Legislature(2007 - 2008)BARNES 124
02/28/2007 02:00 PM House RESOURCES
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| Presentation by Harold Heinze, Alaska Natural Gas Development Authority | |
| Adjourn |
* first hearing in first committee of referral
+ teleconferenced
= bill was previously heard/scheduled
+ teleconferenced
= bill was previously heard/scheduled
| + | TELECONFERENCED | ||
ALASKA STATE LEGISLATURE
HOUSE RESOURCES STANDING COMMITTEE
February 28, 2007
2:07 p.m.
MEMBERS PRESENT
Representative Carl Gatto, Co-Chair
Representative Craig Johnson, Co-Chair
Representative Vic Kohring
Representative Bob Roses
Representative Paul Seaton
Representative Peggy Wilson
Representative Bryce Edgmon
Representative Scott Kawasaki
MEMBERS ABSENT
Representative David Guttenberg
COMMITTEE CALENDAR
PRESENTATION BY HAROLD HEINZE, ALASKA NATURAL GAS DEVELOPMENT
AUTHORITY
PREVIOUS COMMITTEE ACTION
No previous action to report
WITNESS REGISTER
HAROLD HEINZE, Chief Executive Officer
Alaska Natural Gas Development Authority (ANGDA)
Anchorage, Alaska
POSITION STATEMENT: Presented a conceptual gas line project
proposal for bringing North Slope gas to market.
ACTION NARRATIVE
CO-CHAIR CARL GATTO called the House Resources Standing
Committee meeting to order at 2:07:00 PM. Representatives
Gatto, Johnson, Kohring, Wilson, Seaton, and Edgmon were present
at the call to order. Representatives Roses and Kawasaki
arrived as the meeting was in progress.
^PRESENTATION BY HAROLD HEINZE, ALASKA NATURAL GAS DEVELOPMENT
AUTHORITY
2:07:14 PM
CO-CHAIR GATTO announced that the only order of business would
be the presentation of a conceptual gas line proposal by Harold
Heinze.
2:07:31 PM
HAROLD HEINZE, Chief Executive Officer, Alaska Natural Gas
Development Authority (ANGDA), began his PowerPoint presentation
by noting that ANGDA is a public corporation of the State of
Alaska. At the committee's request, he outlined his personal
background before commencing with his presentation: He came to
Alaska in 1969 as a petroleum engineer with the Atlantic
Richfield Company, eventually becoming an executive with the
company and running the Alaska operations. He was appointed
commissioner of the Department of Natural Resources during the
Hickel Administration.
MR. HEINZE explained that ANGDA was formed by public initiative
and that the statutes under which ANGDA exists are very broad as
to the grant of power and direction. He said that in the last
few years, ANGDA has focused on two things: 1) a liquefied
natural gas (LNG) project out of Valdez, as required by the
initiative, and 2) getting gas to southcentral Alaska because
this is a significant emerging issue.
MR. HEINZE reported that he met with the new governor on
December 5, 2006, and that Governor Palin challenged him to
remember why ANGDA was established and asked whether ANGDA's
role was being fulfilled. Thus, he decided that ANGDA had
better come forward with something called the Alaska Gas Market
System (AGMS) because it seems to fulfill the responsibility and
challenge that ANGDA was given by the people of Alaska.
2:09:37 PM
REPRESENTATIVE WILSON inquired as to how this is different from
the last time that Mr. Heinze was before the legislature. Has
ANGDA changed direction, she asked.
MR. HEINZE explained that the intent is to present an entire
system that links the North Slope to gas markets in Alaska.
This is a bigger project in scope than what ANGDA has worked on
before. However, it is a very small project in comparison to
the other projects that are being proposed. He said that ANGDA
is trying to walk the line between being big enough for Alaska
and yet small enough to be very doable. It is both a project
and a process that will play out over the next one to one and
one-half years.
MR. HEINZE noted that ANGDA is a small organization consisting
of himself and an administrative officer, Connie Young, and that
ANGDA basically operates through the use of consultants. He
said that Shaw Alaska, Inc., compiled a lot of the project work
behind his presentation of today. He explained that the concept
of AGMS started first with the needs within Alaska which is
about 250 million cubic feet (mcf) per day for power and heat.
This does not provide for the current industrial uses in Cook
Inlet, he said, but this may happen if those companies decide to
join into this process.
2:12:25 PM
MR. HEINZE stated that when ANGDA first looked at bringing North
Slope gas to the Cook Inlet area, it was found that the project
would probably result in higher costs than homeowners would be
willing to pay. Therefore, ANGDA looked at ways to lower those
costs. One way is to run additional gas down the 700 miles to
Glennallen in order to provide one billion cubic feet (bcf) of
gas a day to Valdez for LNG. This significantly lowered the
transportation cost to Cook Inlet and elsewhere along the
pipeline.
MR. HEINZE referred to the map of the AGMS concept proposal in
his PowerPoint presentation. He explained that a 24 inch pipe
will run from the North Slope to Glennallen, with a capacity of
slightly over 1.25 billion standard cubic feet per day (bscf/d).
There will be no excess pipe capacity within this portion of the
pipeline. However, he said, if someone comes forward with the
inclination and commitment to want more gas, the pipe can be
made bigger and other things can be done.
MR. HEINZE continued reviewing the map and information. He
noted that the 16-inch pipeline coming into the Cook Inlet area
is ample for 0.25 bscf/d and can carry the current Cook Inlet
usage which is about 500 million standard cubic feet per day
(mscf/d). He said that the Valdez pipeline component will
transport 1 bscf/d and that the 20-inch pipe is sized according
to feedback from major world LNG players who indicated that a
volume of 7 million tons of LNG per annum would easily fit into
the worldwide LNG trade. He noted that a North Slope
[conditioning] facility will be constructed to remove the carbon
dioxide and re-blend the natural gas liquids (NGLs).
2:15:07 PM
MR. HEINZE pointed out the importance of remembering that the
current gas in Alaska - Cook Inlet gas - is almost entirely
methane which is very dry. However, he said, North Slope gas is
very rich and contains large volumes of ethane, propane, and
butane. Ethane is the basis of the petrochemical industry and
propane is an excellent fuel for transport to the more rural and
less densely [populated] areas of Alaska.
MR. HEINZE explained that the pipeline coming into Cook Inlet
would terminate in one or two storage fields. This is because
there is a tremendous variation in the use of gas between summer
and winter in the Cook Inlet area. This is not the way to run a
pipeline, he noted, so running the gas into storage allows for
levelized flows and a levelized tariff that is much more
favorable economically. Finally, there will be various take-off
points at various locations along the pipeline such as Yukon
River, Fairbanks, North Pole, and the military installations at
Delta Junction.
MR. HEINZE stated that the cost of all the pipelines as shown on
the chart will be about $4 billion. The conditioning plant will
be about $1 billion and a Valdez LNG plant will be about $3
billion. He said that ANGDA does not visualize building the LNG
plant as part of the system because ANGDA believes it will be
built by people in the LNG business. If these businesses do not
come forward, he said, then there will not be a pipeline to
Valdez. He reported that there are two or three major LNG
companies in the world, all of whom have expressed some interest
in having access to Alaska gas. The reason for their interest
is because their other choices in the world are not good ones
and Alaska offers a lot of advantages.
2:17:38 PM
MR. HEINZE predicted a tariff of anywhere from 50 cents to one
dollar for transporting the gas to Cook Inlet as opposed to
Chicago. He said that this will result in a somewhat lower
price. However, the advantage of bringing North Slope gas to
Cook Inlet is not that it is cheaper, but that it is a very
plentiful supply which will provide stability of price. Given
the impact of 30-40 percent price increases over the past few
years, he stressed, having stability may be one of the best
assets that Alaska can achieve.
MR. HEINZE directed attention to the tariff numbers for Valdez
shown in his PowerPoint presentation and advised that the people
in the LNG business will decide whether this project is a
commercial activity and whether they are prepared to invest
based on these numbers. Preliminary feedback indicates that
they continue to be interested, he said.
2:18:54 PM
MR. HEINZE declared that one of the unique characteristics of a
smaller system like this one is that it does not require the
huge reserve base that the committee is used to thinking of. He
related that the large project carrying 4.5 bscf/d through
Canada will require a reserve base of 50 trillion cubic feet
(tcf). He said that 25 tcf is what is known to exist in Prudhoe
Bay. There is another 10 tcf that has been identified but not
developed on the North Slope. Additionally, the assumption
being used on the large project is that another 15 tcf will be
found. Mr. Heinze emphasized that the ANGDA project is on a
whole different scale. He stated that 10 tcf will provide 1.25
bscf/d for over 20 years. That reserve basis, he said, is more
than enough to finance and undertake this kind of a project.
MR. HEINZE referred to the "Reserves & Financing" chart in his
PowerPoint presentation regarding ways to get to the 10 tcf.
One way, he said, is to use the 3 tcf from the state's one-
eighth ownership in Prudhoe Bay and add it to the 7 tcf of
production from one of the three producers at Prudhoe Bay.
Another way is to take the state's 3 tcf and add it to the Point
Thomson production. A third way is to take the state's 3 tcf
and add it to new discoveries in the Brooks Range.
2:20:29 PM
MR. HEINZE clarified that in terms of financing, the LNG plant
will be built, owned, and operated by people in the LNG
business. He related that they already have a fleet of ships,
that they want to be able to call on the plant with whatever
ships they want, and that they want to be able to sail those
ships to whatever markets they already have. It will not be a
dedicated trade under these kind of circumstances, he advised.
MR. HEINZE next described the "process" as opposed to his
previous description of the "project". He stated that ANGDA has
no illusions of grandeur, it is not going to build this project.
He said that he is not asking for billions of dollars, but
rather a much smaller sum of money that will allow a process to
move forward over the next year and a half. He acknowledged
that the first steps of defining a system like this are the
risky steps. The risk is that not enough is known to decide
whether or not the project is feasible. Until it is determined
that it is feasible most companies are going to have a lot of
trouble committing tens of millions of dollars, he said, and
that is what it takes at some point to advance the project to
actual definition.
MR. HEINZE explained that this is a "Phase I" type of approach,
and in this Phase I the doors are thrown open to anybody wanting
to participate. He outlined the possible participants listed in
his PowerPoint presentation under "Partners We Can Expect".
These participants include oil and gas companies, pipeline
companies, LNG plant and ship owners and operators, energy
project investors, local Alaska utilities, the State of Alaska,
and the federal government.
2:23:00 PM
MR. HEINZE predicted interest from the markets. He said this is
because most of the people on the market side want to go back
upstream. For instance, he contended, there is no doubt that
the utilities in Alaska receiving the gas may look at the gas
transmission system as a viable investment. He said that a
large number of Alaskan entrepreneurs will become involved in
distributing the propane. He said that he will not pick the
entrepreneurs and does not know who they are, but that he is
absolutely confident that people will come and they will come
with all kinds of things to transport the propane in.
MR. HEINZE related that at least three companies have expressed
interest in a Valdez LNG plant, including "BG Group, Mitsubishi,
and Sempra". He said that each company serves a different
market, has its own large fleet of LNG ships, and has very
different re-gas facilities. He noted that a possibility might
be for the three companies to build the LNG plant together. He
pointed out that ANGDA is encouraging a cooperative rather than
a competitive effort in order to get the strongest project
possible. If the companies say that they need more than 1
bscf/d of LNG and they are prepared to make the commitment
behind it, then making the project bigger should be looked at.
2:25:08 PM
MR. HEINZE reiterated that the two industrial facilities in Cook
Inlet are not part of this system. He stated that neither the
Kenai LNG plant nor the Agrium plant have expressed interest at
this time. However, he said that he has every reason to believe
that this will be revisited in the future as things move
forward.
MR. HEINZE noted that because of the extreme richness of the
[North Slope] gas, petrochemical companies have expressed
interest in locating at the pipeline's terminus. He said that
this is because the volume of ethane that will potentially be
available is twice what it takes to have a world-scale
industrial complex and that most of these companies do not have
access in favorable settings to this volume of hydrocarbon.
2:26:40 PM
MR. HEINZE explained that because the pipeline is small, it will
largely follow the Trans-Alaska Pipeline System (TAPS) right-of-
way to Glennallen as this offers some regulatory advantages. He
said that ANGDA believes the pipeline can be delivering gas to
Cook Inlet in six years, based on three years of "front end" and
three years of construction. During the construction phase the
pipeline will require two crews of about 500 workers and this is
well within Alaska's capability in terms of the skills and
crafts that are needed. He said that a 24-inch, high pressure
pipeline like this one is very suitable for welding machines and
other techniques that lessen the requirement for highly skilled
people because it is more of a craft type of setup.
MR. HEINZE stated that ANGDA believes there is a scenario where
gas can be flowing into Cook Inlet ahead of finishing the North
Slope conditioning facility and the finishing of the LNG plant
in Valdez. He noted that this is very important when looking at
the potential energy problems facing Cook Inlet where even two
years might be significant.
2:28:13 PM
CO-CHAIR GATTO estimated a cost of $5000 per home for the
Glennallen to Cook Inlet portion of the pipeline to provide gas
to the Matanuska-Susitna, Kenai, and Anchorage areas. He said
that it will cost more than $5000 per home to switch to heating
oil, so having the ability to continue heating with natural gas
would be a great advantage. Additionally, this figure does not
include Agrium or the LNG plant. This section of the pipe will
be paid for completely and there will be no tariff because the
consumers will all own it, so this is very valuable.
MR. HEINZE agreed with Co-Chair Gatto. He asserted that the
pipeline is clearly a utility because it is servicing a number
of households. The 20-30 year supply of gas to these households
is an incredibly important thing, he said. Alternative
investments for providing the same level of energy, coupled with
energy security over time, are much more than a few hundred
million dollars.
MR. HEINZE remarked that in addition to the spur line, continued
exploration in Cook Inlet remains vital. However, he said, the
cost of Cook Inlet gas will present major problems in the longer
term when one considers that the rule of thumb is about $1
billion for 1 tcf. He noted that LNG could be brought in, but
that there are pricing and security issues associated with LNG.
He said that he would be very uncomfortable with Alaska's
communities having to rely on a tenuous foreign supply of LNG.
2:31:32 PM
MR. HEINZE directed attention to the schedule outlined in his
presentation and noted that the intention is to allow for a
negotiated open season early in the timeline. He explained that
during the open season people must come forward and make
commitments and that this is when you find out if you have a
project, how big the project will be, and what the economics of
the project really are. He predicted that the answers to the
questions will be found quickly because this particular pipeline
is a simple system. However, since this is a "Phase I" type of
work level, the trick is to get there in a way that is
comfortable information-wise to the potential participants. He
noted that on the schedule, the trigger for this is pretty quick
and that this is not inconsistent with the other things that
need to happen to get gas to Cook Inlet in a timely way. Even
though the open season begins early in the timeline, it will
remain open for one year which is longer than the standard
timeline of six months.
2:33:15 PM
MR. HEINZE explained that the joint-work process shown in his
PowerPoint presentation will be a voluntary coming together of
ANGDA, state resources, and individual company resources on a
contributed, in-kind basis. It will be totally non-exclusive as
well as voluntary. He said that if someone elects to
participate, it will not prevent them from also proceeding with
their own efforts or other groupings of efforts. He noted that
many of the issues are issues that are common to any project and
any set of participants and that this will provide a vehicle for
people to participate at a lower risk and, most importantly, to
know that it is happening. Even though not every aspect of this
will be public, he stated, the actual monthly progress reports
will be a very public thing so that people can see what is going
on and whether it is advancing. There will be an incentive for
the participants in the process because only the summary
information will be made public. Participating day-to-day at a
technical level in a project like this is a way to learn the
most.
MR. HEINZE stated that if he is given encouragement by the
legislature, he will take the month of April to call on a number
of people and offer them this opportunity. He said that a few
will accept readily and the others will then also accept because
one of the rules of the game is to never let a competitor have
an advantage. There is no expense to these companies other than
the talent and the expertise that they contribute.
2:36:07 PM
REPRESENTATIVE WILSON asked where would the State of Alaska gain
in this project and will the project make it cheaper for people
in Southeast Alaska.
MR. HEINZE replied that the answer to the second question is
yes. He said that it is ANGDA's belief that everybody has a
stake in North Slope gas. While it has not been the thrust of
other sponsors, it is ANGDA's thrust that 99 percent of Alaska
will participate in the actual molecules coming off the North
Slope. That plentiful supply offers an opportunity for a
modestly priced energy, he said, at a stable price from a large
and secure supply. In Southeast Alaska there are a number of
other alternatives that are different than the alternatives
available in Cook Inlet or Fairbanks. There will be a very
positive impact on the energy price by providing certain types
of energy service, for example cooking and water heating for
which propane and gas are very efficient. When the gas becomes
present, Mr. Heinze said, it will put pressure on other parts of
the energy system in a competitive sense. Once that competition
starts, prices will respond. In the long run it offers an
opportunity to the legislature to determine how it wishes to
value the resources in Alaska. The 3 tscf/d that is the state's
one-eighth share of Prudhoe Bay is enough to provide Alaska with
energy for 30 years.
2:39:15 PM
CO-CHAIR GATTO offered a further response to Representative
Wilson's question by giving an example: If a person uses
heating oil in the free market, it puts pressure on the heating
oil stocks from which other people are also purchasing; but if
that person does not use heating oil, then there is a bigger
supply in the same market. Therefore, he explained, this is one
way that other locations in the state are affected. Another way
is that the state gets a royalty and this, in turn, affects
every resident. He stated his opinion that if Southcentral
Alaska prospers, it does not take away from any other area that
prospers with it.
2:39:56 PM
MR. HEINZE directed attention to the map in his PowerPoint
presentation depicting the transportation of propane with yellow
highlights. He predicted that over 50,000 barrels a day of
propane will come off the North Slope, but noted that the demand
for propane in Alaska is only about 10,000 barrels per day. The
trick, he said, is the logistics of distributing the propane and
that is why the map shows the broad yellow arrows going around
the coastal areas. He related that there are several studies
available for review on ANGDA's website which show that every
coastal community in Alaska will gain by having a plentiful
propane supply. In areas of Alaska that are served by roads
there is already competition between propane suppliers. He
explained that in a similar way [to roads], the Yukon River
system is a logical avenue for moving propane. The difference,
however, is that there are no data points for moving this type
of a commodity on a frozen river. He related that ANGDA is
working with several entities to conduct a demonstration project
based on trucking a small volume of propane out of Prudhoe Bay,
putting it into a facility at the Yukon River, and then, in an
experimental sense, letting the entrepreneurs act.
2:42:20 PM
MR. HEINZE subsequently displayed a PowerPoint picture of a
propane tank. He noted that it is the same size and shape as an
ISO or intermodal container. The tank ships just like an ISO
container and can be stacked and handled together with and in
the same manner as ISO containers. He explained that this
propane tank is the storage mechanism as well as the transport
mechanism. Therefore it can be delivered to a destination, used
until empty, and then exchanged for a full tank with the empty
tank being returned, just like changing the propane tank on a
barbecue grill. Additionally, he remarked, these tanks can be
built in Alaska because they are modest pressure vessels, there
is nothing hard about them, and there could be a standard Alaska
design. He explained that ANGDA is trying to make this work for
everybody and that ANGDA believes that over a period of a few
decades there is an opportunity to influence energy prices
everywhere in Alaska. For example, he said, the Yukon-Kuskokwim
Demonstration Project is of great interest to the Denali
Commission. They do not have a lot of opportunities to come
into new energy models, he explained. Most of their money is
being spent on perpetuating the system that exists and this
offers a chance for a new paradigm.
2:43:51 PM
MR. HEINZE commenced explaining why he needs $5 million dollars
and why it is good for Alaska. He directed attention to the
detailed matrix on the last page of the document in the
committee packet. He stated that the 80 tasks listed in the
matrix will be undertaken during the first one and one-half
years in order to move the project forward. The total cost of
the tasks is $10 million, he said, but he is only asking for $5
million because he can attract the other $5 million as in-kind
contributions. The actual task list will be worked out with the
joint-work participants.
MR. HEINZE stated that at the end of the year or year and one-
half, the project concept will be described to the point that
the participants can make a decision - at their own cost and
risk - on whether to proceed to a formal application to the
State of Alaska as visualized under the Alaska Gas Inducement
Act (AGIA). Participants can hold an open season and they can
make the major financial commitments to design and permit
applications. He pointed out that this is a $100 million
decision.
2:46:04 PM
MR. HEINZE argued that what Alaska gains is an alternative. The
project has two significant virtues: 1) it is not vulnerable to
what does or does not happen in Canada, and 2) it is of a size
that meets Alaska's needs and it only requires one of the
producers at Prudhoe Bay along with the State of Alaska to
commit their reserves. It does not require the unanimity of all
the upstream reserve holders to make the project happen.
MR. HEINZE asserted that $5 million is a cheap insurance for the
legislature to know that there will be a backstop available if
all else does not work out. He argued that the reality is that
the biggest and best of these projects is still very challenged
in terms of probability. The AGMS project is a highly doable
project with a strong market pull and makes sense in many
different ways, he said. He expressed his hope that legislators
will choose to amend the supplemental appropriation to include
the $5 million for the AGMS project since there is no
legislation to appropriate the money.
2:48:50 PM
CO-CHAIR GATTO inquired whether the $1 billion figure for the
gas conditioning plant is also the same figure that has been
given for a 52-inch pipeline.
MR. HEINZE responded that the number shown on his chart may be
toward the higher end because he has nothing to gain by
understating the number. He said that he is unsure who would
want to build and own the gas conditioning plant, but that it
has so many virtues it is hard for him to visualize the
producing operation not wanting to own the plant as a Prudhoe
Bay unit facility. The carbon dioxide that could be recovered
is very usable in enhanced oil recovery. Additionally, under
federal legislation the facility would receive special tax
treatment, such as enhanced oil recovery (EOR) tax credits. The
plant would also be eligible for carbon sequestration credits if
those are ever established.
2:50:14 PM
REPRESENTATIVE WILSON asked how much money the AGMS project will
bring to the State of Alaska. A pipeline must be capable of
carrying a large enough volume of gas to generate an income to
the state, she opined. Otherwise, the state must find a
different way to raise money, such as an income tax.
MR. HEINZE acknowledged that a project two or three times larger
than AGMS will generate two or three times more revenue to the
state. However, he cautioned, the probability of that project
moving forward needs to be considered. The size of the AGMS
project has a very high level of do-ability. If things are
looking grim in another year and one-half, the state may be very
happy to have this size of a project available. While state
revenues are important, the citizens of Alaska also value having
a plentiful, modestly priced supply of gas. They value having
construction jobs and the level of construction for the AGMS
project is much more Alaska sized. He contended that the AGMS
project will not create hyper-inflation or cause the in-
migration of workers that other projects might. Lastly, Mr.
Heinze opined, Alaska citizens are looking for something that
pays attention to the economy here, for the short term as well
as the long term. The creation of a petrochemical industry and
other types of things are potentially more valuable here in
Alaska than anything else. In moving AGMS forward as part of a
Phase I activity, the virtues will be carefully defined in the
sense of benefits to Alaskans on all those dimensions, not just
state revenue.
MR. HEINZE related that past work by ANGDA indicates that this
size of a project will have a significant impact here in Alaska
far beyond the $5 million. A project of this size does not in
any way foreclose a bigger project in the future, he argued. In
fact, it could be tacked onto any other project that is built.
Additionally, a smaller project has the virtue of getting
started because this is one of the biggest problems. "I have
been here since 1969, and if I am worried about anything, it is
not getting started," he said.
2:54:58 PM
CO-CHAIR GATTO remarked that Alaska's new governor wanted all
proposals on the table, therefore this certainly is a legitimate
proposal.
MR. HEINZE responded that he is describing a system. Once AGIA
is brought forth, he said, this may turn out to be a proposal
for three to five projects because there are different
variations of AGMS. Right now it is unknown which variation is
the best.
2:55:33 PM
REPRESENTATIVE SEATON commented that two to three times bigger
does not necessarily mean two to three times more revenue. He
pointed out that provisions in the previously proposed [Stranded
Gas Development Act] canceled two-thirds of the state tax. He
then noted that NGLs are currently put into TAPS and counted as
oil under the production profits tax (PPT). He asked whether
Mr. Heinze is proposing to blend all the NGLs or only those that
are not sold as oil and injected into TAPS.
MR. HEINZE stated that the current oil system has as much butane
blended into it as the oil will hold and still meet the vapor
pressure specifications; if more is added it gets too "fizzy"
and causes air quality issues and other problems. There is some
propane in the oil naturally, but more propane would not be
added purposely to the pipeline. He said that what he is
talking about is that along with moving methane molecules down
the [gas line], the high pressure in the pipe allows the
addition of large quantities of ethane, propane, and butane. He
advised the committee to think of the gas line as a transport
mechanism that is fundamentally unlimited as far as quantity.
For instance, he said, approximately 80,000 barrels a day of
NGLs are currently being re-injected into North Slope wells as
part of enhanced oil recovery. Even a gas line as small as the
one he is proposing has a high enough pressure to accept that
amount of NGLs.
2:58:08 PM
REPRESENTATIVE SEATON related his understanding that a unique
feature of Prudhoe Bay is that all three producers must agree
before any one of them can do something. He asked whether this
could legally limit one of those producers from taking out their
third in order to participate in one of the proposed AGMS
scenarios. Additionally, he asked whether Mr. Heinze saw a
possibility of resolving the Point Thomson issue before the open
season for that area closes in order to have a possibility of
getting a commitment on that gas.
MR. HEINZE took the second question first. He said that he is
not an expert on Point Thomson, but that it seems to him that
the state and the owners of the Point Thomson unit have locked
horns. The court's ruling that the owners have failed to live
up to their lease is a significant ruling in the business. In
his opinion, Point Thomson may actually be off the table and it
is going to be very hard to have a 4.5 bscf/d pipeline. He
argued they are in big trouble because pulling 4.5 bscf/d out of
Prudhoe Bay will not be allowed. Much of the 4.5 bscf/d is
premised on delivery from Point Thomson, he said.
MR. HEINZE then moved to Representative Seaton's first question
regarding the agreements within the Prudhoe Bay unit that deal
with how the owners relate to each other. He explained that one
type of agreement is called a Balancing Agreement - it dictates
how things will be rebalanced if one company gets ahead of the
others. Based on his anti-trust training when he was a
corporate executive, Mr. Heinze surmised that the decisions to
market are separate decisions of these companies and that a
collective decision is not permissible. As a lease holder, each
company has a responsibility to the State of Alaska to dispose
of and market the state's royalty. It has a right to market the
royalty, but it also has a responsibility and this is not a
collective right. He said that in his opinion a representative
of the State of Alaska could not talk to one company while the
other companies were in the room without there being serious
anti-trust implications. He said that he did not know exactly
what the [Prudhoe Bay] agreements are, but that he could say
that no agreement amongst companies can contravene law and that
the companies are obligated to consider market conditions
separately.
3:01:51 PM
CO-CHAIR GATTO turned the gavel over to Representative Seaton.
REPRESENTATIVE SEATON expressed his concern about going down a
path that is based on scenarios that are not realistically
possible. He noted that there might be other scenarios such as
the National Petroleum Reserve-Alaska (NPR-A) and "Shell off-
shore", but that he wants to make sure whether a scenario is
going to be useable during the proposed open season.
MR. HEINZE pointed out that in ANGDA's task list there is a
proposal under the heading of "Risks and Rewards" to look at
these scenario-type issues because there are very significant
assumptions that are taken for granted when, in reality, they
are not 100 percent deals.
3:03:16 PM
REPRESENTATIVE SEATON inquired whether open season would start
in the fourth quarter of 2007 if ANGDA received the $5 million.
MR. HEINZE responded affirmatively. He explained that he
carefully defined that bar as a year because it is a negotiated
type of open season rather than a bid type of open season. "All
you have to do is be willing to negotiate evenhandedly, equally,
offer the same terms to everybody and that may be a better way
at this system," he said. He pointed out that if there are
several participants, such as electric utilities in the Cook
Inlet area and an LNG exporter, there must be a way for them not
to compete against each other because it is necessary for all of
them to succeed. This is done through a negotiating process
because then all of them will win, he contended. It is hard to
know how each company will respond until a cycle is completed
and there is a feel for what the commitments are. Then the
numbers are revised and you go back out again, which is why
ANGDA has allowed a year for the process. He explained that the
information necessary to start this process is minimal and that
is why he "pulls the trigger" so quickly on an open season.
This would be difficult to do in a traditional FERC bid system,
he said. However, completing a process that leads to some level
of commitment by participants is a much easier thing to do on a
negotiated basis.
3:05:29 PM
REPRESENTATIVE SEATON noted that a problem associated with the
previous contract was a 35 percent tax credit on everything
upstream, including the gas treatment plant, and that the state
would lose two-thirds of its PPT rate to this. He asked whether
he was correct in understanding that under ANGDA's proposal the
open season will not be open to any of these kinds of
negotiations and that participants will come to the table under
the existing system.
MR. HEINZE said that there is nothing in this system that deals
with the upstream issues. He noted that nothing he is talking
about, in terms of the open season, involves a negotiation with
the state. However, to lessen the front end risk ANGDA does
need some sort of financial interaction with the state such as a
line of credit, but not an investment. He said that some help
through a completion guarantee is also needed because this
lowers the interest rate for building this kind of a project.
Coupled with utility financing, ANGDA thinks that this project -
on a tariff basis - can do far better than what is shown by
ANGDA's numbers.
3:08:06 PM
REPRESENTATIVE WILSON expressed her concern with not knowing how
ANGDA arrived at its numbers. She inquired as to how many
phases are envisioned and whether ANGDA would be coming back to
the state for more money after Phase I.
MR. HEINZE answered the second question first. He explained
that Phase I would be feasibility. The next steps would involve
taking a further cut at design and developing information for
regulatory approvals, environmental permits, and those kinds of
things. It still would not be a commitment of the major amount
of money; at that point the state is still in for less than five
percent of the total cost. The next phase would lead to the
decision to commit to the big project and move forward and "that
is when the big money hits the table." Mr. Heinze stated that
it is not his intention to come back to the legislature. If
this project does not work, he said, I will apologize to all of
you for the $5 million. If the project does work, there will be
really big companies that will take over the ownership of this
project. He promised that he will require the companies to
reimburse the state for every nickel that it has put into the
project. He said that he is asking for a "grubstake" and that
he would rather ask the legislature for that grubstake than to
go sell "grubstake bonds" which is his other available option.
He explained that he needs enough money to be able to support a
part of the process that will convince these other participants
that the state is at least serious about taking care of itself
by making sure that the gas gets to the state's own markets.
3:10:50 PM
MR. HEINZE explained that the numbers are cost estimates that
are based on benchmark and that ANGDA has had three different
cost estimates done by three different companies. He stated
that he believes the numbers are conservative in that the actual
numbers will be less than what ANGDA is presenting. He noted
that the numbers calculated on ANGDA's chart are based on two
different tariff levels. One is based on the utility model of
financing that looks at an annual revenue requirement and has no
equity investment because it is all debt or borrowed money.
"That leads to a number that is about one-half of the number
that we would scale off of, the $2.50 producer tariff number you
have heard many times before," he said. "We have calculated
both numbers and said we do not know where exactly it will end
up," he continued. "It is probably not higher than the number
that is scaled off of $2.50 to Chicago, but it could be starting
to approach the lower utility end number.". He said that it is
a big range at this point and the purpose of the Phase I work is
to get different participants comfortable. He pointed out that
there has been a lot of input from financial people and that he
expects many financial people will be involved as participants
because they are very interested. A multi-billion dollar energy
project in a place where there is this much gas on the Pacific
Rim is a natural, he asserted.
3:12:53 PM
REPRESENTATIVE SEATON asked how ANGDA and the Alaska Gasline
Port Authority (AGPA) would work together if AGPA were to come
to the table with its design.
MR. HEINZE explained that ANGDA and AGPA are both political
subdivisions of the state. One was created by a statewide vote
and the other was created by more of a municipal type of vote.
The two entities therefore have different histories and slightly
different positions. However, he said, the missions and desires
are shared and the boards are now working closer together and
have recently signed a Memorandum of Understanding (MOU) to
facilitate the exchange of confidential information. He said
that he hopes that AGPA will be one of the first entities
willing to work with ANGDA. At the same time, he said, he
expects them to continue working on a proposal that is bigger
and more suited to where they are in their process. He stated
that ANGDA is not in competition with AGPA, but rather
compatible with them.
3:15:09 PM
REPRESENTATIVE SEATON inquired whether ANGDA would need a
federal loan guarantee.
MR. HEINZE stated that one of the chores on ANGDA's task list is
to clearly understand the ins-and-outs of the federal system
because ANGDA is obviously skating on the edge of that. He
contended that federal law for the Alaska gas pipeline is
written in a language where delivery to the market in Alaska is
the same as delivering gas to Chicago. This is because the term
used in the law is "continental" as opposed to "contiguous"
United States. According to a legal opinion received by ANGDA,
Alaska is part of the "continental" United States. Therefore,
he said, some portion of the project might be eligible for a
federal loan guarantee. He said that on projects like this
there are a number of ways to lower the interest rate and
ultimately lower the tariff in the long run. He acknowledged
that the federal loan guarantee is an effective way to do that,
but in ANGDA's case there may be more effective ways.
Furthermore, he stated, having a state guarantee on the loan
might lower the interest rate more than would a federal
guarantee. It is ANGDA's intention to pursue all of the
options, he said. There is also the issue of export which is a
federal jurisdiction.
3:18:11 PM
MR. HEINZE, in response to a question from Representative
Wilson, explained that he is a state employee, hired and fired
by a seven member board of the Alaska Natural Gas Development
Authority that was created by statute. He said that ANGDA is
under the Department of Revenue, as required by the statute. He
noted that in the previous administration there were times when
a lot of the studies done by ANGDA were to answer questions that
would be helpful to the whole process. He explained that the
tone he is trying to set is to ensure that there is sufficient
information available to the public during the process, not at
the end of the process. In response to a further question, he
explained that AGMS, the Alaska Gas Market System, is the name
of a project.
3:21:51 PM
MR. HEINZE announced that all of the information he presented is
publicly available at angda.state.ak.us.
ADJOURNMENT
There being no further business before the committee, the House
Resources Standing Committee meeting was adjourned at 3:22 p.m.
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