Legislature(2013 - 2014)HOUSE FINANCE 519
03/17/2014 08:30 AM House FINANCE
| Audio | Topic |
|---|---|
| Start | |
| Gas Markets Overview | |
| Adjourn |
* first hearing in first committee of referral
+ teleconferenced
= bill was previously heard/scheduled
+ teleconferenced
= bill was previously heard/scheduled
| + | TELECONFERENCED | ||
| + | TELECONFERENCED |
HOUSE FINANCE COMMITTEE
March 17, 2014
8:49 a.m.
8:49:10 AM
CALL TO ORDER
Co-Chair Austerman called the House Finance Committee
meeting to order at 8:49 a.m.
MEMBERS PRESENT
Representative Alan Austerman, Co-Chair
Representative Bill Stoltze, Co-Chair
Representative Mark Neuman, Vice-Chair
Representative Mia Costello
Representative Bryce Edgmon
Representative Les Gara
Representative David Guttenberg
Representative Cathy Munoz
Representative Steve Thompson
MEMBERS ABSENT
Representative Tammie Wilson
Representative Lindsey Holmes
ALSO PRESENT
Larry Persily, Federal Coordinator, Alaska Natural Gas
Transportation Projects.
SUMMARY
OVERVIEW: GAS MARKETS
8:49:41 AM
^GAS MARKETS OVERVIEW
8:50:01 AM
LARRY PERSILY, FEDERAL COORDINATOR, ALASKA NATURAL GAS
TRANSPORTATION PROJECTS, discussed the PowerPoint, "Alaska
LNG, Does the market need us?" (copy on file).
Mr. Persily highlighted slide 1, "The world changed, not
us."
Global LNG trade has quadrupled since 1995
Asian LNG demand alone could double by 2025
China demand growing double-digit annual rate
Europe looking for alternatives to Russian gas
Worldwide concerns over coal, nuclear plants
Alaska LNG could be the victor of circumstances
Mr. Persily discussed slide 2, "Global LNG trade grows
fast." The growth in LNG demand was attracting hundreds of
billions of dollars of worldwide investment in export
projects. The global LNG import demand in 2013 totaled
approximately 32 billion cubic feet per day. The gas that
moved as LNG across the world was only 10 percent of global
natural gas consumption. Approximately 90 percent of
natural gas consumed in the world was moved by pipeline.
Mr. Persily addressed slide 3, "Asian LNG imports increased
2011 to 2012." He stressed that various areas of the world
purchased natural gas, but Asia made up 70 percent of
global demand. The real growth potential was in China. In
December 2013, China's LNG demand was up 20 percent from
December 2012. China had some shale gas reserves, but had
not conducted much exploration. Much of their shale gas was
in arid, dry areas of the country, and hydraulic fracturing
required a substantial amount of water.
Mr. Persily looked at slide 4, "China's domestic gas supply
deficit." He remarked that China had been producing more
than enough gas to meet its own demand, but could not keep
up with their own economy. China imported roughly has of
its gas by tanker and pipeline, and paid, on average,
almost $10 per thousand cubic feet for pipeline gas from
Turkmenistan; more than $10 per thousand cubic feet for gas
from Uzbekistan; and $12 per thousand cubic feet from
Myanmar. He stressed that those costs did not include the
cost to bring the gas to the cities.
8:56:02 AM
Mr. Persily highlighted slide 5, "Global gas prices
diverge." The slide illustrated what has changed in gas
prices and transportation. He remarked that prices began to
split off five or six years prior. He stressed that the
prices would not last forever, and stated that most
analysts expected the gap to continue widen enough to make
a profit.
Mr. Persily displayed slide 6, "Enough business to share."
Worldwide natural gas demand is forecast to grow
faster than any other energy source
In addition to 12 LNG export projects under
construction, more will be needed by 2025
As many as 10 or 12 more in next decade
Several hundred billion dollars in investment
Cost competitiveness will decide the winners
Mr. Persily highlighted slide 7, "Price is everything."
Japan paid $70-plus billion for LNG in 2013
Energy a big reason for $112 billion trade gap
Third year in a row of trade deficit in Japan after
more than 30 years of a trade surplus
Japan leading the charge for new suppliers, more
competition and lower LNG pricing regime
But prices must be enough to justify investment
Mr. Persily discussed slide 8, "No project has it easy."
BG Group says 525-mile natural gas pipeline to Prince
Rupert, BC, could cost up to $10 billion
LNG tax debate under way in British Columbia
Dredging, harbor, berthing costs estimated at $1.5
billion for Australia's Wheatstone LNG
Russian politics out ahead of project economics
Buyers hold back, wait to see LNG pricing trend
Mr. Persily looked at slide 9, "Canada eager, but delayed."
First Nations want to consult on air quality, pipeline
routing, economic and jobs issues
High development costs at remote gas fields
Pipelines 300 to 525 miles; 2 mountain ranges
Access to Prince Rupert may have to go offshore
Provincial tax and regulatory regimes delayed
No project has all its permits, customers and FID
Mr. Persily addressed slide 10, "Lower 48 faces hurdles."
Tough politics between producers & customers
Oversupply holds down prices for gas buyers
Producers want freedom to seek best market
Energy Department export approvals are slow
Unknown Panama Canal tolls worry LNG buyers
Local opposition to Maryland, Oregon plants, and
against fracking as source of gas production
Mr. Persily discussed slide 11, "Australia and Russia,
too."
Cost overruns in Australia scare investors
Contentious debate is growing that exports are driving
up prices for Australian customers
Environmental, economic issues stacking up
Russian gas comes with politics attached
Distance from gas, distance from market a problem for
at least two Russian LNG projects
9:06:25 AM
Mr. Persily highlighted slide 12, "Alaska has its
advantages."
Proven gas reserves; no exploration risk
Low-cost production vs. greenfield projects
Almost 40 years experience at Prudhoe Bay
LNG plant much more efficient in cold climate
Shorter LNG carrier voyages to Asian markets
North Slope gas high Btu value fits the market
Mr. Persily addressed slide 13, "Alaska has changed, too."
Prudhoe Bay growing older, economics look better as an
oil and gas play rather than oil only
Point Thomson under development and would supply 25
percent of the gas for the LNG project
Major North Slope producers willing to spend
significant money to advance the LNG project
Alaskans appear willing to consider investing
significant state money into the huge project
Mr. Persily looked at slide 14, "Patience is a virtue."
Patience is a must for state LNG investment
Long wait for the first check - but long payback
Norway invested billions in oil and gas and then
waited years for any return; it took a decade before
real investment payback started to roll in
If it wants to act like an oil and gas business,
Alaska must think like one - and think long term
Mr. Persily addressed slide 15, "What's changed since
2002."
Department of Revenue 'Risks and Rewards' report in
2002 looked at a pipeline, not LNG
Different markets, sales, risks and regulations
State is in a better cash position today ($17 billion
in savings) than 2002 ($2 billion)
State equity investment in 2002 might have needed
assistance from the Permanent Fund
100 percent state ownership was on the table in 2002
Mr. Persily highlighted slide 16, "Some things haven't
changed."
DOR 2002 report recommended the state match pipeline
capacity with its share of the gas
Report said conflicts as an owner and regulator are
real, but state-owned corporation could provide a
partial barrier to minimize the conflicts
Minority ownership doesn't give state control
Report warned: Keep politics out of the business
9:11:19 AM
Mr. Persily discussed slide 17, "Big step for Alaska."
Role of risk-taking owner much different than watching
as a tax-collecting observer
Provides state a voice in project decisions
Provides return to state on its investment
Capital draw concurrent with budget deficits
State shares risk of overruns, delays, prices; shares
in rewards of gas and public revenue
Co-Chair Stoltze remarked on two separate phrases: cost-
competitiveness will decide the winners; and price is
everything. He wondered why Alaska could compete globally,
and queried the advantages. Mr. Persily stressed that the
presentation was based on his opinion. He stated that the
advantages included the tanker ships, that the liquefaction
plant would put Alaska at a great advantage. He stressed
that Alaska had proven reserves. In Australia, there was a
plan to buy third party gas before their gas could be
produced. Alaska had lower cost feed gas. He pointed out
that Alaska was a proven producer, and the Asian market
valued that historical success.
9:16:52 AM
Co-Chair Stoltze queried how tax policy worked viability
worked into the markets. Mr. Persily shared that there was
probably no tax regime anywhere in the world that the oil
and gas industry loved. British Columbia had proposed a new
net income tax on LNG exports, but they allow the companies
to recover all their capital up front. The tax would go
from 1 percent to 7 percent after cost recovery on that
capital expense.
Co-Chair Stoltze wondered if Alaska had the patience
necessary to make a proper business decision. Mr. Persily
replied that Alaskans must learn patience, because of the
substantial yearly investment that was required for the
eventual success of the project.
Co-Chair Stoltze wondered if perhaps an increase to pre-K
should wait a few years.
Representative Costello looked at slide 4, and wondered if
the trend would continue. Mr. Persily replied that he felt
that the trend would continue. He stressed that the air
quality in China was the worst in the world.
9:21:51 AM
Representative Costello wondered if there were plans to
outfit China's coal plants with clean coal technology. Mr.
Persily replied that there were some efforts towards clean
coal technology, but stressed that there were limits as to
how clean one could make coal. He stated that if gas had a
good price, it was a better deal than trying to clean coal.
Representative Costello pointed to slide 10, and remarked
that one of the bullets showed that export approvals were
slow. She relayed that there were regulations that ensured
environmentally safe practices. She asked if there were any
delays that were anticipated with the project. Mr. Persily
replied that the biggest delay that was the Department of
Energy approval to export LNG to countries that the U.S.
did not have free trade agreements, including China and
Japan. For decades, there were few regulations in the
Department of Energy. Recently there were many approvals
and regulations that were required for resource export and
development. He remarked that there was a contentious
debate in the Lower 48 over what to do with the natural gas
wealth, but that debate would not extend to Alaska. He
hoped that the LNG licenses would get stalled in the
debate.
9:25:38 AM
Representative Costello queried the importance of the high
BTU content. Mr. Persily responded that, in Japan, their
generators were set to burn at a higher BTU value than the
United States. The Alaska gas stream should fit perfectly
in the Japanese market.
Co-Chair Austerman stressed that the price of gas was tied
to the price of oil in Alaska. He pointed out that gas in
the lower 48 was not tied to the price of oil. He queried
the cost of Alaska's LNG compared to the costs from other
producers in the world. Mr. Persily responded that it would
cost more to liquefy the gas, than it would to transfer it
through the pipeline. On the U.S. Gulf Coast, it was close
to $5 per thousand cubic feet at Henry Hub. He stated that
there was one plant under construction in Louisiana that
had signed a contract at $5 per thousand cubic feet, plus
15 percent more for the burned gas, plus $3 for the
liquefaction charges, plus the tanker charges; so the total
gas would be close to $12 per thousand cubic feet by the
time it has landed. He relayed that the buyers were looking
for something cheap and without the volatility of the U.S.
prices. The alternative in Asia would always be oil, but
have some sort of hybrid pricing.
9:31:57 AM
Co-Chair Austerman wondered if there was some discussion
regarding the cost of oil because of the competitive nature
of gas. Mr. Persily replied that there were many analysts
that believed oil could go to $80 or $90 per barrel. On a
BTU basis, under current pricing formula, there would be a
substantial price for LNG.
Co-Chair Austerman remarked that the liquefaction was the
most expensive aspect of developing LNG. He stated that the
tidewater in the Kenai gave opportunity for the rest of the
state to have off takes in taking gas that was not
liquefied, and therefore should be competitive in the
energy market. Mr. Persily agreed, and furthered that
Alaska would be pulling off a few percent for the instate
needs. He stressed that the economies of scale should give
Alaskans a good opportunity for affordable gas.
Co-Chair Austerman wondered if the pre-FEED work would give
Alaska a sense of the price. Mr. Persily felt that pre-FEED
would only identify the larger hurdles, but it would not
determine the cost of the contracts.
Representative Gara remarked that there was a balance of
benefitting Alaskans with affordable gas that would net
export money, and independent explorers that would discover
economic gas. He shared that the last iteration of the
pipeline stated that there would be rolled in rates for
expansion of the gas line. He wondered what could be done
to increase the chances of securing contracts with
independent producers to get their gas into the pipeline.
He also queried the definition of rolled in rates. Mr.
Persily responded that the chances of an independent
producer increasing the BTU were very slim, because it was
a very substantial amount of gas. He stated that there was
a better chance of a newly discovered field using gas to
produce oil for many years, and would only bring millions
of cubic feet a day. Not billions. He stressed that Prudhoe
Bay and Pt. Thompson did not have enough gas to keep the
pipe full, and felt that the second decade of the project
would show a decrease in production. The industry partners
were banking on the possible discoveries of trillions of
cubic feet of additional gas, because they need the gas to
keep the pipe full for forty or fifty years. He felt that
the discussion should be focused on initial building of the
pipeline, and focus on expansion later.
9:40:35 AM
Representative Gara understood that compression would be
the cheapest way to expand the pipeline. He wondered if
there was a problem for a new producer to put gas in the
pipeline, if there was no option to expand. Mr. Persily
replied that it would be difficult if the cost of expansion
was greater than what was desired. He stressed that it was
difficult to plan for unknowns, but understood that there
should be a consideration of how much the pipeline could be
expanded by compression stations and how much that would
cost.
Representative Gara queried the benefits and detriments of
the state taking its gas in kind as opposed to in value.
Mr. Persily replied that there was trust in the company to
sell the gas at the highest price possible in value and
give a fair return. He stated that the in kind take would
requirement a contract to market the gas. The risk with in
kind was that there would be a bad marketing deal.
Representative Guttenberg looked at slide 17, and noted the
large steps for Alaska. He wondered what was lost when
Alaska gave up its sovereignty and becomes a partner with
the industry. Mr. Persily did not understand how Alaska
gave up its sovereignty.
Co-Chair Stoltze felt it may be a political term. Mr.
Persily felt that Alaska would not give up its sovereignty
in the agreement.
9:45:27 AM
Representative Guttenberg wondered how the division of
marketing and partner would work in the agreement. Mr.
Persily replied that the departments would work together,
but knew that there was a responsibility of government to
enforce the laws, even if it would drive up costs. He felt
that there should be thoughtful discussion, so all involved
realized that the issues were fully addressed.
Representative Guttenberg wondered if this was similar to
Norway's model. He wondered what kind of hurdles that
Norway faced. Mr. Persily replied that Norway had state-
owned companies, but stated that Norway had a different
political situation than Alaska. He stressed that Norway
was extremely disciplined. There was a stoic virtue of
behaving, and no one disrupted that.
Co-Chair Stoltze stressed that Norway was a nation, not a
state.
Representative Guttenberg remarked that Alaska would have a
25 percent ownership in the pipeline, which gave Alaska a
minority voice. He wondered how minority voices succeeded
in enforcing their points that may not be in the overall
best interest. Mr. Persily replied that votes may be lost,
but at least the argument was voiced.
Representative Guttenberg remarked that one major source of
gas to China was pipeline. He queried the source of that
gas. Mr. Persily replied that most of the gas came from
Turkmenistan, Uzbekistan, and Myanmar. The pipeline gas to
the Canadian border was priced somewhere around $10 to $12,
and the average price paid for LNG imported into China in
2013 was $11.80.
9:50:48 AM
Representative Guttenberg noted that the Canadian proposal
would hook into Alaska's pipeline. Mr. Persily responded
that the proposal was to bring oil from Alberta. He felt
that the proposal was not economic, and very expensive.
Representative Thompson remarked that there were a couple
of consultant reports that stated that the proposal was a
radical shift from the state's current situation. Mr.
Persily agreed that the proposal was unusual, and he was
not aware of another state that had a similar situation. He
did not feel that the state was not giving up regulatory
authority. He remarked that the state would be both
competing and contracting. He had not seen a better plan
for bringing the AKLNG to market. He understood that the
proposal was highly unusual, but stressed that the benefits
and risks should be carefully examined.
Representative Munoz queried the effect of oil tax policy
changes on the gas pipeline. Mr. Persily responded that the
oil companies depended on an attractive tax environment.
Co-Chair Stoltze felt that there were many impacts of tax
policy.
ADJOURNMENT
9:57:04 AM
The meeting was adjourned at 9:57 a.m.
| Document Name | Date/Time | Subjects |
|---|---|---|
| Gas Markets HFIN 3-17-14.pdf |
HFIN 3/17/2014 8:30:00 AM |