02/01/2001 10:10 AM House O&G
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+ teleconferenced
= bill was previously heard/scheduled
ALASKA STATE LEGISLATURE
HOUSE SPECIAL COMMITTEE ON OIL AND GAS
February 1, 2001
10:10 a.m.
MEMBERS PRESENT
Representative Scott Ogan, Chair
Representative Hugh Fate, Vice Chair
Representative Fred Dyson
Representative Gretchen Guess
Representative Reggie Joule
MEMBERS ABSENT
Representative Mike Chenault
Representative Vic Kohring
COMMITTEE CALENDAR
HOUSE BILL NO. 83
"An Act relating to natural gas pipelines, providing a statutory
definition for the portion of the constitutional statement of
policy on resource development as applicable to the development
and transportation of the state's natural gas reserves, amending
Acts relating to construction of natural gas pipelines to
require conformance to the requirements of the statutory
definition, and amending the standards applicable to determining
whether a proposed new investment constitutes a qualified
project for purposes of the Alaska Stranded Gas Development Act;
and providing for an effective date."
- HEARD AND HELD
HOUSE BILL NO. 9
"An Act amending the standards applicable to determining whether
a proposed new investment constitutes a qualified project for
purposes of the Alaska Stranded Gas Development Act; and
providing for an effective date."
- SCHEDULED BUT NOT HEARD
PREVIOUS ACTION
BILL: HB 83
SHORT TITLE:NATURAL GAS RESOURCES DEVELOPMENT
SPONSOR(S): SPECIAL COMMITTEE ON OIL & GAS
Jrn-Date Jrn-Page Action
01/19/01 0130 (H) READ THE FIRST TIME -
REFERRALS
01/19/01 0130 (H) O&G, RES
01/19/01 0130 (H) REFERRED TO O&G
01/30/01 (H) O&G AT 10:00 AM CAPITOL 124
01/30/01 (H) Heard & Held
MINUTE(O&G)
02/01/01 (H) O&G AT 10:00 AM CAPITOL 124
WITNESS REGISTER
JOHN WILLIAMS, Mayor
City of Kenai
210 Fidalgo Avenue, Suite 200
Kenai, Alaska 99611
POSITION STATEMENT: Testified on HB 83.
JEFF LOWENFELS, President
Yukon Pacific Corporation (YPC)
1049 West 5th Avenue
Anchorage, Alaska 99501-1930
POSITION STATEMENT: Testified on importance of HB 83; expressed
need to nail down definition of "fit, willing, and able" and to
say that any pipeline needs to serve other markets; gave
presentation relating to YPC's vision.
REPRESENTATIVE ERIC CROFT
Alaska State Legislature
Capitol Building, Room 400
Juneau, Alaska 99801
POSITION STATEMENT: Asked question relating to HB 83.
REPRESENTATIVE JIM WHITAKER
Alaska State Legislature
Capitol Building, Room 411
Juneau, Alaska 99801
POSITION STATEMENT: Asked questions relating to HB 83.
WAYNE LEWIS
Yukon Pacific Corporation
1049 West 5th Avenue
Anchorage, Alaska 99501-1930
POSITION STATEMENT: During hearing on HB 83, answered question
regarding the volumes currently flowing in the "prebuild"
sections of pipeline; commented on long-term LNG contracts.
DUANE HEYMAN, Executive Director
Commonwealth North
810 North Street, Number 202
Anchorage, Alaska 99501
POSITION STATEMENT: Testified during hearing on HB 83 regarding
Commonwealth North's studies of aspects of the stranded gas Act.
ACTION NARRATIVE
TAPE 01-8, SIDE A
Number 0001
CHAIRMAN SCOTT OGAN called the House Special Committee on Oil
and Gas meeting to order at 10:10 a.m. Present at the call to
order were Representatives Ogan, Fate, Dyson, and Guess.
Representative Joule arrived as the meeting was in progress.
HB 83 - NATURAL GAS RESOURCES DEVELOPMENT
CHAIR OGAN announced that the committee would hear HOUSE BILL
NO. 83, "An Act relating to natural gas pipelines, providing a
statutory definition for the portion of the constitutional
statement of policy on resource development as applicable to the
development and transportation of the state's natural gas
reserves, amending Acts relating to construction of natural gas
pipelines to require conformance to the requirements of the
statutory definition, and amending the standards applicable to
determining whether a proposed new investment constitutes a
qualified project for purposes of the Alaska Stranded Gas
Development Act; and providing for an effective date."
Number 0186
JOHN WILLIAMS, Mayor, City of Kenai, came forward to testify.
He noted that in addition to being mayor for the last 15 years,
he has been associated with the oil and gas industry - in
construction, operation, and maintenance - most of his life. He
also is retired from the University of Alaska, where he taught
petroleum technology and process instrumentation for 17 years.
Mr. Williams said his testimony would address the direction of
the pipeline and how that gas should be used in Alaska for
Alaskans, their economy, and their future. He stated:
We in Kenai recognize the fact that for a long time
we've been the seat of industry for manufacturing of
products from natural gas, some 30-odd years now.
Presently we can safely say, by industry standards,
that we do have a nine-year supply of gas - and I tie
that to the contract limitations at the LNG [liquefied
natural gas] plant for survivability - and probably
more gas, but no one really knows and no one can know
until the market requires that gas be produced.
MR. WILLIAMS discussed what he called survivability. The
corridor between Fairbanks and the Kenai Peninsula has about 70
percent of the total human population of Alaska, with the
majority of those people being in and near Anchorage. He
commented, "They, of course, deserve the right to the use of
that gas for many, many generations to come." No matter where
the gas line begins or eventually ends, he said, a spur line has
to intersect with systems that lead to the Kenai Peninsula; that
is crucial for survivability of the industry, the jobs there,
and future manufacturing.
Number 0423
MR. WILLIAMS addressed his second point, the manufacturing
issue. He characterized oil and gas as one of civilization's
greatest building blocks, from which some 21,000 products are
manufactured. He believes it behooves Alaska, as a resource
state, to do everything possible to turn that raw resource into
manufactured and value-added products to ship from Alaska,
rather than exporting the raw product to the rest of the world.
MR. WILLIAMS noted that "BP" is constructing an experimental
plant to develop gas-to-liquids (GTL), which differ from
liquefied natural gas (LNG) in that the latter requires a
refrigeration process, being held at cold temperatures, special
equipment to transport it, and so forth. In contrast, GTL can
be transported at ambient temperature and used as building
blocks for "everything imaginable." He said although the plant
under construction is only an experimental 300-barrel-a-day
plant, there is no reason that a big GTL facility couldn't be
built there; that liquid could be used to manufacture everything
from ethylene glycol to plastics to fabrics. He concluded:
The basis of my entire testimony, then, is, "Let's
make sure, in one manner or fashion, that the Kenai
Peninsula is interconnected to whatever gas line is
built, and let's begin a process whereby every bit of
gas that we can possibly utilize in the manufacturing
industry in the state of Alaska is used in-state." It
makes sense. It creates jobs. It creates an economy.
It creates value-added, and it really gives Alaska a
future economic base that we can build on.
... In my mind, the last great homerun for resource
development is our natural gas. We cannot make as
much money for the State of Alaska and our people,
from any other industry, in such a manner as we can
from the natural gas that may, by some estimates, go
as high as a hundred trillion cubic feet in reserves.
Number 0646
REPRESENTATIVE DYSON recalled hearing some years ago that the
aluminum processing industry had looked at Cook Inlet a couple
of times because of the low electricity prices and access to
deep water; however, [the industry] was turned off by lack of a
long-term, secure gas [source]. Recently, he had heard that
some high-tech component manufacturers in the computer
electronics industry had, in fact, been turning away from places
in the western United States because of the uncertainty
regarding electric power and so on. He asked Mr. Williams,
"What kinds of industries and manufacturing ... have you heard,
specifically, might be interested in coming to our country?"
MR. WILLIAMS answered that he personally had been involved in
some of those (indisc.) manufacturing in that area. Power
generation by gas is cheapest second only to hydroelectric
power, he noted, and "power generation leads to every other
industry imaginable."
MR. WILLIAMS discussed three specific industries that he
personally had been associated with, had failed to acquire, and
had lost because of lack of gas. The first, the Pacific Gas and
Lighting LNG plant, could have been supplying LNG to the West
Coast several years ago. Second, a group ten years ago was
trying to attract a Korean group to build an LNG plant in Kenai;
despite readiness to be built, that plant "went away" because
there were no guaranteed long-term sources. The third instance
involved two separate companies, Midrex being one, that wanted
to go into pelletized iron; it would have involved shipping iron
ore from South America to Cook Inlet, pelletizing it into high-
grade iron ore, and then shipping it to the Orient. Mr.
Williams commented, "We lost it because we could not guarantee
power; we could not guarantee a reliable long-term source of
gas. Those jobs alone would have been worth hundreds of
millions of dollars in payroll ...."
Number 0861
REPRESENTATIVE DYSON asked what the long-term market is for
ammonia, nitrates, and so on that are presently being
manufactured here.
MR. WILLIAMS answered that the long-term market for ammonia and
urea is "fantastic," especially in the developing world in the
Orient. China is the largest manufacturer and producer - and
importer - of ammonia-based fertilizers in the world. He
himself was on a ship that sailed from "our plant to Halongjing
(ph)," he recalled, where then-Governor Sheffield was
instrumental in developing trade to purchase ammonia urea "from
our plant." Mr. Williams noted that Agrium, a Canadian firm
that deals worldwide in that product, has recently purchased
that facility from the Unocal group; Agrium has said it would
like to double the plant's capacity if there are known reserves
available. "And they're in for the long haul," he added.
MR. WILLIAMS said the first and most successful LNG plant in the
United States would double its capacity "if they had the room to
do it." The question might be whether there is a market for it.
He stated:
Let me take you just briefly to a history of the
Phillips plant. When we built that plant in 1969 and
1970, they furnished 100 percent of the imported LNG
to Japan. Today, they are manufacturing and
delivering more than they did then. But if their
market share to Japan is only 3 percent, that means
that Japan has picked up the other 97 percent from
around the rest of the world. So, we could be
manufacturing LNG and shipping it to Japan and
intercepting part of that market, as well.
Number 1003
REPRESENTATIVE DYSON asked whether it is true that Japan, in
particular - and maybe some other Asian nations - is
increasingly uneasy about the security of its LNG supplies,
especially the portion coming from the Middle East, and is
looking for more secure supply lines.
MR. WILLIAMS referred to World War II and Japan's historical
isolation from the rest of the world in its ability to gather
resources. With one small oil field, Japan is very limited in
its ability to produce its own oil and gas, he noted. One of
Japan's greatest lessons from World War II was never to rely
solely on one area for resource materials. From that lesson, he
believes Japan's economy has developed around a concept of
buying from many different areas; LNG is an example. Mr.
Williams remarked, "Their concern is instability in government.
Our pride is in stability of government."
Number 1093
REPRESENTATIVE FATE voiced his understanding that any GTL
produced in Alaska would go through the lines to the Lower 48 to
be used almost directly as fuel. He asked Mr. Williams to
expand on the byproducts that might be available from the GTL.
MR. WILLIAMS responded that when developing GTL, solid chain
molecules are created, which are in a liquid form. Those can be
reformed and recreated into different sizes and types. Ethylene
glycol is one he had mentioned because he had talked to "the BP
people" about taking their 300 barrels a day from the
experimental plant and running it through a smaller process to
manufacture glycol, which could meet "our in-state market."
Other products that can be manufactured include plastics,
fabrics, dishware, detergents, and things of that nature. It is
unlimited. "Everywhere you look around you today, we use
extruded plastic products of every type," he noted.
Number 1193
CHAIR OGAN asked Mr. Williams whether he supports the concept in
HB 83 that requires the capacity to "whatever point - either
Fairbanks or Delta - for other uses, either LNG to Valdez and an
additional line to Kenai."
MR. WILLIAMS responded:
Yes, absolutely. Both the Alaska Municipal League and
several other groups that I also belong to support
that concept. First, the pipeline: let's get it down
to Fairbanks; let's get it from Fairbanks to wherever
it's [going to] go from there - my concept, of course.
I know that Mr. Lowenfels' is slightly different, but
my concept is from there, let's make sure that one way
or the other, there's a branch that gets to the Kenai
Peninsula.
CHAIR OGAN pointed out that the bill is a rough draft at this
point, but that he would appreciate any support Mr. Williams
could muster. He noted the presence of Representative Croft and
Representative Whitaker, the former chairman of the House
Special Committee on Oil and Gas.
Number 1312
JEFF LOWENFELS, President, Yukon Pacific Corporation (YPC), came
forward to testify. He stated:
I, too, wish to bring gas down to Kenai. It's very,
very important, not only for the continuation of the
LNG facility in Kenai, but also for the other
manufacturing opportunities that it presents. And if
Yukon Pacific builds a project to Valdez, there will
be gas delivered to Southcentral Alaska and Kenai, in
particular.
With regard to the bill, there are two items that I
think are important. And since it's in rough-draft
form, let me start with the first item. It doesn't
have to do directly with what language you have here,
but you use the term "fit, willing, and able."
If you take a look at the statute, you'll note that
there are two ways to get a right-of-way. One is a
direct right-of-way, and the other is a conditional
right-of-way. I, unfortunately, have a little bit of
a history with regard to the language amendment that
created the opportunity to obtain a conditional right-
of-way. And that language was inserted into the
statute in order to be able to get the right-of-way
language that was necessary for Yukon Pacific's TAGS
[Trans-Alaska Gas System] to be able to advance the
project forward.
And so, about ten or maybe even fifteen years ago,
Senator Kerttula held some hearings and the statute
was amended. At that time, the attorney general's
office came to me and indicated that the definition of
"fit, willing, and able" had been set forth in a
secret attorney general's opinion. And for about 30
seconds, I was able to see the one-page secret
attorney general's opinion that apparently defines for
the State of Alaska what "fit, willing, and able"
really means.
So, I think one of the things this committee may want
to do is consult with the attorney general's office
about that particular opinion. I've never seen it
since; I've never been able to locate a copy of it.
And it's always concerned me, being a former assistant
attorney general, that such a thing would exist. But,
as a result of that opinion, ... we had to insert into
this language that it ... modified the definition of
"fit, willing, and able."
Number 1460
MR. LOWENFELS detailed his own background. An attorney by trade
who majored in geology as an undergraduate and has a law degree,
he came to Alaska and spent six and a half years as an assistant
attorney general representing the State of Alaska in various
natural resources and environmental areas; responsibility
included counsel to the Alaska Oil and Gas Conservation
Commission (AOGCC) and the State Pipeline Coordinator's Office,
which negotiated on behalf of the state during the formation of
the Alaska Natural Gas Transportation Act and the system that
resulted from it. He also represented the Alaska Public
Utilities Commission; the Alaska Pipeline Commission; the
Division of Oil and Gas (DNR); the Alaska Department of Fish and
Game; the Department of Environmental Conservation; and "almost
every agency on the state side that would have anything to do
with a natural gas pipeline." In addition, he had contact with
"almost every agency on the federal side that would have
anything to do with a natural gas project." Mr. Lowenfels said
he therefore has "a little bit of expertise," and when he
discusses the issue of "fit, willing, and able," it is fairly
significant.
Number 1490
MR. LOWENFELS returned attention to the bill. He stated:
The statute that we have derives from the Mineral
Leasing Act, which is a federal statute. There is a
solicitor's opinion with regard to what "fit, willing,
and able" means under the federal statute. A court
would normally give deference to the federal
solicitor's opinion in interpreting the language in
our statute.
And so, there's a little bit of a conflict, and I
think we really need to nail down what "fit, willing,
and able" really means. And there's a few AG's
[attorney general's] opinions that are not secret in
that regard; ... I would be happy to work with the
committee ... to bring those forward and to discuss
with you the concerns that we have had over the years
with regard to that, that resulted in the need for the
new legislation. And I think that's something very
important.
My second point with regard to the bill really
pertains to page 2, line 26, [paragraph] 2, where the
bill actually discusses a natural gas pipeline ... to
North American markets. And, as you could expect,
since I do not believe that there will ever be a
pipeline that will serve the North American markets,
that particular section concerns me, in part because
of the way it's been interpreted by the press.
My understanding, as I read this bill, is it's a
pretty strong opportunity for the State of Alaska to
say "a pipeline that goes from Prudhoe Bay to the
Mackenzie delta through the Beaufort Sea does not meet
criteria in our state constitution." And I understand
that that may be, in fact, the prime purpose of this
bill, and so, therefore, the bill suggests going
south.
Unfortunately, the paradigm today is that "south"
means "highway project." And I think that's a
mistake. And I think it's a mistake to codify a
potential wish. And I think there's a way to say this
that's slightly different: Any pipeline that goes
anywhere needs to be able to serve other markets, or,
at least in the design, have built in to the design
the ability to serve other markets, whether they're
North American markets or Asian markets.
It's a minor criticism, I guess, in the overall scheme
of things. But, again, what I am seeing in the state
of Alaska right now is akin to "gold fever." And
everybody is convinced that we're going to have a
pipeline down to the lower 48 states. And I'm here to
tell you that we're not, in my humble opinion. ...
The bill itself, I think, is important. I think it
codifies ... the intent of the constitution of the
state. And I do think it's very, very important for
the legislature to ensure that the administration
understands that the "best interests of the state"
determination that has to be made, has to be made ...
in a constitutional way. And I think this bill aids
the administration in making this determination.
Number 1816
CHAIR OGAN remarked that he doesn't find anything in the
constitution about the executive branch managing the resources
of Alaska. On the other hand, it is within the legislature's
purview, in Sections 1 and 2 [of Article VIII of the state
constitution], and the legislature has authority to delegate,
through policy and the statutes, to the administration.
MR. LOWENFELS agreed it is delegated to the executive branch by
the legislature.
CHAIR OGAN mentioned the "quasi hub concept" in the bill. He
suggested the need to make sure the pipeline, if it gets to
Fairbanks, has the capacity, and that the market drives where it
should go.
MR. LOWENFELS said he didn't disagree; he thinks it is important
for people to understand that from [YPC's] perspective, this is
not a bill that endorses a highway project. His presentation
would discuss [YPC's] viewpoint in that regard.
Number 1932
MR. LOWENFELS informed members that the tenet of [YPC's]
proposition is that Alaskans must understand "what rules have
been laid down for us to play in the game." He emphasized the
need for committee members to read and understand the Alaska
Natural Gas Transportation Act passed by Congress in 1976.
Associated with that bill, "and part of the law that results
from the action taken under that bill," is a decision made by
President Jimmy Carter.
MR. LOWENFELS explained that at the time, three projects were
seeking to serve a Lower 48 market, "which was very heavily
regulated, and which had regulated gas prices." Those were the
Arctic gas project to take the gas "over the top" from Prudhoe
Bay through ANWR [Arctic National Wildlife Refuge] down the
Mackenzie delta; an LNG project, which the mayor of Kenai just
referenced, to take gas to the Lower 48 in LNG form and bring it
to California; and the Northwest Alaska Pipeline project, now
called the Alcan project, to take gas down the highway.
MR. LOWENFELS pointed out that the law and the presidential
decision to reject those other two routes set the rules for the
"game" today. The President took away from his administrative
agencies the right to choose. At the time, there was a hearing
going on before the Federal Power Commission, which is now the
Federal Energy Regulatory Commission. The presidential decision
was that the only way that natural gas could be transported to
the Lower 48 was via the Alcan project. That is the law today.
CHAIR OGAN noted that Representative Rokeberg, who chairs the
House Judiciary Standing Committee, had joined the meeting.
Number 2074
REPRESENTATIVE ERIC CROFT, Alaska State Legislature, asked
whether that finding precludes the other two routes.
MR. LOWENFELS said he believes it does, without a change by
Congress. He noted that a Canadian counterpart must be dealt
with, because not only was an Act of Congress passed, but then
the United States entered into treaties with Canada with regard
to the construction of the project. The Canadian government has
a big interest in this. Too much gas coming down from Alaska
impacts Canadian producers. The President of the United States,
in his decision, limited the amount of gas that could be taken
from Alaska to the lower 48 states "to an average daily flow of
about 2.5 billion cubic feet of gas a day." Mr. Lowenfels
commented:
Now, when I listen carefully, I hear the oil companies
talking about 4 billion cubic feet of gas a day. I'm
not sure what the governor's talking about, whether
he's talking about 2.5 billion cubic feet a day or 4
billion cubic feet a day. But the point is, unless
... the federal government changes the law and unless
Canada changes its law, Alaska is limited to 2.5
billion cubic feet a day going down the pipeline.
Number 2181
MR. LOWENFELS gave a presentation from YPC's perspective.
[Because of technical difficulties with the planned visual
presentation, he referred members to the Yukon Pacific
Corporation packet handed out earlier.] He said:
Everybody's talking about the gas pipeline. I'm on
page 1. We've heard the oil companies say that they
want to commercialize North Slope natural gas now.
We're very happy about that. We've heard them say
that they want to commercialize North Slope natural
gas by 2007; God bless 'em.
The gas line is everywhere. Everything you pick up in
Alaska has something about the gas pipeline in it -
newspapers, magazines, it's everywhere. We're going
through what's akin to "gold fever" right now. My
proposition, again, is that you must play ... by the
rules, and the rules are set by this congressional
Act.
Number 2232
MR. LOWENFELS referred to page 10 of the handouts. He said
there are two places where natural gas can be sold into the
marketplace: the Lower 48 states, which has short-term
contracts and local gas-to-gas competition; or East Asia, where
there are long-term, 20-year contracts, and where LNG is priced
based upon world oil prices. In addition, gas can be taken to
Mexico in LNG form, used there, or brought back over the border
into the lower 48 states, particularly California. He said:
Just so that you understand some of the numbers that
we're talking about, in the state of Alaska right now
we use 250 to 300 million cubic feet of gas a day.
The [Alaska Gasline] Port Authority is suggesting a
"Y-line" that would use 6 billion cubic feet of gas a
day. The highway project, ... as provided by the
Alaska Natural Gas Transportation Act of 1976, allows
2.5 billion cubic feet of gas a day. The overland
project that the producers have been talking about is
4 billion cubic feet of gas a day. Yukon Pacific
[Corporation] is talking about a project that would
range from 2 to 3 billion cubic feet of gas a day.
And Prudhoe Bay has 21 trillion cubic feet of gas
left.
Now, when I've given this presentation in the past,
people have said, "Gee, I thought there was 38
trillion cubic feet of gas ... on the North Slope."
And there is. There's probably more than 38 trillion
cubic feet of gas on the North Slope. We use the
figure of 36 or 38 trillion cubic feet of proven
supplies on the North Slope. But in order to finance
a pipeline, it has to be producible supplies,
particularly in Alaska. And right now, the only place
where gas is being produced is Prudhoe Bay.
We used to have 26 trillion cubic feet of gas in
Prudhoe Bay. We have used up 5 trillion cubic feet of
gas in the production of oil and in fueling the first
few pump stations of the pipeline. And now we have 21
trillion cubic feet of gas left, which we can rely on,
for which we can do a project. We can talk about
Point Thomson, we can talk about ANWR, we can talk
about the 100 trillion cubic feet of potential supply
that the USGS [United States Geological Survey] says
is out there. But the only thing that counts in the
gas that's coming out of the ground, and we've only
got 21 trillion [cubic] feet of gas coming out of the
ground. It's quite a bit of gas. But it's not 38
[trillion] and it's not 100 trillion cubic feet.
There are four proposed approaches to transporting the
gas that I know of. The first [approaches] are Lower-
48 approaches. We have gas-to-liquids. We have "over
the top." We have the Alcan project. We have the
East Asian alternative, which is TAGS [Trans-Alaska
Gas System]. And we have the possibility not only
that Mexico and the West Coast markets could be served
by TAGS, but the assurity that Alaska will be served
by TAGS, and not just Fairbanks and Southcentral.
We've been contacted during the past two years by
several companies who wish to take gas in Valdez to
Southeastern Alaska; they would barge it down. They
would either do ... compressed natural gas or some
have actually even talked about the idea of [an] LNG
storage facility, which you could bring the LNG down,
drop it off, and then it could be barged in LNG form
to various locations in ... Southeastern Alaska.
Number 2380
REPRESENTATIVE DYSON asked whether, on a minor scale, LNG could
similarly be transported seasonally along the Yukon River.
MR. LOWENFELS said yes, it could. A company is transporting LNG
by truck "from Beluga, basically, up ... into Fairbanks, and
dropping off little bits of LNG as it goes." It can also be
barged. The cost, however, one has to investigate; he said he
understood that a subcommittee was looking at that.
REPRESENTATIVE DYSON responded, "That's us." He said what needs
to be ascertained is when it becomes competitive with diesel.
MR. LOWENFELS said he doesn't have those numbers. He indicated
he had already spoken to Vice Chair Fate, then stated:
We would be very happy to try to supply names of
contractors who've come to us with various ideas and
see if we can't ... get some answer to that, because
it's obvious that natural gas is the best fuel to use.
And if you can get natural gas to ... places up and
down the Yukon by barge, we ought to be doing it.
Number 2459
MR. LOWENFELS continued with his presentation:
There are nine potential players: Yukon Pacific, the
Port Authority, the Sponsor Group, BP, Exxon,
Phillips, Alaska Resources Corporation, Foothills
Pipeline, and Alaska Gas to Liquids. As far as I
know, there are no other people who wish to play in
this game.
Let's just talk briefly about the overland route. As
I indicated before - I'm on page 12, incidentally -
the Arctic Gas proposal would now be called "over the
top." The El Paso Proposal would now be called "YPC,"
only ... basically to Asia instead of the U.S. And
the Alaska Natural Gas Transportation System [ANGTS]
is now called the Foothills project, but it used to be
called the Northwest project. ...
As I indicated before, the choices with regard to an
overland route have already been determined by the
Congress of the United States. ... And unless you
change the Alaska Natural Gas Transportation Act, the
only way you can take natural gas from Prudhoe Bay
down to the lower 48 states in an overland fashion -
and probably even by LNG - is via the Alaska Natural
Gas Transportation System, ... the relevant portions
of which are owned by Foothills Pipeline, which is a
Canadian company.
The requirements on the Alaska Natural Gas
Transportation System are set forth. They're very
specific. The President of the United States didn't
have to be specific, but Jimmy Carter was extremely
specific in this particular instance. He set every
little, teeny thing in play: where the pipeline would
go, where the compressor stations would be, what kind
of pipe will be used, what pressure, what quantity.
So, people can talk all they want about studies, and
people can talk all they want about gas policy
councils to take a look at how to do things. But
until we change that federal law - which I also will
assert to you requires a change in a Canadian law, any
treaty, at least one, and probably two, between the
United States and Canada - we're talking, and that's
all we're doing.
Number 2595
REPRESENTATIVE JIM WHITAKER, Alaska State Legislature, inquired
about the expiration date of the treaty.
MR. LOWENFELS affirmed that it has an expiration date but said
he didn't know the exact date. He added, "We've got another
couple of years, at least."
REPRESENTATIVE WHITAKER responded, "I think we have ten, twelve
years, if I'm not mistaken. But given that if it does reach its
expiration date, then it simply goes away and is no longer
bother; is that correct?"
MR. LOWENFELS said he didn't know.
Number 2614
REPRESENTATIVE DYSON suggested the need to get copies of that
[the treaty] for the committee.
MR. LOWENFELS indicated YPC could provide copies of the treaty
and the law. Noting that he had given this presentation several
times in Anchorage, he said there are independent sources for
anything he told the committee, for verification. He added:
What I used to say to people is, ... there's an
attorney general's opinion that interprets what I've
just told you about the invalidity of the Alaska
Natural Gas Transportation Act and how you have to use
it. And, in fact, I believe Wilson Condon was one of
the authors of that particular opinion, along with
Morrison and Foerster, the outside counsel from
Washington, D.C. That opinion is available, and you
should read it.
But today there's another opinion you should read. It
was issued on January 18 by the chairman of FERC, the
Federal Energy Regulatory Commission. And that is a
very, very interesting opinion. It confirms what I've
been telling you. Yes, you could entertain, FERC
said, an application to bring gas down from Alaska
outside of the Alaska Natural Gas Transportation Act,
but the Act itself causes severe problems and raises
very serious issues as to whether or not you could act
upon that application. And we'll provide you with
copies of that opinion. It's a very interesting
document. It's very clear. And it was in an answer
to a question raised by [U.S.] Senator Frank Murkowski
this summer about the impact of the Alaska Natural Gas
Transportation Act of 1976 on a pipeline in the year
2000.
So, the bottom line is, to take gas down to the lower
48 states overland, ... without using the Alaska
Natural Gas Transportation System, without using
Foothills Pipeline, you're going to have an extremely,
extremely difficult problem. And on this page 15,
there's the web site for this opinion that I just
referenced from the Federal Energy Regulatory
Commission. Again, we have copies; they may, in fact,
be in your packet. It's well worth taking a look at,
and I think if you take a look at Wilson Condon's
opinion, that's sort of the graduate course, if you
want to go one step further. [Note: the web site
listed was www.ferc.fed.us/news/staffreports.htm]
MR. LOWENFELS, in response to a question from Chair Ogan, said
he believes Wilson Condon's opinion was written during the
1980s; he would get Chair Ogan a copy of it.
MR. WILLIAMS noted that Mr. Condon was the attorney general at
that time.
Number 2739
MR. LOWENFELS returned to the presentation. He stated:
Let's talk just briefly about "over the top." As we
were discussing before, I don't believe - and I think
many members of this legislature probably don't
believe as well - that it meets ... the constitutional
requirements of providing maximum benefit to the
people of the state of Alaska for use of our
resources. ... I've heard many, many stories about the
congressional delegation being extremely concerned
about an "over the top."
I've heard many threats with regard to what would
happen if people tried to get an "over the top," both
from the congressional delegation as well as from the
environmental community. Frankly, I think the easiest
way to put it, and perhaps the gentlest way to put it,
"over the top" is not Foothills. If you're going to
take gas to the lower 48 states, you have to use the
Alaska Natural Gas Transportation Act. The President
of the United States rejected the "over the top"
project. And in order to revive it, you've got to
change that Act, and the treaty. ... For reasons which
I'll explain later on, I don't think it will happen.
CHAIR OGAN said, "The resources and energy committee ... are
probably not too supportive."
MR. LOWENFELS responded:
I would not imagine that any Alaskan would be very
supportive of taking gas over the top, for all of the
reasons ... which the mayor of Kenai mentioned, which
we've talked about; just intuitively, it doesn't make
sense. And environmentally, I don't think it makes
sense. So I think they've got some very serious
problems.
Number 2797
MR. LOWENFELS returned to the presentation:
At the bottom of page 16 is a map. ... If you look
very, very carefully, you'll see in Alberta [Canada] a
place called Caroline. And the dotted lines that come
down from Prudhoe Bay turn into solid lines at
Caroline. And one of the lines runs down to the San
Francisco area, and one of the lines runs down to the
Chicago area. That's called the "prebuild." Those
two lines - one of them is owned by ... Pacific Gas
and Transmission, and the other one is owned by
Northern Border (ph) - are part of the Alaska Natural
Gas Transportation System. And they're full. And
that creates an additional problem, which is noted in
the opinion written by the chairman of FERC, and which
was also noted, I might add, on Friday by one of the
executives from BP. ...
They're full with Canadian gas. They have been
expanded once before. Now, put yourself in the
position of a Canadian producer. Along comes Alaska
and says, "We're going to put 4 billion cubic feet of
gas into that system; you need to pull your [gas] out
of that system." It's not going to happen. It
shouldn't happen. They've been using this system
since the ... early 1980s. There is, I think, very
little chance that Alaska gas is going to displace the
Canadian gas that's already in that system. It's very
significant.
And, again, you don't have to believe me. One of the
executives from BP, in his speech on Friday, indicated
that the real possibility is that we're going to have
to build a pipeline, if we're going to take gas down
to the lower 48 states, all the way to the market -
all the way to Chicago, not to Caroline. So we're not
talking about a 2,100-mile pipeline to Caroline; we're
talking about a 3[000-] or 4,000-mile pipeline to San
Francisco or to Chicago.
It changes the cost factors considerably. ... When you
use the models which Wilson Condon indicated yesterday
would be available to you, you need to take into
consideration the distance, because it makes a big
difference in the cost of the project and, therefore,
in the cost of the gas that you can deliver to the
lower 48 states.
Number 2899
CHAIR OGAN asked what the capacity of the ["prebuild" section]
is.
MR. LOWENFELS answered that he doesn't know the exact numbers
but can get them.
Number 2913
REPRESENTATIVE GUESS asked whether there are projections
regarding how much gas will be demanded to go through that.
MR. LOWENFELS responded, "Not through that system, because it's
full. But what we do have are projections on how much Canadian
gas is projected to come into the United States."
REPRESENTATIVE GUESS told Mr. Lowenfels she would follow up on
that later with him.
MR. LOWENFELS said it is an important question. He restated,
"What we're talking about is displacing Canadian gas." He said
right now, the United States government expects about .1
trillion cubic feet of new natural gas a year to come from
Canada to the Lower 48. A flow of 4 billion cubic feet a day
from Alaska would displace 14 years of new Canadian gas coming
into the United States. Looking at it from the standpoint of
the Canadian producers, he said he didn't believe it was going
to happen.
Number 2970
WAYNE LEWIS, Yukon Pacific Corporation, came forward to answer
the question regarding the volumes presently flowing in the
"prebuild" section of the ANGST project from Caroline down to
Chicago on the eastern leg, and to San Francisco on the western
leg. He said he believes it is 2 billion cubic feet a day or so
going to the east, and about a billion cubic feet going to San
Francisco, for a total of about 3 billion cubic feet a day. [A
portion of the last sentence was not on tape but was recorded in
the log notes.]
TAPE 01-8, SIDE B
Number 2975
MR. LOWENFELS mentioned GTL, saying a pilot plant is being built
in Kenai. The economics of GTL are uncertain, he reminded
members, which is why that is a pilot plant. The proposal is
that GTL would be "built up on the North Slope," the rationale
being that one can put the liquids created in the process into
the existing oil pipeline and wouldn't have to build a new gas
line. He told members:
We believe that there are some serious problems with
that, both from a political perspective as well as an
economic perspective. In order to make the gas, you
have to use up 35 percent of the gas in the process.
Now, if you're doing that up on the North Slope,
that's gas we're not getting royalty for. 35 percent
of the gas would be used up to make the liquid, and
the State of Alaska would get no royalty for that 35
percent.
MR. LOWENFELS said his experience as an assistant attorney
general for the AOGCC leads him to believe that is economic
waste under state law and generally, and that it does not make
particular sense. There are other problems with GTL, and he
doesn't think GTL is a viable way of taking North Slope natural
gas to markets. It is possible that a GTL facility in Kenai or
Valdez would make sense to the State of Alaska, however, because
at those locations, using that 35 percent of the gas to make the
liquid would result in a royalty payment to the state. "Whether
that harms the economics of that project, I don't know," he
commented." He told members:
So, of all the Lower 48 pipeline alternatives, only
Alcan, the Foothills project, appears to be viable.
The gas-to-liquids economics are uncertain, et cetera.
The "over the top" pipeline simply doesn't make any
sense. And the Alcan project is backed by existing
law here and in Canada.
Number 2892
MR. LOWENFELS turned attention to LNG and page 4 of the
handouts. He said his own bias, obviously, is TAGS; he has been
working on this project, in one form or another, since "Governor
Egan and Governor Hickel put it together in 1982." He
explained:
Our system, obviously, is designed to take the Prudhoe
Bay gas down to Valdez, tanker it in LNG form to Asia,
to the west coast of America, and perhaps to the west
coast of Mexico. ... We would liquefy the gas in
Valdez, and we would also have a spur line from
Glennallen into Sutton, which would bring the gas into
Southcentral and, I believe, relieve a lot of the
problems that we are going to face as a result of
Southcentral running out of natural gas.
... We are just now doing the commercial-economic work
and the modeling to determine how much it would cost a
consumer in the Southcentral area to buy natural gas
from the North Slope. And I am astonished and pleased
that our most recent runs indicate that we could bring
the gas into the Anchorage area at the same price that
Enstar is now paying for its natural gas. ... That's a
very significant factor. We believe a 16-inch
pipeline from Glennallen into Sutton can bring North
Slope natural gas into Southcentral for the same price
that Enstar is currently paying for natural gas today
- extremely significant.
Now, we'll work on those numbers. And please, you
have to understand that we're trying to get the right
answers. These numbers may change, but we're feeling
very confident. And that's with a very favorable
wellhead price to the producers of that gas - a very
significant piece of information that I'm imparting to
you today.
Number 2797
REPRESENTATIVE WHITAKER asked why that is significant.
MR. LOWENFELS answered that it is significant for a number of
reasons. He stated:
First of all, we keep hearing people say, ... "If the
price of gas goes up, we'll find more gas in Cook
Inlet." Now, I don't happen to believe that's true,
and I'm using my geological background for a second.
There are lots of large structures in Cook Inlet, and
they've all been drilled. If we're going to find
natural gas in Cook Inlet, it's going to be in little
structures that exist between these larger structures.
And many of them have been drilled as well. ...
They've drilled 79 ... exploration wells in the past
25 years. I get so upset, as a geologist -
nonetheless as an Alaskan - when people tell me, "Oh,
yeah, well, when the price of oil goes up, and when
the price of gas goes up, there'll be more drilling in
the inlet, and we'll find more gas."
Well, were these 79 wells just practice wells? I
don't think so. So it's very significant because
we're able to be able to keep the economics of our
lifestyles today. And it's extremely significant for
Fairbanks, because we're not talking about $7 and $9
fuel oil; we're talking about Fairbanks actually, for
the first time in its history, getting a fuel that's
cheaper than the people of Anchorage get their fuel.
A very significant change, I believe, for the
lifestyle of Fairbanks.
In any case, it's very, very significant. And we'll
continue to refine those numbers, and they may change.
But my feeling is they're only going to change for the
better.
Number 2718
CHAIR OGAN reported that it was also established on the record,
in an overview by the Alaska Oil and Gas Association (AOGA) and
the Department of Natural Resources (DNR), that 98 percent of
the gas found in Cook Inlet was found in the 1960s.
MR. LOWENFELS concurred. He said he believed that the
commissioner of DNR wrote a letter in response to a legislative
inquiry, and the statistic relating to 79 wells is confirmed by
the DNR.
CHAIR OGAN said he had seen that letter. He mentioned that
Representative Croft had requested it.
Number 2691
MR. LOWENFELS agreed. He returned to the presentation:
I do want to let you know that ... we've been working
very hard, even though we haven't been extremely
public for the past couple of years. We have updated
our designs for the pipeline and for the LNG facility
in Valdez. These were completed in April of 2000.
And as a result of that, we went out and got two new
cost estimates for the pipeline and one new cost
estimate for ... the LNG facility in Valdez. And we
now have investment-grade quality estimates for
pipeline costs and for pipeline construction for our
project.
When anybody uses numbers and economic models, these
are the numbers that need to be used - and they're
listed on the next page. And [it's] very important to
understand in the LNG business, worldwide, that ...
your project's not competitive if you are unable to
meet this rule: For every million metric tons of LNG
you plan on producing every year, your basic capital
costs need to be about a billion dollars. So, one
million tons, one billion dollars. That means, when
you look at our charts, phase 1, we would be 9.2
million metric tons a year, at a cost of $7.1 billion.
We would intend on expanding this project up to 18.4
million metric tons a year; and at that number, it
will cost $10 billion.
We're talking about a pipeline cost that is
considerably lower than previous estimates. These
pipeline costs, again, are investment-grade pipeline
costs. We went and actually bid two spreads of the
pipeline - two out of the five spreads that we intend
on having - right on down to the Chevrolet that the
inspectors will be using, driving up and down the haul
road. So, we have a very, very comfortable feel with
regard to these costs. These are the costs that need
to be used when you are comparing our project to
overland projects and to other projects which people
are proposing. These are the official costs for the
Yukon Pacific project. So any costs that we have
given you in the past, please throw out. These are
now the actual, official costs.
Number 2580
MR. LOWENFELS continued:
Now, of course, we do have to compete with LNG
projects around the world, and that's always been one
of the raps: You can't compete with gas that's closer
to the marketplace, and there's lots of gas closer to
the marketplace that ... doesn't require a long
pipeline like your project does. Well, the problem
is, a lot of that gas is located in very bad
neighborhoods. And as Mayor Williams so eloquently
pointed out, the Japanese and the Koreans and the
Taiwanese have all learned that you must diversify
your resources and your sources of supply for those
resources.
MR. LOWENFELS pointed out that some competing projects that are
"not in particularly good neighborhoods" include an Exxon/Mobil
project in Qatar. Furthermore, the Sakhalin project has serious
environmental problems, he said; the sponsors of those projects
are having problems with that government, which is imposing
environmental restrictions for the first time. In addition,
there are serious ice problems in those projects, and the
projects are isolated and need to be connected to gas supplies.
The Natuna project is no longer a viable project because it has
so much carbon dioxide, Mr. Lowenfels said. He added:
We think our biggest competition is not the Australian
project - which we think is going to go - but it is a
project called Tangu (ph) in Irian Jaya, a project
that happens to be owned by one of the producers on
the North Slope; it was purchased by that producer in
the sale of ARCO. And we've been told publicly - "we"
meaning Alaskans - there are problems marketing
Alaskan LNG in Asia, by that particular company. The
problem, from our perspective, is their competitive
project.
Number 2466
And one of the questions that I would hope this
committee - and other committees in the legislature -
will ask the producers: Where are your competitive
projects? Why is there a problem marketing Alaska LNG
but not LNG from Irian Jaya? Why [are] there problems
developing an LNG project from Alaska, where the gas
is already being produced? It's 8.5 billion cubic
feet of gas a day, where you don't have to drill any
new wells, where you don't have to build a new road,
camps, airports. Why is that more difficult to market
than a project in Irian Jaya, where there are no
ports, no roads, no airports, and no producing wells -
no infrastructure in the fields?
We don't understand. ... We need to find out why the
producers on the North Slope are not as excited about
taking gas to the Asian markets as they are about
taking gas to the Asian markets from some of these
competitive projects.
It's not in our best interests to have ... these
projects move forward. The only project we should
care about is the Alaskan project. ...
Number 2389
MR. LOWENFELS continued:
There have been statements by certain politicians that
the Asian markets do not want Alaskan gas, that [YPC]
has been trying to put that gas into the marketplace
for 20 years, and they don't want it - if they
[wanted] it, they would have bought it.
This is not true. I have been to the Asian
marketplace over 50 times. I've sat across the desk
... for the 14 buyers of LNG - and there are really
only 14 buyers who would buy our LNG. They want to
buy Alaskan gas. The Koreans have entered into a
letter of intent. The Taiwanese have entered into a
letter of intent. The Japanese don't enter into
letters of intent. But you're going to have the
second-biggest buyer of LNG in the world coming here
in two weeks, from Tokyo Gas. And I believe he will
tell you that they are very interested in buying gas
from Alaska. And I believe he is coming because they
are concerned about what they are hearing, from
certain politicians in the State of Alaska, that the
Asian markets don't want our LNG.
Number 2333
REPRESENTATIVE WHITAKER asked who "certain politicians" might
be.
MR. LOWENFELS replied:
Well, I think I've heard the governor say that perhaps
our gas is not destined for Asia because the Asians
don't want it; in fact, I have heard the governor say
that. And I don't believe those reports.
CHAIR OGAN said:
I did a special order on the floor of the House
yesterday about the governor's administrative order
[188]. ... He stated in there that many Alaskans
believe the only viable project ... is the Alaska
Highway project.
MR. LOWENFELS replied, "Nobody who reads Jeff Lowenfels' garden
column believes that."
REPRESENTATIVE WHITAKER asked what in the world the motive would
be for a statement of that nature, just speculatively.
MR. LOWENFELS said that clearly he didn't want to impugn the
governor, and that he didn't know why the statements were made.
He then said:
Perhaps I can answer the question this way: The
counsel general of Japan gave a speech a couple of
weeks ago. I think it's in your packet, a report on
it. And he said 55 percent or 52 percent of your
exports in Alaska go to Japan. And in order to
maintain exports to Japan, you need to maintain the
relationship you have with Japan. You need to foster
that relationship. You need to feed that
relationship. When you say you don't want to ship us
gas, you're not fostering that relationship.
When I read that article, I took it as a threat - a
threat well placed, and a well-meaning threat. Japan
wants to diversify its natural gas supplies. I am the
only person from this state who has spent as much
time, and as many times, talking to the markets. They
know me personally. And I'm not being facetious when
I tell you [that] when I go to these meetings, the
first thing we say is, "We're so glad you're here.
Before we finish this meeting, we want to know what
kind of fertilizer to put on our orchids over here."
... We have a relationship with these people. We
understand them. They've been over here, many of
them. They've looked at the facility locations.
They've been up and down the right-of-way. They've
been to the North Slope, and they've put their arm
around that 60-inch pipe that's putting ... 8.5
billion cubic feet of gas a day in the ground. And
they put their arms around that pipe, and to them,
it's better than sex, food, sleep, and sushi, and
sake.
And it's not just the Japanese; it's the Koreans and
it's the Taiwanese. ... They're so excited about the
opportunity to buy gas from Alaska, but they look at
Alaska as dysfunctional. So, it's a very important
situation. ... The mayor pointed out, we have a 31-
year history of supplying LNG to Asia; we opened that
market, and we've never missed a shipment. Now, in
the LNG business, if a ship doesn't come in, you don't
turn your lights on. We've never missed a shipment.
And they appreciate that. And they appreciate the
fact that our country invented the word "stability."
We have a competitive project. We've got the stable
market. And they have told us - they told the
governor - they wish to buy gas from Alaska. So, I
don't understand where the comments come from. I
don't understand. But they're not correct.
Number 2127
CHAIR OGAN noted that Mr. [Shigeru] Muraki, the buyer Mr.
Lowenfels was talking about from Tokyo Gas Company, will talk to
the committee February 15. He said it would be a great honor to
have him here. He also said he would like to go to the market
himself, because he keeps hearing conflicting reports.
REPRESENTATIVE DYSON asked whether Asian leaders are concerned
about the movements of the Chinese in the Strait of Malacca.
MR. LOWENFELS responded that the biggest concern is piracy in
the South China Sea; to his belief, there is not concern about
the movements of the Chinese in the Strait of Malacca in terms
of LNG shipments. He then emphasized that [YPC's] markets don't
include China. Rather, the markets are Japan, Korea, Taiwan,
Southcentral Alaska, Southeastern Alaska, Mexico, and,
hopefully, California. But they do not include China; whether
China wants YPC's gas or not has no bearing whatsoever on
whether YPC moves forward.
REPRESENTATIVE DYSON asked whether there are significant
supplies of LNG moving through the Strait of Malacca.
MR. LOWENFELS answered that there are significant supplies,
which come from Qatar. "I have not heard that they are
concerned about that particular area," he added. He restated
that there is concern about piracy, but it doesn't really impact
the LNG business for some reason. He noted that [pirates] steal
oil tankers, which "can sit there for two years, no problem."
However, an LNG tanker that warms up will cause problems.
Number 1951
MR. LOWENFELS reiterated that the market is there, and the
governor is simply wrong. He then referred to page 22 of the
handouts. He said there are two franchises to take gas from the
North Slope: ANGTS and TAGS. He expressed concern that people
are talking about new projects, then emphasized that neither the
markets nor the legislature will deal with a project until it is
permitted.
MR. LOWENFELS said nobody should be dealing with "over
the top" until it is permitted, either. He expressed
concern about looking at permitting a new project, and
about the idea that the legislature can somehow "wave
a magic wand" and change the federal rules, in
particular. Alluding to the current 50-50 party split
in the U.S. Senate, Mr. Lowenfels said he doesn't
believe that Senators from the gas-producing states of
Wyoming and Colorado will be very excited about the
idea of Alaskan gas coming down to the Lower 48.
Number 1827
MR. LOWENFELS repeated that there are two franchises: ANGTS and
TAGS. He said ANGTS has some serious problems. Besides the
statutory problems he had indicated, [YPC] also foresees some
economic problems. [YPC] had used its "pipeline numbers" and
the costs for a (indisc.) facility on the North Slope to
determine a cost of service for gas from Alaska to the border of
the lower 48 states, "which is the price that we have to meet,
the border price."
MR. LOWENFELS said [YPC] is pretty well convinced that gas
cannot be brought economically to the lower 48 states, at 2.5
billion cubic feet of gas; nor do the economics work at 4
billion cubic feet of gas. He referred to charts in the
handouts, particularly the one that reads, "Alcan appears
uncompetitive in the long term." He noted that demand in the
Lower 48 is depicted in bar form; a red line indicates the
import price predicted by the U.S. Department of Energy
Information Administration, and then there is a cost-of-service
calculation. He explained:
The cost-of-service numbers are higher than the
import-price number. The economics don't work.
If you do the same thing with regard to TAGS,
recognizing that we've got a slightly different
economic situation, we use world-oil-price numbers,
our cost of service is below the world-oil-price
numbers. In other words, the world oil prices are
what are used - there's a (indisc.) of world oil
prices in our formula - to determine the LNG cost.
Ours works. We don't believe the "overland" project
does work.
But there's a more important factor. In the lower 48
states, you've got a supply-and-demand situation. ...
When you don't have enough gas, the price goes up.
When the price goes up, people explore for gas. They
find gas? They put it into the system, the price goes
down.
Number 1733
MR. LOWENFELS said people are exploring for gas in the Lower 48
and Canada faster than ever before, with more drilling rigs than
ever. For example, during the past year a new field has been
located off the coast of Nova Scotia; that field is predicted to
have 50 trillion cubic feet of natural gas. He added, "They are
proposing a 2.5-billion-cubic-foot pipeline to go from this
field in Nova Scotia into the New York area by 2005." He
referred members to two reports [in packets] from last week's
Oil & Gas Journal; he said there is a gigantic basin in the Gulf
of Mexico "and they're proposing that there's 25 trillion cubic
feet of natural gas in that, and it is being drilled like
crazy."
MR. LOWENFELS noted that packets also contain a study by Gas
Research Institute (GRI), a very respected group that does not
believe Alaskan gas will be coming down to the lower 48 states;
it "supports these numbers that we've listed here." He said:
I think the number they use is something like $2.11,
is what the price of gas will go back down to. And I
heard a gentleman from Phillips indicate that if you
don't have [a] $3.55 price for gas - the lower 48
states - the project doesn't work.
And we're quite convinced that there is - let me use
the phrase that they use on us - more gas closer to
the market that [doesn't] require a long pipeline.
The lower-48-states markets have many, many, many
discoveries to be made, and they're being made as we
talk - not so with regard necessarily to the East
Asian markets because, once again, we're talking about
a situation where you entered into 20- to 25-year
contracts. So, if you enter into that contract and
someone makes a new discovery someplace else, it
doesn't impact you.
In the lower 48 states, if somebody makes another
discovery and people can get gas cheaper in Chicago,
they'll turn their tap off to Alaska and take that
other gas. That's not what happens in Asia. [With a]
25-year contract, you're in for 25 years.
Number 1580
CHAIR OGAN suggested Mr. Lowenfels' point is that the discussion
is about building a pipeline to a commodity market.
MR. LOWENFELS affirmed that.
REPRESENTATIVE ROKEBERG asked whether the Alcan [project] costs
are around $12.1 billion.
MR. LOWENFELS responded, "Those are the numbers that we've
picked up out of the various publications." In response to a
further question, he indicated he doesn't believe it can be
financed in the public market. He restated that it is a
commodities market, controlled by the New York Mercantile
Exchange and so forth; that is the problem.
Number 1450
MR. LOWENFELS offered core questions to ask whenever anybody
talks about a gas pipeline. First, when someone says "southern
route," what does that mean? Second, why do people predicate
the construction of a gas pipeline in Alaska upon first building
a pipeline to the Lower 48? He explained:
We believe this is backwards. The pipeline will be
built to Valdez first. And if the market in the lower
48 states can demonstrate that prices can remain high
enough for long enough to finance a system -- not only
to finance a system but to ensure that people will
continue to buy from that system, because it's one
thing to finance a system; it's [another whole] thing
to have the people of Chicago get a cheaper source of
gas all of a sudden.
What happened, because of comments made by the
governor and the producers, is that everybody's been
lulled into the thought that finally we'll build a
pipeline down to the lower 48 states, and, as a result
of that, we're going to get gas uses in the state of
Alaska. And I think you're looking at it backwards.
We're going to build a pipeline in the state of
Alaska. We're going to provide a tap to take the gas
down to the lower 48 states if they ever need it;
we're going to size it to be able to handle those
supplies down to the lower 48 states if they need it.
We're going to try to fill that capacity up as much as
we possibly can - maybe come a point in time where we
can't take gas down to the lower 48 states, but the
market in Asia exists today. It exists at a high
enough price to be able to finance our projects with
[a] long-term project.
People should be talking about the "Alaskan line"; the
"highway line" comes second. Obviously, I'm biased,
in addition to which you've got to be extremely
careful about the whole Alcan situation. ... We call
it "the Alcan of worms," for all of the reasons that
we've talked about. But when people talk about a
highway project, you need to ask them: Are they
talking about the Alaska Natural Gas Transportation
Act project, at 2.5 billion cubic feet of gas, which
is the only one we're allowed to have? Or are they
talking about some other project, at 4 billion cubic
feet of gas a day? And when people talk about "over
the top," you ought to just tell them to shut up.
Number 1290
REPRESENTATIVE ROKEBERG referred to ANGTS and the selection of
only one route by former President Carter. He asked, "So how
could we build a Valdez TAGS route?" He also asked whether
there is a separate permit.
MR. LOWENFELS said that is an excellent question. Because of
ANGTS, there was a provision that "if you could demonstrate
there was no domestic need for the gas - that you had excess gas
- that you could get permission from the President of the United
States and export that gas to other countries." He stated:
That is the provision that we complied with. And we
have a presidential finding that allows us to export
that gas; I think it's Section 9 or Section 12 - and
I'll get you the exact numbers. But we have complied
with the Alaska Natural Gas Transportation Act. And
everybody else is going to have to comply with that
Act, as well.
MR. LOWENFELS noted that the criteria being used - which he
believes to be the right criteria - include competitive
economics as well as jobs and contracts for Alaska.
Number 1191
REPRESENTATIVE DYSON asked how much it would cost [YPC] per
mile, on average, to build a gas pipeline of the necessary size.
MR. LOWENFELS answered that he didn't have the "diameter-per-
inch/mile" figures. Annually, the Oil & Gas Journal publishes
rules of thumb for that, for use in determining the cost of
building a spur line, for example. He agreed to get that
information and distribute it to the committee.
Number 1149
MR. LOWENFELS continued:
Again, going to the criteria - competitive economics -
we have competitive economics. Jobs and contracts for
Alaskans? As far as I'm concerned, the only project
that provides the opportunity for 100 percent of the
jobs to go to Alaska is this project, TAGS. The Alcan
Highway project will be 33 percent in Alaska, and the
rest will be in Canada. And if you think the
Canadians are going to let 100 percent of those jobs
go to Alaskans, then they're different Canadians than
I've been dealing with.
As far as contracts for Alaskans, the same thing
applies: 100 percent in Alaska versus 33 percent in
Alaska. As far as gas to Alaskans, our project can
provide gas to more Alaskans than any other project
that's being proposed. Three out of four Alaskans are
running out of gas in Cook Inlet, and the people of
Fairbanks and in Valdez pay the highest utility prices
in North America. We can provide to gas to them, as
well [as], we believe, to Southeastern Alaska.
Number 1086
We do not understand why the governor would put forth
a policy council on a gas pipeline project and call it
the "Alaska Highway policy council." The criteria
that he has set out for all of you to follow, and for
all Alaskans to accept, are not met by his project,
including, I might add, the fourth criteria, which is
return to the State of Alaska.
The Purvin & Gertz Report demonstrates - and I know
it's confidential, but many of you have it -
demonstrates that a project to take gas down to Valdez
has a higher wellhead return to the State of Alaska
than the Alcan Highway project. Period. So, on all
four bases in those criteria, the highway project
fails when compared to the LNG project.
Now, we have a gas policy council that's called a
highway gas policy council. I see a stacked deck.
And I don't like it. And I don't think Alaskans like
it. And I know the people I talk to in Southcentral
Alaska who are running out of gas are very concerned
about it. And I hope this legislature is very
concerned about it, and ... I think you are, based on
the comments that ... I've gotten from people.
We're talking about the all-Alaska line. We're
talking about the all-purpose project, a project that
can serve the Asian markets that are there, a project
that can serve the lower-48-states markets that you
believe are going to be there, without building a
2,100-mile pipeline system that goes to Canada.
If you believe there's a market in the lower 48
states, the way to take that gas there is by LNG
tanker, not with a pipeline through Canada.
MR. LOWENFELS said what the committee is doing, with review and
bills, is extremely important. He added that while he
appreciates the opportunity to attend caucus meetings, nothing
compares to being able to testify in front of a real committee.
He apologized for any confusion he may have caused by giving
testimony in front of a caucus and said it would not happen
again. He offered to come to Juneau to appear in front of the
House Special Committee on Oil and Gas as many times as is
necessary.
Number 0923
CHAIR OGAN asked about the deadline for gas commercialization.
He referred to legislation passed two years ago, the so-called
stranded gas bill, which allows negotiating payments in lieu of
taxes. Chair Ogan likened trying to build a gas pipeline
project to building a house on shifting sand. He said that
deadline is coming up at the end of June this year; there is no
discussion about that deadline and all the work put into the
legislation, which would help "your gas pipeline project." He
asked, "Are we dealing with this because maybe they're not
planning on doing that? ... Is there kind of a way to draw
attention ...?"
MR. LOWENFELS said he can only speculate. He added:
I think there was a great deal of concern that the Act
was limited to LNG. It didn't include GTL. There was
a lot of politics involved with it, one way or the
other. There's a lot of concern, I think, among the
administration, the Department of Revenue. ... The
people are looking at this as a tax-relieving bill.
And so, I think people are all sort of split and going
in different directions on this thing, and ... I think
we do need to focus on that. If a project needs some
stimulus from the State of Alaska, that's the bill
that would give it. And you're absolutely right: It
expires.
Now, we're not against the idea of giving special help
to anybody that wants to move forward, and we're not
going to fight putting GTL in or doing whatever needs
to be done. But that date was a date that was set in
order to put some pressure on companies to do a
project, and I don't think it's been effective.
Number 0691
CHAIR OGAN agreed. He said he planned to get the so-called
working group [before the committee] for a report. He said he
wanted some specific information, including how much money the
state has spent. He asked about the "gas balancing agreement"
on the North Slope.
MR. LOWENFELS answered:
One of the things that we have to ensure is that the
individual producers can sell their gas individually,
and by that I mean without having the opportunity of
one of the other companies vetoing that opportunity.
And my understanding is that the Prudhoe Bay unit
agreement does not have associated with it a gas
balancing agreement.
Gas balancing agreements are used in units to enable
individual companies to sell their gas. If I want to
sell my gas today, and Representative Whitaker is in
the unit and he wants to sell his gas in four or five
years, the gas balancing agreement provides the
opportunity for me to go ahead and do that.
Without a gas balancing agreement, if I want to sell
my gas today and he doesn't want to sell his gas until
2004, he has the opportunity to veto my opportunity to
sell my share of the gas. And if we don't have a gas
balancing agreement at Prudhoe Bay - and I haven't
been able to locate one - we need to understand what
the dynamics are there. Can, for example - and I
don't mean to be picking this name - Phillips
Petroleum sell its own gas today unless BP and Exxon
also agree?
And I don't need to go too much deeper. There are all
sorts of reasons why one company ... might not want
another company to do something. And that's a very
serious impediment if, in fact, ... it's true. And I
think we need to get some clarification on that. I
tried to get it from ... the state, but there's
nothing on file, really. I've looked at the unit
agreement; it's very complicated. I cannot find a gas
balancing agreement.
Number 0530
CHAIR OGAN noted that there would be an overview by the working
group on February 8. He said the Department of Natural
Resources (DNR) would be included in discussions, as well, in
order to get some answers regarding a gas balancing agreement or
a lack thereof.
MR. LOWENFELS added, "I hope I'm wrong. I hope I'm being an
alarmist. But I'm not sure I am."
Number 0509
CHAIR OGAN referred to taking LNG to the West Coast. He
mentioned talk about the possibility of building something in
Mexico. He asked whether it is to pipe gas up or to generate
electricity.
MR. LOWENFELS answered:
There's actually a couple of things that we're
investigating. First of all, we're looking for LNG
facility locations, siting locations, in the entire
West Coast - not just in California or Baja, but also
in Oregon and Washington. But I do believe that the
Alaska Natural Gas Transportation Act causes some
potential problems in that regard. So, we've
concentrated on looking at bringing gas into Baja.
There are some locations in Baja, Mexico, where they
would have perfect receiving facility locations, where
there is a pipeline being constructed that could take
the gas from Baja and bring it into California. The
Alaska Natural Gas Transportation Act does not
prohibit that, and NAFTA [North American Free Trade
Agreement] makes it relatively easy, oddly enough, to
be able to transfer gas across the border ... in that
way.
There are five power plants being built in Baja ...
right now, in order to be able to transport
electricity across the border into ... California.
And, of course, the reason why people are looking at
Baja is ... it's more difficult to site a facility in
California than it is anyplace in the world.
REPRESENTATIVE DYSON suggested that is because of regulatory
problems.
MR. LOWENFELS concurred.
CHAIR OGAN mentioned using a barge.
MR. LOWENFELS commented:
We have a proposal from a company to put a barge-
mounted LNG receiving facility that could be as far
out as 20 miles off the shore of California, to be
able to bring the gas in. We wouldn't have any siting
problems. But we're looking at that quite seriously,
because there's a very real opportunity. Again, if
you're going to bring gas to the lower 48 states, the
way to do it is LNG form, not via pipeline.
Number 0328
CHAIR OGAN asked how much can be attributed to gas shortages in
California.
MR. LOWENFELS answered:
I don't think any of it's a gas shortage problem. I
mean, there are shortages, but the shortages ...
haven't been created by lack of supply; they've been
created by a pricing problem that's been created by
the California legislature. They're allowed to buy
short term, not long term. The regulated rate versus
the wholesale rate, it's a very ... internal problem
that California has created for itself, and ... it
really doesn't have to do with a shortage situation
per se.
Number 0255
CHAIR OGAN said his primary question to the producers would be,
"Why don't they make the gas available to you so you can build a
pipeline and sell to the markets ... that you have?" He asked
Mr. Lowenfels what his top question would be to them.
MR. LOWENFELS responded:
First of all, I think we have to be very, very careful
not to lump all of the producers together. So I would
ask the good tooth fairy to give me three questions,
one to ask each of the companies.
We tend in this state to believe that we have an oil
industry, and that it's a monolithic group. And it
really isn't. Each one of the companies has their own
perspective on how to commercialize North Slope
natural gas. And they're acting the way they're
acting in their own interests, as well as, as a result
of whatever the Prudhoe Bay Unit agreement requires
them to do. ...
Obviously, the first question I would ask British
Petroleum [BP] is, "You've indicated that there's a
problem marketing LNG in Asia. Do those problems also
apply to your Irian Jaya project, or is your Irian
Jaya project the problem that Alaska faces in
marketing its LNG?"
To Phillips Petroleum, I would like to ask them what
they plan on doing after 2009 with regard to the LNG
facility in Kenai, and how they would propose to
provide gas for that facility - and as [an] aside,
whether they were aware of the fact that we would like
to help them in that regard. ...
I think I might ask Exxon a similar question to the
one that we would ask BP: "You have competing
projects in Sakhalin; you have competing projects in
Yemen and elsewhere in the South China Seas; you have
a competing project in Qatar. Why should we believe
that you have our interests at heart with regard to
gas commercialization, when you have these competing
projects?" ...
I think if I had to ask a question to all three of
them together, it perhaps would be that gas balancing
question. ... I guess the other question that I would
ask them, as a group, is what the absolute, rock-
bottom price is for which they would sell their gas at
the wellhead.
TAPE 01-9, SIDE A
Number 0001
REPRESENTATIVE DYSON asked what Mr. Lowenfels estimates the net
income to the State of Alaska to be for a gas pipeline and so
forth, depending on the wellhead price. He mentioned a figure
of $100 million a year.
MR. LOWENFELS answered, "We have a higher number. Again, it
does depend on the wellhead price, but I think we're talking
anywhere from $200 to $400 million dollars a year - more in the
$400-million-a-year [range]."
MR. LOWENFELS, in response to a question from Chair Ogan
regarding what kind of volume that would be, said, "For 13.5,
and then moving up to 18 (indisc.)." He added that the Purvin &
Gertz Report will state that the wellhead return on an LNG
project is higher than the wellhead return to the State of
Alaska, for a good reason: there is an LNG facility located in
Valdez. It isn't just the return, he said. It's the jobs.
Having 500 people working on the LNG facility in Valdez is "a
very significant economic driver." And people up and down the
right-of-way will be using this gas. He said he cannot
overemphasize how important it is "that we're running out of gas
in Southcentral Alaska."
MR. LOWENFELS pointed out that there will be an update of "that
ISER [Institute of Social and Economic Research] report" done by
[the Anchorage Economic Development Corporation (AEDC)]. He
added, "They're taking a look at the question, as well, because
they're having trouble attracting businesses ... to the
Anchorage area."
Number 0187
MR. LEWIS added to Mr. Lowenfels' comments:
One of the great benefits of an LNG project is the
fact that it only gets built when you have, in hand,
long-term contracts. And so, the pricing regimen is
generally predictable, based on the pricing index and
within a certain range, for landed LNG over 20 years.
The same thing, therefore, is true, essentially, of
the wellhead and the state's share, as opposed to the
commodity market.
MR. LOWENFELS said, "Very predictable. Very straight stream of
cash."
Number 0254
REPRESENTATIVE JOULE referred to Representative Dyson's mention
that some producers had said the return to the state would be
about $100 million.
MR. LOWENFELS clarified, "For their project."
REPRESENTATIVE JOULE, noting that Mr. Lowenfels had just
estimated between $200 and $400 million, asked whether that is
based on the same amount being produced or a different amount.
MR. LOWENFELS emphasized that the answers depend on what gas
pipeline is being talked about, including its size and how much
gas will be put into it. He further stated:
When I say 13.5, that's about 2 billion cubic feet of
gas a day, and that's about $200-$250 million a year.
... Incidentally, there are a number of studies, in
addition to that Purvin & Gertz study, which ... I
will make available if the committee wishes to have
it.
[There] was a Booze & Allen (ph) study done ... in the
1980s, which used the same criteria the governor used
and compared the LNG project to the "over the top"
project to the Alcan Highway project. It's
fascinating reading. ... And there are several of ...
those studies that have been done over the years. I
don't think we need to do any new studies to determine
how much we're going to be making, as a state, for
various projects. ...
I can't tell you, Representative Joule, what size
project they're talking about. I just don't know.
But you have to ask that question, as you did - what
size project, how much quantity - every time we have
this discussion. ... People in Anchorage read the
newspaper, and in 250 words, you can't put in all
these nuances. And so, we're going to have to come up
with a lexicon and a vocabulary so that all Alaskans
understand what we're talking about, that when people
say "southern route," they're not necessarily talking
about a route down to the lower 48 states.
Number 0437
CHAIR OGAN asked what the international market pricing structure
is right now. He added, "I understand it's sold on a long-term
basis. There seems to be, certainly, a price spike in the Lower
48. Is it affecting at all the price in ... the Pacific Rim?"
MR. LOWENFELS answered that there is absolutely no relationship
between the price of gas in the Lower 48 - which is based upon
competition with other gas that comes into the Lower 48 - and
the price of gas "in the Asian markets that we seek to serve."
He explained:
The Asian markets take a "basket" of crude oils - 12
or 15 different crude oils .... And they take a look
at that price, and based off of that price, they have
a formula that determines what the LNG price is.
Now, LNG contracts, because of their long-term nature,
are very friendly in many ways. They have a floor and
a ceiling. Your buyer works with you. ... They share
the pain as well as the benefits, whether the price of
oil is high or low.
And during the last 20 years, the price of gas, LNG
form, has been relatively consistent. ... It's got
spikes, no question, because the price of oil has
spiked; when the price of oil was down at $10, the
price of LNG went down. But there's floors on these
contracts, and they're usually private contracts, so
that (indisc.--coughing) what those are.
Right now, today, Indonesia is selling gas into Asia
for somewhere in the vicinity of $5.50. Oddly enough,
it's closer to the market; it's selling into Asia for
more than the Alaskan gas is going into Asia - it's
about $5. It's very interesting. But that's because
the markets work with you to make your projects work.
Number 0601
CHAIR OGAN requested confirmation that the formula, roughly, is
"gas times six equals oil."
MR. LOWENFELS answered that it is the old formula, which can be
used as a "back of the envelope" formula. However, now some
contracts have variations on that formula, with specific floors
and ceilings built in. He said he would have to check with
[YPC's] expert, John Horn (ph), who is vice chairman and who
actually started the LNG business in Asia, regarding whether
Chair Ogan's formula still works as a rough estimate. He added,
"You raise a very interesting point. We believe we can deliver
this gas to the Asian markets for about $3.50."
CHAIR OGAN mentioned tariffs and asked what the overall project
costs would be.
MR. LOWENFELS answered:
Those are not numbers that we release, because they
have an impact on what the potential wellhead price
would be. But during the negotiations to purchase
state royalty gas, they would become very transparent.
But I think you could maybe work it backwards, if we
think we can deliver gas at the same price that Enstar
is buying gas for - without violating my oath of
"executiveness" or whatever.
Number 0755
DUANE HEYMAN, Executive Director, Commonwealth North, testified
via teleconference. He noted that Commonwealth North is a
statewide public policy organization. Mr. Heyman stated:
I wanted to let you know that we have a very active
study group that is analyzing the same thing that
you're looking at, the commercialization of the North
Slope natural gas, [composed] of about 55 volunteers
that are very well informed and very active in ... the
area. And we're looking at all aspects of the North
Slope gas commercialization.
The charge to the committee included emphasis on in-
state use of the gas, maximum revenue, and maximum
short-term and long-term employment. Other things
that we're looking at are ... creating an industry in
Alaska, workforce issues, Canadian-American issues,
and ... public policies that need to be addressed. ...
One aspect that we are considering, and looking at
very carefully - but I would emphasize, we do not have
a position on this yet - is the stranded gas Act. A
couple of aspects that we are looking at and we would
urge you to consider - again, we don't have a position
on it - ... is the public review and comment period,
and the judicial review and comment period. The
public review currently allows for the 30 days of
comment, and the judicial review, 120 days, and we're
trying to take a look at that and determine whether
that's something that is adequate. We don't have a
position, but you might also take a look at that, as
well.
In addition, something else that we're going to be
taking a look at is what we perceive to be the absence
of any detailed criteria whatsoever to guide the
commissioner's findings, in case there is negotiation
on modifying ... any of the compensation to the state.
So, I just wanted to mention those are some of the
things we are looking at. We hope to have a complete
report done in two or three months, but we may have
some interim findings in the different (indisc.) such
as the stranded gas Act, and we would hope to be able
to offer those findings to you as they become
available.
Number 0946
CHAIR OGAN responded that the committee would be very interested
in those findings. He expressed appreciation for Commonwealth
North's interest in devoting time to that, which is a valuable
service to the state. He then confirmed with Mr. Lowenfels that
he would send the documents discussed earlier to the committee
aide for distribution to members. [HB 83 was held over.]
ADJOURNMENT
Number 1015
There being no further business before the committee, the House
Special Committee on Oil and Gas meeting was adjourned at 11:57
a.m.
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