Legislature(1999 - 2000)
02/23/1999 10:04 AM House O&G
| Audio | Topic |
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* first hearing in first committee of referral
+ teleconferenced
= bill was previously heard/scheduled
+ teleconferenced
= bill was previously heard/scheduled
HOUSE SPECIAL COMMITTEE ON OIL AND GAS
February 23, 1999
10:04 a.m.
MEMBERS PRESENT
Representative Jim Whitaker, Chairman
Representative Fred Dyson
Representative Gail Phillips
Representative Scott Ogan
Representative John Harris
Representative Allen Kemplen
Representative Tom Brice
Representative Harold Smalley
Representative Brian Porter
MEMBERS ABSENT
All members present.
COMMITTEE CALENDAR
Presentation by Alaska North Slope LNG Project
(* First public hearing)
PREVIOUS ACTION
No previous action to record.
WITNESS REGISTER
JOHN MILLER, Engineering Manager
Alaska North Slope LNG Project
700 6th Street
Anchorage, Alaska 99510
Telephone: (907) 263-3726
POSITION STATEMENT: Bring North Slope LNG to market.
STEPHEN ALLEMAN, Commercial Manager
Alaska North Slope LNG Project
12800 Shelburne Rd.
Anchorage, Alaska 99516
Telephone: (907) 265-6853
POSITION STATEMENT: Bring North Slope LNG to market.
GEORGE FINDLING, Commercial Team Leader
Alaska North Slope LNG Project
Box 100360
Anchorage, Alaska 99510
Telephone: (907) 263-4174
POSITION STATEMENT: Bring North Slope LNG to market.
ACTION NARRATIVE
TAPE 99-8, SIDE A
Number 0001
CHAIRMAN JIM WHITAKER called the House Special Committee on Oil and
Gas meeting to order at 10:04 a.m. Members present at the call to
order were Representatives Whitaker, Dyson, Phillips, Harris,
Kemplen, Brice, Smalley and Porter. Representative Ogan arrived at
10:11 a.m.
Presentation by Alaska North Slope LNG Project
Number 0074
CHAIRMAN WHITAKER had an opening statement, which read:
This committee will have no higher goal than to function as a
catalyst for the continued and expanded utilization of
Alaska's vast oil and gas resources. Alaska's oil industry is
currently experiencing a near depression, because of
extraordinarily depressed world oil prices. This is a
situation, which we can do little or nothing to affect.
Alaska's gas industry, on the other hand, provides an
opportunity to serve as the important and necessary component
for expansion of this vital economic sector. Alaska currently
accounts for approximately one percent of world gas
production; all of which is produced from Cook Inlet. This
gas is utilized locally as an energy source, also a
significant portion is exported to Japan. Alaska's North
Slope is conservatively estimated to contain well over 100
trillion cubic feet of natural gas. Some of this gas is
utilized to enhance oil recovery; none has been sent to
market. This is a huge commodity resource; it is therefore
our responsibility and duty to determine if this commodity can
be feasibly taken to market.
Number 0229
JOHN MILLER, Engineering Manager, Alaska North Slope LNG Project,
introduced: David Lawrence, Chairman, Sponsor Group; Steve Alleman,
Commercial Manager, Alaska North Slope LNG Project and George
Findling, Commercial Team Leader, Alaska North Slope LNG Project.
JOHN MILLER read his testimony titled "Alaska North Slope LNG
Project, Presentation to the House Special Committee on Oil and Gas
(February 23, 1999:
Let me preview the main points we will be presenting. First,
despite today's tough economic climate, we have a project team
hard at work. Second, our innovative technical and commercial
program will provide the best chance for success for an Alaska
North Slope LNG [Liquefied Natural Gas] project. Finally, we
don't foresee direct legislative action in 1999-but we are
positioning for some potential actions in 2000.
To be successful we must make this project competitive on a
world scale. To make this project a reality, commercial "mind
set" is a must. You will hear us stress the need to consider
both technical and commercial issues in our work. Now I would
like to describe a base case for the Alaska North Slope LNG
Project. Later, I'll discuss how we are working to improve
that base case.
In our base case, produced gas from the North Slope is routed
to a nearby gas conditioning facility where carbon dioxide and
other impurities are removed. This upgraded gas is similar to
the gas used in homes in Anchorage.
The gas is then transported via a large diameter pipeline to
an ice free port, such as Valdez. At the port, the gas is
cooled in another facility to minus 260 degrees fairenhait.
This reduces the volume by 600 times by forming a liquid, LNG.
This inherently safe liquid is loaded onto low pressure,
refrigerated, ocean tankers for transport to the East Asia
market.
After arrival and off loading, the LNG is allowed to warm for
use as a gas for power generation and other direct heating
uses. LNG technology is well established. After several
years of production and deliveries to Japan beginning in 1969,
the Phillips and Marathon Kenai LNG plant recently delivered
their 1000th safe, on time cargo.
Now, I'd like to briefly review the essentials of the Sponsor
Group. During the first half of 1998, two parallel activities
were underway. In the Alaska legislature, HB 393, the
Stranded Gas Development Act, was working its way through the
legislative process. Concurrently, ARCO was leading
discussions among companies interested in moving an Alaskan
LNG project forward.
HB 393 provides a framework for the State to develop a new
fiscal system for a gas project. Under this framework, a
project can be made more competitive, yet still have checks
and balances that protect the State's interests. The State,
through HB 393, sent an essential signal to industry to
continue efforts to make an LNG project commercial.
This signal was clearly received by our sponsor companies.
Discussions among sponsors intensified as prospects for the
success of the legislation grew. By early August of 1998, the
sponsor companies had announced the signing of an agreement.
The five sponsor companies and their respective interests are
as follows: ARCO Alaska, Inc., 37 percent; Foothills Pipelines
Ltd., 22 percent; Marubeni Corporation, 17 percent; Phillips
Petroleum Company, twelve percent and CSX Corporation, 12
percent through its Alaskan-based Yukon Pacific.
These companies have the expertise and business interests to
solve the problems facing this project. Represented are
Alaska North Slope gas owners, companies with arctic
construction and operations experience, a major international
pipeline developer and operator, a current Alaskan LNG player
that has been in the East Asian trade since the beginning,
permit holders, and a major trading house in the East Asian
market place. Together, there is combined knowledge and
practical experience to assemble a large, international,
venture to acquire North Slope gas and sell LNG in East Asia.
The sponsor agreement also has the flexibility to allow other
companies to participate now or in the future.
The agreement is based on the sponsors' mutual desire to
establish the basis for a viable project through innovative
engineering and commercial initiatives.
Please remember that the sponsor agreement only covers LNG.
GTL or Gas-to-liquids is not part of this agreement. However,
LNG and GTL are not mutually exclusive. There is enough gas
on the North Slope for both technologies. Under the sponsor
agreement, the work will be performed in stages. The first
stage involves project definition, better definition of costs,
identification of potential cost reductions, and significant
advances to our commercial plans. We expect to complete Stage
one in mid-2000 and to spend up to $20 million. The scope and
budget for subsequent stages will be authorized as the project
progresses. Expenditures for an entire program under the
agreement could total up to $100 million and the work could
last up to 45 months.
A board with representatives from each of the five companies
directs the project. Under this board are two steering
committees, one technical and one commercial. All five
companies are represented on the steering committees as well.
I chair the technical steering committee and manage the
technical work effort. Similarly on the commercial side,
Steve Alleman chairs that steering committee and manages the
commercial work.
Steve and I have organized several teams engaged in various
activities. In a moment, I will talk about an innovation
we've made to the traditional concepts of project work teams.
The primary work teams are now located in Alaska, at ARCO's
office complex. The project is staffed with employees from
the five companies. At latest count, we have approximately 50
people actively involved in the project, of which
approximately 15 are full time.
We have adopted the concept of virtual teams. The resources
of each company are at our disposal on an "as needed" basis;
but individuals are not necessarily employed full time. While
we have not kept a precise count, we estimate that perhaps 75
to 100 people have already contributed to the work program in
some form. Further, the sponsor companies have offered any
other resources that Steve and I need to get work done.
In addition to sponsor company personnel, we will be using
contractors for some of the work efforts. Our philosophy in
this area will be to use those contractors that are both
competitive and give us the best chance of realizing the
breakthroughs that are needed for this project to become
viable. If the expertise is available and competitive in
Alaska, we plan to use it. If not, we will search the world
to find the special expertise needed to move this project
forward.
Let's now look closer to the challenges facing the Alaska
North Slope LNG project and what is being done to meet them.
In 1997, the State's consultant, Pedro Van Muers conducted a
study of the relative economic attractiveness of various
competing LNG projects. This work formed the foundation for
the principles developed for HB 393. One of the key
principals was the recognition that the Alaskan project needs
to become competitive over a range of economic conditions with
the best new LNG projects potentially supplying the same
market. Mr. Van Muers' work showed that a combination of cost
reductions, modifications to state and federal fiscal terms,
other major risk reductions, and development of the market
would be needed for the Alaska project to have a shot at
commerciality.
Both the technical and commercial work activities by our team
go directly to the need to reduce the costs and produce
innovative solutions to make the project competitive.
Compared to other, competing LNG projects, Alaskan LNG has
many positive attributes. It draws on known, developed, world
class resources; it has state of the art, existing
infrastructure, and it has all of the benefits of a stable
government.
But, an Alaskan project has one big disadvantage: its capital
costs are relatively high. The cost of an 800 mile pipeline
for Alaska puts us at a competitive disadvantage to other
tidewater projects, even allowing for competitors' higher
field development costs. Since there seems to be no way to
eliminate a pipeline, the challenge is to find incremental
improvements to overcome the disadvantage.
A 1997 project cost review showed that the most reliable,
unlikely to exceed, estimate for an Alaskan project is $15
billion. This work also increased our confidence that the
costs could be $12 billion or lower. These estimates are for
a gas conditioning plant on the North Slope, the pipeline
system, an LNG plant and terminal in Valdez, and ships.
Our sponsor technical effort is aiming to engineer a better
project by reducing costs and defining an optimum
configuration. Please keep in mind that the most meaningful
cost reductions are those that are differential to other LNG
projects. For example, a general reduction in the cost of
materials would likely apply to all projects, not just Alaska.
When the project team assembled in late fall, we immediately
turned our attention to the question of how to differentially
reduce costs. One of the first activities was to bring
everyone together for a data exchange. For two weeks, the
sponsors shared their knowledge and put new ideas out for
consideration.
As we started to sift through the ideas and focus on major
work areas, we decided to challenge the traditional view of
project organization. In the traditional view, teams would be
organized along purely technical or discipline lines: for
example, there might be civil team or a mechanical team.
Rather we decided to organize along an issues focus. The
catch phrase is a "bubble team", implying that the team only
exists as long as the issue needs to be worked, and is staffed
by those with the expertise needed to work the problem. Teams
likely have representation from both technical and commercial
experts.
The technical work has initially been organized into three
major areas, each dedicated to working a common set of cases.
The first area is system integration, which is focussing on
the integrated hydraulics for the pipeline and LNG terminal.
Optimizing in this area requires the parallel consideration of
at least 30 different design parameters related to the gas
plant, pipeline and LNG plant.
Next, is the plant area, which is focussing on LNG plant
siting as well as optimization of the LNG plant process and
physical design.
Third, is the pipeline and compressor stations area, which is
focussed on pipeline routing and key design and construction
issues. It is in this area that we will be trying to find
cost reductions that can significantly differentiate us from
the competition. Finally, each of these three areas includes
commercial efforts as appropriate.
The size of the project is a major consideration and there are
two factors that are driving project size in different
directions. On one hand, from a technical viewpoint, we want
the project to be large so that it can enjoy economies of
scale. That is, costs per unit of gas sold go down as the
project gets larger. On the other hand, the ability to place
all the volumes of LNG in the market decreases as the project
gets larger. The most critical joint technical and commercial
optimization that we have identified to date is finding the
minimum viable project size.
As I indicated earlier, the gas pipeline is the critical
negative element that distinguishes the Alaskan project from
the competition. Naturally, a major focus of our work is to
find ways to reduce the pipeline costs and risks. We are
examining possibilities ranging from design improvements to
construction methods. We are also considering alternative LNG
plant sites and their impact on overall costs. For example,
a pipeline routing to the Cook Inlet is being seriously
considered to see if it provides any advantages over the base
case routing to Valdez.
Finally, a question that we often get is: "When will the
project startup?"
For most people, the answer seems to be an easy way to get a
clear vision of the project. But there is a trap in this way
of thinking that I would like to share with you. We see it as
the "oil mind set" versus the "LNG mind set" and the problem
makes sense when you think about it.
The "oil mind set", with which most of us in Alaska are
familiar, says that the resource developers can decide to move
ahead and then make the investments. For oil projects, this
works, because oil is a commodity that can basically always be
sold. If you will, you don't need to know whom the buyers
will be to commit to developing the project.
Unlike oil, there are only a limited number of LNG buyers who
can use LNG. LNG also has a limited "shelf life": it can not
be stored indefinitely.
Historically, LNG projects have been characterized by long
term contracts and have typically moved ahead only when buyers
were secured. With an LNG mind set, we soon realize that
buyers actually determine when a project proceeds. This ties
back to an earlier point I made about finding the minimum
viable project. Clearly, the smaller the project, the easier
it will be to get the necessary commitments for LNG purchase
from the buyers. Finally, all of this is clouded by the
current economic situation: reliable market projections are
hard to make right now.
With this perspective, and assuming that everything goes
perfectly, including the market being ready, the first LNG
deliveries could begin in late 2007. Please recognize that
2007 is a very aggressive goal. To realize this date, we must
be successful in making the project competitive and in
securing a market that is sufficient in both size and
commitment.
STEPHEN ALLEMAN, Commercial Manager, Alaska North Slope LNG
Project, read his testimony titled "Alaska North Slope LNG Project,
Presentation to the House Special Committee on Oil and Gas
(February 23, 1999):
The cornerstone of the commercial effort is the Marketing
Team. The goal of the team is to develop a marketing strategy
that positions the project, when adequately defined, to
quickly and efficiently move forward in the marketplace. The
key Stage one deliverables from this team will be the
marketing plan and the market proposal, which from the basis
for initiating serious discussions with the buyers. Another
crucial activity is the collection of market intelligence.
While the primary focus of the team is the East Asia market,
the potential instate demand is also to be considered.
Let me briefly offer our perspective on the market. The
sponsor group does not subscribe to the concept of a market
"window" that opens and then closes for an Alaskan LNG
project. With all due respect to the other view, we are
motivated to advance the project even it there is no "window".
We anticipate that the market for expansion and Greenfield
projects like Alaska will come from the demand growth expected
in East Asia in a time frame beginning around 2007 and beyond.
Naturally, the demand for Alaskan LNG can occur only if there
is substantial economic prosperity and commensurate investment
in the market for LNG utilization. Those LNG investments, in
turn, will only be made if LNG is able to compete with other
types of energy, such as oil, coal, and nuclear. Securing
market is about being able to compete at all levels. As John
indicated, our ability to compete in the market will be
improved by finding the minimum viable project size.
At the upstream end, several commercial issues are being
addressed. For example, the project will need to obtain a
supply of North Slope gas. The Gas Supply Team is charged
with developing a basic strategy and sequencing for events
leading up to a gas supply commitment. As another example,
one area of potential cost savings could be the gas project's
sharing of available, existing, oil-related infrastructure.
The infrastructure Sharing Team works in close cooperation
with the technical teams to determine which infrastructure
sharing options may be optimally leveraged and how sharing
arrangements might be formed. Infrastructure may be shared
with North Slope facilities, TAPS, and possibly the Valdez
Marine Terminal.
As the project matures, the Project Structure and Financing
Team activities will advance to the forefront. The
appropriate project structure or legal entities that will
effectively protect, share risks and advance the project must
be anticipated. Clearly, the project can not be realized
unless there is solid financing. Ultimately, some from of
more creative financing may become essential toward enhancing
project viability. In the past, some have questioned whether
the state might have a role in helping finance the project.
Prior studies of this topic have shown that the state may not
be able to take the levels of risk that could make a real
difference in the project economics. For example, it is
difficult to visualize the state providing multi-billion
dollar debt at below market rates. We certainly have not
ruled out such options and will continue our investigations of
the possibilities.
It has been recognized for some time that state and federal
fiscal modifications will be necessary for the Alaskan project
to become competitive. The Fiscal Team is responsible for
advancing, in a coordinated fashion, the state initiatives
through the HB-393 process and the federal initiatives through
federal legislation. With the passage of HB 393 last year ,
we do not see that any state legislative action is needed this
year. Also, we are not anticipating federal legislation this
year.
Finally, I want to focus on one other important team. The
Regulatory Team's goal is to advance a commercial/economic
regulatory structure which prospectively protects both the
initial throughput volumes of the project and the project cost
structure.
Previous work has shown that a project will not be viable if
there is any realistic chance that government can order
proration. Proration occurs when initially contracted volumes
must be cut back to allow for new gas to be carried. Another
form of this problem occurs if the project is mandated by
government to carry this new gas, and yet, is not allowed to
recover the fair costs of providing that service. This is
true whether the mandate involves expanding the system or not.
Yet another from of this problem is a government mandate to
construct greater system capacity that is needed for the
initially contracted volumes.
We are just initiating our analysis of these regulatory
issues; but two aspects are emerging. First, current federal
and state statutes and regulation as well as conventional
thinking go in the opposite direction as to what is needed.
For example, federal and state law allowing the grants of
right of way have not, in the past been interpreted to meet
the objectives I just mentioned. Further, federal and state
agencies generally do not regulate along these lines. The
second aspect relates to a theme John mentioned earlier: that
the pipeline is significantly detracting from the project's
competitiveness. If there were no pipeline associated with
this project, then this area of commercial regulation would
not be as critical. To summarize this area, we will be
working on commercial regulation this year. Currently, we
expect that some federal and perhaps state legislative
initiatives may be brought forward in the year 2000.
Now, stepping back, there are major fiscal and risk
improvements that are imperative in the commercial area for
the project to become competitive. With this perspective, it
becomes clear that the challenge for an Alaskan LNG project is
to simultaneously make the project economically competitive
while developing a market that is sufficient in both size and
commitment. Frankly, this will require the type of
innovative, hard work that is encompassed in the Alaska North
Slope LNG program. Further, the better chances for an Alaskan
project will come from accomplishing the tangible activities
that can lead us to become more competitive.
Even with the right work program in Alaska, we should
recognize that we have a long journey ahead of us. The cost
reductions, fiscal and regulatory modifications and other risk
reductions needed to make the Alaskan project competitive will
not come easily. Further, we need energy prices in general
and LNG prices in particular to recover sooner rather than
later from the historic lows that we are now experiencing. We
will also need to see East Asia not only recover from its
economic difficulties, but get back on the path of growth. In
short, many positive outcomes are needed if we are to stay on
track.
In closing, I would like to summarize what we are trying to
do. First, sustain the effort to creatively position now for
recovery in East Asia. Second, be different by both
establishing an identity and bringing real innovative thinking
to bear. Third, look for every opportunity to make the
project competitive. Fourth, overcome our bid difference from
the competition: the pipeline. Fifth, continue to work
cooperatively with government to advance the project.
Number 1905
REPRESENTATIVE KEMPLEN stated, "Senator Murkowski, on Friday in his
presentation to the legislature, brought up the issue of the
natural gas pipeline, and specifically he was referring to Taiwan
and a linkage being developed in national security and the natural
gas pipeline project. He asked, "What is the current status of
that discussion and how viable is that as a contributor to this
project?"
MR. ALLEMAN stated, "We have not specifically approached Taiwan or
any of the other markets at this time directly. I've heard of this
conversation that was had by Senator Murkowski, but at this time
we're not ready to address that."
GEORGE FINDLING, ARCO, stated, "The question of Taiwan, they're
part of our target market, so we have seen them in that light.
What he's saying though, is as a sponsor group we've not yet
approached it, and in terms of the overall sponsor group, we are
fully booked, we have all of the 100 percent interest that we need
to proceed ahead. Our sponsor agreement certainly allows entry of
others into the process later on, if that's what's required. I
think for right now we're feeling comfortable, that's an engaged
topic, but we can move ahead from where we stand right now."
Number 1995
REPRESENTATIVE KEMPLEN stated, "The issue was really dealing with
the market, and in the purchasing of the natural gas, particularly,
at a higher price. The Taiwanese may be amenable to paying a
higher price for natural gas, from Alaska, because of it's national
security linkage. As a result, that does have direct impact on
your--on the efforts of the sponsor group, as you were trying to
place the market. He asked, "Is that correct?"
MR. FINDLING stated, "I think is really two perspectives here; one
is the Taiwan market is not large enough to really carry our whole
project, we really do need market development in Japan, Korea,
possibly in China as well, so that's not enough to really make or
break the project just in Taiwan. The second thing is, if you
think back to the testimony that was given, the focus here is to
become competitive with all the best projects that in competition,
and in that way, if there is a benefit down the road to some price
basis in one particular market or one particular buyer, we can
certainly enjoy those benefits. But to get this project off the
ground, we've got to be competitive overall with our competition."
Number 2060
REPRESENTATIVE KEMPLEN stated, "The other issue that I keep hearing
about, is the pipeline itself. That it is a major cost factor in
making this project viable. I guess one of the areas that seems to
merit exploration, is the question of technological innovation in
pipeline construction, and the foothills--They don't have a
representative here today?"
MR. FINDLING stated, "I'm there representative. I'm speaking on
behalf of the sponsor group."
REPRESENTATIVE KEMPLEN continued, "Well, I would be very interested
in hearing about just how advanced that partner is, in terms of
technology, and what type of new technologies are being explored
for application in the trans-Alaska gas pipeline. Also, the issue
of incentives for innovation and pipeline construction, whether
those incentives being federal tax credits, that we're able to get
through at the national level, or some partnership with state
agencies, such as the Alaska Science and Technology Foundation. It
seems to me that that is really--the pipeline is really where the
biggest obstacle is, and it seems to me that's where we should be
devoting significant attention to reducing those obstacles. I
guess there are kind of three questions. He asked, " One, what are
you currently doing in terms of technological innovation and
pipeline construction, looking at Alaska's situation, two, the
federal case for incentives for applying new technology to the
pipeline, and three, a partnership with Alaska based organizations,
such as Alaska Science and Technology Foundation?"
Number 2167
MR. MILLER stated, I think that your point about the pipeline being
the albatross, so to speak, you picked up a key point that we were
trying to get across in the testimony. Foothills is part of our
group, and I guess I want to stress, I think one of the strengths
of the sponsor group is the diversity of the people we have on it,
so we are represented by Foothills pipeline, which is an
international pipeline operating in design company. They are in
fact doing some of the analysis for us, directly out of Canada."
MR. MILLER continued, "Let me just talk a little about some of the
things we're doing to look at the pipeline, and I'll put it in the
context of looking for this minimum viable case. So we're looking
at pipeline sizes ranging from 24 inch to 36 inch, for example.
We're also looking at everything from x80 type pipe, which is high
yield strength pipe, and going higher to x100, which--simplifying,
just basically lets you make the thickness thinner, but the pipe
stronger, and that way it would be more economic to go to those
higher yield strength ratings. Now x80 has been used in Canada,
and that is a leap forward from the previous look at the project.
We're kind of taking that as our base case and looking to see if we
can go beyond that to x100.
MR. MILLER further stated, "We're also looking at a variety of
pressures--I guess I want to come back. You can't take the
pipeline alone totally, you still have to look at the gas treatment
plant, and the LNG plant, and the pipeline is kind of like the
connector of the two. So, you've got pressure issues and
temperature issues, and so we're looking at a wide range of
pressures on the pipeline. We're looking at all the way from 2000
pounds per square inch to 3500 pounds per square inch, because we
know that the higher the pressure is at the LNG plant, the more
efficient an LNG train is. Now what can we do upstream to get that
kind of gas, and where do we have to put compressor stations, and
then how many do we need, and which way are we going; all that is
tied together, it is a very complicated problem. Right now
foothills is looking at analyzing compressor stations and pipeline
size configurations, and to come back with maybe a set of curves
that says, for a 24 inch pipeline you need this many compressor
stations, for a 28 inch you need this many, and looking at both
routes. Don't focus--the pipeline is a key part, but the pipeline
is also affected by the other parts, but we are working a lot of
issues around the pipeline."
MR. MILLER continued, "In fact, one of the unique things we've just
come up with is, in evaluating the routings--we actually have
another company looking at cost estimates right now--we're
evaluating different areas along the route as swampy,
mountainous--most of the cost estimates that we see, in fact all of
them just assume a cost per length of pipe--we're breaking it down
by area of terrain to see if that gives us a clue as to where we
might be able to do things like line-loop. There may be a real
advantage to putting in a smaller pipeline and then having the
ability to loop it later, and maybe in the real difficult parts put
in the bigger pipeline to kind of minimize the up-front cost."
Number 2355
CHAIRMAN WHITAKER followed up, "You mentioned x80 pipe; this
pipeline has been kicked around for years and years and years, ten
years ago x80 pipe was considered to be somewhat innovative and it
was, if I'm not mistaken, part of an initial design concept." He
asked, "Why are you still considering x80 pipe, as opposed to
another type of pipe?" He said, "I don't presume to know your
business, but I do presume to know that there is an urgency related
to this project that I'm not seeing reflected in your design
criteria at this point."
MR. MILLER stated, "We are looking at x100 pipe as well. I guess
the way that I look at it is, yes, x80, ten years ago was an
innovation, but x80 has only recently been used, and I kind of look
at technology--if you look--I go back to the space shuttle was
designed in 1949 and we're still flying it. So, x80 pipe has just
recently been used, for example, in Canada, and there's all kinds
of strength of material issues around that as well. So, It was an
innovation ten years ago and I guess my answer now is, x100 is an
innovation that we may see ten years from now as well, and we are
starting to see the higher strength pipes in use. So, we want to
take advantage of that, I don't want to give the impression that we
don't, but I think we also want to keep in mind that we want a safe
system and we want proven technology, and so we're going to step
out, but step out where we feel confident that we can..."
Number 2439
CHAIRMAN WHITAKER stated, "My concern with that, to use your term,
proven technology, and also to pick up on one of the terms that has
been used continuously throughout your presentation, and that is
viability. It seems to me that if you're looking for the most
viable project, that indeed you will use proven technology and not
strive for an optimal project, which may never be attainable in an
environment in continuously changing technology. My concern is
that while striving for perfection, if you recognize you will never
attain it, but that you recognize that viability is your goal, not
an optimal project."
MR. MILLER replied, "I couldn't agree more; we just hit on the same
spot. I think we're in total agreement."
MR. FINDLING stated, "When it comes to federal tax issues, let me
break it down to near-term and long-term. First, near-term we feel
adequately funded to do the work that we're doing, so that we
haven't really advanced any federal initiative to try to get some
tax incentive to currently create..."
TAPE 99-8, SIDE B
Number 2466
MR. FINDLING continued, "...tax modifications in the viability of
this project. I think everyone that remembers that report, will
remember that the federal government actually has a larger tax take
than the state under current tax law, so modifications to the
federal tax would be real power-houses in making us become more
competitive. That's an area that we're going to be pursuing with
the federal delegation as we go along in this project."
REPRESENTATIVE KEMPLEN followed up, "I guess I'm really interested
to in incentives for--federal tax incentives for innovation. We
are moving very rapidly in to a new economy, a knowledge based
economy, driven by technological change and innovation, and it's
certainly recognized at the federal level. So, incentives
that--when you were talking before about differential, trying to
make something in the Alaska case that differentiates itself in the
international market place. It seems to me that being out with a
new product, a new way of doing things, a new technique, the cause
of our American ingenuity is a legitimate course of action for us
to be seriously pursuing, particularly with the advances in
material science that are going on."
REPRESENTATIVE KEMPLEN continued, "That material science--and it
comes right back to the question of the cost of the pipeline, the
issue you brought up about the x80 pipe and x100 and that the
pipeline itself is, again, the big cost item, and anything that we
can do to reduce that really would make a substantial contribution
to the viability of the project. The federal tax policy--tax
incentives--that reward technological innovation in this project
seems to merit certainly more serious and focused attention,
particularly when some of these policies can take a while to
germinate, and get them through at the federal level. As long as
we have--we're fortunate to have at the federal level some very
competent statesmen there, and it seems appropriate for us to be
taking advantage of that leadership at the federal level, to be
pushing for this type of changes that would make this project more
viable." He asked, "Have you had any discussions with Senator
Steven's office to date or are you planning to?"
Number 2362
MR. FINDLING answered, "Yes. We've had discussions with their
staff; we really have on going discussions with them about what are
the--first, what are the needs of the project to become more
competitive in terms of federal fiscal modifications, and then
second, what's the viability of achieving those. The feedback
we've gotten, and it was really reflected I think in Senator
Murkowski's remarks to the legislature last week, was that we
needed to get the state fiscal [system] a little more lined out
before the federal side would be ready to act. I would just
respond to one other thing you said, the work that we've seen, and
in Pedro it was clear as well, that the kind of federal
modifications that are going to really help this project be
competitive are, basically capital based, they're based on the
total amount of capital that's being spent, things like accelerated
depreciation and so forth are the big drivers that make this
project that make this project competitive. Certainly,
modifications that try to encourage technology are always helpful,
but I don't think that we should view those as the things that are
really going to lift this project into the realm of being
competitive..."
Number 2308
CHAIRMAN WHITAKER stated, "A dramatic change in the federal tax
regime would be beneficial to the project. It may even give it a
quantum leap so to speak." He asked, "Is that a true statement?"
MR. FINDLING replied, "That is true, but in keep in mind, though,
as we said in the testimony, you have to have a combination of
things going right; we have to have cost reductions, we have to
have federal and state fiscal modifications, we need to see risk
reductions in regulatory and other areas and we need to see a
viable market with buyers that are willing to commit sufficiently
for the required volumes."
Number 2279
CHAIRMAN WHITAKER followed up, "There is still a sequence, and the
first portion of the sequence is that, one, the project be
identified, two, the project be costed, and, three, the market be
approached. I don't think that there is really any argument with
regard to that, and as part of that costing process, of course, and
the overall viability of the project, we must determine what the
cost of federal taxes is, that is a huge increment." He asked, "Is
it not?"
MR. FINDLING said, "Yes, federal taxes are a very important driver
in this. I would say though that our view is that we think all of
things we've mentioned need to advance simultaneously. That the
way we view this project becoming viable, is if we get improvements
in all, and that in all these areas the improvements are reflected
crosswise. We see that the improvements happen in parallel, not in
sequence."
CHAIRMAN WHITAKER said, "I would respectfully disagree with you;
there is a need for sequencing with regard to any endeavor. With
that in mind, let's go back to federal tax regime, it is a given,
it is a very large and important component relating to the
viability of this project, to the magnitude of billions upon
billions of dollars over the life of the project." He asked, "If
there were no federal taxes adherent to this project, would it be
significantly more viable?"
MR. FINDLING answered, "Yes, Pedro Van Muers work showed that zero
federal taxes would make a project significantly more viable, as
would a significant cost reduction."
MR. ALLEMAN commented, "That's one piece, it is a large piece, but
it will take several pieces, and think that is where George is
going with this. In certainly is a significant piece on the
federal level to have this type of tax relief, but again it's one
piece and we need several."
CHAIRMAN WHITAKER followed up, "When you say it's one piece, relate
it's significance with regard to the other pieces in magnitude of
dollars."
MR. ALLEMAN replied, "I don't know that we are in a position yet to
relate that exactly, that's part of what we're reviewing right now
in our overall look at this thing; how do these pieces fit exactly,
what are the economics behind that, what type of relief do we think
we could possibly see, what is the probability that we could go
forward and get that from the federal government, but it certainly
is a large piece and we haven't put a definition around exactly,
percentage-wise, for instance, what that piece is."
Number 2158
CHAIRMAN WHITAKER said, "We have, and it is a significant piece, in
fact it could be termed indeed a quantum leap...Just be aware, that
is a huge increment and indeed may be the dominant increment with
regard to the viability of a project, with regard to the viability
of attaining that there is a means, by which, it may be attained."
REPRESENTATIVE BRICE asked, "How long is the sponsor group willing
to follow this Andover under the current economic assumptions,
number one, number two, is there a drop dead date that you guys
have set to disband and move on?"
MR. ALLEMAN replied, "We have staged this work and funded it
through the stage one, which is 18 months, we will take a look at
that point; do we have a viable project before we make the decision
to move forward."
Number 2102
REPRESENTATIVE BRICE followed up, "So, 18 months then. One other
question on your remarks, Mr. Alleman, with regards to the
regulatory team and the concerns about the mandates for proration
or over-capacity production, was that in relation to providing
access to the resource for the communities down the line or are you
guys taking into account markets up and down the line, I know
they're probably insignificant to the economics, but I do know
folks in Fairbanks want to have access too."
MR. ALLEMAN replied, "Certainly the in-state gas used will be
addressed, in fact, we welcome the in-state gas use as a part of
making this project viable, as we do with Greenfield in-state gas
projects that may come along. The concern is that under proration
that some large, other either producer or entity, would come in and
say that they had some preferential right to ship on that pipe, but
it's not a direct(indisc.). As you mentioned, the volume involved
with the in-state gas use would be expected to be significantly
smaller than the overall project."
Number 2033
REPRESENTATIVE PHILLIPS asked Mr. Miller, "Thinking outside of the
box, and looking at alternatives for moving the product to the
market, what I'm wondering is if you folks have spent time looking
at moving the product other than through a pipeline. Have you
looked at moving the product through a rail line, or a truck line,
or building a pipeline to Fairbanks and trucking or railing it from
there. Did you consider all those different alternatives in moving
the product, and not necessarily only looking at pipeline?"
MR. MILLER said, "In my testimony I spoke about this big data
exchange that we had at the beginning. What we did was we
exchanged a lot of ideas and we've kind of had a rule that we
follow; we don't want to reinvent the wheel, but we want to use the
best answers that have been developed over time. We want the best
product that is out there. So, we went back and looked at all
those studies, we even went back to the blimps, and we think that
after looking at all that again, that our best bet on this is to go
on the technological improvements on the pipeline, look at those
areas that I mentioned early and then also focus on this minimum
viable case. Reviewing all the past studies, we think that's the
right way to go. We did also look at up to 30 different pipeline
routings, and we've relooked at all the studies that are out there
that we could get our hands on...We've narrowed it down to five
sites, and now we're in the evaluation phase of those five sites.
Also in response to your question, we're taking some pieces of
those studies, for example, how you use the right-of-way of a
pipeline; can you save costs by going along a rail system and is
there another optimum way to go. I guess my answer is to take all
the best pieces and sift through them and get down to something
that's really workable and viable, but not ignore any of the past.
We are also documenting every reason we've eliminated something, so
that as we go along we don't have to keep on going back..."
Number 1887
REPRESENTATIVE PHILLIPS asked Mr. Alleman, "Would you please go
into a little more detail on the proration aspect, and how it would
affect, particularly, the Alaska in-state market and how they tie
together, with the pipeline producing a product that could be used
in-state, but where does proration come into play?"
MR. FINDLING answered, "It's a good question. Let me just describe
proration and then I'll go to the in-state gas. Proration, the
notion there is that all of the--and I want to emphasize this--all
of the export volumes for this project are going to be likely under
some kind of contract, and the buyers are really going to want to
know that we can always fulfill those contracted volumes...We don't
want a situation where these volumes have basically been contracted
and then suddenly someone else can so, well no, I want to send my
gas and now everyone has to be cut back, and by proration that's
typically meant in proportion to the volumes that are in tender.
That's the fundamental notion, is that we need to secure and
protect the volumes on the export side, so that the contracts--if
there's a chance that they could be prorated, we're simply not
going to be able to get buyers to commit, and that's the real test
of whether we've done a good job."
MR. FINDLING continued, "Now we've always--we've long been saying
that we need to accommodate in-state gas usage, and that was part
of HB 393; in the past we've testified that some kind of
methodology has to be accommodated there, so that the in-state gas
situation can be accommodated. There is going to be a struggle
here to figure out--what I just described in prorating tends to say
that on the state side, you need communities to commit early and
for fairly long time periods for the gas that they want. They may
not know that right away, and so the struggle is going to be can we
devise a system where we can accommodate maybe some changes in
local gas needs as time goes on...We have more questions than we
have answers in this area. But there is the commitment to work the
local gas issue."
Number 1748
REPRESENTATIVE PHILLIPS followed up, "Is proration--In your
industry, is proration a major consideration that's always taken
into consideration with a gas pipeline?"
MR. FINDLING said, "In the oil industry, proration is common, some
regulated pipelines in the lower 48 for gas it's common, but what
we're actually talking about here is a new industry, in that it is
an LNG industry, with the complete export, and the United States
really hasn't experienced it a project like that or an industry
like that. So, we're plowing new ground here, and we don't have a
lot of look-a-likes that we can say, oh, this is how this industry
typically works."
Number 1711
REPRESENTATIVE SMALLEY said, "In a conversation this summer down on
the peninsula, the chamber meeting, Yukon Pacific gave a
presentation; they talked in terms of the permitting processes and
the permits that they had in hand." He asked, "Does the sponsor
group have the permits at hand to go the Cook Inlet route, if they
don't, what's the time frame that it would require to get those,
and is that going to push the 2007 date possibility?"
MR. MILLER responded, "Right now we're looking at trying to
identify a viable project, and if there's economic advantage to go
one way or the other, we want to identify that. We have permit
holders on the team, Yukon Pacific has some permits, which we will
evaluate as part of stage one, because we need to study what
exactly they do for us, and we don't have that answer yet.
Foothills also has some permits that we need to evaluate, but we've
taken the approach that that's kind of a bird-in-the-hand, maybe,
we don't know, but if there's advantage to go another way or by
blimp or by train, we want to know it...Then it will be a decision
as to what it takes to permit that other route. We have a group
working in both the commercial and technical area that wants to
persue ways to look at permitting, in case we have a different
routing to go...The intent is not to look at another routing to go
slower, the intent is to look at another routing to make it better,
viably. We do have other permit holders, so we will evaluate all
of those permits as part of stage one, and analyze as a group,
because we have five sponsors from the Japanese to the Canadians to
Phillips, ARCO, and Yukon, that not all have the same level of
knowledge about the permitting process, and so one of our goals is
to bring everyone together on this."
Number 1579
REPRESENTATIVE SMALLEY said, "I guess specifically what I was
looking for, was maybe the 'yes' or 'no' are there permits in hand,
in review of a potential Cook Inlet route."
MR. MILLER said, "That's part of the evaluation is to--I can't--we
think we have permits, we just don't know what they're good for
totally yet, but we want to study the problem first."
Number 1542
CHAIRMAN WHITAKER followed up, "Is it fair to say that 'no' you do
not have permits to Cook Inlet, 'yes' you do have permits to
Valdez?"
MR. MILLER answered, "That again is part of our study, we need
to--we hope we have permits one way, and we think we might--we have
people on our team that think they have the permits--excuse me, Mr.
Chairman in response to your question, we just need to analyze it.
I can't--I hope we do, but that is part of the work program for
stage one, and one of the work products will be an analysis of what
permits exist. I don't have that answer today, but we're working
it in parallel with all the other studies."
Number 1498
CHAIRMAN WHITAKER stated, "One of the frustrations that we feel,
that the entire state feels, is that there is the perception that
there are permits in hand from a specific place to a specific
place. We have some need for an explaination as to why those
permits are not taken as a baseline, a starting place. The
question begs to be asked, if that is the starting place, after
years of study, not only by Yukon Pacific Corporation, but also by
ARCO, by BP, by EXXON, every entity on the North Slope, and from
around the world has probably studied North Slope gas and the
routing, and taking it to market." He asked, "Why in this period
of need, why in this period of--this being the only viable market
commodity that the state of Alaska has, are we continuing to deal
with questions that have been answered years ago? If our goal is
to achieve viability."
MR. MILLER answered, "If you'll remember in my testimony I spoke
about a minimum viable case, which would be, by definition, likely
a smaller pipeline in parts. Some of the studies we're doing are
looking at how that pipeline might be routed. I don't think we
have permits for the minimum viable case, whether it goes to Cook
Inlet or Valdez. I guess, my answer is, also that despite all
those studies there is no viable project to date, so we are trying
to identify what the minimum viable project is, and we feel that is
the most--the quantum leap that we can make to this effort is to
identify what that is, and then whether or not that can be
permitted or if we have permits in hand that cover that."
Number 1375
CHAIRMAN WHITAKER followed up, "The scale of the advantage that you
are trying to achieve, in terms of dollars--that is a question,
what is the scale of the advantage you are trying to achieve in
terms of dollars with regard to your routing study?"
MR. MILLER said, "I think we need to go back to the idea that this
is not a purely technical study, and I think that is one of the
reasons we feel that the other studies were lacking something,
because they didn't tie in the commercial aspects. When we talk
about minimum viable case, we're not talking about reducing
technological costs just for the sake of reducing the cost, it's to
match up with whatever we feel we can fit into a market. That is
the way to make the project viable. So, I guess the answer to my
question is, we think that there is a volume less than the total
needed to get into the market, and that's the minimum viable case
that we're trying to identify, so it's going to be a (indisc.)
process as we go through to identify that."
Number 1302
CHAIRMAN WHITAKER said, "I think we're on different plains. Let me
re-phrase my question. The scale of the advantage of a routing
study, is it in the range of $100 million, $50 million, $200
million, that is the question."
MR. MILLER responded, "I guess if I knew the answer to that, I
wouldn't have to do all the studies I'm doing. Remember we're
looking at a wide range of pipelines, we're looking at a wide range
of technology, we're looking at several routings, we're looking at
what can an LNG train do, depending on how the pressure arrives.
If I could add a little bit, I didn't talk to much about an LNG
train, but if you take the LNG train, a real cost advantage is how
you deliver the pressure, and so that requires location of
compressor stations, not just the pipeline size itself. In other
words, there might be an advantage to go with a smaller pipeline
and more compressor stations to get pressure higher in a certain
place, so it's very--it's hard to answer a question just
specifically on the pipeline, because it may lead to something else
that we're also studying concurrently, the operation of an LNG
train. We might be able to add pieces to a train that would allow
to have, what we call, 'turndown availability', where instead of
putting two trains in, maybe we can design a train that's more
expandable. That's how we then have to group compressor stations,
pipeline sizing and all of that together. When all that is done,
we'll have an idea of if it is viable, or if it is competitive with
our base-case, which is the current base-case to Valdez, which we
don't feel is marketable as a whole right now."
Number 1184
CHAIRMAN WHITAKER said, "You more or less answered the question and
that's fine. I guess I would relate to that there is a cost to a
re-routing--a re-thinking of a routing--of a route, and that cost
not only relates to dollars and cents, but also time, and
gentlemen, again, there is some urgency with regard to this
project, and I'll leave it at that."
REPRESENTATIVE PORTER stated, "The discussion on proration, while
I appreciate your recognition that there's some in-state usage
needs around that, that should probably be considered, and I'm glad
that you are, I don't think anybody in the legislature or the
Administration is of the mind that we don't recognize the need to
fulfill a contract that you would have to make this whole project
work. The idea of stepping in the middle of that, and well, never
mind that we want to do this, is not an option that I would guess
would be available from the contract level of consideration given
by anybody." He asked, "Did I understand you George to say that
the market was generally 100 percent complete for the project?
When we were discussing the Taiwanese enhanced cost potential, I
thought I heard you something about the market's been taken care
of."
MR. FINDLING stated, "That wasn't what I was trying to say."
REPRESENTATIVE PORTER asked, "Where are we with the market?"
MR. ALLEMAN said, "With the market, we're now busily developing our
strategy to approach the market. The market you do not want to
approach until you have something solid to bring them, to be
considered (indisc.) if you don't walk in with a fairly defined
project to go forward. We have certainly identified the markets,
we spent some time identifying what the drivers are to those
markets as it relates to cold nuclear--the alternates. We've
certainly taken a lot of time to identify who the other players are
out in the world, we'll be competing against, and there's
competition all over the world, and we're trying to match that up,
but there'll be very little contact with the market until we have
this project ready to go forward."
Number 1020
REPRESENTATIVE OGAN stated, "I'd like to go back to the question of
routing. I know we've been around this issue for probably 100's of
committee hours, as we all have sat across the table from each
other for a number of years. I recall very specifically the
discussion of Yukon Pacific that they looked seriously at a Cook
Inlet route at sometime and it was rejected by not only them, but
the feds. I don't recall the specific reasons, but I'm concerned
that if--as much--with all due respect to my friend from Valdez I'd
like to see the pipeline end up going through my borough and maybe
a terminal somewhere in the borough or close by. I'm concerned
that that would delay the project for a number of years, I mean I
think we all know that--I mean the hurdles that have already been
cleared by Yukon Pacific in getting those permits out of the feds
and the time line that would be involved to get additional permits
for additional routes, I think would place a tremendous burden on
trying this gas to market anytime soon..."
MR. ALLEMAN replied, "We are certainly looking at all of these
alternatives. We have not turned our backs at all on the--on any
permitting at this point, and we are bringing them along in
parallel, again, because we have to be able to go back and explain,
to these individual corporations that are going to be investing
these billions of dollars, that we have looked at all the
possibilities and that, yes indeed, that is the appropriate route
to go, whatever that route is, and--but is a parallel effort, we're
not abandoning one and going to the other. We're bringing the five
locations, if you will, simultaneously. Again, we have to come up
with the right answer for Alaska, we have to come up with the right
answer for the investors, and in our minds it's prudent that we, at
least, look at these in parallel...so as to which direction we take
this project."
Number 0870
REPRESENTATIVE PHILLIPS followed up, "Mr. Alleman are you in a
position to tells us what those five routes might be at this point
in time?"
MR. MILLER answered, "We're looking in the Valdez area at the
Valdez marine terminal...The Valdez marine terminal may offer some
infrastructure benefits, and that is not a current permitted way,
but it goes to Valdez. Anderson Bay, which we may have permits for
that area, but we don't know what they cover. In the Cook Inlet
area we're looking at Tyonic, Boulder Point, and Nikiski. Now,
there are synergies going that way within state gas sales that we
want to evaluate, and there are also synergies with an existing LNG
facility that we want to evaluate. So, if the answer--maybe I can
say a few words about how we're--we're going to look at these sites
and likely come back with an analysis of the pros and cons."
Number 0765
REPRESENTATIVE HARRIS addressed Mr. Miller, "Obviously, my
preference would be since I represent an area--I want to see this
project go for the state of Alaska more than just for Valdez or any
other place in particular. I recognize that the Kenai Peninsula
has a tremendous amount of infrastructure already for gas, so
there are certainly some positives there, and I hope no matter
where the project goes that gas is put to that direction anyway.
It would be a tremendous loss to the state if we ran out of gas
there and we don't put other gas to it. A couple of things that
you brought up earlier in your testimony, and maybe actually Mr.
Alleman did, you said fiscal and regulatory modifications were
needed." He asked, "Can you elaborate on that a little bit, what
you meant by that?"
MR. ALLEMAN responded, "Fiscal and regulatory will be--part of it
is that the regulatory issue is the proration issue, part of the
regulatory issue is legislative drafting, if you will, for the
federal government. Part of the fiscal areas are going to be some
form of tax modification within the state and within the federal to
fit this project, to make this project go. Specifically, we don't
know exactly what those are going to be, certainly you stop and
think about investment--accelerated depreciation is one area, you
talk about the different types of fiscal areas that you could
attack in that regard, and certainly there's consideration on how
the taxes structured within the state of Alaska. Pedro Van Muers
study references front-end loading, back-end loading of taxes, and
we will certainly look at that, as far as some way to still pay our
fair share, but to structure it in a way, so that the project that
has very high intense capital investment up front doesn't get taken
under before it can start realizing some revenue."
Number 0610
REPRESENTATIVE HARRIS addressed Mr. Miller, "Certainly, as a
representative from the state of Alaska, it's my concern that we
market our gas or our natural resources before anybody else in the
world does. I think that should be our obligation as
representatives of the state." He asked, "How can we be assured
that this project is getting preferential treatment by companies,
or at least a company, who has world wide interests--competing
interests--how can we be assured as Alaskans that we're getting a
first shot at this and not being put aside by other competitive, or
say more competitive, as you said maybe there are some advantages
to some of these other world wide projects from an economic point
of view, which from Alaska's point of view we shouldn't be
concerned about?"
Number 0492
MR. MILLER responded, "I just want to say that I'm here on the
capacity of speaking for the sponsor group, so I'm going to just
say one thing and then pass it to George Findling to respond.
We're looking for a competitive project world wide, so we're
competing with lots of projects, and some are in ARCO and others
are outside of ARCO, but there's a whole slate of projects that
we're competing with..."
MR. FINDLING said, "I hope the committee members all received a
copy of a letter we sent to Chairman Whitaker..."
CHAIRMAN WHITAKER said, "I have that here with some comments,
George, I have not distributed it, but I will."
MR. FINDLING continued, "The essence of that letter, and we wanted
to keep the focus here on the sponsor work, we did address this
issue last time and we've addressed it in the letter, but the
essence of that is that our efforts on our other project, which is
the Tangguh project in Indonesia, are not taking away from our
efforts here in Alaska, that's really the bottom line. We want to
see both of those advance, and we see that both of them advancing
is an integral part of our strategy to become an LNG player in the
East Asian marketplace..."
Number 0418
CHAIRMAN WHITAKER said, "I had some concerns with the letter...In
your letter you state:
The question posed to us was whether ARCO's interest in the
Tangguh project in Irian Jaya, Indonesia is detracting from
our effort on the Alaska North Slope project.
I don't think that's the question. I think those of you associated
with this project are not in anyway, anything other than
competitive with the Irian Jaya project, the Tangguh project. You
want your project to succeed, I understand that, and that's a
given. But I think the more telling question is, is Tangguh a
competing project, with regard to market share, and I know George
you have addressed that, but I would again question your answer in
some regards. My point is this, there are different levels of
competition. I think it's fair to say that, indeed, you feel that
your project is omnipotent, the most important project, and you
will advance that to the further extent that you can. Our concern
is that, at the next level, that is the higher level of management
within your corporate entity, the Tangguh project is also competing
on an equal basis with Alaska North Slope gas. That being the
case, ultimately a decision may be made within--at the highest
level of your entity, your corporate entity, that may allow for the
bringing to market out a different feel, a different source of gas.
CHAIRMAN WHITAKER asked, "Percentage of ownership, Prudue Bay,
ARCO, with regard to gas?"
MR. FINDLING responded, "I'm struggling for that number, I think
it's 37 percent overall as a gas owner..."
CHAIRMAN WHITAKER asked, "Percentage of ownership with regard to
Tangguh?"
MR. FINDLING responded, "I don't have that number, I can get it for
you."
CHAIRMAN WHITAKER said, "That would be very, very beneficial to
us."
MR. FINDLING responded, "The vision you had of the higher levels of
our corporation sort-of making this either or decision is not
consistent with the strategy of our corporation, which I've
outlined in this letter. The strategy of our corporation is to
become a major player of LNG in the Far East, and in so doing we
want to see both projects move ahead, as we've laid out in this
letter, so that we don't share at all this vision of an either or
choice being made at the higher levels of our corporation."
Number 0191
CHAIRMAN WHITAKER said, "I understand your disagreement and it's
taken respectfully and given back respectfully. I would ask
further with regard to the letter, describe the geographic market
that both Tangguh and Alaska North Slope gas are targeted
for...where is it going."
MR. FINDLING responded, "The market for LNG in East Asia is pretty
well known, it's Japan, it's Korea, it's Taiwan, it's potentially
China. I don't know how much more specific we can be, but those
are the general markets.
CHAIRMAN WHITAKER said, "You need be no more specific and it's a
given that both projects have that as their ultimate explanation."
He asked, "Describe the delivery and ramp up period for Tangguh as
opposed to Alaska North Slope gas?"
MR. FINDLING responded, "I think we have reached a point where I
would like to either come back or we can provide these answers in
some other forum, because basically now we're talking about the
Tangguh project and we came here today to talk about are work
activities on Alaska North Slope gas. So, with all respect, I
wonder if we could arrange that for a separate venue."
CHAIRMAN WHITAKER stated, "Your request for a separate venue is
certainly is conceded to, in regard to time. Another time, no
problem, I understand your desire to make sure that the information
you provide is indeed that which is correct..."
TAPE 99-9, SIDE A
Number 0013
REPRESENTATIVE HARRIS asked, "What kind of vision did you have with
the state's involvement--if the state owned the pipeline are there
federal tax implications and various other things with the state
owning the pipeline, and contracting to somebody to operate the
type of a thing that would make this project more attractive
earlier, or not?"
MR. ALLEMAN responded, "We are looking into all financing
opportunities--all financing--creative financing type of
situations, certainly that would be one that we would consider. Do
we have a response to that in terms of how we see that in terms of
can we do it first, what would be the actual tax ramifications, we
don't have that answer for you today, but certainly that is on our
radar screen as something we will look at."
Number 0123
REPRESENTATIVE BRICE said, "We talked a little bit about state
fiscal regimes, federal fiscal regimes and the work your doing
there, what about municipalities, what consideration have they been
given in your discussions in development of the project, especially
questions of accelerated depreciation on the actual infrastructure,
which will have a dramatic impact on property taxes, that they
collect...?"
MR. ALLEMAN responded, "Certainly that is also something that we
are looking at very closely within the framework of how we
structure this entire deal; how are the municipalities involved,
how's the state involved, how's the federal government involved..."
Number 0224
REPRESENTATIVE KEMPLEN stated, "Just like to go in the area of the
market, I know there has been significant discussion on the Asian
flu and what's going on with the Asian economy, and since this
project is geared specifically toward those economies, I guess I
would be interested in hearing from you, since I'm sure you have
the pulse..." He asked, "What are you hearing, in terms of those
economies, and I hear some of them are planning a rebound, some of
them will take longer time, what do you guys hear?"
MR. ALLEMAN responded, "We see, for instance, that China hasn't
suffered as much as some of the others have. Taiwan hasn't suffered
as much as some of the other countries, like South Korea and Japan.
The big question is will they recover and when will they recover.
We totally believe that they will recover and grow, that is the
impetus for us continuing forward on this project. The big issue
always is when, and that's--again we think by the year 2007 and
forward we will start to see growth again in those economies and it
will turn around. Exactly when, we don't know that for sure..."
REPRESENTATIVE KEMPLEN asked, "Do you see any--when you define
Asian markets, does that include India as part of that boundary, or
are you focused more on...the Pacific Asia?"
MR. ALLEMAN responded, "India is certainly one of the emerging
nations that we are looking very hard at, not necessarily for our
gas, but as part of the market share that's going to be absorbed
with competing project throughout the world. We will continue to
look hard at India as a player, and see how they contribute to
this, again, we believe they are an emerging market, certainly a
potential growth market, probably slower than some of the others,
but, again, it's about where does the rest of the world LNG
business go, and part of it will have to go to fill that market.
Again, our primary focus is South Korea, Japan, Taiwan, because of
the distance."
Number 0474
CHAIRMAN WHITAKER asked, "Has the sponsor group submitted an
application to the State Department of Revenue?"
MR. FINDLING answered, "No, we have not."
CHAIRMAN WHITAKER said, "I understand why you have not at this
point, and that's not to be held against you, there's a great deal
of work that need be done before that can be done."
CHAIRMAN WHITAKER asked, "It's an assumption on my part that the
project plan is being developed, is that correct?" He said, "The
project plan is related in HB 393--HB 393 requires a project plan
with very specific steps related to that."
MR. FINDLING responded, "The sequence here is identifying the
viable project, then preparing the application that would go to the
commissioner, and in the preparation of that application, yes, we
would have to develop a project plan."
Number 0558
CHAIRMAN WHITAKER said, "I'm glad you mentioned sequence, because
as part and parcel to that there are the specific components to the
project plan, and I just want to read through these and get a
definitive answer as to where you are on them. These are
stipulations as required by HB 393. Project plan must contain,
one, a description of work to date." He asked, " I'm assuming you
keep a running record of the work that you have done to date, it is
that correct?"
MR. ALLEMAN said, "Yes sir, we do."
CHAIRMAN WHITAKER continued, "Schedule a project to completion,
including commencement of commercial activities." He asked, "Has
that been started?"
MR. ALLEMAN said, "Yes sir."
CHAIRMAN WHITAKER asked, "Is it completed?"
MR. ALLEMAN said, "No sir."
CHAIRMAN WHITAKER continued, "A description of the project
activity, that is the project itself, not just the activity leading
up to the project, but a description of project activity." He
asked, "Has that been started?"
Number 0630
MR. FINDLING said, "If we're trying to compile how close are we to
an application, I guess what I'd have to go back and say is, the
key...thing here is we have to develop a viable project before we
can make an application. So, we haven't been focused on--I mean a
viable project is all the necessary work that goes into the
commercial and technical efforts that we've been describing. We
haven't been separately accumulating the specific information for
an application. Our presumption has been that in the normal course
of work of developing the viable project, that we would naturally
have that work ready to be summarized in an application."
Number 0683
MR. ALLEMAN clarified, "Certainly, we are working towards the type
of items you've asked me about, but not specifically towards
preparing our documents to bring it forward. We're looking for the
worthy project, that we realize we need to have a worthy project
according to the 393, before we bring it forward. As we develop a
worthy project, we are documenting as we go, was the point I was
making."
CHAIRMAN WHITAKER stated, "Your point is well taken. There are
many of the items that are related in this particular section of
393 that should relate to, and are, basic components to the
determination of a viable project, such as a project schedule,
project activity. Item number 4, under that section of HB 393, a
description of each lease, from which gas will be extracted." He
asked, "Do you know from where you going to get the gas?"
MR. FINDLING answered, "No, we have not secured the gas supply, so
no we don't know the answer to that."
CHAIRMAN WHITAKER said, "That's all the questions I have." He
asked, "Are there other questions from the committee? Other
comments from those who have made the presentation today?"
Number 0758
REPRESENTATIVE KEMPLEN said, "Thank you for coming today. I think
you guys are doing great work in moving forward with this
initiative. I think it's going to be good for the state of Alaska,
and I certainly appreciate all the hard work your putting into it."
REPRESENTATIVE PHILLIPS said, "I'd like to express my appreciation
for this update and certainly encourage both the technical and
commercial teams to look very strongly at the Cook Inlet."
CHAIRMAN WHITAKER said, "I too would add my thanks, gentlemen,
although our questions have been difficult, and at times at odds
with perhaps where you want to go. I hope you understand that it's
done in the spirit of friendly dialogue, it's done in the spirit of
we having a specific responsibility, and needing to have answers.
Thank you very much for coming."
ADJOURNMENT
Number 0817
CHAIRMAN WHITAKER adjourned the House Special Committee on Oil &
Gas meeting at 11:50 p.m.
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