Legislature(2009 - 2010)BARNES 124

04/10/2009 01:00 PM House RESOURCES


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01:05:55 PM Start
01:06:16 PM Presentation: Alaska Fischer-tropsch Synthetic Fuels Pilot Program
02:37:25 PM Adjourn
* first hearing in first committee of referral
+ teleconferenced
= bill was previously heard/scheduled
+ Presentation by Mark K. Iden, Deputy TELECONFERENCED
Director of Operations, Defense Logistics
Agency - Defense Energy Support Center:
"Alaska Fischer-Tropsch Synthetic Fuels
Pilot Program"
+ Bills Previously Heard/Scheduled TELECONFERENCED
                    ALASKA STATE LEGISLATURE                                                                                  
               HOUSE RESOURCES STANDING COMMITTEE                                                                             
                         April 10, 2009                                                                                         
                           1:05 p.m.                                                                                            
                                                                                                                              
MEMBERS PRESENT                                                                                                               
                                                                                                                                
Representative Craig Johnson, Co-Chair                                                                                          
Representative Mark Neuman, Co-Chair                                                                                            
Representative Kurt Olson                                                                                                       
Representative Paul Seaton                                                                                                      
Representative Peggy Wilson                                                                                                     
Representative David Guttenberg                                                                                                 
Representative Chris Tuck                                                                                                       
                                                                                                                                
MEMBERS ABSENT                                                                                                                
                                                                                                                                
Representative Bryce Edgmon                                                                                                     
Representative Scott Kawasaki                                                                                                   
                                                                                                                                
COMMITTEE CALENDAR                                                                                                            
                                                                                                                                
PRESENTATION:  ALASKA FISCHER-TROPSCH SYNTHETIC FUELS PILOT                                                                     
PROGRAM                                                                                                                         
                                                                                                                                
PREVIOUS COMMITTEE ACTION                                                                                                     
                                                                                                                                
No previous action to report.                                                                                                   
                                                                                                                                
WITNESS REGISTER                                                                                                              
                                                                                                                                
MARK IDEN, Deputy Director of Plans & Operations                                                                                
Defense Logistics Agency                                                                                                        
Defense Energy Support Center                                                                                                   
U.S. Department of Defense                                                                                                      
Fort Belvoir, VA                                                                                                                
POSITION STATEMENT:  Provided a presentation on the Alaska                                                                    
Fischer-Tropsch Synthetic Fuels Pilot Program.                                                                                  
                                                                                                                                
JOHN MARTIN, Major                                                                                                              
Commander, Defense Energy Support Center, Alaska                                                                                
Elmendorf Air Force Base, Alaska                                                                                                
POSITION STATEMENT:  Answered questions regarding the Alaska                                                                  
Fischer-Tropsch Synthetic Fuels Pilot Program.                                                                                  
                                                                                                                                
KEVIN BANKS, Director                                                                                                           
Division of Oil & Gas                                                                                                           
Department of Natural Resources                                                                                                 
Anchorage, Alaska                                                                                                               
POSITION STATEMENT:  Answered  questions regarding the permitting                                                             
process  that would  be required  for the  Alaska Fischer-Tropsch                                                               
Synthetic Fuels Pilot Program.                                                                                                  
                                                                                                                                
                                                                                                                                
ACTION NARRATIVE                                                                                                              
                                                                                                                                
1:05:55 PM                                                                                                                    
                                                                                                                                
CO-CHAIR  MARK   NEUMAN  called  the  House   Resources  Standing                                                             
Committee meeting to  order at 1:05 p.m.   Representatives Olson,                                                               
Guttenberg,  Tuck, Wilson,  Johnson, and  Neuman were  present at                                                               
the call to order.   Representative Seaton arrived as the meeting                                                               
was in progress.                                                                                                                
                                                                                                                                
^PRESENTATION:    ALASKA  FISCHER-TROPSCH SYNTHETIC  FUELS  PILOT                                                             
PROGRAM                                                                                                                       
                                                                                                                                
1:06:16 PM                                                                                                                    
                                                                                                                                
CO-CHAIR NEUMAN  announced that the  only order of business  is a                                                               
presentation on the Alaska  Fischer-Tropsch Synthetic Fuels Pilot                                                               
Program.                                                                                                                        
                                                                                                                                
1:06:43 PM                                                                                                                    
                                                                                                                                
MARK  IDEN,  Deputy  Director  of  Plans  &  Operations,  Defense                                                               
Logistics Agency, Defense Energy  Support Center, U.S. Department                                                               
of Defense, said  he will be giving an overview  of the synthetic                                                               
fuel  initiative that  his agency  is  looking to  pursue in  the                                                               
state of  Alaska.   He explained  that he  works for  the Defense                                                               
Energy  Support  Center  (DESC)  [slide 1]  which  is  under  the                                                               
Defense Logistics Agency  (DLA), a defense agency  under the U.S.                                                               
Department of Defense (DOD).                                                                                                    
                                                                                                                                
MR. IDEN  noted that  his agency  used to  be called  the Defense                                                               
Fuel Supply  Center and  during that  time the  agency's business                                                               
was  to provide  liquid fuels  to  its customers  - the  military                                                               
services and  federal civilian agencies like  the U.S. Department                                                               
of Agriculture,  U.S. Department  of the  Interior, and  the U.S.                                                               
Bureau of Indian  Affairs.  In the last dozen  years, however, he                                                               
said his agency has taken  a larger emphasis into energy products                                                               
by buying natural  gas and electricity, and in  Alaska the agency                                                               
is also buying coal [slide 2].   In addition, DESC is involved in                                                               
many  energy   initiatives,  cost-savings   initiatives,  energy-                                                               
savings performance contracts,  and so forth.   The agency's goal                                                               
is to be the energy provider of choice to its customers.                                                                        
                                                                                                                                
1:09:35 PM                                                                                                                    
                                                                                                                                
MR. IDEN  explained that  DESC is  predominantly fuel  [slide 3].                                                               
It  maintains  60  million  barrels  of  fuel  storage  worldwide                                                               
through 630  storage terminals located on  bases and intermediary                                                               
distribution systems.   The DESC sells about  130 million barrels                                                               
of product  a year which  equates to  about 5 billion  gallons of                                                               
fuel on  an annual basis  throughout the world.   As a  result of                                                               
fuel  price increases,  the amount  of DESC's  sales has  gone as                                                               
high as  nearly $18  billion a  year and  is targeting  about $15                                                               
billion for this  year.  Sales are to customers  such as the U.S.                                                               
Army, Navy, Air Force, and federal civilian agencies.                                                                           
                                                                                                                                
MR. IDEN said DESC does roughly  $1 billion a year in business in                                                               
natural  gas [slide  3];  for  example, it  buys  natural gas  in                                                               
Alaska for the  Elmendorf and Fort Richardson bases.   The center                                                               
also competitively buys  electricity and coal and there  is now a                                                               
new  area  of  focus  on solar,  wind,  photovoltaic,  and  other                                                               
renewable  power.   He said  DESC privatized  utility systems  in                                                               
Alaska at  Fort Richardson, Fort  Greely, and Fort  Wainwright by                                                               
selling the utility systems to a  supplier - Doyon, Limited - and                                                               
that is  now buying back the  service from Doyon.   The award for                                                               
this  50-year  utility privatization  contract  was  for over  $1                                                               
billion, he added.                                                                                                              
                                                                                                                                
1:12:15 PM                                                                                                                    
                                                                                                                                
MR.  IDEN, in  response  to Representative  Tuck, explained  that                                                               
DESC does both  electricity and natural gas in the  Lower 48, but                                                               
only  natural gas  in  Alaska.   In  the  1990s  the natural  gas                                                               
industry  was de-regulated  in the  Lower 48  and DESC  could buy                                                               
wellhead gas  and move  it cheaper  than could  each installation                                                               
individually.     The  DESC   also  started   buying  electricity                                                               
competitively  when it  was deregulated,  but this  has not  been                                                               
done in Alaska.   Under a department-wide  initiative, DESC began                                                               
privatizing the utility systems in  the late 1990s, although some                                                               
of  the  services  do  it  themselves.    As  a  consolidator  of                                                               
requirements, DESC  can talk  to industry in  only one  voice and                                                               
get a better competitive process  than could each of the branches                                                               
of the armed forces individually.                                                                                               
                                                                                                                                
MR. IDEN,  in further response to  Representative Tuck, explained                                                               
that privatization  is a  bill of  sale to  a new  provider which                                                               
then owns  the system and gets  an easement and rights  to get on                                                               
the base to  do the work there.   In turn, DESC  puts a long-term                                                               
contract  in place  for the  utility services  of gas,  electric,                                                               
water, and wastewater.  He  explained that DOD was having trouble                                                               
maintaining the infrastructure due to  lack of funds and ability,                                                               
so  the decision  was  made to  sell those  systems  and buy  the                                                               
service back from people who know how to run utility systems.                                                                   
                                                                                                                                
1:14:42 PM                                                                                                                    
                                                                                                                                
MR. IDEN,  in response  to Representative  Wilson, said  the main                                                               
presence for coal in Alaska is  Usibelli Coal Mine, and this coal                                                               
is put to Eielson Air Force Base.                                                                                               
                                                                                                                                
JOHN  MARTIN, Major,  Commander, Defense  Energy Support  Center,                                                               
Alaska,  added that  the  coal is  also put  to  Clear Air  Force                                                               
Station.   In  further response,  he said  he is  not sure  which                                                               
energy source [gas, electricity, or  other] is cheapest, but that                                                               
Doyon will  supply the  utility at its  discretion and  right now                                                               
the utility is set up for coal.                                                                                                 
                                                                                                                                
MR. IDEN  offered his belief  that the  coal power plant  has not                                                               
been  privatized,  rather it  is  the  rest of  the  distribution                                                               
system -  the power  lines on  the base and  utilidor -  that has                                                               
been privatized.   He said that if at some  point the lifespan of                                                               
the  coal plant  is  determined to  be too  short  and not  worth                                                               
operating or  maintaining, then conversion  to another  source of                                                               
energy can be considered.  He  added that he is unsure whether it                                                               
would be  Doyon, the base,  or both that  would make the  call in                                                               
this regard.                                                                                                                    
                                                                                                                                
1:17:06 PM                                                                                                                    
                                                                                                                                
MR.  IDEN  commenced  with  his  presentation  about  the  Alaska                                                               
Fischer-Tropsch   Synthetic  Fuels   Pilot  Program   [slide  4].                                                               
Fischer-Tropsch refers  to a specific  process of  converting gas                                                               
or coal  fuels to liquid,  he explained.   It is named  after the                                                               
two Germans  who developed the  process during World War  II when                                                               
Germany lost access  to petroleum and began using  coal to create                                                               
liquid fuels.   South Africa  currently uses  the Fischer-Tropsch                                                               
process, he added.  The DOD  has made a concerted decision to get                                                               
the  U.S. away  from its  reliance on  foreign oil  and to  begin                                                               
developing  capabilities  within  the  U.S.    Military  services                                                               
identified the desire to move  from petroleum to synthetic fuels,                                                               
which are  now in the  process of  being tested and  certified in                                                               
various aircraft  and ground-fuels  equipment to prove  that they                                                               
are  reliable and  have no  detrimental  impacts.   There are  no                                                               
synthetic  fuel plants  working  in operational  capacity in  the                                                               
U.S., continued Mr. Iden, and it  takes about three to four years                                                               
to  build  a plant.    The  DESC  recognized  that it  needed  to                                                               
jumpstart this process  and identified Alaska as  the location to                                                               
do so.                                                                                                                          
                                                                                                                                
CO-CHAIR NEUMAN commented that playing  host to the first gas-to-                                                               
liquids  plant  in  the  Northern  Hemisphere  would  be  a  huge                                                               
opportunity for the state of Alaska.                                                                                            
                                                                                                                                
1:19:48 PM                                                                                                                    
                                                                                                                                
MR. IDEN  reviewed the agenda  for the March 11-12,  2009, summit                                                               
that was held in Anchorage [slide  5].  Discussions at the summit                                                               
included how current fuel support  is being provided to customers                                                               
and how it would occur if  a synthetic fuel plant is successfully                                                               
built in  Alaska.   A number of  subject-matter experts  from the                                                               
DESC attended  the summit  and talked  to industry  members about                                                               
contracting  issues, including  how  to  structure contracts  and                                                               
proposals, how  industry would  provide its  offers to  DESC, how                                                               
DESC would  evaluate the offers,  pricing and  financial matters,                                                               
and quality and environmental considerations.   He said about 100                                                               
people  attended  the  first session  of  the  summit,  including                                                               
military  customers, industry,  and legislators.   On  the second                                                               
day,  one-on-one  sessions  were  held  so  industry  could  talk                                                               
privately  with  DESC  staff.    A level  of  interest  is  being                                                               
developed,  he continued,  and  the  goal of  the  summit was  to                                                               
publicize this  and get  feedback to  make sure  that DESC  has a                                                               
reasonable process ahead of it.                                                                                                 
                                                                                                                                
1:21:32 PM                                                                                                                    
                                                                                                                                
MR. IDEN  stated that Alaska  was chosen as the  location because                                                               
it  is rich  in the  traditional feedstocks  of coal  and natural                                                               
gas.  Also,  he needed a location  where he could get  all of his                                                               
customers onboard with this approach  and this concept (slide 6).                                                               
He  said  the  fuel  being  looked  at  is  JP8,  the  military's                                                               
equivalent  to  commercial  jet A1  which  is  the  international                                                               
commercial jet  fuel.  In addition  to aviation, JP8 is  used for                                                               
ground diesel  requirements, making  JP8 the  single fuel  on the                                                               
battle field.   As part of  the package, DESC is  also looking at                                                               
some other  ground programs  in Alaska that  do not  normally use                                                               
JP8.                                                                                                                            
                                                                                                                                
MR.  IDEN  explained that  DESC  typically  does business  on  an                                                               
annual  basis,  but  that  one-year contracts  will  not  do  for                                                               
developing  this particular  industry  given that  a plant  costs                                                               
several  billion dollars.   The  DESC can  do a  minimum of  five                                                               
years with its  current authority, and add  five one-year options                                                               
on to that,  for a quasi ten-year commitment.   However, industry                                                               
would like to see more than  that and DESC has proposals floating                                                               
through  "the  legislative  side"  to  go  up  to  a  twenty-year                                                               
contract.                                                                                                                       
                                                                                                                                
1:24:32 PM                                                                                                                    
                                                                                                                                
MR. IDEN stated  that DESC is looking to go  operational with the                                                               
Fischer-Tropsch Process because it  cannot tinker around with new                                                               
concepts and  ideas.  The  Fischer-Tropsch Process is  proven, he                                                               
said; there  just are not  yet any plants  in the U.S.   Industry                                                               
will decide  whether the  feedstock is coal  or natural  gas, and                                                               
whether to have a biomass component  if the feedstock is coal.  A                                                               
straight synthetic  fuel will not be  used; rather, it will  be a                                                               
50:50 blend of traditional  petroleum-based product and synthetic                                                               
product.   Weapon  systems  are currently  being  tested on  this                                                               
50:50 blend and commercial industry  is also testing its aviation                                                               
platforms  on  this  blend;  therefore  everyone  is  looking  to                                                               
initially start  with a 50:50  blend fuel.   He pointed  out that                                                               
DESC   cannot  receive   only  the   synthetic  product   at  its                                                               
installations  because it  is  not in  the  business of  blending                                                               
fuel, instead the supplier will have to provide the 50:50 blend.                                                                
                                                                                                                                
MR.  IDEN,  in response  to  Co-Chair  Johnson about  DESC  being                                                               
feedstock  neutral, confirmed  that DESC  will not  dictate which                                                               
type of feedstock must  be because they all will do  the job.  He                                                               
said DESC will also not tell industry where to build the plant.                                                                 
                                                                                                                                
1:26:37 PM                                                                                                                    
                                                                                                                                
MR.  IDEN,  in  response  to   Co-Chair  Neuman,  explained  that                                                               
synthetically-derived fuels  are ultra clean, which  can have the                                                               
unintended  consequence   of  impacting  the  seals   of  weapons                                                               
systems.   When  a  straight-run synthetic  product  is used  the                                                               
seals do  not swell like  they normally do with  traditional fuel                                                               
and this  results in leaks.   The tests are therefore  being done                                                               
on a 50:50 blend to make sure these problems do not occur.                                                                      
                                                                                                                                
REPRESENTATIVE SEATON recounted his  own experience with problems                                                               
when he used ultra-clean fuel in two heating stoves.                                                                            
                                                                                                                                
MR.  IDEN,  in  response  to Co-Chair  Neuman,  stated  that  the                                                               
military services  are testing their aviation  systems right now,                                                               
including all fighter  jets and helicopters.   In addition, tests                                                               
are being  done on all  of the ground  equipment.  He  noted that                                                               
there were  problems with the JP8  when it was first  used; thus,                                                               
it is necessary to do all of the testing carefully.                                                                             
                                                                                                                                
1:29:49 PM                                                                                                                    
                                                                                                                                
MR.  IDEN pointed  out  the importance  of  the replacement  fuel                                                               
being  competitively  priced  with  what it  is  replacing.    He                                                               
related  that  DOD has  said  the  fuel must  be  "competitively"                                                               
priced, which means that it can  be slightly more in cost as long                                                               
as it  remains within the  competitive range.  With  crude prices                                                               
currently at $40-$50 per barrel,  industry is feeling that it can                                                               
get there  because the synthetic  product is right on  the border                                                               
of being  competitive.   A rise  in crude  prices to  $70-$80 per                                                               
barrel  is expected  in  the  relative near  future,  which is  a                                                               
competitive  range.   He said  DESC  therefore thinks  this is  a                                                               
viable project from the economic point of view.                                                                                 
                                                                                                                                
1:31:14 PM                                                                                                                    
                                                                                                                                
MR. IDEN related that Section  526 of the Energy Independence and                                                               
Security Act of  2007 says that when the Department  of Defense -                                                               
which means the DESC -  buys fuel for operational requirements, a                                                               
synthetic-based fuel  cannot have  a larger  lifecycle greenhouse                                                               
gas  emissions footprint  than a  normal, straight  run petroleum                                                               
product.  However, he continued,  the DESC receives a waiver from                                                               
this  requirement when  the  fuel is  purchased  for testing  and                                                               
certification  processes; thus,  DESC can  buy any  fuel to  meet                                                               
testing needs.   He  went on  to explain that  natural gas  has a                                                               
lower   greenhouse  gas   emission  footprint   than  traditional                                                               
petroleum products and  is therefore in a  net positive position.                                                               
Coal,  on the  other hand,  generally  starts out  in a  negative                                                               
posture.    Mixing  coal  with biomass  brings  down  the  carbon                                                               
dioxide emission  footprint.  The  whole lifecycle of  the system                                                               
must be  looked at  to determine the  greenhouse gas  footprint -                                                               
where  the  feedstock product  is  produced,  getting it  to  the                                                               
refining plant, the  refining process, getting it  to the end-use                                                               
customer,  and   checking  the   emissions  from   the  equipment                                                               
tailpipes.  Since this product  burns cleaner, DESC is looking at                                                               
the feedstocks and not worrying about the emissions.                                                                            
                                                                                                                                
1:33:34 PM                                                                                                                    
                                                                                                                                
MR.  IDEN   said  this  is   a  DOD-level  program   focusing  on                                                               
alternative and  renewable fuels  [slide 7].   Emission standards                                                               
for commercial  and military  aviation are  coming down  the pike                                                               
that  current fuels  will  not  meet, he  continued.   The  50:50                                                               
blends  are much  cleaner than  current  fuels and  will help  in                                                               
meeting these  emission standards,  so going this  way is  a good                                                               
thing right  up front.   The DESC  and the military  services are                                                               
coordinating on  this program in Alaska.   The U.S. Air  Force is                                                               
by far  DESC's biggest customer  and it has  taken the lead  as a                                                               
military service and expects to  have all of its weapon platforms                                                               
certified  by 2011.   The  U.S. Air  Force's goal  is to  have 50                                                               
percent  of the  domestic aviation  requirement using  this 50:50                                                               
blend by  2016.  The  process to meet  this goal must  be started                                                               
now, Mr.  Iden stressed, given  there are currently no  plants in                                                               
the  U.S. producing  at this  level and  it takes  three to  four                                                               
years to build a plant.                                                                                                         
                                                                                                                                
1:35:17 PM                                                                                                                    
                                                                                                                                
MR. IDEN  stated that  DESC conducted  a Request  for Information                                                               
(RFI)  for this  initiative  back  in 2006,  to  which 28  people                                                               
responded  and  27 indicated  the  Fischer-Tropsch  was the  most                                                               
viable process  to use.   Information received from  this initial                                                               
RFI  identified  the desire  for  long-term  contracts and  floor                                                               
pricing.   A second RFI  in 2007  requested industry to  let DESC                                                               
know  if  it could  provide  a  blended  fuel without  a  20-year                                                               
contract.   This  RFI is  what led  DESC to  pick Alaska  for the                                                               
operational-sized pilot  program, he said, and  success in Alaska                                                               
will be replicated in the Lower 48.                                                                                             
                                                                                                                                
MR. IDEN,  in response to  Co-Chair Johnson, explained  that DESC                                                               
buys  locally at  each of  its  worldwide locations.   There  are                                                               
synthetic fuel plants overseas, he  said, but right now the focus                                                               
is  on   the  domestic  side.     About  60  percent   of  DESC's                                                               
requirements  are  CONUS [contiguous  Lower  48  states], and  40                                                               
percent are "OCONUS".                                                                                                           
                                                                                                                                
1:37:40 PM                                                                                                                    
                                                                                                                                
MR.  IDEN  resumed  his  presentation,  pointing  out  that  DESC                                                               
recognized  it  needed  to take  both  a  short-term  acquisition                                                               
strategy and  a long-term  acquisition strategy  [slide 8].   The                                                               
short-term strategy  focuses on the certification  and testing of                                                               
weapons systems  and DESC has  conducted three buys  of synthetic                                                               
fuels  in this  regard.   One purchase  was a  gas-to-liquid fuel                                                               
from Shell  Malaysia and two  purchases were  coal-to-liquid fuel                                                               
from Sasol, the South African state oil company.                                                                                
                                                                                                                                
MR. IDEN, in response to  Representative Wilson pointing out that                                                               
South Africa is  a very hot climate, explained  that the military                                                               
takes  all  weather  conditions  into  consideration  during  the                                                               
testing and  certification process.   He acknowledged  that there                                                               
are  some  problems  with  JP8  in Alaska  because  of  the  cold                                                               
weather, so JP4 is used in some locations because of its cold-                                                                  
start  properties.   He expressed  his confidence  that when  the                                                               
military says the  synthetic fuels are safe to use,  they will be                                                               
safe to use worldwide.                                                                                                          
                                                                                                                                
1:40:00 PM                                                                                                                    
                                                                                                                                
MR. IDEN, in response to  Representative Tuck, clarified that JP8                                                               
is  a  straight,  non-blended  fuel.   In  further  response,  he                                                               
explained that JP4 is the aviation  fuel that was used during the                                                               
Vietnam  War  and  is  a  gasoline-type jet  fuel  that  is  very                                                               
volatile; for example,  many planes were brought  down in Vietnam                                                               
by small arms fire.  He said JP8  is a much safer fuel and is the                                                               
primary fuel used today.                                                                                                        
                                                                                                                                
CO-CHAIR NEUMAN commented that Shell  Malaysia and Sasol recouped                                                               
their investments  in the construction  of their plants  within 4                                                               
years, which  indicates the demand  and value for  this synthetic                                                               
fuel.                                                                                                                           
                                                                                                                                
MR. IDEN pointed out that South  Africa had no other choice as it                                                               
could not  get fuel because of  apartheid and therefore it  had a                                                               
big demand and  customer base to justify building the  plant.  He                                                               
said he is  unsure why Malaysia has gone to  synthetic fuels, but                                                               
that a lot of times the  extraction of crude oil produces lots of                                                               
excess natural gas.                                                                                                             
                                                                                                                                
1:41:56 PM                                                                                                                    
                                                                                                                                
MR. IDEN  returned to his  presentation, explaining that  DESC is                                                               
now  beginning its  long-term strategy  [slide 8],  which is  the                                                               
sustainment, or operational,  phase.  While the  pilot program is                                                               
in the  state of Alaska,  the ultimate  goal is expansion  to the                                                               
Lower 48 and  domestic production from plants  located within the                                                               
U.S.                                                                                                                            
                                                                                                                                
MR.  IDEN, in  response  to Representative  Seaton regarding  the                                                               
production of  synthetic fuel and  running it through  the Trans-                                                               
Alaska Pipeline  System, stated  that this issue  came up  at the                                                               
Alaska  summit.   He  said  that the  "BP  plant"  in Nikiski  is                                                               
providing another  refinery with synthetic crude  that is blended                                                               
with  that  refinery's  traditional  crude stocks  to  produce  a                                                               
blended  crude.   However, he  continued, DESC  wants a  finished                                                               
synthetic product and a finished  petroleum-derived product to be                                                               
blended together.   The issue is how to ensure  that the blend is                                                               
the targeted ratio.   He said he has a  handout detailing some of                                                               
the  specifications for  the synthetic  product  and the  blended                                                               
fuel,  as well  as a  handout summarizing  the over  80 questions                                                               
that were brought up at the summit.                                                                                             
                                                                                                                                
CO-CHAIR NEUMAN added that an  increase in the economies of scale                                                               
might  allow  Flint  Hills  Refinery   to  act  as  the  blending                                                               
facility.                                                                                                                       
                                                                                                                                
1:46:24 PM                                                                                                                    
                                                                                                                                
MR. IDEN commenced his presentation with  a review of some of the                                                               
questions  that have  been asked  [slide 9].   In  answer to  the                                                               
question "Why  do this?" he  said one reason is  energy security,                                                               
especially given  that 70 percent of  the crude used in  the U.S.                                                               
is   from  non-domestic   sources.     Another  reason   is  that                                                               
conventional  fuels  will  have  problems  meeting  the  tailpipe                                                               
emission standards  that are coming  down the pike.   The blended                                                               
fuel has  the environmental benefit of  being a lot cleaner.   In                                                               
addition, DESC  customers want this  product in about  six years,                                                               
and since there  are no plants in the U.S.,  DESC must start this                                                               
process now in order to meet  its requirements.  In answer to the                                                               
question "Who  could do this?"   Mr. Iden said  both traditional,                                                               
existing suppliers  and new  synthetic fuel  production suppliers                                                               
could  do  this.    He  offered his  belief  that  a  partnership                                                               
arrangement  will  need  to  occur because  of  the  50:50  blend                                                               
requirement.                                                                                                                    
                                                                                                                                
1:48:44 PM                                                                                                                    
                                                                                                                                
MR. IDEN specified that DESC's  annual fuel requirement in Alaska                                                               
is approximately 70 million gallons [slide  10].  He noted that a                                                               
separate  initiative  for  building  a  coal-to-liquid  plant  on                                                               
Eielson  Air Force  Base is  being worked  at the  federal level.                                                               
Therefore,  DESC  must  be  very   sensitive  to  this  separate,                                                               
distinct initiative while moving  forward with its own initiative                                                               
as it does not want to crush or  take over that initiative.  As a                                                               
comparison to DESC's  70 million gallons, Mr. Iden  said that the                                                               
Ted Stevens  Anchorage International  Airport requires  about 800                                                               
million  gallons per  year, and  Fairbanks International  Airport                                                               
requires 100-200  million gallons a  year.  Thus,  the commercial                                                               
aviation  requirements in  the state  of Alaska  far outrank  the                                                               
DOD, and a  supplier should look into  supplying these commercial                                                               
requirements as well as DESC's  requirements.  In addition to the                                                               
aviation fuels,  he continued, there are  the ground requirements                                                               
such as the state's ferry, rail, and trucking systems.                                                                          
                                                                                                                                
1:51:36 PM                                                                                                                    
                                                                                                                                
MR. IDEN, in response to  Co-Chair Johnson regarding clean diesel                                                               
for  trucks, said  he is  unsure whether  the blended  fuel would                                                               
qualify for trucks and he will get an answer back to members.                                                                   
                                                                                                                                
MR. IDEN  said he is  mentioning commercial  requirements because                                                               
industry  looked at  DESC's requirements  during  the summit  and                                                               
pointed out  that the agency's  requirements would only  be about                                                               
one-tenth of what  a typical plant would produce.   Therefore, he                                                               
continued,  it is  therefore critical  that industry  be involved                                                               
with the commercial side  as well as the DOD side  in order to go                                                               
forward.                                                                                                                        
                                                                                                                                
1:52:50 PM                                                                                                                    
                                                                                                                                
CO-CHAIR  NEUMAN related  that Alaska  Airlines has  spoken about                                                               
its  needs and  wish for  this initiative  to go  forward because                                                               
carbon  emissions  at 35,000  feet  have  10 times  the  negative                                                               
effect on greenhouse gases than at ground level.                                                                                
                                                                                                                                
MR.  IDEN, in  response to  Representative Wilson,  confirmed her                                                               
statement  that Eielson,  Fort  Richardson,  and Fort  Wainwright                                                               
will  be requiring  both  JP8 and  JP4 fuels  and  the only  ones                                                               
outside of that will be Fort  Greeley and the U.S. Coast Guard at                                                               
Kodiak.   In further response, he  stated that the DOD  will only                                                               
be testing and  certifying the weapons system and  it is doubtful                                                               
that testing will be conducted  on snowmobiles and things of that                                                               
nature.    He  added  that   DESC  is  working  with  CAAFI,  the                                                               
Commercial Aviation Alternative Fuels  Initiative, on testing for                                                               
the commercial aviation  side.  He said the U.S.  Army is testing                                                               
different ground engines, such as  the Cummins engine and others,                                                               
and he assumes  that this would apply to  the commercial industry                                                               
for trucking  requirements, so there  will need to be  a parallel                                                               
commitment for this to occur on the commercial side.                                                                            
                                                                                                                                
1:56:30 PM                                                                                                                    
                                                                                                                                
MR.  IDEN  resumed his  presentation,  explaining  that the  next                                                               
steps  after  the  summit  include  refining  DESC's  acquisition                                                               
strategy,  issuing  Requests  for  Proposals  (RFPs),  evaluating                                                               
offers,  awarding a  contract, and  establishing  a timeline  for                                                               
building the  plants and  product delivery [slide  11].   He said                                                               
the timeline  for the five-  or ten-year contract will  not start                                                               
until the  first drop of fuel  is provided so that  four years of                                                               
the contract  is not eaten up  by construction of the  plant with                                                               
only one year for delivering fuel.                                                                                              
                                                                                                                                
MR.  IDEN  reviewed   the  notional  timeline  [slide   12]:    a                                                               
solicitation will  be issued [June  1, 2009] and closed  in 45-60                                                               
days [July 30,  2009], initial evaluations will  occur [August 1-                                                               
August 30,  2009], negotiations will occur  [September 15-October                                                               
30, 2009], final  evaluations will be completed  by [November 30,                                                               
2009],  a contract  will be  awarded  by December  30, 2009,  and                                                               
first  delivery will  occur in  five years  [December 2014].   He                                                               
said DESC recognizes  that this is a big,  complex investment for                                                               
which it  will take time to  develop a proposal.   Since DESC has                                                               
already issued two  RFIs and told industry at the  summit what it                                                               
wants  to do  in  Alaska, the  process may  be  started in  early                                                               
summer with  a more generic proposal  so that a "down  select" to                                                               
two or  three companies can  be done.   Then, later in  the year,                                                               
DESC  would  ask  for  the   specifics  from  the  two  or  three                                                               
companies.                                                                                                                      
                                                                                                                                
1:59:42 PM                                                                                                                    
                                                                                                                                
MR. IDEN, in  response to Co-Chair Johnson  about regulations and                                                               
permitting, acknowledged that  there was a little  bit of concern                                                               
expressed  at the  summit about  this and  he will  be addressing                                                               
this topic  later in his  presentation when he discusses  how the                                                               
state can assist.                                                                                                               
                                                                                                                                
MR.  IDEN  commenced  his  presentation,  saying  he  thinks  the                                                               
industry summit  was a  success [slide  13].   Follow-on sessions                                                               
with  the Alaska  State Legislature  will continue,  he said,  as                                                               
will follow-on coordination  between DESC and the  U.S. Air Force                                                               
so that  the acquisition strategy  can be refined and  the course                                                               
ahead plotted.                                                                                                                  
                                                                                                                                
2:01:20 PM                                                                                                                    
                                                                                                                                
MR. IDEN  pointed out  that this cannot  be a  DOD-only solution;                                                               
the commercial industry must be brought  into the mix in order to                                                               
make the  plants efficient  in size,  scope, and  benefits [slide                                                               
14].  He said DESC has  only one restriction - the feedstock must                                                               
be produced in  the U.S.  By  default, it must be  done in Alaska                                                               
for  the  Alaska pilot  program.    In  structuring the  RFP  for                                                               
success, DESC  must develop a  model as  to how the  lifecycle of                                                               
carbon emissions will be measured.   Teams from the Environmental                                                               
Protection Agency (EPA)  and the U.S. Air Force  DESC are ironing                                                               
out the quality  and technical criteria, as well  as the contract                                                               
length and contract pricing structure.                                                                                          
                                                                                                                                
MR. IDEN  stated that in regard  to pricing, DESC had  thought it                                                               
would price the  synthetic fuel like it prices JP8.   However, he                                                               
related, the  folks at the  summit who  are looking at  a natural                                                               
gas feedstock said the 50:50  blend should be priced according to                                                               
natural gas prices and the  folks looking at coal feedstocks said                                                               
the coal portion  of the synthetic should be  priced according to                                                               
coal prices.   He went  on to note that  this can be  argued both                                                               
ways:  when crude is at $150  per barrel he would prefer to price                                                               
it at the cheaper natural gas  prices, but if the price situation                                                               
reverses he does not  want to be paying more than  he would for a                                                               
conventional product.  Therefore, DESC  is looking at this issue,                                                               
but the  real issue is  how to evaluate  a gas provider  versus a                                                               
coal provider versus a traditional provider.                                                                                    
                                                                                                                                
2:04:35 PM                                                                                                                    
                                                                                                                                
MR. IDEN,  in response to  Representative Wilson, said it  is not                                                               
DESC's  intent  [to  have several  different  feedstocks  in  the                                                               
Alaska  pilot  program  so  it  has  the  ability  to  switch  to                                                               
whichever  feedstock is  cheapest].   He said  he does  not think                                                               
DESC will award more than  one plant, although other plants could                                                               
be built  by other suppliers.   He explained that when  DESC buys                                                               
JP8 for Alaska, it pays the  market price by taking an average of                                                               
three West  Coast market  indexes -  Los Angeles,  San Francisco,                                                               
and Seattle.   For the 50:50 blend, the  petroleum component will                                                               
likely be escalated  this same way, he advised, and  the gas- and                                                               
coal-derived fuels  may be tied to  the price of natural  gas and                                                               
coal in  Alaska.  He assured  members that it is  not DESC's goal                                                               
to award multiple contracts and then play one off the other.                                                                    
                                                                                                                                
2:07:32 PM                                                                                                                    
                                                                                                                                
MR. IDEN addressed  areas where the state  could possibly provide                                                               
assistance [slide 15].  He suggested  that one such area could be                                                               
financial  incentives to  industry  to participate,  such as  tax                                                               
credits or incentives  and loan guarantees.  He said  he does not                                                               
believe any federal  stimulus money has been  identified for this                                                               
type of initiative.   Another area could be  encouragement to the                                                               
commercial    aviation    industry   through    incentives    for                                                               
participation, given  that fuel  costs are the  largest component                                                               
of  this industry's  cost  structure.   A  third  area for  state                                                               
assistance,  he  continued,   could  be  streamlining  regulatory                                                               
requirements   for  permitting,   easements,  and   environmental                                                               
standards.                                                                                                                      
                                                                                                                                
2:09:42 PM                                                                                                                    
                                                                                                                                
REPRESENTATIVE  SEATON   offered  his   belief  that  a   lot  of                                                               
legislators  would be  opposed to  converting Alaska's  renewable                                                               
energy credits  into alternative  credits so  that coal  could be                                                               
used,  but that  these folks  would not  be opposed  to something                                                               
like an alternative energy credit  program that would incentivize                                                               
coal.                                                                                                                           
                                                                                                                                
CO-CHAIR JOHNSON responded  that there may not  be the opposition                                                               
that Representative Seaton thinks.                                                                                              
                                                                                                                                
2:11:45 PM                                                                                                                    
                                                                                                                                
MR.  IDEN,  in response  to  Representative  Tuck about  the  RFP                                                               
requirements shown on slide 10,  stated that the requirements are                                                               
likely to be more than shown  because the map only depicts DESC's                                                               
annual  requirements   for  bulk   fuel.     He  said   DESC  has                                                               
requirements for other programs such  as the ground fuel program.                                                               
In further response,  Mr. Iden clarified that JP8  is the current                                                               
fuel product and the 50:50  blend would be 50 percent traditional                                                               
JP8 and  50 percent  synthetic fuel.   He further  clarified that                                                               
DFSP is the acronym for Defense Fuel Supply Point.                                                                              
                                                                                                                                
MAJOR  MARTIN added,  "Chevron's  terminal is  our  DFSP for  the                                                               
Anchorage area and it feeds Elmendorf through pipeline."                                                                        
                                                                                                                                
2:14:03 PM                                                                                                                    
                                                                                                                                
MR. IDEN,  in response to  further questions  from Representative                                                               
Tuck,  confirmed that  [JP8  will  be the  product  in the  50:50                                                               
blend]  and JP4  will probably  remain in  use [in  the locations                                                               
depicted  on slide  10] because  of some  unique issues  with the                                                               
equipment,  such as  the cold-fuel  starting capability  that the                                                               
JP8 does  not provide right now.   He stated that  that equipment                                                               
will eventually  be taken  out of  inventory.   In regard  to who                                                               
would supply the JP4, Mr. Iden  said the JP4 will not necessarily                                                               
[be supplied  by the 50:50  blend supplier] and that  there could                                                               
even be multiple suppliers for this fuel.                                                                                       
                                                                                                                                
2:15:02 PM                                                                                                                    
                                                                                                                                
MR. IDEN, in response to  Representative Seaton, said he does not                                                               
know what the capacities are  of [Alaska's] traditional petroleum                                                               
refineries [as compared  to DESC's 70 million  gallon annual fuel                                                               
requirement].   He  related that  industry has  said the  nominal                                                               
size for a  synthetic fuel plant is about 25,000  barrels per day                                                               
in  output capacity.   Since  DESC's daily  requirement is  about                                                               
2,500 barrels a  day, it can be seen why  inclusion of commercial                                                               
airport requirements  makes this  a more  economically attractive                                                               
package.                                                                                                                        
                                                                                                                                
CO-CHAIR NEUMAN pointed out that  converting Alaska's methane gas                                                               
to  liquid  fuel in  an  in-state  plant  could be  done  through                                                               
payments  of royalty-in-kind  methane to  supply carbon  neutral,                                                               
sulfur-free  fuels for  the state's  ferry system  and everything                                                               
else that  the Department of  Transportation &  Public Facilities                                                               
operates.                                                                                                                       
                                                                                                                                
2:17:26 PM                                                                                                                    
                                                                                                                                
MR.  IDEN returned  to  his presentation  and  reviewed how  DESC                                                               
purchases its  bulk petroleum in  the U.S. and  worldwide through                                                               
its four major  programs [slide 17]:   the Inland/East/Gulf Coast                                                               
Program,  the Rocky  Mountain/West Program,  the Western  Pacific                                                               
Program,  and the  Atlantic/European/Mediterranean  Program.   He                                                               
said all of the programs  are through one-year contracts that are                                                               
staggered  on  a quarterly  basis  around  the world.    Alaska's                                                               
requirements are embedded in the  Rocky Mountain/West Program, he                                                               
said, and while there is  always the potential that the synthetic                                                               
product could be  delivered to the other programs, he  said he is                                                               
not sure the economics are there to support that.                                                                               
                                                                                                                                
MR.  IDEN  explained that  the  vast  majority of  U.S.  refining                                                               
capacity is located  in the Gulf Coast and the  West Coast [slide                                                               
18].    The  vast majority  of  fuel  in  the  U.S. is  moved  by                                                               
pipeline, he said.   He pointed out DESC's  storage systems shown                                                               
on the  map and said  the DESC  moves its product  comingled with                                                               
commercial product in the pipeline  systems, although the fuel is                                                               
isolated  because it  is JP8  and not  commercial jet  fuel.   He                                                               
added that DESC's fuel is occasionally transported by tanker.                                                                   
                                                                                                                                
2:19:57 PM                                                                                                                    
                                                                                                                                
MR. IDEN  read from  Section 526 of  the Energy  Independence and                                                               
Security Act [original punctuation from slide 19 provided]:                                                                     
                                                                                                                                
     No  Federal  agency shall  enter  into  a contract  for                                                                  
     procurement  of  an   alternative  or  synthetic  fuel,                                                                  
     including   a   fuel  produced   from   nonconventional                                                                    
     petroleum sources, for  any mobility-related use, other                                                                    
     than  for  research  or testing,  unless  the  contract                                                                    
     specifies that  the lifecycle greenhouse  gas emissions                                                                    
     associated with  the production  and combustion  of the                                                                    
     fuel supplied  under the contract  must, on  an ongoing                                                                    
     basis, be  less than  or equal  to such  emissions from                                                                    
     the   equivalent   conventional  fuel   produced   from                                                                    
     conventional petroleum sources.                                                                                            
                                                                                                                                
MR.  IDEN reiterated  that DESC  was able  to purchase  fuel from                                                               
Shell Malaysia and  Sasol because that fuel was  for research and                                                               
testing; but once  this goes operational, the  portion of Section                                                               
526  related to  lifecycle  greenhouse  gas emissions  associated                                                               
with  the production  and combustion  of  the fuel  will go  into                                                               
effect.                                                                                                                         
                                                                                                                                
2:21:13 PM                                                                                                                    
                                                                                                                                
MAJOR  MARTIN,  in  response to  Representative  Tuck  about  the                                                               
sources  of the  fuel used  by  DESC in  Alaska, said  it is  all                                                               
supplied in Alaska.                                                                                                             
                                                                                                                                
CO-CHAIR NEUMAN noted  that at "$2 per MMBtu"  the synthetic fuel                                                               
would  be competitive  because synthetic  fuel made  from Prudhoe                                                               
Bay gas could  be produced for $48-$52 per  barrel, which equates                                                               
to about $1.20-$1.50 per gallon                                                                                                 
                                                                                                                                
2:22:12 PM                                                                                                                    
                                                                                                                                
MR. IDEN, in  response to Co-Chair Johnson about  whether a plant                                                               
can switch feedstocks, said he believes  that if a plant is a gas                                                               
plant it will  be gas driven, and  if a plant is a  coal plant it                                                               
may have  the ability to  accommodate biomass into  the equation,                                                               
but he  does not  know if  there is an  easy way  for a  plant to                                                               
switch   between   the   two   feedstocks   without   substantial                                                               
investment.                                                                                                                     
                                                                                                                                
MR.  IDEN,  in  response  to   further  questions  from  Co-Chair                                                               
Johnson, explained that  the nature of coal itself  makes it very                                                               
high  in carbon  and  the process  of converting  the  coal to  a                                                               
liquid  produces a  tremendous amount  of carbon  dioxide.   When                                                               
looking at the whole lifecycle  greenhouse gas emission, one must                                                               
look at the  extraction of the coal, the  conversion process, the                                                               
distribution process for blending, and  passing the product on to                                                               
the  end-use customer.    It then  dovetails  with the  petroleum                                                               
industry for  what comes out of  the tailpipe for emissions.   He                                                               
confirmed Co-Chair  Johnson's statement that the  lifecycle would                                                               
include  emissions from  the  tractor digging  the  coal up,  the                                                               
train delivering the  coal to the plant, and  the electricity for                                                               
the conveyer  belt taking  the coal to  the plant,  and therefore                                                               
the lifecycle is not just the  actual conversion of the coal into                                                               
liquid fuel.   He  added that  folks are  currently working  on a                                                               
model that will quantify all of these things.                                                                                   
                                                                                                                                
CO-CHAIR  NEUMAN pointed  out that  there are  numerous processes                                                               
that  are  used  for  Fischer-Tropsch.   He  offered  to  provide                                                               
further information to members if they stop by his office.                                                                      
                                                                                                                                
2:25:37 PM                                                                                                                    
                                                                                                                                
MR. IDEN,  in response to  Representative Wilson,  explained that                                                               
the  DOD would  never  get the  patents  for the  Fischer-Tropsch                                                               
processes because  they are commercial  processes that  have been                                                               
used around  the world since World  War II.  Just  as in refining                                                               
petroleum,   he   continued,   there   are   different   patents,                                                               
techniques,  and capabilities.    In further  response, Mr.  Iden                                                               
reiterated  that  some  companies  already  have  access  to  the                                                               
technology,  patents, and  capabilities  for doing  this.   Pilot                                                               
plants in the U.S. have been  producing this fuel, but unlike the                                                               
plants in Malaysia  and South Africa, the volumes  have been very                                                               
small.   It is a  viable, proven  technology in which  people are                                                               
interested, he  stressed, with plants currently  being considered                                                               
for location in Ohio and Mississippi.                                                                                           
                                                                                                                                
CO-CHAIR NEUMAN added  that even Tyson Foods, Inc.  is looking at                                                               
a Fischer-Tropsch  plant as a way  to use the oils  produced from                                                               
its processing.                                                                                                                 
                                                                                                                                
2:30:20 PM                                                                                                                    
                                                                                                                                
CO-CHAIR JOHNSON,  in regard to  what can  be done by  the Alaska                                                               
State   Legislature,  surmised   that  siting   is  key   because                                                               
transportation distance will impact the carbon footprint.                                                                       
                                                                                                                                
MR.  IDEN agreed.   He  pointed out  that DESC  does not  want to                                                               
dictate to  industry and the  commercial sector where to  build a                                                               
plant, what  feedstock to use, or  what size to build  the plant.                                                               
Rather, DESC  is stating  its desire for  a finished  product and                                                               
where the  locations are for  that finished product  and industry                                                               
can then determine where to site the plant.                                                                                     
                                                                                                                                
2:32:00 PM                                                                                                                    
                                                                                                                                
KEVIN  BANKS, Director,  Division  of Oil  &  Gas, Department  of                                                               
Natural  Resources, in  response  to Co-Chair  Johnson about  the                                                               
scale of the permitting process,  said it would depend upon where                                                               
the facility  is located.   For  example, it  would be  easier to                                                               
manage if the  plant is located at Prudhoe Bay  because there are                                                               
potential lease  sites that could be  afforded to a company.   He                                                               
said  he believes  the facility  would  look similar  to a  small                                                               
refinery  like  the  Flint  Hills Refinery.    Locating  a  plant                                                               
elsewhere  may   involve  more   permitting,  depending   on  the                                                               
location, he advised.   In further response, Mr.  Banks said that                                                               
while this  would be  a new manufacturing  facility, he  does not                                                               
think it would  be of the scale or controversy  as something like                                                               
Pebble  Mine.   If  the plant  was  built in  a  place zoned  for                                                               
manufacturing, it  would require  certain air quality  permits as                                                               
well  as permits  for water  use  and disposal.   As  far as  how                                                               
extensive the permitting  process would be, he said  he would put                                                               
it on the same level as expansions in Prudhoe Bay.                                                                              
                                                                                                                                
CO-CHAIR JOHNSON commented that he does  not want the state to be                                                               
behind the  curve on this, and  does not want the  legislature or                                                               
the state's  permitting departments  to be  the reason  this does                                                               
not happen.                                                                                                                     
                                                                                                                                
2:35:25 PM                                                                                                                    
                                                                                                                                
MR. BANKS,  in response to  Representative Seaton, agreed  that a                                                               
synthetic fuel plant  would be about the same scale  as the coal-                                                               
to-gas project that  was proposed by Agrium,  Inc., especially if                                                               
the  plant was  built  in a  part  of the  state  where no  other                                                               
development was going on.                                                                                                       
                                                                                                                                
CO-CHAIR  JOHNSON requested  Mr.  Banks to  send  someone to  his                                                               
office to explain all of the aforementioned in more detail.                                                                     
                                                                                                                                
CO-CHAIR NEUMAN understood it would  take about 250 million cubic                                                               
feet a day of gas to  produce 25,000 barrels of a Fischer-Tropsch                                                               
blend.   He said that as  a spinoff the plant  could also produce                                                               
up to 50,000  gallons of clean purified water  and another 50-100                                                               
megawatts of electricity.                                                                                                       
                                                                                                                                
2:37:25 PM                                                                                                                    
                                                                                                                                
MR.  IDEN, in  response  to Representative  Wilson about  whether                                                               
using an older  pipeline would create problems, said  he does not                                                               
believe there would be any  negative impact because this is being                                                               
looked at as a complete drop-in replacement fuel.                                                                               
                                                                                                                                
ADJOURNMENT                                                                                                                   
                                                                                                                                
There being no  further business before the  committee, the House                                                               
Resources Standing Committee meeting was adjourned at 2:39 p.m.                                                                 

Document Name Date/Time Subjects
DESC F-T SYN FUEL Presentation (Apr 09).ppt HRES 4/10/2009 1:00:00 PM