Legislature(2001 - 2002)
03/13/2001 05:07 PM House O&G
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* first hearing in first committee of referral
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+ teleconferenced
= bill was previously heard/scheduled
ALASKA STATE LEGISLATURE
HOUSE SPECIAL COMMITTEE ON OIL AND GAS
March 13, 2001
5:07 p.m.
MEMBERS PRESENT
Representative Hugh Fate, Vice Chair
Representative Fred Dyson
Representative Mike Chenault
Representative Vic Kohring
Representative Gretchen Guess
Representative Reggie Joule
MEMBERS ABSENT
Representative Scott Ogan, Chair
OTHER LEGISLATORS PRESENT
Representative Joe Green
Representative Lesil McGuire
COMMITTEE CALENDAR
KEN THOMPSON, PACIFIC RIM LEADERSHIP DEVELOPMENT: NATURAL GAS
TRADING HUBS
PREVIOUS ACTION
No previous action to record
WITNESS REGISTER
KEN THOMPSON, President
Pacific Rim Leadership Development
3601 C Street, Suite 1400
Anchorage, Alaska 99503
POSITION STATEMENT: Provided a presentation regarding natural
gas business and natural gas trading hubs.
ACTION NARRATIVE
TAPE 01-18, SIDE A
Number 0001
VICE CHAIR HUGH FATE called the House Special Committee on Oil
and Gas meeting to order at 5:07 p.m. Committee members present
were Representatives Dyson, Chenault, Fate, Kohring, Guess, and
Joule. Chairman Ogan was absent due to illness. Other
legislators present were Representatives Green and McGuire.
KEN THOMPSON, PACIFIC RIM LEADERSHIP DEVELOPMENT: NATURAL GAS
TRADING HUBS
VICE CHAIR FATE introduced Ken Thompson who would provide the
committee with a presentation regarding natural gas trading
hubs.
Number 0110
KEN THOMPSON, President, Pacific Rim Leadership Development,
informed the committee that over the last couple of years he was
the Executive Vice President for ARCO's Asia Pacific operations
as well as the head of Global Gas Marketing for ARCO. However,
Mr. Thompson emphasized that today he is speaking to the
committee as a concerned Alaskan who wants to speak out on his
vision for North Slope gas. He specified that his comments
today will be focused on the natural gas business in Alaska, gas
trading hubs, and gas trading principles for Alaska that would
create multiple market options for the future. He explained
that Pacific Rim Leadership Development is a consulting firm in
Alaska. Although this firm works with companies in the oil and
gas industry, most of the companies the firm works with are not
in the oil and gas industry.
MR. THOMPSON, in response to Representative Dyson, affirmed that
he is no longer with [ARCO Phillips]. In further response to
Representative Dyson, Mr. Thompson stated that his current
clients are taught leadership development of executive teams.
He identified some of his clients of which none were owners of
gas.
Number 0325
MR. THOMPSON recalled when he was president of ARCO in 1995 when
the Alaska Petroleum News reported that he was taking major
steps to gather the owners for the first serious public effort
in natural gas commercialization. That report said that "we"
were taking strides to progress natural gas. However, Mr.
Thompson said that he would amend that today to say that he is
sprinting to [develop natural gas] and he thinks Alaskans should
do the same. He emphasized, "I do think at $3 per mcf (million
cubic feet) in the Lower 48, Alaska North Slope gas is
commercial now and we need to make it happen." He related his
belief that North Slope gas sales should begin by 2007. While
working for ARCO, he started long-range plans with a start date
of 2007. Furthermore, he thought that if gas sales weren't
started by 2007, the state would lose patience by 2001 or 2002.
Therefore, he felt that the state and the producers should try
to work together to adhere to the 2007 timeframe. Such action
will require taking steps now in creating multiple markets for
the future in a broader natural gas business within Alaska.
Number 0511
MR. THOMPSON turned to slide 2 and pointed out that the
"producers are completing studies to create their gas 'vision.'"
Therefore, he suggested that the state should proactively
complete separate studies to create a long-term "vision" that's
best for Alaskans. Mr. Thompson, as an Alaskan, disagreed with
the suggestion to wait and see what option the producers have
because the producers' and the state's perspectives will differ.
"The producers must focus on discounted present worth and rate
of return of any project .... On the other hand, putting on the
hat of an Alaskan, we need to make sure ... the option we
propose should be one to create the most socio-economic benefit
to Alaskans for the next 50 years because this is a long-lived
resource base," he explained. Therefore, infrastructure in the
state needs to be created as well as thousands more jobs.
Perhaps a gas industry could be created rather than merely
constructing a pipeline through which gas is shipped elsewhere.
Such "vision" should be examined and a "win-win" situation found
with the producers.
Number 643
MR. THOMPSON continued with slide 3, which delineates his
recommendations for a business vision for natural gas. He
recommended that the state support a gas pipeline that traverses
Alaska. "If you consider the vision is to also create a natural
gas business in Alaska, the Northern route is not even in my
vocabulary. It is not an option; it has no value," he said.
Furthermore, as a past oil and gas executive, he remarked that
he wouldn't want the environmental or operational risk of the
Northern route either. As former gas marketer, he also didn't
like the Northern route because a better deal can be made if
there are multiple markets and the Northern route only has one
market. Such a situation should be avoided because markets
could cycle in the next 10-15 years.
MR. THOMPSON remarked that if the desire is to have more gas
distribution across the state at fair valuation and
methodologies, then a natural gas hub should be created near
Fairbanks or Delta Junction. He clarified that the hub isn't
merely a series of valves and manifolds to distribute gas to
different pipelines. Hubs common in the Lower 48, the United
Kingdom, Canada, and the European Union, include trading
principles and regulations for gas such that the netback price
valuation is clear as well as the fact that the buyer can get
access to the gas. Currently, Alaska doesn't have such rules or
regulations in place and thus they are necessary before gas
flows. Mr. Thompson offered the legislature his help in making
sure that the [state] has these types of principles over the
next couple of years.
MR. THOMPSON expressed the need for the state to retain 12.5
percent royalty share of gas in kind. [This is necessary
because] initially the state could also market gas in the Lower
48. He remarked that the state shouldn't form a gas marketing
company of its own, rather the state could contract with
renowned firms such as Williams Energy Trading. The state's
role should be to beat the price obtained by the producers
because the state leases mandate that, for taxes and royalties,
the state obtains the higher of actual proceeds or market
valuation. If [the state] can beat [the producers'] prices,
then the [state] can get higher valuation. Or, at least, the
state should market the test that the producers are getting the
best value for Alaskans. Another reason for the state to retain
12.5 percent royalty share is that such can facilitate the
natural gas industry in Alaska. Mr. Thompson informed the
committee that if a pipeline [produces] 2-4 bcf (billion cubic
feet) per day, the state's royalty share would be about 250-400
mcf per day. He pointed out that the current gas usage in
Alaska is 115 mcf (million cubic feet). Therefore, it is
evident that the industry can be expanded if the 12.5 percent
royalty share is maintained by the state.
Number 0990
MR. THOMPSON related his belief that the state's main role for
business is to create a positive business climate. However, in
this case, he recommended that the state invest 12.5 percent
share in a gas pipeline, at least in the segment from the North
Slope to the hub. He pointed out that the 20 years of
disagreements on the Trans-Alaska Pipeline System (TAPS) have
been in regard to tariffs and costs relating to tariffs. He
feels that the state should have a seat on the pipeline when
decisions are made [so as] to know costs accurately. However,
he emphasized that the state doesn't need to form a separate
company or department to do this because there are [already]
companies that can operate that interest for the state.
MR. THOMPSON turned to his recommendation for the state to
formulate policies and regulations for clear and transparent
valuation/pricing [of gas at the hub]. He informed the
committee that in the prior two years he was appointed by U.S.
Secretary of Energy Richardson to assist the Asia Pacific
Economic Cooperative (APEC), which consists of 21 nations. He
noted that he was one of the two Americans on APEC, both of whom
were charged with helping business representatives from other
nations develop natural gas and power generation policies in
Asian countries. Mr. Thompson emphasized that currently it
isn't clear how to netback price gas and that needs to be clear
before the first gas flows. He noted that he has worked with
other nations, such as China, Thailand, and Peru, on this type
of netback pricing methodology, and therefore he offered his
help to Alaska.
Number 1200
MR. THOMPSON, in response to Representative Dyson, said that he
has spoken to Robert Gottstein who had inquired as to his views
on the hub facilities.
REPRESENTATIVE DYSON noted that Mr. Gottstein seems to share Mr.
Thompson's view in regard to the state having an ownership
position [in the natural gas line] and employing a partner to
manage it [that ownership]. Representative Dyson related his
sense that those in Asia - Taiwan, South Korea, and Japan - are
very interested in having a secure natural gas supply due to
fears of their supply routes from the Middle East being
interdicted. He inquired as to Mr. Thompson's thoughts.
MR. THOMPSON informed the committee that a U.S. Department of
Energy security study shows that if the rate of increase in
import by Japan, Korea, Taiwan, and China continues, they,
particularly China, will be 90 percent dependent on Middle
Eastern fuels. The "state department" is very concerned about
that and thus teams have been sent to progress the natural gas
industry in Asia to build those supplies. Mr. Thompson related
his belief that LNG will be viable to some of these nations as
long "we" can be competitively priced. Having personally
marketed LNG to Japan, Korea, and Taiwan in the last two years
from the largest LNG plant in the world, he felt that it is
difficult for Alaskan gas to compete with supplies from
Indonesia and the Middle East. However, he pointed out that his
proposal is to establish things so that the cycles change in
which case the state would need to be prepared to ship LNG from
Alaska in the future.
REPRESENTATIVE DYSON indicated that it would only take a radio
broadcast of a change in the political situation in the Middle
East to change that [cycle].
MR. THOMPSON agreed and emphasized the need for Alaska to be
poised to have access to multiple markets such as the LNG
markets in the future.
Number 1390
REPRESENTATIVE DYSON asked whether Mr. Thompson, as a
consultant, would be available to help the legislature if the
legislature decided to pursue his advice.
MR. THOMPSON replied yes and announced that he would waive his
fees because helping the State of Alaska is important to him.
Number 1430
REPRESENTATIVE GREEN inquired as to how long Mr. Thompson
predicted it would take for the state to gear up if it already
had the hub.
MR. THOMPSON suspected that gearing up for LNG in the future
would take 3-5 years or more. He noted that building the line
all the way to the North Slope wouldn't be necessary because the
line could be built from the hub to Valdez or Cook Inlet. He
saw the only option that would provide a faster turnaround for
LNG to be a trunk line from the hub to Anchorage and the Kenai
Peninsula, with expansion of the Phillips LNG plant. He noted
that he had no knowledge regarding whether Phillips was
assessing such. In reviewing the various markets, Mr. Thompson
stressed his belief that the Lower 48 market is the market that
Alaska should proceed with and capture. Furthermore, the state
should have the highest sense of urgency for the Lower 48 market
while leaving itself open for some of the other markets.
REPRESENTATIVE GREEN remarked that if such occurred, he felt
that a perpetual supply of gas would be available to "our area"
and thus could create a significant industry in the Kenai area.
He interpreted Mr. Thompson's testimony to mean that if the
facility is available, then ships and/or a cooler could be added
in order to decrease the turnaround time considerably. He asked
if Mr. Thompson saw any [merit] in a situation in which the
state doesn't own the portion of the [pipeline] going to the
operators or should the state be involved across the board, he
asked.
MR. THOMPSON noted that he serves on the Natural Gas Policy
Council and is on the committee dealing with in-state use. The
committee plans to review different things for in-state use,
including expansion of LNG or a future LNG project, as well as
the size of the line from the North Slope to the hub and whether
the line should be larger in order to handle capacity of future
ideas. Perhaps the state, Native corporations, Alaska
companies, or potential LNG participants and buyers would have
to look at investing in such.
REPRESENTATIVE GREEN concurred with Mr. Thompson's testimony
regarding the need for the state to "get with the program"
quickly, if not immediately, in regard to having our own input
because the oil industry's needs and views are different than
those of the state. Therefore, he inquired as to whether Mr.
Thompson felt that the state should seek a consultant with a
worldwide perspective or could someone locally handle the job.
MR. THOMPSON answered that having a world-renowned consultant
with a staff would [be ideal]. However, he reiterated his
willingness to advise [the legislature] on issues involving
methodologies and regulations for trading and price valuation.
REPRESENTATIVE GREEN related his belief that due to the Joint
Committee [on Mergers] last year, the legislature is aware of
the importance of having its own people to advise it.
Number 1827
REPRESENTATIVE DYSON [inquired] as to whether the hub in Delta
would prohibit having a tap on the pipe in Fairbanks for local
use.
MR. THOMPSON replied no and noted that he would discuss the two
components of the hub later in his presentation. He remarked
that the same trading hub methodologies and trading policies for
natural gas, rights to access for gas, and the process by which
the gas is valued in netback pricing for a potential buyer off
the spur should all be very clear. This are standards.
Number 1879
MR. THOMPSON continued with slide 4 of his presentation. Slide
4, "Trading Hub and Natural Gas Business Vision with Future
Multiple Markets Access," is a schematic that he suggested the
committee envision occurring over 50 years. He posed a few
scenarios for the committee to consider, such as a natural gas
liquids processing plant for propane butane that can be trucked
or barged into villages. Such a scenario would be cheaper and
cleaner than the barged diesel being used today. He inquired as
to why Alaskans can't dream and create this broader natural gas
business vision while setting the policies before the first gas
flows.
MR. THOMPSON turned to slide 5, which outlines how to put the
gas business vision into motion. In 2001 there should be a
resolution in support of principles of natural gas business in
Alaska in conjunction with the Lower 48 gas line. In 2002-2003
there should be clear regulations regarding transparent netback
pricing [in order to avoid litigation]. Such action would be a
win-win situation for both the producers and the state. During
2002-2003 there should be clear rules for transparent access for
in-state use. For example, if a producer sells in Chicago for
$3.00 mcf and the netback price at the trading hub is $1.00,
what should the cost be to Alaskans that want to access gas.
Mr. Thompson felt that cost should be $1.00 or slightly above.
"If they can meet or beat the netback pricing, that should be
the deal," he charged. However, under the current regulations a
producer could say that if their natural gas isn't used, then
diesel would have to be used. One alternative for the use of
diesel is barging it up from Seattle; the market is that
replacement cost. Therefore, the state needs to establish
regulations for access and the price of access based on netback
pricing. Furthermore, there should be rules for clear access
for overseas markets. Also, the state should finalize its
decision of investment during 2002-2003. During 2004-2006, he
envisions the state attracting investors for the hub and spur
lines for in-state distribution, city infrastructure, and value-
added processing. Although this may be "small potatoes" to the
producers, it could be very attractive to small Alaska companies
or Native companies. The year 2007 is when he envisioned Alaska
having "Gas to Cash" for Alaska and Alaskans.
MR. THOMPSON remarked that the remaining slides are further
justifications that have already been discussed.
Number 2268
REPRESENTATIVE DYSON noted that some don't favor the trans-
continental pipeline and thus say that the $3.00 per mcf will
empower more exploration and deeper wells in the Gulf and off
the east coast of Canada. Thus, the market would respond to the
price and supply the need further than we see.
MR. THOMPSON pointed out that what Representative Dyson
described can happen in any market. If the current eight or
nine projects that could be viable in Asia were done at the same
time, then it could happen. In fact, Japan's utilities have a
very organized effort under way to convince everyone that their
project is the winner so that everyone will build the project so
as to have an oversupply of LNG, and then have LNG prices
decrease. Although there is gas in the Rockies that could be
developed, it is reserves without the rate capacity. He
explained his belief that the gas from the Rockies would add
reserves, but not enough incremental rate. Furthermore, the
Gulf of Mexico is "falling off" more rapidly on shelf gas
deposits than some forecasted.
MR. THOMPSON noted that the Camber Energy Research Associates
(CERA) met with us on the Natural Gas Policy Council. He
pointed out that the Lower 48 market is about 60 bcf of gas per
day and Alaska production would perhaps increase from 2 to 4
[bcf]. However, what's remarkable with the U.S. market is that
if the demand is growing at 1.5-2 bcf a day per year, within a
year a lot of gas could be absorbed from Alaska, Canada, and
off-shore. In fact, most believe that would happen and thus
would bring prices from $5 plus per mcf down to the $3 mcf
described earlier. However, Mr. Thompson felt that Alaska could
compete better than other sources where the rate capacity is not
as high as Prudhoe Bay, which can already produce 8 bcf a day.
As long as Alaska gets in the market now in the Lower 48, Alaska
will win in [the Lower 48] market.
Number 2465
VICE CHAIR FATE asked if Mr. Thompson had a scenario of
development. He asked if Mr. Thompson's aforementioned target
year of 2007 was for flow, for the beginning of the pipeline, or
for establishing markets.
MR. THOMPSON clarified that he meant 2007 would be the beginning
of gas sales [flow of gas]. Therefore, the producers would have
to make decisions regarding moving forward for permitting and
making the project happen by the end of this year or early 2002.
He understood that some on the Gas Study Group also use a 2007
target year while others target the year 2008. Either 2007 or
2008 seem feasible if a decision is made by July 2002.
Number 2549
MR. THOMPSON returned to the presentation and continued with
slide 8, "Natural Gas Trading Hub/Contracts." He highlighted
the fact that although the hub concept is a physical system, it
is a contractual system as well. Furthermore, although spur
lines are an alternative to hubs, he charged that Alaska should
ensure that there is no alternative to the contractual [hub]
system. Even if the physical hub isn't done, he felt that there
will be investors who will want to review a trading hub.
Although trading hubs may be new to Alaskans, they are
fundamental to gas distribution and for clear transparent
trading. The Lower 48 has numerous trading hubs as does Canada,
the United Kingdom, Europe, and they are progressing in Asia.
For example, the old ARCO was working to progress a natural gas
trading hub in the gulf of Thailand that could ship and
transport gas to Vietnam, Malaysia, and Thailand. He pointed
out that it was a contractual system with these countries.
Number 2627
REPRESENTATIVE GREEN pointed out that customarily gas contracts
for the Lower 48 are long-term contracts that can be in the
range of 20 years. He asked whether Mr. Thompson's proposal
would continue under that long-term timeframe or should there be
a new perspective.
MR. THOMPSON explained that in the Lower 48, the trading
mechanisms and the instruments to hedge the prices are so
sophisticated that most financing for most projects won't use
long-term contracts. He imagined that in the Lower 48 market
one-fourth of the sales may be long-term contracts, one-fourth
of the fuel and contracts may be medium-term contracts, and
perhaps 50 percent of the volume may be sold on the spot market.
Also, [the state] should watch for more integration of gas
supply tied to power plants in the U.S. Mr. Thompson indicated
that Alaska should consider adopting [at least] elements of the
European Gas Directive regulations, which require a party to
disclose if it is a party downstream. Such relates to the
trading hub methodologies and pricing valuation regulations,
which don't exist in Alaska.
Number 2799
MR. THOMPSON returned to his presentation and addressed slide 9.
He informed the committee that arrangements in the U.S. [Lower
48], the European Union Gas Directive, and the United Kingdom's
Natural Gas Trading are examples of regulations [that Alaska
should consider]. He pointed out that the same producers in
Alaska are the same that contributed to developing the
regulations in the aforementioned countries. He then turned to
the rights for access. If a person with a proven financial
capability bids a competitive price and the capacity is present,
that person should have the right to the gas. That is the case
in the aforementioned countries.
VICE CHAIR FATE asked if the existing contracts for gas would
allow such.
MR. THOMPSON replied no. He explained that such would have to
be [addressed] in the trading agreements and the regulations
within Alaska. There are no lease requirements that specify
that the producers have to sell to anyone that can meet the
netback price. However, as he suggested earlier, the producers
will probably have some percentage of long-term and medium-term
contracts for financing; that is a contract that Alaskans
wouldn't have the right to get that gas. He clarified that he
is referencing the excess capacity. This is another [reason]
why Alaska should maintain its royalty share because Alaska can
manage that.
TAPE 01-18, SIDE B
MR. THOMPSON expressed the need for access rules to be clear.
he noted that he had already covered slide 10 as well as slide
11. He emphasized that if the state doesn't invest in the
natural gas pipeline, then allow Alaskan companies to invest in
the 12.5 percent share and thus more profits would be kept in
the state. Therefore, there would be some people "at the table"
whose board of directors are in Alaska.
Number 2891
REPRESENTATIVE GREEN posed a situation in which [the state] has
the 12.5 percent and a proportion of long-term contracts, while
the operators have some short-term to medium-term contracts.
The line is in and going, but the entity is going to cut back
production and hold. At that time, [the state] was doing its
12.5 percent. He said, "Now they cut back. Does that
adversely, in your opinion, effect our rate at 12.5 before they
cut back?"
MR. THOMPSON noted that he wasn't sure of the structure on the
gas pipeline. Perhaps it will be constructed so that each owner
will have contractual volume shares in the lines. For example,
if the line is capable of moving 2 bcf a day, the state, if it
chose to invest, would have a contractual right to move 12.5
percent of 2 bcf at any time regardless of what the others were
moving. He agreed with Representative Green that this would go
back to the productability. Therefore, if the producers,
because of poor market conditions, opted to cut back, they can
do so. However, where there are contracts, the producers would
have to provide those volumes. Mr. Thompson pointed out that
the state may choose to keep supplying in-state businesses for
other business reasons. Perhaps the state would make more money
from the taxation of those businesses than the royalties.
REPRESENTATIVE GREEN surmised then that [the producers] could
require more than 12.5 percent of the production.
MR. THOMPSON said, "Of the net capacity?" He identified that
the issue Representative Green is raising as one that hasn't
been resolved in the gas pipeline. He related his understanding
that if some cut back [contractual volumes], then others can
produce their full volume. However, he said that he didn't know
how it would evolve.
MR. THOMPSON returned to his presentation and noted that slide
12 had already been discussed. However, he acknowledged that it
may be difficult to perform the actual negotiations as was the
case with some of the oil agreements. Still, Mr. Thompson hoped
that there could be a win-win situation in which the producers
and the state could do it up front in order to avoid lawsuits
after gas is flowing.
Number 2720
MR. THOMPSON moved on to slide 13, "Example Resolution
Principles for Alaska - European Union Gas Directive." The
European Union Gas Directive [principles that Alaska should
review] includes the following:
Gas transmission, distribution interconnected, no
barriers;
State(s) regulates gas business: nondiscriminatory,
clear;
Fair and open access to the natural gas system;
Access to pipelines allowed under set of transparent
rules;
Participants in the market will not abuse their
dominant position nor engage in predatory behavior;
Participants have open, nondiscriminatory storage
access;
Gas suppliers will compete freely for "eligible
customers."
MR. THOMPSON closed with slide 14, which offers key conclusions
of a gas business vision, and slide 15, which delineates the
steps to reach the gas business vision. He offered to answer
any questions.
Number 2620
VICE CHAIR FATE thanked Mr. Thompson. He then related his
belief that legislation is necessary and thus the committee
would be happy to have Mr. Thompson's help in that vein.
MR. THOMPSON remarked that he would be honored to help clarify a
resolution of principles that are favorable for the Lower 48 gas
line while establishing the principles for a financial gas
industry in Alaska.
REPRESENTATIVE GREEN mentioned that Mr. Thompson was the author
of ARCO's "No decline after '99." Although many thought Mr.
Thompson was crazy, there was no decline but rather an increase
[in production] after 1999. Representative Green explained that
he was using that to illustrate that Mr. Thompson is a man of
vision and honor.
Number 2531
MR. THOMPSON, in response to Representative Dyson, said that the
resolutions in the system should be reviewed to determine
whether the current resolutions should be amended or whether a
new resolution should be drafted. He offered to provide advice
in that area.
REPRESENTATIVE DYSON expressed the need to meet with Mr.
Thompson in order to outline this and its scope.
MR. THOMPSON agreed and remarked that such could be accomplished
in a principles type of format from which the details could
follow in the future.
ADJOURNMENT
There being no further business before the committee, the House
Special Committee on Oil and Gas meeting was adjourned at 6:07
p.m.
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