Legislature(2001 - 2002)
02/07/2002 10:14 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 7, 2002
10:14 a.m.
MEMBERS PRESENT
Representative Scott Ogan, Chair
Representative Hugh Fate, Vice Chair
Representative Fred Dyson
Representative Mike Chenault
Representative Vic Kohring
Representative Gretchen Guess
Representative Reggie Joule
MEMBERS ABSENT
All members present
COMMITTEE CALENDAR
CONTINUATION OF ROYALTY-IN-KIND GAS SALE HEARING (continued from
2/5/02)
- HEARD; APPOINTED SUBCOMMITTEE
PREVIOUS ACTION
No previous action to record
WITNESS REGISTER
BONNIE ROBSON, Deputy Director
Division of Oil & Gas
Department of Natural Resources
550 West 7th Avenue, Suite 800
Anchorage, Alaska 99501-3560
POSITION STATEMENT: Discussed the royalty-in-kind (RIK) gas
sale and answered questions.
MARK MYERS, Director
Division of Oil & Gas
Department of Natural Resources
550 West 7th Avenue, Suite 800
Anchorage, Alaska 99501-3560
POSITION STATEMENT: Offered information on the RIK sale
process; highlighted the need for a two-pronged approach
including both the RIK sale and federal legislation.
MICHAEL J. HURLEY, Senior Commercialization Specialist
ANS Gas Commercialization
Phillips Alaska, Inc.
P.O. Box 100360
Anchorage, Alaska 99501
POSITION STATEMENT: Testified regarding effects of the RIK sale
on the producers.
ACTION NARRATIVE
TAPE 02-8, SIDE A
Number 0001
CHAIR SCOTT OGAN called the House Special Committee on Oil and
Gas meeting to order at 10:14 a.m. Present at the call to order
were Representatives Ogan, Fate, Kohring, Guess, and Joule.
Representatives Dyson and Chenault arrived as the meeting was in
progress.
CONTINUATION OF ROYALTY-IN-KIND GAS SALE HEARING
CHAIR OGAN announced that the committee would continue its
hearing, begun Tuesday, February 5, 2002, regarding the royalty-
in-kind (RIK) gas sale. He reminded members that much
information had been covered at the previous meeting, but that
testimony by the Division of Oil & Gas had been cut short by
time constraints.
Number 0146
BONNIE ROBSON, Deputy Director, Division of Oil & Gas,
Department of Natural Resources (DNR), testified via
teleconference. She informed the committee that she would
provide detail on matters she'd discussed previously, but also
would address other important aspects to consider, in the
context of the RIK sale, regarding issues raised by BP
Exploration (Alaska) Inc. ("BP") and Phillips Alaska, Inc.
("Phillips").
MS. ROBSON referred to indication by Mr. Konrad of BP, at the
previous hearing, that BP believes the RIK sale is premature.
She told members:
If you will recall, initially the state started down
the process of an RIK sale based on the statements by
BP, Exxon [ExxonMobil Corporation], and Phillips that
an open season for pipeline capacity could be as early
as the first quarter of 2002. In light of that, we
did begin the process, although we have been more
recently informed by BP, Exxon, and Phillips that at
this point in time, they do not currently envision
that they will conduct an open season in 2002.
... That statement came within two weeks of one of
those three parties' informing us that an open season
could be in the second quarter of 2002. So, we do not
feel that we have the guarantee that there will not be
an open season this year. But as a practical matter,
all we know is that an open season may be this year;
it may be next year; it may be next decade. We do not
know. So what do we do to prepare?
The important thing to remember is that when the open
season closes, a decision between royalty-in-kind and
royalty-in-value will have been made, and it will have
been made for one of two reasons - either because this
issue is treated today as if it were a "now or never"
proposition, with recognition that the original
capacity, 4 or 4.5 billion cubic feet a day, will not
be again in play until 2025, 2030, or possibly 2035,
[or], alternatively, a decision between royalty-in-
value and royalty-in-kind can be made by inaction or
by gambling that the open season will not be until at
least the latter part of next year, when the
legislature would have a chance to address the matter
of an RIK contract in the session next year.
Number 0331
MS. ROBSON suggested it is more appropriate "to make a decision
by treating the issue seriously today." She conveyed her belief
that the committee sees the same need to address the issue in
short order.
MS. ROBSON reminded members that there are only two seasons:
the open season and the closed season. The open season lasts a
matter of weeks, perhaps at most a matter of a couple months.
Therefore, the closed season dominates; it will dominate for the
period of construction plus 15 years and possibly longer. She
cautioned:
When the season is closed, the pipeline is essentially
a private pipeline. So if the state does not play now
- if it does not participate in decisions made on what
happens with the initial 4 billion cubic feet a day of
pipeline capacity - it may not be able to play at all
until, as I indicated, 2025 or later.
Number 0455
MS. ROBSON responded to an indication by the producers that the
state should consider "the prospect of a future open season on
expansion capacity as some solution to the state's needs." She
told members:
I am going to suggest to you that that is not
appropriate. First of all, an expansion is not a
given. We do not know that there will be an
expansion. And we have heard conflicting testimony on
whether FERC [Federal Energy Regulatory Commission]
can order expansion.
The "big three" [oil producers] would have us believe
that FERC does have that ability. The FERC staff, the
lawyers representing the State of Alaska, and those
representing the explorers all indicate that they
think that FERC does not or, at best, it is arguable
whether FERC has that jurisdiction.
So I think it's safe to say that we have no guarantee
that FERC can order expansion, and if FERC cannot
order expansion, then ... the right to expansion rests
in the sole control of the big three.
Number 0561
MS. ROBSON continued:
Even if FERC does have jurisdiction - as the big three
suggest - they have suggested that it only exists
where there is a showing made that there is some
behavior on ... the part of those who own the
pipeline, [that] there is something about the market
structure that justifies FERC intervention. And that
kind of proceeding is never easy, it's never cheap,
it's never quick, and it's never certain. And I
suggest to you that we should not rest all our hopes
for getting RIK gas into a pipeline on a future,
possible expansion where there is such lack of
certainty.
It is also possible that a future expansion may be
controlled by preferential rights given to those who
receive the initial pipeline capacity. And if the
initial pipeline capacity is limited to BP, Exxon, and
Phillips, and they have preferential rights to
expansion capacity, again, we may not have the chance
to play in expansion capacity at all. Nor may
explorers or other sources of new gas.
But in any case, if we do have an opportunity to
participate in a future expansion, our ability to ...
work within that expansion will probably be limited to
one-eighth of the expansion capacity, representing our
royalty share. So if we start with a 4-billion-cubic-
feet-a-day pipeline and expansion is on the order of 1
billion cubic feet a day - or, to make the math easy,
let's say, .8 billion cubic feet a day - our role in
the expansion may be limited to .1 billion cubic feet
a day, that is, 100 million cubic feet of gas, at a
time when our royalty share is on the order of a half
billion or 600,000 million cubic feet [mcf] a day.
Number 0715
MS. ROBSON addressed the issue of fairness. She noted that BP
and Phillips, in testimony at the previous hearing, had
questioned the fairness of an RIK sale, at least if it is used
as a "backstop" to new sources of gas. "Specifically, they
implied that those who pay for the pipeline have the exclusive
right to ship on the pipeline," she said. "They also say that a
backstop - that is, any RIK sale that lets new sources of gas
into original pipeline capacity, would cost them on the order of
$2 billion." To that, she responded:
I suggest to you that neither of these are true.
First of all, as to their implication that those who
pay for the pipeline have the exclusive right to ship,
that is simply not the way it works. Ownership of the
pipeline is devoid from the right to ship on the
pipeline under current law. Those who own the
pipeline do not have the ability or the right to ship
even one mcf of gas on that pipeline unless they sign
a ship-or-pay commitment for pipeline capacity. It is
those who sign a ship-or-pay commitment during the
open season that acquire the right to ship gas on the
pipeline.
Number 0802
MS. ROBSON, at the request of Chair Ogan, described ship-or-pay
commitments. She noted that the expected duration is at least
15 years, but perhaps 20 or 25 years. She explained:
When the open season comes ... those who are willing
to sign up for pipeline capacity of long duration -
and I'll just use 15 years for simplicity - sign a
firm contract. ... They say, "We will pay, for that
capacity, ... a certain amount, say, $1.25, $1.50, for
every mcf of gas within that capacity, regardless of
whether we use that capacity or not."
So, if somebody comes to the open season and they say,
"I am making a commitment now for a half bcf of gas
per day," they, in fact, sign up to pay on the order
of $500,000 per day or more, regardless of whether
they, in fact, ship gas. So, it is something that
requires some risk, some nerve, some gumption on the
part of a party, particularly a party who doesn't know
whether they have gas or knows they have gas but
doesn't know whether their gas can otherwise get into
the pipeline, to show up in the open season and sign
one of these contracts.
And I suggest to you, they are making a substantial
commitment to this pipeline, even though they are not
the ones that pay for construction of the pipeline at
the time of construction. They pay for the pipeline
by paying a tariff once gas flows, regardless of
whether their gas is, in fact, flowing.
Number 0943
CHAIR OGAN noted that all members were present.
MS. ROBSON continued with ship-or-pay contracts, discussing the
distinct roles of producers and those that build the pipe:
I think what you need to do is ... separate the role
of BP, Exxon, and Phillips, as producers at Prudhoe
Bay and potentially as producers at Point Thomson,
from their role as "pipeliners," if they are, in fact,
the ones that build this pipeline. As producers, as
owners of the gas, they will be signing a ship-or-pay
contract with the pipeliners, whoever the pipeliners
may be. They will not, as producers, be paying for
the construction of this pipeline at the time of
construction.
Now, if BP, Exxon, and Phillips are the ones to build
this pipeline, you must regard them in the role of
pipeliners, and so they undertake the obligation to
pay for construction, at the time of construction, as
pipeliners. And if, in fact, we have something like
the pipeline consortium, a "foothills arrangement"
building this pipeline, then it is not BP, Exxon, and
Phillips who pay for construction of the pipeline at
the time of construction; in fact, they simply sign a
ship-or-pay contract at that time, as would anybody
else who shows up for the initial open season. And
they effectively pay for the pipeline on a per-mcf
basis, through the tariff, once gas actually flows.
So you have to ask yourselves, when ... BP and
Phillips suggested that it is unfair to use RIK as a
backstop for new sources of gas, to look at what those
new sources of gas must do to support this pipeline.
They, like the producers, as producers of gas, must
step up in the initial open season and sign a ship-or-
pay contract to pay for pipeline capacity, regardless
of ... whether they use it. ...
Number 1088
MS. ROBSON discussed the greater risk that she believes the
explorers have:
I suggest to you, those who have not even discovered
their gas yet, who are betting on a discovery of their
gas, are, in fact, undertaking a greater risk in
signing a ship-or-pay contract, than those that are
sitting on a ... known source of gas that is produced
day in and day out, and reinjected into the ground at
this point in time.
I also have to ask whether it is fair [if] those who
come forth in the initial open season and sign a ship-
or-pay contract - regardless of whether it is the
producers or the explorers or any other potential
source of gas - are precluded from playing in the
initial 4 bcf of pipeline capacity.
Number 1135
MS. ROBSON addressed the producers' assertion that an RIK sale
would cost them perhaps $2 billion:
The second argument that the producers made with
regard to an RIK contract, at least where it's used as
a backstop for potentially new sources of gas, is that
they say it would cost them on the order of $2
billion. And this is their calculation. And I do
have to thank the producers because after the hearing
on Tuesday, I did have an opportunity to speak with
some of the personnel ... from Phillips, and they gave
me some additional information on how they calculated
the $2 billion that they referred to on Tuesday when
testifying before you.
If you recall their scenario, they said, "Let's assume
we start with a pipeline that has 4 billion cubic feet
a day of capacity. And let's also assume that 4
billion cubic feet a day initially flows from Prudhoe
Bay, but that after some period of time, .35 billion
cubic feet, or 350 million cubic feet of gas, enters
the pipeline from a non-Prudhoe Bay source." And they
argued that this would, in fact, reduce their
profitability to the tune of $2 billion.
The information that I received after the meeting on
how they got to $2 billion is, they said, well, what
will happen if you get .35 billion cubic feet of gas
from a non-Prudhoe Bay source and put it into that
initial 4 billion cubic feet of capacity is that, in
fact, their equity shipments will drop by roughly 300
million, or .3 billion, cubic feet a day. The royalty
share from Prudhoe Bay will drop by about 50 million
cubic feet a day, and the big three, as owners of the
300 million cubic feet a day in equity gas from
Prudhoe Bay that has been backed out or reduced, will
lose a $1 wellhead value on each and every mcf that
they have been backed out of for a period of 20 years.
So they took 300 million cubic feet a day, multiplied
it by a $1-per-mcf wellhead value, multiplied it by
360 days, for one year, and then by 20, for 20 years.
That comes out to $2.2 billion.
Number 1311
MS. ROBSON discussed ways the producers might mitigate potential
damage:
I suggest to you that BP, Exxon, and Phillips ... can
mitigate that damage, possibly in its entirety so that
they face no damage at all - certainly, substantially.
... One way in which they could mitigate that
potential damage is for them to have participated in
the RIK sale by offering a premium for gas that would
have cost them less than $2 billion. They decline to
do so, despite some initial conversations in which
they expressed interest.
But I think the second and real way for them to
mitigate their damage: after gas is flowing, when
they realize [a] new source of gas is going to come
into the pipeline, when they realize they are going to
be backed out to the tune of 300 million cubic feet a
day, equity gas, they can at that time expand their
own pipeline. They will have years' advance notice
that new-source gas has been found, is ready for
production, and is going into the pipeline. During
those years, they can move to expand their own
pipeline. They can take their gas to market. They
can get that $1 wellhead on each and every mcf for the
20 years, and they can totally mitigate the $2.2
billion.
Alternatively, maybe they're not quite so quick in
expanding their pipeline. Maybe it takes them 5 years
to expand it. ... If they expand it in 5 years, as
opposed to after 20 years, they limit their damages to
$500 million, not $2.2 billion.
Number 1406
MS. ROBSON continued with mitigation for the producers,
addressing tariffs and pipeline expansion:
The important thing to keep in mind is, if there is an
expansion, and if it is their pipeline, they certainly
have control over that expansion, as long as the
tariff for gas that comes in under expansion capacity
is roughly equivalent to the tariff for gas that's
flowing on the original pipeline capacity. Then they
have totally mitigated their damages.
So it is only if the tariff on expansion capacity is
higher than the tariff that goes with gas flowing on
the original capacity that they stand to lose
something. And if the tariff on the expansion
capacity is a little bit higher than the tariff on the
original capacity, but is less than $1 higher per mcf
- and I suggest to you that it would be - then they
are not facing anything like $2.2 billion in damages.
Now, what do we know about the tariff on expansion
capacity? ... BP, Exxon [and] Phillips have come to us
and they've painted a scenario where you have an
initial pipeline on the order of 4.5 billion cubic
feet per day. You can expand that pipeline, and you
can expand it through compression to about 5.5 billion
cubic feet a day. And the expansion capacity - that
additional 1 billion cubic feet a day - comes in with
a tariff that is roughly equivalent to the underlying
tariff on the original pipeline capacity.
That is what they have represented to us. They have
then indicated that capacity beyond 5.5 billion cubic
feet a day becomes more expensive. So you have to do
more than just adding intermittent compression
stations, and that costs more.
But if what they say is true - if that expansion
capacity costs no more than the original capacity, at
least for the first billion dollars - then, again,
they do not face damages as long as they expand their
pipeline, which they control, to take in ... that .3
or .35 billion cubic feet of gas that is backed out
under the backstop scenario.
Number 1547
MS. ROBSON continued discussing expansion:
And I indicate to you that ... perhaps it is a lot
easier for those who own the pipeline - for the big
three - to get the expansion of the pipeline, as
opposed to leaving it to new sources of gas. If you
take the scenario where your new source of gas must
come to BP, Exxon, and Phillips and ask for expansion
of pipeline capacity, they have no legal right, under
current law - or at least no more than an arguable
right under current law - for that expansion.
BP, Exxon, and Phillips -- and this is nothing
particular to these companies. It's to any three big
companies that dominate a market structure. We could
be talking about the auto industry, as opposed to the
oil and gas industry in the state of Alaska. You have
to ask, when a competitor ... comes to the big three
and asks for something, are they certain to get it?
And I suggest to you, no, they are not; that is, the
producers will expand their own pipeline when it is in
their own self-interest ... , as it would be under a
backstop scenario. We cannot count on the producers'
expanding their own pipelines when it is simply in
their competitors' interest to expand that pipeline.
Number 1642
MS. ROBSON referred to indication by BP and Phillips at the
previous hearing that they aren't troubled by every RIK
contract, but by contracts that let a new source of gas into the
original pipeline capacity. She noted that they'd referred to
the backstop proposals made both by Chevron [ChevronTexaco Corp.
as of October 2001], for Point Thomson gas, and by Anadarko/AEC
[Anadarko Petroleum Corporation/Alberta Energy Company] for
foothills gas. She remarked:
I'm going to suggest to you that every RIK contract
offers the potential of letting new-source gas into
the ... original pipeline capacity. The way it works
is this: Anybody who is an RIK buyer will have to
sign a ship-or-pay contract to take that gas off the
North Slope. But once they've signed their ship-or-
pay contract, they've committed to the pipeline for,
say, 15 years to pay for that capacity. They are
going to fill that [capacity]. They may fill it with
the RIK gas; they may fill it with gas from another
source.
Historically, every RIK contract has provided for the
possibility that the contracts may not be of the
duration initially contemplated. So, if you take an
example where we sign a ... 15-year contract for RIK
sales, and the RIK buyer comes in and signs up for 15
years of pipeline capacity under [a] ship-or-pay
contract, it is always possible that, for a multitude
of reasons, that ... buyer will not, in fact, buy our
gas for 15 years. They might not buy it because they
find a cheaper source of gas; that could be new-source
gas. They could terminate their RIK contract. Worst-
case scenario, they could default on their contract
and we could terminate it. But they would still own
the pipeline capacity, and they may fill that with
new-source gas.
So I suggest to you that if the producers object to a
backstop RIK sale - the one that may let a new source
of gas into the pipeline - they, in reality, are
objecting to every RIK contract that we may enter now
or in the future.
Number 1774
MS. ROBSON offered an example. The Trans-Alaska Pipeline System
(TAPS), the oil pipeline, is a common carrier for which getting
capacity hasn't been a problem; nominations for pipeline
capacity are made monthly. By contrast, a gas pipeline would be
a contract-carriage pipeline requiring long-term commitment of
15 years or more. If TAPS were contract-carriage and were full,
it would have resulted in the same situation being faced now
with gas, which would have been a problem for [the state]. She
explained:
We signed a 1998 contract for the sale of royalty oil
to Williams for their Fairbanks refinery. It was a
contract with a five-year duration. And if they had
had to sign a ship-or-pay contract, presumably they
would have - to get that oil to their Fairbanks
refinery, to refine it - through 2003.
In fact, what has happened under that contract - as is
allowed under ... every RIK contract - is that they
have reduced their volumes. And where are they
getting their volumes from? They're getting it from
new-source oil. They are buying Anadarko's Alpine
production.
Number 1815
MS. ROBSON continued:
If this had been a contract-carriage pipeline, if this
had been a full pipeline, we would have a problem.
Anadarko would not have this opportunity to sell their
oil, to put it on the Williams pipeline capacity, and
to get it to Fairbanks. Yes, we may have had our RIK
sale. Yes, it may have gone for the entire five
years. But another interest of the state might not
have been served, and that is in getting new-source
oil into the pipeline.
So while we recognize the producers' concerns and we
want to work further with them - we want to understand
better their concerns and work to accommodate them -
we also have to recognize that the interests of BP,
Exxon, and Phillips are not the only interest of the
state.
And while we are very happy to see them pursuing a
natural gas pipeline at this point in time, we do have
to look beyond the immediate interest in getting a
pipeline. We do have to look to future exploration
and new basins, and even getting Point Thomson gas
online, as is suggested by Chevron's proposal to
purchase RIK gas.
Number 1934
MS. ROBSON addressed access, referring to testimony at the
previous hearing that while an RIK contract may provide access,
it isn't the only potential answer. Theoretically, Ms. Robson
told members, there are other ways to serve the access. For
example, access could be improved through a change in federal
law or through an agreement with BP, Exxon, and Phillips.
However, the state and the legislature don't control federal law
or the agreement of BP, Exxon, and Phillips.
MS. ROBSON pointed out that the RIK sale is a mechanism for
access that is, by contrast, within the control of the state and
the legislature. She concluded by emphasizing the need to keep
that option available while pursuing other, theoretical options.
Number 2000
CHAIR OGAN referred to Ms. Robson's mention that a [producer]
had said there could be a sale in the second quarter of 2002.
He asked whether who said that is confidential information.
MS. ROBSON answered:
I don't know that it's confidential. I would prefer
not to point fingers at one particular company. We
also did have a similar representation come from the
pipeline consortium, also in December and possibly
also January of this year, that ... an open season
could be as early as the second quarter.
So what happens is, when the producers say they do not
... currently envision that they will conduct an open
season in 2002, that does not provide us with the
comfort that we need, in case a ... pipeline
consortium chooses to go to open season in 2002. It
also does not recognize that while the producers on
this date may not contemplate that they will conduct
an open season in 2002, because so recently they were
of the opinion that they might, we have to envision
that they might - if they get the federal legislation
they seek - go to [an] open season themselves in 2002.
Number 2083
CHAIR OGAN offered his understanding that a contract carrier -
at least the oil pipeline - isn't regulated to the same extent
by the Regulatory Commission of Alaska (RCA).
MS. ROBSON responded:
I think there's been universal recognition - by you,
Mr. Chairman, as well as by some of the other
legislators, by the Regulatory Commission of Alaska,
by this division, by the Department of Law - that we
have a problem on access, and we have a problem with
the [federal] laws on access, that they ... are not
tailored to the needs of the State of Alaska and its
particular circumstances, but that changing that law
is outside the control of the state, because it is a
federal matter where the federal government preempts
state law if any gas destined for markets in the Lower
48 or outside the state of Alaska is carried on this
pipeline. And that will certainly be the case.
Number 2148
CHAIR OGAN noted that he is working on a resolution to send to
the federal government; he mentioned the so-called energy bill
before Congress. He asked Ms. Robson to provide a list of
things she believes will facilitate gas development in Alaska;
he cited access as a major concern. He added that a number of
people have suggested RCA be at the table with FERC for some
kind of joint management of the gas pipeline, should it happen.
MS. ROBSON replied, "We'd absolutely be happy to provide you
with what we have."
Number 2231
REPRESENTATIVE DYSON asked: If this RIK sale is the best way to
encourage or empower independent explorers to continue
exploration, what happens to the independent explorers who don't
prevail in the RIK bidding?
MS. ROBSON responded:
Certainly, those explorers and potential future
explorers who are willing to come forth in the initial
open season and participate at this time are going to
have [the] advantage when the open season closes. It
... takes a certain amount of ability to withstand
risk to come forth in this open season and nominate
and pay for pipeline capacity, not knowing whether you
are going to have gas. It does put those who do at
some sort of advantage.
There is the possibility that future explorers can
pursue pipeline capacity in one of a number of ways,
but ... I cannot suggest to you that they are as
certain or as sure or as desirable as what could
theoretically be available to somebody participating
now in the open season who does get an RIK contract,
because, again, this really is a unique opportunity to
play in the initial 4 billion cubic feet of pipeline
capacity. And there isn't going to be a similar
opportunity, we think, until 2025 or later.
The potential ways other explorers could obtain some
of that initial pipeline capacity are, if it were to
turn out that certain explorers did get an RIK
contract and they did not find gas or did not find as
much gas as they were hoping to find, there is at
least the potential that they could assign their RIK
contract to other explorers who had proved more
successful.
So once this contract is out there, if at all, it does
become an asset for the state for getting certain
volumes of new-source gas into the pipeline, but no
greater volumes.
Again, future explorers will have a shot at expansion
capacity, but I can't tell you that there will, in
fact, be an expansion or that the tariff will be the
same for expansion capacity or when that expansion
will be. So explorers who do not play now will face a
disadvantage. Hopefully, they will not consider it a
hopeless state. But it is troublesome.
Number 2406
REPRESENTATIVE DYSON asked whether perhaps the RIK sale
shouldn't have been winner-take-all, and should have allowed
several explorers "to have had a piece of our royalty gas."
MS. ROBSON answered:
Basically, it is not necessarily a winner-take-all
proposition. We indicated that we would be offering
up to 70 percent of the state's royalty share, and on
the 4-bcf pipeline that ... translates to 350 million
cubic feet a day. If, instead, you have a 4.5-bcf-a-
day pipeline, that's 400 million cubic feet a day.
We offered up to that amount. We did not indicate
that simply because somebody offers to buy the entire
amount, that we will, in fact, sell the entire amount
to a single party. So we do have multiple bids from
different parties seeking the lion's share of that
350-400 million cubic feet a day. If ... the
Department of Natural Resources goes forward with a
recommended contract, it's not necessarily going to be
one contract; it could be multiple contracts, to serve
the needs of multiple participants in the RIK sale
process.
Number 2520
MARK MYERS, Director, Division of Oil & Gas, Department of
Natural Resources, testified via teleconference in further
response to Representative Dyson's question. He said:
We tried to create a process, through the RIK
proposals, to allow for maximum flexibility to ...
review those types [of] issues and ... not even to
presume we knew, at the point of the sale, what the
highest and best use for the state gas was.
So RIK backstopping is only one possible use of the
state gas. And I think you've seen that with the
bidding, again, where you have a company like Williams
- which doesn't explore for gas in Alaska - involved
with the process for a different reason. We've seen a
local power utility worried about ... getting an in-
state supply of gas. So the process was designed so
that we could review all the potential and have a
relatively open process in that review and discuss the
various values that might be achieved by ... an RIK
sale.
I think the other thing that's important to note is
that that RIK sale was open to the producers to bid as
well. If they were really concerned about mitigating
the effects of an RIK sale, the obvious solution is to
bid and offer the state more in value than they will
receive in RIV [royalty-in-value]. Their response, at
least Phillips' response, is the terms were
commercially unreasonable. ... We see Chevron, ...
Anadarko/AEC, Williams, and Alaska Power [& Telephone
Company] showing that they ... believe to the
contrary, by their bids.
So, once again, I think the RIK process was designed
to be open enough to both meet some of the producers'
concerns about ... the potential to mitigate the
effects of ... RIK-RIV switching, but also to deal
with the broader ... policy issue of what is the best
and highest use for the state gas.
Number 2610
MR. MYERS referred to concern about later explorers and
suggested a two-pronged approach. The first prong, the RIK
sale, would allow for potential options and provide [assurance]
to the state that it has a choice in how its gas is used. The
second prong, federal legislation, would enable expansion on a
fair and equal basis, and would compel an economic expansion of
the pipeline. He stated:
Your comments last time about common-carrier would
solve the problem; that's absolutely correct. This
whole problem of access wouldn't exist if the gas line
is common carrier, but we've seen no indication that
... that is being contemplated or that that option is
available. ...
The RIK sale is an imperfect solution. It only helps
the first trench of explorers if, in fact, it is the
choice of the legislature to use this gas for RIK
backstopping. But further legislation is also needed
to help that later round of explorers elsewhere.
Number 2655
CHAIR OGAN asked how the 70 percent figure was arrived at, and
what the plans are for the other 30 percent.
MS. ROBSON answered:
The thought process behind that was that if we are
operating with 4-billion-cubic-feet-a-day initial
pipeline capacity, the state's royalty share, at one-
eighth, is a half billion cubic feet a day, or 500
million cubic feet a day.
We thought it appropriate to reserve some future gas
for a number of possible uses. And we thought 150
million cubic feet, or 30 percent of the royalty
share, would be sufficient for anything that was
likely to be contemplated in the ... near future, and
in light of the fact that ... a future buyer, if they
are to use the gas someplace other than the North
Slope, won't have a way to get pipeline capacity, or
not in significant volumes.
So if we reserve 150 million cubic feet a day, that's
sufficient, certainly. For instance, if we wind up
with Internet data centers on the North Slope, we
still have gas available to sell to them.
If we want to sell some of that gas for in-state use,
the producers have indicated ... that there may be 50
to 100 million cubic feet a day of pipeline capacity
that is basically "flex" capacity that could be used
to accommodate in-state demand. And we could fill ...
that flex capacity with demand from future in-state
buyers. But there's not going to be the flex, absent
a formal expansion, for us to sell 250 or 350 ...
million cubic feet a day, in a future gas sale,
without there being another open season, because there
simply won't be a buyer who can get the gas into the
pipeline to take it to their destination.
The other thing is, we did need to retain some
percentage of gas in value with the producers, because
what they report as the value - what they sell that
gas for - then becomes a baseline number used in
calculating the price for royalty-in-kind purchasers.
Number 2784
CHAIR OGAN noted that in the audience were current and former
employees of Phillips who were members of the Phillips Civic
Action Program [Alaska]. He welcomed them to the committee.
Number 2810
REPRESENTATIVE FATE asked what the cost would be to add capacity
if the pipeline increased from 4 bcf to 4.5 bcf in capacity. He
inquired about a rule of thumb regarding this, suggesting it
might be better asked of the producers.
MS. ROBSON answered:
I can tell you what we have been advised by BP,
Phillips, and Exxon, but I cannot give you any
independent information on this. We have been advised
that, as currently contemplated, they're looking at an
initial pipeline that really isn't on the order of 4
bcf a day, although the math is easy with 4 [bcf], and
I think people keep falling back to that; it's more on
the order of 4.5 bcf a day. And it will initially be
designed with [an] eye towards some expansion at some
point in time. ...
The "easy" expansion will come through adding
compressor stations - not between every existing
compressor station, but quite a few compressor
stations. And that will allow pipeline capacity to go
up to around 5.5 billion cubic feet a day.
Beyond that - at least, we're being advised - you
don't get your additional capacity simply by adding
more compressor stations. Then you have to lay
additional pipe. You have to do looping, and it may
be full-line looping. Presumably, that's going to be
more expensive.
So, our information is that you have about a billion
cubic feet a day of expansion possible, that at least
the representation on that has been, the tariff on
that expansion will be basically the same price as for
the underlying, original capacity, but then you get
into what is currently envisioned as more expensive
expansion.
Number 2923
REPRESENTATIVE FATE asked what the cost differential is in the
design, at the front end, between a 4.5-bcf-a-day and a 5-bcf-a-
day pipeline. He again noted that the producers may be better
able to answer.
MS. ROBSON replied:
I think they're talking about the same diameter [of]
pipe, regardless of what the initial capacity is.
It's probably going to be a 52-inch thick-wall
diameter pipe. It's just a matter of how many
compressor stations you start out with.
Number 2970
REPRESENTATIVE DYSON said he'd been asking the same question
that morning, and would have guessed on the order of 5 percent
to build in capacity in the initial construction.
TAPE 02-8, SIDE B
Number 2970
REPRESENTATIVE DYSON reported that one of the "industry folks"
he'd been talking to said it is certainly less than 10 percent.
In response to a remark by Representative Fate, he surmised that
if future expansion were to be facilitated by an increase in the
diameter of the pipe from 48 to 52 [inches], it would be closer
to 10 percent. However, he encouraged Representative Fate to
seek confirmation from someone more expert.
Number 2934
MS. ROBSON said:
The producers have told us, from the very beginning,
that they are going to build a pipeline that will be
expandable. So, to the best of my knowledge, they
have never contemplated building a pipeline without
the additional expense that comes in designing this
pipeline with [an] eye towards future expansion.
Number 2918
CHAIR OGAN brought up the issue of the effect of the drawdown of
gas on the production of oil, especially in the Prudhoe Bay
Unit. That will be a factor in deciding the size of the gas
pipeline, he said. He recalled that the drawdown effect is one
of three major factors in the considerations of the producers.
He said he'd really like to have an independent analysis of
that, perhaps by a combination of [DNR] and the Alaska Oil and
Gas Conservation Commission (AOGCC). He added, "I'll work on
making sure funding for that is in the budget somewhere."
CHAIR OGAN thanked Ms. Robson and Mr. Myers for their
willingness to communicate with the legislature.
Number 2858
MICHAEL J. HURLEY, Senior Commercialization Specialist, ANS Gas
Commercialization, Phillips Alaska, Inc., came forward to
testify, noting that he wouldn't dispute the benefits of an RIK
sale to the state and to the exploration companies. He offered,
however, that the cost of those benefits is being "basically
placed on the producers." He added:
In our view, this isn't really a question of access.
It's a question of who's going to carry the burden and
who's going to take the risk for that additional
access. We believe the RIK backstop provisions are
basically shifting the risk of costs and risk onto the
producers from those who want to go out and explore
and find new gas.
Number 2759
CHAIR OGAN asked, "That's assuming the producers build the
pipeline, correct?"
MR. HURLEY agreed, adding, "We haven't got there yet." He
referred to discussion at the last two hearings about the burden
and that it can be mitigated, is not too big, or is "just a
burden on us." He said nobody, to his knowledge, has denied it
is there. He stated, "From our perspective, ... it is a burden;
it is additional risk." He then addressed expansion:
We did build this line with expandability in mind. We
intend to expand this system if we can, and if it's
economic. ...
If we just wanted to sell 4.5 bcf a day without making
any potential for expansion, I think we probably could
have gotten by with a 48-inch pipe. But we didn't.
We're building a 52-inch pipe because we know we want
to try and be able to expand this system. I can't
tell you how much additional that costs; I haven't
seen anybody put a pencil to it in terms of dollars.
But there are additional costs already being incurred
just to make that expansion capability available.
Number 2674
MR. HURLEY discussed the need for fiscal certainty. He said,
"Let me suggest that the RIK scenarios we're painting here are a
prime example of what kinds of things are understood by the
industry to be fiscal certainty." Referring to the Alaska
Stranded Gas Development Act passed in l998 [as HB 393], he told
members, "We had originally worked that deal out; the
legislature approved it. That legislation was designed to be
able to work through some of the fiscal certainty items." He
said that was originally envisioned and designed to be for any
commercial gas project, including a pipeline in the Lower 48,
GTLs [gas to liquids], or LNG [liquefied natural gas]. Before
passage, however, it was limited to LNG.
MR. HURLEY referred to AS 43.82.200, which he said recognizes
the state's need to figure out some way to deal with this "RIV-
RIK problem." He added that it's a problem in any kind of gas
pipeline that uses contract carriage, which by its nature
creates this kind of scenario. This kind of RIK backstop and
the state's "flipping back and forth" is an issue, he said, and
"increases the uncertainty for us or costs additional money to
build in upfront - and it's basically just a shifting of the
burden."
MR. HURLEY told members, "We believe that access is going to
happen." He referred to discussion regarding FERC and [lack of]
guarantees and control. He said:
We believe that the FERC is a responsible regulatory
body and does its job, just like they do everywhere
else in the U.S. Not only do we have them watching
over us, you folks yourselves have been doing a great
job of looking over our shoulder at everything we try
and do. So I don't believe that access is going to be
a problem, in and of itself because, a) FERC regulates
it, because b), Mr. Chairman, you're watching
everything we do, along with lots of other members of
the legislature and the Division [of Oil & Gas]. So
if there are opportunities out there for expansion
that make sense in our economics, we're going to do
them - a) it's in our best interest to do them, and b)
everybody's going to be watching us.
MR. HURLEY reiterated that he doesn't believe it is a matter of
access, but of who will have the burden of risk and cost. "We
believe this RIK backstop proposal shifts those burdens from new
players to the existing players, to the existing players'
detriment," he concluded.
Number 2462
REPRESENTATIVE GUESS referred to Mr. Hurley's testimony that if
it's economic, expansion will occur. She pointed out that
something economic from a pipeline standpoint might not be
economic from a producer's standpoint; she asked which
perspective he was speaking from. She also asked, once the
[pipeline is built], what Mr. Hurley envisions the legislature's
role to be in forcing expansion of the pipeline and providing
access to new players.
MR. HURLEY responded that once the pipeline is built, there will
be separation. He said there is a FERC requirement to keep
those companies separate, and a fairly stringent set of rules
about how affiliates can interact; in fact, the FERC recently
published some new rules on affiliate interactions and a
standard of conduct about how affiliates can interact. Mr.
Hurley added, "I'm sure this Enron debacle probably hasn't
helped, quite frankly."
MR. HURLEY said it will always be in the pipeline companies'
interest to expand. Furthermore, it is also usually in the
shipping companies' interest to expand because expansions are
usually cheaper - or certainly no more expensive - if all that
is required is additional compression, rather than additional
sections of pipe. "So it's usually in everybody's interest to
expand a pipeline," he concluded.
Number 2375
REPRESENTATIVE GUESS again asked how Mr. Hurley sees the role of
the legislature is ensuring that happens once the pipeline is
built. She said she sees nothing in statute, either at the
federal level or state level, that will force "you all" to do
something that may be in the state's best interest versus the
"pipeline's" best interest.
MR. HURLEY responded that certainly there is nothing specific
that will provide that power.
Number 2338
REPRESENTATIVE GUESS referred to Mr. Hurley's testimony about
the producers' bearing the risk and cost of ensuring expansion
if there is an RIK [sale]. She asked, "As a pipeline company,
don't you just pass that on?"
MR. HURLEY answered:
The RIK backstop deal will not impact the pipeline
company piece of this at all. The pipeline company is
totally indifferent. ... The people that are impacted
are the existing shippers. That's why, when I kind of
went through that example, what happens is, the
Prudhoe Bay shippers of equity gas are the ones that
get cut back and get their revenue reduced. ... It has
no impact at all on the pipeline.
Number 2308
REPRESENTATIVE GUESS said she has heard that there will be more
than the three producers - Phillips, BP, and Exxon - bidding in
the open season. She asked why none of the other potential
shippers are coming forth and saying there is a problem with the
RIK [sale].
MR. HURLEY answered that he wasn't aware of anyone who would
"step up and bid big volumes of gas," with the exception of the
three companies mentioned. He said there may be others, but
none he was aware of.
Number 2263
REPRESENTATIVE GUESS referred to testimony that having common
carriage would help solve this problem. She asked, "Is Phillips
pushing to think outside the box and have this be a common
carrier?"
MR. HURLEY replied:
No, I don't believe this could be a common carrier.
Normally in the business, when you're selling gas, if
you're in a common-carrier situation, you can get
prorated out. So if I, for example, have a long-term
contract, as Phillips, to sell gas to a utility in
Chicago who's then providing power to light my
grandmother's lamps and stove and heat, I can't be put
in a situation where, at any given month, I can be
prorated out of the line. I've got contracts to
supply gas to ... people to heat their homes and do
their business. So gas is virtually always sold on a
contract-carriage basis.
REPRESENTATIVE GUESS noted that Mr. Hanley's testimony had
indicated common carriage could be an option, whereas Mr. Hurley
is saying he doesn't believe it could be.
Number 2180
CHAIR OGAN suggested it is important, at some point, to hear
directly from FERC regarding pipeline access. He informed
listeners that it had been discussed in the Joint Committee [on
Natural Gas Pipelines] during the past summer; he said neither
that committee nor DNR believes [FERC] has that authority.
Furthermore, the independent explorers disagree with the
assertion [that FERC has that authority]. Recalling FERC's
testimony before the joint committee, he said there is some
ambiguity.
REPRESENTATIVE DYSON, noting that he hadn't attended those
meetings, suggested that members of the House Special Committee
on Oil and Gas read the minutes and obtain background
information on FERC, including its mission and authority in
implementing legislation.
REPRESENTATIVE FATE agreed that the FERC discussion was
ambiguous regarding authority.
Number 2039
CHAIR OGAN recalled discussion that there was confusion over
which federal law [FERC] needed to follow.
REPRESENTATIVE FATE said there also was an "unsettling" in that
agency because of turnover in personnel. He added that the
agency had been in the process of reorganizing.
Number 1996
REPRESENTATIVE DYSON remarked that if the legislature is going
to pin its hopes for equitable and fair opportunities to get
"all of our gas to market" on FERC's power and authority, he'd
like to know whether FERC has done this kind of thing in the
past and whether any court cases challenging FERC's authority
have been decided one way or another. He agreed it is important
to know FERC's authority.
Number 1946
CHAIR OGAN said at least one independent company has "FERC-type
attorneys" on staff; he suggested that the company's bidding
indicates a lack of belief that FERC can [compel access]. He
restated the importance of discussing the issue further.
CHAIR OGAN asked whether anyone else wished to testify; there
was no response.
Number 1869
CHAIR OGAN appointed a subcommittee consisting of Representative
Fate, chair; Representative Guess; and himself. He explained
that top priorities would include questions regarding FERC,
access, and how the drawdown of gas will affect oil production.
Noting that expertise would be required for the last issue, he
asked that producers share information, if not with committee
members directly, then with DNR and AOGCC. He reiterated that
his own mission would be to get enough money to study the issues
and make a decision on the RIK gas sale.
Number 1790
REPRESENTATIVE GUESS asked what connection exists between the
RIK [gas sale] and the effect on oil production from the
drawdown of gas.
CHAIR OGAN answered that for him, the effect from drawing down
gas will directly affect the decision on the pipeline's
capacity. It might not affect it, he acknowledged; there might
be more than enough gas, with Point Thomson, for example, or
mitigation measures may be put in place using carbon dioxide,
water flooding, or other techniques.
CHAIR OGAN pointed out that production drops when there is warm
weather at Prudhoe Bay because the turbines don't work as well
to reinject the gas, to make the oil come out of the ground; he
suggested that certainly a significant drawdown of gas also
would affect production. He referred to testimony that this is
one of three areas being investigated regarding pipeline
capacity. He concluded that it is related to the RIK gas sale.
CHAIR OGAN thanked Mr. Hurley for his participation.
ADJOURNMENT
Number 1682
There being no further business before the committee, the House
Special Committee on Oil and Gas meeting was adjourned at 11:27
a.m.
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