFERENCED |
HB 271-APPROP: RAILROAD FEASIBILITY STUDY
2:18:29 PM
CHAIR P. WILSON announced that the only order of business would
be HOUSE BILL NO. 271, "An Act making a special appropriation to
the University of Alaska Fairbanks for a study of the
feasibility of constructing a railroad between Fairbanks and
Deadhorse; and providing for an effective date."
2:19:39 PM
REPRESENTATIVE ISAACSON, prime sponsor of HB 271, emphasized the
importance of the rail extension since the rail extension can
greatly help diversify the economy. He related that
historically, the railroad has hauled freight from North Pole
and the impending closure of Flint Hills Resources refinery
diminishes the freight from 55 percent of the Alaska Railroad
Corporation's revenue to 15 percent. In fact, he was unsure how
much revenue the railroad would receive from the North Pole
Flint Hills operations. He recalled when he was mayor, Pat
Gamble, who was president of the ARRC stressed that the ARRC
needed to go north. Today he spoke to Mr. Gamble who provided
reasons the rail extension should go north. First, this could
help resource development and second, it would provide year
round passenger rail service. Mr. Gamble additionally recalled
the president of ConocoPhillips Alaska, Inc. indicated the
company expected to spend $105 billion more of capital to
extract oil on the North Slope as compared to the $5 billion the
railroad extension was expected to cost.
2:22:08 PM
REPRESENTATIVE ISAACSON pointed out Dr. Metz will explain how
the $5 billion investment will lower the cost of transportation
in multiple industries. He recalled an earlier question about
this project and whether it would be "welfare to the
university." He emphasized Dr. Metz's experience in multiple
projects that have become operational, including the university
studies that led to the Tanana Bridge, the Port MacKenzie rail -
which is three-fifth completed - and the G7G effort to bring the
rail from Alberta to Delta Junction. Thus, Dr. Metz has "real
world" experience in research for rail and other projects.
2:23:56 PM
PAUL METZ, Ph.D., Professor of Geological Engineering,
Department of Mining & Geological Engineering, College of
Engineering and Mines, University of Alaska Fairbanks, stated
that the UAF has been involved in a series of studies beginning
in 2000, which are not academic exercises. In the context of
all the other rail investigations, rail extensions have had an
immediate effect on Alaska's economy. First, the study for the
rail link from Eielson Air Force Base to Delta Junction was a
joint effort with Lockheed Martin and several engineering firms.
Second, the Alaska Canada rail study released in 2007 was a
joint effort with Lockheed Martin and HDR Engineering, the
largest railroad engineering firm in the U.S., and Van Horn
Institute at the University of Calgary, an industry-funded
applied research group, and not part of the university. The
purpose of U.S. Senator Frank Murkowski's original "rails to
resources" legislation, signed into law in 2000, was to examine
the impact of a rail extension on the North Slope natural gas
development.
2:26:11 PM
DR. METZ stated that the first few commissions studied rail
extensions to the east and south; however, the federal
government is now going back to its original basis in its most
recent national-level discussions. He then turned to his
presentation entitled "Economic Impact of a North Slope Rail
Extension on Future Northern Energy and Mineral Development"
dated August 7, 2013. He provided two quotes, one from William
Shakespeare, "What is yet to come is still uncertain" and the
other from Yogi Berra, "The future ain't what it used to be"
[page 1]. He acknowledged that the future is uncertain and
projections made today change over time. For example, forty
years ago the state couldn't predict the Trans-Alaska Pipeline
System (TAPS) would be built more quickly than anticipated or
that it wouldn't last forever. This shouldn't prevent us from
looking forward.
2:27:49 PM
DR. METZ suggested that Alaska's future is tied to the oil patch
and it will continue to be linked to the oil industry for a very
long time. The major sources of oil revenue began in 1977 and
oil revenue is dwindling; however, the North Slope still has
enormous oil resources, which he estimated in excess of 40
billion barrels of additional oil that is yet to be produced.
He surmised an additional 100 billion barrels of unconventional
oil exists. Petroleum resources and reserves are two concepts
often confused. Petroleum resources represent a quantity of
petroleum that can be potentially useful, but a petroleum
reserve is one that can be currently produced at a profit from
existing technology at current costs of production and at
current market prices for petroleum. He stated that a large
portion of the resources on the North Slope are resources and to
convert them to reserves will entail large capital investments
by the private sector. He offered his belief that a competitive
economic climate is necessary to produce those resources.
2:29:37 PM
DR. METZ pointed to the huge surge of petroleum production in
the continental states since 2011 although hydro-fracking was
first patented in 1947 [page 2]. This process entails pumping
fluids into the ground, breaking rock, and increasing the
porosity of the oil and gas formation. He reported the Bakken
in North Dakota and Montana and Eagle Ford in Texas are projects
that have been producing large quantities of oil. Additionally,
large quantities of natural gas are being produced in the
Eastern states in Marcellus shale and other units.
2:30:13 PM
DR. METZ related that the West Texas oilfield that produced
about 35 billion barrels of oil had been estimated by the Carter
administration of having the potential to produce 100 million
barrels from the source beds. He estimated these source beds
would cover 10,000 square miles. The Shublik formation, one of
the source beds in the North Slope, underlies an area
approximately 30,000 square miles or a size equivalent to the
size of Ireland, which is three times larger than the West Texas
oil field. He concluded the North Slope resources offered
tremendous potential resources that need to be changed into
reserves.
2:30:52 PM
DR. METZ reported that hydraulic fracturing has only been
conducted on the North Slope in relatively small levels for
investigative purposes. This method of extraction has not been
used for production due to the high cost operation on the North
Slope. Additionally, wells produced by fracking shale units do
not have the same levels of productivity as conventional oil
reservoirs, plus this method has higher costs. Thus, the
margins are much narrower [page 3].
2:31:27 PM
CHAIR P. WILSON asked whether one additionally reason production
hasn't occurred was due to the high tax rates [in Alaska].
DR. METZ interjected that one reason is due to the "historic"
tax rates. In further response to Chair Wilson, Dr. Metz
offered his belief that SB 21 is absolutely essential to reduce
taxes. He concluded there has been no "surge" in oil production
as a consequence of fracking. Winston Churchill said, "A
pessimist sees the difficulty in every opportunity; an optimist
sees the opportunity in every difficulty." He stressed that
Alaska has to be optimistic about its future.
2:32:44 PM
DR. METZ turned to "An Arctic Oil Bonanza [that] Never Was (see
Miller, 2010)" [page 3]. He highlighted that many
misconceptions exist, one of which is that the North Slope
investment resulted in huge rates of return for the oil and gas
industry. He referred to a 2010 John Miller discussion that
demonstrated the Atlantic Richfield Company (ARCO), which
discovered oil on the North Slope, could have made a higher rate
of return by putting its money in federal bonds than it did from
operating on the North Slope. He said this was due to the high
cost of operations and the extensive delays in obtaining a
permit for Trans-Alaska Pipeline System (TAPS).
2:33:49 PM
DR. METZ discussed "Constraints on Northern Alaska Oil, Natural
Gas, and Mineral Development" [page 4]. The high costs of
operations on the North Slope have been well documented by the
Department of Defense (DOD). He related that he served six
years with the U.S. Air Force and his job was to cost out
projects in Alaska, Greenland, and elsewhere. He said that what
the USAF discovered was that the cost indexes for the North
Slope were extremely high due to long supply lines, remote
areas, and extreme environmental conditions. Additionally, the
USAF found Alaska had high tax burdens relative to the tax
burdens occurring in other jurisdictions. He said the state has
created a "huge economic hurdle" that has been difficult for oil
companies to overcome.
DR. METZ explained that reducing oil taxes is an essential and
necessary first step to enhance the competitive economic
environment in Alaska [page 4]. Developing a railroad to the
North Slope, which could handle large volumes of bulk
commodities and low unit cost material could have an enormous
impact on the cost differential on the North Slope as compared
to other areas. He emphasized this is especially true since
rail would provide backhaul capabilities for low-cost transport
of mineral commodities south to tidewater. He reported that he
developed an RTS forecast system that provides a fundamental
exercise to determine costs.
2:36:14 PM
DR. METZ reported that all of the studies considered the impact
of mineral resources within 50 miles of the transportation
corridor. He envisioned that mine owners would fund rail spurs
or road connections to the rail corridor to transport material
out and resupply in. For example, over 600 known mineral
occurrences have been identified from Nenana to Prudhoe Bay. He
indicated that a rail system would create a huge incentive for
exploration and hence, mineral occurrences would be identified
if the railroad system existed today.
2:37:00 PM
DR. METZ discussed figures based on the U.S. Department of
Defense (DOD), which have changed very little from the 1960s to
the present [page 5]. The historic cost factors for North Slope
DOD facilities in the Aleutians were about the same as the
Alaska North Slope operations. These operational costs run 4 to
4.5 times more than continental U.S. costs. He reported the
index was based on an average of all DOD construction contracts
in Lower 48. He stated that the cost of operations on the North
Slope as compared to fracking costs occurring in East Texas is
about 6.5 times as costly, or about 5 times as costly to the
average cost in Texas. He highlighted that these figures are
not percentages but represent the factors that are huge cost
differentials.
2:38:09 PM
DR. METZ turned to the benefits and costs of the rail extensions
page 6]. He reported that Great Bear Petroleum announced the
company would like to drill 200 wells per year on the North
Slope using horizontal drilling and hydro-fracking to produce
oil from the Shublik formation and other source beds on the
North Slope. He estimated that the 200 wells would result in
2.4 million tons of freight per year based on 12,000 tons per
well, which is 2.5 times the concentrates that are hauled out of
Red Dog mine per year. He represents a huge amount of freight
["frac" sand, drilling steel, drilling fluids, cement, diesel
fuel, and other equipment] that would need to be sent north,
equivalent to 500 car trains, carrying 10,000 tons per train
five times a week. He compared the potential rail freight to
trucking, which would require 168 18-wheelers necessary to haul
40 tons one-way. This would represent enormous volumes of
freight being hauled on the Dalton Highway yet it doesn't
include the additional backhaul that might occur with the
development of other mineral resources.
DR. METZ referred to the map to remind members of the other
large oil resources to the east at the in the MacKenzie River
Delta and Northwest offshore resources, as well as very large
coal resources on the North Slope that would all benefit from
the proposed railroad extension [page 6].
2:40:54 PM
REPRESENTATIVE ISAACSON recalled a prior question was raised
with respect to an alternate rail route from Deadhorse to the
Brooks Range instead of from Nenana or Fairbanks. He asked
whether it could be done and if it would still achieve the same
benefits.
DR. METZ explained the overall plan is to eventually connect the
railroad to Huntsville, Alabama. For example, once the rail is
completed, steel could be placed on a rail and transported
across the country to a rail-barge system in Southcentral Alaska
and be delivered to the North Slope. He acknowledged one option
would avoid building a tunnel through Atigun Pass, but doing so
would require offloading the material, which would mean handling
the material again to truck it. He offered his belief that the
tunnel wouldn't be a daunting task. In response to a question,
he identified the location of Atigun pass on the map as being
the number "3" between Coldfoot and Deadhorse.
2:42:34 PM
CHAIR P. WILSON asked whether the mineral corridor would extend
50 miles each side of the proposed railroad extension.
DR. METZ acknowledged that the mineral corridor was an arbitrary
estimate based on the cost a moderate size mine could bear to
build a road or rail. He indicated that a utility corridor lies
north of the Yukon River that has been set aside as federal land
designated as a transportation corridor. He reported that he
did an assessment for the Bureau of Mines of all the mineral
resources in the aforementioned corridor that were known in 1975
through 1977. He recalled that the corridor is 18 miles wide.
2:43:43 PM
DR. METZ highlighted some photographs that demonstrate the
terrain in the proposed rail extension project [pages 7-9]. One
shows a stretch of road north of Livengood in the Hess Creek
area, which has challenging permafrost conditions [page 7]. He
described the road system in the early days of the pipeline as
being "very tough." He indicated the extreme grades that
illustrate the extreme grades over Atigun Pass on [pages 8-9.
REPRESENTATIVE P. WILSON remarked [traveling over Atigun Pass by
truck] can be pretty scary.
DR. METZ explained that the proposed route uses the braided
stream valleys to the greatest extent possible and to keep the
alignment at a 1 percent horizontal grade.
2:45:25 PM
DR. METZ compared the rail versus truck freight costs for North
Slope shale oil logistics [page 10]. He estimated the trucking
cost from Fairbanks to Prudhoe Bay based on 13,000 tons per well
for the 470 miles at a transportation cost of $1 per ton would
add about $5.5 million per well. From Dunbar or Nenana to
Prudhoe Bay represents 450 rail miles at $.10 per ton mile,
which would cost $550,000. He commented that the cost analysis
isn't from the oil industry perspective or the trucking
industry, but from the state's perspective. He stressed that
the project cost and revenues need to be considered. He offered
his belief that huge benefits would accrue to the oil industry
in reduced freight costs, and it would result in more revenue to
trucking since a lot more freight would be shipped elsewhere.
2:47:44 PM
DR. METZ explained the capital cost of the proposed railroad
extension to Prudhoe Bay based on the unit cost from previous
studies at $6 million per mile for 450 miles. The unit costs
were based on a long, deep tunnel in the Alps at $2.5 million
per mile [page 10]. However, the Atigun Pass tunnel would be
4.5 miles in length whereas the tunnel in the Alps is 57
kilometers long and 1,000 meters deep. Therefore, it follows
that the tunneling project, even at Atigun pass would be a much
easier tunneling project than the one in the Alps. The Yukon
River Bridge costs are estimated at $500 million, noting the
original bridge cost $31 million. He concluded the overall cost
estimate is very conservative at $5.2 billion including
provisions for a terminal on the North Slope.
2:49:09 PM
DR. METZ discussed the proposed benefits to the State of Alaska
based on one-eighth royalty on the 200 proposed wells. He
projected that at $85 per barrel it would generate about $1.5
billion per year [page 11]. Further, this oil would fill up the
pipeline and fill the treasury with the resource potentially
lasting a very long time.
DR. METZ discussed the benefit cost analysis and rate of return
on investment analyses [page 11]. He predicted the cost-benefit
analysis would be 2.5, assuming royalty oil as the only benefit.
He estimated an adjusted rate of return on investment at 30
percent. For comparison, he mentioned that when Warren Buffet
bought the Burlington Northern Santa Fe Railroad (BNSF), the
transportation index went up 30 percent. Thus, the proposed
rate of return projection for this project is not astronomical
given what is happening in the contiguous states. In fact, 60
percent of the oil from the Bakken is being transported by rail
and overall huge amounts of oil are being transported by rail,
which was not even considered in this analysis.
2:50:49 PM
DR. METZ explained proposed project funding by Alaska Railroad
Corporation Bonds [page 12]. He suggested the state could use
the bonding authority of the Alaska Railroad Corporation to sell
non-recourse tax exempt revenue bonds. This brings to light the
"wake up" call on the need to make a decision on the project.
The revenue bonds can only be sold if the state or the ARRC can
sign long-term contracts guaranteeing revenue stream to repay
the bonds. He characterized this as a "go" or "no go" decision
point. In order to reach this stage the state must complete a
business case for the financial community to defend the $5.2
billion capital estimate. The proposed $2 million [fiscal note
for HB 271] would provide funding to do so. The state must
provide a business case the federal Surface Transportation
Board, which is the agency of authority for all railroad
extensions in the U.S. He compared the fiscal note costs to
other feasibility studies, such as the Quartz Hill's project
feasibility cost of $100 million or for the feasibility study to
reopen the A-J mile by Echo Bay mines, also at $100 million.
These projects are all large capital intensive projects, which
require detailed engineering studies to justify the long future
projections on the revenue sources, to address uncertainties,
and to ensure that today's prediction will have a reasonable
chance.
DR. METZ highlighted other benefits for the Northern Mineral
Development [page 12]. He explained that the cost of trucking
mineral concentrates from the Brooks Range or other low unit
value commodities from the North Slope is too high to justify
the development of the projects. The only way the base metal
occurrences, such as the copper in the Ambler district or other
lead zinc deposits will happen is if the rail extension on the
North Slope also occurs.
2:54:30 PM
DR. METZ presented challenges and logistics for the North Slope
which can be addressed, in part, by the railroad. Additionally,
the proposed rail project would provide year-round
transportation access to the state's major asset although this
large project would not happen immediately. For example, the
railroad extension from Eielson Air Force Base to Delta Junction
also took considerable time. The aforementioned project began
in 2003 and took 10 years to complete. He urged members to
start this project now so it would be completed in time to haul
pipe and help develop the gas fields on the North Slope. He
noted it is also possible to bring gas liquids from Point
Thomson south, which is not included in these projections. He
predicted that without a rail extension to the North Slope that
it would is very unlikely shale gas development will occur on
the North Slope.
2:56:01 PM
REPRESENTATIVE ISAACSON summarized the mechanics of the proposed
project. The feasibility study or business concept would be the
first step, followed by seeking environmental study funds from
the National Transportation Surface Board (NTSB). At that
point, it would be the state's responsibility to see the project
completed.
DR. METZ answered the NTSB would not fund the environmental
impact study (EIS). He suggested that once the business case is
made, the NTSB would take it over; however, someone has to fund
the EIS. He recalled the EIS for the Eielson Air Force Base to
Delta Junction project cost $ 20 million. U.S. Senator Stevens
obtained first $15 million. Typically, EIS costs range from 2
to 3 percent of the capital cost. He reported that Norway
approaches oil and gas develop in a novel way. First, Norway
performs the preliminary science by funding seismic surveys and
the EIS and then parcels it out to the private sector. He
suggested that something similar could be done with this
project. For example, it might be possible to include the cost
of the EIS in the bonding. The caveat would be uncertainty
since the project could be delayed and the costs would escalate.
2:58:47 PM
CHAIR P. WILSON suggested it would be easier for a country like
Norway to accomplish this than a state since Alaska must obtain
permission from the federal government.
DR. METZ acknowledged the difference.
2:59:14 PM
REPRESENTATIVE ISAACSON suggested that the state needs to be
optimistic and start this now. He asked Dr. Metz to discuss the
downsides. He suggested that the business case would include
holding discussions with the Generating for Seven Generations
(G7G) mineral interests including Great Bear Petroleum,
ConocoPhillips Alaska, Inc., and Nova Copper, Inc. The state
could invite them to participate and share the expense. He
asked whether he was correct.
DR. METZ answered yes. He suggested that all the potential
freight haulers and customers should be contacted.
3:00:50 PM
REPRESENTATIVE ISAACSON suggested the bill may need to be
changed a bit. He urged the committee to support HB 271 due to
the implication for jobs and to provide transportation of goods
and services at a much reduced rate for decades to come.
3:01:28 PM
CHAIR P. WILSON asked whether the G7G group interest means that
perhaps other countries could help Alaska.
DR. METZ agreed. He explained that the G7G discussion was
initiated by the Alberta government in Canada. The Van Horn
Institute, at the University of Calgary was one of the partners
of the 2007 study and the institute is the managing entity
responsible for the $1.8 million that the Alberta government put
forward for the oil sands feasibility study.
CHAIR P. WILSON acknowledged that the Van Horn Institute
approached the Alaska delegates at the Pacific NorthWest
Economic Region meeting and this is still something the
institute is very interested in, she said.
DR. METZ agreed, noting the UAF has a small portion of that
contract.
[HB 271 was held over.]
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