Legislature(2003 - 2004)
02/17/2004 09:08 AM FIN
* first hearing in first committee of referral
= bill was previously heard/scheduled
= bill was previously heard/scheduled
SENATE BILL NO. 241 "An Act making an appropriation to the Alaska Natural Gas Development Authority; and providing for an effective date." This was the first hearing for this bill in the Senate Finance Committee. Co-Chair Wilken explained that SB 241 would appropriate $2.15 million to the Alaska Natural Gas Development Authority (ANGDA) to conduct an analysis regarding the development of an Alaska natural gas pipeline. These funds, he shared, would lapse in the year 2009. Continuing, he noted that a new Finance Committee committee substitute has been provided for consideration that would: increase the amount of the appropriation to $3 million; would appropriate the funds to the Department of Revenue rather than ANGDA; and would expand the scope of how the funds could be used. Co-Chair Green moved to adopt the Finance Committee committee substitute, Version 23-LS1279\H, as the working document. There being no objection, Version "H" was adopted as the working document. SENATOR GENE THERRIAULT, the bill's sponsor, explained that the original bill was introduced to support "the wishes of the public to create" the Alaska Natural Gas Development Authority (ANGDA) "to bring the natural gas on the North Slope to market via a pipeline to tidewater in Valdez" in a liquefied form "to serve Pacific Rim markets." He noted that the bill, as introduced, specified $2.15 million to support the project because that was the amount of money that ANGDA had remaining in the previous year's appropriation, and he had determined that that amount "would be a good starting point for discussion." Continuing, he shared that he had clarified to the ANGDA Board of Directors that they would be required to justify the funding in order to receive the appropriation. He stated that the ANGDA Board of Directors has been meeting with Governor Frank Murkowski's Administration since the beginning of the second session of the Twenty-third Legislature. He noted that the State has received two applications, through the Stranded Gas Act, that are also furthering the necessity to consider developing a natural gas pipeline to deliver the gas via an overland route through Canada to the Midwest or to Canadian markets. Senator Therriault continued that the committee substitute, Version "H," "is a blending of the two ideas" in that it focuses on bringing the natural gas from the North Slope "to market" rather than specifying that either an overland or tidewater pipeline be furthered. Furthermore, he envisioned that the objectives of both the ANGDA Board and the Administration's Stranded Gas Act negotiations be combined to further the goal of bringing the gas to market. He noted that routing the appropriation through the Department of Revenue mirrors how the appropriation was previously funneled to ANGDA from such entities as the Division of Legislative Budget & Audit and the Administration. He stated that this routing would also provide the ANGDA Board with the Department of Revenue's auditing, contracting, and accounting mechanism resources. He reiterated that questions seeking justification for the $3 million appropriation amount should be directed at the ANGDA Board. He noted that at the February 16, 2004 ANGDA meeting, the Board of Directors passed a resolution in support of the language in Version "H." He read a portion of that resolution as follows. "The Alaska Natural Gas Development Authority supports the appropriation of $3 million in the remainder of FY 04 to the Department of Revenue for work related to bring the North Slope natural gas to market." Senator Hoffman inquired to the reason that ANGDA was eliminated from the language in the committee substitute. Senator Therriault responded that the reason that ANGDA was eliminated was "the realization" that the efforts to further the goal of getting natural gas to market would involve an overlapping of various entities. He continued that "generic" rather than specific legislation would be more beneficial to that end. Senator Bunde noted that while he knows what LNG is, he is unsure of the definition of "LPG." Senator Therriault stated that the representative from ANGDA would best explain LPG. Co-Chair Green asked whether the Stranded Gas Act Application fee of $1.5 million would be used to support this endeavor. Senator Therriault responded that the $1.5 million fee is required to fund the expenses associated with processing, negotiating, and evaluating each proposal. He shared that while the fee would provide funding for the process associated with the application, the $3 million attached to this bill would support the State's endeavor to be adequately prepared "to negotiate with some degree of knowledge and strength." Furthermore, he noted that currently the $1.5 million Stranded Gas Act applicant fee could not be used to "cover any costs" associated with the ANGDA proposal. Therefore, he continued, the generic terminology presented in the Version "H" committee substitute would allow the Administration to use those funds to prepare for negotiations relating to the Stranded Gas Act and to help gather information pertinent to the ANGDA project. To include, he continued, studies relating to spur pipelines, access taps along the pipeline to serve local markets, and economic impact studies. Co-Chair Green asked which entities, in addition to ANGDA, might request funding in this endeavor. Senator Therriault responded that other State agencies, such as the Department of Natural Resources, might need to "secure particular expertise" or a consultant or funding for a Request for Proposal (RFP) in order to develop an economic model. Co-Chair Green asked whether the sponsor is comfortable with the broadened language in Version "H;" specifically the language pertaining to getting the product from the North Slope to market. Senator Therriault responded that he is comfortable with the "fairly broad language" because he is familiar with the multitude of legislation that the Legislature has entertained regarding the issue. In addition, he stressed the importance of the State being "well-prepared and tough advocates on behalf of the citizens of Alaska…." In order to accomplish that objective, he stated that funding "for some preparation and some technical advice" would be required. Senator Therriault reiterated that he had introduced this legislation to "jump start the discussions;" however, he advised the Committee that as long as the funding issue "moved forward," he would not object were other legislation submitted or another funding mechanism or level of funding identified. SFC 04 # 11, Side B 09:56 AM HAROLD HEINZE, Chief Executive Officer, Alaska Natural Gas Development Authority, testified via teleconference from Anchorage and referred the Committee to a graph that ANGDA had developed titled "Alaska Natural Gas Development Authority FY 04 Funding Plan" [copy on file]. This graph, he noted, depicts ANGDA's initial funding; the $2.1 million that was added in FY 04; and the FY 04 Total Funding of $2.5 million. Mr. Heinze reviewed that $150,000 initial funding was used to set up the Corporation and conduct some Board of Directors meetings. He stated that the outcome of those meetings was the determination that a Liquid Natural Gas (LNG) project and the delivery of natural gas in Alaska would "make sense" provided the State use its financial abilities to support the project, as, he explained, it might not attract private support due to the fact that there might not be the potential for a high rate of return to commercial investors or "high interest borrowers." He commented that the State could participate via the Authority. He also noted that during the initial meetings, the Authority identified some of the major issues that would require addressing. Mr. Heinze stated that the Board requested an additional $200,000 to fund the Business Contractors component depicted on the graph, which includes such things as a Benefit Analysis, Market Insight, and Tax Advice. He stated that the Authority determined that previous Benefit Analysis studies of the project were narrow in scope in that they were limited to such things as "a rate of return type model for making decisions" or "how much money was flowing to the State of Alaska in forms of government revenue." He continued that the Authority recognized that "the benefit of bringing North Slope gas to market were much more broader than that and had much more value." He stated that the Tax Advice and Market Insight followed the Benefit Analysis determination. He summarized that the Current Spending Column on the graph reflects how the initial $350,000 funding authorization was used. Mr. Heinze continued that the graph also depicts that the additional FY 04 funding authorization of $2.15 million was used to fund the operations of the ANGDA Board and the Business Contracts. Additionally, he specified that the funds were expanded to support the Project Contract component. He stressed that identifying the proper business structure is important as it would address how "to lower the cost of service of transporting the gas" as that would "increase the value at the wellhead, and that makes the project better for both project proponents as well as increases the revenues to the State of Alaska." Mr. Heinze stressed the importance of getting Alaskans to understand and support the concept of producing natural gas, as, he contended, its development would lower residents' expenses. He noted that people living in Anchorage are currently experiencing low natural gas supplies and consequently, are paying high prices. He stated that were a spur natural gas line provided, communities, such as Anchorage, would benefit. In addition, he reminded the Committee that the Authority was charged with addressing the basic project, project design, and project scheduling in the Statewide Ballet Measure 3 Initiative that established the Authority. He shared that, early in the process, the Authority worked with the Murkowski Administration to identify the types of contractors who would be required to conduct the various jobs; the kinds of expertise that would be required; questions and issues would require answers; what internal resources were available; and what kind of work had already been conducted. Therefore, he clarified that the Project Contractors specified on the graph are those that the State does not have expertise in. Mr. Heinze noted that the fact that two Stranded Gas natural gas applications have recently been received is important to the Authority, as some of the work already conducted by the Authority would contribute to the State's efforts in moving forward with the applications. He avowed that the fact that the first 530 miles of both the over-land and to tidewater routes are in common and thus could "contribute toward each other's financial success." Additionally, he attested, that while both the applicant's "benefits to Alaska are weak," ANGDA "could help in that regard." Mr. Heinze informed that ANGDA has responded favorably to Governor Murkowski's Administration request that it "work as part of a team" in the endeavor to bring Alaska's North Slope natural gas to market, and in that regard, he mentioned that ANGDA has introduced itself to both of the Stranded Gas applicants. Senator Hoffman inquired as to whether ANGDA would be providing an annual report of its expenditures to the Legislature and also whether additional funding requests might be forthcoming. Mr. Heinze replied that the Authority has been established as a public corporation, and as public entity, convenes monthly Board of Director's meetings and generates full monthly accountings of the it's expenditures and contracts. Therefore, he stated that a full accounting on a monthly or annual basis could be provided to the Legislature. Mr. Heinze communicated that while the two Stranded Gas Act applications have caused an increase in activity, he is unsure of the affect the applications would have on the Authority. However, he shared that, in anticipation of further involvement, he has developed alternate funding models for the corporation. He reminded that the Authority is statutorily charged with providing a development plan for the spur project by June 15, 2004; however, he stated that were ANGDA directed to assist with the Stranded Gas applications that requirement might be deferred. He mentioned that while this might delay some of ANGDA's activities, he anticipated the delay to be short term. He deferred to the Department of Revenue to provide a more thorough analysis of ANGDA's budgetary projections. Senator B. Stevens commented that the cost of developing a LNG spur line has been consistently estimated to cost $20 million. He voiced that the amount is confusing in that other legislation and expanded routing alternatives have been proposed that might have had some affect on the spur line's expense. Mr. Heinze corrected that rather than being $20 million, the amount in question is $20,000. Continuing, he explained that the amount, which is a "rough estimate," focuses on determining the feasibility of a spur line rather than being inclusive to such things as design work. Furthermore, he noted that the engineering and cost work expenses are low because a lot of the expertise has been donated or provided at no charge. He stated that were ANGDA to have fully paid for all the components required, the expense would have been in "the tens of millions of dollars." He stated that the goal of this exercise is for the State to be able to make a decision based on adequate information. He contended that there are numerous other studies that must be conducted over time. STEVE PORTER, Deputy Commissioner, Office of the Commissioner, Department of Revenue, testified via teleconference from Anchorage and explained that the $3 million funding request included in the legislation would assist the State in addressing the two Stranded Gas applications. He noted that per an agreement between the State and each applicant, the applicant could be required to reimburse the State for expenses associated with such things as independent contractors. He noted that while the funding recipient was changed from ANGDA to the Department of Revenue, the process has not changed. Furthermore, he stated that were expertise available within the Department of Revenue, the service and information would be provided at no charge. However, he continued were the expertise unavailable in house, or had been conducted by another entity, it might require a purchase. He stated that either the Department of Revenue or ANGDA could make the purchase, depending on, he declared, how the information would be utilized. He stated that were "the information to be kept confidential then ANGDA would not be the proper forum to request or fund it." In addition, he stated that were the expense to be a reimbursable expense, then the Department of Revenue would be the proper forum. Therefore, he concluded, in order to maximize efficiency, the most flexible manner to address funding needs would be to allocate the funds to the Department of Revenue. Senator Hoffman stated that the backup material contains two separate LNG Project schedules: one titled "ANGDA All-American LNG Project Conceptual Schedule" amounting to $10 billion using Revenue Bonds; and the other titled "ANGDA Project Concept & Cost" amounting to $12 billion. He asked that the two schedules be reconciled. Mr. Heinze responded that the $2 billion difference is that two LNG tankers would be leased rather than purchased. Senator Hoffman noted that the information contained in the $10 billion project specifies that two Jones Act tankers would be built. Mr. Heinze clarified that the information is all encompassing in that it reflects the major elements included in the project. He clarified that the tankers would be built by another entity. Senator Hoffman understood therefore that everything but the tankers would be owned and operated by ANGDA. Mr. Heinze pointed out that the term "conceptual" best describes the plan as currently determined. He stated that such things as the business structure, interest rates, and bonds are unconfirmed. He stressed that the chart is designed to reflect components and monies that might be supported by bonds. He stated that the Authority might not be involved in all of the various aspects that have been itemized; however, he continued it is charged with developing a comprehensive plan in order to determine the feasibility of the project. He exampled that while a treatment plant to remove CO2 must be built on the North Slope, the producers rather than the State might desire to own the plant. He stated that the $2 million treatment plant is included in the itemization because somebody would be required to build it, as part of the project's operational needs. Co-Chair Wilken asked regarding the "Alaska Natural Gas Development Authority Alternate FY 04 Funding Strategies" chart that has been provided. Mr. Heinze responded that this chart was developed to reflect alternate FY 04 funding strategies that might occur due to the Authority's response and involvement in the recent Stranded Gas Act applications. He noted that, in addition to providing the entities with information regarding such things as tax write-offs, timelines might require being revised as things develop. Co-Chair Wilken referenced the letter from Mr. Heinze to the Vice Presidents of ANS Gas Development, ConocoPhillips; Alaska Gas, BP Exploration Alaska; and ExxonMobil Alaska Production, dated February 13, 2004 [copy on file] that references an alternate route to the Beaufort Sea. He asked that further information regarding the reference to this route be provided, as that route is not commonly considered to be an option. Mr. Heinze responded that this letter and the letter to MidAmerican Energy Holdings Company, dated February 12, 2004, [copy on file] were generated in response to these entities' Stranded Gas Act applications to the State. He continued that the application by the producers: ConocoPhillips; BP Exploration Alaska; and ExxonMobil Alaska Production, "made it very clear that in their minds, both routes were on the table." He continued that Governor Murkowski informed them that the Beaufort Sea route was not to be considered. However, he stated that the Authority's desire to initiate a relationship with the applicants is apparent in that it recognizes "the fact the one of the producers" supports the Beaufort Sea alternative. Overall though, he stated that the intent of the letter is to offer assistance in a mutually beneficial manner to both the applicant and to ANGDA. Co-Chair Wilken thanked Mr. Porter for the explanation as he would not desire "that sentence to become a lighting rod that affects" other efforts. Co-Chair Wilken stated that there are "two camps" in regard to the gas pipeline: those who say "show me a customer and I'll show you a gas line," or those who support building a gas line as the belief is that the customer will come." He asked who potential customers of the State's natural gas might be. Mr. Heinze responded that the marketing question of whether the pipeline or the customer occurs first "is one of the key questions" and issues when seeking financing. He noted that while there is a market for natural gas in the State, this intrastate market, while important, is not large enough "to justify the project." Secondly, he noted, that the process of transiting the natural gas to LNG would allow the product to be shipped via tanker to the west coast of North America or to Asian economies such as Japan, Taiwan and Korea who are traditional LNG consumers. He assured that Alaska natural gas could be competitive in all those markets; however, he reiterated there being "no single customer at any single moment in time" who would purchase the volume required to support the entire project. Continuing, he shared that discussions are underway with a "mega-company," Mitsubishi Corporation that acquires and distributes LNG to customers worldwide. Co-Chair Wilken stated that the conceptual schedule specifies that the gas could be available for market as soon as 2010. Continuing, he asked who the customers of that gas might be. Mr. Heinze replied that those "potential customers would be a mixture of the west coast of North America" as well as Japan, Taiwan, and Korea. Co-Chair Wilken asked whether conversations with specific countries, which might be interested in purchasing Alaska gas in 2010, have occurred. Mr. Heinze responded that the LNG market on the West Coast is "rapidly evolving," and that a port in the Baja, Mexico area and two or three other ports on the West Coast are moving forward. He anticipated that the State would be able to provide LNG to one or two of these ports. Additionally, he stated that a port in Korea is possible and that the State has been encouraged by the response from other Asian markets. He stated that, "being able to compete is the essential ingredient," and therefore, the State "needs a business structure that lowers our cost of service to the point that we are competitive." He continued that this would require long-term commercial transactions, and that the fact the Alaska is part of the United States is a strong element in terms of marketing. None-the-less, he stated that the project must be "economic and competitive." Senator Dyson voiced that it is "very difficult" to understand how Alaska natural gas could be competitive with other worldly markets on the Pacific Rim such as Qatar. Mr. Heinze expressed that the proposed $12 billion investment in Alaska LNG must have a high rate of return in order to advance. He referenced the "Notional Cost of Service Comparison" calculation chart [copy on file] that reads as follows. Notional Cost of Service Comparison Does not include Wellhead Purchase Price High ROR Not Benefit Drive Commercial Taxable Infrastructure Pipeline $ 1.40 $ 1.00 0.75 LNG $ 1.50 $ 1.20 0.90 TOTAL COST $ 2.90 $ 2.20 $1.65 OF SERVICE Mr. Heinze stated that, based on this calculation, the natural gas target level should be $3.50. He shared that experts in the field predict that long-term gas prices would range between $3.00 and $3.50, and that some existing fields, such as the one in Qatar ranges around $3.50. He pointed out that were the cost of the total $12 billion Alaska natural gas project factored in, "the cost of service becomes very low for our gas," and he continued, at a wellhead value ranging between $3.00 and $3.50, the State could do "very well," and "do more than service our debt on the project." He noted that price factors would be affected by various factors such as whether the pipeline follows the highway, is converted into LNG, or distributed into the market in a number of different ways. He noted the "Estimated Cost of Service Comparison to WCNA" (West Coast North America) chart [copy on file] and stated that, depending on how the State and the Authority use their "unique financial structures," the cost of service could be reduced further and the State could be competitive with any of its competitors. Mr. Heinze explained, in response to an earlier question from Senator Bunde, that LPG is things such as propane or butane. He stated that natural gas liquids (NGL) are liquids that are derived from gas that is being produced, and he continued that LPG is the same as NGL except that it is derived from the gas after the gas has been transported. He noted that LPG fuels are easy to use and easy to transport. Mr. Heinze stressed that the timing of the receipt of this funding is very important to ANGDA, as the initial $350,000 funding has been expended. Therefore, he urged the Committee to expedite this legislation, as more funding would be required in order for further work to be done. Mr. Porter also voiced support for expediting the request, as there are several AGNDA contract requests that are awaiting funding and should be "executed." Co-Chair Wilken ordered the bill HELD in Committee.