03/28/2001 03:10 PM House O&G
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+ teleconferenced
= bill was previously heard/scheduled
ALASKA STATE LEGISLATURE
HOUSE SPECIAL COMMITTEE ON OIL AND GAS
March 28, 2001
3:10 p.m.
MEMBERS PRESENT
Representative Scott Ogan, Chair
Representative Hugh Fate, Vice Chair
Representative Fred Dyson
Representative Mike Chenault
Representative Vic Kohring
Representative Gretchen Guess
Representative Reggie Joule
MEMBERS ABSENT
All members present
COMMITTEE CALENDAR
HOUSE CONCURRENT RESOLUTION NO. 8
Expressing the legislature's opposition to the proposed
"northern" or "over-the-top" route for a natural gas pipeline to
transport North Slope natural gas reserves to the domestic North
American market, and expressing the legislature's support of
commercialization of North Slope natural gas for the maximum
benefit of the people of the state.
- MOVED CSHCR 8(O&G) OUT OF COMMITTEE
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
PREVIOUS ACTION
BILL: HCR 8
SHORT TITLE:NORTH SLOPE NATURAL GAS PIPELINE ROUTING
SPONSOR(S): REPRESENTATIVE(S)WHITAKER
Jrn-Date Jrn-Page Action
03/16/01 0625 (H) READ THE FIRST TIME -
REFERRALS
03/16/01 0625 (H) O&G, RES
03/28/01 (H) O&G AT 3:00 PM CAPITOL 124
BILL: HB 83
SHORT TITLE:NATURAL GAS RESOURCES DEVELOPMENT
SPONSOR(S): 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
01/30/01 (H) MINUTE(O&G)
02/01/01 (H) O&G AT 10:00 AM CAPITOL 124
02/01/01 (H) Heard & Held
02/01/01 (H) MINUTE(O&G)
03/28/01 (H) O&G AT 3:00 PM CAPITOL 124
WITNESS REGISTER
REPRESENTATIVE JIM WHITAKER
Alaska State Legislature
Capitol Building, Room
Juneau, Alaska 99801
POSITION STATEMENT: As sponsor of HCR 8, gave a PowerPoint
presentation and answered questions.
MICHAEL J. HURLEY
Government Relations
North American Natural Gas Pipeline Group
601 West 5th Avenue, Suite 500
Anchorage, Alaska 99501
POSITION STATEMENT: Testified on HCR 8.
MEAD TREADWELL
528 "N" Street
Anchorage, Alaska
POSITION STATEMENT: Testified on HCR 8 on behalf of former
Governor Walter J. Hickel; read a letter from Governor Hickel to
Chair Ogan and summarized points from an excerpt from E.L.
Bartlett that was written at the Alaska Constitutional
Convention; answered questions.
ACTION NARRATIVE
TAPE 01-21, SIDE A
Number 0001
CHAIR SCOTT OGAN called the House Special Committee on Oil and
Gas meeting to order at 3:10 p.m. Members present at the call
to order were Representatives Ogan, Fate, Dyson, Chenault,
Kohring, Guess, and Joule.
HCR 8 - NORTH SLOPE NATURAL GAS PIPELINE ROUTING
Number 0072
CHAIR OGAN announced that the first order of business would be
HOUSE CONCURRENT RESOLUTION NO. 8, Expressing the legislature's
opposition to the proposed "northern" or "over-the-top" route
for a natural gas pipeline to transport North Slope natural gas
reserves to the domestic North American market, and expressing
the legislature's support of commercialization of North Slope
natural gas for the maximum benefit of the people of the state.
CHAIR OGAN informed members that in the new proposed committee
substitute (CS), the sections were reordered and some redundant
language was consolidated.
Number 0124
REPRESENTATIVE DYSON made a motion to adopt the proposed CS for
HCR 8, version 22-LS0764\J, Chenoweth, 3/28/01, as a work draft.
There being no objection, Version J was before the committee.
Number 0186
REPRESENTATIVE JIM WHITAKER, Alaska State Legislature, prime
sponsor of HCR 8, came forward to give a PowerPoint
presentation. [He provided a written copy later to the
committee, the first page of which read, "Natural Gas in Alaska:
What Does it Mean to the People of the State?"]
REPRESENTATIVE WHITAKER explained that information in the
presentation had been garnered from the web site of the Energy
Information [Administration] and from Tokyo Gas Company Ltd.
The conclusions were his own, he emphasized, and were undergoing
third-party review.
REPRESENTATIVE WHITAKER told members that to Alaskans, natural
gas means $680 million to $4.2 billion a year to the state;
significantly lower energy costs; and major direct and indirect
employment opportunities, "if we demand that our resource be
developed in our best interests."
REPRESENTATIVE WHITAKER referred to a chart showing national
trends in home heating, furnished courtesy of BP; he said the
trend for natural gas is increasing significantly when compared
to electricity as a source of home-heating energy. He noted
that for electricity, even though heating use has decreased,
other uses have increased significantly. The "energy mix" is
getting "lighter," and gas is becoming a larger component for
the production of electricity.
REPRESENTATIVE WHITAKER called gas "clean and green"; the waste
associated with its use is significantly less than that
associated with coal, he said, and air pollutants are
significantly less than from oil or coal. He noted that the
related charts also were furnished by BP.
Number 0487
REPRESENTATIVE DYSON asked Representative Whitaker whether one
could infer from the graph that coal and oil are not being used
enough in America for heating.
REPRESENTATIVE WHITAKER said he didn't know whether that could
be inferred, but one could infer that gas is being used more, in
relationship to coal or oil, for home heating.
Number 0540
REPRESENTATIVE DYSON stated his understanding that in the United
States most home heating [previously done] by coal or oil has
been converted to electricity, with coal and oil going towards
[electrical] generation. He suggested that may be a bit beyond
the current discussion, however.
REPRESENTATIVE WHITAKER replied:
I think it is a bit beyond it, but I don't think that
your assumptions - given that those are your
assumptions - would be correct. I think you'd find
that indeed gas has replaced coal and oil for home
heating, and it is also replacing coal and oil for new
electrical generation in the Lower 48.
REPRESENTATIVE WHITAKER noted that the demand for natural gas is
soaring. He referred to a chart titled "Supply & Demand for
North America" and said the numbers came from the Energy
Information [Association]. He also noted that the chart
referred to: current and expected supply from Canada and the
Lower 48, including a depletion factor; expected additional
supplies from Mexico and the Rockies; gas from an Alaskan
pipeline project; and gas supplies from a Mackenzie delta
project. Pointing out that the supply and demand curves on the
chart don't come together, he offered his conclusion that it can
be anticipated that higher prices will continue.
REPRESENTATIVE WHITAKER brought attention to a chart titled
"Supply & Demand for the Pacific Rim," which mentioned "contract
supply volume," "contract extension volume," and both an Alaskan
LNG [liquefied natural gas] project - which he mentioned being
online by 200 - and a Sakhalin LNG project. He commented,
"Again, given that we probably don't have all supply sources
included in this, I think it's fair to say that this line is
more probably aligned with the mid-demand range; but, still,
there is an upside, meaning to me that there is room in the
marketplace."
Number 0767
REPRESENTATIVE WHITAKER mentioned the "world market dynamic
reality." Referring to another "slide" in the presentation, he
said:
Supply will restrict demand for the foreseeable
future. That's an incredible statement to make for a
commodity as important as natural gas. And given that
Alaska's North Slope is the largest undeveloped
reserve of natural gas in North America, we need to
ask ourselves, "How can we take advantage of that
situation?" It's very simple: We ... take our gas to
market.
REPRESENTATIVE WHITAKER briefly addressed pipeline routing
options shown on a series of maps, including the "over-the-top"
route, which he depicted as undesirable; the governor's
preferred "highway" route; the TAGS [Trans-Alaska Gas System]
route; and the so-called hub approach, "hubbing someplace in the
Interior of Alaska, providing for a significant market access."
Number 0872
REPRESENTATIVE WHITAKER referred to a "slide" showing the state
constitution, Article VIII, Section 2, which says the
legislature shall provide for the utilization, development, and
conservation of all natural resources belonging to the state,
including land and waters, for the maximum benefit of its
people. He emphasized that it is the legislature's
responsibility.
Number 0913
REPRESENTATIVE WHITAKER turned to the question of how to obtain
the maximum benefit. He highlighted the need for maximum market
exposure, saying an overland route alone would exclude worldwide
markets, especially in Asia and probably the West Coast of the
United States. By contrast, connecting to multiple markets
would stabilize market opportunities. He noted that the "over-
the-top" and the Foothills "highway" routes exclude Asia, and
the TAGS route excludes "middle America." Therefore, he said,
the hub approach gives maximum market exposure.
Number 0995
REPRESENTATIVE WHITAKER turned to the issue of maximum dollars
to the state. He said:
If we're to truly understand how the state can accrue
the maximum dollars from a project of this nature, we
have to discuss financing, because indeed there are
dollars to the state associated with financing, or
dollars from the state associated with financing.
And so, we look at our two options for financing:
public financing, private financing. Public financing
will exempt the financing component from federal
taxes, which significantly improves the economics of
an Alaskan gas project and increases the return to the
state.
Additionally, the return on financing a project of
this size will be 8 to 12 percent of capital costs per
year for 30 years; that's a significant return.
Number 1069
REPRESENTATIVE WHITAKER addressed public ownership versus
private ownership. He told members that under public ownership,
besides being exempt from federal income taxes, the state-owned
pipeline would give a greater netback to the state because no
taxes would be charged back against the netback, and no tariff
would be charged to the state. Under private ownership, on the
other hand, taxes would be paid to the federal government, and a
tariff would be paid to the producers. He continued:
So, in dollars to the state, what's the difference
between public and private ownership? Given a six bcf
[billion cubic feet] project, that's six billion cubic
feet per day; the numbers are different, but the
theories are the same whether it's a four-bcf-per-day
project or a six-bcf-per-day project. We're using a
six-bcf model.
By the way, these are Purvin & Gertz's assumptions.
You can read it as well as I can: Under private
ownership, the state would accrue $680 million per
year; under public ownership, $1.3 billion per year.
The difference is ... the tariff that would accrue to
the state and the return, I'm assuming, to the
permanent fund on the capital invested. ... We're
assuming $2.59 per million Btu[s] [British thermal
units] sold in middle America; that is the assumption
that Purvin & Gertz used in their study.
Number 1178
CHAIR OGAN asked about amortization under either public or
private ownership.
REPRESENTATIVE WHITAKER replied:
As you can see, there is a return to the permanent
fund; that is the amortization cost. And instead of
that going to a third party, that would be returned to
the state, to the permanent fund, assuming that was
the [Alaska] Permanent Fund Corporation that invested
in it.
CHAIR OGAN asked whether that would be the 8 to 12 percent
[shown in the presentation].
REPRESENTATIVE WHITAKER affirmed that, saying it was assuming a
12 percent tariff.
Number 1238
CHAIR OGAN asked whether that is also with an assumption that 25
percent of the royalty would go to the permanent fund.
REPRESENTATIVE WHITAKER answered that the formulation would not
change, given public ownership or private ownership.
CHAIR OGAN asked for confirmation that the assumption for the
graph is 25 percent of the income.
REPRESENTATIVE WHITAKER affirmed that. He specified that it is
assuming a per-million-Btu field price in middle America of
$2.59. He noted that the charts also addressed assumptions of
gas prices at $4.50 and $8.00. Emphasizing that it is a 30-year
project, and that gas prices are uncertain, he also noted that
the current price is $5.34. He concluded that assuming the
$2.59 price, under either private or state ownership, the
producers would still get a substantial portion; in neither
scenario would the state get more than its fair share.
Number 1360
CHAIR OGAN asked what Representative Whitaker's assumptions are
regarding the state's purchase of the gas.
REPRESENTATIVE WHITAKER replied:
We're not buying the gas. The gas continues to be,
once having left the unit, the property of the
producers. We are collecting a royalty, a severance,
a tariff, and a return on investment. The rest goes
to the producers.
CHAIR OGAN asked whether the state wouldn't have the same
problem that YP[C] [Yukon Pacific Corporation] has, for example:
wanting to build a line, but having no gas. He said, "We've got
12.5 percent; [we could] take our gas in kind, ... but how do we
get there with the producers, if the state decides to build the
gas pipeline?"
REPRESENTATIVE WHITAKER replied that he had an answer [in other
legislation], but it wasn't relevant to this particular
presentation. His point is that there is a significant return
to the producers and a reasonable return to the state.
Number 1453
REPRESENTATIVE WHITAKER addressed maximum in-state usage
opportunity, saying those opportunities increase in relation to
two factors: the number of population centers that the pipeline
crosses, and the number of miles of pipe in the state. He
indicated the "over-the-top" route [fails] in this regard; the
"highway" route is "close"; the TAGS route is "closer"; and the
hub concept works.
Number 1504
REPRESENTATIVE WHITAKER addressed maximum competition for gas
production. He told members that a publicly owned pipeline
would ensure that no producer on the North Slope would control
access to the gas transportation system; he emphasized the
importance of this component, noting that one problem in Alaska
is too little competition and too few producers on the North
Slope. Any producer of gas or oil should have an opportunity to
produce and sell its product, he said. Public ownership ensures
that access to the transportation system is available.
REPRESENTATIVE WHITAKER turned attention to maximum job
opportunities for Alaskans. He said the state needs to ensure
that both long-term and short-term jobs associated with the gas
pipeline project are provided to Alaskans. Obviously, public
ownership provides more opportunity for that.
Number 1563
REPRESENTATIVE WHITAKER concluded his PowerPoint presentation,
summarizing the reasons that a hub project, publicly owned but
privately operated, is in the best interests of Alaska. He said
the hub approach gives maximum market exposure for Alaskan North
Slope gas, and it allows maximum gas usage for Alaskans.
Furthermore, public financing gives maximum dollars to the
state, ensures maximum competition for North Slope gas
production, and ensures both short-term and long-term jobs for
Alaskans.
REPRESENTATIVE WHITAKER emphasized his willingness to have a
third-party review. He said legislators have no choice but to
follow the constitution, which is clear. He called HCR 8 a
first step, highlighting the need for a northern (but not "over-
the-top") route, as well as the legislature's role in ensuring
that Alaska's gas goes to market. He pointed out that the
debate regarding public-versus-private ownership and financing
is for another day.
Number 1718
REPRESENTATIVE GUESS referred to the question of costs. She
asked Representative Whitaker whether he had looked at which
route would maximize a broader definition of profit, including
not just money, but also jobs and "the greater profit."
REPRESENTATIVE WHITAKER answered:
Again, relating to the benefits, we've tried to list
and define what is in the maximum best interest of the
state. Included in that, of course, is employment and
dollars to the state. And it was clear, under
analysis, that the project that was adherent to
maximum best interest of the state was the same in
both cases.
REPRESENTATIVE GUESS stated her understanding that [the
analysis] hadn't looked at whether one route was three times
more costly, however.
REPRESENTATIVE WHITAKER replied:
We did, yes. Again, we used the "costing" assumptions
association with the Purvin & Gertz study, which were
very definitive with regard to the cost of a specific
type of pipeline to a specific point. And, again, the
program that we have here is available; we're happy to
provide you with a copy of it. All of our analysis
data is included.
CHAIR OGAN requested that the committee be provided hard copies
of that material.
REPRESENTATIVE FATE also requested that Representative Whitaker
provide an explanation of how the hub concept isn't just a
physical concept, but is also a "pricing mechanism."
REPRESENTATIVE WHITAKER agreed to both requests.
Number 1878
REPRESENTATIVE GUESS turned attention to the ownership issue.
She asked Representative Whitaker whether he had looked at both
the cost of operating a pipeline - even if it's privately run -
and what the risks of ownership are.
REPRESENTATIVE WHITAKER answered:
We certainly have. ... The cost-of-service and cost-
of-fuel assumptions are the same whether it is a
privately owned entity or a publicly owned entity.
The risk, of course, is that the market is not
adherent to the project, and we have to assure
ourselves that the market is there. ... I'm very
comfortable with the market dynamic. The market
exists. ... And I've come to that conclusion as a
result of years of analysis. I'm very, very
comfortable making that assertion.
Number 1933
CHAIR OGAN noted that a memorandum of understanding (MOU) has
been signed to deliver LNG from the Timor Sea, in Australia, to
the West Coast of the U.S. He also noted that an LNG plant
owned by Exxon has been shut down due to political unrest in
Indonesia. He referred to testimony from previous overview
hearings and to questions asked of Mr. Muraki [of Tokyo Gas
Company Ltd., who had given a presentation before the
committee]. Chair Ogan said:
I think maybe the shipment of LNG to the West Coast
does indicate that one of the strongest markets,
certainly for natural gas, in the world is the Lower
48, and it's unfortunate that it's not Alaska gas
that's being shipped there - or at least the
commitment for Alaska gas being shipped there.
Number 2078
MICHAEL J. HURLEY, Government Relations, North American Natural
Gas Pipeline Group, came forward to testify as follows:
As you are aware, the three companies participating in
the group (BP, ExxonMobil, and Phillips) are working
diligently to develop an economically viable project
to commercialize North Slope natural gas by pipeline
through Canada to the Lower 48 market. And in doing
that, it is incumbent on us to fully consider the
options that could help us accomplish that goal.
Indeed, the Federal Energy Regulatory Commission
[FERC], before it will issue a certificate of public
convenience and necessity, requires us to analyze
alternative pipeline route options as part of the
application process.
This project has the potential to be the largest
energy project in North America, and will require
capital investments in the billions of dollars.
Indeed, investment decisions cannot be taken lightly,
and must be made with the confidence that can only be
gained by a thorough evaluation of the alternatives,
and an understanding of their relative strengths,
weaknesses, risks, and rewards. Such an approach is
fundamental to good business decision making.
Our efforts are focused on creating and understanding
opportunities, not prematurely discarding them. This
resolution seems to suggest that we do the latter. We
believe that legislative action which recommends
shutting down options before they are fully understood
limits dialog and interferes with the fundamental
dynamics of a free-market economy.
It cannot be forgotten that any Alaskan gas project,
whether it's LNG, GTL [gas-to-liquids] or pipeline
technology, must be able to deliver products to the
market at a competitive cost in order to succeed.
There are many other competing sources of supply, and
buyers will be going elsewhere if a project fails in
this regard. If either Alaska project advances, the
benefits to the state and its citizens and businesses
will be substantial, and will make a significant
contribution to Alaska's economic future.
Finally, the work we are undertaking this year will
yield information we believe will be necessary for
reasoned decision making. We have been listening to
the views and concerns of the Alaska legislature ...
and of Alaska's citizens, and we will be evaluating
alternatives based on seven criteria: overall project
economics, Alaskan access to gas, jobs for Alaskans,
revenues to the state, safety, environmental
protection, and project timing.
Number 2271
MR. HURLEY, in response to a question by Representative Dyson,
affirmed that "overall project economics" includes profit for
the three companies involved. He continued:
We do not feel that we have enough information yet to
make a route decision; indeed, that is the reason for
our aggressive work program. Again, we think that the
interests of commercializing North Slope gas are best
served by creating choices, and not eliminating them.
We expect that there will be many future opportunities
for legislative guidance and action.
Number 2318
REPRESENTATIVE DYSON asked whether Mr. Hurley agreed that the
only thing HCR 8 would preclude is the "over-the-top" route;
that it could facilitate any of the other three options; and
that it says nothing about hubs or ownership.
MR. HURLEY indicated that is his understanding as well.
Number 2375
CHAIR OGAN asked what Mr. Hurley would say "if we said we were
trying to save you 75 million bucks."
MR. HURLEY replied:
What we're going to have to do in our program this
year is, as yet, unclear. ... Part of these
requirements are put on us by the Federal Energy
Regulatory Commission. And even if the legislature
were to appropriately express its desires to have one
route or another, I'm not sure that that changes what
we're required to do by the [federal government].
Number 2468
REPRESENTATIVE FATE asked whether the projected timeline for
reporting at the end of the year on the findings of Mr. Hurley's
group was still on target.
MR. HURLEY answered:
We are in the process of pulling together the
contractors. And their first task, once we get
contractors onboard, is going to be to look at the
timeline we've given them and tell us whether they can
do it or not. And we're waiting right now for them to
get up and running, to be able to tell us that. We're
still holding on to our goal to be finished and ready
to apply by the end of this year, but we'll find out
more once the contractors have reviewed the scopes of
work that we've outlined and tell us whether or not
we're being reasonable. ... We don't know yet.
Number 2476
CHAIR OGAN said he doesn't doubt the sincerity of Mr. Hurley's
group and its efforts. Referring to the tight deadline, he said
if it doesn't happen by the end of this year, and if the
[legislature] must wait for several more months, legislators'
hands will be tied unless there is a special legislative
session. Chair Ogan said that is one reason he himself looks
favorably upon HCR 8 and upon making this policy statement as a
legislature.
CHAIR OGAN acknowledged that Mr. Hurley's group needs to use due
diligence. However, he cautioned against saying that if the
producers decide the southern route isn't economic, then there
wouldn't be a project. He said the committee has to make an
important policy call. He asked Mr. Hurley whether he cared to
comment.
MR. HURLEY answered that the legislature, with the resolution,
is expressing a preference, which it should do. He added:
What we're suggesting to you is not that you shouldn't
have a preference, but that you should think about the
implications of that preference, especially when you
get into some of the language where it says that the
legislature will use all efforts ... to make that
occur.
Number 2625
CHAIR OGAN suggested that the language to which Mr. Hurley
objected was on page 2, line 31 [continuing to page 3] of
Version J, where it says "the legislature will exercise every
power within its authority [to prevent the routing of a North
Slope natural gas pipeline that bypasses Alaska"]. He further
noted that on [lines 26-28] it says "the legislature will
exercise every power within its constitutionally required
authority to guarantee commercialization of Alaska North Slope
natural gas for the maximum benefit of the people of the state".
He commented:
I remember one statement by a member of your group
that said that the producers' interest is the same as
the [state's]. And I disagree with that statement.
... I think that we have a lot of similar interests
and a lot of interests that align, but it's not the
same interest, because we each have our fiduciary
responsibility. And there's nothing wrong with that;
I think it's absolutely appropriate. ... You have a
fiduciary responsibility to your stockholders,
basically, and ours is to our "stockholders." We
happen to be an owner state. ... We own the resources
collectively. And so, I guess we're exercising our
fiduciary responsibility by having this discussion.
MR. HURLEY said he understands that.
Number 2693
CHAIR OGAN asked whether this sends a discouraging message to
Mr. Hurley's group or the companies behind it.
MR. HURLEY replied that he thinks it can. He clarified that he
doesn't think the expression of a preference does [send a
discouraging message] because everyone will have a preference.
However, the language that Chair Ogan had quoted [on page 2,
lines 23-25 and 28-29] may worry people, especially people who
are "out trying to invest billions of dollars in assets."
Number 2731
REPRESENTATIVE DYSON said he appreciates that Mr. Hurley has a
job to do, and that this may be disconcerting. He said,
however, that it is hard to see how an across-the-top route can
provide jobs for Alaskans; gas for Alaskan consumption, except
to Kaktovik; or significant revenue from the gas transportation
system. He said he appreciates Mr. Hurley's good-faith
presentation but has to believe that the companies are,
foremost, interested in their own bottom line. He suggested it
would be very difficult to convince the committee that leaving
the "over-the-top" option on the table would be best for
Alaskans.
MR. HURLEY said he agrees that it could be a tough road. He
then stated:
We envision that this project is going to be large
enough that it's not going to just challenge putting
all the Alaskans to work, it's going to challenge
getting enough people in North America to do it. So
people who are going to want to work, no matter which
direction it goes, are going to be able to get jobs.
It's going to take a lot of people to build this.
With respect to gas for Alaskans, there have been
discussions, and I believe the group is committed to
evaluating a spur line down to Fairbanks, even ...
when you're looking at the "over-the-top" route.
So anytime you're looking at multiple criteria, it's
hard to say you can maximize one [criterion] at the
expense of all others. ... You've got to try and
optimize against a bunch of criteria. And what we
tried to do here was lay out the criteria we're
looking at. And they do include jobs; they do include
gas to Alaskans. And our problem is, we don't yet
have enough data to be able to fill in the matrix of
... what are the different attributes of the different
routes in any detail or with any confidence.
Number 2889
REPRESENTATIVE FATE said he understands that the bottom line of
the companies for which Mr. Hurley works is all-important, and
that internal finances are important for any company to survive.
On the other hand, to him this is more than just indicating a
preference. The constitution mandates that the [legislature]
maximize the resources for the benefit of Alaskans.
REPRESENTATIVE FATE asked whether the FERC had already issued
certificates of convenience to another company close to 20 years
ago, and now [Mr. Hurley's group] is reapplying for those. In
the alternative, he asked whether the group is expecting a new
issuance, and thus there would be two "layers" of certificates.
MR. HURLEY answered that at this point, they are pursuing it by
doing the work necessary to file a new "green field." [This
isn't on the tape, but was recorded in the log notes.]
TAPE 01-21, SIDE B
Number 2951
REPRESENTATIVE FATE further asked whether FERC has the power to
negate the other issuances.
MR. HURLEY answered that the projects will be different and, to
some extent, don't directly overlap; they have different "end-
points," with different technology. He further stated:
The routing may mostly be the same, but it's not clear
to us how different it is before the FERC gets to
separate them in their own dockets, if you will. ...
We have seen studies by the FERC that say that the
ANGTA [Alaska Natural Gas Transportation Act] stuff
does not preclude putting in a new "7C" application.
...
Quite frankly, we've seen and looked at several
different legal opinions, and they all say different
things, and that's something we're going to have to
sort out, as part of this process. We don't know the
answer yet. That is part of our work program.
Right now, we're assuming that, if you will, the worst
case is, you have to go and file a brand new "green
field," which means you have to do all the work
necessary to have all the information for an
application. That's the worst case in terms of the
most work you have to do, so we're assuming that for
the time being, as we move the process forward.
Number 2856
CHAIR OGAN asked Mr. Hurley whether his group opposes HCR 8.
MR. HURLEY answered that to the extent HCR 8 is expressing a
preference, they don't oppose expressing a preference but
suggest, if anything, that it may be premature, "given that
there's not enough data out there to make a decision."
CHAIR OGAN asked whether his assumption is true that it wouldn't
change what [the group] is doing, because they have to go
through an analysis, both to meet the federal requirements and
to have "the holy water, if you will, sprinkled upon the project
by the boards that want to invest the money."
MR. HURLEY replied that to the best of [the group's] knowledge
right now, that is correct.
CHAIR OGAN reiterated, "Let the record reflect, we tried to save
you 75 million bucks."
Number 2797
REPRESENTATIVE KOHRING referred to page 1, paragraph 5, of Mr.
Hurley's written testimony, which read in part, "We believe that
legislative action which recommends shutting down options before
they are fully understood limits dialog and interferes with the
fundamental dynamics of a free-market economy."
REPRESENTATIVE KOHRING mentioned his own concerns with regard to
trying to force the eventual construction of a pipeline. He
said he appreciates the efforts of committee members and other
legislators, and surmised that his "no" vote may be the only one
when something like this gets to the House floor. He explained:
We're supposed to be a government that's promoting a
private-sector free-market economy, and I just don't
see that this is consistent with that. And I know our
constitution says one thing, and we all took an oath
of office to uphold the principles of the
constitution, but that doesn't necessarily mean the
constitution is 100 percent right, either. ... It
might have been God-inspired, but it's still written
by men, and it's still subject to errors.
REPRESENTATIVE KOHRING suggested that supporting [every aspect
of] the constitution may not always be in the best interests of
Alaskans. He cautioned against acting prematurely, limiting
options for the future, or doing something that discourages the
oil and gas industry - which he believes has an excellent track
record and which has added enormously to the state treasury -
from acting in a "free-market way."
Number 2650
REPRESENTATIVE GUESS said she agreed in many ways. She observed
that there is an oligopoly for oil and gas natural resources:
there are very few producers, which may cause natural market
failures. It is not a free market.
REPRESENTATIVE DYSON compared it to a table-stakes poker game
for which it takes $3 billion or $4 billion to buy into the
game.
Number 2561
CHAIR OGAN thanked Mr. Hurley and stated that should HCR 8 pass,
he and the committee, to his belief, "stand ready to assist you
in whatever way possible to get this ... gas developed." He
asked Mr. Hurley to "please convey the message to your
colleagues and to your superiors" that this should be
interpreted as positive, not negative.
Number 2520
MEAD TREADWELL testified via teleconference from Anchorage,
noting that he would speak both on behalf of former Governor
Walter Hickel, who was unable to testify that day, and as an
individual.
MEAD TREADWELL, on behalf of former Governor Hickel, read into
the record a letter [dated March 23, 2001, in packets], as
follows:
Dear Representative Ogan,
While I'd hoped to visit you and the House Special
Committee on Oil and Gas before the end of March, I'm
not able to do so because I'm traveling to Moscow for
a meeting of Northern forum leaders. Nevertheless, I
want to compliment you and the committee on its
efforts to understand where Alaska stands in world
markets for natural gas.
Any successful gas project requires willing buyers,
willing sellers, willing transporters, and financing.
My work in this area has been to try to bring those
elements together, and I hope your committee can do
the same.
If I were there, I would make three points.
First, Alaska has to look out for its own interests.
In the late 1970s, an overland project failed - but
not before Alaska's efforts helped Canadian reserves
get to market. If overland was the best way to go, we
would have an oil pipeline to Bellingham today. We
don't. Tidewater gives us the most options, and while
we can pursue an overland route, we can't allow the
tidewater option to be ignored by the state or the
producers. We must aggressively pursue Asian markets,
and that means ensuring that a gas supply is
independently offered for sale. So far, that has not
been done. Instead, we're telling the Asian market
we're not ready to sell.
Second, I've attached an excerpt from a talk the late
Senator Bob Bartlett gave to Alaska's Constitutional
Convention. He warned about companies with assets
outside Alaska warehousing assets they acquire in
Alaska. Of course, no oil company would admit that
they are warehousing gas, or keeping it out of the
market because it has other supplies available. But a
state owner of such a large resource has to protect
itself, because it could happen. It is clear to me
that we have not protected ourselves.
What to do? We must be tough. Our options range from
a reserve tax to taking back the resource for
nonperformance. Neither of these options would be
necessary if a sufficient gas supply to serve the LNG
route were committed to an independent marketing
effort.
Third, we must learn our lessons from the oil line:
Unless structured correctly, a pipeline owned by
producers is likely to result in tariff, royalty, and
tax disputes because of a conflict in incentives
between profits from transportation and profits from
wellhead production. Since TAPS [Trans-Alaska
Pipeline System] began, the state has had to collect
close to $10 billion in dispute because of the way the
Trans-Alaska Pipeline was structured. Two options
could help head off similar disputes on gas. First
may be requiring an independent transportation company
to carry the gas. Second may be having the state take
an ownership interest in the pipeline at least equal
to its royalty interest in the gas. Ken Thompson's
trading hub idea also has merit in heading off this
kind of conflict.
At least two transport companies have invested
millions of dollars designing and permitting systems
to deliver North Slope gas. The state is doing
nothing I'm aware of to help bring these investors
together with the producers.
I look forward to further discussion with you on my
return. I'm doing what I can, as an individual, to
urge producers, transporters, buyers, and financiers
to get together. And the state must help to do the
same.
If this letter is presented to your committee in my
absence, Mead Treadwell - who works with me - can
attempt to answer any questions you have.
With best regards.
Sincerely,
Walter J. Hickel
Number 2329
MR. TREADWELL referred to the attachment to the letter, pointing
out that E.L. Bartlett [at the time of the Alaska Constitutional
Convention in 1955] had noted that Alaska was becoming an owner
state, and had said there are two dangers when a state owns a
lot of natural resources: First, there can be exploitation
under the thin disguise of development; second, taking Alaska's
mineral resources without leaving some reasonable return for the
support of Alaska's governmental services and the use of all the
people will mean a betrayal in the administration of the state's
wealth.
MR. TREADWELL highlighted the second danger discussed by Mr.
Bartlett: Outside interests, determined to stifle development
in Alaska that might compete with their activities elsewhere,
will attempt to acquire great areas of public lands in order not
to develop them until such time that "in their omnipotence and
the pursuance of their own interests, they see fit." Mr.
Treadwell concluded by noting that Mr. Bartlett had said the
following: If large areas of "Alaska's patrimony" are turned
over to such corporations, Alaskans may be even more the losers
than if the lands had been exploited.
Number 2262
CHAIR OGAN remarked that he had found the statement by E.L.
Bartlett, made in 1955, so prophetic that he had read a portion
of it on the [House] floor.
CHAIR OGAN referred to the statement in Governor Hickel's
letter, "Instead, we're telling the Asian market we're not ready
to sell." He asked who "we" is.
MR. TREADWELL answered that in this instance, he thinks Governor
Hickel is referring to what appears to be a policy "where they
returned from a trip to Asia and kind of reported that there
isn't a market." He suggested [Governor Hickel's] position is
that if someone is trying to sell something, that person doesn't
tell his or her customer there is no market there. He added:
We watched, very closely, the visit that you had from
the representative of Tokyo Gas [Mr. Muraki], and
we're also watching very closely what you reported to
the committee at the beginning of this session, which
is that there are now at least two projects announced
to bring Australia gas to the West Coast of the United
States or the West Coast of Mexico. ...
Take a look at the clear difference there. ... You've
got oil producers in that case announcing projects.
Those projects don't necessarily have market
commitments as yet, but they announce an intent to
sell and an intent to go out and try to sell. And
we've never had that similar kind of intent announced
on behalf of Alaska gas in the Asian marketplace that
I'm aware of.
Number 2157
CHAIR OGAN referred to other markets and the Timor Sea. He
asked Mr. Treadwell whether he was aware of any disincentive
clause such as a reserves tax or a "use-it-or-lose-it-type of
scenario built into their statutes" that might motivate these
types of agreements.
MR. TREADWELL answered that he didn't have firsthand knowledge,
although he had heard, in several cases, that most leases have
performance clauses, which in some cases have a "short fuse."
He added, "We have a performance clause, but our gas is mixed up
with our oil, so that there is performance on the leases right
now because the oil is being produced." He suggested it would
be a good issue for the committee to try to obtain more
information about.
CHAIR OGAN replied, "We've been attempting to get that
information, and it's difficult to obtain. But we have asked
the producers if they're aware of any, and we're expecting
responses."
Number 2080
CHAIR OGAN asked what former Governor Hickel meant when he
talked about an independent marketing effort on the second page
of his letter. Chair Ogan said he believes too much
responsibility has been delegated by the legislature to the
executive branch. He further asked, "What could we do better to
market our gas?"
MR. TREADWELL responded that former Governor Hickel mentions, in
the idea of an independent marketing effort, that options range
from a reserves tax to "taking back for nonperformance." If,
however, the legislature - through incentives, creating an
authority, or working with the existing authority and "the
existing permitted transporter for LNG" - were to see whether a
commitment allowing the project to go forward could be put
there, then it could live or die on its own merits in the
marketplace - without a question of its being held back from the
marketplace because of other competing projects owned by the
same North Slope producers.
MR. MEAD went on to say that the gas doesn't necessarily have to
be confiscated. The idea would be to get agreement to "put the
marketing rights for that gas in a position where a group has
the sole incentive to get that gas to market with a positive
return to the state and ... the producers, as opposed to
comparing the return from Alaska gas to any other kind of gas
out there." If Alaska sells that gas, then Alaska makes the
money. But if it doesn't sell and somebody sells gas out of
Irian Jaya or the Northwest shelf of Australia, the state
doesn't get any return at all.
Number 1920
CHAIR OGAN stated his understanding, then, that it would take a
cooperative agreement between the producers and the state. Or
perhaps the legislature would delegate an agent or designee to
market the state's gas on its behalf. He mentioned that a big
stumbling block with the Pacific Rim is that Yukon Pacific
[Corporation] doesn't own gas. He asked Mr. Mead how he
envisions something like that would be done.
MR. TREADWELL replied that there are couple of options. He
suggested reviewing Mr. Thompson's proposal that the state
commit to, in essence, moving the wellhead to Fairbanks. If the
state assessed the feasibility of that option - in return for
providing help in the infrastructure that could potentially help
both the overland project and the LNG project - then perhaps the
quid pro quo is that there would be a commitment of gas to an
independent marketing entity.
MR. TREADWELL pointed out a second option: to incorporate an
independent marketing entity or to offer the state's royalty gas
to a marketing entity that is able to get the other gas there.
He explained that there are a number of disincentives for the
state such as reserve stacks; however, it may be possible to get
a positive finding.
MR. TREADWELL offered a third option: looking at "antitrust."
If there is a competitive disincentive to sell, maybe there's an
antitrust rule whereby a settlement could put an option [for]
this gas into an independent marketing effort. He remarked that
he thinks Governor Hickel is suspicious of ever having serious
consideration of the Asian market unless all the incentives for
Alaska are working together.
CHAIR OGAN remarked that he would prefer, philosophically, to do
something in a positive light, rather than "holding guns to
people's heads." He said he would like to discuss, with the
committee, exploring and taking the lead on the hub issue, which
probably needs to be developed in the interim. He remarked that
it probably would be fairly complex to figure out how to move
the wellhead to Fairbanks, for example, and it likely will take
extensive statutory and policy changes.
Number 1731
CHAIR OGAN went on to say he thinks the "wellhead to Fairbanks"
or hub idea probably addresses the third issue brought up by
[former Governor Hickel], about structure and disputes. He
noted that he says "requiring an independent transportation
company to carry the gas." Chair Ogan said Representative
Whitaker addressed that in his presentation. He asked if Mr.
Treadwell could expand on this.
MR. TREADWELL offered some history in reply. When Alaska North
Slope gas was discovered, there initially were at least three
proposals to get it to market: an over-the-top route, the
Alaska Highway route, and the El Paso LNG route. Congress
stepped in and passed ANGTA, which said the President would make
a choice and avoid a competitive choice by what was then the
Federal Power Commission, which preceded FERC. There was never
a question that gas would be brought to market by a
transportation company, rather than the owners of the gas
itself. Later, the owners of the gas became part owners of the
Alaska Natural Gas Transportation System (ANGTS), which then-
President Carter chose to have go down the highway. Even later,
a "waiver of laws" package may have "increased that."
MR. TREADWELL continued, stating that since then, the country
has gone through deregulation whereby the difference between
transporter companies and producer companies has been erased in
the law. There was a reason for that law in the first place; he
suggested the state should look at its own reasons for whether
or not it wants to have independent transportation companies.
He explained that one argument for an independent transportation
company is it provides good transparency regarding the cost of
delivering the gas, in order to fully know what the wellhead
[price] is, and to avoid disputes later on.
MR. MEAD explained that another advantage can be getting the gas
to market if somebody wants to hold [gas] off the market,
whereas now there is no "check" on that. He suggested it would
be worthwhile for the committee to study that issue.
MR. MEAD further suggested that if the state is going to spend a
lot of money permitting new projects - on routes that have
already been permitted by independent transportation companies -
it may be worthwhile to try to get the transportation companies
and producers to work together. That hasn't been seen yet. In
fact, he said, the unstated assumption of the administration
appears to be that there must be a different transportation
company. That assumption shouldn't go unquestioned.
Number 1480
CHAIR OGAN noted that in the same paragraph of the letter,
former Governor Hickel talks about the state's having an
ownership interest at least equal to its royalty interest in the
gas, which is about 12.5 percent. Chair Ogan offered his
perception of the advantage of that: at least [the state] would
be at the table, and the information no longer would be
proprietary. He asked Mr. Treadwell whether [former Governor
Hickel would agree].
MR. TREADWELL answered that he thinks [former Governor Hickel's]
argument is this: "If you look how money has been made in the
oil business since '77, when tax began flowing, there's
certainly been money made at the wellhead, but there's also been
money made in transportation." A question is how much money is
made on transportation versus how much is made at the wellhead.
If the state is an owner in the pipeline, then it is neutral,
and there aren't conflicting incentives. He added that other
arguments include the "information argument" brought up by Chair
Ogan; the question of transparency, which Mr. Thompson had
brought up; moving the gas; and Alaska's long-term position in
the gas market. He added, "It doesn't come from any kind of
socialist impulse. ... It comes from, basically, the state, as
an owner, using a development tool to help make this happen."
CHAIR OGAN further noted that the letter says, "The state is
doing nothing I'm aware of to help bring these investors
together with the producers." He asked, "What can we do
better?"
MR. TREADWELL replied that there are carrots and sticks. On the
carrot side, if the legislature or the committee brought the
people who got the permits for this project together, the state
might save a lot of money in processing new permits.
Number 1284
CHAIR OGAN remarked that he would talk with the governor as to
how the legislature can do its job better, by persuasion rather
than coercion, if possible.
MR. TREADWELL stated that he thinks that's former Governor
Hickel's point of view as well.
CHAIR OGAN asked Mr. Treadwell what he thinks former Governor
Hickel's position is on [HCR 8].
MR. TREADWELL answered that [Governor Hickel] did not have the
chance to specifically review the resolution; however, he stated
in his letter that he is not crazy about the Alaska Highway
pipeline. He remarked that he thinks [Governor Hickel] would
support what is stated about the constitution and what the
legislature's roll is in the policy of the state. He added that
he doesn't think [Governor Hickel] has any objection with
expressing preferences. Finally, he said [Governor Hickel]
would argue that a resolution could be passed against something,
but would also argue to try to make something positive happen at
the same time.
Number 1009
REPRESENTATIVE FATE made a motion to move the CS for HCR 8,
version 22-LS0764\J, Chenoweth, 3/28/01, from committee with
individual recommendations and the attached zero fiscal note.
Number 0974
REPRESENTATIVE KOHRING objected. He explained that he would be
more amenable to the resolution if it did not have the word
"guarantee" on page 2 [line 27]. He remarked that he has a
problem: while the government is [advocating] a free-market
economy, it is forcing the issue and the hand of industry in
terms of attempting to guarantee a certain outcome.
CHAIR OGAN asked Representative Kohring if he would be more
comfortable with the word "facilitate".
Number 0860
REPRESENTATIVE KOHRING said he would. He made a motion to adopt
a conceptual amendment, "to substitute 'guarantee' with
facilitate'." There being no objection, it was so ordered.
REPRESENTATIVE KOHRING withdrew his objection to moving the
resolution from committee.
Number 0785
CHAIR OGAN announced that without further objection, CSHCR
8(O&G) was moved from the House Special Committee on Oil and
Gas.
CHAIR OGAN called an at-ease at 4:37 p.m. He called the meeting
back to order at 4:44 p.m.
HB 83 - NATURAL GAS RESOURCES DEVELOPMENT
[Contains discussion of SB 164]
Number 0765
CHAIR OGAN announced that the final order of business would be
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."
CHAIR OGAN informed members that he had no intention of moving
the bill that day, but wished to [adopt] a proposed committee
substitute (CS), Version L [22-LS0322\L, Chenoweth, 3/28/01], as
a work draft. Version L has language that would make it almost
a companion bill to [SB 164]; however, it keeps the project
language originally in HB 83, on page 2, lines 15 through 25, as
well as the idea of designing enough capacity.
CHAIR OGAN indicated his desire to have a short meeting on
[Version L] and to have members familiarize themselves with its
new language. He stated his intention of eventually developing
HB 83 into the hub concept, but acknowledged it may take longer
than the current session to do so. He announced the intention
of having meetings over the interim, therefore, in order to move
rapidly at the beginning of the next session, should that be the
wish of the committee.
Number 0380
CHAIR OGAN referred to a letter in committee packets [dated
March 21, 2001] from Ken Thompson of Pacific Rim Leadership
Development. He read from the attachment, which listed
"Requirements for a Natural Gas Industry in Alaska." He noted
that the first item, "Gas pipeline traversing Alaska," will
probably be taken care of by the Senate bill. The second item
needed discussion as to whether the state has at least a 12.5
percent share in the pipeline. The third item related to "in
kind" use of gas [versus taking monthly royalty checks from
producers selling the state's share]; he suggested in-kind gas
could be on the Kenai Peninsula, for example, to keep the urea
plants going there. The fourth item read:
4) State formulate clear policies and regulations for
clarification of transparent netback pricing at the
"hub" or "spur line points" as a valuation basis for
gas sales within the State and netback pricing at the
North Slope wellhead for clear and transparent royalty
and taxation purposes.
CHAIR OGAN commented that Mead Treadwell [who had testified on
HCR 8 that day] had described that as moving the wellhead to
wherever the hub is. Noting that Amerada Hess, in years past,
had tracked every single drop of oil and every shipment in order
to settle royalty disputes because the laws and policies were
ambiguous, Chair Ogan emphasized the desire to avoid ambiguity
and contentiousness with the producers by getting transparent
royalty and taxation policies.
CHAIR OGAN suggested perhaps the hub to Fairbanks is a good
idea. He restated his intention of working on the hub policy,
if it is the will of the committee. In response to a question,
he said the following Friday there would be testimony and
lengthy discussion about [Version L].
Number 0025
REPRESENTATIVE DYSON expressed hope that the administration's
representatives would be present.
CHAIR OGAN indicated his office would make that request.
TAPE 01-22, SIDE A
Number 0001
REPRESENTATIVE GUESS announced that she and Representative Joule
would be in a House Special Committee on Education hearing on
Friday and would, therefore, defer to the wisdom of the other
members.
REPRESENTATIVE DYSON commended the chair for choosing to work on
this during the interim, and for being proactive, rather than
just responding to what is going on in the marketplace in that
industry. He offered to use some of his office account to
assist Representative Joule in attending interim meetings,
should there be no funding for the committee during the interim.
CHAIR OGAN suggested the need to discuss with the leadership a
bit of a budget to facilitate this. He said he would like to be
that proactive facilitator.
REPRESENTATIVE DYSON proposed that the committee should put
together what they foresee as being in the best interests of the
state, and then say to the industry, "If you can top this, go
for it." He characterized the industry as the goose that lays
the golden egg for the state.
[HB 83 was held over.]
ADJOURNMENT
There being no further business before the committee, the House
Special Committee on Oil and Gas meeting was adjourned at 4:51
p.m.
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