Legislature(2003 - 2004)
01/28/2004 01:45 PM House FIN
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* first hearing in first committee of referral
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= bill was previously heard/scheduled
+ teleconferenced
= bill was previously heard/scheduled
HOUSE FINANCE COMMITTEE
January 28, 2004
1:45 PM
TAPE HFC 04 - 14, Side A
TAPE HFC 04 - 14, Side B
TAPE HFC 04 - 15, Side A
CALL TO ORDER
Co-Chair Harris called the House Finance Committee meeting
to order at 1:45 PM.
MEMBERS PRESENT
Representative John Harris, Co-Chair
Representative Bill Williams, Co-Chair
Representative Kevin Meyer, Vice-Chair
Representative Mike Chenault
Representative Eric Croft
Representative Hugh Fate
Representative Richard Foster
Representative Mike Hawker
Representative Reggie Joule
Representative Carl Moses
Representative Bill Stoltze
MEMBERS ABSENT
None
ALSO PRESENT
Representative David Guttenberg; Representative Cheryl
Heinze; Representative Norman Rokeberg; Representative Harry
Crawford; Harold Heinze, Chief Executive Officer, Alaska
Natural Gas Development Authority; Steven Porter, Deputy
Commissioner and Liaison to the Alaska Natural Gas
Development Authority, Department of Revenue; Dan Sullivan,
Member, Board of Directors, Alaska Natural Gas Development
Authority.
PRESENT VIA TELECONFERENCE
Bob Favretto, Member, Board of Directors, Alaska Natural Gas
Development Authority.
GENERAL SUBJECT(S):
The following overview was taken in log note format. Tapes
and handouts will be on file with the House Finance
Committee through the 23rd Legislative Session, contact 465-
2156. After the 23rd Legislative Session they will be
available through the Legislative Library at 465-3808.
JOINT WITH MEMBERS OF THE HOUSE OIL AND GAS COMMITTEE
OVERVIEW: ALASKA NATURAL GAS DEVELOPMENT AUTHORITY
Plans to Develop a Natural Gas Pipeline
LOG SPEAKER DISCUSSION
TAPE HFC 04 - 14
SIDE A ALASKA NATURAL GAS PIPELINE
000 Co-Chair Harris Convened the House Finance Committee
meeting at 1:45 p.m.
0125 HAROLD HEINZE, CHIEF Reviewed his professional background in
EXECUTIVE OFFICER, oil and gas, emphasizing his involvement
ALASKA NATURAL GAS with the gas issue for over 30 years.
DEVELOPMENT
AUTHORITY
256 Mr. Heinze Explained that he would discuss the
Alaska Natural Gas Development Authority
(ANGDA) and its funding through the
supplemental budget process. Ballot
Measure 3 passed in the November 2003
election created ANGDA as a public
corporation of the state. A 7-member
board of directors was appointed in May
2003.
505 Mr. Heinze Reviewed ANGDA's broad authorities that
include the features of a public
corporation. Explained that the Board of
Directors is given decision-making
control of the Authority and its
corporate features.
549 Mr. Heinze Explained that ANGDA will produce a
report by June 2004 on the feasibility of
an LNG project out of Valdez with a spur
line from Glennallen to Cook Inlet.
Initially looked at how to accommodate
Alaska's needs for gas. The Authority
found that the volume was quite low, with
an inability to meet the state's needs.
Attention shifted to a project to
transport the gas to tidewater and
connect with a spur line to Cook Inlet to
provide benefits to Alaskans as well as
export capability.
706 Mr. Heinze Stated that the creation of other
petrochemical or business industries in
Alaska may be the single greatest benefit
of North Slope gas development.
745 Mr. Heinze Reviewed ANGDA's study of a project that
would involve a gas treatment plant on
the North Slope to remove the CO2, a
pipeline running alongside the Trans-
Alaska Pipeline to Valdez, an LNG plant
in Valdez to cryogenically cool the gas,
and a fleet of tankers to deliver the gas
to the West Coast or across the Pacific
Ocean to potential customers. Gave a
price estimate of $12 billion for the
project.
834 Mr. Heinze Explained that this would be a difficult
commercial project because the high rate
of return on $12 billion when translated
into pricing in the marketplace doesn't
fit with the expected long-term
conservative price of gas. When ANGDA
recalculated those economics under other,
more appropriate assumptions as an
Authority with a unique tax status, it
dramatically altered the economics into
more competitive project.
942 Mr. Heinze Discussed broader view of how the project
would work. Referred to " ANGDA All-
American LNG Project Conceptual Schedule"
(copy on file) and explained the project
involves three phases: a feasibility
phase of determining the market, a
business plan, and contracting to build
the project. The feasibility decision
will be made in June 2004 when ANGDA
publishes its findings. Alaskans will
make the decision whether or not to
proceed with the project.
1147 Mr. Heinze Asserted that the information ANGDA will
provide by June 2004 will be extremely
valuable to the legislature. Stressed
that the $2.5 million general fund
contribution is ANGDA's total funding
request from the state and that the
Authority will privately finance the
remainder of the project. The first $200
million raised through venture capital
will allow ANGDA to develop thorough
information about the project's
credibility that is essential in
approaching lenders. The $10 billion
needed to build the project will be
raised through revenue bonds.
1343 Mr. Heinze Delineated legislature's role and said
that $2.5 million represents his estimate
of what will be needed.
1525 Co-Chair Harris Asked if ANGDA has obligated and spent
the money it received from the state.
1540 Mr. Heinze Responded that he's an employee of the
Department of Revenue and he has
obligated the funding, although not all
of the work has been completed.
1633 Mr. Heinze Summarized FY 04 Funding Plan (copy on
file.) An essential component is
marketing the project and North Slope
gas.
1736 STEVE PORTER, DEPUTY Explained that he has worked closely with
COMMISSIONER AND ANGDA on the funding commitments, which
LIAISON TO ALASKA cannot exceed $350 thousand. Recently
NATURAL GAS the money has been obligated and
DEVELOPMENT contracts have been signed. Currently the
AUTHORITY, total amount is close to being fully
DEPARTMENT OF committed to contracts.
REVENUE
1936 Mr. Heinze Continued explaining the FY 04 Funding
Plan. Money has been set aside to
produce the findings in a report to the
public.
2042 Mr. Heinze Reviewed FY 04 Funding Plan, Business
Contractors. Commented that ANGDA is
awaiting good legal advice on the exact
tax structure of the Authority. The
Benefits Analysis will review economic
and personal impacts to Alaska, including
potential new jobs, rising property
values, and lower heating bills.
2250 Mr. Heinze Spoke to issues relating to market
dynamics. Contracting for the best
advice in these business analyses has
been expensive.
2331 Mr. Heinze Reviewed the third phase, Project
Contractors, in which funds are set aside
for engineering and technical project
management issues to deliver gas to
Valdez and liquefy it. The Authority has
received invaluable information and
assistance from several entities, and
signed a Memorandum of Agreement with
Mitsubishi for their expert advice
relating to natural gas.
2557 Mr. Heinze Stressed that there are four months to
finish the remaining work of ANGDA and it
is more than a statutory deadline because
it also involves the market and the
feasibility of the project.
2649 Mr. Heinze Mentioned that this work by ANGDA will
yield business structure information
beneficial to the legislature in dealing
with the Stranded Gas Act. Spoke to the
other benefits of the work.
2920 Co-Chair Harris Asked about the feasibility of supplying
gas to Kenai Peninsula.
2953 Mr. Heinze Replied that legislation will address the
specific project. A requirement of Ballot
Measure 3 was the inclusion in the
project of a spur line from Glennallen to
the Cook Inlet area because of a great
need for gas in that area, with near
depletion of the plentiful gas of 30
years ago.
3127 Mr. Heinze He continued, current Cook Inlet
wholesale price of gas is $2.25, which
also applies to power generation, driving
the electrical cost as well. The price of
gas in Anchorage is projected to double
the current price in 5-7 years.
3219 Mr. Heinze Asserted that once the gas is delivered
to tidewater and Cook Inlet, it would be
possible to deliver it to coastal
communities and up the rivers to reach
99% of Alaskans.
2219 Vice-Chair Meyer In relation to last week's announcement
by the producers, asked the possibility
of all three parties working together.
3425 Mr. Heinze Replied that ANGDA doesn't need to build,
own and operate all the benefits. ANGDA
has had initial discussions with Pacific
Star and would like to discuss the
project with all the parties.
3606 Vice-Chair Meyer Noted that Mr. Heinze referred to this as
"The People's Pipeline," and asked if
$2.8 million is the total funding
request.
3703 Mr. Heinze The supplemental request for $2.15 added
to the $350 thousand will total $2.5
million. The project is benefit-driven,
not investment-driven, making it belong
to Alaskans. Individuals may invest in
the project.
3903 Representative Fate Inquired if one of the biggest challenges
to the project relates to The Jones Act,
and asked whether there has been
resolution.
4035 Mr. Heinze Explained that The Jones Act requires
that any trade between U.S. ports be
carried in U.S. built, crewed and flagged
ships. One target market is the West
Coast, requiring LNG vessels to supply
the gas. Reviewed the issues.
4229 Mr. Heinze Discussed LNG tanker cost estimates. The
Jones Act explicitly requires that the
tanker hull be of U.S. manufacture, but a
tanker potentially could include Japanese
ship interiors. The time involved in
building a fleet is a potential problem.
The State would contract out for the
ships to be built, or for use of existing
ships.
TAPE HFC 04 - 14, Side B
4633 Mr. Heinze Discussed the Stranded Gas Act in
response to a question by Representative
Fate.
4519 Representative Asked if there is a mechanism to insulate
Hawker the state from a risk of loss.
4437 Mr. Heinze Responded that Ballot Measure 3 is
explicit that the Authority cannot
obligate the full faith and credit of the
state. The project financing is non-
recourse financing, and issuing a note,
bond or certificate is high risk and high
reward. At-risk investors will be
brought in early.
4223 Representative Asked if ANGDA has discussed with tax
Hawker counsel the compatibility of issuing
private investor bonds that will not put
the state at risk and still retain tax
exempt status.
4138 Mr. Heinze Explained that he has sought the best
legal advice because of potential
conflicts. The Authority can't propose
technical amendments to the law.
3945 Representative Asked if ANGDA would have answers to the
Hawker tax questions if the legislature approves
the $2.5 million funding request.
3921 Mr. Heinze Replied, "Absolutely."
3835 Representative Asked what percentage the State would
Stoltze need in order to have a voice in the
process.
3807 Mr. Heinze ANGDA will help the state by keeping the
cost of transporting the gas as low as
possible, which will increase the
wellhead value to benefit the producers
and sponsors.
3632 Mr. Heinze Continued, the ANGA is not directly
involved in the Stranded Gas
applications. The three major companies
are submitting applications, and all
discussions involving ANGDA, a public
entity, are public.
3453 Representative Commented in support of the spur line.
Rokeberg Expressed concern regarding the $200
million development phase to be financed
through the high-yield junk bond market.
Questioned the short four-month window to
devise a plan for the Security Exchange
Commission, to have the bonds in place
and to sell them almost immediately. He
asked if there aren't conflicts between
the public authority having tax exempt
status but a lack of equity position.
3227 Mr. Heinze Responded with a discussion of debt
financing.
2934 Representative Asked if ANGDA will maintain its public
Rokeberg status and not look for any private
equity investment.
2914 Mr. Heinze Replied affirmative, and discussed the
tax code.
2805 Representative Commented on the seed money and the turn-
Rokeberg around coming up with the $200 million
dollars in bond proceeds. He expressed
skepticism, stating that it will be
difficult to demonstrate a profit.
2653 Mr. Heinze Responded that current cash flows for
this type of project are good. The
bonding agencies have confidence in the
project. Big projects can be financed and
the market will support them.
2459 Representative Asked if the $12 billion project estimate
Rokeberg is accurate in light of Yukon Pacific's
figure of $18-19 billion.
2435 PAUL FUHS, Clarified that Yukon Pacific's estimate
REPRESENTING was closer to $12 billion dollars.
BACKBONE
2409 Co-Chair Williams Commented on the decline in oil
production in the State and asked if some
of the oil tankers could be used for this
project.
2332 Mr. Heinze Replied that's a good idea; however, an
LNG has an expensive, cryogenic insulated
tank. The oil tankers are not designed
for this type of tank. An LNG tanker has
a separate system and it is difficult to
change the service.
2239 Mr. Heinze Commented, could fill Jones Act barges
successfully along the coast.
2220 Co-Chair Williams Asked the source of funding for the
building of the facility, and if it comes
from the state, asked if it would reduce
the production price of the gas.
2150 Mr. Heinze Responded that because of the non-
taxable status, the Authority's number is
30% lower than other funders. Servicing
debt only would drop it further. He
suggested that the issue of how the State
will improve the marketability will
eventually be addressed. It will be in
some form of the State giving up revenue,
but ANGDA offers cost of service by not
paying federal income tax.
2015 Representative Referenced the chart, FY 04 Funding Plan
Hawker (copy on file.) He asked about the
components that make up 60% of the costs:
Plant Concepts, Engineering Design and
Cost & Schedule. He recommended working
on the confidence builders first.
1759 Mr. Heinze Addressed Contractor Coordination that
assists with managing the complex and
watching the outflow. Under the business
contractors are items underway. The
project economics have not yet been
launched.
1646 Mr. Heinze Continued discussing contractor
coordination and permit review. Spoke
to the potential benefit of increasing
Alaska hire.
1506 Mr. Heinze Described issues in terms of the
engineering design. Asserted that $750
thousand dollars does not design very
much. Discussed the idea of co-locating
the compression stations with the Alyeska
pump stations to facilitate construction
and, later on, the operation and
maintenance of the gas line. He was
unsure if the producers have considered
the idea.
1256 Mr. Heinze Discussed the cost and schedule aspects.
The work to be done is well defined, and
how fast it can be accomplished may be
crucial. Some of the factors are
different than those with the oil line.
If it could be finished in two
construction seasons, he said the impact
could be incredible.
1145 Mr. Heinze Limiting choices for money requests.
1126 Mr. Heinze Innovative thinking.
1105 Representative Expressed his support for moving to the
Hawker next level and diagnosing viability of
the project.
1036 Mr. Heinze Explained that he works with Mr. Porter
to issue contracts through the State
system. There are others who share
concerns with spending public money.
Asserted this will yield a good benefit
for the State of Alaska.
924 Representative Croft Asked when the Board was appointed.
914 Mr. Heinze Responded, May 2003.
910 Representative Croft Asked when ANGDA received the first
installment of $150 thousand.
902 Mr. Heinze Replied, July 1, 2003.
855 Representative Croft Asked when ANGDA received the $200
thousand from Legislative Budget & Audit.
847 Mr. Heinze He was unsure if it was October or early
November, 2003.
841 Representative Croft Asked his scheduled date for letting
these contracts in order to complete the
mandated report by June 2004.
833 Mr. Heinze Replied, "Yesterday." He is willing to
work with the Legislature to make things
happen. Feeling pressure but he has a
background of pulling together to get
things done. Stressed that the timing of
funding is crucial.
733 Representative Croft Noted that the funding has been delayed.
In a year and half schedule, a year has
been wasted. The Authority needs the
money soon, and he expressed hope that
the legislature would fund the project
over the next month.
623 Representative Asked which petrochemical by-product of
Heinze the LNG could be the most profitable.
546 Mr. Heinze Explained that this project will deliver
natural gas, which is mostly methane and
some ethane, and also heavier
hydrocarbons that have very high values
compared to methane. The pipeline would
be designed to carry the hydrocarbons to
the LNG plant where they could be
extracted. Suggested that once the
private sector knows what is available,
the ingredients can make it profitable to
industry.
338 Representative Spoke to the critical shortage of gas for
Heinze the electrical grid of the state and
emphasized the need for the state to
provide the infrastructure for that.
243 Mr. Heinze Offered to prepare a paper on the supply/
demand issue.
138 Mr. Heinze The ANGDA has limited ability to change
the gas supply situation but it could
make available gas at the current market
price. For those projects that would
require gas at a much lower price than
the current price, the Authority
"probably economically cannot do that."
In the case of Agrium, he was unsure how
much ANGDA could help them.
035 Representative Asked if ANGDA could provide gas to
Heinze Agrium at today's price, which they need
to stay in business. Mr. Heinze
responded that the Authority is the only
hope for Agrium, which is on a slender
pricing edge.
TAPE HFC 04 - 15, Side A
0031 BOB FAVRETTO, Stated that ANGDA is tasked by the
MEMBER, BOARD OF mandate of Ballot Measure 3 to answer
DIRECTORS, ALASKA questions by June 15. Expressed
NATURAL GAS frustration with the workload over next
DEVELOPMENT four months and asked the committee to
AUTHORITY fund the project.
0237 Mr. Faveretto Said that the Board is working with
contractors to answer the question of
whether or not it is a viable project.
0351 BOB SULLIVAN, Agreed with Mr. Heinze that the numbers
MEMBER, BOARD OF show potential. Said that he himself is
DIRECTORS, ALASKA personally tight-fisted with public
NATURAL GAS dollars. Spoke in support of the need to
DEVELOPMENT take the next step and further fund the
AUTHORITY project. The most important question is
how to maximize the state's return from
the development of a finite resource. By
the end of June, the report will say if
this project should proceed.
0544 Mr. Sullivan Reviewed the meetings of the board with
various entities that have included Yukon
Pacific, Sempra, Mitsubishi, Pacific
Star, and the Port Authority. Mentioned
that Conoco Phillips analyzed the project
as a corporate entity, not as a tax-free
entity. Bechtel analyzed the costs of
the LNG line a couple years ago. The
board met with Enstar to discuss
southcentral's gas needs and Enstar's
interest in building a gas line.
0720 Mr. Sullivan Stated that investors must be convinced
that there is a market. The board has met
once a month over the 8 months of its
existence. He expressed hope that the
legislature would concur that the project
shows enough potential to move forward
and that $2.1 million is a reasonable
request.
0809 Representative Asked if a government-owned and operated
Kohring gas pipeline is preferable to private
sector ownership.
0832 Mr. Sullivan Responded that the best interest of the
state must be considered in developing a
resource that will only last 30-70 years.
Asked how the state can maximize its
return to all the citizens if it owns the
resource and leases it out. Sometimes
the state is involved in infrastructure,
or transporting energy from the source to
the market.
0937 Representative Commended the Board and the Authority for
Kohring their work, but expressed concern over
the government being involved in private
sector projects that haven't succeeded.
He cited as examples the Susitna Dam
Project, the Pt. McKenzie Dairy, the
Seward Grain Terminal, and Delta Barley.
He frankly expressed skepticism and
concern over establishing a bureaucracy
on state payroll.
1051 Mr. Sullivan Countered that Delta Barley wouldn't have
been financed if it had gone out to
market, whereas this project must prove
there's a market to get funding from a
bank. The infrastructure that the state
owns will facilitate the project. The
private sector will make a lot of money,
with tremendous involvement.
1231 Representative Asked if he could point to any world
Kohring examples of government-owned facilities
of this nature which are a success.
1249 Mr. Heinze Replied that almost all of the foreign
countries now developing LNG, including
Cutter and Sakhalin, are government-owned
facilities partnered with the private
sector. If the ANGDA built the LNG plant,
at a low cost of service infrastructure,
it would be almost identical with the
situation in Indonesia, with no tax and
no interest. Stated that it might be
positive for Alaska but those decisions
haven't been made yet.
1352 Representative Referred to legislation he sponsored last
Kohring year authorizing the Alaska Railroad to
issue tax exempt bonds, and asked if the
Authority has the legal means to take
advantage of the $18 billion of cheap
money that is available.
1426 Mr. Heinze Replied that he's aware of the bill. The
Authority would look at that vehicle as
part of its total bonding consideration,
and the limitations on the amount of the
bonding.
1548 Representative Reiterated his skepticism.
Kohring
1609 Mr. Heinze Responded that he respects Representative
Kohring's position. If the private
sector is unwilling, perhaps the state
will take greater role..
1716 Co-Chair Harris Asked if there is any assurance of the
Administration's position on the funding
request.
1756 Mr. Heinze Reiterated that he is a state employee of
the Department of Revenue, and he has
arranged to delegate himself certain
authorities. Since Senator Therriault
introduced his bill, Mr. Heinze has not
received any indication of the Governor's
position on the funding request. There
are concerns on spending the money.
1936 Co-Chair Harris Asked for clarification that he is an
employee of the state requesting $2.1
million but he's unsure if the state
supports this request.
2008 Mr. Heinze Responded that he's unsure of the
Administration's position on this
specific request.
2022 Mr. Sullivan Suggested that the Administration is
neutral but recognizes the ANGDA needs
funding to accomplish its mission by June
2004.
2044 Co-Chair Harris Pointed out that $150 thousand is
earmarked for ANGDA in the FY 05 budget,
and asked how the money will be utilized
if the Authority is inactive after July
1.
2111 Mr. Sullivan Replied that it's a good question. There
is no overt opposition from the
Administration to the appropriation. Co-
Chair Harris countered that there is no
overwhelming support for it, either.
ADJOURNMENT The meeting was adjourned at 3:34 PM
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