Legislature(2007 - 2008)BARNES 124
03/14/2007 01:00 PM House RESOURCES
| Audio | Topic |
|---|---|
| Start | |
| Presentation: Enbridge, Inc. | |
| Adjourn |
* first hearing in first committee of referral
+ teleconferenced
= bill was previously heard/scheduled
+ teleconferenced
= bill was previously heard/scheduled
ALASKA STATE LEGISLATURE
HOUSE RESOURCES STANDING COMMITTEE
March 14, 2007
1:04 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 David Guttenberg
Representative Scott Kawasaki
MEMBERS ABSENT
All members present
COMMITTEE CALENDAR
PRESENTATION: ENBRIDGE INC.
- HEARD
PREVIOUS COMMITTEE ACTION
No previous action to record
WITNESS REGISTER
DOUGLAS KRENZ, Vice President, Gas Transportation & Development
President, Enbridge Offshore Pipelines, L.L.C.
Enbridge, Inc.
Houston, Texas
POSITION STATEMENT: Presented information regarding Enbridge,
Inc. and the proposed Alaska Natural Gas Pipeline.
RON BRINTNELL, Director of Pipeline Development
Enbridge, Inc.
Calgary, Alberta, Canada
POSITION STATEMENT: Answered questions during the Enbridge,
Inc. presentation.
IAN MCFEELY, Vice President, Gas Development
Enbridge, Inc.
Calgary, Alberta, Canada
POSITION STATEMENT: Answered questions during the Enbridge,
Inc. presentation.
ACTION NARRATIVE
CO-CHAIR CARL GATTO called the House Resources Standing
Committee meeting to order at 1:04:23 PM. Representatives
Kawasaki, Roses, Wilson, Edgmon, Guttenberg, Johnson, and Gatto
were present at the call to order. Representatives Seaton and
Kohring arrived as the meeting was in progress.
^PRESENTATION: ENBRIDGE, INC.
1:04:44 PM
CO-CHAIR GATTO announced that the only order of business would
be a presentation by Enbridge, Inc.
DOUGLAS KRENZ, Vice President, Gas Transportation & Development,
President, Enbridge Offshore Pipelines, L.L.C., Enbridge, Inc.,
began his presentation with an overview (slide 2) of Enbridge,
Inc., an oil and gas pipeline transportation company. He said
Enbridge: has an interest in 50,000 miles of oil and gas
pipelines; owns and operates the world's longest and largest oil
pipeline system running from western Alberta, Canada, to the
Midwest and East Coast of the U.S.; delivers half of the Gulf of
Mexico's deep water natural gas production; has Canada's largest
gas utility which is in Toronto, Ontario; and has international
interests in Columbia and Spain. Mr. Krenz reviewed his
responsibilities within Enbridge and stated, "The most important
thing I am focusing on is how Enbridge can help facilitate
moving the Alaska Natural Gas Pipeline forward."
1:08:49 PM
MR. KRENZ, in response to Co-Chair Gatto, clarified that moving
the Alaska gas pipeline forward is the most important thing that
he personally is working on, as opposed to it being the most
important thing for the company. The most important thing for
Enbridge is a very significant capital growth program to expand
its oil pipelines. Strategically, the Alaska gas pipeline is
very important to Enbridge, he said, but it is even more
critically important to the industry. North America currently
has an extremely fragile supply and demand balance. An extreme
winter could result in school closures, he warned.
1:10:19 PM
CO-CHAIR GATTO inquired whether the fragility in North America's
gas supply extended to Alaska.
MR. KRENZ responded that Alaska has its own growth and demand
requirements that come into play. However, Alaska is a
significant frontier supply source for natural gas that can
primarily serve the Lower 48's demand for natural gas well into
the future. Everybody in North America would benefit, he said.
1:11:07 PM
MR. KRENZ pointed out that there is a gap in the supply-demand
balance between now and the time the Alaska gas pipeline is
expected to come on-line in 2017. It was thought that liquefied
natural gas (LNG) would fill that gap beginning in 2010, he
said. However, global liquefaction projects are sliding and LNG
is not coming on-stream as fast as was anticipated. Re-gas
projects in North America are operating today at less than a 50
percent load factor. What has happened is that LNG has become a
global commodity. He advised that even with full contract
assurance and shipper-pay utilization for new projects, there is
no guarantee that the LNG will show up at that facility. This
is because the primary owners of LNG tend to be major oil
companies and governments, and they will ship the LNG to where
ever the highest priced market for that LNG is. Enbridge's
concern, he said, is that the U.S. will not be able to compete
with Europe, especially in winter, which puts further dependence
on finding a secure, stable, long-term natural gas supply -
Alaska has it.
1:13:21 PM
MR. KRENZ cautioned that supply will meet demand. What this
means is that demand will be destroyed if Alaska does not get
moving soon and LNG keeps falling off. Demand will move
offshore or somewhere else, alternate energies will get lots of
legs and create lots of competition, and it will get harder and
harder to justify moving this project forward. This is the
biggest risk to all of industry, he said. Right now the
economics are aligned to make the project work and while the
producers are very tough negotiators, they want the project to
move ahead.
1:15:10 PM
MR. KRENZ, in response to Representative Wilson, confirmed that
Enbridge's inter-state pipelines are regulated by the Federal
Energy Regulatory Commission (FERC).
REPRESENTATIVE WILSON asked whether there will be an open season
sometime in the future because Enbridge needs more gas in its
pipelines.
MR. KRENZ responded that Enbridge's Alliance Pipeline is fully
contracted through 2015. After that, all the contracts are up
for renewal. The Alaska gas project would go through a process
of having an open season. He explained that when Enbridge is
determining whether there is the demand for a pipe, the company
will go out with a nonbinding open season to see if anyone shows
up. If they do, then an attempt is made to negotiate terms and
conditions to put the framework together such that there is the
support for a FERC application.
1:16:34 PM
MR. KRENZ, in response to Representative Roses, confirmed that
Enbridge is basically in the business of transporting product
and does not buy or explore for product.
REPRESENTATIVE ROSES inquired about Enbridge's process for
working with the producers.
MR. KRENZ replied that if Enbridge owns the pipeline, a strong
shipper-pay contract is required in order to proceed. This
contract guarantees that the producer will pay Enbridge
regardless of whether the producer ships volume in the pipeline
or not. That contract, then, is used to finance the project.
The bank looks at that, he said, because Enbridge does not have
nearly the credit-worthiness as a major oil company and the bank
looks to see who the real player is that will be backstopping
the project.
1:17:47 PM
REPRESENTATIVE ROSES asked what percentage of the gas product is
expended through the liquefaction process and any other
processes that are required to get the product to market.
MR. KRENZ said Enbridge's position is that the natural gas
pipeline is by far the best solution for the industry and for
Alaska. There are competitive proposals to build a natural gas
pipeline to Valdez and liquefy it there for transport to various
markets, but Enbridge does not think that makes sense in the
long-term. There is energy compression to liquefy gas, so there
are losses, he said. Because of the large volume of gas in
Alaska, there is not market available on the North American west
coast to accept that and floating LNG to foreign countries does
not do what needs to be done from North America, nor are the
economics as attractive as the gas line. The gas line will also
have rich gas flowing through it and at some point there will be
some processing of the gas to extract the entrained liquid
products - the ethane, propane, butane - that will move
ultimately to refineries or petrochemical plants. A key synergy
is the tar sands development in western Canada, Mr. Krenz
continued. Because the oil is very thick, diluent must be mixed
into it and the diluent is nothing more than the pentanes and
the heavier liquids that are extracted from the gas. This would
be a win-win scenario for everybody.
1:20:40 PM
REPRESENTATIVE ROSES reiterated his question as to what
percentage of product would be lost by liquefaction.
MR. KRENZ answered that he would be guessing on that number.
MR. KRENZ, in response to Co-Chair Gatto, confirmed that
pentanes can be shipped with the gas.
1:21:02 PM
CO-CHAIR JOHNSON asked what the Alliance Pipeline capacity is.
MR. KRENZ replied that the capacity is approximately 1.6 billion
cubic feet per day (bcf/d). Enbridge has contracts for
approximately 1.3 bcf/d and, for the incremental volume,
Enbridge provides an authorized overrun service. Thus,
utilization of that pipeline system is maximized, he said. In
response to further questions from Co-Chair Johnson, Mr. Krenz
confirmed that the capacity is through compression and various
technologies. The Alliance Pipeline system went into service in
2000. It is a high pressure, state-of-the-art system and could
easily be expanded with some incremental compressor stations.
He guessed it could be incrementally expanded to a maximum
capacity of about 2.5 bcf/d without putting new pipe into the
ground. Regarding whether [the Alaska Natural Gas Pipeline]
needs to run all the way to Chicago, he said that Enbridge has
looked at the decline curves in western Canada, and its
preliminary assessment is that between the Alliance Pipeline
system and TransCanada there should be adequate capacity to
accept the gas from Alaska's pipeline.
1:22:32 PM
MR. KRENZ again stressed that timing is critical. He further
outlined Enbridge's extensive experience in natural gas (slide
3) which includes 10,000 miles of natural gas gathering and
transmission lines and involvement in joint venture partnerships
that move over 5 bcf/d. There are technical challenges to
building the Alaska pipeline and Enbridge has technical
experience in both the north and south, he said. For instance,
in the Gulf of Mexico the company's deepest pipeline lays on the
ocean floor at 6800 feet. Enbridge is experienced with very
sophisticated techniques, including robotics. In Arctic Canada
(slide 4), the company built the first pipeline buried in
permafrost - the Norman Wells Pipeline. It was built in 1985
and is still owned and operated by Enbridge. He noted that
Enbridge is providing technical consulting to Alyeska Pipeline
Service Company regarding the changing of some of the controls
on the Trans-Alaska Pipeline System (TAPS).
1:25:33 PM
MR. KRENZ, in response to Representative Wilson, relayed an
answer from his assistant in the audience that the gas pipeline
to Inuvik is about 35 miles long. One of the benefits of that
pipeline, he said, is being a part of the community and the
culture. The northern cultures are key stakeholders in the
Inuvik project and this requires developing and maintaining a
good relationship to prove that Enbridge will do what it says it
will do. Mr. Krenz detailed Enbridge's commitment to corporate
social responsibility (slide 5). Social responsibility is going
to be a key to success in this project, he said, and First
Nations engagement will also be critical to success.
1:27:16 PM
MR. KRENZ moved to slide 6 and noted that Enbridge is
constructing $15 billion worth of capital projects over the next
7-10 years. These projects are primarily new and expanded
pipelines associated with the growth in tar sands. This relates
to the Alaska Natural Gas Pipeline because the labor force is
not there to carry out the magnitude of the projects in Alaska
and Canada. Enbridge will be recruiting and training workers
for its upcoming projects who will then be able to work with
contractors from both Alaska and Canada. When its project is
complete, he continued, Enbridge will have the most recent
state-of-the-art experience in managing and completing major
cross-country natural gas pipelines.
1:28:39 PM
CO-CHAIR GATTO inquired whether Mr. Krenz envisioned a single
pipeline or multiple pipelines.
MR. KRENZ replied that there is not a detailed design as that is
the next phase of the project. He relayed that Enbridge would
expect a single, buried pipeline with a diameter of 48 inches.
CO-CHAIR GATTO commented that this agrees with testimony the
committee previously received.
1:29:17 PM
REPRESENTATIVE SEATON noted that several years ago Enbridge had
talked about two 36 inch pipelines. He asked whether this was
still in the mix.
MR. KRENZ responded that no option has been eliminated at this
point because there is not yet a project sponsor and the sponsor
will be the one to determine the pipeline design. Building two
parallel pipelines is much more expensive than putting one in a
ditch, he said. Two smaller pipelines would give optionality
down the road to use one of the pipelines for something else
should the gas supply drop off. Enbridge, however, is
optimistic that the larger diameter pipeline is the way to go
because there is significant reserve in Alaska. Additionally,
he said, once the project proceeds there will be more
development.
1:30:58 PM
REPRESENTATIVE WILSON told of her tour at Fort McMurray,
Alberta, one and a half years ago and of the drastic need for
more workers at that time. Enbridge will likely be fighting for
the same workers, she surmised, thus any workers trained right
now would find employment immediately.
MR. KRENZ answered yes, very definitely. There is a significant
labor shortage; over the last several years, Enbridge has seen
its labor costs go up 50-60 percent and this is concerning.
1:32:11 PM
CO-CHAIR GATTO returned to the topic of two pipes versus one.
While it is more expensive to put two pipes in the ground, the
first pipe could be built and finished a year earlier and money
could start being made, he said. Then a second pipe could
follow the same route as the first. He asked whether the
economics of that have been dismissed.
RON BRINTNELL, Director of Pipeline Development, Enbridge, Inc.,
stated that it was three years ago when Enbridge first looked at
the "dual 36's". At that time it appeared unlikely that the
market would be ready for, or able to handle, 4.5 bcf/d "out of
the chutes." The thought was that if a 36 was built, the market
could be ramped up over time, he said. However, there is no
longer a need for the dual 36's because, as time has gone on,
the need has increased and the supply has decreased. Thus,
there should be the ability to take the full 4.5 bcf/d right
away.
1:34:09 PM
REPRESENTATIVE SEATON related that one of the concerns at the
time was that much gas coming on at one time would drop the
price significantly. He asked whether this would still be the
case or will people buy it if it is cheap enough.
MR. KRENZ replied that Enbridge's perspective is that it will
reduce the amount of demand that is being destroyed for natural
gas. "There is adequate market to be served with this gas
supply based on our projection of when it is going to be coming
on," he said. We need it all and it is not going to be a
pricing issue.
1:35:12 PM
MR. KRENZ discussed several points made by the Honorable Jim
Prentice, Minister of Indian Affairs and Northern Development,
during a presentation to the Canadian Energy Pipeline
Association in May 2006 (slide 7). He said the points made by
Minister Prentice are still relevant: the market will decide
what is the best and optimum solution and timing for this
project; there must be an efficient regulatory process to
support the project to move it ahead and expedite the regulatory
approvals; project management and cost control is going to be
significant and key to a successful project; social
responsibility and Aboriginal issues; and, finally, it must be a
win-win solution for all of the stakeholders, whether Alaskan,
Canadian, or North American end users.
1:37:06 PM
MR. KRENZ explained that in Canada there is debate about which
regulatory process to use - the old Northern Pipeline Act (NPA)
process from 30 years ago along with the [1976] Alaska Natural
Gas Transportation Act (ANGTA), or the new policies and
procedures based on today's environment (slide 8). He said
Enbridge is optimistic that it will be the latter. The outlet
of this pipeline will not access a single pipeline. A producer
is going to have significant commitments to the Alaska Natural
Gas Pipeline in the form of "taker pays". What that means, he
advised, is that the producers are going to want assurance and
reliability that the downstream pipelines are going to take the
gas.
1:38:23 PM
CO-CHAIR GATTO inquired whether there is First Nations land on
the expected highway route to Alberta.
MR. KRENZ answered yes, through the Yukon Territory. The right-
of-way has been defined through that area, he said, but there
are stakeholders there that will need to be dealt with.
1:38:51 PM
REPRESENTATIVE SEATON requested Mr. Krenz to address the concern
expressed by some that a private company building the pipeline
will have no incentive to keep the construction costs as low as
possible in order to keep the tariffs low so that the producers
can have a high netback.
MR. KRENZ stated that there is much risk in the construction
phase of this pipeline project and Enbridge cannot take that
risk. The regulated returns that are allowed by FERC are not
high enough for a pipeline company to take that level of risk.
Therefore, Enbridge's contracts would clearly state that any
cost directly accrues to the tariff in the transportation rates.
"In the future, and we have it in our oil pipeline systems, we
will likely enter into some form of incentive tariff with the
shippers where we both benefit if we can create operational
efficiencies and lower the cost," he said.
1:40:59 PM
REPRESENTATIVE GUTTENBERG inquired about Enbridge's experience
in dealing with the different regulatory processes on both sides
of the border and how they do or do not mesh. He referred to
slide 2 and asked whether there is a significance in regard to
the break in the pipeline where it crosses the border between
Regina, Saskatchewan, and the United States.
MR. KRENZ explained that the blue line [shown on slide 2] is the
oil pipeline system and the red line is the Alliance natural gas
pipeline system. He said the break in the oil pipeline shown on
the slide is a printing glitch and that the pipeline in reality
is continuous. With respect to the regulatory process, the
Canadian and U.S. segments would need to be worked together in a
concurrent process for approval. The Alliance Pipeline system
is a good example of this, he said, because it is both a U.S.
and Canadian pipeline and there are tariff structures on both
sides of the border.
1:43:10 PM
REPRESENTATIVE ROSES asked what other benefits, in addition to
petrochemical plants and oil extraction from tar sands, could be
expected from a pipeline through Canada.
MR. KRENZ said this is the first project going through Canada
that is not sourced by Canada and the end use is not in Canada.
Thus, the comment that Enbridge hears is, "So what's in it for
us in Canada?" There is a lot in it for Canada, he said, such
as liquids extraction and the petrochemical fit. He said he
tries to portray that it is a North American situation on a
supply-demand balance. Other benefits to Canada could be that a
large diameter pipeline going through a portion of the country
could become a conduit for other development.
1:44:52 PM
REPRESENTATIVE ROSES inquired what the anticipated benefit that
Canada will go after is. Is the petrochemical part going to be
enough, is the liquid extraction going to be enough, he asked.
"At some point in time what we have to take a look at is: are
we better off to extract those and use them ourselves and
develop a product here," he said. "Are we better off to use
that as part of the enticement in order to 'allow' us to use
their land to move our pipeline through to our other states."
MR. KRENZ responded that the traditional issues will come into
play, such as how much [revenue] Canada will receive for the
right-of-way and in taxes on the asset. From a bigger picture,
Canada understands the strategic nature of the natural gas
supply in Alaska, the need to serve the North American market,
and the longer term impacts of not serving that market. If all
the alternate energies are spurred on, he said, Canada has a
significant resource that may not be of nearly as much longer-
term value as it is right now. So, Canada is very incented to
work together to make this happen.
1:46:21 PM
REPRESENTATIVE ROSES commented that Canada's knowledge of the
need to move product is partly what pleases him and partly what
scares him. Canada's recognition of the value of utilizing its
land puts Canada in the more advantageous bargaining position.
MR. KRENZ said this is the real crux of the whole situation.
There are numerous stakeholders in this project and if
reasonable compromise cannot be reached, if greed cannot be
replaced with compromise, then everybody loses. Look at the
significant tax revenues that Alaska loses every single year
that this project is delayed.
1:47:52 PM
CO-CHAIR JOHNSON asked what the compensation would be for gas
taken from the pipeline [somewhere in Canada].
MR. KRENZ explained that the shippers on the pipeline would have
title to the gas on the liquids; initially, these shippers will
likely be the major oil companies. If Alaska transports its
royalty-in-kind gas and has a shipping contract through the
pipe, those liquids may be part of Alaska's. Basically, there
would be a commercial arrangement with the party that extracts
those British Thermal Units (BTU's) from the gas stream and the
shipper would be paid for them. Typically liquids are more
valuable than natural gas, he said. Total BTUs may be lost at
the end of the pipe, but the economic value will not be lost.
Whether Alaska decides to sell its gas or just do a netback
calculation to determine the royalty value, it would just be
part of an equation as to what percent of liquids is being
extracted and the value of that amount.
1:50:02 PM
CO-CHAIR JOHNSON inquired whether extraction would affect
tariffs. Will tariffs go down after the point of extraction, he
asked, or is the tariff from Prudhoe Bay to Chicago.
MR. KRENZ said that in the case of an extraction plant located
at the end of the Alaska Natural Gas Pipeline, there would be
less gas going into the downstream pipelines and, yes, the
tariff would be based on the actual gas going through those
downstream pipelines. He said he did not know what would happen
if the extraction is in the middle of the Alaska pipeline system
because there must be a tariff structure that covers the cost of
the Alaska system. He did not know how it would be structured
if the upstream capacity is used. He said he thought that in
reality it would be more likely that the liquids plants would be
located at the end of the Alaska system.
1:51:08 PM
IAN MCFEELY, Vice President, Gas Development, Enbridge, Inc.,
stated that the Alliance Pipeline is a bullet line that goes
from northeastern British Columbia to Chicago. Liquids are
extracted from the rich gas in Chicago by a company owned in-
part by Enbridge. After taking the liquids from the shippers on
the system, dry gas - methane gas - is returned to the pipe that
has the same BTU value as the liquids that were taken out. That
dry gas is then shipped downstream to make money for the
shippers. There are other alternatives that Alaska could
consider, he said. For example, Alaska could build an
extraction plant at the end of its pipeline, take the liquids
and sell them into the Alberta market. Nobody will grab
Alaska's liquids if the state wants to keep them.
1:52:25 PM
CO-CHAIR GATTO asked whether a BTU of propane is worth a BTU of
natural gas.
MR. KRENZ responded that liquids tend to track oil price much
more than gas price.
1:52:40 PM
MR. KRENZ moved to slide 9 of his presentation and noted that
Enbridge's agenda with the First Nations is an on-going process
of education, engagement, training, building relationships, and
creating long-term employment opportunities.
1:53:14 PM
REPRESENTATIVE GUTTENBERG asked whether Mr. Krenz is pointing
out that TransCanada may not have the exclusivity with the First
Nations that it thinks it has.
MR. KRENZ explained that the NPA was approved 30 years ago when
much of the Alberta infrastructure was not there. There is a
route that is defined and, not surprisingly, TransCanada thinks
it should have the right and the NPA regulatory approval should
still be used. But that approval does not acknowledge that the
First Nations are a stakeholder in the project and it is not in
compliance with today's regulatory and environmental
requirements. Why would anyone think it will be rubber stamped
based on an out-of-date, 30-year-old deal, he asked.
1:54:47 PM
MR. BRINTNELL clarified that there are First Nations in the
Yukon who actually own the land and have title and control of
the land, although there are some that do not. Consultation
requirements are a responsibility of Canada's government, not
Alaska's. TransCanada has certain things that it was granted
exclusive rights to under the NPA, but that was prior to modern
consultation requirements that have been put into law over the
last 10 years in Canada. Constitutional rights of the First
Nations have changed since the NPA was enacted, he said. Thus,
while TransCanada has specific rights, Enbridge questions
whether TransCanada has the exclusive right to move the project
forward. There is no chance that TransCanada has the ability to
go unchallenged by the First Nations in Canada.
1:56:14 PM
CO-CHAIR JOHNSON pointed out that an agreement still has
standing regardless of how old it is. Just because things
change in between, that agreement does not change, unless laws
are different in Canada than in the U.S. Of course, anything
can be litigated, he said, but winning is another thing.
MR. KRENZ answered that the defined right-of-way is protected
and that has not changed.
MR. BRINTNELL added that it is only a partial right-of-way. He
asked whether Co-Chair Johnson was referring to the First Nation
issue or the exclusivity issue.
1:57:04 PM
CO-CHAIR JOHNSON said he is referring to both. He inquired
whether there is something in Canadian law that supersedes the
agreement of 30 years ago with the new constitutional amendment
for First Nations.
MR. KRENZ stated that the government has not yet ruled on this.
There are challenges on the Canadian side of the fence and this
is one that Enbridge is pushing to get resolved. The response
has been that the Canadian government will do something once the
Alaska project is actually moving.
MR. BRINTNELL added that only certain parts of First Nations
issues have been dealt with under the NPA.
1:57:56 PM
CO-CHAIR JOHNSON remarked that this is a red flag to him. Why
would Alaska want to enter into a 40-year agreement knowing that
it is going to be changed in 25-30 years, he asked.
MR. BRINTNELL stated that Enbridge is not trying to take away
the rights granted to TransCanada and is not trying to change
the agreement. TransCanada has specific rights, but it does not
have exclusivity.
MR. KRENZ said there will be an approval process that will
define what has to be lived with on the pipeline system.
1:59:09 PM
MR. KRENZ turned to slide 11 of his presentation and noted that
the traditional supplies in the Lower 48 are dwindling. He said
Enbridge expects the majority of Alaska gas to go to the
northeast and eastern markets. [Slide 11 lists the key markets
for Alaska gas as being the Midwest and Northeast U.S., southern
Ontario, Canada, and Alaska.] He explained that there is some
expansion in existing re-gas projects and some new projects are
being constructed that have firm supply contracts (slide 12).
The projects that have not yet started and that are still
looking for supply are probably going to be looking for supply
until after 2015, Mr. Krenz predicted. Some of the LNG projects
are falling by the wayside; environmentally they all have
challenges, but the biggest challenge is finding supply. He
moved to slide 13 depicting the global LNG supply forecast for
2004-2006 and noted that the forecast for 2006 is likely
optimistic as it is continuing to slide.
MR. KRENZ reviewed the motives for producer ownership (slides
14-15) and stated that the single word is control. The
producers will bear the risk on this pipeline and there are
technological challenges. Contracts with the producers for the
capacity of the pipeline are a must-have, he said. The Alaska
situation is similar to the one in the Gulf of Mexico where
"Shell" built its own pipeline.
2:01:55 PM
MR. KRENZ explained that the Canadian oil sands development is
extremely complicated (slide 16), but despite the challenges the
development moved ahead quickly and everybody is benefitting.
He acknowledged that the infrastructure is being stretched in
the developing areas, such as having enough workers.
MR. KRENZ said Enbridge thinks that the producers must play a
key role in the Alaska project in order for it to move ahead
(slide 17). Enbridge's concern is in respect to timing and the
producers need to be at the table sooner rather than later. The
issues that must get resolved are those between the state and
the producers and once resolved the project will move ahead
rapidly, he said. The creditworthiness of the producers is
needed in order to have the higher financing on the project
which reduces the cost of service. In order to have the
producers sign the 25-year shipper pay contracts, the producers
are going to want to have cost control over the project because
they will be the ones to bear the risk of cost overruns.
2:04:18 PM
REPRESENTATIVE ROSES summarized his understanding of what is
being said: Mr. Krenz is confident that Enbridge would produce
a quality product should it be granted the authority to build
the pipeline; Enbridge is experienced in building pipelines in
Canada and the Gulf of Mexico; Enbridge is the best company to
deal with because of its relationships in Canada; and Alaska
will not receive a commitment from Canada until the project is
defined. However, he said, Alaska is not going to define the
project until the commitments on the other end are known; it is
a give and take. He asked for Mr. Krenz's opinion on how
difficult it is going to be to secure a reasonable contract
through Canada.
MR. KRENZ said he is very confident. While there are issues in
Canada, they can be resolved in a timely fashion that will not
cause any delay to the project. Once traction is seen on the
project it will become a much higher priority.
2:06:20 PM
REPRESENTATIVE ROSES noted that one of the requirements in the
proposed Alaska Gasline Inducement Act (AGIA) is that
prospective licensees must outline how they plan to secure First
Nations rights if the pipeline goes into or through Canada. Is
this easily definable, he inquired.
MR. KRENZ responded that he thinks Enbridge can easily define
what the issues are and establish a timeframe on when those
issues would have to be resolved to work with the project
schedule. He recommended the state get the producers back to
the table and find compromises on those issues that need to be
resolved. The pipeline is going nowhere until there is an
agreement on those issues, he opined. Enbridge must come
together with a producer consortium before it will spend the
time and take the risk of going through the AGIA process.
2:08:39 PM
REPRESENTATIVE ROSES appreciated Mr. Krenz's candidness as
Alaska cannot afford to hedge its bets and move forward without
knowing what to anticipate. He said his concern is that the
stakes with Canada will get higher each day if the negotiations
involve putting the Alaska pipeline across Canadian land.
MR. KRENZ pointed out that there are a lot of commercial
arrangements between the United States and Canada. Washington
[DC] will weigh in real quickly if Canada is not playing fairly
in this scenario because this is so critical to the Lower 48, he
predicted.
REPRESENTATIVE ROSES remarked that Mr. Krenz may have more
confidence in Washington [DC] than he does.
2:10:02 PM
CO-CHAIR GATTO stated that if Enbridge had the framework of an
agreement with the producers, it could still come forward to the
legislature.
MR. KRENZ expected that if the producers come forward with an
application in the [AGIA] process, that application will be
conditioned on resolving the fiscal issues. Fix that, he urged,
then all of the other noise will go away and things will start
moving.
2:11:13 PM
CO-CHAIR GATTO requested Mr. Krenz to expand his comments on
resolving the fiscal issues.
MR. KRENZ understood that there was some desire by the shipper
group to have clarity on future costs for the project which
included taxation. It was not necessarily just gas taxation; it
was also oil pipeline taxation. The producers cannot be blamed
for wanting more certainty on a go forward process, he opined.
There has been a little hiatus after the elections, but
negotiation is still ongoing. The group that Alaska is
negotiating with is "extremely sophisticated [and] will try to
wear you out." They are very good at what they do, but they
also want to do the deal and they want to get it moving now.
The producers see the same concerns and pitfalls that I have
been trying to explain, he said. Enbridge could be an operator
in the project, or a neutral third party in the pipeline group
with the producers to add value. Whether or not Enbridge is
involved, it is a win for Enbridge and for the industry to see
the project moving ahead.
2:13:24 PM
CO-CHAIR GATTO asked whether a 10 year certainty on a tax
structure that is in place at the time of agreement seems
reasonable to Mr. Krenz.
MR. KRENZ said it may be, but whether it is reasonable or not is
unknown "until after you've gone through all this pipeline stuff
to get to that." What is the disadvantage of throwing out an
olive branch to [the producers] to come to the table with the
new administration, he asked.
CO-CHAIR GATTO responded that he thinks this is what is being
done. The tough point is getting a mediator to come up with one
document that everyone can buy into that includes the tax
structure, the 10 years, the pipeline estimate, the diameter,
the direction, and First Nations.
MR. KRENZ agreed. However, he said, going through this pipeline
scenario does not really get to the issue that needs to be fixed
right now.
2:15:36 PM
REPRESENTATIVE SEATON stated that a majority of Mr. Krenz's
suggestions have been done, including converting the gross tax
to a net profits tax. Alaska worked really hard with the
producers, and while there is a difference of a percentage or
two, basically the structure is there. [The legislature] has
not heard what the big problems are, he said, the problems are
unknown until there is an offer on the table.
MR. KRENZ said he thought it unrealistic to expect to negotiate
such complicated issues in an open forum. Closed doors are not
meant to hide from the legislature what the administration is
doing with the producers. It will be tough to see progress, he
advised, if the players that the state is dealing with have to
do something in a public forum.
CO-CHAIR GATTO pointed out that a deal had been agreed to, but
there was no commitment to actually do anything with the deal.
The legislature did not think that was in the best interests of
the state, he said. The tax structure was one thing, but the
simple core value that the producers did not even have to build
the pipeline was unpalatable.
2:19:47 PM
REPRESENTATIVE GUTTENBERG stated that he has been a pipeline
worker in the oil fields all his adult life. "You had to come
to us with a pipeline deal that was really bad in order for us
to reject it," he said, "and that's what happened." The
phenomenal election that turned things around should have been a
lesson to the industry about the attitudes of the people of this
state. Now we are turning around and negotiating back, and the
negotiations must be in public and be a part of the public
process. Sovereignty and Alaska hire issues must be on the
table. Representative Guttenberg said he is unsure if a
proposal that went around AGIA would be acceptable, but that if
some entity came back to the people of Alaska through the
legislature and the governor with a proposal that at least
partially answered some of the questions and concerns, "we would
be at the table in a minute's notice" with a special session.
Had the previous administration's product lived up to the
constitution and the commitment that legislators have made to
their constituents, he said, these meetings would not be
happening right now - "they'd be ordering pipe."
MR. KRENZ applauded the comments. He noted that Enbridge was
not part of the previous negotiations, but that it has offered
to help facilitate getting the project going because of the
timing concern and not wanting to see the project slide another
few years. He said he did not know whether AGIA is the right
approach, but that there must be resolution with the producers
for the pipeline to go ahead, "otherwise we're all just wasting
each other's time." The state does not need to spend $500
million supporting a pipeline application; fix the issues and
the pipeline will move ahead.
2:23:33 PM
CO-CHAIR JOHNSON asked whether an open season commitment of the
reserves that are known today would be enough to finance a
pipeline.
MR. KRENZ said he thought yes with the [known reserves of] 35
trillion cubic feet (tcf). The upside is that as the reserves
grow and more volume is transported, the tariff gets lower.
2:24:28 PM
REPRESENTATIVE ROSES appreciated Mr. Krenz's willingness to
provide a presentation as per the committee's invitation and
thanked him for answering questions that were beyond the scope
of what he was asked to speak about.
MR. BRINTNELL said Enbridge has had dialog with the Canadian
government and Canada will be ready to handle the issues. What
Canada is looking for is that costs do not outweigh the
benefits. In other words, if the pipeline goes through the
Yukon and roads have to be built it is not a negative to Canada.
If it is economic, Yukon would like to be able to have a tee to
be able to take gas off or put gas on. It is not that Canada is
going to hold out, he advised, only that Canada wants things to
be fair.
2:26:21 PM
REPRESENTATIVE SEATON understood the benefits that Canada would
want, such as property tax on the pipeline which would be a
normal thing. He inquired whether there is normally a severance
tax on the gas or a transport fee for the BTU's when a pipeline
goes through another country or province.
MR. BRINTNELL responded that normally it is just property tax on
the land that the pipe sits in.
2:27:10 PM
REPRESENTATIVE GUTTENBERG asked whether there is validity to the
thought that if a non-producer were to build the pipeline, the
producers would be forced to release their gas into the pipeline
as a result of pressure from shareholders, the public, and the
U.S. Congress.
MR. KRENZ replied, "Based on my experience dealing with the
sophisticated players that you are dealing with, they are not
intimidated ... they react very negatively to pressure, I'm not
optimistic that that approach would be very worthwhile."
2:28:13 PM
REPRESENTATIVE SEATON inquired whether Mr. Krenz could provide a
written discussion paper describing what would be a normal
third-party pipeline agreement regarding tariffs and who bears
responsibility for cost overruns when it is a third party
pipeline builder instead of the producers.
MR. KRENZ said it would be a typical, standard inter-state
pipeline system.
REPRESENTATIVE SEATON said this would be helpful for discussions
regarding whether to have the pipeline built by a third party or
by producers.
MR. KRENZ agreed to do so. The quick answer, he said, is that
on a non-jurisdictional, purely commercial pipeline - which
Enbridge does all the time on its gathering systems - Enbridge
estimates the cost, does a reserves analysis on the
deliverability, and then establishes a tariff. Enbridge might
bear the risk of the cost overrun, but the estimates are put
together to compensate for that. For cost overruns on a project
of the magnitude of the Alaska pipeline, he said, the
expectation would be that the pipeline builder would go back for
another rate case to get a revised rate approved at the higher
cost of service.
2:30:42 PM
CO-CHAIR GATTO talked about the different perspectives of Canada
and Alaska and the reasons why each party would like to see a
gas pipeline. Alaska is motivated, he said, but it is an
amateur dealing with "big guys" who know how to trick other
people, and this has made the state gun shy about accepting the
first offer. All the legislature is after is to have a deal
presented by Enbridge or anyone else that is fair and lays out
all the details.
MR. KRENZ said Enbridge stands ready, willing, and able, and has
been trying to facilitate resolution of the issue. The
legislature's job is to maximize value long-term for Alaska and
that is what the other stakeholders are trying to do for
themselves as well.
2:34:44 PM
CO-CHAIR GATTO commented that a deal may not be maximized, but
it could be adequate enough to agree to. Alaska does not want
to be flattened by a steamroller.
MR. KRENZ said Enbridge will try to be creative and work with
the producers.
CO-CHAIR GATTO asked for Enbridge's opinion of the current
structure of the petroleum production profits tax (PPT).
MR. BRINTNELL responded that the short answer is PPT can be a
part of the solution, but because Enbridge is not one of the
producers he cannot say whether it is "the" solution. People
must come to the table to talk about whether the existing sets
of tools can be used - of which PPT is one - or whether to
change or modify them. So, the answer is all of the above.
2:36:35 PM
REPRESENTATIVE ROSES stated that anyone worried about getting
hoodwinked should not be at the negotiating table and should
hire a knowledgeable representative instead. That is part of
the dynamic of where [the legislature] needs to be and why the
committee is listening to presentations. This project will not
move forward unless everybody has something to gain by it, he
noted. The question is how to maximize the potential for the
state of Alaska and minimize any liabilities. "I think we are
in the position to move forward," he said. He shared Mr.
Krenz's concern about how open the process can be. Teacher
contracts are not done in public, nor are they expected to be
done in public. Therefore, he cannot see how something like
this can be totally open. Progress on the negotiation must be
reported, he said, but the negotiation is not in the open.
MR. KRENZ responded that most of his career has been business
development and coming up with win-win structures. The concern
is that it is not short-term, it is not the first 10 years. The
state must be protected and be sure it is getting its fair share
down the road. Perhaps there could be some form of incentive
taxation structure that allows this fair share compensation in
the future, he suggested.
2:41:08 PM
REPRESENTATIVE SEATON presented a scenario in which an oil
pipeline and a gas pipeline each made $5 billion in profits. He
inquired whether Mr. Krenz would expect the tax rates to be
different on the oil profits versus the gas profits.
MR. KRENZ answered that it is the financial value that has been
created, so why would it be any different.
2:42:13 PM
REPRESENTATIVE SEATON remarked that this has been one of his
chief conundrums in trying to understand. Even though the
producers get to subtract out all of their expenses under the
net profits system so that profit is the only thing being talked
about, they are saying they want to pay one-third of the tax
rate on gas profits that they pay on net profits. It is
something for which the legislature has not been given an
explanation.
MR. KRENZ said he did not know. He guessed that, "It may come
down to their economics on the oil side of the business are much
stronger than the gas side of the business and when they
independently look at the projects ... they can negotiate with
you and bear more tax load on the oil side than on the gas side
and still have the project be a project that meets their
criteria."
2:43:24 PM
REPRESENTATIVE SEATON stated that it is the net profit in either
case, so the expense part is taken out. He said it would be
very beneficial to receive an answer on this.
MR. BRINTNELL responded that the issue may be the risk factor.
Net profits do not take into account the amount of return on
equity that one might need for a more risky project. A riskier
project may require a larger return.
REPRESENTATIVE SEATON commented that this is the main thing for
which the committee does not have a good understanding.
CO-CHAIR GATTO agreed. He noted that if a certificate of
deposit (CD) could be bought for a 10 percent return, why would
someone go build a pipeline for 10 percent - but show me a 10
percent CD.
2:45:08 PM
ADJOURNMENT
There being no further business before the committee, the House
Resources Standing Committee meeting was adjourned at 2:45 p.m.
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