Legislature(2001 - 2002)
02/27/2001 10:05 AM House O&G
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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
HOUSE SPECIAL COMMITTEE ON OIL AND GAS
February 27, 2001
10:05 a.m.
MEMBERS PRESENT
Representative Scott Ogan, Chair
Representative Hugh Fate, Vice Chair
Representative Fred Dyson
Representative Mike Chenault
Representative Vic Kohring
Representative Reggie Joule
MEMBERS ABSENT
Representative Gretchen Guess
OTHER LEGISLATORS PRESENT
Representative Jeannette James
COMMITTEE CALENDAR
OVERVIEW OF STAGE 1 & STAGE 2 - ALASKA NORTH SLOPE LNG PROJECT
SPONSOR GROUP
PREVIOUS ACTION
No previous action to record
WITNESS REGISTER
STEVE ALLEMAN, Sponsor Group Commercial Manager
Alaska North Slope LNG Project
PO Box 100360
Anchorage AK 99510
POSITION STATEMENT: Provided a Power Point presentation
regarding the Alaska North Slope LNG Project.
GEORGE FINDLING, Manager
External Strategies
Sponsor Group
[Alaska North Slope LNG Project]
PO Box 100360
Anchorage, Alaska 99510
POSITION STATEMENT: Provided additional information regarding
the Alaska North Slope LNG Project.
ACTION NARRATIVE
TAPE 01-17, SIDE A
Number 0001
CHAIR SCOTT OGAN called the House Special Committee on Oil and
Gas meeting to order at 10:05 a.m. Representatives Ogan, Dyson,
Chenault, Fate, Kohring, and Joule were present at the call to
order. Representative James was also in attendance.
OVERVIEW OF STAGE 1 & STAGE 2 - ALASKA NORTH SLOPE LNG PROJECT
SPONSOR GROUP
CHAIR OGAN announced that the committee would receive an
overview of Stages 1 and 2 of the Alaska North Slope LNG Project
Sponsor Group.
Number 0143
STEVE ALLEMAN, Sponsor Group Commercial Manager, Alaska North
Slope (ANS) LNG Project, noted that he is a long-time Phillips
Alaska, employee. He informed the committee that the ANS LNG
Project consists of Phillips Alaska, BP Exploration (Alaska),
Foothills Pipelines, and Marubeni Corporation. Mr. Alleman
began by providing the committee with some background. He
explained that this project was initiated by the sponsors in an
attempt to develop an economically and commercially viable LNG
project. After the passage of the Stranded Gas Act, ARCO
solicited interest in 1997-1998 in order to form a sponsor group
with the following working interest: Phillips Alaska - about
30 percent interest, BP Exploration - 26 percent interest,
Foothills Pipelines - 25 percent interest, and Marubeni
Corporation - about 19 percent interest. The sponsors completed
an 18-month $12 million engineering design effort in August
2000, which was Stage 1. Now the focus has turned to the many
ongoing issues of the commercial aspects for Stage 2.
Therefore, he said he is present to update the committee on the
past and ongoing efforts of this project.
MR. ALLEMAN turned to ANS LNG commercialization. He explained
that it's about defining an economically viable project. That
is, finding the right size for market entry, which was the focus
of the Stage 1 efforts. Furthermore, [an economically viable
project] would include innovative design in order to minimize
capital costs, which was the focus in Stage 1 and the continuing
focus in Stage 2. Also, [there is the need] to minimize
commercial constraints, which is where much of the discussion
lies in relation to Stage 2. Finally, [there is the need] to
test and rework the economic viability of the project. The
commercialization of ANS LNG also [necessitates] the
development, through parallel activities, to closing. After
those things are done, the project would be constructed and
ultimately, be in operation.
MR. ALLEMAN continued with a slide of the project basics from
which he highlighted the guess that the project would purchase
gas from the producers on the North Slope and build an 800-mile
pipeline to either Valdez or Anderson Bay, or to Nikiski into
Cook Inlet. At that point, LNG would be manufactured and
shipped to market. The target markets would be Japan, Korea,
Taiwan, and other markets.
REPRESENTATIVE DYSON inquired as to what Marubeni brings to the
table.
MR. ALLEMAN explained that Marubeni is a Japanese trading
company that does business throughout East Asia and the world.
The [Sponsor Group] has a market liaison office established in
their office so that all of the different markets can contact
them and have a source specifically representing the Sponsor
Group. Although Phillips and BP have offices and marketing
efforts ongoing in the same countries, the [Marubeni office]
focuses on the ANS LNG Project.
REPRESENTATIVE DYSON asked then if Marubeni is a wholesaler.
MR. ALLEMAN specified that Marubeni is primarily a trading
company and hasn't been directly involved as far as an LNG
seller. However, he noted that Marubeni is involved with other
LNG projects around the world. He didn't recall those projects.
Mr. Alleman returned to the Power Point presentation and
informed the committee that Marubeni is working for the sponsor
group in Tokyo. The updates are continuous [due to staff in
Asia].
MR. ALLEMAN continued with the two fundamental elements
necessary for Alaskan LNG to move forward: commercial viability
and a market that's ready for gas from Alaskan projects. With
regard to commercial viability, the project needs to be the
right size so that it can obtain a toehold in the market and
significantly advance projects. Furthermore, such requires
competitiveness with other projects trying to enter the market
place. A market that is ready for gas from the new Alaska LNG
project will require additional new demand, which will first be
incremental expansions from the existing LNG projects and then
the most competitive new LNG projects that can provide secure
supply and can deliver when the market is ready.
MR. ALLEMAN turned to market analysis, which has been done in-
depth. The first one was done for the Sponsor Group in 1999 and
that was revisited in the spring of 2000. By the end of Stage
2, there will be another market assessment. As mentioned
earlier, the initial target markets were Japan, Taiwan, and
South Korea. Also, the emerging markets of China and India were
reviewed. In Stage 2, U.S. and west coast Mexico markets will
be reviewed. Mr. Alleman informed the committee that the market
analysis reviewed, for each country, the following:
* Government initiatives in nuclear power capacity
* Competition from coal-fired versus LNG/gas-fired
generation
* City gas companies' ability to displace with
competing fuels
* Deregulation of electricity and city gas industries
* "Other" gas competition from potential pipelines
* Effects of independent power producers in a
deregulated environment
REPRESENTATIVE DYSON inquired as to the impact of deregulation
of electricity on the sale of natural gas.
MR. ALLEMAN pointed out that deregulation can vary. Generally,
one views deregulation as allowing other market entrants into
the marketplace. Therefore, [the analysis] attempts to gauge
the impacts of deregulation in each marketplace. In general,
Mr. Alleman felt that deregulation would be helpful.
MR. ALLEMAN continued with the Power Point presentation and the
LNG market view, which he viewed as fiercely competitive. He
showed a slide delineating possible market competition that
summed 68-75 MTPA (million tons per annum) of LNG potential,
including Alaska. The outlook for supply and demand is 20-40
million tons of LNG by 2010. The problematic trends are the
downward price pressure, and the shorter contracts and spot
deliveries. Mr. Alleman related the belief that the Asian
marketplace will continue as a long-term base supply, although
there will be more pressure for more spot sales over time.
Therefore, a smaller market entry reduces the market entry risk
and provides [the Sponsor Group] with a better chance to get
into the marketplace. The other competitor for ANS LNG is U.S.
gas demand [through a Lower 48 gas pipeline]. He referred to
the slide that had a bar chart entitled "2010 New Source Needs"
in order to provide the committee with the magnitude of the
various marketplaces.
MR. ALLEMAN moved on to discuss Stage 1, which included the
development of the market entry project. Historically, [the
Sponsor Group] had looked at 14-15 million ton market entry
projects that would cost between $14-15 billion. However, a 7-8
million ton per year project was developed at $6.8 billion. He
emphasized that the number was not just cut in half, but rather
the project was completely redesigned to defer costs as needed,
as well as minimizing any pre-investment cost. [The Sponsor
Group] believes that this smaller size improves the groups'
market entry probability and significantly reduces the capital
cost and risk. However, the project remains expandable to a 14
million ton project if and as the market develops. Internally,
the [the Sponsor Group's] mandate is to develop a project that
could stand alone economically at a 7-8 million ton project,
even if future expansion never occurs.
MR. ALLEMAN continued with a slide entitled "Key Area of
Redesign." He informed the committee that the [the Sponsor
Group] believes that it can begin with zero compression other
than compression at the gas treatment facility and into the LNG
facility. This, field compression, is an expense that can be
deferred further out into the project and help economically. He
pointed out that there would be two LNG trains that begin at 3.6
million tons. With Alaska's ambient temperature and other
innovations, those can be expanded to 7 million tons each.
After the redesign of the project, the ramp up illustrates how
the ongoing risk of entering the marketplace is eliminated.
MR. ALLEMAN moved on to a slide entitled "Technical Data Base"
pointed out that there was significant external input into the
process through workshops that incorporated both external and
internal experts and [both routes/sites advanced]. He noted
that he is often asked why both routes/sites are [reviewed], to
which he explains the need to develop a cost competitive project
that can be done at either location. Furthermore, neither site
works if the overall project isn't doable. He noted that Stage
1 designing and engineering was done for both routes and sites.
Keeping both routes/sites alive provides flexibility. With
regard to the Nikiski site, it has the benefits of in-state gas
sales to the existing markets [along the pipeline corridor],
growth opportunities, and existing infrastructure. There is the
opportunity to include the Kenai LNG plant in this process.
Furthermore, there is the potential for lower cost in-state gas,
although there wouldn't be the need for a long spur line.
REPRESENTATIVE DYSON inquired as to the advantages of the
Valdez-only route.
MR. ALLEMAN explained that the Valdez route includes the
existing Trans-Alaska Pipeline System (TAPS) corridor and thus
there is possibly less resistance to environmental issues and
possibly less landowner issues.
CHAIR OGAN pointed out that the next slide, "Stage 1 -
Permitting Work" notes that any permitting time differences are
doable within the current market timing needs. "If you already
have permits for a route and you have fewer environmental
hurdles ... how can a western route, the Cook Inlet route, be
permitted in the same timeframe," he asked.
MR. ALLEMAN clarified, "We're saying doable within the current
market timing needs." He pointed out that the base case refers
to a 12-18 month difference. In the low case, there is the
belief that with government-agency support it can be done in
less time. He acknowledged that in a high case it may take more
time; there is no exact science within the permitting world. He
noted that both internal and external experts were brought in to
perform an extensive analysis. He also noted that the Nikiski
route doesn't pass through the Denali National Park.
MR. ALLEMAN continued with the presentation and explained that
the design work and cost estimating exceeded expectations for
what was intended to be accomplished in Stage 1. He pointed out
that the accuracy level reached was +40/-20, which was taken
even further in some areas and thus reached the pre-construction
engineering design stage. He directed attention to a slide
entitled "Stage 1 Work" that includes a photograph of the Stage
1 library that houses all the documented activities [of the
Sponsor Group] as well as the 26 outside contractors. He
summarized the fact that Stage 1 work was completed on time,
within the budget, and exceeded engineering and design
expectations.
CHAIR OGAN asked if that means that there will be a project
soon.
MR. ALLEMAN answered that it means that the [Sponsor Group] is
still trying to make this a commercially viable project.
REPRESENTATIVE DYSON mentioned the hub concept and asked if it
appears viable to sell gas to the Midwest in the future. He
questioned, "Is it possible to either do both or provide for
both as we get started here?"
MR. ALLEMAN responded that [the Sponsor Group] believes there is
enough gas to do both projects. He explained that part of the
reason [the Sponsor Group] is moving forward is because it
believes that although there isn't a commercially viable project
yet, [the Sponsor Group] is confident enough that it maintains
interest. One of the items that will be reviewed is in regard
to how to share costs with a Lower 48 project. Furthermore,
there is "that plum" in regard to obtaining the LNG markets at
the turn of the decade.
REPRESENTATIVE DYSON inquired as to the conversion factor
between gas measured in cubic feet at atmospheric pressure
versus tons of LNG.
MR. ALLEMAN answered that, for rough figures, he takes the MTPA
and multiplies that by .14, which results in the bcfd (billion
cubic feet a day).
REPRESENTATIVE DYSON asked how many cubic feet of gas at
atmospheric pressure would result from one ton of LNG. He
requested that the presenters provide that information later.
MR. ALLEMAN returned to his presentation, which turned to Stage
2 and its key areas of focus. Stage 2 began last September and
is a 12-15 month program that costs about $3 million. He noted
that design cost optimization work is continuing and much work
is being done with the synergy of shared cost with a Lower 48
pipeline project. There is interest in [including] a public
entity or port authority concept to the project. Mr. Alleman
highlighted the importance of identifying the key risks, their
impact, and potential mitigation strategies. [The Sponsor
Group] is also looking to alternate LNG markets, including the
U.S. and west coast of Mexico. Furthermore, there has been and
will continue to be much review of competing LNG projects. He
noted that the permitting analysis is continuing and an
environmental assessment for the Cook Inlet route is being
performed now in order to be able to move forward if the
opportunity arises.
MR. ALLEMAN continued with the slide entitled, "Key Stage 2
Highlights." He noted that there has been additional capital
expenditure optimization of approximately $400 million, which
reduces the market entry project to 7.8 MTPA for $6.5 billion
and that includes ships, or $4.9 billion excluding ships.
Attempts to identify other cost savings opportunities that might
be shared with the Lower 48 pipeline project are continuing.
Mr. Alleman informed the committee that there has been
evaluation of the public entity valuation in regard to how [the
Sponsor Group] may be able to join with a public entity to form
a project. Currently, there is no compelling evidence
supporting a public-private project at this point. He explained
that generally, the benefits passed to private enterprise would
be taxable and the public borrowing rates are unlikely to offset
private entity deduction of interest and depreciation.
REPRESENTATIVE FATE asked if that included the Port Authority,
which claims to have certain tax advantages that might offset
some of the costs.
MR. ALLEMAN answered, "Right now it would include, yes, any type
of public entity and ... it doesn't mean there won't be
something that we can find down the round that might match up,
but the types of structures that we've seen so far wouldn't
match up between the two - the public and the private."
GEORGE FINDLING, Manager, External Strategies, Sponsor Group,
[Alaska North Slope LNG Project], interjected that this doesn't
comment on the Port Authority or a government entity doing a
project on its own. He explained, "This is primarily trying to
put a project that's public and private together." The tax
exemptions and relief enjoyed by the Port Authority would become
taxable the moment it attempts to pass those on to a private
entity.
MR. ALLEMAN continued with the presentation and turned to a
slide entitled, "Stage 2 Market Engagement." He reiterated that
until a fully defined, cost competitive project is developed and
a need for new, green field projects is established, the market
contacts are limited to updates on progress. Furthermore, there
is continual review as to how [the Sponsor Group] compares with
other markets, including nontraditional markets.
MR. ALLEMAN moved on to the "Economic Issues" to which the key
is: "To become cost competitive with other East Asian LNG
projects at a sufficient economic rate of return." From [the
Sponsor Group's] standpoint, this project isn't quite there yet
and isn't economic on a cost of capital basis in regard to the
expected risk for a project of this size. He then highlighted
the considerable additional efforts required as follows: reduce
cost, share cost or find other synergy, reduce risk, and achieve
meaningful fiscal modification. Mr. Alleman said, "For us, the
truth here is: Project economic assumptions must be salable."
CHAIR OGAN referred to the slide entitled, "LNG Market View"
that lists market competition. He inquired as to who owns the
primary interest in each of the projects listed on the slide.
MR. ALLEMAN and MR. FINDLING said that information could be
provided to the committee later.
CHAIR OGAN related his interest in seeing the relationship
between what [the Sponsor Group] is justifying internally and
the global forces that are competing within the same companies.
MR. ALLEMAN returned to the presentation and referred to the
slide entitled, "ANS LNG Project Current CAPEX Estimate." The
current estimated CAPEX is approximately $6.5 billion and that
includes the following components: gas treatment, pipeline and
compression, Nikiski LNG and terminal, and shipping. He
reiterated that a primary effort in Stage 2 is to develop
improved economics with shared cost of a Lower 48 pipeline. In
closing, Mr. Alleman said, "This project is still alive and
well. We've got a lot of work ongoing, attempting to develop
this cost competitive project. And certainly we want to be
prepared ... but we also want to be realistic about market
timing and how we enter the marketplace."
CHAIR OGAN noted his confusion with the testimony that [the
Sponsor Group] isn't competitive with other projects in the
world, although it doesn't know what the other projects are or
who owns them.
MR. ALLEMAN reminded the committee that his initial statement
was in regard to [the Sponsor Group's] initial goal to obtain an
economically viable project internally. However, now [the
Sponsor Group] is looking outward. In fact, a workshop will be
held in May, during which the issues regarding how [the Sponsor
Group] stacks up to other projects [will be discussed].
CHAIR OGAN inquired as to the netback to the producers that
would make the project economically viable.
MR. ALLEMAN said that he didn't have that specific number; it
would be dependent upon the absolute price of the LNG that is
sold.
MR. FINDLING explained that the focus on the Sponsor Group's
commercial structure is to purchase gas at the wellhead and sell
LNG. In further response to Chair Ogan, Mr. Findling said that
[the Sponsor Group] anticipates that there will be a negotiation
that would be complex, with many terms and conditions in regard
to how the purchase would take place and how it relates to the
market price, et cetera. Therefore, he felt that it would be
difficult and inappropriate to establish a "rule-of-thumb"
number for the minimum price or the netback.
CHAIR OGAN inquired as to whether there is a gas balancing
agreement between the producers on the North Slope.
MR. FINDLING replied, no. In further response to Chair Ogan,
Mr. Findling provided the committee with the following
explanation of a gas balancing agreement. He explained that the
idea behind a gas balancing agreement is to establish the
process by which all the co-relative rights - the rights that
each individual owner has in these jointly owned fields - have
the rights to the gas and thus someone else won't take the
rights to their gas. Therefore, everyone's rights would be
protected in a unit setting.
CHAIR OGAN asked if the lack of a gas balancing agreement
provided one company de facto veto power. That is, wouldn't the
lack of a gas balancing agreement place [the Sponsor Group] at a
disadvantage.
MR. FINDLING answered that that's not the way he saw it. The
existence of a gas balancing agreement or lack thereof
historically, hasn't been a process by which people have held up
projects. He related his belief that as the economic interests
converge and there is a desire to move forward, then these types
of agreements are worked out.
REPRESENTATIVE JAMES asked if the gas balancing agreement is
mainly intended to ensure fairness.
MR. FINDLING agreed that the gas balancing agreement is a way to
establishing the rules under which gas can be taken.
CHAIR OGAN asked whether [the Sponsor Group] would meet the
deadline of June 30th for application for projects wishing to
take advantage of HB 393 from a couple of years ago.
MR. ALLEMAN answered that [the Sponsor Group] believes that it
is qualified and prepared to do that. However, the date doesn't
coincide with the time of need in the marketplace. There is a
plan to [make a] decision on that in the upcoming quarter.
CHAIR OGAN inquired as to who would be [the Sponsor Group's]
potential customers.
MR. ALLEMAN answered that the potential customers are all of the
markets within Japan, Taiwan, and South Korea.
CHAIR OGAN asked whether Mr. Maroki(ph) is a major player in
that.
MR. ALLEMAN replied yes. In further response, he felt that Mr.
Maroki(ph) would have a buyer's perspective on market analysis.
REPRESENTATIVE FATE asked if there have been any studies
regarding the possibility of moving laterally through Glennallen
to Cook Inlet. He recognized that the throughput would have to
be expanded.
MR. ALLEMAN answered that work has been done with taking in-
state gas supplied from the Nikiski route and taking it to
Anderson Bay. It has always been assumed that someone else
would build the spur line to Anchorage and thus wouldn't be part
of the project.
TAPE 01-17, SIDE B
CHAIR OGAN inquired as to whether there has been any review and
comparison of the political and business conditions in Qatar,
Yemen, Nantuna, and Sakhalin versus Alaska. He asked whether
there is any advantage for markets to look to Alaska because of
its political stability and military strength in the Pacific
Rim.
MR. ALLEMAN related his belief that Alaska has political
stability and a known, established gas supply that's already in
existence, which are two distinct advantages. He mentioned,
"And that's part of what we intend to do is not only just go
back and look on straight up cost of service basis, but how else
do we compete with these projects; and how realistic are some of
these other projects as far as really being able to come
together at the end of the day also."
MR. FINDLING pointed out that the question may be: "To what
extent will the markets value these ... advantages that Alaska
has ...." He felt that [the Sponsor Group] believes that the
market is, first, going to look for the lowest cost supply.
Therefore, the other issues will be secondary.
CHAIR OGAN said,
Because of that, we've got some internal conflicts
with some of the producers' projects that compete.
Those same people who are producers in Alaska have
projects that are in direct competition with Alaska's
projects. Comments that are made on the record by
some of the producers that ... "Alaska just isn't
competitive ... the projects ... that are good
projects get funded by our company." I'm kind of
fearful that ... because there's gas in other areas
that are at tide water and we don't have to build a $7
billion pipeline, that our gas will be warehoused ...
possibly an indefinite time. ... I've been here for a
while and I remember all the discussion about ... you
have to build this expensive pipeline and the capital
investment, and I don't see much difference between
that argument with LNG - why it might not be a
competitive market - versus that argument on a
pipeline route to the Lower 48 [where] you have to
build a very expensive pipeline that's three times as
long as our pipeline and then compete in a market
where there's already lots of gas down there, it's
just not in the pipes yet.
CHAIR OGAN remarked that if he were in the [Sponsor Group's]
shoes he would be a bit discouraged by the governor's comments
as well as some of the comments of the producers.
MR. ALLEMAN commented that since [the Sponsor Group] believes
that there is enough gas for both projects, it behooves them to
continue forward to develop LNG. From Phillips' standpoint, Mr.
Alleman noted that he has a directive to continue to explore
this option because it wants to develop every option available
to it. The Lower 48 project is viewed as bringing a potential
leveraging synergy to still do an LNG project, which is
encouraging.
REPRESENTATIVE JAMES expressed her concern with some of the
companies [in the Sponsor Group] also owning gas in other parts
of the world. She recalled the testimony that the first
consideration is the lowest cost. Therefore, she surmised that
regardless of the owner, the price of getting the gas to market
would be the determining factor.
MR. FINDLING replied, yes. If the costs are attractive to the
marketplace, that's where the market will focus attention.
Therefore, it isn't so much of a question of who owns it but
rather the fundamental characteristics of the gas supply and the
requirements to commercialize the gas and move it to the market.
He related his belief that Alaska should focus on how it can be
cost competitive with the other projects.
REPRESENTATIVE JAMES related her belief that the public is
concerned that the perception of or real bias would lead
companies to do things elsewhere because it is cheaper than
Alaska. She inquired as to the answer to that.
MR. FINDLING emphasized that this is really about the
fundamental cost structure of projects; it's not about gaming
[in order] to obtain concessions. However, he noted that
federal tax relief on an Alaskan project can make a big
difference in regard to how competitive it looks in the
marketplace. With such, the social question is whether that is
in the best interest of the public to do such in order to help
make a project competitive so that it will be competitive.
Still, Mr. Findling maintained the importance of the
fundamentals of these cost projects. Furthermore, the fact that
the project is 800 miles from tide water is an issue that must
be overcome.
REPRESENTATIVE JAMES asked if any consideration had been given
to the possibility of the "public" building the pipeline and
[the Sponsor Group] being charged to move the gas through it.
MR. FINDLING said that there have been some discussions with the
Port Authority, which is the best model for such. There has
also been review of the state's calculations regarding the
benefits to an enterprise that was relieved from federal tax and
that looks attractive. However, how such would be structured is
a matter that needs to be discussed and worked out. He noted
that [the Sponsor Group] will be discussing possible
opportunities.
REPRESENTATIVE JAMES expressed concern with regard to the lack
of Exxon's presence in this process. She asked if [the Sponsor
Group] has had any conversations with Exxon.
MR. FINDLING informed the committee that when ARCO first lead
the formation of the Sponsor Group, a variety of different
companies were invited. However, at the time [ARCO] decided not
to explicitly give the names of all the companies in order to
[have candid discussions]. That tact has been maintained. He
remarked that the Sponsor Group has quite a bit of gas
represented by [Phillips and BP] and, in his mind, he included
the state royalty gas as another possibility and thus there are
enough reserves that the participation or nonparticipation of
one company isn't really a leveraging thing.
CHAIR OGAN related his understanding that Phillips owns Timor
Sea. He asked if there are any provisions in law that would
penalize or jeopardize Phillips for delaying bringing natural
gas to production in the Timor Sea.
MR. ALLEMAN said that he didn't know the specific answer.
However, he expressed the need to avoid attempts to compare one
element of the concession and fiscal system in one entity with
the leasing and fiscal system in Alaska. There has to be a
comparison of the entire [project]. He pointed out that Alaska
has a strong leasing system and there is a fiscal structure that
is at the pleasure of the state government.
CHAIR OGAN pointed out that part of comparing the project in its
totality is comparing what Alaska's gas is competing against.
Therefore, he said he would appreciate an answer to this
question.
MR. FINDLING remarked, "I really have a hard time believing that
some kind of punitive measure is going to help us become more
cost competitive relative to other projects."
CHAIR OGAN said that if a board of directors has a fiduciary
responsibility to its stockholders and gas that isn't developed
in a certain area is lost or a tax is incurred because of the
lack of development, that is a factor in regard to what is
developed first.
CHAIR OGAN inquired as to the [Sponsor Group's] strategy for
securing a gas supply and the assumptions for the wellhead
price.
MR. ALLEMAN answered that the gas strategy is that there would
be an open bid process and all the producers would be allowed to
bid to supply gas to an ANS LNG project and the lowest bidder
would be taken. He pointed out, "Obviously, if we're not
competitive with what they can do other places, we won't see
gas." He said that he didn't have any assumptions of what a
wellhead price would be.
CHAIR OGAN inquired as to the price of gas on the East Coast.
MR. ALLEMAN replied that the delivery price to the East Coast
would be the current U.S. Henry Hudd (ph) market price in those
particular areas plus the differential. In further response to
Chair Ogan, he recalled that the Everet, Massachusetts area is a
long-term contract. However, he didn't know what the other
markets - Cope Point, Elba Island, and a site in Louisiana - are
looking at.
REPRESENTATIVE FATE asked if there is a grasp on the [projected]
cost of capital or construction relative to things such as the
wellhead price that are unknown. He said, "What I'm getting at
is through these questions I haven't yet determined that the gas
is not economical at this point because you have made some
assumptions that when we've asked the questions, you can't
answer them." If the anticipated wellhead price could be known,
then it would provide [the state] the ability to anticipate what
the market would be and thus whether this is economical at that
point in the future. However, currently it seems difficult to
determine whether this project is or is not economical.
MR. ALLEMAN said that the pieces provided today are the capital
costs broken down. "We haven't tried to impute a cost of
service to put in front you," he said. He pointed out that any
forecasted long-term price would normally be confidential within
our company. He explained that providing the committee with a
cost of service number is problematic because to what is it
compared. Certainly the raw numbers can be given to the
committee, which was down with CAPEX numbers today. He noted
that everyone will have different assumptions with regard to
whether this is a profitable project.
REPRESENTATIVE FATE inquired as to when the committee will hear
that this project is economic. These exercises could continue
because everything is based on assumptions. He noted that the
State of Alaska has to answer to its stockholders, the people of
Alaska and thus he expressed the need to have [this information]
so that [the state] can make some projections as well.
CHAIR OGAN announced that his patience with this is "running a
little bit thin" because he has been involved with this for many
years and it doesn't seem closer.
MR. FINDLING reiterated, "We are not cost competitive."
However, he wasn't sure how that could be proven. He explained
that he looked at the activities that people are doing to move
ahead. The Sponsor Group has done a lot of work, spending $12
million, and developing an innovative design without suffering
the cost disadvantages that one would expect on a per unit
basis. Although [the Sponsor Group] is trying to move forward,
the market is oversupplied and fiercely competitive. The market
seems to indicate that this is a later-decade project.
CHAIR OGAN pointed out that there is a company interested in the
project, if it could have the same open-bid process that the
[Sponsor Group] has. He asked, "What's the deal?"
MR. FINDLING reiterated that [the Sponsor Group] has put a lot
of work into this. He said that how to acquire gas is being
thought of as a Sponsor Group versus a producer. Therefore,
"nothing makes us particularly special in our ability to try to
go and acquire gas ... other than we have a lot of work behind
us," he said.
MR. ALLEMAN returned to the issue of the smaller entry project
versus the larger project and pointed out that it's about the
market risk. The [Sponsor Group] feels that its project is
better than what was developed for the 14 million ton project.
However, if 14 million tons can be placed in the marketplace, he
said he would want expansion.
CHAIR OGAN turned to the U.S. West Coast market. He noted that
BP recently announced building a receiving facility on the West
Coast. However, he remarked that obtaining permits in
California is difficult. He recalled that President Bush had
mentioned easing the restrictions in regard to other countries
selling the U.S. power. He inquired as to whether [the Sponsor
Group] has looked at the West Coast market and what the delivery
cost to the West Coast would be.
MR. ALLEMAN acknowledged that [the Sponsor Group] is now
focusing on the West Coast market. It all turns on the
sustained price over time, which is the same thing the Lower 48
pipeline would look at. He confirmed that there could be some
synergies with the Lower 48 pipeline [because] the line is half
built and the gas is halfway there. He reminded the committee
that there would still be a toll.
CHAIR OGAN inquired as to the impact to all these projects if
the state announced that it would build a pipeline that would
have enough capacity for both projects to Fairbanks.
MR. FINDLING agreed that is an interesting assumption. However,
built into that are a couple of assumptions that the state would
need to think about. The state needs to feel that it can
execute the aforementioned project in a cost-competitive manner.
CHAIR OGAN remarked that even if the state was merely a co-owner
in the pipeline, then there would be some advantages in that
information that the state doesn't have now would be provided if
the state is involved as a co-owner. He reminded everyone that
the state owns 12.5 percent of the gas and perhaps the state
should own 12.5 percent of these projects. He asked if the
[Sponsor Group] would have any objections to the state reviewing
that.
MR. FINDLING replied no.
REPRESENTATIVE KOHRING remarked that the pipeline should be
built based on economics and whether the market justifies moving
forward. Therefore, he had no problem waiting to see if this
project eventually becomes feasible. He didn't believe that the
legislature should rush ahead to get this pipeline built,
although he would welcome the economic stimulus created. He
noted his distaste to the idea of considering penalties to the
industry but rather proposed review of an incentive package such
as a tax reductions.
REPRESENTATIVE JAMES turned to the LNG market of the Lower 48.
She related her understanding that there has been some reduction
in the cost of producing LNG by a new method. Therefore, she
asked whether the Kenai LNG plant would have to be retrofitted
in order to take advantage of [the new method that reduces the
cost].
MR. ALLEMAN assumed that Representative James was speaking of
the Trinidad facility that is basically owned by BP. He
explained that the cascade process was originally developed in
Kenai. However, he acknowledged that there have been
technological advancements since that facility was built. The
project this group is reviewing is a stand-alone project that
would be in a different plant (indisc.) than the existing Kenai
facility.
REPRESENTATIVE JAMES reiterated that the process is an
advantage.
MR. FINDLING pointed out that there is a process called extended
end flash (ph). He explained that as the LNG process is done
and things are cooled, there's always gas that flashes off the
end of the process. Normally, such is recycled back into the
facility and reused to make LNG. However, with extended end
flash that gas is taken and the pressure is released, more LNG
is made than could be otherwise. Then [that gas that is taken
during the extended end flash] can be sold to another facility,
such as the existing Kenai facility, to put in its process.
That is the advantage with using the existing Kenai facility.
REPRESENTATIVE JAMES explained that her question relates to the
indication that other LNG facilities will be opened due to the
decreased cost of LNG along with the higher cost of natural gas
that has made LNG more competitive with natural gas. She
inquired as to the ratio of the btus of using LNG versus natural
gas without this decrease in the production cost. She also
inquired as to what the cost would have to be in order to avoid
LNG not being favored.
MR. FINDLING said that he didn't know now, but could provide
that information later.
REPRESENTATIVE JAMES emphasized that if the state decided to be
an owner in that, then the state would also have capital costs.
She commented on the importance of trust in this issue.
CHAIR OGAN inquired as to what other projects the [Sponsor
Group] anticipates would enter the marketplace before Alaska's
projects. He also asked if the project was downsized because
you think other projects will enter the marketplace before
Alaska enters and thus the demand will decrease.
MR. FINDLING explained that there would be 20-40 million tons
per annum of new demand in 2010. He agreed that Alaska would be
competing with those other projects that don't have the 800-mile
pipeline involved. However, he pointed out that [the Sponsor
Group] is the only one that is discussing double digit
[supplies] and thus it will take some time to develop.
MR. FINDLING, in further response to Chair Ogan, said that there
are some projects that are closer to being developed than this
project. He noted that analysis over the next couple of months
will be done to understand that.
CHAIR OGAN inquired as to what projects [are closer to being
developed] than Alaska's project.
MR. FINDLING said that there aren't any black-and-white answers.
Each project faces its own set of issues.
CHAIR OGAN commented that it would behoove [the Sponsor Group]
to know who "has the leg up" on them.
MR. ALLEMAN said, "We will."
CHAIR OGAN pointed out that the periodicals from the oil
industry are full of information regarding the projects of
various companies.
MR. ALLEMAN said that he could provide that information to the
committee later.
CHAIR OGAN asked if there were any further questions. There
were none.
ADJOURNMENT
There being no further business before the committee, the House
Special Committee on Oil and Gas meeting was adjourned at 11:38
a.m.
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