Legislature(2011 - 2012)HOUSE FINANCE 519
03/18/2011 08:00 AM House FINANCE
| Audio | Topic |
|---|---|
| Start | |
| HB110 | |
| Adjourn |
* first hearing in first committee of referral
+ teleconferenced
= bill was previously heard/scheduled
+ teleconferenced
= bill was previously heard/scheduled
| += | HB 110 | TELECONFERENCED | |
| + | TELECONFERENCED |
HOUSE FINANCE COMMITTEE
March 18, 2011
8:05 a.m.
8:05:07 AM
CALL TO ORDER
Co-Chair Stoltze called the House Finance Committee meeting
to order at 8:05 a.m.
MEMBERS PRESENT
Representative Bill Stoltze, Co-Chair
Representative Bill Thomas Jr., Co-Chair
Representative Anna Fairclough, Vice-Chair
Representative Mia Costello
Representative Mike Doogan
Representative Bryce Edgmon
Representative Les Gara
Representative David Guttenberg
Representative Reggie Joule
Representative Mark Neuman
Representative Tammie Wilson
MEMBERS ABSENT
None
ALSO PRESENT
Representative Alan Austerman; Representative Mike Hawker;
Senator Cathy Giessel; Tom Barrett, President, Alyeska
Pipeline Service Company; Pat McDevitt, Senior Project
Manager, Alyeska Pipeline Service Company.
SUMMARY
HB 110 PRODUCTION TAX ON OIL AND GAS
HB 110 was HEARD and HELD in committee for
further consideration.
HOUSE BILL NO. 110
"An Act relating to the interest rate applicable to
certain amounts due for fees, taxes, and payments made
and property delivered to the Department of Revenue;
relating to the oil and gas production tax rate;
relating to monthly installment payments of estimated
oil and gas production tax; relating to oil and gas
production tax credits for certain expenditures,
including qualified capital credits for exploration,
development, and production; relating to the
limitation on assessment of oil and gas production
taxes; relating to the determination of oil and gas
production tax values; making conforming amendments;
and providing for an effective date."
8:06:21 AM
Co-Chair Stoltze informed the committee that there would be
a presentation on the Trans Alaska Pipeline System (TAPS)
and issues related to HB 110.
TOM BARRETT, PRESIDENT, ALYESKA PIPELINE SERVICE COMPANY,
provided a brief overview of his experience, including
directing Coast Guard operations and Deputy Federal
Coordinator for the Alaska Natural Gas Transportation
Project. He was a former regulator, headed the U.S.
Pipeline and Hazardous Material Safety Administration, and
was Deputy Secretary of the U.S. Department of
Transportation.
Mr. Barrett provided a PowerPoint presentation, "Declining
Throughput on the Trans Alaska Pipeline System, Alaska
House Finance Committee, March 18, 2011" (copy on file). He
added that he had been working for Alyeska since January 1,
2011, and was the first president that did not come from an
owner company.
Mr. Barrett pointed out that the employees and contractors
that operated and maintained TAPS moved hundreds of
thousands of barrels each day from the North Slope to
Valdez, and were committed to safety and protecting the
environment.
Mr. Barrett asserted that the challenges related to TAPS
were very real and present; he believed that without
increased throughput in the line, the challenges of
operating the line safely would increase over time. He
pointed out that the challenges had been made very clear
during the recent, unscheduled shut-down in January. He
believed the event should be a "wake-up call" for Alaskans.
He described the experience of the shut-down as arising out
of a "perfect storm" with serious risks. He felt the
situation had been contained because of the dedication,
talent, and commitment of Alyeska employees, contractors,
owners, and the administration.
Mr. Barrett highlighted that one reason the situation was
urgent was that it would take at least five years to get
more oil in the line, even if production increased
dramatically right away. He added that it would take ten
years to get oil into TAPS for a big field. He spoke as a
pipeline operator and asserted that the system was behind
and that challenges were increasing daily. Since 1989,
there had been a steady incline in crude oil coming from
the North Slope at the rate of 5 to 6 percent each year. He
did not see anything that would reverse the situation any
time soon.
Mr. Barrett informed the committee that current throughput
was about 640,000 barrels per day. He believed that the
company was in new territory every day. When TAPS opened,
throughput was about 700,000 barrels per day; it then
increased to 2.1 million barrels and declined steadily to
the current rate. He was concerned about the steady and
consistent decline.
Mr. Barrett directed attention to a graph on Slide 4,
"Throughput history…January Average Throughput." He
emphasized that when throughput fell below 500,000 barrels
per day, there were consequences like settlement of water
(leading to ice), increased wax fallout, and the risk of
frost heaves. He underlined that the risk would increase
even if the oil was flowing.
8:13:29 AM
Mr. Barrett noted that at one time the Energy Information
Administration (EIA) had said that Alyeska delivered about
25 percent of the country's domestic crude supply. The
number was down to about 12.4 percent for 2010. Production
of oil in the United States went up, while production in
Alaska went down.
Mr. Barrett pointed out that a $10 million study had been
launched in 2007 to consider how declining flow affected
TAPS and what measures could be taken to mitigate the
situation. He pointed out that the temperatures being
experienced were well below what was considered likely when
the pipeline was designed. In the original design, the
ideal flow rate was about 1.5 million barrels per day. He
reported that he had been up at Pump Station 4 talking to
employees; they were ready, willing, and able to move
production flow up to about one million barrels per day.
Mr. Barrett noted that the study included examining water
accumulation under low-velocity conditions, looking at the
potential for increased corrosion due to declining flow,
assessing the potential for ice formation in the winter,
examining increased wax deposits in the pipeline and crude
tanks in front of pigs (pipeline inspection gauges, which
were regularly moved through the line to keep the line
clean and corrosion-free), and evaluating potential geo-
technical impacts such as frost heaves. He detailed the
effects of frost heaves on underground segments of the
line; frost heaves were aggravated by declining flow in the
line. Other items studied were impacts of operating pigs
due to the wax and ice, particularly at low points in the
line.
Mr. Barrett reiterated that the decline in throughput was
steady; in 2007, the Department of Revenue (DOR) estimated
that the flow in 2011 would be about 676,000 barrels per
day, but the actual flow had been consistently behind the
projections.
8:16:08 AM
Mr. Barrett emphasized that the most serious low-flow issue
facing the state was the temperature of oil in the
pipeline. Temperature decay in the line was a function of
flow-rate, velocity, and time. The temperature of the oil
continued to drop as the throughput continued to decline.
Mr. Barrett indicated Slide 3 ("January Crude
Temperatures"), a line graph depicting the decline rate
with the temperature profile and decay at 800,000, 630,000,
and 400,000 barrels per day. He noted that the spike in
graph represented the North Pole refinery, since some heat
was recovered through recirculation there. He explained
that oil came into the line at about 108 degrees (there
were standards relative to the temperature of the oil
entering the line) and declined steadily.
Mr. Barrett discussed the recent shut-down, which he called
the "January event." He detailed that during a winter
shutdown, the temperature would start at a lower point
(such as 60 degrees) and the decay from that point would
drop the temperature and result in ice formation and wax
problems. There would be less time to get the line back up
before there were serious consequences. He pointed to a
potential scenario with blocked valves and damaged
sensitive equipment resulting in a shut-down that could
last for months. The consequence would be less time to
manage any kind of shut-down.
Co-Chair Stoltze queried the dynamic of re-starting a
natural gas system.
Mr. Barrett replied that the situation could potentially be
the same, and could be worse. He pointed out that with the
January shut-down, there had been about a two-week supply
of fuel in the Interior; if Alyeska had not been able to
get the line up and running within those two weeks, the
region would have been out of jet fuel and heating fuel,
and production would have been affected. When TAPS shut
down, producers were asked to scale back operations and to
shut in wells; at some point some of the wells would not be
recoverable. He emphasized that the consequences would be
enormous.
Mr. Barrett continued that the longer the line was down,
the tougher it was to bring it back up safely. In the
January event, they knew it would take around eight or nine
days for repairs and to put in a by-pass line at Pump
Station 1; any interruption at all (such as weather or
delay getting equipment or parts) would have meant a pig in
the line would have been pushing ice and wax towards the
pump. Once a mainline pump went down, it would be very
difficult to fabricate and install a new one.
8:20:29 AM
Vice-chair Fairclough referred to earlier questions related
to temperatures. She asked why a decision was not being
made to add the ability to heat the oil at different
stages, and what that would cost.
Mr. Barrett replied that Alyeska was ready to add heat to
the line; a lot had been done to add heat in January,
including recirculation from the North Pole refinery. In
the January event, Pump Station 7 was added and BTUs were
added everywhere possible. He added that the study
mentioned had identified other potential ways to apply heat
to the line and manage temperature decay, including adding
crude-oil heaters, heat tape, or insulation on certain
segments of the pipe. The company was considering what
measures would be prudent and economically viable to
implement over the years.
Mr. Barrett reminded the committee that the falloff in flow
because of declining production was steady and had come
faster than previously predicted.
PAT MCDEVITT, SENIOR PROJECT MANAGER, ALYESKA PIPELINE
SERVICE COMPANY, added that ways of heating the line were
being considered, such as crude-oil heaters, recovering
heat from turbine waste gas, and recycling capability
because of new equipment.
8:23:07 AM
Representative Doogan asked why Alyeska had not addressed
the problems sooner, when it knew there were issues such as
the temperature problem because of low flow as early as
1989.
Mr. Barrett answered that the study was started in 2007 and
had been driven by a recognition that the problem would
increase. He reported that Alyeska had always taken into
account that there would be a need to address the issue of
re-starting the line in cold weather. He believed that the
issue was in reality much more complex; temperature was not
the only driver, and it was not only an issue during shut-
downs. There had been increasing awareness that the
consequences of low-flow would also create serious risk for
the line.
Representative Doogan agreed that hindsight was always
clearer; he still believed the company was late to
recognize the issue.
Mr. Barrett noted that he had watched Alyeska for a number
of years as a federal regulator. He opined that it made
sense to begin where they were. His beginning point had
been what he had learned from the January event. He was
proud of Alyeska employees, who had restored service in
seven days without hurting a single worker or the
environment; those were not simple accomplishments. He
stated that the company's commitment was to work through
the issues as rapidly and as intelligently as possible.
Mr. Barrett added that one of his concerns as the operator
was the huge implications related to temperature. During
the January event, they tried to add BTUs, but even that
had consequences; taking temperatures up and down on the
line had implications for the quality of the crude oil in
the line. He emphasized that the situation was complex;
there were other risks in addition to temperature. For
example, the cleaning program to prevent corrosion in the
main line was very aggressive, and exceeded regulatory
standards. Instrumented pigs were run through the line
every three years (the standard was five). However, the
current technology on instrumented pigs was not designed to
be successful at one mile per hour. The company was
beginning to understand that the risk of corrosion would
increase.
8:28:16 AM
Mr. Barrett noted that the company had a very
sophisticated, state-of-the-art leak-detection system on
the main line that operated very well. He pointed out that
no regulator in the world would allow the operation of a
48-inch line with the amount of oil going through without a
very solid leak-detection system in place. However, the
system would not work in low-flow areas, which meant the
system had to be replaced, upgraded, or improved, and at
enormous expense.
Mr. Barrett emphasized that there were complex technical
and economic factors at play. The 48-inch line was big, and
was designed to run at 1.5 million barrels per day, but it
was running at 640,000 barrels per day. He provided the
example of a car designed to run at maximum efficiency at
50 to 60 miles per hour; there would be carbon build-up and
other problems if it was driven constantly at 20 mph.
Representative Wilson queried the financial impact of
having to reheat the oil on the North Slope refineries.
Mr. Barrett responded that he did not know the financial
impact. He noted that Alyeska had great support during the
shut-down from the refinery, administration, employees, and
contractors. He thought the same kind of cooperation was
needed day-to-day.
8:31:42 AM
Mr. Barrett underlined the complexity of the situation. He
pointed out that once North Slope wells were shut in, a
substance similar to anti-freeze was added to prevent
freezing. However, the result was anti-freeze in the crude
stream, which was good for a well, but bad for a refinery.
Testing had to be increased to determine what exactly was
in the line at re-start, because what was coming in had
different component standards than usual, and the oil still
had to meet standards. He referred to Betsy Haines,
Alyeska's Oil Movements Director, who had been aggressive
in making sure that nothing was done that would have an
inadvertent collateral consequence, such as damaging the
refinery.
Representative Wilson asked what would happen to the
pipeline if the refinery could not operate to heat up the
oil.
Mr. Barrett replied that the pipeline would have to find a
way to add heat in another manner, such as crude oil
heaters or insulators. He noted that the worst temperature
decay started well before North Pole. He thought the bigger
consequence was losing the refinery and what it produced.
Representative Hawker noted that he had worked on the
development of one of the North Pole complexes and was
familiar with the process. He had not understood the
potential for risk to the community the refinery served in
the event of a prolonged shutdown. He thought that the
community had developed a dependency that had not existed
before the refinery was there. He asked whether Alyeska was
involved in contingency planning to protect the community
if there was a disastrous disruption of flow in the
pipeline. He wondered whether the communities were actively
involved in contingency planning, or if that was outside
the purview of the company.
8:35:10 AM
Mr. Barrett responded that Alyeska did not directly control
or influence contingency planning. He was concerned about
managing the risk of having a major piece of necessary
equipment (such as the pigs) create a problem. He reported
that Alyeska was in active communication with the
administration and the governor's office, from which there
was strong support; Commissioners Sullivan [Department of
Natural Resources] and Hartig [Department of Environmental
Conservation] had been closely involved. Alyeska had
resources that would be available in a community emergency,
but the actual response would be done through the State
Emergency Management Office.
Mr. Barrett assured the committee that he had been very
concerned about life-safety consequences resulting from the
refinery going down, because of his experience with the
Coast Guard. He believed there would be life-safety
concerns on the North Slope, as there were thousands of
people there that would have to be gotten out. He stated
that the company took pride in outreach to local
communities around the state; employees supported
elementary school programs and other community projects.
Representative Hawker wanted to further discuss community
risk. He referred to a previous presentation with an Alaska
North Slope (ANS) production forecast by DOR [3/16/11,
HFIN]. He believed that the situation with TAPS had become
increasingly problematic. He feared that the 500,000
barrels per day level could be reached in 2013. He believed
the horizon was short and the issue very urgent. He asked
whether the community was adequately prepared. He wondered
whether the legislature should emphasize the risk.
8:39:48 AM
Mr. Barrett stated that he was uncomfortable with a
throughput level of 640,000 barrels per day and thought the
recent shut-down was a "wake-up call." He referred to the
recent earthquake in Japan; similar experiences closer to
Alaska could create problems. He agreed the situation was
urgent. He urged the legislature to consider the possible
consequences of inaction. He emphasized his pride of the
employees at Pump Station 1. He was not going to allow a
rushed restart that hurt someone, but the employees sensed
the importance of getting the line back up. He encouraged
the legislature to have the same sense of urgency.
Mr. Barrett asserted that the company had to do better. He
maintained that the standard was flawless and reliable
operations.
8:43:13 AM
Co-Chair Stoltze referred to a worker that he knew.
Representative Guttenberg appreciated the work done by
Alyeska, especially during the crisis. He noted that when
the pipeline was at its peak, drag-reduction additives were
put in to make it flow better; now on other end, there was
a whole other set of issues. He asked whether corrosive
inhibitors were currently being put into the line.
Mr. Barrett replied that Alyeska had an extensive
corrosion-management program, including injecting
inhibitors in the line, though not the main line. He stated
that Alyeska was very aggressive, and had learned the
lesson and increased the strength of biocide in the
inhibitor profile. On the mainline, scraper pigs were used
rather than the corrosion injections, and the inspection
tool was used to identify areas with corrosion that needed
to be repaired.
Mr. McDevitt added that currently, corrosion on the
mainline pipe had been external; internally, the pipe was
in very good condition. Inhibitors would most likely be
used in the mainline when water drop-out started to occur
around throughput levels of 500,000 barrels per day.
Representative Guttenberg noted that Alyeska had started
reconfiguration a few years prior, including moving
employees to Anchorage. He believed the move had been
controversial. He asked whether people were being moved
back to where they needed to be rather than being kept at a
central office.
8:46:33 AM
Mr. Barrett replied that a lot of the employees in
Anchorage had been helpful during last incident; the
engineering, planning, and design work needed to bring the
system back up was done primarily in Anchorage, while the
physical work (such as fabrication and welding) was done in
the field. He felt that having the personnel in Anchorage
was an advantage. He pointed out that the integrity
management (IM) program was back up to full staffing. He
reported that he had witnessed the ability to of the team
to leverage talent.
Representative Guttenberg asked whether the situation would
have been the same if the problem had been at Pump Station
7 or like the incident at Pump Station 9.
Mr. Barrett responded that the incidents were different. In
any of the scenarios, there was an enormous overhead of
front-end design, planning, and engineering. There was also
the physical work of getting people where they were needed
to do the work. He related that there were many people
involved in the incident and close coordination was needed
with other state authorities, such as the police and
security. In January, people had been mobilized up and down
the line. There were personnel at Pump Station 1, a pig was
recovered at Pump Station 8, and there was cold-restart
equipment staged everywhere. He opined that they were
organized correctly to handle a large-scale crisis with the
IM team located in Anchorage.
Representative Gara referred to frequent discussion about
how the oil production projections had been off, but he did
not recall an expectation of project shutdowns. He asked
how much oil was lost in the shutdown and in the 2006
shutdown.
Mr. Barrett replied that he did not know about the event in
2006. In the more recent event, the actual oil loss was
about 317 barrels (the amount recovered from the leak site
at Pump Station 1). The flow rate was at zero and was
brought up gradually to 640. He did not know much of the
loss would be recovered over time.
8:51:32 AM
Mr. Barrett stated that he was very concerned that there
could have been a three-to-five-month shutdown, with no oil
going through and no revenue, if the situation had not been
managed almost perfectly; however, he had been more
concerned with the operational piece. He did not know about
the recoverability after a shutdown.
Representative Gara asked how many annual barrels were lost
in the current year because of the shutdown, regardless of
whether they were recovered in the future.
Mr. Barrett did not know, but offered to get information to
the committee based on the average throughput. He cautioned
that the situation was complex. Day-to-day, the average
throughput was 640,000 barrels per day; it would be hard to
guess the flow that had been missed over the specific 11
days of the event. However, the average could be found in
order to get an approximation of the loss.
Representative Gara referred to reports in the media that
Alyeska was asking for a tariff increase. He noted that as
tariffs increased, the state's and the company's shares
decreased. He wondered whether the state had challenged the
tariff increase.
Mr. Barrett stated that he could not comment on the
particular case as it was potentially a litigation issue.
He did say that as Alyeska's costs increased, the tariffs
increased, and the amount of the cost to the owners
increased; the amount of money to the state would decrease.
Managing all the issues cost Alyeska more per barrel. He
asserted that the company had to manage the line safely and
that costs had to increase to meet whatever needed to be
done; if the amount of oil going through the line
decreased, the relative cost per barrel would rise, with
all the attendant consequences.
8:54:44 AM
Representative Gara recalled a chart showing that most of
the largest spills related to the pipeline had occurred in
the past six years. He queried plans to mitigate future
spills and shut-downs.
Mr. Barrett wanted Alyeska to have the highest standard,
which he defined as "flawless operations." He pointed to
time working at the Department of Transportation and Public
Facilities with aviation and the relatively low accident
rate. He thought everything possible needed to be done.
Mr. Barrett discussed initiatives to prevent a repeat of
the recent incident. He noted that the engineering division
was conducting a walk-down survey of every similar piece of
pipe on the line to assess the risk. He emphasized that the
main line had a very aggressive pigging program. He felt
there was no perfect situation. He made an analogy with
football and quoted a coach: "We're going to chase
perfection, knowing full well we will not catch it; in
chasing it, we will catch excellence."
Mr. Barrett reported Alyeska had been having discussions
with its employees about how to get to flawless operations,
with "zero-zero-zero" and nobody hurt, no oil spilled, and
no unscheduled shut-downs. He noted that there were 43
regulators; he believed the employees knew a lot about the
system. He had asked a group of employees whether
everything possible was being done to prevent a repeat of
the incident. He pointed out that there were people who had
worked on the line for 20 or 30 years; they knew the
systems as well as the risks.
8:58:47 AM
Mr. Barrett believed people in the company would be able to
raise any issues about safety. He stated that Alyeska would
do anything it could and that the company would prepare for
the future as well as it could to mitigate risk, given the
declining throughput. He hoped to have an active, engaged
culture of achievement, excellence, and reliability within
the company.
Representative Gara queried the minimum throughput for
operations.
Mr. Barrett responded that there was no specific answer
because of the complexity of managing throughput at lower
volumes. He emphasized that there were technical limits in
the current configuration of the current, aging system. In
addition, there were economic limit factors. He did not
know what the outer limits were. He did not want to be
naïve about the consequences regarding lower flow rates.
9:02:21 AM
Co-Chair Stoltze referred to statistics presented at an
earlier hearing.
Mr. Barrett replied that the pipeline was designed and
optimized to run at 1.5 million barrels per day; he wanted
to have from 800,000 to 1 million barrels per day with the
current line. He emphasized that the large (48 inch) line
was not designed to handle 500,000 barrels per day.
Co-Chair Stoltze queried the cost of delivering each barrel
of oil at a rate of 1 million barrels per day compared to
500,000 barrels per day.
Mr. Barrett stated that the cost of delivering was higher
as there was a minimum level of infrastructure needed.
Representative Costello asked about Alyeska's relationship
working with the state and federal governments in a crisis
situation. She noted the state's dependence on air cargo
for fuel and other commodities. She asked whether Alyeska
would work with the state to address a crisis in which no
aviation fuel was available.
Mr. Barrett responded that the company was in very close
contact with the state and federal governments and that
they regularly exercised response scenarios that involved
the pipeline. He added that Alyeska was not directly
involved in how the state would manage the described
scenario. He explained that a couple of weeks prior, there
had been unusually bad weather conditions on the North
Slope; the company had helped by providing power and
clearing an airport. The company had extensive emergency
response plans for oil spills; the plans were tested on a
regular basis.
Vice-chair Fairclough asked about the North Pole refinery
and the temperature changes. She wondered whether there was
a contractual relationship between Alyeska and the
refinery.
Mr. Barrett replied in the affirmative; there were
connection requirements and standards regarding the type of
crude that could be delivered. He added that the standards
were in effect everywhere there was a connection.
Vice-chair Fairclough discussed a temperature increase that
was expected to take place at a certain point in the line.
She wondered whether there was an agreement in contract.
Mr. Barrett responded that there would be discussions; the
temperature of the oil both in and out of the line was
important and was reflected in the agreement. He added that
Alyeska worked closely with the refinery during the recent
incident.
Vice-chair Fairclough asked whether there would be response
time required in contract if the refinery were in trouble
and was forced to close.
Mr. Barrett repeated that relationships were close and
communications were good. He noted that in the recent
event, he had spoken with the governor; one of the issues
raised was the two-week window for fuel.
9:10:48 AM
Mr. Barrett emphasized how difficult the situation was to
manage because of extensive distances and high costs. He
explained that the cost was enormous, and those costs may
not be sustainable in some communities.
Vice-chair Fairclough discussed lost production. She asked
about the number of barrels that were left the line.
Mr. Barrett responded 317 barrels.
Vice-chair Fairclough wondered whether any wells were shut
in or shut down because of the incident.
Mr. Barrett replied that a lot of the wells were shut in
and he did not know whether they were all brought back on
line.
Vice-chair Fairclough referred to how the federal
government through the Environmental Protection Agency
(EPA) had wanted to shut down the pipeline. She queried
EPA's role in the crisis and who had been there to champion
Alaska's efforts.
Mr. Barrett noted that there had been a lot of help through
the congressional delegation and the administration in
Washington, D.C. He pointed out that Commissioners Sullivan
and Hartig had worked with the EPA to keep it from getting
"too crazy." He believed there had been a question about
jurisdiction in the case. His goal was to get the pipeline
running, so he decided not to argue about it in order to
reach his objective.
Mr. Barrett illustrated the situation by sharing a story
about a meeting with the incident management team in
Fairbanks. He and Commissioner Sullivan had received a very
solid brief in Fairbanks regarding all aspects of the
incident before the restart. At the end of the meeting, an
EPA representative noted that they were really gambling.
Mr. Barrett had responded that he did not gamble; he
emphasized the risk of the consequences to Alaska if the
line was not rapidly and safely up and running. The EPA
representative had "backpedaled" on the issue.
Mr. Barrett stated that he was acutely sensitive about
protecting Alaska's environment. He felt there was a lack
of understanding of the importance of getting the line up
safely, using the interim restart. He questioned the
sensitivity of the EPA.
9:16:50 AM
Mr. Barrett added that to be fair, he had expected a worse
response from the EPA. He questioned the need of the
representative to be in the state. He thought they were
overreaching.
Mr. Barrett reported that he had had reports from Alyeska
employees working at Pump Station 1 that the regulators
were getting in their way. There were safety concerns with
someone looking over the shoulders of workers who were
trying to manage a well at 20 degrees below zero. He felt
the regulators were making the employees anxious.
Vice-chair Fairclough believed Alaska had done a tremendous
job protecting the environment. She referred to meetings in
Washington, D.C., with the U.S. Department of Interior. She
maintained that Alaska was unique and felt the process of
trying to education EPA and the Department of the Interior
was a long one. She noted frustrations at people coming in
from outside the state when professionals were trying to
balance a national security need for energy and Alaska's
security needs. She appreciated the strong response by
Commissioner Sullivan.
9:20:39 AM
Mr. Barrett addressed the cumulative effect of all the
federal rules, including the permitting process, which
could take five to ten years to get oil on line. He
asserted that Alaska was different, and had its own rules
about managing a restart in the Interior. He referenced a
contingency plan called "Cold Restart" that was never
exercised during the incident; it involved moving equipment
in place up and down the line, including moving 300-ton
cranes in the dark on icy roads. He pointed out that
Alyeska was being told under EPA rules to bring the
equipment back, even though it was not going to be used
except in an extreme response scenario; the equipment could
not be left on site without permits, as it would become a
"permanent installation." The company was told they would
have to get a permit to leave the equipment in place. The
cost of making equipment changes to get a permit for a
contingency they hoped to never use would be very high. He
had asked the EPA whether they could get a waiver; the
answer was that no waivers were allowed. He asserted that
the person had never been to the places in Alaska and
experienced the extreme conditions.
Mr. Barrett did not think the rules made operational sense.
The rules were designed for other places, perhaps in
response to someone cheating on the rules; he questioned
why everyone should be punished.
9:25:11 AM
Mr. Barrett asserted that Alaska was an Arctic state with
particular consequences.
Vice-chair Fairclough noted that only 20 percent of
Americans surveyed knew the U.S. had an Arctic coastline,
but 80 percent of Alaskans knew.
Vice-chair Fairclough turned to the issue of maintenance on
the line. She asked the reason for not replacing the pipe
with a smaller pipe from Valdez backwards if that was where
there were more corrosion issues.
Mr. Barrett replied that the decision would rest with the
owners. He offered that once any segment of the line was
downsized to 24 inches, the line would no longer be capable
of handling a lot of oil if a big oil field were opened or
another way were found to transport heavy oil out of
Prudhoe Bay. He opined that he would not design the system
the same way again; perhaps the line would not go to
Valdez. He thought the consequences for the future of
making decisions such as those related to downsizing the
line would be enormous. He believed limiting the size of
the pipe would limit options. He believed moving oil
through a large line was the safest way to move oil.
9:28:48 AM
Representative Neuman wanted to focus on the risk of
consequences to the state and the cost of delivery per
barrel. He referred to the presentation chart. Oil came
into the pipe at 180 degrees but dropped significantly
because of the low volume in the pipe. There was a need for
the temperature to be increased at the North Pole refinery
in order to keep the 800-mile long pipe above 38 degrees
(48 degrees south of Fairbanks). He understood that when
oil was above $70 per barrel, the cost of operating Flint
Hills Refinery went up. He believed the consequences to the
state of losing North Pole refinery could be huge, and
could mean losing fuel services to Ted Stevens
International Airport ($1 billion per year). On the other
hand, the cost in tariffs of keeping the oil warm enough
was also enormous. He requested comment on the importance
of the heating facility.
Mr. Barrett agreed that without the refinery, there would
have to be another solution to maintain the appropriate
temperature. He believed there would be enormous challenges
to heat the line, whether through crude oil heaters,
insulation, or additional recirculation at other pump
stations.
Mr. McDevitt agreed that North Pole refinery added about 15
million BTUs per hour; if the refinery were not
functioning, temperatures would drop in the southern
section.
9:32:45 AM
Representative Neuman pointed out that the direct costs of
tariffs for keeping oil at the required temperature were
high.
Mr. Barrett agreed that the per-barrel cost of doing
business was increasing as production decreased.
Representative Neuman highly recommended the Alyeska TAPS
low-flow oil plan summary, which he thought was informative
regarding the process, cost, and risk-management potentials
of adding the heat at the pump stations.
Representative Neuman questioned the ability of continued
operation, given the information. He pointed out that when
the line was full, it moved a lot slower and cooled down.
Representative Guttenberg commended efforts to meet a high
standard through listening to employees and coming up with
operation and safety excellence. He pointed out that in the
final analysis, however, Alyeska was not the one with the
money and that the owners (Exxon, BP, ConocoPhillips, and
others) had different agendas. Part of the discussion was
whether the owners considered Alyeska a transport mode for
their product, or a profit center. He questioned the level
of funding needed to maintain and operate the pipeline.
Mr. Barrett replied that Alyeska was considering
reshuffling priorities to address issues raised during the
January event. He had not seen leveling on funding to run
the pipeline safely; the thought the challenge from the
owners was related to the cost of running such large
infrastructure with a steadily declining flow. At some
point, major investments would be required. He expected
reluctance by the oil companies to making investments to
keep the line viable for another 30 to 40 years.
9:37:49 AM
Mr. Barrett added that one of the issues being considered
related to physical limits. For example, additional work
would be needed in the upcoming work season at Pump Station
1, based on the January event. He pointed to limits to what
could be done because of the footprint size of the station
and the fact that the line would be operating for most of
the time. He emphasized the difficulty of doing work when
oil was still moving through the line. He reminded the
committee that the seasonal work window was very short in
the Arctic.
Mr. Barrett stated confidence about getting the money
needed to keep the line maintained and operated safely. He
reported that he was getting positive signals. He opined
that there was a limit to how much and how fast something
could be done, given the footprint size and seasonal work
windows. He did not think that spending another $20 million
to $50 million would necessarily solve the problem. He
mentioned that the 300 people working on site in January
was close to the limit of how many people could be there
safely.
Representative Guttenberg recalled experience in the field
related to keeping the "men in the white hardhats as far
away as possible" so that the people working could do their
jobs.
Mr. Barrett agreed.
Representative Doogan reminded the committee that the task
before the committee was to evaluate whether the governor's
proposal to put money into oil companies would result in
more oil in the pipeline. He did not think the amount of
oil in the pipeline could be brought up to 1.5 million
barrels per day, or nearly doubled. He queried the effect
of incremental increases in the pipeline's operation.
Mr. Barrett responded that anything that stemmed the
decline of oil in the pipe was positive, but he questioned
whether an amount that was not enough would be sufficient
to reverse a 6 percent decline. He pointed out that Alyeska
was a common-carrier pipeline, regulated by the Federal
Energy Regulatory Commission (FERC), and required by law to
take oil from any source, whether the pipeline owners or
independent producers, as long as connection requirements
were met. He was concerned about reversing the slope of the
decline enough.
9:43:00 AM
Representative Gara commented that communications from the
Finance Committees to federal agencies sometimes helped. He
asked that Alyeska give pertinent information to the
committee so that letters could be written to the agencies.
In addition, he noted that there were connections with the
congressional delegation that could be used.
Representative Gara believed that when Alyeska retrofitted
the pipeline to carry smaller volumes of oil, there had
been a goal of being able to operate the pipeline down to
250,000 barrels per day. He asked whether that was true.
Mr. Barrett responded that he was not aware of all the
planning assumptions from the past period. He warned that
repetition of an event like the one in January would become
increasingly more difficult manage. He did not believe
there was a magic number (of minimum barrels per day), only
that the risk became higher and response more costly as the
throughput decreased.
9:46:22 AM
Mr. Barrett concluded that more oil was needed in the
pipeline. He urged the committee to recognize the
consequences and importance of getting the throughput back
up. He stated that TAPS needed political help from sources
in Washington, D.C., as well as Alaska.
Mr. Barrett relayed a story illustrating the consequences
of inaction. He offered a mental model that he had used and
applied in the Coast Guard: a ship in distress going down
in the Bering Sea. The desired response was to move all
possible assets aggressively and as quickly as possible,
because the consequences might be worse in the future if
not addressed while there was a window of opportunity. He
argued that if it turned out that too much was done too
soon, the assets could be easily called back.
Mr. Barrett reiterated the details of how assets were moved
in the January event; he had been called Saturday morning
initially, and by early Sunday it had become clear that the
risks of waiting until the bypass was installed was very
high, with enormous potential consequences. Options were
narrowed and a specific set of actions were taken, but
initially, all potentially useful assets had been moved
immediately.
Mr. Barrett emphasized that the consequences of inaction
were not good. He suggested policy that would push a lot of
resource at the current problem and see if the result was
positive. He repeated concerns and underlined the
commitment of Alyeska to operate according to high
standards.
9:51:57 AM
Co-Chair Stoltze reviewed expectations regarding upcoming
meetings.
Representative Gara noted that he wanted Commissioner
Bryan Butcher to come before the committee to answer
questions that had been asked. He queried the bill and
amendment process in committee.
Co-Chair Stoltze stated that the bill would be passed when
it was ready.
Representative Doogan pointed out there was always a
possibility that the committee would not report a bill out.
Co-Chair Stoltze agreed that it would take six votes to
move the legislation out of committee.
9:55:56 AM
ADJOURNMENT
The meeting was adjourned at 9:56 AM.
| Document Name | Date/Time | Subjects |
|---|---|---|
| HB110 Alyeska HFIN 031811 PDF.pdf |
HFIN 3/18/2011 8:00:00 AM |
HB 110 |
| HB110 Barrett Testimony HFIN031811.doc |
HFIN 3/18/2011 8:00:00 AM |
HB 110 |