Legislature(2003 - 2004)
10/14/2004 09:05 AM House BUD
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* first hearing in first committee of referral
+ teleconferenced
= bill was previously heard/scheduled
+ teleconferenced
= bill was previously heard/scheduled
ALASKA STATE LEGISLATURE
JOINT MEETING
LEGISLATIVE BUDGET AND AUDIT COMMITTEE
SENATE RESOURCES STANDING COMMITTEE
October 14, 2004
9:05 a.m.
MEMBERS PRESENT
LEGISLATIVE BUDGET AND AUDIT
Representative Ralph Samuels, Chair
Representative Mike Chenault
Senator Lyman Hoffman
Senator Con Bunde
Representative Reggie Joule, Alternate
SENATE RESOURCES
Senator Tom Wagoner, Vice Chair
Senator Kim Elton
MEMBERS ABSENT
LEGISLATIVE BUDGET AND AUDIT
Representative Mike Hawker
Representative Vic Kohring
Representative Beth Kerttula
Senator Gene Therriault, Vice Chair
Senator Ben Stevens
Senator Gary Wilken
SENATE RESOURCES
Senator Fred Dyson
Senator Ralph Seekins
Senator Georgianna Lincoln
OTHER LEGISLATORS PRESENT
Senator John Cowdery
Senator Gretchen Guess
Senator Hollis French
Representative Eric Croft
Representative Bud Fate (via teleconference)
Representative Lesil McGuire
Representative Carol Gatto
Representative Nancy Dahlstrom
COMMITTEE CALENDAR
ALASKA NATURAL GAS PIPELINE ISSUES
Presentations
The Process of and Criteria Used in Making a Decision on Whether
to Invest in a Pipeline Project - Mr. Ron Brintnell, Director of
Gas Pipeline Development, Enbridge
The Process of and Criteria Used in Making a Decision on Whether
to Invest in An Upstream or Midstream Project - Mr. Ken Thompson
President and CEO, Pacific Star Energy and Mr. Joe Marushack,
Vice President of Alaska Gas Development, ConocoPhillips Alaska
[Presenting on behalf of ConocoPhillips, BP, and Exxon Mobil]
Economic Impacts of Alaskan Ownership of an Interest in an
Alaska Natural Gas Project - Mr. Tony Palmer, Vice President,
Alaska Business Development, TransCanada
Training and Hiring Alaskans for a Gas Pipeline - Commissioner
Greg O'Claray, Department of Labor & Workforce Development; Mr.
Jim Sampson, Alaska President, AFL-CIO; Mr. Jim Laiti, Business
Manager, Plumbers and Pipefitters Local 375; Mr. Click Bishop,
Executive Board Member, Operating Engineers Local 302; Mr. Mike
Gallagher, Business Manager/Secretary-Treasurer, Laborers' Local
341; Mr. Dick Cattanach, Executive Director, Associated General
Contractors; Mr. Bob Morigeau, District Representative,
Operating Engineers 302
ACTION NARRATIVE
TAPE 04-32, SIDE A [BUD TAPE]
CO-CHAIR RALPH SAMUELS called the joint meeting of the
Legislative Budget and Audit Committee and the Senate Resources
Standing Committee to order at 9:05 a.m. Senators Hoffman,
Elton, Cowdery, and Guess and Representatives Chenault, Gatto,
Joule and Chair Samuels were present. He announced the committee
would take up the first agenda item, The Process of and Criteria
Used in Making a Decision on Whether to Invest in a Pipeline
Project, and introduced Mr. Brintnell.
MR. RON BRINTNELL, Director of Gas Pipeline Development,
Enbridge, thanked members for this third opportunity to speak to
the committee. He said he hoped to bring a unique pipeline
development perspective to the discussions and gave the
following presentation [based on a Powerpoint presentation, a
copy of which is located in the committee file.]
A little bit of background - today almost all major
interstate pipelines, both in the United States and in
Canada, are owned independently of producers. They are
run independently but there has been some transition.
For example, the Alliance pipeline, which Enbridge now
owns 50 percent of, runs from British Columbia through
to Chicago so it's a pretty substantial pipeline - not
only interstate but across [the] border. It initially
was mostly producers that were in that project. It was
producer led. Enbridge was the only pipeline company
from day one. We started off with about 15 percent
ownership and that particular project, what happened
is the producers had a desire to get a new pipeline up
and running and so they led it to the point where they
felt that it was going to get developed and they
slowly exited that project and more pipeliners got
involved. Because there aren't as many producers right
now owning pipelines doesn't mean there isn't a role
for them in the development of projects. We've seen
before that that works well and I'll talk a little bit
more about how pipelines evolve over time and their
ownership evolves.
The MacKenzie Delta project in Canada is one of the
most recent producer led pipelines so there are still
ones that are being led solely by producers. Another
example is in the U.S. Rockies and Canada - is looking
to develop a project ... basically from Colorado
through to Wyoming and that's being led by the
producers so producers do do their own development but
typically you'll see some sort of transition.
What does it take to get a pipeline built? Some of
this will be repetitive from what you've heard before
but I want to bring you a pipeliner's perspective.
Basically there [are] two things that get pipelines
built. You either have supply-push and that's partly
what we see here today in Alaska. There [are]
substantial resources available that need a home. The
producers and the developers of that gas are looking
for a way to move it to market and there isn't any
existing capacity to do so.
Examples of that, like I said, are the Alaska pipeline
but, also more recently, the Maritimes Northeast
Pipeline in the Canadian East Coast. Gas was developed
out there about five years ago. The producers went out
and found it. There wasn't any ready market for it on
the Canadian East Coast so they developed a pipeline
to run through to the Boston area and they did that
jointly. That was another case where producers worked
cooperatively with pipelining companies to get that
project done so that was a case where supply had no
home and they went out and developed a pipeline.
The other supply push is where there is insufficient
take-away capacity. There is already capacity
available but it is not able to take all the gas and
move it to market. Alliance was an example of that, as
I mentioned before, where TransCanada had a pipeline
running from the western Canadian sedimentary basin to
the Chicago area to Ontario to the market, but the
producers felt that it was insufficient, that it was
depressing prices. They went out and led the
development of a new pipeline and that led to
Alliance. Same thing is happening right now in the
U.S. Rockies. I think you heard yesterday about Kern
River's expansion to California. It's expanded a
couple of times. There have been new pipelines being
developed. El Paso is developing the Cheyenne Plains
project to move gas out of the Rockies so it's not
that there isn't capacity, it's just insufficient to
get that gas moving to market, which results in
depressed prices so there's a driver to try to get the
pipeline built.
The other catalyst, I like to call it, is basically
market pull. We heard a lot yesterday from UBS and
others, and I'm sure you've heard lots of it over the
last several months about the fact that Alaskan gas is
needed. The market for gas is continuing to grow
through gas-fired generation, just through general
economic growth both in Canada and the United States,
so we believe there's a need and a market desire for
the additional gas - that's what's driving all the LNG
development is the fact that the market requires it.
So, in the case of Alaska, we believe that there's
both a market pull and a supply push. It's not just
the fact that this gas doesn't have a home or needs a
home. The market requires it and so we believe that
the market will ultimately step up and I'll talk a bit
about that because I think there is the ability for
the market to play a role, not just the producers and
the state to be capacity holders but others as well,
and the biggest driver for the market to potentially
step up is that there is increased cost of gas. Ten
dollar gas? It doesn't make Moms and Dads happy, plus
it makes the economics of various industries more
difficult so there is the desire on the behalf of the
downstream market to see not only lower prices, but
also more price stability. The volatility we see today
is not good for anyone.
Investment environment - what do pipeliners look for
when considering to invest, not only in an Alaska
pipeline but I'd like to talk more generically about
investment in general. What do Enbridge or other
pipeline companies look for when they're considering
an investment?
Firstly, we want to know that there's an adequate
supply behind the pipeline. These are long term
investments - 20, 30, 40 plus years. It's nice to know
that there will be an adequate supply. That doesn't
mean it needs to be fully developed today. It just
means that we have to have a sense that it has the
ability to be developed. In the case of Alaska, we've
heard a lot about the fact that there's lots of
potential for new supplies and so as a developer of
pipelines, we like to hear that. You know, we like to
encourage new growth and if we were to work on this
project, we would want to encourage the ability to
move more gas on the pipeline, not just the existing
shippers but those in the future as well.
In terms of shipper commitment, we want to know that
those who commit to take capacity can pay for it in
the long haul because this is a long-term commitment.
You heard yesterday about the billions of dollars of
commitment that the various parties are going to make.
That's substantial dollars. The federal loan guarantee
will help but we will still have to do our own
independent credit checks on the various shippers. In
the case of the Alaska project, they will be pretty
substantive and creditworthy parties but in other
projects, unlike the Alaska project, you may find a
more diverse group. It was interesting in the days of
the marketers, credit was an interesting issue and it
became more so in the last four or five years when
some of those marketers' credit wasn't so strong. So
it is an area we look at pretty closely.
The constructability - can we build it, not only in
terms of land access but just in the environment we
find ourselves in when trying to build it. Alaska's
going to be challenging. You've heard, I think over
previous hearings, things about the difficulty of
building in permafrost. It takes a company that's had
experience and understands those challenges to get it
built, so it's not just a matter of being able to have
the finances to build it. You have to have the skills
to be able to build it. Enbridge has had some pretty
significant experience in building in permafrost. We
were the first ones to build and operate in permafrost
in Canada. We've been doing that since 1985 so you
have to have someone who's experienced in the various
challenges in being able to build a pipeline.
Material and labor - you've probably heard quite a bit
about this over the last several months. With the size
of this project, it does have the ability to overheat
the market for labor. There's going to be a lot of
jobs, a lot of job opportunities. That also - and I
think someone joked yesterday about the fact that, you
know, has the ability to create the desire to make
more money, maybe we'll slow that project down or
we'll ask for more. Hence, there has to be the ability
to balance that and have dialog with the unions and
with others on how we can all make a fair profit and a
fair return from this but not overheat the market. You
also have to have a look at what is also going to be
going on at the same time. The Alaska project is not
the only project that's potentially going to be going
on in this kind of timeframe so, as a pipeliner, we
try to see what other projects might be being
developed at the same time and have that dialog to
make sure that we're not trying to pull too hard on
the same resources.
REPRESENTATIVE ERIC CROFT asked Mr. Brintnell to address the
price of steel.
MR. BRINTNELL said that right now, the price of steel is very
high. The Chinese market is taking all of the steel it can get.
The price of steel has increased 50 to 75 percent over the last
couple of years. That price increase is causing problems for
pipeline companies in being able to predict what the costs are
going to be. Some of the existing projects that are going
forward today relied on relatively firm pricing, only to find
out that is not the case because the market is so hot. He
acknowledged that will be a challenge for the Alaska pipeline
project because it will require so much steel and will tax the
ability of the steel mills to produce it. He thought that issue
can be dealt with by initiating a serious dialog with steel
producers. He said it does not differ from the labor market in
that you say, "Okay, here's an opportunity for you to make some
money but let's be realistic as to what your expectations are."
He said another consideration will be the type of steel used.
Some of the newer steels have not been tested over long
distances.
CO-CHAIR SAMUELS asked if the steel manufacturing plants or
pipeline companies do the testing.
MR. BRINTNELL said the pipeline companies do and noted that some
limited scope tests are underway right now for the higher-grade
steels.
CO-CHAIR SAMUELS asked the timeframe of the tests.
MR. BRINTNELL said it is not the testing that is as important as
getting comfortable with the technology. He said, for example,
X-180 pipe has been used in the United States for a very short
time on the Cheyenne Plains project, even though that steel has
been around for a while.
CO-CHAIR SAMUELS announced that Representatives Fate (via
teleconference), Gara, Croft and Senator French were in
attendance.
REPRESENTATIVE GATTO asked Mr. Brintnell to equate the amount of
steel that will be necessary to build the pipeline to another
project, such as building an aircraft carrier, so that he could
gauge how involved getting the metal will be.
MR. BRINTNELL likened that to comparing widgets. He thought
another presenter said that it might take the entire world's
steel capacity production, although he would not go that far. He
said the amount will depend on the size of the pipeline.
Enbridge has considered not only 48 and 52-inch pipelines, but
it has also considered a 36-inch pipeline, the reason being that
the existing steel mills in North America are able to handle a
36-inch pipeline. He said although capacity might have to be
increased if a 36-inch pipeline is built, the steel mills could
continue to build 36-inch or 42-inch pipe once the Alaska
pipeline is completed. Enbridge believes a substantial part of
the steel can be sourced within America but offshore sources
will be necessary because of the size of the project.
REPRESENTATIVE GATTO asked if the world's steel production could
be tied up in this project for one year.
MR. BRINTNELL was unsure.
REPRESENTATIVE GATTO questioned whether this project could be
stalled by a lack of metal.
MR. BRINTNELL said the steel supply is a very important
consideration so ascertaining where the metal will come from is
part of the dialog that must take place now, as well as whether
the Chinese market will remain as hot as it is now.
CO-CHAIR SAMUELS noted that Representative Dahlstrom joined the
committee.
REPRESENTATIVE GARA pointed out that Enbridge is the only
company that is proposing to build one or two 36-inch pipelines
instead of a larger one, which could increase the cost of the
project substantially. He asked Mr. Brintnell why two 36-inch
pipes would make this project cheaper.
MR. BRINTNELL answered:
... A couple of reasons, one is do we know what the
shipper commitments are going to look like from day
one. Do we know what development might look like down
the track? You know, we've heard the fact that we want
to make sure that the Alaska project isn't just for
existing producers, that there's the opportunity for
others who, as they develop supply, to bring it on
board. You heard a bit yesterday about being able to
loop. The positives, and I want to make it clear that
Enbridge is not pushing dual 36-inches, we just think
it's important to be considered as an option, is that
you can start off slower. You can build one 36-inch
pipe, make sure it's full and, as additional supplies
come onboard, either because you don't want to
overheat the market - you heard yesterday about the
impact that can have on prices, which impacts your
netbacks, both as the state and as the producer. You
can bring on looping, 'incrementalize' the supply.
The other thing is it adds reliability. If you have a
dual 36-inch line versus a single 48 or single 52, if
there is an issue with part of the line, a compressor
failure or somewhere along the line you need to do
maintenance on a piece of the line, you don't go from
100 percent capacity to 50 percent - you go,
typically, from 100 percent capacity to about 70
percent capacity - just the way you can bypass the
section that you have a problem in [indisc.] to flow
so there is some reliability benefits associated with
dual 36.
So, in the context of what do you invest in, that's
one of the things, and ... you'll see later on that I
talk about reliability. Reliability is not just price.
Shippers look to a pipeline company not only to give
them a competitive price, they also want to make sure
the gas gets to move because if you're going to have
to pay your shipping commitment - and you heard that
yesterday that a big part of this is ... in most
cases, you're going to pay. I wouldn't say it's Hell
or high water, but in most cases, you're going to pay
for your shipping commitments. You want to make sure
that that gas can flow. And so, in the context of
reliability, what do you invest in. Sometimes
duplication is more reliable and you're willing to pay
more for that.
MR. BRINTNELL continued with his presentation.
And then finally, can you finance it? I'll talk a bit
more about that later on. You sort of segued into my
next slide, which is what motivates the various
parties because, as a pipeline developer, we're only
one of three parties potentially to participate.
Producers do want the lowest cost of delivery.
Obviously, as the state and as the producers you want
the highest possible netback but I have experienced
before where the lowest cost pipeline doesn't
necessarily get to be the one that gets to be built.
They're looking for reliability. They're looking for
'optionality.' You know, does your pipe give things
that others wouldn't? And I say 'optionality,' for
example, in the case of the Alliance pipeline. It
provided for free fuel-only interruption -
interruptible service. So what do the various parties
bring to the table - so they're not just talking about
the lowest demand charge but what other things can you
bring to the table.
The market's the same thing. The added mix, I guess,
in the downstream market is they all started buying
the gas so they want to know - they want to have
competitive and reliable gas pricing.
And then the transporter side - we're looking for a
fair return and I will talk a bit about what we
classify as fair return, risk/reward balance, later
on. But we want to have manageable risk. We're not
looking for no risk. There isn't the ability to have
no risk but we want to understand our risk to be able
to manage it and then have some financial certainty
around the risk that we define.
You heard yesterday a bit about - from what we call
the [indisc.] bar hopping. I like to call this the
oval of opportunity. Basically, as the risks increase,
as investors and developers in pipelines, we are
looking for the opportunity to make more money. Now
that's just - they go hand-in-hand. We will and have
been, when we can take risk, pipeliners will take
development risk. We like to take the risk we think we
can manage. One of the things the pipeline companies
do is build pipelines so we should be able to manage
construction risk and we'll take some of that risk.
Things that are beyond our control, for example, steel
price. No matter how hard we might want to try, as an
individual company, to manage steel prices, we can't.
We can't control the global market so those are the
kinds of risks where you have to try and look for a
balance between the developer and the other industries
as to who gets to share that risk-reward balance.
You know, technology - we talked a bit about that.
Where do you decide to take which pipe? It really
depends on where you are in the process. As we move
along on the Alaskan project, it has become more and
more important to move it along faster. Well, do you
take the risk of unproven technology? You might and it
might bring the cost down, but you have to bear in
mind that you're taking a risk. So that's the kind of
thing - you have a dialog with not only our own
company and the banks because they're important to
this, but also the shippers themselves saying look,
there are things we can do. We can bring the cost down
but there's a cost. The cost is the risk goes up
essentially.
What do we need to invest? Typically, and I think you
heard this yesterday, typically looking for return on
equity around 12 to 15 percent. Fifteen percent -
there are projects going on right now that are in the
15 percent area. There are those going on at 12. It
could potentially be lower than that. It really
depends upon what the risk balance is. Our investors
look - the people that invest in pipeline companies
are looking for return so they're looking for us to
make, you know, an adequate return - 12 to 15 percent
is kind of the range they're looking for us to make on
investments, otherwise they could invest their money
somewhere else. So that's kind of the range in order
for us to get the equity we need in our companies.
That's the range of return we're looking for. We need
access to that and there was quite a bit of discussion
yesterday about the fact that for this project there
likely will be a fair bit of opportunity to bring in
various types of debt, both through the equity markets
and through the other forms but we have to understand
where that debt is coming from.
I talked a bit about cost certainty. It's not cost
certainty as much as it's predictability. We need to
be able to predict what those costs are. What are the
bands? You asked, in the context of making an
investment decision and I'll bring it back to about 36
versus 52 or 48, having built quite a bit with the
small diameter pipe, we are better able to predict, we
think, what the cost variability might be like in that
and so put a tighter band on what the outside might
be, versus say, a 52 or a 48, which hasn't been tried
as much so you have a higher unpredictability on a
higher size pipe that you might not have on a 36. So
that is having the ability to better manage and better
understand that cost uncertainty. Is it worth
something to the shippers? It might be or they may say
no, I want the lowest cost pipe. But that's the kind
of thing we consider when we look at pipes.
Regulatory certainty - I'm sure it's been talked quite
a bit about in previous hearings, not so much in this
one, but that's important to us as pipeline developers
- understanding the process not only from gaining land
access but just in terms of getting the tariffs
approved. In this project we've got the FERC approval
we're going to need to have. We're to the NEB -
National Energy Board approval in Canada. Can we
understand the process? Do we understand the process?
Is it clearly defined - and not only the process going
into it but over the long haul? One of the things that
pipeliners are most concerned about is that we develop
a project only to find the regulatory environment
change after the fact. We're willing to look at the
oval of opportunity and take more risk, but we don't
want to then find out that after we've taken that risk
and expected a higher return, only to have that clawed
back after they've said well no, you've taken the risk
and thanks very much and now we want a lower return.
We want to have regulatory stability over the longer
haul.
... The last point is we need to understand how we're
going to get access to the land, both the state,
federal, private and the aboriginal Native
corporations that play a big role there.
REPRESENTATIVE CROFT asked what risk Mr. Brintnell is referring
to since cost overruns would be added to a FERC 12 percent base.
MR. BRINTNELL said that is not necessarily true even though the
implication has been made that pipeliners do not take risk.
Enbridge has a long history of that not being the case. Enbridge
prefers negotiated settlements in which it will take some risk.
During the negotiations for the Alliance Pipeline, the
developers negotiated a 12 percent return but that was variable.
If the developers were able to bring the project in under
budget, the return could go up. If it came in over budget, the
return went down. In the case of the Alliance Pipeline, the
return did go down so the shippers were not the only ones
bearing the brunt of a cost overrun. He noted that more and
more, pipeline companies are entering into negotiated
settlements. Enbridge believes the Alaska pipeline will be a
negotiated settlement that will contain some risk/reward
balancing. He added:
Other things are you take some risks operationally.
Our ANR-Vector Pipeline, which runs from Chicago to
Ontario, we benefit and take pain on an O&M basis,
operation and maintenance basis, so if we do better
than we predict, then we, the pipeline owners, get to
share in some of those benefits. But if we do worse,
we bear the pain and we share that with shippers. So
it isn't quite as straightforward as no risk because
you could build a no-risk pipeline. But, quite
frankly, I don't think that any of the shippers,
including the state if you decide to be a shipper,
works out that way. I think you're looking for
pipeline companies to take some risk and be innovative
on how they might be able to do that. And we're
willing to do that. We want to. I mean the reality is
our investors in our companies look for us to do
better than just, you know, a flat rate. They want us
to try and make more money and so they're expecting us
to take risk.
REPRESENTATIVE GARA said everyone has accepted as a given that
the investors in a pipeline expect a 12 to 15 percent rate of
return, as that is what pipelines have earned historically. He
questioned why that is still the case in today's financial
markets where people are looking hard to find an investment that
will return 7 percent.
MR. BRINTNELL said that number is not "gospel" but one needs to
distinguish between financial investors who will take a lower
return and companies that know how to run pipelines. Enbridge's
investors are looking for Enbridge to bring a return in the 12
to 15 percent range, depending on the risk. He maintained that
this project cannot be solely financed by financial investors.
He pointed out that the other owner of the Alliance Pipeline is
a financial player, not a pipeline company. Its returns and
expectations are different but they do not know how to run
pipelines and are in it solely on an investment basis.
REPRESENTATIVE FATE recalled that a 36-inch pipeline was
discussed at an earlier date and asked if that option is still
on the table. He asked what some of the deleterious aspects of a
36-inch pipeline would be.
MR. BRINTNELL said that option is certainly still on the table
for Enbridge because it reduces the potential risk. He said the
downside is the higher cost. However, if growth to 4 BCF does
not occur for five to seven years, it makes more sense.
CO-CHAIR SAMUELS noted the presence of Senator Wagoner.
MR. BRINTNELL said he would not focus on financing
considerations as that topic was discussed at length the
previous day but he pointed out that basically, Enbridge and the
financial community are looking for the same things. The banks
want to be assured they are dealing with financially strong
players and that whoever is putting equity in has experience. He
repeated that financial players will take a lower rate of return
because they know that those who are looking for a higher rate
of return have the experience and are risking their own dollars
to make a return. He pointed out that regarding risk, "Our money
comes last, the banks come first." Financing companies are also
looking at the quantity and kinds of reserves that are backing
the pipeline. He continued with his presentation:
There can be quite a broad variety of sources of debt,
and I won't go through this. Once again, you heard
yesterday quite a bit about who might invest,
including the equity market, pension funds, but they
are looking for - they are happy to invest in
pipelines because the returns are higher than they
might get in other ways but they still want to know
that there's someone reliable and able to run that
pipe. That's why they're willing to invest in
potentially not the same return that others might,
because they're not pipeliners.
I'm going to skip through this. This talks a bit about
what they're looking for and the biggest thing is debt
service coverage ratio. They want to know that there's
sufficient commitment to pay them back because the
banks get paid first and participants like ourselves
get paid later and hence, the reason why you want a
slightly larger return because you're paid last.
A bit of a commercial for those of you who don't know
who or may not know who Enbridge is. We're a pretty
substantial pipeline company - about $13 billion in
assets. We own and operate the world's largest oil
pipeline so we have a number of years of pipeline
experience. We built the first pipeline in continuous
permafrost, so the most technical hurdles and issues
we've got a bit of experience with. We built a
distribution company in Inuvik [ph] so we know that
one of the key aspects of this project is local
markets and how can that be accessed so we're looking
to try and help in that.
We may or may not be an investor in the LDCs but at
least we understand some of the difficulties in
getting gas to new areas. We brought gas to Inuvik. We
brought gas to New Brunswick, which never had gas
before. So being an LDC company, a local distribution
company ourselves, we kind of understand some of the
challenges that it takes to get gas to new regions -
just like Alaska is trying to do. We have a strong
environmental track record. We have won numerous
awards for building pipelines and operating our
pipelines. We think we're kind of uniquely able to
participate in this project and we think that we have
a strong history - we do have a strong history - with
engaging First Nations people.
We will be looking at taking a potential shipping
commitment on the pipeline so I know there were two
divergent opinions yesterday as to whether local
distribution companies would in fact step up and take
capacity. Enbridge is taking a very serious look at
taking capacity on our own right for our local
distribution company in Ontario, so we could
potentially be a shipper. We are looking to go and
talk to other LDCs, both in the Chicago area and as
far east as New York. We believe, and we've seen
indications, that they will be or might be willing to
step up. The issue they face is being able to get
regulatory approval. With markers stepping up several
years ago and taking capacity, the LDCs were
discouraged and, in fact, told they couldn't take long
term capacity commitments. With those markers leaving,
the opportunity is there to let them take it again,
but the regulators have to be encouraged to allow them
to do that. So we're going to go out and work with the
LDCs to see if we can't have some dialog with those
regulators and potentially with the states themselves
because we think they're the ones that are going to
benefit from your gas. You'll benefit because you're
going to earn the royalties and the revenues. Those
states benefit because the gas gets there and so we
believe that there is an opportunity for Alaska to go
and talk to those other states and encourage them to
encourage their regulators of those LDCs to be able to
take long-term commitments. And we know they are
looking at it. I've talked to LDCs that are looking at
potentially taking long-term commitments on LNG
facilities so if they're willing to take long-term
commitments on LNG, why not Alaska? So we think
there's an opportunity there.
And I guess the last part of the commercial is we have
had pretty extensive cross-border. The one thing we've
talked about - these hearings are all about Alaska but
this is a cross-border project so we think it's
important to be able to look not only at the U.S. side
but the Canadian side and understand some of the
politics and issues and we've had a long experience,
through Alliance and through Vector and other
pipelines of dealing cross-border. So we think that
we're uniquely well positioned there and that sort of
ends the commercial.
REPRESENTATIVE GATTO said the Governor remarked that he was in
active negotiations with both TransCanada and the producers. He
understood the Governor to say that was because he had
reimbursable service agreements (RSAs). He asked Mr. Brintnell
if Enbridge has reimbursable service agreements also.
MR. BRINTNELL said Enbridge has not signed an RSA, not because
it is averse to doing so but because it has been focusing on
where it can add value first, which is why it is looking at
having the LDC discussions and at dual 36-inch pipelines and a
few other things. He noted that Enbridge is more than willing to
sign those agreements but, again, believes it is more important
to focus on other areas of the project right now. Enbridge's
understanding is that the rights-of-way will not be exclusive so
it is not concerned that there will be no opportunity. He said
Enbridge officials met with the Governor's staff this week.
REPRESENTATIVE GATTO indicated that dual 36-inch pipelines will
have more capacity than a single 48-inch line, so that the dual
36-inch pipelines may cost more but can deliver more. He
estimated that it would take 1.8 36-inch lines to equal a single
48-inch line. He asked for the ratio of the increased cost
versus what the state would get.
MR. BRINTNELL guessed the amount to be .5 billion cubic feet,
maybe more. He added:
The thing about it is is that you don't directly go to
a dual 36. You loop it out so the beauty of it is that
if we thought we were only going to get to the point
that we needed capacity for a 48, you wouldn't
necessarily fully loop out the 36. You can
incrementalize yourself to the various capacities,
unlike building a single pipe where you build it and
it's there. In the case of a dual pipe, you can build
it up over time.
SENATOR GUESS indicated that Governor Murkowski opined during
his presentation yesterday that he must take some risk in order
to move the project forward. She asked Mr. Brintnell his opinion
about whether the state must take risk or must take some
ownership in the pipeline to move the project forward.
MR. BRINTNELL replied that Enbridge believes the state has a
role to play and the ability to take some risk that an
independent company like Enbridge does not. He continued:
There are some benefits that the state will get from a
project that someone who was just purely investing in
the pipeline won't. You know, the fact that the gas
moves from the state has some benefits so I think
there [are] benefits in participation ... it just
depends on how you structure the risk. I'll give you
an example, not necessarily what I would advocate
here, but we've looked at before where some parties
are willing to take more risk or have more
opportunities than [indisc.] a producer who would be
participating in the pipeline. They might be willing
to take more back-end risks. In other words, allow the
pipeline to take potentially a lower return but have
more stable returns and they would get more returns at
the back-end. So, you know, that's the kind of thing
the state potentially could do is say okay, we'll
participate on an equity basis. We'll take more
returns than you will, Enbridge or a pipeline company,
because we're willing to take slightly more risk. So I
think that the state, you know, could have a role to
play here. Is it essential? I'm not sure it's
essential but it's positive.
SENATOR GUESS said she is aware of the positives and negatives
but was trying to ask whether it is essential.
CO-CHAIR SAMUELS asked if Enbridge has partnered with any
government entity, regarding an equity share.
MR. BRINTNELL could not think of any government partnerships in
the Canadian or U.S. pipelines but he was not sure about
offshore projects in Colombia or Spain.
CO-CHAIR SAMUELS asked if Enbridge simply did not need
government equity participation in the Canadian or U.S. pipeline
projects or whether it chose not to deal with government
bureaucracy.
MR. BRINTNELL said Enbridge did not need government equity
participation. He pointed out that Alaska is in a unique
position because 12 percent of 4 BCF per day amounts to a lot of
gas and puts Alaska in a unique position.
SENATOR ELTON asked Mr. Brintnell if he was referring only to
equity.
MR. BRINTNELL said he was. In terms of shipper commitments,
Enbridge discussed a project with the Wyoming Pipeline Authority
in which the state might have been a shipper. He clarified that
Enbridge has had dialogs with government entities about entity
participation in the past but nothing was formalized.
CO-CHAIR SAMUELS thanked Mr. Brintnell for his presentation and
introduced Mr. Ken Thompson, past Executive Vice President of
ARCO and the past President of Arco Alaska, and Mr. Joe
Marushack, Vice President of Alaska Gas Development,
ConocoPhillips Alaska. He noted that Mr. Marushack would be
presenting on behalf of ConocoPhillips, BP and Exxon Mobil. He
informed members that Mr. Thompson would be giving two different
presentations and wearing two "hats" so he asked members to
limit questions to the specific presentation entitled, The
Process of and Criteria Used in Making a Decision on Whether to
Invest in an Upstream or Midstream Project.
MR. KEN THOMPSON explained to members that he would be wearing
the hat of an ex-ARCO Executive Vice President, having sat and
participated in meetings of that corporation for his last two
years at ARCO, and that he would also be arguing for capital for
Alaska as President of Arco Alaska from 1994 to 1998 and explain
how projects got prioritized on the capital allocation list of
that corporation. He said he is currently serving on the audit
committees of the boards of directors of Alaska Air Group and
the Coeur D'Alene Mines Corporation, where he oversees capital
allocations. He began:
How did large corporations like an ARCO make
decisions? How did capital get approved when projects
were commercial? Not all projects that were commercial
were approved. There is a finite amount of capital
that any company can spend, as I'll describe in a
moment.
Before I get into that, I'm going to briefly talk
about something that's extremely important from the
discussions yesterday. Those were ... [END OF TAPE 04-
32, SIDE A]
TAPE 04-32, SIDE B
MR. THOMPSON continued:
... or helped oversee signing of joint venture
agreements for natural gas development and pipeline
development with Malaysia. It was joint venture LLCs,
profit sharing, as well as they took equity
participation. I also signed similar joint venture
participation agreements in the country of Thailand -
also, in the country of Indonesia, where ARCO had a
lot of operations. All the deals we made there in
development [were] equity participation by the
government company, as well as production sharing and
profit sharing. I also signed deals in Trinidad
natural gas and also deals in the country of Qatar in
the Middle East. All of these deals were, in fact,
what Pedro Van Meurs talked about yesterday.
These were deals that ARCO moved ahead on on natural
gas development, where those countries took an equity
participation and I recommend that the legislature
also approve that Alaska this time changes the
business model, that this time, Alaska takes an equity
participation in the pipeline - at least your 12.5
percent share to more or less obtain the tariff
profits on your royalty share of gas. I've also been
recommending for two years that the state take its
royalty gas in-kind and you get in the market and you
see what you can do, whether it's your own little
division that you set up with experienced gas
marketing or you can contract that out to very viable
excellent gas marketing firms.
These decisions are very important. I also found very
important, and it was very significant, and I don't
know if all of us fully understood the impact of what
UBS was saying yesterday and Lehman Brothers were
saying yesterday. After the federal legislation was
passed, where the federal government will guarantee
the debt, capital markets will flow to this particular
project now. It is financeable. And, it will lower the
risk substantially on anyone because the state, for
your share, will put in 20 percent equity and the rest
is - and this is significant - it is project debt,
non-recourse back to the state or the corporations.
You'd have to make sure that [indisc.] happen but the
likelihood of that is higher now that you have those
loan guarantees.
On a shelf in my living room, which I'm very proud of,
is a beautiful clock that was given to me by the Prime
Minister of Malaysia and the Prime Minister of
Thailand for ARCO signing a joint venture agreement
with those two countries for a gas pipeline from the
central part of the Gulf of Thailand and development
of a huge gas field there that's underway. It was an
equity sharing where they take equity ownership and
it's also profit sharing. And I hope someday you all
have clocks because we've done the same thing here in
Alaska and this time you better take the profits of
transporting your own gas rather than paying it to
owners out of state.
Now let me get to this other subject, which is how to
pen these - how to get these on the capital allocation
of these major corporations. So I want to talk about
what is the importance of capital budgeting and
allocation in a corporation. How do they decide what
projects to do? What is the framework that executives
in different locations like this one understand that
process? What is the investment criteria they use, the
sensitivity they look at? And then what are the risks
they may look at and what are the common techniques of
risk mitigation because we have to answer that risk
mitigation. You heard every speaker talk about that
yesterday and you hear me talk about it. That will be
how we mitigate the risk, such as taking equity
participation, such as sharing part of the risk
involved with the other investors could make this
project go forward.
I'll also talk about something that in the press and
in speeches that gets thrown out somewhat haphazardly,
and there is a big difference. I'm going to talk about
commercial rate of return and competitive rate of
return - it's very significant to understand the
difference, and then just wrap up with some
conclusions or recommendations.
I've already talked about experience with capital
portfolios serving on a couple of boards, also serving
on corporate boards, also with experience in ARCO that
I've already mentioned. At one time I was also manager
and resource planning for ARCO, which the sole
function was capital allocation of budget - that was
it. It is one of the most significant financial
activities a firm does. It really determines the core
activities of the firm over a long-term future. It
confirms which projects receive capital to proceed
timely and which ones do not receive capital. A very
important point, a controversial point sometimes, but
it's simple to understand - not all projects that are
commercial or even competitive are approved internally
when capital is constrained. When there's not enough
cash to go around, not everything gets done. How do we
make sure in such a world that the Alaska project
makes it on the list? And the capital constraints do
force an allocation process - I worked 26 years for
ARCO. In those 26 years, not once did all the projects
that we had on our list get approved because it was
more capital than we had available. Most companies and
large corporations are that way.
Decisions must be made carefully and rationally with
owners, and this is important, with shareholders in
mind. Why does a shareholder invest in Exxon Mobil or
ConocoPhillips, a past ARCO, a BP - and it's important
to understand why they invest in that versus - and
then what the shareholders want to see out of an
Enbridge and a TransCanada, because that impacts the
capital allocation decisions.
This is an interesting - in slide 5, really the
capital budgeting fits into the financial planning of
a corporation. The overall financial goal, if a
business wants to stay in business, is maximize the
shareholder wealth - the stock price increases and the
dividends is earning enough return for that
shareholder or they'll exit and take their money out
of the business by selling their shares. So really,
when a chief financial officer gets all this cash in,
this last - in the year 2003, at relatively lower oil
prices, in the 30s, not the 50 bucks we're seeing now,
the CFO of Exxon Mobil was looking at this chart and
said how do I spend the $30 billion cash flow I got in
2003? BP said how do I spend my $20 billion cash flow?
After everything else, how do I invest the $20 billion
I got left from my revenues minus all my expenses - of
all fields, of all overhead, I've got $30 billion.
Where do I spend it? I've got $20 billion at BP and I
have $10 billion, just under 9.8 actually, was for
ConocoPhillips last year. I haven't looked to see -
some of those numbers may be doubled this year with
oil prices. I don't know.
So how do you decide? You have to allocate between the
pots. You have to make an investment decision of the
capital - what projects, long-term, short-term, but
you also have to make very important dividends - how
much of that cash flow will go back to shareholders in
terms of dividend that can prop your share price up or
also many investors want to see that dividend - maybe
see that dividend increase over time. You need to pay
those owners.
But I want to talk about the one box about investment
decision capital budgeting. You see, the cash flow -
when you see a lot of cash, not all of it can come for
projects. Shareholders want a big piece of that and
they do deserve it in the dividends that are paid.
Also that CFO, when they're looking at it, we'll talk
about the debt equity mix. How much debt is safe? How
much debt is unsafe? Looking at projects, how much
equity, and we certainly heard UBS and Lehman Brothers
talk about those debt equity ratios yesterday on this
project. Whether it's 20 percent equity put in, the
rest is debt guaranteed by the federal government, is
a sweet deal. I have not seen one like that come along
in a long time.
Broad framework for capital budgeting - again, the
maximized shareholder - and when projects go through,
and when I was a young engineer looking at projects,
we understood there were different phases. One, it was
an idea. You're sitting around the table, an idea
comes up for exploration or midstream, yes?
REPRESENTATIVE CROFT asked, "On the overall - so, a producer
that knew that this was a possible commercial venture - that the
pipeline was commercial - if it knew it would also have an
adverse impact on the overall gas prices for the next 15 or 20
years, I mean how is that internally computed? There's a plus
and minus. It will make some money on the one end but it will
lower the return I would get for my LNG projects or others. How
are those rationalized?"
MR. THOMPSON said the decision is very difficult because the
companies must also take into consideration that delaying a
project for three years might prevent an impact on gas prices on
the rest of their gas, yet if that project is delayed, other
competitors could bring in LNG. He said producers should be very
concerned that if enough gas supply is not brought, gas prices
could get to a point where a lot of fuel switching to other
resources could take place and people might conserve more
effectively. In addition, if different countries cannot grow
their economies because prices are too high, the demand could be
dampened. He continued:
So, if you don't get your gas on the market, prices go
too high, you could dampen demand for the rest of the
gas. That's going to happen anyway and there's ways of
calculating that. You know, DOE mentioned that if gas
was brought on by 2012, gas prices would decline by
about 25 cents, I think was the report if I recall
right. On the other hand, other factors could cause
the same thing. So it's a tough balance. You mitigate
the risk is one way, and we'll talk about it later.
So we have the idea phase. Then you start doing the
preliminary evaluation and on something this massive,
you put people on it, you spend money. Producers, for
example, spent, as you all well know, $125 million. I
would say that would be in the preliminary evaluation
phase.
Now we're about to approach a decision sometime and I
hope the decision is made by the end of 2005. It was
also very significant, a subtle point that didn't get
reported by the press here, another very important
point in that federal legislation was the federal
government saying if there are no applications for a
certificate of an Alaska gas transportation system
within 18 months, certainly by the end of next year or
February or March of 2006, the Secretary of Energy
shall conduct a study of alternative approaches to the
construction and operation. And I would say that you
ought to be sure and have that in any fiscal package
that you pass. You tie in with the federal law of
anything you pass, you make that date very important,
and I'll talk about that later of why the importance
in a capital allocation decision. We want to get all
these companies - producers, pipeline companies, to
the true business evaluation phase, which crosses over
the final detailed engineering and cost estimates into
the permitting phase and what have you, and then after
all of that, which could take a couple years, only
then do you make that decision at board rooms to start
digging dirt and put a pipeline in the ground. Most
projects go through these kinds of phases and to be
approved, the project must pass all of those phases.
It is important that the Alaska gas pipeline project
has passed the preliminary evaluation phases to the
degree that companies are interested enough in the
producers that they have lobbied hard for the federal
legislation and are working with the state. They are
wanting to be able to lay something, I think, on the
table to their boards that will get them to the
business evaluation phase. And when you're in a
company, and you're a manager-executive even of a
profit center like in Alaska, you learn this kind of
stuff. That's how the company works so you get a
system of capital evaluation that becomes very
cultural.
SENATOR ELTON asked Mr. Thompson where the corporations are on
that list now and how working through the different steps will
mesh with the 18-month timeline in the federal legislation.
MR. THOMPSON said in 1996, when he was president of Arco Alaska,
he formed a permanent group to work the Alaska gas pipeline.
[Prior to that] the three companies formed ad hoc project teams
every three years to study the project for commercial potential
and determined it was not a commercial venture. The teams were
again created on a two-year basis and again determined the
project was not commercial, the main reason being that a lot of
re-injection was going on. By 1996, Arco Alaska was the first
company to form a permanent team to determine what it would take
to get the project done. The team was fully staffed and Arco
Alaska brought in its best folks. He told members:
I would challenge the timetable it was in - so it's
not just 18 months to make the decision about going to
the evaluation phase, I'd say it's been 10 years. In
1996 we really began in-depth the preliminary
evaluation phase with permanent staffing. Prior to
that it was ad hoc team staffing. Does that make
sense? So we were in the idea phase prior to then, in
1996 when ARCO crossed over to the preliminary
evaluation phase, and I know ConocoPhillips has
continued that work by having a permanent gas team, so
it's been 10 years. So 18 more months to go to the
business evaluation phase, but the only way to get
them there is mitigating part of the risks that we'll
talk about later and we know that mitigating the big
chunk was federal legislation and now it's state
fiscal certainty. That's the next big thing if we want
to get them to the business evaluation phase, along
with they want certainty in Canada as far as the
regulations and they're trying to reduce costs as
well.
So, I would hope, in 18 months, and I met with one of
the undersecretaries of energy on this very matter a
year ago, the federal government sees this gas now
being needed for consumers, and if in 18 months
there's not something laid out there, they are looking
at alternatives. And I will tell you the alternatives
they'll look at, and UBS and Lehman Brothers hit on it
yesterday. They will look at somehow alternative
financing and who isn't out there that wants to build
this and get on with it?
SENATOR ELTON asked if the process is just short of a business
evaluation.
MR. THOMPSON said that is correct and, in fact, producers may be
saying they are in that phase now and could be. He explained, "I
would venture certainly, in my mind, the business evaluation
phase where I can start taking it to a board of directors is
where now I've got a timetable to make a decision - 18 months, I
have wonderful federal legislation and, hopefully, by next March
or April and this next year, the fiscal package by the state is
done and then you can take that and then more certainty in
Canada and then you can get to that true business evaluation
phase where after the couple of years of detailed engineering to
get the cost honed in, as well as permitting, right-of-way
procurement, you could then go to the board and you say this is
a go-ahead or reject meeting."
REPRESENTATIVE CROFT noted that Mr. Thompson said that it didn't
make any sense for ConocoPhillips to pursue the project earlier
because it was making more money reinjecting the gas.
MR. THOMPSON clarified that decision included two main factors:
gas prices were about $2 to $2.50 MCF but a constant $3 MCF is
necessary to get a 12 percent return; second, a lot of the gas
was being reinjected into the oil realm and there was a very
high oil rate. As time goes on, that very high incremental oil
rate declines.
REPRESENTATIVE CROFT asked if that is one of the problems the
state faces in confronting the internal capital management. He
furthered that the state is not just dealing with the economics
of the project but also with competing economics within the
company.
MR. THOMPSON replied, "Sure. In that case, I will tell you my
advice is you're better off having, at that time, that
incremental oil. That incremental oil rate through gas injection
declines and declines. By 2010 it may be diminimus and it's
something that the companies look at. It's something the Oil and
Gas Conservation Commission is surely looking at too."
REPRESENTATIVE GARA noted, in relation to Mr. Thompson's remark
that companies have a finite amount of capital to spend, that
ConocoPhillips just signed onto a joint venture deal in Russia
and has "angles" on jumping from there into Iraq. He asked if
the fact that ConocoPhillips has committed money elsewhere
should be cause for concern for the Alaska project.
MR. THOMPSON said hopefully, ConocoPhillips will also try to
balance this project at the right time and to its portfolio.
However, ConocoPhillips is a D and P [Development and
Production] company, as are Exxon Mobil and BP. He explained
that those companies have to allocate a certain percentage in
their portfolios. He pointed out that ARCO used to own a 5
percent share of LUKoil, which ConocoPhillips bought. LUKoil had
set a deadline for its bid. He noted deadlines are non-
discretionary in that if you don't meet the deadline, the
opportunity is gone. He said as long as an opportunity is
available, it is called "discretionary" and you may or may not
have to allocate capital. He then stated:
Another reason they want that deal is that purely
development and production. For Exxon Mobil, return on
capital employed - you heard that return on capital
employed for the pipeline being 12 percent, or return
on equity, return on capital employed is a compilation
of all this. Return on capital employed for Exxon
Mobil in upstream development and production was 30.6
percent according to their annual report. Now you
would put money into development and production? Or
are you going to put it in a pipeline that makes 12
percent? The answer is you do want some in 12 percent,
particularly if it's strategic in getting your
products to market. And if you'll notice, and by the
way, that average over there I took for the allocation
last year, it's 2003, I took rough averages and then
rounded up out of the Exxon Mobil and BP annual
reports - you can get a breakdown of how they spent
their capital. About 10 percent of their capital
budget, total budget after they figured out how much
to go to shareholders through dividends and then their
other financing needs, they allocate big bucks
worldwide and average 10 percent in exploration. Very
risky, it's expense, high risk. You can hit and you
can lose so you balance that. Development and
production, that is their bread and butter.
You know, a shareholder wants to invest in these
companies because they're in oil and gas development,
not because they're pipeline companies. So they only
allocate, and this is important to understand, they
only allocated to pipelines and natural gas processing
only about 10 percent. So when you're competing for
the pie, it's not only you're having to compete for
the total budget - maybe only 10 percent of their
whole budget is getting allocated. Now if you take an
Enbridge, a MidAmerican Energy, a TransCanada, I would
suspect it's 80 percent or more that goes to pipelines
because shareholders are buying them because they want
that more constant kind of return, as well as that's
what the business is they're in. Midstream is 10
percent. Downstream, oil refining and retail marketing
was 20 percent and then chemical manufacturing. CFO,
CEOs, boards will discuss what percent of the
portfolio - it's sort of like an individual has to
decide how much in bonds, how much in money markets,
how much maybe in stock. These boards will decide how
much in these phases of the business and last year for
pipelines, natural gas processing, 10 percent of the
capital for those lines of business.
What criteria [are] used? According to a survey done
by the Harvard Business School last year of 700 major
corporation CFOs, 70 percent of corporations make most
of their decisions that you get - you get it in the
bucket - whether or not it gets done is a question,
but at least to make it to the board table, internal
rate of return is one of the criteria and then also
discounted cash flow, net present value - if you look
at all the cash flows in the future what's that worth
today? And then payback period, especially if prices
collapse. When prices collapse, and prices go low,
companies look at payback period and only do things of
short payback, for example. But my years at ARCO, at
mini-corporations, certainly with Alaska Airlines, as
well as Coeur D'Alene Mines Corporation, internal rate
of return and discounted cash flow, net present value,
are two of the most important criteria. And for those
that want to learn more about this exciting topic,
page 9 defines all those. Net present value, flow
stream over 40 years, how much is it worth to me
today? Internal rate of return is that rate of return
on projects that you'd want to use and sometimes
companies have hurdle rates rate of return. You just
saw Enbridge talk about 12 to 15 percent, for example,
and that's fairly common. Twelve percent is very
common. In testimony Exxon gave a couple years ago to
the state they said 15 percent rate of return.
Okay, let's have some fun now. Just quickly - here now
you're the board of a corporation. I'm going to tell
you you've had a phenomenal year because oil prices
have been above $40 a barrel - I should have put 50
but - and you have no capital constraint. You have so
much cash flow that you have no capital constraint and
you have three projects that you can do - A, B, and C.
And these are all over the world. Summing up that
column that says INV - that's investment on the
project. The C1 is the cash flow that would come from
it in the first year and you see the cash flow coming,
positive cash flow in the five years. You can discount
it at 12 percent and you get the net present value and
then I showed you the investor's rates of return. You
have unlimited capital constraint. Which projects
would this board do? All of them. You have enough
money. They all are above the 12 percent rate of
return. They're all positive net present value. Uh-oh,
here it comes, tough decision for the board. Here
comes a brilliant young engineer in asking for
projects that - there's three of them - engineer A, B,
and C and they all argue. And what's interesting, they
all lay out for you projects that are above the 12
percent rate of return - 21 percent, 14 percent. Only
the oil prices have fallen to $30 a barrel and you
don't have $130 million capital you can spend now. You
can only spend 80. It's pretty much like our families.
The family wants to spend more often than what you
take in and you have to allocate, you have to budget.
So this corporation, this board is going to budget,
you only have $80 million to spend and you have three
very good projects. Which two would you do?
A key is, first look at the rate of return. If you
look just at the rate of return, which two would you
do? A and C. Sum up the net present value and see
which two combinations yield the highest present value
for the shareholders - are worth to the shareholders.
[Indisc.] Again it's A and C. You add those two
together and you get $11 million [indisc.] for some of
the big projects. Now which one doesn't get approved?
B. Is it commercial? Yes, it is a very good project -
13 percent rate of return but it never makes the
capital allocation. It is commercial. It is not
competitive. That's the distinction and companies and
shareholders demand that it be competitive.
Would 14 percent make - you have a couple of choices.
You can defer that project to future years or what's
another choice that sometimes an ARCO might use for
certain projects? There are a lot of companies that
would love to have a 14 percent return project that
maybe have some capital. But you know what? If I can
hold on to B forever, what am I going to do? I'll
wait.
Another big factor in just the last point I made,
boards also talk about is this a non-
discretionary/discretionary. We often had to break
down our capital requests into those two buckets and
then it made it to the discussion on those kinds of
criteria - discretionary, non-discretionary. I will
tell you, I've got that clock from the prime ministers
of Malaysia and Thailand. We had a deadline to get the
field on-stream or lose and turn it over to somebody
else to develop. Why did it make our capital
allocation? Actually, it was a pretty good rate of
return because of profit sharing and they took risk.
So it wasn't a rate of return issue but we also knew
that we faced a deadline and maybe it was 18 months.
That's a good one that the federal government is
saying, for example. This also matters - if it's
discretionary, you can hold it and wait until it fits
your portfolio in the future or let someone else do
it.
Now this is an interesting thing. This is a big
decision. Let's get to [indisc.]. How does the gas
pipeline project equity capital fit in the majors'
capital portfolios? And if there's one thing we need
to think about, is the way that you spread risk is
taking a lot of partners. It's very common in
industry. Does Exxon have to spend $20 billion on this
pipeline project? Is it a $20 billion decision for
them? Is it for TransCanada? No. Is it for BP? And you
hear the words $20 billion. It is not. It is not a $20
billion decision for any of these companies. In fact
if we look, they're going to put us at project - I'm
wrong now, they did this before the federal
government. They're going to project finance at 70
percent, $14 billion debt. That's not wrong. We'll be
able to have more because the 80 percent - and then
equity capital - if you just took 70 percent
financing, the capital needed is $6 billion. Three big
companies - how much capital do you have to lay out?
Equity. From the capital allocation budgeting tool,
how much capital do they really have to lay out? $2
billion each - a lot of money. But the $2 billion each
is over 4 years of construction so it's basically on
the - yea, if you look at it per year, and then this
is the total capital spent last year by Exxon Mobil
$15 billion, BP spent 12.4, ConocoPhillips spent 6.2
and the equity capital needed for the line shows you
how much each would spend and that would mean 3
percent, 4 percent, 8 percent of their capital budget.
But a big problem is - remember the other graph that
shows you could fit this capital in but remember you
only have 10 percent in your company allocated to
midstream-downstream because you're not a pipeline
company. People want you - investors and the
stockholders want you to invest in oil and gas
development and so that's an important thing to look
at. By the way, another factor - look at the ROCE
[Return on Capital Employed] that these companies
actually made - 18 percent overall for Exxon Mobil
last year. That's a composite of all the projects and
assets deployed. Sixteen percent in the Phillips - 16.
Does a 12 percent project excite those folks? No. In
fact, 14 percent is pretty tough. It's time to share
risk if we want this on their capital allocation.
Now has the debt worsened? This is interesting. This
might explain some behavior. Here's the debt they
would each take. All of them would have to have a
debt. Divide the debt by three and this shows the debt
each one would have to take. Now this is how much debt
they have. This is amazing - $9 billion debt, although
Exxon has very little ratio of debt to equity. Now BP,
ConocoPhillips has a little higher debt. In fact, if I
was Jim Mahaney I might want an extra incentive or
two. If I were Exxon, I wouldn't even care about the
federal legislation. I might just write a check for my
investment when the time comes.
So, you hear ExxonMobil not asking for incentives.
They just want the federal government to pass the
expedited permitting. BP wanted the other things but
notice Exxon and BP don't want the commodity risk
provision but ConocoPhillips does. I might too if I
had a little higher debt ratio. I might want some
extra assurance on downsides. On the other hand, this
is still very safe. All of these companies - these are
extremely good financial situations for all three of
these.
Now though, a big home run for all of us was the
federal government guaranteeing the debt. That debt
you see there will not go on the balance sheets more
than likely. They'll have to footnote it after the
Enron fiasco but the debt will be owned by the
pipeline company itself more than likely, and that has
to be verified by the project financing terms. But
these companies would report this debt in the
footnotes of their financial statements and some
investors would look at total debt that you see there,
and a bit more of an impact on ConocoPhillips and
Exxon Mobil, but still very, very financeable.
And then let me try to wrap up here in the next few
minutes. You know, you don't just - when you go to the
board - when I've presented big projects within Alaska
to the board of directors of ARCO, I just didn't - we
ran the projects at current oil and gas prices but we
always had a sensitivity analysis after so many of us
having lived through the down cycles of low prices.
All of our projects had to make a 12 percent return at
a low side oil price. At that time we used $12 a
barrel. That's a sensitivity analysis. Most
corporations do that. We do that at Alaska Airlines,
Coeur D'Alene Mines Corporation - different
sensitivity. The project had to be 12 percent at $12
oil. BP's CEO, John Brown, in a speech to investor
analysts in New York last April, mentioned that BP
test all projects at a downside price now of $20 a
barrel. That's very common in many of the companies
now, and many companies run gas projects with a
downside of $3.50 per MCF.
Remember when we did that example where we had to
choose and we left out one project and we did two? You
then run, if those are your two, you then run your
whole company financials, if you made that your
capital pot, what your corporation looked like and you
looked at the effect upon cash flows, the company
value, the debt equity mix in the future, and then the
final portfolio is decided by executive management and
the board of directors.
The CEO is the most leveraging single person in the
decision with the board. When you have projects that
are tough and you have to make some tough calls,
that's very important. And it's not only the local
folks of companies. I think they argue very hard for
Alaska. It is the CEOs that can finally get this over
to that phase that we need it to finally be decided.
You look at a lot of risk in the upstream-midstream
projects. These are some of the risks. I think Ron did
a great job describing pipeline risk and, you know,
for upstream and midstream projects you have
forecasting risk of production, the exploration-
geologic risk, political risk, permitting, and what
have you. Projects must be resilient to those risks.
That's why when you heard the Governor and when you
heard Pedro Van Meurs yesterday, whom I highly regard
- now I don't agree with Pedro on one thing, that this
capital level could make these people go bankrupt or
put them into dire straights. $20 billion for one
company - he's right, but I don't agree with him on
when you split it up among three or four companies and
spread the risk that way, it is not as a percent of
their capital spending each year a big risk. And a
downside might be not a zero return, it might be if
things collapsed, very high cost overruns and what
have you, you could have impact but I would bet even
then your return is 6 to 8 percent, not like with
exploration. I've drilled several dry holes in my
life. That's a pretty negative return. I had a few
successes too. That's the only thing I disagree with
him [about].
I do agree with him that risk mitigation now, if we
want to get that project to get in the capital
allocation of these companies that make 16 to 18
percent return on capital employed, then we have to
take part of the risk and I think part of it is that
equity ownership, and then consideration - I don't
always know what's going on behind the scenes in the
profit sharing, but it's something that needs to be
considered. All the deals I did with other countries
in my last two years at ARCO had those two factors.
They participated in the equity and they had the
profit sharing.
This is just an educational slide [18] for all of us.
Commercial means this: the investor rate of return
exceeds the cost of capital. I believe it was - I
can't recall if it was UBS or if it was Lehman
Brothers yesterday. You take a company that had to pay
7.5 percent on their debt, and then their shareholders
are running at 12 percent return on their stock
appreciation every year. The cost of capital would be
9.75 for that company when you weighted it. In most
companies there's a premium that you put on that. So,
an investor rate of return to be commercial for many
companies here is 12, is commercial. Competitive? For
an Exxon Mobil, for their upstream projects last year,
their return on capital employed was 30.6 percent.
They have some awesome projects. So, competitive, when
you hear that, I believe the Alaska gas pipeline
project today, especially after the federal
legislation passed, is commercial today and no one
would convince me that it's not commercial today. It
does exceed the cost of capital on return. Is it
competitive to get in the capital allocation
portfolio? No. That's the distinction. Keep in mind
that last point.
Corporations differ in IRR [Internal Rate of Return]
hurdle rates. Return on capital employed of many
pipeline companies is far less than producers and they
allocate a larger percentage of their capital for
pipelines and those kinds of companies might be very
interested in 12 to 14 percent.
So here [are] the conclusions. [Slide 19] Getting the
Alaska pipeline project into the major companies'
portfolios is challenging. I believe the project may
be commercial today, especially after the federal
legislation, but it is not competitive. It is
discretionary versus non-discretionary, although I do
like the federal government's point of trying to nudge
it and in visiting with the undersecretary of energy,
trying to nudge a little bit of it to being non-
discretionary within 18 months. It would be nice for
the State of Alaska to do the same I think.
Investors who desire a commercial rate of return are
important to consider as investment partners. I'll
talk later about Pacific Star Energy. I will tell you
this is our number one project. It is the only thing
in our global portfolio and we would love to have a 12
percent return for Alaskans and our multiple partners
can mitigate risk on any one firm. That's the way you
spread risk. If somebody says this is too much capital
to risk, get 10 players in. That's very common in
exploration to have three or four instead of just one
or two.
Government assurance of fiscal certainty is essential.
I could not take this to the board - I had a slide
each year when I presented in Santa Barbara in January
to the board of directors. It was called political
climate in Alaska and I would talk to political risk
and what everybody was doing in the legislature and
with the administration and what was the risk for the
next outlook. I was fortunate that often the outlook
was very positive, certainly for exploration and
production and I think a lot of the things that you've
done in the last few years has helped that segment of
the business. Now it's time to address the fiscal
certainty on the downstream side, midstream side of
the gas pipeline. That's the next big thing. Canada
has to do the same and I know the producers and
pipeline companies are working on cost reductions.
Sharing of risk by government is essential. I will
tell you I believe, and I'd recommend, you do the 12.5
percent. Now I will tell you in my own personal
opinion, UBS yesterday gave an example of 25 percent.
I wish they hadn't done that. I found it a bit
confusing because the 12.5 percent - you already own
the supply - your royalty gas, so that is not a risk
for you. And then I believe you can find good
customers and the state ought to be working on good
customers right now. 25 percent though, you're going
to have to make deals with producers on the supply and
that could be a bit more riskier. 12.5 percent yes.
The other you have to think about long and hard, not
to rule out.
And then local ownership I'll talk about later in the
second presentation. Local ownership does add
incremental value. We have a report consultants say
that shows for the first time quantitatively if
profits off the gas pipeline are left here in Alaska,
how many more jobs and how much incremental benefit it
does to the economy and it's the first time it's ever
been quantified to my knowledge as far as a private
company owning part of the gas pipeline. It could mean
an additional 20,000 jobs and $1.3 billion to the
economy over a period of time if you do that, and
we'll talk about that later.
SENATOR ELTON asked if it is fair to say that it is more
essential that the state take an equity position in the natural
gas pipeline if the pipeline is producer owned, and less
essential if the pipeline is owned by pipeline builders.
MR. THOMPSON said he would advise the state to take an equity
position of at least 12.5 percent regardless of who owns the
pipeline. He added that is based on his intuitive judgment,
having seen country after country benefit by getting the profits
of moving and selling their own gas. He indicated that the
equity would amount to about $50 million each year, which he
would elaborate on later.
SENATOR ELTON asked, in the context of taking a shipper's risk,
if it is less essential for the state to have equity ownership
if a pipeline company is doing the pipeline.
MR. THOMPSON replied:
In either case, if I were the state when you had the
equity ownership and then with your gas, I would also
look at what could be customers on the other end of
the pipeline that would be willing to buy your gas,
including we figure out all of the instate use. I'll
talk about that more later in the second presentation,
and that those firms are taking the shipping risk -
the utilities that buy your gas are taking your
shipping risk, as well as maybe firms within the State
of Alaska that [are] buying Alaska gas could take the
shipping risk. It may be, when you talk with customers
that the state has to share in that shipping risk and
you won't know until you go to the customers and the
deals. But certain customers, even for pipeline
companies you heard, will take that shipping risk and
I think they will too for your share of royalty gas -
for part of it anyway.
REPRESENTATIVE GATTO asked why everyone who speaks to the
committee is encouraging the state to be an investor. He
questioned whether the reason is that the speakers are
charitable people and want to see the state do well or whether
there is some inherent advantage to their positions.
MR. THOMPSON said he is saying that as an Alaskan advising the
state on matters to consider. He said if one looks at whether
the state should have invested in TAPS, the answer would have
been no due to the cost overruns on construction but TAPS is the
best operated pipeline in the world. He noted that a tariff of
$3 per barrel amounts to $1 billion per year in revenue and the
amount was $2 billion during its heyday. He said members will
see later the economic benefit if more of those profits are kept
instate to be redeployed, versus the pipeline tariffs going to
Houston or London. He then said he feels blessed to have worked
in Alaska and then moved to other countries for his last two
years with ARCO to see what the other countries have done to be
highly successful in the natural gas industry. That experience
motivated him to tell the state to do the same thing.
CO-CHAIR SAMUELS asked if it makes sense to separate the
capacity from the investment in the pipeline itself and take a
percentage of one and a percentage of another so that the state
could be an investor in the construction of the pipeline but
still only take the 12.5 percent royalty share in the capacity
itself.
MR. THOMPSON said that financial calculations have to be made.
TAPE 04-33, SIDE A
MR. THOMPSON indicated that making those decisions boils down to
running the economic cases so it is hard to determine without
seeing all of the numbers. He said hopefully Mr. Van Meurs and
his team are doing that.
SENATOR FRENCH asked for some examples of places where
collaborations between governments and pipeline owners did not
work out.
MR. THOMPSON said he has seen some examples of collaborative
exploration that were unsuccessful because you can lose
everything. Some countries, because they want a stake in the
production, will take the stake in exploration and lose when the
holes are dry. He said the pipeline cases that he worked on were
good for both the companies and the governments and did not
require a lot of risk. He deferred to Mr. Van Meurs for a more
detailed answer.
CO-CHAIR SAMUELS thanked Mr. Thompson for his presentation and
asked Mr. Marushack to present to the committee.
REPRESENTATIVE BUD FATE interjected to thank Mr. Thompson who he
has had lengthy discussions with. He urged members to partake of
Mr. Thompson's knowledge of corporate inner workings.
MR. JOE MARUSHACK, Vice President of Gas Development for
ConocoPhillips Alaska, informed members he would also be
speaking on behalf of BP and Exxon Mobil. He noted he would be
speaking on the ConocoPhillips decision-making process. He added
that he would generalize about the decision-making process and
then talk about Alaska gas in that context because Alaska gas is
different and strategic. He would then make sure he answered all
questions in the [September 27] letter. [Mr. Marushack's dialog
accompanied his PowerPoint presentation. A copy can be found in
the committee file.]
For major oil companies, projects, opportunities arise
in many ways. There's outside proposals, there's
grassroots initiatives, there's management directives.
Regardless of the size and the complexity of the
projects, the initial approach to the evaluation
follows the same path. However, the rigor with which
you might go through the process could be very, very
different.
All projects are evaluated in terms of their value
drivers. The value drivers primarily are technical,
commercial and political and, in the case of the
Alaska gas pipeline, each of those are pretty extreme.
Companies expect to earn returns commensurate with the
project risks and the project risk in the Alaska
pipeline is pretty significant. Models are created.
Discount rates are assumed. We've got various ways of
analyzing projects there that we'll talk about a
little bit - discounted cash flow, Monte Carlo -
basically Monte Carlo would be a form of probability
analysis, decision analysis, and then that analysis
goes into your corporate overlay where you're looking
at the financial strength of your project, shareholder
expectations - and you're going to hear me talk an
awful lot about management judgment because, in my
view, the Alaska gas project is an awful lot about
management judgment.
The process we use in the key drivers - there [are]
four or five major items there that you look at from a
larger mega-project basis. Clearly [on] all projects
we do analytical data and I'm going to talk to you
about some of the analytical and metrics we do in a
case there. The only difference between this project
and other projects is the size of the models, if you
will. The models on the Alaska gas projects are multi-
megs. Some of them, a simple project could be a
spreadsheet, some you just do over and over again.
Commercial arrangements - those can be hard or tough,
not necessarily depending on the size of the project.
A lot of times, the commercial arrangements are based
on the relationships you've got in the country you're
dealing with, as well as the prior history of that
area. I would expect commercial arrangements on this
project would be very significant - the financing
issues very significant, a lot of detail analysis and
a lot of detail arrangements.
Project management - Ken Thompson talked a little bit
about that and I'm going to talk about it in a little
different context because project management, once we
get through the federal legislation and the state
legislation and the state contract, this project is
all going to be about project management and managing
that - managing costs and managing risk.
The risk mitigation plans - what you've seen on the
Alaska gas project are pretty much unprecedented risk
mitigation plans. We've asked for several acts of
Congress. We've been fortunate that we've achieved
now, assuming the President signs, many of those. When
it comes to the state, we've got the Stranded Gas Act
application. These are pretty much unprecedented in
the U.S. to need this kind of legislation and to be
fortunate enough to be making progress on them.
And then alignment of the parties is important.
Alignment of the parties - one of the things that -
the question was asked a little bit about what does
state ownership do? State ownership, in my view, the
single biggest thing it does is it aligns the parties
and we'll talk in more detail about that.
Once you add all that together, you bring in your
unique analysis. You looked at this gated process
we're going to talk about and your senior management
input. I can tell you that on this project, senior
management input happens every single month, every
single week, sometimes every single day. This is a
very, very important project to our senior managers.
Typical value drivers - what we're really
concentrating on here is maximizing value. Revenue,
expense, capital and schedule are the primary
components of that. If you break that - the right-hand
side are issues we're working on right now. The left-
hand side are issues that we're trying to mitigate
where we can, but basically we take what's left over
from that. In terms of the revenue side, we're all
price takers, not price makers and so the revenue will
be what it is. Clearly we're looking at various
scenarios but the revenue will be what it is.
On the expense side, once we get this project
engineered we're going to know what the fixed and
variable costs are fairly reasonably. And actually,
what we're doing right now is working on taxes with
the state. Those things though, you're left with after
the project is up and running. The right-hand side is
what we're concentrating on right now - capital and
schedule. We're trying to control capital and, in
terms of schedule, we're looking at the project
management process in order to control that capital
and put in there a timeframe that actually works.
You notice the value drivers here from the producer
perspective, financing is not on that sheet. The way
we look at the projects, we look at projects to try to
get a fundamentally good project. Once we have a
fundamentally good project, a viable project, then we
figure out the optimum way of financing the project.
Now we haven't completely discarded financing because
we did draft the loan guarantee language. The loan
guarantee language is actually something that helps
after we've moved to those next steps, so it helps in
the financing process but it's not a key value driver
at this stage of the game from the producer
perspective.
We think alignment with the state and the producers is
something that really is addressed pretty well in the
key drivers here. What we're really trying to do - we
want the wellhead value to be as high as possible. We
don't control the price so we are trying to control
the cost. The costs of processing and transportation -
that is essentially the capital costs of the project
and how you're going to pay the capital costs of the
project. Now why are the producers interested in this
project from an upstream standpoint? Because those
costs affect our upstream, our wellhead value. We're
trying to control the costs, if you will. The whole
project from some liquid hub up, in my view, is an
upstream project and I understand why it's a big
pipeline and a midstream asset and people talk about
that but the project from Alberta north is an upstream
project.
Talking about some of those tools, and this is just a
very, very simplified measure of the tools that we use
there, this is a decision tree analysis. A decision
tree analysis can go out, page after page after page
on the right-hand side, given all of the various
things you're looking at but what we're trying to do
here is we're looking at various scenarios. We're
looking at you'll see P10, P90, P50 there. You might
consider some of those to be price. We look at various
price scenarios. You might consider some of them to be
cost - P90, P10, P50 are costs. There might be
reserves. There might be exploration. These things can
go out a long, long ways. What I'm trying to show here
though is what the decision tree does for you is it
tells us where are the key items that we really need
to concentrate on. What are the key risk elements that
we've got out there? It does not give us a single
answer. No place in here will we get a single magic
bullet answer that tells us we're ready to move
forward with the project. You've got to add together
all the various issues, including the strategic
implications to be able to move forward.
What measures do we use? We use the standard economic
measures. We use after tax cash flow. We use discount
rates. We use payout. We use profitability index. We
use rates of return and we can describe what those
items are and how they're calculated. The bottom line
is no single one of them is magic. No single one of
them counts necessarily more than any other one. A lot
of times folks will ask us what are the numbers or the
hurdle rates. First of all, there are no single
numbers because risk for every project is different.
Second of all, the strategic value of the project
requires different numbers in different areas. Third
of all, even though if there were some cutoffs, some
general cutoffs, we don't share those things. We don't
share them with Exxon Mobil. We don't share them with
BP. We don't share them with the public. That would be
a competitive disadvantage.
How do we communicate then how we're able to talk
among others given when we don't share prices, we
don't share discount rates? Well, we come up with a
third party price forecast, if you will. We bring
those into our model so we can speak on the same
basis.
CO-CHAIR SAMUELS asked where the economic risk would fit in the
decision matrix of a scenario in which ConocoPhillips might
invest all of its money in a project in the Congo, which could
then suddenly nationalize the project afterward.
MR. MARUSHACK replied:
You try. We may have - when we go way out to the
right-hand side here with various other elements,
there we may consider the cost of - the probability of
getting nationalized. We may consider the probability
of new taxes. Clearly, in Alaska, we have to consider
that because that's what our Stranded Gas Act
negotiations are about. Let's agree on what the take
is and let's agree on it for a long period of time.
But it's not that simple, Representative Samuels, and
actually this is where you get into management
judgment and strategic value. Many times we'll develop
contracts and those contracts will have lots of
elements in order to protect ourselves. But we have
experience with being nationalized. In the '70s we got
nationalized in Venezuela. Now we're back in
Venezuela. ConocoPhillips is probably the single
biggest investor in Venezuela, based on relationships,
based on opportunities, and based on risk reward.
Obviously, if you're going into a country where you
think you're nationalized, you're going to want to be
rewarded for that and you're going to want to protect
yourself as much as possible. It's also tied in with
the relationship and the alignment issues and maybe
this is one of the more important issues. A lot of
times what we've done in order to protect ourselves is
we do a deal in the foreign country on that asset,
then we do a deal in the market, then we do a deal in
the midstream, so we're all tied together. So
nationalizing any one part affects the other parts
here. Again, it's an alignment issue. You try to get
yourself aligned. The more you can get aligned, the
better off all the parties are.
CO-CHAIR SAMUELS announced that Senator Hoffman, Representative
McGuire and Representative Berkowitz had joined the committee.
MR. MARUSHACK then said he would speak about the project
management process:
This is part of a gated decision making process. The
detailed project reviews include analysis and review
of the project at all stages here and the stages
change. The process is designed to mitigate risk and
exposure to the corporation. This slide [8] that
you've got right there is physically part of an
internal project management process. It's
ConocoPhillips' version. Again, Exxon Mobil and BP
have similar processes although everyone calls their
process a little different.
In stage one or the appraisal process, there is
actually an area probably outside of this but we can
consider all in the appraisal process. In that
process, you're identifying and framing the concepts.
You're evaluating those concepts. One of the things
that ConocoPhillips did in this process is we didn't
look just at the pipeline, we looked at GTL [gas-to-
liquids] and we looked at LNG. LNG and GTL came off
the table fairly - well I was going to say fairly
quickly after about $14 million that came off the
table. We identified the pipeline project as having
the best single opportunity out there. Then we got
together with BP and Exxon Mobil. We formed a project
team. We spent $125 million on the appraisal process.
What the appraisal process does to me is it tells me
what I don't know. It tells me where my risks are so I
can start mitigating risks. Out of that then you saw
all the risk mitigation measures that we've
implemented over the last three years since then.
The next two stages would be the optimize and define
phases. Further refinement and project - it moves
toward a single design. It occurs in these phases. Key
commercial agreements are entered into, detailed cost
estimates and plans. The work done in this stage
should narrow the range of uncertainty to allow a
final decision to be made on the project. For the gas
project, this will take about $1 billion in order to
get through these next two phases. Now the reason I've
broken up that bottom line you'll see into dashes, is
because we will not commit $1 billion, I don't
believe. That's not normally how it works. We usually
work in phases and so you'll commit some amount of
dollars to do the first thing that you need to do to
see how that affects the process. Then you'll go back
and get some more money. Finally you'll be up through
- but it will take you about $1 billion, maybe more
than $1 billion to get to the stage of the AFE or
authority for expenditure - the decision point.
Once you've got to that point there, then you're into
the execute and operate position there. The execute is
where we'll spend somewhere between $18 billion, $19
billion. If you don't have to go from Canada south,
you'll spend something like $15 billion. A key element
on here is a natural tension that we see between those
of us who have to implement this and those who want to
see the project move faster and faster. This must be a
very disciplined process. Where you see projects get
off track and you go back and you do analysis of what
happened is they took shortcuts on their project
management process. When you take shortcuts on your
project management process, you're clearly going to
have cost overruns.
The next slide [9] hopefully gives a summary view of
how that happens. During concept and feasibility
phase, those are the stages where we have the ability
to make material changes - material design changes,
consider the risk opportunities and how to mitigate
those. The cost of doing those is fairly low. We've
spent $125 million, not $1 billion. As you're moving
into design and execute though, every stage you move
into, the cost of making changes gets higher and the
opportunity to influence how you make those changes is
less. Finally, when you're in the execute stage, if
you've found that you short-circuited the process and
you've got train wrecks that should have been picked
up in either concept or feasibility, you can't change
all that much and the cost of change is very, very
expensive. An example might be TAPS. Through the
execute phase, you saw the project go from what - $1
billion to $8 billion, $9 billion - something like
that, and the problem with that is not everything was
done in order on concept, feasibility phases of
analysis.
In terms of the critical elements - we've completed a
$125 million study. The study concluded the project
was technically feasible but had significant risks. We
identified where governments could play roles and
we've been working to address those risks. Where we're
at on this right now is the State of Alaska fiscal
certainty right at the very top. That has to get done
in order to move forward. That's the single most
important issue out there right now and it's also one
that between the producers, the administration and the
legislature, we control that process.
We've got passage of the federal legislation - very,
very positive series of events there. The predictable
Canadian regulatory process - we're not saying we need
new laws. We're not saying we need new regulations but
we do, as we're getting progress on the first two
items, need a process to make sure about how the
regulatory process in Canada will work, how it will
work with aboriginals - and a long-term favorable
market outlook.
This project - one of the questions you asked is what
gets shared with your board. I'm going to go back
through all those questions here in a minute here.
This was actually something that's been shared with
our senior management and our chairman. I don't know
if it made it to the board or not but I suspect it
did. What this tells us right here, this project is
absolutely unique. It's not like anything else we've
ever done. I think Pedro may have mentioned that this
is the biggest project in our portfolio - I believe he
said that - clearly for ConocoPhillips. He's exactly
right. When we've been doing planning, when we've been
doing logistics, there are no models that cover a
project as big as this. Hence you go back to the
project management process and you really have to have
that well understood.
One of the key elements that we've talked about is
this assessed timeline on here. This was included in
our application but I thought it was important to talk
about where we're at, where we're going. Right now
we're working on government frameworks. We had a big
success this week. We're making, I feel, progress with
the state. I think the things you've heard from the
Governor and Pedro yesterday were very positive. A key
element, again, on that government framework is the
fiscal contract.
As we move to the next stages, the next stages would
be to begin environmental work for the FERC/NEB
application, detailed technical work to be completed,
so that those committees of an open season have
sufficient assurance that the project design, cost
estimates are accurate so that they can make binding
precedent agreements. We hold an open season. If
sufficient gas is committed, we finalize the design on
whatever gas has been committed and at that point in
time, then we're looking at trying to define the
right-of-way and finalize that.
Finally, we get to a record decision after we get all
permits back. Once you're in the record of decision,
then you're starting to spend very, very significant
dollars on procurement and on construction.
Procurement and construction will take - what we're
talking about is, again, pretty much unprecedented. GE
[indisc.] compressors are the largest compressors on
earth. Those are actually backlogged compressors right
now. Steel that's 48 or 52 inch, inch and a half
thick, X-80, X-100, not rolled right now in any place
in the world. Clearly we need 40 percent of the
ability of the world to make that over a very long
period of time. So when folks talk about trying to
streamline or fast track this process, we've got a lot
of people - a lot of people who've done big projects
think this is a pretty aggressive schedule. In fact,
if you had one of the engineers here talking to you
rather than the commercial people, you'd have a little
different spin on how aggressive this was.
We think first gas about 9 or 10 years after we're
into project planning is very aggressive and we're
pretty excited. It's a good opportunity.
Before I conclude, I wanted to go back through what,
Representative Samuels, the letter you sent us and
make sure I at least made an attempt to answer all the
questions. Frequency of decision-making and whether
annual or otherwise? We do annual budgets. Our budgets
are approved on an annual basis. Major projects and
major opportunities are reviewed on a quarterly,
monthly basis. On this project, we get a lot of input
on this on a very, very regular basis. We're not
talking, I don't believe, in this project when we go
to the board of saying commit $20 billion or $6
billion or whatever the number is. We're talking about
a phased approach. Clearly what we would do is we
would lay out an approximate timeline with approximate
costs in it and get that approved but we're only
approving this on a phased basis.
Percentage of equity and debt assumed for purposes of
comparing costs of projects? We assume all projects
must pass the hurdle rates if we're putting 100
percent of our own money into it - 100 percent equity.
Actually, a capital budget is an equity budget. How
you finance out of that capital budget is then a
separate series of issues. Clearly on this project
once we move forward into these phases where you're
investing serious money, billions and billions of
dollars, we'll be looking at how to finance that,
we'll be looking at how the federal loan guarantees
work. The federal loan guarantees, though, are not a
panacea because you still have to work through either
the project or the corporations. What the federal loan
guarantees really did - going out and trying to get
$16 billion in capital is, again, unprecedented. We
thought the loan guarantee there would help make going
out and getting the financing a little bit easier and
we hope through the loan guarantee we also could get a
little reduction in the interest rate that you pay
because you have the federal government way behind all
of the project there, which may reduce the toll a
little bit also.
Net present value rate of return, hurdle rates - I
think I've discussed them. Limitations on available
capital? Again, this project is really, really
different in that regard. This project is a strategic
project. When you hear Phillips' executives talk about
this project, you hear them talk about Alaska as a
legacy project, a legacy asset. Including the Alaska
gas project for us is our biggest opportunity. It has
the ability to book substantial reserves. This is
being reviewed as a project that needs to get funded
in the capital - when we've got the risk and reward
balanced right.
P50, P90 sensitivities - we've talked about those a
little bit. Risk of the pipeline project versus
exploration - I'm not exactly sure what was meant
here. Exploration is a whole different concept in my
view where you know that the money you're risking has
a very high probability of zero return so that's built
into your corporate portfolio. The Alaska gas project
is very different. You're not going to invest $6
billion, $20 billion on a gross basis unless you think
that this is a project that makes sense for you.
Diversifiable risk versus non-diversifiable risk -
again, I assume this is a question that is - are the
oil companies in the business of taking risk or not?
We're in the business of taking prudent risk and so a
lot of what we've done is trying to address how we
limit that risk and how we minimize the risk and make
this a good project for our shareholders.
Factoring the consequences of failure to invest?
Again, this may be code for reserves tax and I'll
assume it is because by adding additional costs or
burdens to the project does nothing to improve the
viability of the project.
Imposing a gas reserve tax sends a strong negative
message to the same folks that we're trying to get to
make a strong strategic decision to invest up here. It
increases the perception of project risk and it really
moves my team for how to get this project done into
how to fight off a reserves tax that we don't think is
justified so it takes time and sets back the project.
Ranking potential projects? Clearly there's ranking of
potential projects. Alaska and the Alaska gas project
is very, very different. When you see companies do
these big strategic deals - LUKoil, things like that,
sometimes they're in the budget, sometimes they're not
in the budget. They're strategic decisions though that
aren't probably part of the normal way that you
allocate capital and I would view the Alaska gas
project as having many of those characteristics.
Materials available to and in the role of management
committee and board of directors? Our chairman is our
decision board on this project. He knows an awful lot
about this project. He's very interested in this
project. He will, as I think as Ken Thompson said, be
highly influential about what goes to the board and
what the board approves. I feel pretty good that
through a process like this you get to know your
decision makers pretty easy, you know what they're
looking for. Clearly it's my job to take him all the
information - take them the decision trees, the
political aspects. It's his job then to say have I got
the risk and reward balance right and make the call on
the money.
So, in conclusion...
CO-CHAIR SAMUELS interjected to say the consequence question
wasn't just aimed at the reserves tax, it was also aimed at what
happens if the window of opportunity closes for Alaska as the
market shifts to LNG or an entirely new source.
MR. MARUSHACK said he does not actually believe in the window of
opportunity. He believes in making all projects as economically
feasible as possible and moving forward to fund them. He stated:
We want to do every economic project to increase the
shareholder value that we possibly can. Now in terms
of gas, do I worry that the price of gas is going to
get too high and you're going to get fuel switching?
Yea, I think that's a legitimate issue. Do I think LNG
is going to ever close the market so that there will
never be room for Alaska gas? I don't believe that at
all. I think LNG has finite permitting problems - I
mean we're seeing that on projects we're trying to do.
I think you need a diversified source of U.S. energy.
I think Alaska gas is a very positive. I think it is
something that people are going to want to see and
it's just a question of if the market is going to
support that or not. The way I tend to look at this is
I want to bring these projects on as quickly as
possible. I do not have any fear of competing with LNG
projects. I do have a little more fear of too high a
price.
MR. MARUSHACK then continued his presentation.
Okay, in conclusion, I just wanted to reiterate here -
very large project, largest infrastructure project
that we can find, no models that really work in this
case, no logistics models, you know, we're kind of
looking at military models. That's about the only
thing big enough to make any sense to us. Size of
scale creates a lot of risk, a lot of risk when you're
talking about the amount of dollars here. There's no
single metric approach or criteria. We use a
discipline process designed to reduce our risk. Lots
of gates - when we're spending money, that's a
positive case. Folks always want to know when do you
commit the $20 billion. Actually, in no project do we
commit to full funding until we're actually starting
to buy steel and drill or whatever it would be. We
want to avoid artificial deadlines that increase cost
and risk. For the priorities, we'll try to develop a
strong base project, follow a disciplined project
management process, get our deal done with the State
of Alaska so we can move on to the next phases.
Representative Samuels, with that I'm here to answer
any questions that you may have.
CO-CHAIR SAMUELS informed members that he and Mr. Marushack have
discussed proprietary information, which no one wants to give
out and the difficulty of attempting to speak for three
companies. He thanked Mr. Marushack for providing generic
answers to questions, as that is what he asked for.
REPRESENTATIVE GARA asked Mr. Marushack to address the timeline
he mentioned of 2014 as the date gas could be on line. He also
asked Mr. Marushack where he stands as far as seeing the project
as financially feasible and, if he sees the project as feasible,
how soon he thinks gas can be on-line and whether the state's
goal of getting that gas to market in 2012 can be met.
MR. MARUSHACK said, regarding getting gas on-line by 2012,
ConocoPhillips and BP have operating experience on the North
Slope. All three companies have a long history of investing and
working on very big projects. He said he would like to bring the
project on in 2012 too but when ConocoPhillips laid out the
plan, it saw 2014 as the best possible case. He said fast
tracking has safety and environmental implications and this
project is too big to take any such risks. Regarding the tax
mechanism and financial feasibility, he said ConocoPhillips and
BP looked at how to make this project go forward and recognized
that federal mechanisms were needed. Together with Exxon, the
three companies developed enabling legislation. The companies
still believe the tax mechanism is very important but they will
continue to work on that in Washington, D.C. while it is
negotiating with the state. When they complete negotiations with
the state, they will look at where they are at on the federal
side, look at the market, and then reassess and decide whether
to move forward with the project.
REPRESENTATIVE GARA asked if he would be working on the $2 low
price guarantee at the same time he works with the state. And
then, assuming that he doesn't get the low price guarantee,
he'll see what he gets from the state and then decide whether he
still needs the low price guarantee.
MR. MARUSHACK said he would call it a tax credit, not a low
price guarantee. He explained that a tax credit has not been
included in any federal legislation but he believes it still has
some value. He plans to work with the state to get a deal done
and then look at the state deal, any federal legislation at that
time, the market, technical feasibility of the market, and
decide how to move forward with the project. He said if prices
drop substantially, that would be an important component. He
assured members that he is willing to move forward as rapidly as
possible to get the state deal done so that he can begin to move
into the next phases.
REPRESENTATIVE CROFT asked if ConocoPhillips would commit to
build the line if it got the federal tax credit.
MR. MARUSHACK noted that ConocoPhillips has said in the past
that if the legislation out there was enacted and it had a deal
with the state, it could move to the next step. He said the next
step is investing the $1 billion to see if the project is
feasible. Right now, ConocoPhillips believes it has a $20
billion project. If, after the design engineering, the project
cost is $40 billion, the state and ConocoPhillips have a serious
problem. Therefore ConocoPhillips will invest a substantial
amount of money to move forward if it has the pieces.
SENATOR ELTON said he first heard about the 18 month provision
in the federal legislation that morning and asked how that will
affect the decision making process and the magnitude of the
issues that need to be addressed.
MR. MARUSHACK said it does not affect him because ConocoPhillips
and the producers want to get a deal done with the state as
quickly as possible so that it can go before the legislature
this session. He noted the reasons are high prices, the state
wants the project, the producers want it, and the timing is
right. He repeated the 18-month window is not as important to
him because now that the federal legislation was enacted, he
wants to get the deal done with the state as soon as possible.
CO-CHAIR SAMUELS thanked Mr. Marushack and announced a 6-minute
recess.
CO-CHAIR SAMUELS reconvened the meeting at 11:30 a.m. and
informed members that Mr. Ken Thompson would address the
committee on the economic impacts of Alaskan ownership of an
interest in an Alaska natural gas project.
MR. KEN THOMPSON, Pacific Star Energy, gave the following
presentation.
What I'd like to talk about now, really it is a
different hat - before I talked about - was asked to
talk about the capital allocation as a past, retired
executive of ARCO. Now I just want to talk as an
entrepreneur in Alaska and about a start-up company
called Pacific Star Energy. What I really want to show
is the results of the first ever-quantitative socio-
economic study of the impacts on Alaska if Alaska
companies, whether it's Pacific Star Energy or
different companies, if Alaska companies can have
ownership. If Alaskans have the chance to have a
mechanism to invest themselves, what kind of impact
would that mean over the next two or three decades?
... I'll talk about the vision of Pacific Star Energy.
I'll talk about our value added proposition - what we
think we can bring to the table working with producers
or pipeline companies in the state. And then most
importantly, we'll share the results of an economic
impact of Alaska company ownership in the natural gas
industry and that was prepared by an outside
consultant, Northern Economics Incorporated here in
Anchorage. And we asked them to say what if that 10
percent was owned by a company in Houston or London
versus what if that 10 percent was owned by a company
here in Alaska. What is the difference? Many benefits
accrue regardless of who invests. There is a
difference if some ownership stays here and I'll talk
about the implications of that and recommendations.
A little bit about the vision of the company. We
started two years ago and PSE, the way we look at it,
will become an integrated natural gas consortium of
Alaska. Our goal for the next few years is to have a
10 percent interest in any North Slope gas pipeline
project to Alberta or a 20 percent interest in the
North Slope gas pipeline from the slope to the Alaska
Canadian border. You heard yesterday, I believe it was
Lehman Brothers or perhaps it was UBS that talked
about financial instruments in a master limited
partnership way of investing that it may make a
difference on the ownership for us whether we go into
the Canadian segment or not.
Importantly though, we are one of the only companies
talking about what we'd do with cash flow from the
pipeline. Our vision would be - and I used to manage
these businesses for ARCO years ago in the Lower 48 -
we would take one-half of our cash flow of our share
of the gas line and distribute back to our shareholder
owners, individual Alaskans, Alaska companies. The
other half of the cash flow, our business plan calls
for reinvesting in the state and the different ways
would be in hub gas distribution centers, one near
Glenallen, for example, and also we are interested,
like the Alaska Natural Gas Development Authority and
we're working cooperatively with them, for example, on
spur lines into Anchorage by 2015 to supply gas here
as gas declines from the Cook Inlet.
We also are examining interest in natural gas
processing. We would see taking part of the gas
liquids, like propane and butane, for distribution in
Interior communities, as well as Southeast Alaska. And
we're not ruling out niche petrochemicals. We have
done some work on that. That's a tough one to make
commercial in Alaska, although we are continuing to
examine small scale. In other projects, I've looked at
very large scale and have not been commercial or
competitive. We're taking a look at just niche
petrochemicals down on the Kenai Peninsula that could
be readily shipped to the West Coast.
REPRESENTATIVE CROFT asked for an example of a niche
petrochemical.
MR. THOMPSON replied, "Right now one that we're looking at would
be - we would spur a pipeline into Anchorage that would tie into
the Enstar system. It would also allow for additional gas
distribution as the Cook Inlet declines down to the Kenai
Peninsula. We would build a small niche petrochemical plant
there that would mainly manufacture ethylene and then
polyethylene resin - it's a feedstock for plastics that could
then go to other chemical plants in Asia. Although that's a very
small part of our business, it would be something into the
future.
MR. THOMPSON continued his presentation.
Near term, a percentage interest ownership in the gas
pipeline - in fact, if the state does not own 12.5
percent equity ownership, we would gladly take any
percentage that you don't take. So if you don't take
the 12.5 percent, we will. At least that money would
stay in Alaska. If you take 6.25, we'd be happy in
pulling together Alaskan investors to invest in all
6.25. That's what we're essentially looking at. We
were very pleased to be brought into the consortium
with MidAmerican Energy. MidAmerican Energy owns just
over 80 percent and we were pleased to be brought into
their consortium this past year as a just under 10
percent owner and then CIRI is also a part owner, just
under 10 percent.
We wouldn't rule out, first time ever, it might be a
miracle, but 2017 our vision calls that on the North
Slope, could you imagine for the first time ever, an
Alaska company actually owns gas production. Right now
gas production - there's no equity ownership - a
couple of Native corporations have royalty ownership
in the oil and gas but not one Alaska independent owns
in that so we have maybe fully integrated in the
future through cash flow from the pipeline to plow it
back into the North Slope and perhaps acquire or
explore for natural gas.
This is just a schematic - slide 4 - of what we'd do.
We would have ownership in the main gas line down to a
hub near Fairbanks, Delta Junction and, of course, the
gas line would go on to the Lower 48. We'd hope for 10
percent interest in the yellow that you see there.
Then we would own a majority interest, potentially
even operate the hub. Hubs are very common in the
Lower 48. They're more trading hubs while this would
be, to some degree, a trading hub but much more of a
mechanical hub to then get gas moved into spur lines
to Fairbanks and on to Anchorage. We're looking at
supplying utilities for power generation and then if
entrepreneurs feel like an LNG project of a smaller
scale can be commercial out of Valdez in the future,
we certainly would want to look at participating in
any spur line that went to Valdez.
Here's where we stand as far as funding and the game
plan we can afford. We do see it as an opportunity for
any interested Alaskan and that's one unique thing. In
the past couple of years I've talked to the regional
corporations - the Alaska Native Regional... [END OF
SIDE A]
TAPE 04-33, SIDE B
MR. THOMPSON continued.
...large companies, individuals that might be
interested at one point.
Seed funding - I'm pleased to say that we have
successfully obtained all of our seed funding through
the end of next year. We were seeking that from the
Native corporations. They have decided to do their own
thing from their own consortium and within a month of
that, and within a month of that being announced, I
did obtain another investor that fully funded our
company through the end of next year. We would
approach additional investors, companies here in
Alaska, individuals that are accredited, for funding
to then get positioned so that if the federal
government 18 month deal does come into effect at the
end of next year and if the state fiscal package also
had that same time constraint, hopefully everybody
involved - producers, pipeline companies, go to that
next phase that we call the business evaluation phase
and, as Joe talked about, there [are] a lot of things
involved in that - the detail project engineering to
get final estimates, permitting the right-of-way, we
would need substantially more money by that timeframe
of 2006 to 8 and so we're looking for additional
investors this year and next.
I would say that's a risky phase because, as you know,
that could be - that's the business evaluation phase
for a couple of years. During that phase, there could
be a decision made not to go ahead with the line for
different reasons. If that were to be made, that's a
risky investment. So for the next phase of funding, we
really are approaching companies or accredited high
net worth individuals. However, when construction
starts, we envision and are looking at ways and
talking to different investment banking firms on ways
for a financial instrument for any interest in Alaska
to invest. So, if an Alaska family of three wants to
invest one of their permanent fund dividend checks in
2009 and own a piece of the pipe, this could be a way
to do it. This would also be an alternative mechanism
that the federal government talked about in their
legislation, at least for a percentage of the line.
When the line is underway, we see the risk as moderate
or certainly lower because once construction starts,
you do know the terms from the federal and state
governments. By that time of construction you will
have made gas contracts with customers on the other
end. Hopefully you would have secured gas supply by
that point. We would be very interested in helping
transport part of the state's royalty gas for example.
And then we're looking at the financial instruments,
investment trusts, innovative mutual fund ideas, and
actually we have also screened and are looking at
master limited partnerships that you had heard talked
about yesterday by Lehman Brothers. Warren Buffett
used master limited partnerships on pipelines over the
last few years - spent about $2.5 billion, and that's
been his innovative financial instrument and that's
one that we're also assessing.
We believe our company can bring something unique in
the gas line. More profits stay within Alaska. That's
a healthy state economy. By the way, this may be mind
boggling to some, perhaps, 10 percent interest from
the slope to Alberta, would create the largest revenue
company in Alaska. And if a 12 percent return is made
on that investment, it would also create the most
profitable private company in Alaska. So, a 10 percent
interest may sound small, but for Alaskan business, it
is very, very significant and that's what interests us
in this.
Also you have a company where profits stay here. I
think that an argument can be made that helps the
state economy and I'll show you in a moment. That
perhaps could be a very significant way of lessening
risk of producer tax increases. We would pledge on
part of our cash flow to build markets, investments in
in-state gas use and infrastructure. We can help on
permitting, enhancement of Alaska hire obviously, and
then help in government relationships and then it
could be that we could play a role in helping also in
pulling together minor producers' gas volumes for
marketing or even the state's gas.
Slide 7 is an interesting one. It's the first time
that we've shown it publicly because it is the
conclusion of a report and I've got a more detailed
copy of that. That shows with more details but bottom
line we asked Northern Economics Incorporated if an
Alaska company, whether it's ours or it could be
anybody, say another group comes forward and offers a
better deal to Alaska investors - we're not in the
picture but another one is - this could also be an
example of the benefits that could be made with state
owning some equity ownership in keeping profits here.
What we looked at, we asked Northern Economics what if
that 10 percent is owned by an Alaska company versus
that same 10 percent. Obviously, whoever owns any
interest - there's going to be a lot of jobs, you've
heard that, 10s of thousands of jobs in construction,
permanent jobs numbering a few thousand potentially,
and then there's a multiplier effect. We're not
looking at that. That's already been reviewed with you
in other testimony. We're just looking at the
incremental additional benefits to Alaska if this
time, for the first time ever, Alaska's companies had
equity ownership. In TAPS, Alaska companies own
nothing, nor on the oil. So this is a different
example of we actually become and change the business
model and Alaska companies play this time. And the
incremental benefit is this. Northern Economics found
that about over 35 years actually, $1.8 billion in
profits, just for that 10 percent ownership, would be
left within the state. From that would be over 22,000
incremental, part-time and full-time jobs, about 650
new jobs per year that otherwise would not be created
if the cash left the state. Some of that, a small
portion, comes from the spur pipelines or natural gas
processing that our company would do but really most
of that comes from the multiplier effect of cash being
left with Alaskan shareholders and that's important to
understand that as they spend their money on different
things.
We're sharing with all of the unions in Alaska and
that could actually mean $830 million incremental
payments to labor and that is significant, above and
beyond the normal impacts that would accrue from just
the pipeline itself. Bottom line, it's $1.3 billion
total value added to the state economy over 35 years
and that, again, is over and above what a 10 percent
interest owned by an outside company provides, is the
way that they looked at it. That's important for a
company, whether it's ours or to facilitate another
Alaskan company or series of companies to have some
ownership. The federal government has done that and
I'll talk about it in a moment and we'd like to have
the state legislature consider it as well.
Exactly what investment is needed to secure - and I
did this just because the state is looking at a 12.5
percent interest. If our company did a 12.5 percent or
the state, how much equity is needed that needs to be
raised. If you run all the way from the North Slope to
Alberta, the cost of that is $11.6 billion. Now that
would save the state - our company doesn't own
anything in the gas conditioning plant, that's a
leased facility that will likely be owned by the
producers, and it doesn't rule out state ownership but
yet I'm saying the producers would own that. And then
the state or even our company would own 12.5 percent
from the Slope to Alberta. There would be equity
capital of $435 million or $108 million per year. So
basically, we would have to obtain equity capital
through our investors for that amount by the timeframe
of 2009. And you see the share of debt at about $1
billion. Again that would be debt secured and
guaranteed by the federal government and that debt, in
this case, would be owned by the pipeline company.
From the North Slope to the border, if the state only
owned 12.5 percent of that, you'd have to come up with
net costs of $750 million. That was the capital that
we would also have to look at. That means equity
capital of $225 million. By the way, all these assume
30 percent equity, 70 percent debt so if it's actually
20 percent equity, 80 percent debt, the equity
amounts, of course, are 'ratioed' down.
So the sum means that we're trying to raise by about
2009 the $50 to $100 million per year from investors
and through different financial instruments, or the
state, if you took the 12.5 percent, these would be
your numbers to raise by that time frame.
Bottom line, what's interesting is significant
implications - is if you look back on slide 7, the
last from the bottom bullet says $1.3 billion added to
the state economy. In a way, if the state did in a
fiscal package provide additional incentives, like Joe
mentioned state incentives, perhaps for commodity risk
protection, if the state were to do that, you're
giving some value up. There's no doubt about it, you
are. However, if the state owned equity participation
or even if an Alaskan company like ours owned a
participation percentage, through the additional
incremental benefits to the economy, you can actually
gain back much, if not all, of that value that you'd
have to give up to get the project going. And these
are the kinds of things that I'm sure Pedro Van Meurs
and his team are looking at.
We would urge that similar to our federal delegation
passing a Sense of Congress regarding encouragement of
Alaska company participation, if you do a fiscal
package next year, as an Alaskan, we would hope you'd
incorporate identical intent of the legislature, just
like Congress did for a Sense of Congress and I'll
talk more about that in the closing slide.
And the bottom line, we see even a 10 percent
ownership by Alaskan companies could add $1.3 billion
to the state economy and 22,000 new jobs but we
realize we have to bring additional value that I
already mentioned.
So recommendations would be that the state and/or
Alaska companies and individuals should own at least
12.5 percent of the gas line from the Slope to the
border or at least all the way to Alberta to the
marketing hub. And we would encourage you to include
intent of legislature language and, by the way, what
I've included in slide 10 comes out of the new
military appropriations bill that Congress passed in
the exact language. Congress passed a Sense of
Congress that Alaska Native corporations and other
companies owned and operated by Alaskans and
individual Alaskans should have the opportunity to own
shares of the Alaska natural gas pipeline in a way
that promotes economic development of the state and
then to facilitate economic development, sponsors
should negotiate in good faith with any willing
Alaskan person. We certainly have found willing
Alaskan persons that are interested in investing in
having ownership of the - and change the business
model from the old oil business model. So that's my
concluding remarks. I'd like to also mention that our
company would also comply and would understand and if
you put an 18 month timetable on the fiscal package
and we had to do everything we could to make a
decision to go to the next phase and raise money for
that phase of permitting and detail engineering by
2006, we feel we can. And our business plan calls for
compressing the three years of the detailed
engineering and permitting from three to two and our
goal is to start construction by 2009 and have first
sales by the end of 2012. It's about a year longer
than the MidAmerican proposal but about a year has
passed since that proposal. With that, Mr. Chairman,
that concludes my prepared comments.
REPRESENTATIVE CROFT asked:
Putting together some of the things that we've heard
over the last day ... Exxon, BP and Conoco have
limited capital resources and some internal reasons
not to do it. Lehman Brothers and UBS talked about the
interest that people have in investing in this outside
of Alaska. You've talked about the interest that
Alaskans have in investing in this. I guess, putting
those all together, why should we wait for the
producers? If non-Alaskans are interested, equity
markets are interested, if there's reasons why the
producers might not want to move as quickly as we want
to and you're interested, why are we waiting?
MR. THOMPSON said as a start up company, even raising the 10
percent level of capital is a challenge. Pacific Star Energy is
fully funded through next year with seed money. However, when
the project moves into the permitting phase, the investment gets
riskier. The cost could be $1 billion over two years, although
he estimates $500 million. No matter the amount, Pacific Star
Energy's share will be $50 to $100 million over two years and
that is the riskiest part of the project. Pacific Star Energy's
challenge is to find that money by the end of next year. He
feels confident that can be done, knowing the interest of the
financial markets. The Department of Energy will be arguing for
a 14 percent rate of return. Investors want that. This would be
a good hedge fund investment not tied to the stock market but
tied to a relatively flat cash flow and a FERC regulated rate of
return with loan guarantees. He said raising all of that money
will require some big capital players. He added that if even two
of the producers sign on, Pacific Star Energy would get its
share quickly because that would bless the project by large,
sophisticated investors. He noted the producers have the
capital; the issue is how that capital is allocated as an
upstream or downstream project. He pointed out that Exxon
Mobil's upstream projects had a 30.6 percent return on capital
employed, according to its annual report. He noted that he does
not support a gas reserves tax because the producers are at the
table negotiating in good faith and financial firms are
interested in investing, so a gas reserves tax will cloud the
water. He believes the state needs to create a fiscal package
that will provide certainty for a number of years. He said the
ball game was different three years ago when no one was sitting
at the table.
CO-CHAIR WAGONER asked if the state considers taking an equity
share in the project - possibly larger than 12.5 percent - that
could have a detrimental effect on Pacific Star Energy.
MR. THOMPSON said that is correct. He predicted if the state
took 12.5 percent and the producers and pipeline companies
wanted the rest, it might be more difficult to allow Pacific
Star Energy a small percentage. He said, "I would hope that good
hearts prevail and that they would allow Alaskans a chance to
invest so that men and women on the street that want to invest -
but you are right, it could mean that we would be cut out of the
picture and that's the way it goes."
CO-CHAIR WAGONER suggested the possibility that Pacific Star
Energy could negotiate a percentage off of the state for
investment purposes for state residents.
MR. THOMPSON agreed and offered:
What we have mentioned to certain individuals in the
state is doing the Exxon case - like the Alliance
Pipeline. If you remember, they took a large equity
percentage in that large line from Alberta to Chicago
to get it constructed and built and then later sold it
off. Enbridge was one of the buyers. If the state took
an interest, you'd get your payout and you want to
hold it long term, keep it long term. If you want to
get some of your cash back, you could divest and we'd
certainly be interested in being in the bidding room
to bid and buy back from the state after that. Then we
would create the Alaska company.
Plan B, by the way, is even if we are cut out of the
line because producers don't want us in or the state
takes a larger percentage, our company still is
interested and would pursue Plan B, which is the
ownership and investment in some of the spur lines and
even natural gas processing. But that's going to be
more difficult because the way that we did in Plan A -
to fund that stuff, is the stable cash flow from the
gas pipeline percentage so we do a 10 percent, 12
percent return project there, stable cash flow,
redeploy into more risky gas processing.
12:58 p.m.
With no further questions, CO-CHAIR SAMUELS thanked Mr.
Marushack and Mr. Thompson. He then announced the afternoon
presentations would be about manpower requests and recessed the
meeting until 1:30 p.m.
CO-CHAIR SAMUELS reconvened the joint Legislative Budget and
Audit Committee and Senate Resources Committee at 1:34 p.m. and
announced that Mr. Tony Palmer would present to the committee on
a topic entitled, Getting a Job on the Pipeline - How Many
People, With What Skills, and During Which Phase of Construction
or Operation?
MR. TONY PALMER, Vice President, Alaska Business Development,
TransCanada, gave the following narrative to a PowerPoint
presentation [copy available in committee file].
Thank you Mr. Chairman and members of the committee.
I'm pleased to be in front of this committee again
after an eventful day yesterday, which I enjoyed. I
didn't get an opportunity to see all of it but I did
get to enjoy most of the presentations you saw
yesterday. Today my presentation will be short but I
was asked to speak to project workforce skills
requirements. I'll walk that through for you quickly
and would be happy to try to respond to any of your
questions as we go through or at the end at your
pleasure.
Just a quick map on the pipeline - I won't spend any
time on this other than to show you that the existing
prebuild starting from central Alberta - that's in the
green, from a location called Caroline just north of
Calgary - it currently exists down to a point on the
U.S. border on the east side called Monchy. That's on
the Montana border. It connects with the northern
border and the pipeline going west connects at
Kingsgate on the U.S. border - Idaho border - with
PG&E national energy group. That used to be called PGT
but now it's called GTN.
I will speak today to primarily the two - there are
four phases of the project. We're still in the
development phase. I will speak primarily to the
preconstruction and construction phases, which are the
highest labor components for this project and then
operations as well, which I will not speak to today.
I'll give you a high level project schedule and I'll
speak to labor details in terms of types of employees
required for this project and quickly a contracting
plan and finally summarize - I do have a couple of
videos to show you some actual construction.
First to address preconstruction - this slide [4]
shows you general categories of preconstruction and
construction phases. Prior to preconstruction, there
will be work done in the field to gather data for
project planning, engineering, environmental, socio-
economic, etcetera, which will provide opportunities
for local businesses. The labor numbers that I'm going
to show you and the quantities are not included for
events occurring before the preconstruction phase.
Just to indicate for you what terminology we're using
when we talk about preconstruction, we mean gravel
processing, access road construction, stockpiling
equipment at sites, building camp sites, compressor
station sites, development, receiving the pipe so
receiving it within the state, double jointing -
that's connecting the pipe so you have two pieces of
pipe connected together, coating the pipe - it needs
to be coated to protect it for a long term basis, that
would occur as well. Haul and stockpile the pipe - so
haul it to locations along the right-of-way to be
ready for construction and brush clearing on the
right-of-way. That's fundamentally what we mean by
preconstruction. Sometimes it's called logistics but
fundamentally preparing to do the construction phase.
The construction phase is truly pipe construction -
connecting the pipe, laying it in the trench and
covering it, and compressor station construction as
well.
This is our project schedule [slide 5], which we put
in front of the state with our Stranded Gas
Development Act application on June 1. I've given you
two designations here, both calendar years starting in
2005, as well as year one through eight and I can tell
you that, of course, it's all driven off of the first
row, which is when the commercial agreement is struck.
We have anticipated here a commercial agreement being
struck by the middle of 2005. If that doesn't occur,
the project schedule will shift backward
proportionately. So just be aware of that.
CO-CHAIR SAMUELS interjected to note that ConocoPhillips
testified earlier that such a schedule would be considered to be
extremely aggressive. He asked Mr. Palmer to respond.
MR. PALMER said if a commercial agreement is reached with
TransCanada by mid-2005, TransCanada can achieve this schedule
to begin service in 2012.
CO-CHAIR SAMUELS asked if he is speaking to "signing on the
dotted line to gas flowing."
MR. PALMER said TransCanada holds an existing certificate in
Canada and would not have to file for new certificates, which
would give it a timing advantage. He then continued his
presentation.
I won't take you through the other components. This is
all laid out but fundamentally we'd work through the
engineering and field study data and you'd be at a
point in 2008 where you'd have arranged your
financing, starting to procure you're equipment, as
well as steel, then you'd start preconstruction at the
same time - the end of 2008. Then we have a two-year
construction timeframe, which I can tell you includes
working winter and summer both in Alaska and Canada
and I'll actually show you the winter-summer
construction schedule as we walk through with how many
crews and where they're working. So I'll show you that
later in the presentation.
CO-CHAIR SAMUELS asked if regarding gearing up for job
opportunities, most of the [employment] will occur between 2009
and 2012.
MR. PALMER said the bulk of the work will occur beginning in
late 2008 and end in late 2011. He then continued.
So I'll take you through the numbers by skill type
during preconstruction. This is for the Alaska
component of the project only and these, of course,
are preliminary estimates based on what we have given
you before. It's a 48-inch pipeline, high pressure,
moving 4.5 bcf/day initially. That's what's
contemplated here. If the project changes and volumes
change, these numbers will change.
So, just walk through it - pipefitters and welders, in
fact I'll show you a video shortly to show how the
welding process has changed on high-pressure pipelines
over the years. Equipment operators - modest numbers
there as well. A large number of truck drivers and I
have a video on that as well showing you how moving
the pipe to the site is a very significant event
during preconstruction. Some labor numbers -
supervisory and others - and other is really the
catchall for all the other components. Then you see
totals in the 1300 to 1600 individuals hired just
during that peak time of preconstruction.
Here are the construction numbers - during the actual
two-year construction timeframe. This is a peak labor
requirement. You'll see ranges around this. Once again
you see larger numbers for pipefitters and welders,
equipment operators and truck drivers - very large
numbers at this point, as well as laborers. Higher
number, of course, for supervisory and others, once
again a catchall, gives you numbers in the 5500 to
7000.
Now you will see that preconstruction does overlap
construction because this will be staged down the
right-of-way and, in fact, I'll show you here on the
next slide, which is a summary because events will be
occurring simultaneously in different locations along
the right-of-way.
CO-CHAIR SAMUELS asked if Mr. Palmer is estimating 6,000 full-
time jobs for three-years.
MR. PALMER replied, "No. What I'm describing for you here are
6,000 at the peak. Now over the course of that two years, we may
be at lower numbers at some point during the two years, but what
I'm giving you are the peak numbers and those jobs will be for
most of the period but I can't assure you they're going to be
for the full two years." He then continued his presentation.
The next slide [8] is just a summation of the previous
two to show you that in terms of overall peak, you're
looking at numbers in the 1600 to 8600 range so in the
order of 8,000 full time jobs during that two to three
year timeframe, they will not necessarily be there for
the full three years but they will be there for a
significant component of that - a very significant
project in terms of establishing manpower, putting it
in place in these categories.
This next slide [9], and I hope it shows up better in
your handout than it does here, the next slide
identifies for you contractors A-B-C and D so four
different contractors, four different spreads, to use
pipeline terminology, would be working winter and
summer. And if I just looked, starting from Prudhoe
Bay, at the orange, the orange is winter construction
so contractor A would have winter construction in our
schedule starting from Prudhoe Bay south and
contractor A would have a second winter construction
from about midway between Prudhoe down to Atigun Pass.
They would do the second part of that. They'd have a
summer construction south of the Atigun Pass and so on
as you work your way down the right-of-way. So there
will be simultaneous work occurring across the project
by contractors A-B-C and D, winter and summer. And the
same thing will be occurring on the Canadian side so
that you'll have a massive alignment of individuals on
this project both in Canada and Alaska at the same two
to three year window.
[The following testimony accompanied a video MR. PALMER showed.]
I would like to just spend a moment for those of you
that may not be familiar with construction. This is
what we mean by trenching. This is how the majority of
the pipe trench will be established. You dig it with a
trencher. When you go through the Atigun Pass and up
through the Brooks Range you'll clearly be blasting
but a lot of the digging of the actual trench is done
with a piece of equipment like this. You can do that
for a 48-inch diameter pipeline. We do that on our
systems across Canada. Just to give you an indication
as to how quickly this moves down the right-of-way is
a very efficient piece of equipment that allows you to
dig the trench and dispose of your waste material.
One more item I thought I'd show you - the old version
of moving pipe and this, as you can see, is some 80 to
90 years ago. Here's why you need so many truck
drivers. You can see this truck is transporting big
inch pipe along a right-of-way. You can see a number
of significant volumes of pipe already aligned along
the right-of-way. That's what I mean by
preconstruction. This will be an assembly. That's why
you can complete construction on a project in a couple
of years because you've got things ready to go.
One more video - here's the old version of welding
pipe. Once again, from 50 or 75 years ago, if you look
at this old truck on this side, you can see how
ancient this video is but this is the way a lot of
people think welding is done on a pipeline. That's no
longer the case I can assure you. And you'll hopefully
see in this video here the new mechanized welding.
These are trained welders that operate this electronic
equipment but we've done significant technological
advances working with trade unions, as well as steel
manufacturers as to how this can be done. And now you
can see - this case happens to have a single welding
torch head. We're now doing it with tandem multiple
heads on the welding torch. It makes the project go
faster and it's safer and you get a better weld.
SENATOR BUNDE asked if during the construction of the
TransAlaska Pipeline, virtually no Alaskans were pipeline
welders. He said his impression is that the pipefitters union is
very tight and headquartered in the Lower 48. He questioned
whether that is still the case.
MR. PALMER said he did not have an answer about the availability
today but said that TransCanada would clearly prefer to retain
local residents. That would be more efficient for the project.
TransCanada believes that by identifying the labor needs now,
Alaskans can begin to position themselves for those jobs.
SENATOR BUNDE commented that it is not only a matter of
training, it would require the worker to get a [union] card, so
that matter needs to be investigated further.
MR. PALMER agreed.
CO-CHAIR SAMUELS asked if, regarding the design work,
TransCanada would be doing that work in-house or whether it
might hire Alaskan firms.
MR. PALMER explained that TransCanada generally would do a
project of this scale with a combination of in-house engineers
and outsourced engineers, Alaskan and Canadian. TransCanada
worked with VECO and Canadian engineering firms on its last
project. He continued his presentation.
Just to summarize - peak labor requirements of
approximately 8,000. These are direct labor jobs on
the pipeline. They do not include other labor provided
by Alaskan businesses. No multiplier effects here. So
they are not positions that engineering firms will
have retained. They're not support services. They're
not materials. The labor force estimates are
preliminary until final design. I've described that to
you. We would argue that training should commence once
commercial agreements are in hand. The project phases,
as I described, one year for pre-construction and two
years for pipe and station construction and they cross
over; they're concurrent.
That's all I had. Thank you.
SENATOR ELTON asked Mr. Palmer if he sees training as
TransCanada's role or a role for other entities.
MR. PALMER said he generally sees that as a role for other
entities, such as community colleges, industry, and unions.
However, TransCanada has been involved in training programs in
an advisory position in the past and understands how that
training should occur.
SENATOR ELTON asked if TransCanada has helped to fund training
programs in the past.
MR. PALMER said it has on occasion. He noted that federal money
will be forthcoming to assist Alaska in job training.
CO-CHAIR SAMUELS thanked Mr. Palmer and asked Commissioner Greg
O'Claray to address the committee.
COMMISSIONER GREG O'CLARAY, Alaska Department of Labor and
Workforce Development (DOLWD), gave the following presentation
entitled, Training and Hiring Alaskans for a Gas Pipeline.
Yesterday Governor Murkowski addressed you with
respect to the equity involvement of our state in the
construction of this particular project, or at least
the ownership of the project. My role as commissioner
of the Department of Labor and Workforce Development
is quite simple. My charge is to provide an
opportunity for every citizen of our state that's an
Alaska resident to be employed in good paying jobs
within the industries that are fostered by this
particular project.
The federal legislation that Senator Lisa Murkowski
brought back to us here the other night when she
stepped off of the Northwest flight at the Ted Stevens
International Airport has a proviso in it that you
should be aware of. Many of you have seen the
legislation. I won't quote from it but I'll give you
in general what it says. It provides for $20 million
in tax dollars to be funneled through the Alaska
Workforce Investment Board, which is the Governor's
workforce investment board under the Workforce
Investment Act. That is supported by and actually
directed and operated through the Department of Labor
and Workforce Development. Out of the $20 million, 15
percent of that will be dedicated toward a training
facility to be located in Fairbanks, specifically for
training pipeliners.
Before I get too far in my remarks, I want to tell you
that I'm about to execute signature on a grant that
will provide for training of 100 pipeliners that will
be working on the North Slope beginning this winter.
It's a joint agreement between the Alaska Works
Partnership - the pipe trades unions from the
Fairbanks area. All of those folks, by the way, will
be testifying after I've completed my remarks and
various contractors that are going to be doing work on
the Slope. Tara Jollie, if I might Mr. Chairman, I'd
like to introduce Tara Jollie who is our administrator
for the STEP program - State Training and Employment
Program.... You don't mind a little theater, do you
Mr. Chairman?
I hereby sign this document that will allocate the
state's share of a match - total grant in the amount
of $344,063 of STEP funds that you authorized through
your good efforts as legislators. The industry has
come forward. Mike Andrews, are you here? Mike, what
was the amount of match from the industry?
MR. ANDREWS replied $175,000.
COMMISSIONER O'CLARAY continued.
So the industry is participating with us on a joint
basis and we will be training the 21st Century next
generation of pipeliners and I want to congratulate
the Alaska Works Partnership, the contractors, and the
oil industry-producing owners that participated in
this particular effort. Thank you.
SENATOR BUNDE asked for a definition of "pipeliner."
COMMISSIONER O'CLARAY introduced Mr. Laiti, the business manager
of the pipe trades in Fairbanks, and told members he is a
pipeliner. He said the description of a pipeliner during the
construction of TAPS was anyone who could get dispatched, walk
on two feet, and chew gum at the same time. He pointed out the
actual job description could fit a number of trades and crafts
involved in the construction of a pipeline.
SENATOR BUNDE repeated his concern that Alaskans can be trained
for these jobs but, as happened with TAPS, they might not be
able to get dispatched as pipeline welders. He asked if that is
still the case and, if so, what can be done about it.
COMMISSIONER O'CLARAY said during the TAPS project, that
particular project labor agreement involved the International
Presidents of the Building [and Construction] Trades and was
negotiated at a higher level than in-state. It did not involve
any local union business agents. The signatory party from the
Plumbers and Pipefitters International, Marty Ward, signed that
agreement. Under the agreement, the only skilled pipe welders
came from Local 798 in Tulsa, Oklahoma. He said although he may
ruffle some feathers, if his efforts combined with the efforts
of partners who are working to train Alaskans are successful,
there will be no need for Local 798 to come to Alaska. He added
that in the language being negotiated under the Stranded Gas
Act, the Department of Labor has a seat at the bargaining table
at Governor Murkowski's request. He said he cannot disclose the
exact language being negotiated, it will be brought before the
legislature for consideration. That language will be stronger,
more precise, and will make sure DOLWD is involved every step of
the way with respect to training and pipeline employment. He and
the Governor believe that a project labor agreement is
applicable to this project, just as it was with TAPS. His charge
is to ensure strong enough language that Alaskans will come
first in every case.
SENATOR BUNDE said he is glad to hear that.
REPRESENTATIVE CHENAULT asked whether the labor agreement will
be part of the proposal brought to the legislature for approval
or something done at a later date.
COMMISSIONER O'CLARAY said it is his desire that it be included
in the agreement. He furthered:
The appropriateness of putting the project labor
agreement requirement in the Stranded Gas Agreement,
or the agreement negotiated under the Stranded Gas
Act, is debatable. When the contract could or would be
signed, in my view, should be negotiated between the
parties - that is the contractors slash owners that
will be involved and organized labor. Again, let me
restate. I believe the only way to guarantee Alaska
hire that's supportable in the courts - let me repeat
that - that's supportable in the courts by precedent,
is to have a project labor agreement in place. I
believe that those discussions should begin as soon as
possible, as soon as an interested party that comes
forth with a viable proposal to build the line is
identified, I think those discussions should be
undertaken.
REPRESENTATIVE GARA asked Commissioner O'Claray what other
options DOLWD is pursuing to make sure that the court rules that
prohibit a certain level of Alaska hire don't get in the way.
He asked if there might be an advantage to involving Native
corporations that may have a right to hire local residents.
COMMISSIONER O'CLARAY said some things can be done to ensure
that rural residents participate in building the line. He said a
specific section of the TAPS agreement required Alaska Native
hire.
TAPE 04-34, SIDE A
COMMISSIONER O'CLARAY said the state has gained from its TAPS
experience and he believes there should and will be an effort on
the Administration's part to make certain that rural residents
have a preference. He added that of the 100 people who will be
trained as pipeliners beginning in November, over 40 percent are
rural residents. The Alaska Works Partnership has done a
marvelous job of recruiting people interested in apprenticeships
in the building trades from Bush Alaska. Recruitment entailed
traveling to villages and reaching agreements with several
tribal governments. He recognized the efforts of Mike Andrews,
who was the original executive director of ERIC, which preceded
the Alaska Workforce Investment Board. Mr. Andrews put together
an aggressive group of recruiters. He then said he believes any
agreement should contain a provision that identifies the
demographics of Alaska so that rural residents will have
priority for training and employment. He suggested asking Mr.
Palmer how TransCanada handled its project labor agreement in
Canada.
REPRESENTATIVE GARA asked Commissioner O'Claray if he could
share the legal memo with the legislators so that they can feel
assured that everything possible is being done to hire Alaska
labor.
COMMISSIONER O'CLARAY said he could share the legal memoranda
and the court rulings but he was unable to share draft documents
associated with the Stranded Gas Act negotiations. He pointed
out that several legal precedents deal with the legality of
project labor agreements.
REPRESENTATIVE JOULE said, regarding the 100 pipeliner jobs, it
sounds like a lot has already been done in terms of selection
and advertising.
COMMISSIONER O'CLARAY said a lot remains to be done. He said no
one should be deluded into thinking that the state can train and
staff all of the jobs with Alaskans. He explained:
And let me tell you why. We can't afford to ...
because at the peak numbers that were shown, what do
we do with those folks when the pipeline project is
over with? Certainly some of them will have skills
that will transfer to maintenance and operations, but
perhaps the producers that own the Alyeska line would
be willing to replace some of their non-resident
workers with those folks. I would hope that would be
the case but no one, at least in my department - I
don't believe anyone in organized labor or the state
really believes that we'll be able to train that many
skilled people and provide them with sustainable work,
but we will try.
REPRESENTATIVE JOULE asked how an interested person would "get
their foot in the door" for the training program that begins in
November.
COMMISSIONER O'CLARAY said one way is to visit or get on-line
with one of the Alaska job centers, administered by DOLWD. A
person could also contact one of the pipe trade groups or the
Alaska Works Partnership Outreach Program. He emphasized that
the Stranded Gas Act proposal will also include another
provision dealing with Alaska vendors and Alaskans in general
because the economic benefit of this project is not limited to
the construction jobs. It also includes use of local companies
and vendors who will provide services and materials. He said
Alaska has sold itself short over the long haul by not putting
teeth in its procurement law so that public entities must pay
attention to the local economy when contracting - that is part 2
of Alaska hire.
REPRESENTATIVE JOULE noted that Commissioner O'Claray said that
40 percent of the 100 recruits were from Bush Alaska.
MR. MIKE ANDREWS, Director of Alaska Works Partnership, told
members that under the training proposal signed by the
Commissioner today, an estimated 100 people will be involved in
a two-week pipeline training program in Fairbanks to start
around November 8. About 60 of those workers will come from the
Fairbanks North Star Borough and 40 will come from the Northwest
Arctic and the North Slope. The training provides an opportunity
to work as a team among the four pipeline crafts: the
pipefitters, the operating engineers, the skilled laborers and
the teamsters. They construct as a team, so the program will
individually train journey persons who need upgrade skills on
new equipment. No training has taken place for five years and
equipment has changed. Additionally, the other trainees will be
apprentices who will be learning pipeline trades. He said the
Alaska Works Partnership has budgeted to recruit at least 40
persons from the Northwest area who will be recruited through
the apprenticeship programs. The work will start in January and
is tied to a ConocoPhillips project at West Sac. The idea is to
demonstrate the skills as a team during the second week of
training in Fairbanks, where participants will construct a 2,000
foot 8 inch pipe. He added that it will primarily be a
demonstration of the team's skills for H.C. Price and Norcon and
will act as a model or a test.
REPRESENTATIVE JOULE asked Mr. Andrews if he feels confident
that the Alaska Works Partnership will not repeat the mistakes
made during the construction of TAPS.
MR. ANDREWS said Alaska Works Partnership was formed several
years ago by the building trades unions and their apprenticeship
programs to reach out to rural Alaska to provide open programs,
union or non-union, to get people into the construction trades.
It takes several years to train each worker. Its funding came at
the request of Senator Ted Stevens through the U.S. Department
of Labor. The Alaska Works Partnership has been piloting for the
department the creation of a system that reaches out to the
village levels. The Partnership has served 60 villages in rural
Alaska and has brought on average 60 new apprentices into the
trades each year. In addition, it has recruited 150 building
maintenance repair apprentices to build houses in rural Alaska.
This system will have a statewide impact. It was put together to
show how quickly labor and employers can respond to the
opportunity of new jobs on the North Slope.
SENATOR ELTON noted, in response to Representative Chenault's
question, that Commissioner O'Claray said a labor agreement may
not be ready when the package comes to the legislature. He asked
Commissioner O'Claray if he would consider putting contingency
language in the agreement saying the agreement was contingent
upon signing a project labor agreement.
COMMISSIONER O'CLARAY said he is not empowered to discuss the
provisions being debated but urged members to articulate that
concern to the Governor and negotiators of the Stranded Gas Act.
Those negotiators are the commissioners of the Department of
Revenue, Natural Resources, and the attorney general.
REPRESENTATIVE McGUIRE asked what is being done regarding
training in the Southcentral region of Alaska. She pointed out
that a lot of people have moved to Anchorage from rural Alaska
who are looking for a trade.
MR. ANDREWS said the Alaska Works Partnership's grant resources
have been for the primary purpose of recruiting from rural
areas. He acknowledged that he is working with DOLWD right now
to provide ways for people to get access to individual training
at job service centers. The Alaska Works Partnership and
Associated General Contractors have also spent a lot of time
working with high schools in Anchorage, Fairbanks and Delta to
create a construction trades program that would allow students
direct entry into the trades from high school. They have also
been working with rural school districts in an effort to get
more applied learning in those areas. He said the Partnership
would like to do more in the urban areas but is working with
limited resources.
REPRESENTATIVE McGUIRE asked Mr. Andrews to approach
Southcentral area lawmakers about this subject because the
perception that Anchorage has a lot of jobs for people simply is
not true. Many young people want to stay or return home but need
a good paying job to do that.
MR. ANDREWS informed members that the Alaska Works Partnership
recently entered into a memorandum of agreement to do work for
the Cook Inlet Regional Housing Association so it has created a
pathway there.
SENATOR ELTON asked about rural communities in Southeast Alaska.
MR. ANDREWS said the Alaska Works Partnership has had an office
in Juneau for over a year and has been active with Klukwan, the
Tlingit and Haida Housing Authority, and the vocational center
in Juneau, but he admitted the training has been focused on the
needs of employers and projects so employers must be willing to
commit the trainees.
CO-CHAIR SAMUELS noted the arrival of Senator Cowdery.
COMMISSIONER O'CLARAY introduced Andy Baker from Baker Aviation
in Kotzebue and asked that he address the committee on local
hire in Kotzebue. He told members that Mr. Baker was recently
elected as chair of the Alaska Workforce Investment Board
(AWIB). Under the federal legislation, the $20 million minus the
15 percent for construction of the Fairbanks facility will go to
the AWIB. He also introduced Ramona McAleese, the new executive
director of the Alaska Workforce Investment Board.
MR. ANDY BAKER, Chairman of AWIB, said that fitting training to
available jobs is an exciting approach. He looks forward to
working on the government side putting Alaskans to work.
MS. RAMONA McALEESE, Executive Director of AWIB, explained that
AWIB is basically the old Job Training Partnership Act program.
AWIB is responsible for allocating all Workforce Investment Act
funding that comes to the state. Last year, those funds amounted
to $18 million. AWIB is also responsible for the STEP program.
AWIB has commitments and measurements to allocate funding for
rural areas; right now 60 percent is allocated to rural areas.
She said the AWIB is committed to the Governor's Alaska hire
initiative.
SENATOR BUNDE asked if half of the $20 million will be used to
build a training facility in Fairbanks.
COMMISSIONER O'CLARAY clarified that 15 percent of the $20
million, or $3 million, will be used for the facility.
MR. JIM SAMPSON, Alaska President, AFL-CIO, thanked members for
the opportunity to address the committee and noted this is the
first time the AFL-CIO has received an invitation to address a
legislative committee. He said he was accompanied by
representatives of four Alaska unions, all of who have at least
30 years in pipeline construction representing workers in
Alaska. These four unions have built about 98 percent of all
pipelines in Alaska. He gave the following presentation.
While any Alaska natural gas line project will have
major associated building trade work, such as a gas
conditioning plant on the Slope, compressor stations,
or LNG facilities in the case of an LNG project, these
representatives also have a good understanding of
training requirements for these types of projects as
well.
If I may, if I could just introduce for the committee
those who are here - Jim Laiti is here. He is a
business manager of the Plumbers and Pipefitters Local
375 in Fairbanks. Along with him is John Kanabe, their
training director. We have district representative Bob
Mahaney of the Operating Engineers Local 302, and
Click Bishop, who is the training director for the
state, is with us as well.... We have two business
managers with the responsibility of providing laborers
on pipeline work in the state. One business manager is
out of Fairbanks. His jurisdiction is all work north
of the 63rd parallel. We have one here today with the
responsibility for Anchorage and Valdez. He's really
our LNG guy. [They are] Tim Sharp and Mike Gallagher,
originally from Valdez and they're here as well. Joe
Mahaney isn't here. It's probably a communication
goof-up on my part and I apologize for him but we will
hopefully do the best we can to answer any questions
regarding trucking. If we really need some help we
have Barbara Huff here in the audience and she's a
trucker with the Teamsters.
What I hope to do is just give you a couple of
thoughts on how we view the project and then ask these
folks to give you four or five minutes apiece and be
prepared to answer any questions.
The building of an Alaska gas line project will be the
largest construction project in the history of North
America. It will require thousands of field
construction workers not only for the Alaska portion
of the project, but an even larger workforce for the
Canadian piece to the hub in Alberta and on to the
Midwest. The project cannot be built on the American
or Canadian side of the border without an agreement
with labor. In response to the Alaska natural gas
line project agreement Sense of the Senate language
recently included in federal legislation, labor is
prepared to negotiate a project agreement with the
sponsors of the project similar to the terms and
conditions of the agreement used in the building of
the TransAlaska Pipeline. This means any discussions
with labor will include the National Building and
Construction Trades Department of the AFL-CIO and
international union representatives, which I believe
will be in Alaska's best interest and the interest of
gas line sponsors, as these international unions
represent both workers in Canada and Alaska across the
border.
We anticipate the pipe for the project will move on
American ships manned by maritime crews represented by
the AFL-CIO. We anticipate AFL-CIO longshoremen in
Alaska will unload the ships and, once unloaded, we
believe the pipe will be moved by the Alaska Railroad,
represented by railroad unions of the AFL-CIO or by
trucks driven by Teamsters. We anticipate the Alaska
Laborers to coat the pipe, members of the Operating
Engineers to do the trenching and the dirt work and UA
welders to weld the pipe. We also anticipate the other
Alaska building trades to be involved in construction
of compressor stations and the gas conditioning plant
on the North Slope.
We believe it's extremely important to Alaska that
efforts be made early on to prepare the Alaska
workforce for the project, and those of us here today
from labor thank the committee for your interest in
this area. All of us, the state, labor and pipeline
sponsors need to look at the past and improve our
efforts to give qualified Alaskans, regardless of
where they live, whether it be urban or rural Alaska,
an opportunity to work on the project before non-
Alaskans.
Our efforts to prepare for the project will be
determined by the amount of work in the market between
now and the start of any natural gas pipeline project.
As legislators what you do today will determine
whether Alaskans work on the project or not. Under the
Stranded Gas Act, you approve any contract the
administration negotiates with gas line sponsors and
we believe our legislators must do everything they can
to assure that whatever they can do be done to give
Alaskans and, just as importantly, Alaskan
contractors, the opportunity to work on the project.
Yesterday you spent considerable time on risk and
reward. Labor costs are a big component of any
pipeline project, especially one of this size. The
state and sponsors need to understand the labor costs.
They need to know that they will be able to secure
qualified workers. They need to ensure that the
project is built without any interruption of work and
we need to have appropriate labor protections for
Alaska workers. We can do this by working together now
to ensure that these protections are put in place.
Labor is prepared to work with the state and the
sponsors to do this.
We have been working closely with our congressional
delegation over the last couple years to ensure the
availability of federal funding for training Alaskans
for our project. We encouraged Senator Stevens and
Senator Murkowski to include training funds in the
federal legislation. In the military construction
appropriations report passed earlier this week, as
other speakers have said, there's $20 million and I'm
sure there's a lot of people looking at that $20
million. Labor also requested funds. It was our
request for $3 million up to 15 percent, to expand our
training facilities in Fairbanks. We believe that
Fairbanks, the Interior, will be central to any
project, whether it's an all Alaska project or whether
it's an LNG project. Our request that those funds will
be included in federal legislation was to help us
expand and augment and supplement our existing
training program that we have in Alaska. Our hope is
that that facility will be built primarily - it will
be built to be used by pipeline unions and contractors
and it will have a residential addition on there for
the purpose of bringing in workers from rural Alaska
to house them so we can train rural Alaska workers in
some of the more complicated aspects of training - the
training that we can't deliver out to rural Alaska.
The skilled construction workforce that Alaska has
today is directly tied to the commitment of Alaska's
construction industry led by the Associated General
Contractors, the National Electric Contractors, the
Mechanical Contractors, the trucking industry and
others. Labor in the industry has 29 jointly
administered apprenticeship programs that exist in
Alaska at this time and these programs account for
about 85 percent of all actively registered
apprentices in the state and about 95 percent of all
construction apprentices in the state. We have 15
jointly managed training facilities in the state, with
a combined value of $25 to $30 million. We have
training instructors and training facilities that
employ 90 people full-time and 60 part-time contract
instructors. All of these facilities, for the most
part, are funded by private contributions from our
contractors.
Last year we brought in about 350 new construction
apprentices. Teamsters 959, even though they're not
here today, is prepared to offer opportunities in
training to Alaskans in preparation of a gas pipeline,
as well as the three pipeline unions that are here
today. Recently Teamsters 959 director of training for
Alaska, Mark Johnson, was appointed to be the director
of training for the Teamsters nationwide. His 40 or 50
years in Alaska and his commitment to the state, I
think, is going to be beneficial for [indisc.]
sponsors and Alaskans in the training of Teamsters on
that project.
There was a discussion of the Stranded Gas Act and the
AFL-CIO's position on that. I will provide the
committee with a copy of a letter I sent to Governor
Murkowski on March 4th, which contains some of our
recommendations for contract negotiations for
[indisc.] sponsors, including the inclusion of a
project labor agreement. So with that, that concludes
my remarks.
CO-CHAIR SAMUELS asked, when it comes to international rules,
whether Alaskans will be able to work in Canada or whether
Canada must address its own citizens first.
MR. SAMPSON said he is not an expert on immigration but he has
found, in his experience, that it is easier for Canadians to
work in Alaska than vice versa. He noted interest among
[indisc.] sponsors about worker movement between the two
countries. A lot depends on how the Canadians would build the
line and where the spreads would begin and end. He said from the
view of labor, the project will take thousands of skilled people
so if all pipeline spreads fire up at one time, manning the
spreads will be very problematic. He said a lot of piping has
already been done in Canada but a lot of work remains to be
done. In one case, extra help was needed on a British Columbia
project so workers were imported from the Northwest. He
explained that Mano Frey is the regional vice president of an
international pipeline union. He is responsible for seven or
eight western states and four or five provinces in Canada,
including Alberta, British Columbia and the Yukon. He represents
pipeline laborers in those areas. He felt if Canadians needed
help, Alaskans would be willing to go whenever called.
CO-CHAIR SAMUELS asked Mr. Sampson to comment on Commissioner
O'Claray's statement that during the construction of TAPS, all
of the welders came from outside of Alaska because of the
agreement.
MR. SAMPSON deferred to the representative of the welders'
association for an answer but stated that all of the union
representatives present were involved in TAPS and there are many
opinions on how that project worked out.
SENATOR BUNDE expressed concern that the international unions
were not friendly to Alaskans during the construction of TAPS.
He cautioned Mr. Sampson not to follow the same procedure used
then.
MR. SAMPSON said he is very familiar with the TAPS agreement and
what support Alaskans got. He believes that Alaskan labor will
be leading at the table in these negotiations. The Alaskan
unions have a relationship with the national building trades in
Washington. He said he does not believe a president of an
international union would say that Lower 48 workers should have
a work priority over qualified Alaskans. He said Alaskan union
representatives are prepared to make big commitments to Alaskans
in a negotiated contract.
SENATOR BUNDE said he was not casting aspersions about Mr.
Sampson's good will but was just cautioning him that Alaska is
sometimes a small fish in a big pond.
SENATOR COWDERY said his understanding is that the pipe to be
transported is very heavy so that even if overload permits are
obtained, many of the bridges cannot handle those loads.
MR. SAMPSON said the size of the pipe differs among the
proposals so that is yet to be determined. He suggested several
transportation scenarios but said he is sure the industry will
ask for waivers on road to weight and that those problems can be
addressed relatively easily.
SENATOR COWDERY said he is hoping his bill to extend the
railroad through Canada will come about.
MR. SAMPSON agreed, but said the pipe can also be trucked if
need be and jested that the unions are willing to build roads,
bridges, dams or any other project that might be required.
MR. JIM LAITI, Business Manager with Pipefitters Local 375,
Fairbanks, introduced Mr. John Kanabe, retired training
coordinator, who was instrumental in implementing some of the
corrections to the lessons learned during TAPS. He read the
following prepared statement.
Thanks, Mr. Chairman, and committee members, for this
opportunity. I appreciate that. As I said, I'm the
business manager of the United Association of Plumbers
and Pipefitters, Local 375, in Fairbanks. We are one
of three pipefitter locals in the state and we were
chartered in 1946. My personal experience began with
my apprenticeship in Local 375, beginning late in
1969. Back in those days you could still join an
apprenticeship program if you were under 18 and many
of us, while we were still in high school, started
then.
My timing was very fortunate. It was right in the
middle of the construction boom we witnessed in the
1970s. I gained a tremendous amount of experience that
many others weren't able to gather prior to those
times here in Alaska. I also experienced first hand
the decline that we saw following that boom.
Regarding the issue of maximizing Alaska's workforce
involvement in a gas project, the best way, in my
opinion, to prepare Alaskans for this project is to
utilize the existing programs, facilities and
instructors already in place. These apprenticeship
programs have evolved tremendously, like I said with
ours, but I think ours is a good example of most all
of them from the lessons that we learned from TAPS.
Prior to that time there wasn't a project similar to
that, not just in our area but probably in the world.
The Local 375 apprenticeship program is representative
of many others in the building and construction
trades. In order to produce journey level craft
persons, the pipefitters 5-year program requires
completion of nearly 2,000 hours of shop and classroom
training and 8,000 hours, approximately, of on-the-job
mentoring type training under the supervision of
qualified craftsmen to turn out each journeyman at the
end of the typically 5-year period. I'd like to re-
emphasize that training by itself will not create an
effective workforce. There's got to be a linkage to
on-the-job experience. An analogy would be you
wouldn't build a competitive football team solely on
play books and videos and there's got to be a
translation into field experience. You can't beat that
on-the-job experience and, as an example, you know
pipeline level of welders, because of the productivity
and the quality requirements, those guys need to work
most of the year-round. I mean their skills
deteriorate and they're capable of being employed full
time. If there's not a project here in-state...
CO-CHAIR SAMUELS interjected to ask if the unions factor into
their decisions about training the downside risk that the
trainees will have no marketable skills after the pipeline is
completed.
MR. LAITI said these large projects create a bell curve as far
as employment goes for skilled craftsmen but Alaska will need
more skilled craftsmen after the project is completed for
maintenance and operations and the unions can estimate that
amount. He noted the pipefitters' union tries to keep people
working while they are in the apprentice program and is pretty
successful. It is also market driven.
SENATOR ELTON said Mr. Laiti's play book analogy suggests a
potential problem in that if training begins now, a presumption
must be made that once that training is done, projects will be
available for possibly 5,000 hours of on-the-job training.
MR. LAITI said that is correct. He acknowledged there will be
some conjecture that will have to be made about the timeframe
between project approval and when it starts. He said some of the
skilled workers will have to be imported since it will not be
beneficial to have 1,000 pipeline workers unemployed in Alaska
after the project is finished. He noted that he was forced to
leave Alaska to work in 1979 and 1980.
MR. JOHN KANABE said many workers can be trained to a certain
level and then "polishing" them would take a short period of
time.
SENATOR ELTON said if unions begin training Alaskans now for
Alaskan jobs, they may not be able to get the on-the-job
training necessary for them to become welders; they may end up
as welders' assistants.
MR. LAITI said these folks will need continuous employment until
the project starts to maintain their skills. [END OF SIDE A]
TAPE 04-34, SIDE B
MR. LAITI continued his prepared statement.
... into the construction industry is without
comparison. According to statistics compiled by
Information Insights in their May 2004 report, labor
and management JATCs in Alaska accounted for 84
percent of nearly 1400 active registered apprentices.
These apprentices benefit directly from the culture
that we've seen developed in the oil industry in the
last probably 10-12 years.
Attention to safety - a safe workplace, workforce
productivity, producing a quality product with careful
consideration for our environment - I mean these are
all refinements and changes we've seen probably in the
last, as I said, 10 or 12 years and that's good for
the state, good for our workforce, good for the
product that we build. We've come a long way since
TAPS. Let's make the most of our collective experience
using language for a project labor agreement that will
ensure utilization of our proven apprentice programs.
MR. KANABE added that the pipefitters union has been training
continuously since 1951. The union is market driven, meaning it
can only train for the jobs that are out there. He noted that
the union has hundreds of trainers, all of them journeymen.
Classroom training is only one component and most learning
occurs in the field. He said journeymen have a vested interest
in training new workers.
CO-CHAIR WAGONER asked how many people will be trained during
the project during the next year on the Slope.
MR. LAITI clarified that that project consists of about 24 miles
of pipe and he expects that everyone who goes through the
pipefitters union pipeline orientation will have an opportunity
to work on that, but not at the journeyman level. He explained
that the four pipeline crafts have gotten together in the past
to provide training at different levels. Everyone who
participates as a pipefitter is at the welder's helper level,
apprentice level or lower. Some of them will have the
opportunity to work as journeymen prior to the pipeline project.
He said there has been interest in dictating total Alaska hire.
The Plumbers and Pipefitters Union national pipeline director
has visited Alaska and is very sensitive to the Alaska hire
issue. Its general president has also visited a number of times,
which did not happen when the TAPS was underway.
CO-CHAIR WAGONER said he wants to hire as many Alaskans as
possible, but questioned how many certified pipe welders are
available in Alaska today.
MR. LAITI estimated 200 to 250, depending on the type of
certification. He said the Local 798 union began to train to
that standard in the early 1980s and helped [Local 375] welders
to learn to perform to the non-destructive testing standards,
which are almost to nuclear standards.
CO-CHAIR WAGONER surmised that many of those welders will not
leave their current jobs to work on the pipeline.
MR. LAITI said some will, some won't.
CO-CHAIR SAMUELS called Mr. Bishop to testify.
MR. CLICK BISHOP, Apprenticeship and Training Coordinator for
the Operating Engineers Local 302, introduced district
representative Bob Morigeau from Anchorage, and thanked members
for the opportunity to speak. He told members he has been with
the operating engineers for 30 years and worked on the
TransAlaska Pipeline right after completing high school. He has
also worked on civil, heavy and highway work and spent 17
winters working in Prudhoe Bay. He began his current position in
1991, at which time he had 17 apprentices. Today he has more
than 120. He said technology has changed so that today, the
project will rely on hydraulic excavators with GPS technology
and trenching machines. This new equipment requires much more
training than was required 30 years ago.
CO-CHAIR SAMUELS asked if the new technology will require fewer
people.
MR. BISHOP said the peak manpower numbers provided by Mr. Palmer
showed the need for a lot fewer operating engineers than the
1974 project required. He noted that as the pipeline crafts came
together in 1997 and 1998 with the industry, labor and the oil
companies, it did some training for North Slope work. Out of the
28 students that were trained in his craft, 25 were employed.
His apprenticeship program is designed to only train the number
of people that can be actively employed. He works hard to
recruit from rural Alaska. Apprenticeship numbers for Alaska
Natives depend upon timing but run from 30 to 40 percent of
participants. He said the unions can collectively do a better
job to assure training for this project than they did in 1974.
He commented that the Pebble Mine project may be starting at the
same time as the gas line and that could create a manpower
problem. He offered his services to the committee for any help
it may need.
MR. BOB MORIGEAU, District Representative, Operating Engineers
302, told members that he traveled to Alaska 30 years ago from
Montana and remained here. He explained that most of the work
done by the Operating Engineers is heavy highway work; 7 out of
10 of its projects have no mandated training or apprenticeship
hours. This project would be a perfect vehicle to increase its
numbers because many contractors will not employ trainees on
their own unless mandated in the job specifications. Close to 7
out of 10 Department of Transportation and Public Facilities
projects have no training hour mandates. If projects contain
such mandates, the union could increase its number of trainees
from 15 or 25 per year to 50 or 60. That would provide a perfect
vehicle to ramp up for the pipeline project.
REPRESENTATIVE JOULE said one disadvantage of union membership
for rural Alaskans is that if there is no work in their areas,
the chance of being called for a job is remote. He asked if they
are called regardless of where the work site is located once
they are in an apprenticeship program.
MR. BISHOP said the fact that apprentices leave the villages
because steady work is not available in the villages is one of
the things that he gets "beat up" on by elders when he goes to
the villages. He explains to the elders that at some point in
time, the workers will be able to retire in the villages. He
lamented that is a tough issue and said they keep apprentices
actively employed and work hard with rural students.
MR. MORIGEAU commented that the hiring hall recognizes local
hire issues and gives preference to rural workers who live
within the vicinity of a job, regardless of where that person's
name sits on the out-of-work list. Hiring is done via telephone
so, if a person is on the out-of-work list, they get called and
offered a job no matter where it is.
MR. MIKE GALLAGHER, Business Manager of Laborers' Local 341,
Anchorage, said he is responsible for the geographic area of
Southcentral Alaska. His counterpart, Tim Sharp, is responsible
for the geographic area up North. The Alaska Laborers' Training
School is jointly managed with contractors appointed by the
Alaska General Contractors (AGC). They have two training
facilities in Anchorage and Fairbanks. Trainees from other areas
are provided with room and board. He noted in 2003, the
laborers' union trained over 2000 people at those facilities. It
also does satellite training in Kenai, Kodiak, and Southeast.
Training consists of pipe laying for water and sewer lines,
grade checking, building construction, concrete, pipeline
construction, road building construction, drilling and blasting,
and upgrade training for certification. The union spends an
average of $1.3 million per year on training of the Alaska
workforce and has spent over $2.5 million on training assets.
MR. TIM SHARP, Business Manager of Laborers' Local 942,
Fairbanks, told members he represents 1100 members from above
the 63rd parallel and in Southeast Alaska. He said his members
can be likened to the "Marines" of the industry and would do the
drilling and blasting on the right-of-way for a pipeline job.
They also do pipe coating, carpentry, sheet metal work,
insulation, and load and unload trucks. He said the consistent
themes he heard during the last two days are risk management,
maximizing value, rate of return and best policies. He said his
programs tie into those themes well. He explained:
I saw a lot of heads nodding here yesterday that the
Legislature, along with the people of Alaska, decided
on a southern route and they did that for a lot of
reasons but I think the main driver was jobs and
opportunities for Alaskans. I think the issue before
us and the thing that we help bring to the table is
how do you develop that integrated approach to manage
the risk or maximize the value out of these jobs and
opportunities. Those are our programs. Those are all
the trade programs because they're the best in the
industry - I mean they're just recognized as the best.
They have that track record, and even had we never
testified, it's just the accepted fact that no one
does it better than the unions. We can turn on a dime.
We can train for any new particular skills that the
contractors bring before us. If there's new cutting
edge stuff we're right there for them. We just need to
know which way we're going and we go there.
It's been covered before that we're market driven. We
don't train for the sake of training. There's an
outcome for our training programs. There's a job or we
don't do it. We deliver a seamless career package for
Alaskans. We get them right to work at the end of
these programs. We - and Mike covered it - and I think
this is key and I would like it to be maybe noted that
all of our training programs are administered jointly.
There are contractors on the other end of this
equation. We don't just go do what we think is a good
idea. There's a check and balance and it's well
thought out.
I guess the other thing, in terms of what makes us
different, is whatever projects we do, whether it was
the TransAlaska Pipeline up to today, we leave in our
wake residual benefits. We're not a drain on the local
economy. We nurture the local economy with health
benefits. We pay our own way. We have pensions that
are created as a result of our jobs and projects that
we are involved in, leaving Alaskans a chance to
retire here. We help feed the equation here in terms
of local economy. Because we're market driven, and I
think the representative from TransCanada mentioned it
earlier, the need to get going. You can't train, for
instance, a journeyman pipefitter in a year. No one
has a crystal ball but we don't have the luxury of
waiting for all the certainty that we might need to
get going on this but I'll tell you right now, if we
don't get going, we will be - and [Representative]
Joule mentioned it, how do we not make the same
mistakes we made the first time. Well this is the
whole key. If you have the project labor agreement, if
you have the glue that kicks this all into gear, you
have the certainty that gives the trades a target to
know how many people to prepare for, when this is
going to happen, what the needs of the contractors
are, it guarantees results as opposed to some of the
other language we've seen in past bills. It's
enforceable language as opposed to words like
'endeavor,' or 'may,' or 'we should strive for Alaskan
hire' - we can get Alaskan hire this way.
I guess I'll try to keep it short because there were
four people before me that might have given you
everything else.
CO-CHAIR SAMUELS thanked Mr. Sharp.
REPRESENTATIVE JOULE asked Mr. Gallagher how well his local
union is doing recruiting people who have moved from rural
Alaska to Southcentral.
MR. GALLAGHER said he believes they are doing well. About 27
percent of their apprentices are from rural Alaska. One problem
is that people come from rural Alaska on an interim basis so
housing is problematic. The AGC and organized labor discussed
that issue this year and devised a mechanism to resolve that
problem in which workers will be provided with either housing or
per diem.
MR. SHARP invited all members to the pipeline demonstration in
Fairbanks in November.
CO-CHAIR SAMUELS thanked Mr. Sampson for attending and
apologized to the non-union groups that wanted to testify. He
explained that he set the agenda and did not intend to omit any
point of view but the number of people who wanted to testify was
overwhelming. He said he would try to invite those people to
speak at the next hearing. He then called Mr. Cattanach to
testify.
MR. DICK CATTANACH, Executive Director, Associated General
Contractors, told members he would share his perspective on some
of the comments made earlier. He stated:
You need to understand what the construction industry
is and how big it is. We talk about 8,600 employees at
the peak. You have to recognize that in 2004, we're
expecting an average construction employment of 17,400
workers. So we're looking to grow by 50 percent if
these projections are correct. And that's all
construction workers. That's laborers, that's
operators, that's Teamsters, that's carpenters, that's
bricklayers, that's a lot of people who aren't going
to be involved in this. So if you look at the impact
on the trades, you're going to see that we're probably
going to increase the impact to trades by two-thirds
or more. We'll double them in some cases.
To think that we can hire everybody locally is a
fool's errand. I mean it's not going to happen and I
think we need to understand that. The commissioner
pointed out some very good reasons why we couldn't do
that. Some of the other gentlemen have talked about
what happens after and if you were here in the late
'70s, you saw all those construction people and
unemployment lines. There was no work for them. What
we need to do is be concerned about that as well.
Some of the things that I think are important for us
to think about - our construction ranges from an
average in 2004 of about 13,700 in January. January,
if you look at the graphs, is traditionally the low
time of the year for construction employees - to a
high of about 22,000, which will be in August. That
difference is about 8,300 employees. If we could
construct the pipeline in the winter, we could have a
relatively even transition from people that would be
laid off normally into the pipeline. But when we add
it on top of summer construction, those are 80-some
hundred more people that are going to have to be
trained and come into the industry.
We also need to remember, and it was pointed out,
training is not homogeneous. You don't provide
training and then you have somebody that can go and do
everything. A carpenter that's been trained is not a
finish carpenter when he's gone through his minimum
training. That takes time. That takes an awful lot of
time. So what you're going to have is a lot of entry
level jobs that you've prepared people for. They're
not going to be doing the skilled labor jobs. Those,
unfortunately, are going to come out of our existing
workforce. When I say 'unfortunately,' you have to
recognize what happens. They're going to come out of
the workforce but they've got to be replaced so the
roads that are built in Southcentral and northern
Alaska - all over Alaska, are going to be built with
people that don't have any experience because the
experienced people are going to be working on the
pipeline and who would deny them the opportunity to
work 12 hours a day, 7 days a week and take home those
huge checks, rather than work highway construction for
40 hours a week. You're going to see that. You're
going to see the skilled labor moving to this
pipeline. That's going to have a huge impact on
construction, as we commonly know it. So if you think
you've got delays right now driving around Anchorage
or other places, imagine what it's going to be like
when you take the skilled workforce and they're
building the pipeline. It's a problem we're going to
have to learn to live with and it's a problem that
it's actually nice to know in advance so we can start
doing some planning.
One of the things that was pointed out is that what
you see in construction is we have a very good
construction labor force. It's there because of a
relationship developed between management and labor
many years ago. An apprenticeship program paid for by
the private sector through negotiated agreements with
labor unions - they provide 86 percent, a comment I
heard, of the trained workers in construction. The
government doesn't play a role in this. So if we're
going to get the government involved in training when
they're not involved in the job placement and
everything else with that, we need to make sure that
we all understand what that role is so they're just
not training people that end up standing in an
unemployment line because nobody's looked at the job
opportunities. There needs to be a better thought
process going into what the role of government should
be. They have to be part of it. They've got money but
what should their role be? I really don't have the
answer.
We've heard discussions today about local hire. We're
all in favor of local hire. I haven't heard one
mention about maintaining local contractors. When the
pipeline was built, principal contractors were
Bechtel, Fleur, Parsons - these are outside companies
that owe nothing to Alaska. They contribute nothing to
Alaska. They leave nothing when they leave except, if
we look at the missile defense system, some broke
contractors, broke subs who have to work with them and
end up going broke. I would like, when we think about
local employment, to extend that to try to get local
contractors involved and you say do we have local
contractors. You have VECO. You have AIC. Who
mentioned AIC or, actually, one of the gentlemen
mentioned AIC. You have Kewitt - Peter Kewitt, one of
the largest companies in the world. You have Wilder
who is owned by Granite Construction. You have Alasko
(ph) - Alaska Quality, owned by a French company.
These are Alaskan companies. They can certainly
provide some of the expertise we need.
What I fear is we're going to see Bechtel and Fleur
and these people who owe nothing to the state, have no
allegiance to the state, you'll never see them in
Juneau saying we've got some laws we need to change,
we've got some conditions we need to address. Instead
they'll come, they'll take their money and they'll
leave the state and that's of concern. That's
something that my membership is very concerned about.
And with that, my remarks are concluded.
SENATOR BUNDE said when he thinks of Alaska hire, he thinks of
the people who do the hiring, as well as the people who get
hired. He then asked if recruiting young people into the trades
has been challenging.
MR. CATTANACH said the construction industry has to grow by
about 1,250 workers each year right now just to replace the
growth predicted by the Department of Labor and turnover. He
said according to statistics, the state has had no in-migration
since 1990 so that demand is not going to be met by importing
workers. The demand must be met by high school graduates or
unemployed workers yet Anchorage's unemployment level is below
the national average. Alaska high schools graduate about 7,000
workers per year, of which an estimated one-third will go to
college, therefore, the construction industry has to attract
about 20 percent of those graduates to meet its needs. He said
that schools are doing an abysmal job at training. Students do
not graduate ready to go to work. They do not know how to show
up for work every morning. Counselors are not advising students
to go into the blue-collar trades. He noted that labor is doing
what it can to improve the image of blue-collar workers and
money is what attracts those graduates.
SENATOR BUNDE said enticing people to get trained should be part
of the legislature's discussion.
CO-CHAIR WAGONER said he left the community college system in
1986 when the university system and legislature decided to merge
the two. That merger has been very unsuccessful because the
community college mission got lost. He believes in
reconstituting the community college system because they are
strong in vocational training and thinks something will be done
about that in the next few years. He said it is important to
increase awareness among high school students and students who
do not complete high school. They can be enticed into the
community college system for further training.
MR. CATTANACH said students must be proficient in math to enter
the construction trades.
CO-CHAIR WAGONER agreed but said math can be taught using an
applied method rather than with a theoretical method.
SENATOR ELTON asked Mr. Cattanach if he has any suggested course
of action to protect Alaska contractors or whether he has been
working with the administration on that issue.
MR. CATTANACH said the AGC has been shut out of that discussion
so he raises his voice about it whenever he can. He said the AGC
got shut out during the oil pipeline construction. He said he is
bothered by the fact that the trained workforce in Alaska was
trained by the contractors who are here and have made a
commitment to the state, yet they get left out. He said he has
carried that message to the administration but he is not sure
how well it resonates.
SENATOR ELTON said it would be helpful for both labor and
management to come forward with ideas that would work.
REPRESENTATIVE JOULE said he is glad Mr. Cattanach raised the
issue of Alaska contractors. Regarding vocational education and
whether students are prepared, he sees that as a great
opportunity but certain things must be fixed first. Our
secondary school system does not offer much in the way of
vocational education because of the [foundation] formula so that
is a change the legislature would have to address. He said
Representative McGuire mentioned the King Career Center earlier.
His belief is that because the economies of rural Alaska and the
rest of Alaska are joined at the hip, the legislature needs to
figure out how to make those kinds of partnerships that can
reach across Alaska to get students to take advantage of those
systems. Some school districts are talking about the need for
boarding schools in Anchorage to allow rural students to take
advantage of those opportunities. He said the legislature needs
to look down that road as these discussions take place.
TAPE 04-35, SIDE A
CO-CHAIR SAMUELS announced that the committee would take up its
roundtable discussion. He started by explaining the procedure
for ratifying a contract. He told members the [Stranded Gas] Act
provides the Administration with the authority to accept
applications from entities interested in building a gas
pipeline, shipping gas through the pipeline, or doing both. The
Administration can negotiate with applicants on royalty, tax and
other terms subject to certain limitations contained within the
act itself. When and if the Administration successfully
concludes negotiations with an applicant, it is to prepare a
best interest finding in favor of the proposed contract. The
Administration will then release the proposed contract, the
preliminary best interest finding, the financial, technical and
market data supporting the contract, as well as the work papers,
analysis and recommendations of any independent contractors used
by the Administration. The Legislature has been guaranteed
access to a lot of the information that is currently
confidential, as soon as the negotiations have been completed.
CO-CHAIR SAMUELS further explained that when the proposed
contracts, findings and data are first released, the
administration must provide a minimum of 30 days for public and
legislative comment. The administration must offer to appear
before the Legislative Budget and Audit Committee for discussion
of and questions on the proposed contracts and other
documentation. The administration can provide more than 30 days
for public and legislative comment. When the comment period
closes, the administration must prepare a final best interest
finding within 30 days if it plans to proceed with the proposed
contract. The final best interest finding must discuss all
comments formally registered during the comment period. The
comment period is the Legislature's first formal opportunity to
express its opinion on contract terms and on any amendments to
the proposed contract that it considers appropriate. Legislators
can comment individually by committee, as the House, as the
Senate or however they choose during this period and no vote
will be required. After the 30 day comment period, which by
statute is the Legislature's "first bite of the apple," the
proposed contract goes back to the administration for 30 days to
prepare its final finding and any proposed amendments to the
contract. The Legislature will then get a second "bite of the
apple" when the contract comes before it for a vote. There is no
deadline for a legislative vote; the Legislature will have the
opportunity to hold more hearings in any committees before it
votes. The Legislature can also take whatever time it needs to
review supporting documentation and consult with legal counsel.
CO-CHAIR SAMUELS commented that because of the short timeframe
before the legislative branch, the Legislature has been in
contact with various entities, including experts of FERC and the
NEB. He acknowledged that it has been difficult at times to find
people who are not already employed by the administration, a
pipeline company or the producers and would have a conflict of
interest. He noted that some want to work quickly to avoid
delaying the project. The purpose of the joint hearings has been
to "get up to speed" because of the difference between the
Legislature's legal right to take all of the time it wants and
the practical reality of having to work relatively quickly.
CO-CHAIR SAMUELS informed members that he has been advised by
legal counsel that the Legislature can approve the contract,
reject it unless certain conditions have been met, or reject it
outright. If the Legislature rejects the contract with certain
parameters, it takes the risk of rejecting the contract
completely. He summarized that the role of the Legislature in
this contract is to put one entity in charge of the negotiations
so that all 60 legislators are not "picking it to pieces." He
pointed out the Stranded Gas Act is silent on some issues; those
issues will have to be decided upon when the time comes.
SENATOR ELTON suggested that Chair Samuels circulate copies of
the description he provided to all legislators.
SENATOR BUNDE reflected on the Governor's opening remarks in
which he said he wanted a signal from the Legislature. His
personal view is that this portion of two legislative committees
cannot speak for the entire Legislature and that this
Legislature cannot speak for the legislature that is sworn in in
January. He furthered:
I don't know how we can give the Governor what he
wants other than personal opinion or personal
preference and I'm certainly willing to do that.
Personally I'm not opposed to some sort of equity
position if - if, and that's a really big if for me,
appropriate firewalls can be instituted that will
protect any future pipeline management from political
pressures from both the administration and from the
Legislature. Representative Croft and I had a little
brief written conversation earlier and he pointed out
that we've done that very well with the Permanent
Fund, however, at that time, there wasn't any direct
payback to the public from the Permanent Fund. The
dividend didn't come in for seven more years. At this
juncture and when we make these decisions, I think
there will be some direct financial influence for the
public, whether low gas prices or high wages or a
combination thereof, and I'm concerned that the
state's best long term interest may not be aligned
with some individual's short term interests.
So, with that proviso that there has to be some very
impenetrable firewalls, then I could possibly support
an equity position but, as I think has been said
several times here, the devil will be in the details.
So, I can't make a commitment for the Legislature. I
can make a minor, sort of, little bit of commitment
for me.
CO-CHAIR SAMUELS said he didn't want to put words in the
administration's mouth but he believes one of the goals of
having the hearing at such an awkward time so close to the
election, was to get the conversation out to the public arena so
that people can give the matter consideration. He agreed the
"devil is in the details" and that legislators cannot provide
answers until it sees the proposal.
CO-CHAIR SAMUELS then told members he is interested in getting
more information about the international workforce question.
REPRESENTATIVE DAHLSTROM informed members that she attended a
public meeting the previous evening sponsored by the Friends of
the NRA, during which she talked about yesterday's legislative
meeting. The overall response of the group was excitement about
progress being made on the natural gas pipeline. No one seemed
to be concerned about state ownership of the gas line, however
people needed time to think about how to finance that ownership.
She said she personally likes the idea of investing in the
pipeline with their Permanent Fund dividends and believes many
people would like that choice. She said her constituents will
not be happy if the Legislature uses $1 billion from the
Permanent Fund. She emphasized the need to get more details to
make an educated decision.
REPRESENTATIVE CHENAULT commented that investing in the pipeline
with dividends might be an option as early as next year. He then
noted that Mr. Cattanach commented that the Legislature needs to
be involved in training plans for this project, whether it is
with the contractors or different unions or whoever ends up with
this project. His personal view is that he questions how deeply
the Legislature or state government should fund the whole thing.
He thinks contractors and the companies can work that issue out
amongst themselves.
REPRESENTATIVE FATE asked that the questions about royalty-in-
kind and the percentage of equity the state might have be
pursued. He said it should be clarified that at the present
time, the 12.5 percent royalty can be taken in value or in-kind
and that the in-kind royalty should be separate from any equity
amount the state holds unless the two are combined. He cautioned
that if the two are combined, the state might not be able to use
the royalty-in-kind for the benefit of people in the state, as
suggested by Ken Thompson.
REPRESENTATIVE FATE said his second concern is that the problem
of the inadequacy of our present transportation infrastructure
needs further consideration. He noted the Haul Road is in
deplorable condition and has been almost ignored for 24 years,
even though it is the lifeline of the State of Alaska. The
problem is even more severe south of Fairbanks to the border.
The current transportation system simply will not facilitate the
weight of the pipe. He said the Legislature must begin to
consider that issue now so that any improvements on those
highways will be completed before the targeted date of pipeline
construction. He cautioned that could create a bottleneck.
CO-CHAIR WAGONER said, in response to Representative Dahlstrom's
concern, that he does not believe the Legislature would want to
take money out of the Permanent Fund earnings because it would
have to first look at what it would have to pay in bonded
indebtedness versus what those earnings would earn. If the
Legislature can get the bonds cheap enough, the state would
actually be making the state money by using its bonding
capabilities. He noted the Permanent Fund is currently earning
16 to 18 percent. He said many of his constituents want the
opportunity to invest their permanent fund dividends to help
fund the gas pipeline for two reasons. First, they realize the
overall importance of the gas line to the state. Second, they
want to invest in something on a long-term basis and have the
opportunity to participate in their own future. He said he is
not afraid to say no to every other crazy scheme that is
presented to the Legislature.
SENATOR GUESS thanked Chair Samuels for the presentations he
arranged for members and said one question that needs to be
answered sooner rather than later is whether the state falls
under the federal guarantee because the state's risk is tied to
that question. She then suggested spending more time considering
the range of risk and on how that risk is being portrayed to the
Legislature and to constituents. She said the overview of risk
in general during the past two days was great, but she feels the
need to determine what that risk looks like regarding whether
the state will not collect any taxes and whether it will require
a $300 million line item in the budget. She further questioned
how access will play in, given the federal legislation, which
contains fairly constrained access provisions. She questioned
whether the state could leverage its share to ensure access for
future exploration and whether it may need to play that role.
CO-CHAIR SAMUELS said he would provide a better synopsis of the
Legislature's role and provide bullet points on the exact roles
and procedures of the legislative branch. He will also provide a
better synopsis of what the federal legislation does and does
not do and how far reaching it is. He suggested that if members
hear from people about state participation and risk, those
comments be relayed to Senator Guess, Representative Joule,
Senator Wagoner, or himself, since they are acting as the
conduits [with the administration].
CO-CHAIR WAGONER suggested that he and Chair Samuels send out a
joint letter to every legislator that contains a copy of the
Governor's presentation and ask them to approach their
constituents for input.
CO-CHAIR SAMUELS jested that the downside of that is legislators
who did not attend these two days of hearings will be providing
an explanation.
CO-CHAIR WAGONER said they could just provide the Governor's
presentation and ask whether the people of the state want to
look into a state equity position in the pipeline. He said many
people are already approaching him with opinions as they are
already contemplating it.
SENATOR ELTON noted that the discussion cannot focus only on
risk - it must also focus on reward if legislators want to sell
the idea to constituents. To do that, legislators need to fully
understand the potential rewards.
CO-CHAIR SAMUELS commented that Dr. Van Meurs said the risk was
very small but the hole was very deep.
REPRESENTATIVE GARA agreed with Senator Elton and said his
biggest concern is that the Legislature needs to be vibrant and
a vocal participant during the 120-day comment period before the
federal government about the access rights. He suggested sending
a message to the Governor, if appropriate, saying the
Legislature wants as much access as possible and wants the
state's interest pushed as far as possible and to request
interim funding from the Legislature if necessary. He cautioned
that the administration will need sophisticated negotiators and
experts during a period when companies with conflicting
interests need the same personnel to do the opposite. He said
that should be set up now because it could radically change the
prospects of what the gas line will look like over the next 120
days.
CO-CHAIR SAMUELS said he and Commissioner Corbus and Senator
Therriault discussed access issues with the Governor's Gas
Cabinet but those issues should be further emphasized.
SENATOR GUESS agreed with Representative Gara that it is
important to have someone focus on the federal regulation public
comment period on behalf of the state for the next 120 days. She
said Dr. Van Meurs is busy trying to negotiate, so to also
expect him to stay on top of the regulations [is not feasible].
She said if she were one of the players involved, she would have
draft regulations submitted to FERC by now.
CO-CHAIR SAMUELS thanked everyone for their participation and
adjourned the meeting at 4:00 p.m.
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