Legislature(2007 - 2008)BARNES 124
04/16/2007 01:00 PM House RESOURCES
| Audio | Topic |
|---|---|
| Start | |
| HB177 | |
| Adjourn |
* first hearing in first committee of referral
+ teleconferenced
= bill was previously heard/scheduled
+ teleconferenced
= bill was previously heard/scheduled
| += | HB 177 | TELECONFERENCED | |
| + | TELECONFERENCED |
ALASKA STATE LEGISLATURE
HOUSE RESOURCES STANDING COMMITTEE
April 16, 2007
1:09 p.m.
MEMBERS PRESENT
Representative Carl Gatto, Co-Chair
Representative Craig Johnson, Co-Chair
Representative Bob Roses
Representative Paul Seaton
Representative Peggy Wilson
Representative Bryce Edgmon
Representative David Guttenberg
Representative Scott Kawasaki
MEMBERS ABSENT
Representative Vic Kohring
COMMITTEE CALENDAR
HOUSE BILL NO. 177
"An Act relating to the Alaska Gasline Inducement Act;
establishing the Alaska Gasline Inducement Act matching
contribution fund; providing for an Alaska Gasline Inducement
Act coordinator; making conforming amendments; and providing for
an effective date."
- HEARD AND HELD
PREVIOUS COMMITTEE ACTION
BILL: HB 177
SHORT TITLE: NATURAL GAS PIPELINE PROJECT
SPONSOR(s): RULES BY REQUEST OF THE GOVERNOR
03/05/07 (H) READ THE FIRST TIME - REFERRALS
03/05/07 (H) O&G, RES, FIN
03/06/07 (H) O&G AT 3:00 PM BARNES 124
03/06/07 (H) -- MEETING CANCELED --
03/08/07 (H) O&G AT 3:00 PM BARNES 124
03/08/07 (H) -- MEETING CANCELED --
03/13/07 (H) O&G AT 3:30 PM HOUSE FINANCE 519
03/13/07 (H) Heard & Held
03/13/07 (H) MINUTE(O&G)
03/15/07 (H) O&G AT 3:00 PM BARNES 124
03/15/07 (H) Heard & Held
03/15/07 (H) MINUTE(O&G)
03/19/07 (H) O&G AT 8:30 AM CAPITOL 106
03/19/07 (H) Heard & Held
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03/20/07 (H) Heard & Held
03/20/07 (H) MINUTE(O&G)
03/21/07 (H) O&G AT 5:30 PM SENATE FINANCE 532
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03/22/07 (H) Heard & Held
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03/24/07 (H) O&G AT 1:00 PM SENATE FINANCE 532
03/24/07 (H) -- Public Testimony --
03/26/07 (H) O&G AT 8:30 AM CAPITOL 106
03/26/07 (H) Heard & Held
03/26/07 (H) MINUTE(O&G)
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03/28/07 (H) O&G AT 7:30 AM CAPITOL 106
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03/28/07 (H) O&G AT 8:30 AM CAPITOL 106
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03/29/07 (H) Heard & Held
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03/30/07 (H) O&G AT 8:30 AM CAPITOL 106
03/30/07 (H) Heard & Held
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03/31/07 (H) -- MEETING CANCELED --
04/02/07 (H) O&G AT 8:30 AM CAPITOL 106
04/02/07 (H) Heard & Held
04/02/07 (H) MINUTE(O&G)
04/03/07 (H) O&G AT 3:00 PM BARNES 124
04/03/07 (H) Moved CSHB 177(O&G) Out of Committee
04/03/07 (H) MINUTE(O&G)
04/04/07 (H) O&G RPT CS(O&G) NT 3DP 2NR 2AM
04/04/07 (H) DP: RAMRAS, DOOGAN, OLSON
04/04/07 (H) NR: SAMUELS, KAWASAKI
04/04/07 (H) AM: DAHLSTROM, KOHRING
04/04/07 (H) O&G AT 8:30 AM CAPITOL 106
04/04/07 (H) -- MEETING CANCELED --
04/05/07 (H) O&G AT 3:00 PM BARNES 124
04/05/07 (H) -- MEETING CANCELED --
04/10/07 (H) RES AT 1:00 PM BARNES 124
04/10/07 (H) Heard & Held
04/10/07 (H) MINUTE(RES)
04/11/07 (H) RES AT 1:00 PM BARNES 124
04/11/07 (H) Heard & Held
04/11/07 (H) MINUTE(RES)
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04/12/07 (H) Heard & Held
04/12/07 (H) MINUTE(RES)
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04/13/07 (H) Heard & Held
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04/14/07 (H) Heard & Held
04/14/07 (H) MINUTE(RES)
04/16/07 (H) RES AT 1:00 PM BARNES 124
WITNESS REGISTER
WENDY KING, Manager
ANS Gas Development Team
ConocoPhillips Alaska, Inc.
Anchorage, Alaska
POSITION STATEMENT: During hearing on CSHB 177(O&G), presented
information and answered questions.
ACTION NARRATIVE
CO-CHAIR CARL GATTO called the House Resources Standing
Committee meeting to order at 1:09:04 PM. Representatives
Gatto, Johnson, Edgmon, Kawasaki, Wilson, Seaton, and Roses were
present at the call to order. Representative Guttenberg arrived
as the meeting was in progress.
HB 177-NATURAL GAS PIPELINE PROJECT
1:09:13 PM
CO-CHAIR GATTO announced that the only order of business would
be HOUSE BILL NO. 177 ,"An Act relating to the Alaska Gasline
Inducement Act; establishing the Alaska Gasline Inducement Act
matching contribution fund; providing for an Alaska Gasline
Inducement Act coordinator; making conforming amendments; and
providing for an effective date." [Before the committee was
CSHB 177(O&G).]
1:09:53 PM
WENDY KING, Manager, ANS Gas Development Team, ConocoPhillips
Alaska, Inc., explained that ConocoPhillips is the state's
largest oil and gas producer. In fact, ConocoPhillips has had
1,200 liquefied natural gas (LNG) shipments since 1969 from the
facility in Kenai. Furthermore, ConocoPhillips has drilled 60
exploration wells in Alaska since 1999, including 16 wells in
National Petroleum Reserve-Alaska (NPR-A). ConocoPhillips is
the largest holder of acreage on the Alaska North Slope (ANS) on
both state and federal lands. ConocoPhillips, the Heritage
Company Phillips, was the first oil company to establish offices
in Alaska. Alaska is a major part of ConocoPhillips's global
portfolio with 13 percent of its 2006 production based in Alaska
and 19 percent of its 2006 reserves based in Alaska.
MS. KING then related ConocoPhillips' agreement with the
administration that timing is important, which is why
ConocoPhillips is present today and committed to finding a way
to develop the ANS gas resource. Furthermore, ConocoPhillips is
also willing to consider creative solutions as there are many
alternatives by which a project can be moved forward. She then
thanked the members of the House Special Committee on Oil and
Gas for the positive changes it made that bring the Alaska
Gasline Inducement Act (AGIA) closer to resulting in a gas
pipeline. However, she opined that significant additional
changes are necessary to AGIA.
1:11:48 PM
MS. KING then turned the committee's attention to slide 1 of the
PowerPoint presentation, which relates that from the 1970s into
2000, ConocoPhillips worked on other technologies, such as LNG,
gas-to-liquids (GTL), and alternative project proposals to
market this ANS gas. The graph illustrates that starting in
2000 there was an upturn in gas prices that caused
ConocoPhillips to renew its focus, which it did by working
jointly with BP and Exxon Mobil Corporation (ExxonMobil) in 2001
and 2002. In fact, ConocoPhillips spent $125 million reviewing
technologies, environmental regulatory work, and commercial work
that would be necessary to advance a gas pipeline project. Ms.
King pointed out that ConocoPhillips has focused on a southern
route project since the 2002 study. Through 2003-2004,
ConocoPhillips worked hard on the federal legislation, which
resulted in the Alaska Natural Gas Pipeline Act. She then
recalled the reauthorization of the Alaska Stranded Gas
Development Act (ASGDA) in 2003, and noted that ConocoPhillips,
BP, and ExxonMobil submitted an application in January 2004.
Ms. King said that ConocoPhillips has been actively working
since 2000 to advance a gas pipeline project.
1:13:22 PM
CO-CHAIR GATTO asked if Ms. King was part of the negotiations
requiring a signed confidentiality statement.
MS. KING replied yes, and noted that the confidentiality
provisions were outlined in ASGDA.
1:13:52 PM
REPRESENTATIVE WILSON inquired as to which route is considered
the southern route.
MS. KING clarified that basically [the route] would parallel
Fairbanks and would cross Alaska into Canada into Alberta.
1:14:18 PM
MS. KING continued her presentation by relating that
ConocoPhillips is prepared to work with Governor Palin and the
Alaska State Legislature in order to develop a framework that
would advance the project. "We believe that dialogue and
balance [and] accommodation of each other's reasonable concerns
are essential to create the alignments necessary to move this
mega-project forward," she opined. She then turned the
committee's attention to slide 2, which relates that in 2001
dollars the estimate of the cost of this project all the way to
Chicago was about $20 billion. Slide 2 points out that the next
largest pipeline is the Rockies Express pipeline, which is
currently in construction and estimated to cost $4 billion and
cover approximately 1,300 miles. The planned capacity of the
Rockies Express pipeline is 1.5 billion cubic feet (bcf) a day.
The next largest project is the Alliance project, a 1,800 mile
pipeline, with a capacity of 1.3 bcf a day and a cost of about
$3.6 billion. She explained that the McKenzie Delta project
isn't on this chart because it isn't in construction. However,
the most recently publicly available cost estimates for the
McKenzie Delta project are $14 billion, including the upstream
portions of the project. The McKenzie Delta project is
estimated to have a capacity of about 1.2 bcf a day.
1:16:32 PM
MS. KING, in response to Co-Chair Gatto, clarified that the
chart on slide 2 only relates to projects that only include
midstream figures, which is why the McKenzie Delta project
numbers aren't included. Ms. King then highlighted that the
2001 project cost estimate doesn't include the upstream finding,
development, and operating costs that will be incurred to get
that gas ready for production. Therefore, there are additional
costs associated with the project beyond those on the chart. In
further response to Co-Chair Gatto, Ms. King confirmed that the
cost of the gas treatment plant, estimated to be $2.5-$3 billion
in 2001 dollars, is included. Therefore, the gas treatment
plant alone is a mega-project. In fact, each individual
component of the Alaska project is a mega-project. The Alaska
project, based on volume and cost, is significantly larger than
other interstate pipelines going forward in North America.
1:18:05 PM
MS. KING moved on to slide 3, titled "Alaska Gas Pipeline
Project Risks". With regard to the costs, she pointed out that
since 2001 steel prices have nearly doubled. Furthermore, labor
costs continue to rise. Therefore, the previous $20 billion
cost estimate would be significantly higher today. Moreover,
significant regulatory, engineering, and commercial work would
be required to obtain an updated cost estimate prior to an open
season. Ms. King then highlighted that gas prices continue to
remain volatile and predicting natural gas prices over a 20- to
40-year period is a huge challenge. She noted that the state
and the lessees are aligned in that both are exposed to the
natural gas price and cost overrun risks through the royalty and
production taxes.
1:20:13 PM
MS. KING, in response to Co-Chair Gatto, confirmed that a
pipeline owner with a firm shipping commitment is indifferent to
what is occurring with natural gas prices. For example, if the
toll was $4 and natural gas prices for the day or month were
$3.50, the pipeline owner will still be paid $4 while lessees
and the state will receive less value for that gas in that
instance. That's one area where the lessees and the state are
aligned, she noted.
1:20:56 PM
MS. KING returned the committee's attention to slide 3 and
pointed out that there are other risks and uncertainties.
Normally, upstream oil and gas projects illicit discussions
regarding cost, price, and reserves. However, this mega-project
includes other risks and uncertainties that must be included.
She emphasized that the Alaska project will be a world-scale
project and thus there will be world-scale logistics and
material procurement that must be addressed. Furthermore, one
must ensure that trained, qualified workers are available when
needed. Weather impacts must also be managed, she pointed out.
1:21:56 PM
CO-CHAIR GATTO inquired as to the number of employees required.
MS. KING recalled that just for the directed jobs, it would take
27,000-man years in the construction phase alone. She offered
to do some calculations to break it down further for the
committee.
CO-CHAIR GATTO commented on the difficulty of finding labor.
MS. KING said that she has additional data regarding labor that
can be supplied to the committee. However, she reminded the
committee that the data is based on a 2001-2002 study.
CO-CHAIR GATTO commented that it would be helpful for the
committee to review what the state's schools can produce in
terms of vocational and technical skills as well as the pipeline
quality personnel that might be available. The aforementioned
would be helpful in determining what can be done to reach the
need.
1:23:36 PM
REPRESENTATIVE WILSON expressed interest in the number of people
that would be working.
MS. KING agreed to provide the committee with more details on
the workforce requirements of this project. She recalled that
at the federal level, $20 million was already allocated for
training funds in recognition of the significance of having the
labor trained and ready by the time the construction phases of
this project are reached.
1:24:30 PM
MS. KING continued discussion of the risks and uncertainties,
including how to ensure the right up-front engineering. She
explained that the processes of front-end engineering design
(FEED) and front-end loading (FEL) have been developed in order
to help those executing a mega-project spend dollars up front
that will minimize risks and uncertainties such as a significant
cost overrun risk later in the project. If a project is managed
correctly, dollars spent up front can save a lot of dollars
later. With regard to the risks and uncertainties of reserves
and deliverability, Ms. King questioned where the gas will be
found. She recalled that with the base case about 50 trillion
cubic feet (tcf) is necessary to have a 4.5 bcf a day pipeline.
Therefore, 15 tcf more gas has to be found, which causes the
following questions to arise: where will that gas be located;
what will the deliverability of it be; what will the
deliverability be; what will the cost of development; will the
wells produce as expected; and will the compressors perform as
expected. Ms. King related that she has worked on many
production assets during her career, and pointed out that
[ConocoPhillips] has had difficulty predicting production over
just one year.
1:26:10 PM
CO-CHAIR GATTO asked if ConocoPhillips has a plan for finding 15
tcf.
MS. KING stated that ConocoPhillips has been an active explorer.
In fact, ConocoPhillips is exploring in a region in NPR-A that
is known to be gas prone. If a gas pipeline project is moving
forward, she anticipated that ConocoPhillips would be one of the
companies actively pursuing exploration on the North Slope.
1:26:38 PM
REPRESENTATIVE SEATON returned to what he characterized as a
critical item, deliverability. He expressed concern with regard
to where the producers have identified the source of the [gas in
the quantities necessary]. He related his understanding that
Point Thomson actually has been identified as an oil field and
thus a blow off of gas from it might be very problematic. He
asked if ConocoPhillips has requested that the Alaska Oil and
Gas Conservation Commission (AOGCC) reevaluate the gas off-take
from Prudhoe Bay or Point Thomson.
MS. KING pointed out that ConocoPhillips is a 36 percent working
interest owner in the Prudhoe Bay field. The Prudhoe Bay
working interest owners have been working with the AOGCC for
over a year. Prior to an open season, it would seem prudent for
any working interest owner to have that issue resolved, she
opined. Ms. King highlighted that a shipping commitment means
that there's a financial obligation to pay a pipeline. Although
one doesn't necessarily have to have gas to back the shipping
commitment, particularly for a strong financial company, it's a
fairly risky prospect to take out capacity on "spec" from a
pipeline of this magnitude. Ms. King said she anticipated that
[ConocoPhillips] will continue to work with AOGCC regarding a
new approved off-take rate prior to an open season. However,
ConocoPhillips would need to work with the working interest
owners in order to determine the appropriate investment level.
Furthermore, there will have to be discussions with DNR
regarding the plan of development. Ms. King stated that nothing
in an open season would foreclose others from [being involved].
She noted that ConocoPhillips has a relatively minor interest,
about 5 percent, in Point Thomson. Still, ConocoPhillips, she
related, is hopeful that it will find additional exploration
volumes so that it can make a nomination from other volumes as
well. All of the aforementioned will come together at an open
season, she said.
1:30:31 PM
REPRESENTATIVE SEATON highlighted that the producers have been
emphasizing the need for certainty. However, they haven't even
determined how much gas can be taken off the two major fields.
The study from the working interest owners group from Prudhoe
Bay hasn't produced enough information to reassess Rule 9. As
to whether there's momentum toward an open season, it seems
questionable, he said.
MS. KING said that ConocoPhillips anticipates that upon
completion of the project planning phase, which under AGIA would
be after a license is awarded, there would be an open season for
18 months to 2 years. ConocoPhillips, she opined, believes that
it can do the appropriate reservoir engineering and subsurface
work to have a plan with the AOGCC prior to the open season.
She related her understanding that the working interest owners
are working on that and continuing to do so. The intention, she
noted, of ConocoPhillips is to continue that work with the
Prudhoe Bay working interest owners.
1:32:41 PM
REPRESENTATIVE SEATON inquired as to how a pipeline company can
develop a proposal based on anticipated volumes of gas if the
producers aren't going to know, until just prior to the open
season, what volumes will potentially be nominated for the
people to design the pipeline to place a proposal and tariff
forward. He related his understanding that the aforementioned
must be in place prior to an open season.
MS. KING said that she would cover some of these issues in
upcoming slides.
1:33:45 PM
MS. KING returned to the risk and uncertainties and highlighted
the actual cost to explore and develop the known gas resources
and future gas resources. She posed a situation in which the
pipeline project is going forward and [a company is spending]
tens of billions of dollars in the construction phases of the
project. If [a company] is also trying to prepare Prudhoe Bay
for gas production, there will be additional investment
associated. Those developments and capital expenditures will
proceed concurrently with the largest private construction
project in North America. Therefore, within the state there
will be competition for goods and services in order to ready the
assets and the pipeline. When the pipeline is ready and it
comes on stream, she said she wouldn't want to be the upstream
person who hasn't "gotten the upstream development right" and
the gas isn't ready to enter the pipe. There will be many
logistical challenges, she opined.
1:35:53 PM
REPRESENTATIVE GUTTENBERG informed the committee that this
process is something that he has been through and the producers
on the North Slope do every year. Furthermore, many of the same
comments being made today were made during the Prudhoe Bay
expansion in the mid 1970s. Therefore, the oil industry has
much experience with these risks and uncertainties. With regard
to labor availability, Representative Guttenberg said that labor
has been driven away from the North Slope as work on the North
Slope has become less desirable than it ever was before. He
then opined that the industry has done little to make the North
Slope a place that people want to work and have a long-term
career.
MS. KING said that she hasn't worked on the North Slope nor is
she an expert on labor as she has focused entirely on the gas
pipeline since arriving in Alaska. However, she related that
one of the challenges with which she has been charged is to look
forward. Therefore, if there is going to be a large labor
demand, she expressed the need to work with others to have the
labor ready. The timeframe between now and construction is
critical to try to have the appropriate training facilities in
place to ensure success in delivery of the project.
1:39:59 PM
MS. KING, continuing with slide 3, reiterated that predicting
over a 20- to 30-year timeframe is difficult in terms of knowing
and/or guaranteeing the project economics. With these risks and
uncertainties, Ms. King opined that there's no entity that's
capable of guaranteeing an economic return on this project. She
highlighted that the magnitude of the initial shipping
commitments are staggering. For example, if the toll is $3.50
and the pipeline open season proposed signing up for a 20-year
shipping commitment, that could amount to in excess of a $26
billion financial obligation for 1 bcf a day, which would
roughly amount to ConocoPhillips' share. For 4 [bcf a day] that
would amount to over $100 billion in financial obligations that
would be made to a pipeline entity for a 20-year shipping
commitment. Strong parties, she emphasized, will be required to
have the financial strength to sit behind a shipping commitment
of that magnitude.
1:41:39 PM
CO-CHAIR GATTO asked if there is insurance available against
catastrophic losses.
MS. KING said, "I'm not aware that we would be pursuing
something like this." She clarified that it would be
ConocoPhillips that would be sitting behind that shipping
commitment and guaranteeing the pipeline company that it would
pay it. The pipeline company and/or the banks will assess
whether ConocoPhillips is strong enough to meet that obligation.
1:42:12 PM
REPRESENTATIVE SEATON requested an explanation as to where the
80 percent federal guarantee comes in if firm shipping
commitments for 100 percent of the project are being required.
Representative Seaton related his understanding that if the
markets have full confidence in ExxonMobil, ConocoPhillips, and
BP, the 80 percent [federal guarantee] seems to be meaningless.
MS. KING related her understanding that the pipeline entity will
hold an open season and specify what size it thinks the pipe
will be, how much the costs would be, and shipping commitments
will be made. She explained that the shippers are agreeing to
ship gas or pay demand charges for a fixed term, as specified on
slide 4. Those shipping commitments can then be used by the
pipeline company to repay its debt and obtain a return on equity
on its contribution. Those commitments allow the pipeline to
obtain the financing, and furthermore it serves as collateral
for that financing. With regard to the loan guarantees, she
opined that there's a fair amount left to be determined as to
how the actual federal loan guarantees will actually be used.
She related her understanding that the federal loan guarantees
will only step in after the lenders in the pipeline have gone
back to the shippers. Therefore, she surmised that the U.S.
Department of Energy, in reviewing the impact of the loan
guarantees, will review the likelihood of the pipeline entity
and/or shippers will default in order to determine where the
federal loan guarantees will step in. She likened this to a
third tier. Still, more work is necessary with regard to the
implementation of the federal loan guarantees. In further
response to Representative Seaton, Ms. King said that she would
follow up on the 80 percent federal guarantee. She clarified
that she hasn't heard anyone say that they could build a 4.5 bcf
a day pipeline and obtain financing if there was only signed
shipping commitments for 20 percent of it. In order to obtain
financing, firm shipping commitments for the full volume are
necessary.
1:47:41 PM
REPRESENTATIVE GUTTENBERG pointed out that the lease holders
don't necessarily have to be the same people as the shippers or
the pipeline entity. He opined that the pipeline won't be built
until the gas and the markets are present. Furthermore, and how
it lines up will be determined by who has the ability to take
the greatest advantage at the time.
[Co-Chair Gatto passed the gavel to Co-Chair Johnson.]
MS. KING clarified that the pipeline entity will be a separate
pipeline entity that will be formed as an affiliate, even if
it's a BP, ExxonMobil, ConocoPhillips pipeline. In fact, the
model discussed before was a limited liability corporation
within the Alaska portions of the pipeline with a different but
equivalent structure for the Canadian portions of the pipeline.
It's quite likely that the gas treatment plant (GTP) would also
be owned by the same pipeline entity or by a separate GTP
entity. "The lessee, when I talk about the lessee, that's when
I'm talking about when we're, say for example, as an owner in
Prudhoe Bay and Prudhoe Bay lessees will make decisions based as
a working interest owner," she explained. However, the
decisions regarding the shippers and the shipping commitments
will be made by ConocoPhillips alone. ConocoPhillips will make
an independent decision on a shipping commitment to that
project. There's no requirement as to specific amounts from
specific fields. The timeframe, in a success-based schedule,
between an open season and first construction is roughly eight
years and ConocoPhillips might have plans to actively explore.
When making a decision regarding a shipping commitment,
ConocoPhillips will review whether it believes the market
supports a shipping commitment. ConocoPhillips will have a
marketing affiliate that will review and make decisions
regarding how to market the gas. Therefore, there are a number
of affiliates available that are regulated by the Federal Energy
Regulatory Commission (FERC).
1:51:26 PM
REPRESENTATIVE GUTTENBERG surmised then that when ConocoPhillips
has a specific unit of gas available to it in reserve, it might
use smaller percentages and look for a second open season to
ship more if a larger market can be found.
MS. KING said this is entering a really complex area because if,
for example, ConocoPhillips, as a working interest owner,
decided not to take its share of gas in a field while other
parties did, the Gas Balancing Agreements could be used in order
to ensure that parties produce consistently. It could be
problematic if parties get out of balance and something happens
in the reservoir. If ConocoPhillips wanted to take out some
capacity on spec, then it's ConocoPhillips' obligation to pay
the pipeline company if the gas wasn't found or try to get its
exploration and appraisal program in place to deliver the gas.
Again, it would be an independent decision that ConocoPhillips
would make based on the risks and uncertainties of the market as
well as the cost of the project at the time.
1:52:57 PM
MS. KING commented that ConocoPhillips is going to use a
rigorous investment-making process to assess making those long-
term shipping commitments on the project or to sanction a
project. ConocoPhillips will review the risks and uncertainties
and won't review a single financial metric. On such a large
project, ConocoPhillips will review a number of financial
metrics and weigh the risks and uncertainties against those
metrics at the time the investment decision is made.
1:53:44 PM
MS. KING said that ConocoPhillips will establish processes to
manage those risks and uncertainties as things move forward.
She opined that the authors of AGIA must have recognized that
the project sponsors could see the possibility of the project
being unsuccessful in the future.
[Co-Chair Johnson returned the gavel to Co-Chair Gatto.]
1:54:28 PM
MS. KING reminded the committee that ConocoPhillips has a 36
percent working interest in Prudhoe Bay, which circulates
approximately 8 bcf a day of gas into the producing oil
reservoir. That gas keeps the reservoir pressure up in order to
get more oil out of the ground and to convert to a miscible
injectant that's used to inject in fields to also produce more
oil. Furthermore, ConocoPhillips is extracting natural gas
liquids and placing them in TAPS to the extent possible. The
gas in Prudhoe Bay is currently being used to produce more oil
every day. The Prudhoe Bay owners have invested billions of
dollars in Prudhoe Bay gas to increase oil recoveries out of the
Prudhoe Bay field. She said that Prudhoe Bay gas continues to
work hard to produce more oil; the gas nor the owners are
sitting idle. Ms. King then turned to the discussions of
litigation, which she characterized as a losing proposition
because while litigation occurs, costs could continue to
increase, gas demand could be lost, and progress toward this
project could be stalled.
1:56:04 PM
CO-CHAIR GATTO said that in the Prudhoe Bay field there is an
ideal amount of gas to reinject. He asked if it's past that
point.
MS. KING said that although she's heard references to that, she
doesn't understand that conclusion. The gas is currently [being
injected] and more oil is being produced. There will be a point
at which all parties can agree that it's appropriate to take gas
off. Ms. King opined that currently both the state and
ConocoPhillips are the beneficiaries of the amount of oil being
produced out of Prudhoe Bay. She said that she isn't aware of a
particular crossover point by which gas has to be produced.
CO-CHAIR GATTO asked if there is a point at which it could be
helpful to place more gas in the ground.
MS. KING said the discussion is moving into a complex area of
reservoir engineering. She further said that there will be a
lot of work done on Prudhoe Bay and in fact, some of the most
sophisticated models and engineering is being done on that asset
on a daily basis. There are ways to mitigate any impacts on
oil, which is what will be studied along with the cost
effectiveness of those once the process moves to take the gas
off. However, when the gas is taken off, that's a different
production mechanism on the Prudhoe Bay field. In further
response to Co-Chair Gatto, Ms. King clarified that FERC's job
is in relation to interstate commerce. The parties that would
assess engineering solutions so that oil isn't left in the
ground unnecessarily would be DNR and AOGCC.
1:59:15 PM
MS. KING directed the committee's attention to slide 5, titled
"Success Case Project Timeline". The timeline is roughly a 10-
year period from the project planning to the actual delivery of
full capacity. She said she anticipated that it would take
approximately a year from moving gas to the full ramp up of all
compressors. She highlighted the permitting and engineering
bars, which illustrate that the "forward plan" requires a
tremendous amount of additional work that would be required on
the project. The hope is that the aforementioned work would
reduce the uncertainties and risks around such areas as
materials procurement and engineering. She estimated that to
proceed through the project planning in the first four years
would be a $1 billion gross expenditure under the 2001 estimate.
Once the project reaches the point of project approvals and the
project has received FERC and National Energy Board (NEB)
certificates and completed permitting and right-of-ways, the
project sanction decision is at hand. At that point, under the
2001 study, that's when one would make the decision to invest
$19 billion-plus. She pointed out that it will cost roughly
$400-$500 million to conclude an open season, which would get
one through the first two years.
2:01:30 PM
MS. KING moved on to slide 6. She explained that in the oil
industry, it's been learned that projects that become schedule
driven usually fail. Therefore, ConocoPhillips has established
a "gated decision-making process" by which risks and
uncertainties can be managed and reduced as more engineering and
environmental work is performed. In the first two years, the
feasibility phase, she anticipated spending between 1-2 percent
of the total project costs. The feasibility phase would be when
the preliminary design basis and hopefully when fatal risks are
identified. The feasibility phase is the best opportunity to
reduce risk with the least amount of cost and thus it's a very
critical part of the front-end engineering design timeframe.
The next phase, referred to as the design phase, would be after
an open season and while the permits are sitting with FERC and
NEB. She anticipated spending 5-7 percent of the total project
costs during this time. The design phase is when the major
permits are obtained and 10 percent of the detail design is
completed. Much design optimization work is performed at this
point, she said. Furthermore, risk mitigation plans are
implemented during the design phase. After the first four
years, the project sanction decision would be made and the
execution and construction phase of the project would proceed.
Ms. King commented that the execution phase is by far the most
expensive time to re-engineer the project.
2:05:25 PM
REPRESENTATIVE WILSON returned to slide 5. She inquired as to
how a company can make commitments in an open season without
having decided how everything fits together.
MS. KING said that the tough question is how comfortable the
state is in making a firm shipping commitment to a pipeline
entity, probably eight years in advance, with the level of
information available at the time of the open season. She
reiterated that it's critically important to determine as good a
cost estimate as possible going into an open season. One of the
scenarios of concern is that an entity wouldn't expend very much
financially prior to an open season, but put forth a project
estimate. Ms. King opined, "Sometimes when people are going to
buy something, those that know the most about it may be more
constrained in their ranges, those that maybe have not studied
it as much might ..." say they can deliver it for a specified
amount. Therefore, it's very critical for the right
engineering, permitting, and environmental field data work to be
performed in parallel to an open season process so that there is
an understanding that the shippers can deliver what was said
during the open season.
2:08:02 PM
REPRESENTATIVE ROSES commented that the aforementioned is part
of his concern as well. However, it would be in an entity's
best interest to spend as little as possible to reach the open
season and then spend as much as possible after the open season
because at that point the state will potentially spend 80
percent up to the $500 million rather than the 50 percent
matching funds prior to the open season.
MS. KING said that by establishing a system in which the state's
matching is different on both sides of the open season is
clearly an area of concern because entities may be motivated to
pursue an open season quickly, which places the entity in a
position of receiving the 80 percent matching funds from the
state. The aforementioned places a shipper in a difficult
position when the licensee has promised something on which it
can't deliver. This proceeds down the losing path. Ms. King
explained that her hope with some of the graphs she's presented
is to highlight some of the complexities pointing to the need
for a clear, gated decision-making process in order to deliver
this project in the most effective manner. No one benefits if
the project ultimately costs $40-$50 billion because the state
will receive less royalty value and tax production value and
less value is received from the gas. She acknowledged that some
have said that if the appropriate engineering work isn't done
initially, one could argue that some of the costs weren't
legitimate and shouldn't be included in the toll. However, she
opined that it's an incredibly difficult argument to make before
FERC. Therefore, [ConocoPhillips'] focus on work commitments is
how to best establish a process by which the state can gain
comfort and that there's a clear commitment to advancing the
project while providing [ConocoPhillips] the ability to manage
the project using a gated decision-making process.
2:11:21 PM
REPRESENTATIVE ROSES recalled that the other producers have
concern with regard to waiving the right to an appeal. The
problem is knowing that the up-front data is really the best
data so that the decisions being made are the best decisions.
He opined that it seems that [AGIA] establishes a situation in
which an entity would proceed to the point of the [open season]
and the 80:20 match from the state when it would then call for
change orders.
MS. KING indicated her agreement.
2:14:08 PM
REPRESENTATIVE GUTTENBERG surmised that this is a negotiation
process for what goes into AGIA and what doesn't.
MS. KING said she will try to address those points during her
testimony.
2:15:37 PM
MS. KING related ConocoPhillips' agreement that a public
transparent process is desirable. Furthermore, ConocoPhillips
believes that a balanced deal is critical so that all involved
share in the rewards and challenges. She further related that
ConocoPhillips believes it can bring some value to the project.
As an owner, ConocoPhillips can bring financial strength, its
Arctic and Alaska experience, project management skills, mega-
project skills, as well as much interest and expertise in other
pipeline projects. ConocoPhillips also views itself as unique,
she said, in that it's a producer as well as an explorer. As
the state's largest explorer, ConocoPhillips is disappointed
with comments discounting ConocoPhillips as an explorer. Ms.
King said that ConocoPhillips wants to work through some
critical issues with the legislature and the administration.
She emphasized that ConocoPhillips isn't locked into the old
proposal. Ms. King said:
We need to find a framework that addresses the
critical resource issues that are needed to support
those billion dollars of shipping commitments, those
long-term shipping commitments that will facilitate
the construction of the largest project in North
America," she opined. My primary focus today ... is
to convey that we want to work with you in a
constructive way and we believe changes are needed to
AGIA to deliver a successful gas pipeline project.
The risk-reward balance is very different between the
regulated portions of the project, particularly if
they've been backed by strong firm shipping
commitments. The majority of those risks pass through
to the initial shippers on this project.
2:18:15 PM
MS. KING then identified the following areas of key questions of
concern related to HB 177 as specified on slide 7. She said
that ConocoPhillips believes that the current structure of AGIA
hinders competition and creative alternatives. She questioned
why the state would want to block alternative projects rather
than let the free market work most efficiently. The passage of
AGIA as drafted seems to make it very difficult to see how an
alternative project could be advanced over the next decade. She
drew attention to the licensed project assurance clause on page
23 of CSHB 177(O&G). This provision, page 23, lines 16-22, is
problematic because parties could be spending hundreds of
millions of dollars advancing this project. Therefore, this
language specifies that the state could be exposed to triple
damages, in the amount of billions of dollars. "This provision,
we see, severely constrains the state's right to change tax
terms and royalty terms, and royalty terms are a contractual
arrangement, for a project other than the licensed project, even
when the licensed project is not moving forward or is not fully
subscribed for over a decade," she highlighted. Furthermore,
the state could have litigation exposure as well as billions of
dollars in damages. Drawing upon her experience, she opined
that the term "preferential" can easily be disputed.
2:20:42 PM
MS. KING, in response to Co-Chair Gatto, questioned why the
state would tie itself up for over a decade and expose itself to
litigation and treble damages.
2:22:30 PM
REPRESENTATIVE SEATON opined that competition is being limited
because there's no incentive for an early proposal or a
competitive proposal because there's no detriment.
MS. KING commented that she would hope that the common objective
is to get the gas pipeline project regardless of who or how.
She expressed concern with a situation in which the state awards
the bid, but that entity can't deliver on it. The
aforementioned situation places ConocoPhillips in a position in
which it couldn't discuss tax and royalty terms with the state
without exposing the state to litigation and/or the triple
damages clause. Ms. King then pointed out that if the project
was permitted outside of the AGIA license, the language seems to
expose the state to litigation when it grants a permit to
perform environmental field work.
2:25:18 PM
CO-CHAIR GATTO opined that the aforementioned has been
considered and two commissioners have been selected with staff
to select the licensee. He related his belief that if the
commissioners feel that an entity has done an inadequate amount
of work, then no one receives the [bid] and the process would
begin again.
2:26:07 PM
REPRESENTATIVE GUTTENBERG directed attention to the sentence
beginning on page 23, line 16, which seems to come back to the
state. He opined that simply issuing a permit to perform field
work isn't preferential treatment for royalty tax or monetary
treatment. He further opined, "In the world of risk, I think
these are the things that everybody should be wanting to see in
this contract, even if you're the successful bidder and even if
you're just somebody going into this process because on the
other hand, certainly the three producers that have come before
us have wanted all kinds of fixed resource issues."
2:27:40 PM
MS. KING clarified that the tie to the streamlined permitting is
on page 23, lines 13-16. She then pointed out that the
inducements referred to in that sentence are the $500 million
plus the benefits of the AGIA coordinator. The AGIA coordinator
was modeled off the federal legislation in the Alaska Natural
Gas Pipeline Act, but the federal [legislation] specified that
it would apply to any Alaska natural gas pipeline project.
Therefore, if a winner was established and the project stumbled
a few years later, it wouldn't require an act of Congress to
have that process available to any project. With respect to the
upstream terms, Ms. King noted that the last contract included
the upstream model contract which was designed such that other
working interest owners in the fields have the same resource
terms if they were willing to make a long-term shipping
commitment. She explained that if one entity is trying to
advance something in NPR-A but that entity has different
resource terms than the partner in the field, it's very
difficult for that initial entity to obtain alignment with
regard to how to move forward with development. Therefore,
ConocoPhillips believes it's important that all resource
provisions are available to all parties that might take long-
term shipping commitments. Ms. King then pointed out that AS
38.05.020(b)(9) offers an alternative vehicle for streamlined
permitting. Although there are benefits to the AGIA
coordinator, those provisions should be applicable to any
natural gas pipeline project that's moving forward.
2:30:30 PM
MS. KING returned to slide 7 and addressed ConocoPhillips'
second concern, which is the prescriptive bid requirements as
outlined on page 3, proposed AS 43.90.130. The current version
of HB 177 has about 20 requirements. In addition, the
legislation provides that future preparation of requests for
applications (RFA) could establish more requirements. If an
applicant has demonstrated that he/she has met the
commissioner's satisfaction for each requirement, then the bid
would be considered for public and legislative review. However,
an applicant that doesn't meet even one of those requirements
would be rejected as a nonconforming bid, although there could
be scenarios under which the best solution might be one of those
rejected bids. For example, ConocoPhillips may have estimates
for the project size, receipt, and delivery points since it
knows that those will change, which is what the open season is
supposed to address. If ConocoPhillips said that it projects a
4.5 bcf a day pipeline, ConocoPhillips and Anadarko might be
successful in NPR-A and may develop a $500 million nomination
during open season and thus the pipeline would need to determine
how to do a 5 bcf a day pipeline.
2:32:47 PM
REPRESENTATIVE SEATON asked if Ms. King is saying that there
should be a proposal without any terms.
MS. KING replied no. She clarified that under the current
legislation, a specific set of requirements must be bid. If
those requirements needed to be changed due to an open season,
it's left to the commissioners to approve or disapprove the
change. Ms. King acknowledged that the state needs to know the
route and other such particulars as the current design basis.
However, the reality is that it will change at an open season.
Ms. King said that the provision includes quite a bit of
prescription that needs to reflect that those items will be
updated as the project proceeds.
2:34:02 PM
REPRESENTATIVE SEATON asked if Ms. King is saying that a
redesign should be allowed without commissioner approval.
MS. KING acknowledged that the majority of this would need to be
seen as a bid requirement, but there are some components within
the proposed provision, AS 43.90.130(2), that seem to be
variable over time. Some common language needs to be developed
in order to address the aforementioned. ConocoPhillips' base
design is for a 4.5 bcf a day project, but if in open season it
turns out to be a 5 bcf a day project everyone would be aligned.
However, she questioned what would happen if in the open season
it's determined to be a 4.3 bcf a day pipeline.
2:36:12 PM
REPRESENTATIVE SEATON pointed out that currently the approval
has to be reasonable with the commissioners, which is an
administrative process. He asked if ConocoPhillips wants the
determination of a reasonable modification to come before the
legislature rather than the commissioners or have the licensee
make the determination.
MS. KING said that she would be happy to provide the committee
with an answer on that. She explained that she's envisioning
review of an existing open season process and the federal
regulation of that in order to bridge the gap. She said that
she understands the legislature's need to have enough
information to be able to evaluate [a modification].
2:37:37 PM
CO-CHAIR GATTO pointed out that this pipeline is a monopoly
rather than a free market. Within the monopoly are established
parameters within which the companies must work. Co-Chair Gatto
opined that it's advantageous to work within the specified
parameters and that violation of any one parameter would require
mutual agreement.
MS. KING offered that some of those requirements will not be
paid by a pipeline entity as many of them are costs that FERC
allows to be passed through the toll. This is illustrated in
the earlier example in which the appropriate up-front
engineering work wasn't done and the project costs much more.
In such a situation, it's difficult for a shipper to say that
more engineering work should've been done as it would've reduced
the cost. Ms. King opined that she could foresee a scenario in
which parties could promise things without necessarily having to
pay for them and then applicants that will end up paying for it
may charge that it's commercially unreasonable. Many of the
provisions seem to usurp the way in which FERC manages the terms
and rates associated with pipelines. She opined that some of
the provisions obligate parties to act a certain way before FERC
in order to influence FERC's decision in a particular scenario.
2:40:04 PM
CO-CHAIR GATTO characterized the two commissioners as a set of
judges and once [an applicant] passes the gates, the proposal
must stand on its merits. The commissioners could not choose
anyone and call it a failed open season.
MS. KING pointed out that his supposition pre-supposes that
these requirements would allow a party to bid. She reiterated
that some of the requirements are problematic. Ms. King
emphasized that ConocoPhillips would at least like a process by
which the legislature and the public could see its proposal,
which could still be rejected. Therefore, ConocoPhillips, she
related, believes that moving from bid requirements to bid
variables would be [appropriate], although she said
ConocoPhillips is open to alternatives. In further response to
Co-Chair Gatto, Ms. King assured the committee that her
materials were prepared by a team at ConocoPhillips and any
common themes across companies is due to the view of common
risk.
2:43:04 PM
REPRESENTATIVE ROSES returned to whether the bid is conforming.
If an entity put a considerable amount of funds into a bid, he
questioned why that entity wouldn't submit a bid that relates
the costs per size of pipe. However, under "this scenario"
[proposed in AGIA] there's no knowledge as to whether such a bid
would be considered in compliance. Therefore, he said he agreed
with Ms. King that some of the requirements may be too
prescriptive.
2:45:23 PM
CO-CHAIR GATTO indicated that it's reasonable to have the
requirements, and therefore he said he wasn't sure that the
overall structure of the requirements should be changed.
2:46:46 PM
CO-CHAIR GATTO recessed until 15 minutes after the conclusion of
the House floor session.
4:13:24 PM
CO-CHAIR GATTO called the meeting back to order at 4:13 p.m.
Representatives Gatto, Roses, Seaton, Wilson, and Edgmon were
present at the call back to order. Representative Johnson
arrived as the meeting was in progress.
4:13:34 PM
MS. KING continued her presentation and drew the committee's
attention to slide 7, titled "Proposed AGIA." With respect to
the bid requirements, she related that ConocoPhillips has been
struggling to develop a work commitment package that allows a
project to be implemented. The legislation specifies three
fixed date requirements such that in order to make a conforming
bid, an entity has to commit the following: that within 36
months an open season will be concluded; a date certain by which
the entity could begin the National Environmental Policy Act of
1969 (NEPA) pre-filing process; a date certain by which the
entity would submit its FERC applications. The concern, she
opined, is that an entity might have a proposal in which it can
meet two date requirements while the third is a challenge and
results in parties potentially offering an alternative to
demonstrate work commitments. However, she read the legislation
to mean that the aforementioned situation would result in the
rejection of the bid as a nonconforming bid. For about a year,
ConocoPhillips has been on record saying that it can offer more
on work commitments. Furthermore, ConocoPhillips is concerned
with hard dates, which seem contrary to the best way in which to
implement a mega-project. She acknowledged that people want to
see a commitment to the project, which could be fulfilled by
committing dollars. The aforementioned is a situation in which
the prescriptive nature of the bid requirements could be
problematic.
4:17:06 PM
CO-CHAIR GATTO asked if there's some way to [put in place] a
variable such that the commitment is for either 36 months or
something else.
MS. KING identified alternatives that ConocoPhillips could work
through as variables in which the bid could include either one
[requirement] or another, or there is a specified minimum.
"Something that opens it up, that doesn't just say you have to
do these three dates or you'll be rejected as a nonconforming
bid," she explained.
4:17:40 PM
REPRESENTATIVE WILSON questioned why an entity couldn't propose
the date it felt it could meet and maintain that it can't
guarantee it.
MS. KING answered that she understood the aforementioned, under
the language of the legislation, to be a caveat to the bid.
Therefore, there would be the ability to reject that as a
nonconforming bid if conditions were placed on it.
4:18:34 PM
REPRESENTATIVE SEATON directed attention to the requirement on
page 5, lines 14-17, in CSHB 177(O&G), which requires the
conclusion of an open season no later than 36 months after the
date the license is issued. However, the evaluation of the
project will be based on the net present value and on the speed
of the proposal. Therefore, an entity that says it can
[conclude an open season] in 24 months would provide an extra
work commitment. Representative Seaton related his
understanding that Ms. King wants to be able to say that the
entity won't be able to [conclude an open season] within 36
months and that be considered acceptable. However, the
legislation seems to say that the only acceptable bid is one
that provides an open season within 36 months. He questioned
why it's unacceptable to specify an outer time limit.
MS. KING opined that this comes back to the point that schedule
driven mega-projects have not had a successful track record.
Therefore, the largest concern with any fixed date is that it
could result in a scenario in which an entity isn't spending
enough up front because it's trying to meet an arbitrary date
requirement, which could result in that entity having
significantly higher costs in the later years. The
aforementioned is a challenge for the industry. However, she
acknowledged that the state wants to see a project move forward.
One solution proposed by ConocoPhillips is that with the
appropriate fiscal framework, an alternative might be to commit
to a certain amount of dollars while advancing the project. For
example, some of the steps to completion of a FERC application
aren't within the project sponsor's control. Therefore, if
ConocoPhillips were to draft date requirements, they would be
heavily caveated by those things outside of the company's
control. However, the company could still offer an alternative
that could be accepted or rejected. The aforementioned allows
companies to bring forward alternative work commitments and ask
whether it meets the state's needs.
4:23:13 PM
CO-CHAIR GATTO related his belief that three years is enough
time [to conclude an open season], but it seems that
ConocoPhillips is saying that one never knows what amount of
time is enough.
MS. KING questioned whether the distinction between 36 months
and 37 months, if that was the difference in something
substantial in the project, would be a large value driver. She
opined that there are other ways, beyond hard dates, for
applicants to demonstrate a commitment to advance the project.
In further response to Co-Chair Gatto, Ms. King said that with
all of these requirements there would be a tendency to go
through them and modify them to make it a minimum. The concern
is that each individual will weigh each [minimum requirement]
differently. Ms. King opined that ConocoPhillips is attempting
to find a way in which to implement the project in such a way
that it's successful, take care of how ConocoPhillips'
shareholders' money is spent, and deliver the best project
possible. Therefore, she clarified that if [the requirements]
can be opened up across the board, ConocoPhillips can make a
proposal to which the legislature has the right to reject.
4:26:39 PM
REPRESENTATIVE WILSON said that she could see why the producers
would like it to be a money amount instead of a specified date
because they are large corporations that can handle such.
However, that seems to eliminate the pipeline builders.
Representative Wilson opined that [the legislation] attempts to
make a level playing field for all.
MS. KING clarified that she only speaks on behalf of
ConocoPhillips. She further clarified that she didn't want to
infer that her comments related to the work commitments are
representative of what all the producers want. Ms. King
explained that if the work commitments could be converted to a
variable, the pipeline company could propose dates for the
legislature to consider. She reiterated ConocoPhillips' desire
for an alternative to fixed dates by which it could demonstrate
work commitments to the state. Moreover, proposals received
with fixed dates will have to be reviewed in terms of whether
those dates can be met. She further clarified that she isn't
trying to eliminate an entity's ability to bid a fixed date and
the state giving them extra points for such.
4:29:35 PM
REPRESENTATIVE ROSES said he understood the need for
flexibility, but also understands the need for a timeline
commitment. With regard to the earlier mentioned dollar
commitment, Representative Roses questioned to whom does it go.
He recalled Ms. King's earlier statements with regard to the
time, effort, and money ConocoPhillips has put forth on this
proposed pipeline and opined that ConocoPhillips' ability to
meet the 36-month deadline will be easier than others who
haven't been in negotiations or performed studies.
MS. KING clarified that the $125 million and 1 million man-hours
was spent collectively by BP, ConocoPhillips, and ExxonMobil.
With regard to fixed dates, there are many decisions within the
timeline and ConocoPhillips' ability to meet those decisions are
dependent upon many third parties, whether that's negotiations
with contractors or other state agencies. A fixed date places
an entity in a difficult position with regard to managing those
negotiations on a mega project. Although an entity might be
willing to take that risk on some projects, the dollars are
significant on this project. "If we find ourselves being driven
by a schedule, we get increasingly concerned about our ability
to predict the costs and avoiding a cost blow out. Ms. King
again reiterated that on a project this large, one can't predict
that those dates will be met. Ms. King related that
ConocoPhillips is trying to find a way to develop a legitimate
work commitment proposal that can be weighed and if it doesn't
meet the state's needs, then it could be rejected.
4:34:29 PM
CO-CHAIR GATTO pointed out that if an entity fails it has the
right to cure. If it can't cure, [the legislature] has the
right to dissolve the relationship and take all the assets and
award them to another entity.
MS. KING stated her agreement with the right to cure, but
emphasized that again it returns to the willingness of a party
to accept that cure. If an entity has agreed to a certain date,
but it can't maintain that date, the other side needs to be
willing to say that the entity has the right to cure. She
opined that there will be many wading through whether the
requirement wasn't met due to actions within their control or
without their control. Such questions and debates could result
in disputed areas. She acknowledged the legislature's need to
see solid work commitments. However, ConocoPhillips is asking
whether more flexibility can be offered in order to allow
creativity with a proposal.
4:36:45 PM
REPRESENTATIVE WILSON returned to slide 5, and related her
interpretation that there is a commitment in that certain things
will be done in each phase.
MS. KING said that's why the title of the graph on slide 5 is
"Success Case Project Timeline." She pointed out that areas
such as field data collection could add additional time. She
explained that the four seasons of environmental field data has
to be completed before an application can be submitted to FERC
and NEB. Furthermore, prior to obtaining that environmental
field data, permitting must occur. Moreover, the weather would
be a factor in an entity's ability to obtain the data. She
questioned what would happen if the weather prohibits an entity
from obtaining the data within the prescribed timeframe.
4:38:53 PM
CO-CHAIR GATTO related his understanding that if the reserves
tax had passed, ConocoPhillips would be on the hook for annual
taxes and the legislature could say the 90 days isn't necessary
because the state is collecting money until the licensee
produces gas. "Without that inducement, which is an inducement
not for the bidder and we don't have it to offer any more, then
our fear is that 90 days can become any number of days ...
unless there's something in there that gives ... the bidder a
penalty," he said.
MS. KING said this goes back to the exclusivity point. If the
state chooses a licensee that's a pipeline entity and that
entity can't deliver, she questioned upon who the gas reserves
tax would be imposed. She opined that those who have been asked
to make the shipping commitment would face the punitive damages.
If ConocoPhillips isn't chosen as the licensee, but the licensee
promises something ConocoPhillips doesn't believe it can deliver
and ConocoPhillips' options to do something outside that process
are closed off by signing a 10-year exclusive agreement, it's a
lose-lose situation.
4:41:04 PM
CO-CHAIR GATTO said that the penalty would be given to whoever
is the licensee, regardless of whether they own gas.
MS. KING said that the legislature will still have to weigh
proposals and the work commitment included in them. Ms. King
further said:
The problem is: is that there's probably 8 or 10 of
these buckets ... but they've been manifested in 20
different requirements of which some of them the
customers of the actual pipeline will pay, not the
pipeline itself .... And so, there's a different
risk-reward balance that's been set up with that
requirement. For some parties, they can come in and
say, "Yes, I can commit to do that." Other parties
might say "Well, actually I'm going to be the one that
might end up having to pay for that, I think that's
commercially unreasonable; I'm uncomfortable with
that. And so, that's the balance we're trying to find
is by opening up that to bid variables, all of these
up to bid variables, ... it allows you and the
administration to weigh that.
MS. KING opined that ultimately there will be proposals with
strengths in different areas.
4:44:16 PM
REPRESENTATIVE SEATON characterized allowing an entity to say it
will spend some money without guaranteeing it will ever go to
open season as problematic. The only date certain is the 36
months and the others are dates certain that the entity chooses.
Representative Seaton opined that the purpose of AGIA is to
obtain bids on building a pipeline and thus he said he has
difficulty in determining how [progress is made] when nothing
more than a monetary commitment is made.
MS. KING related that it would be unacceptable to
ConocoPhillips' management to spend funds to get nowhere.
However, there needs to be a commitment to spend dollars in a
certain manner in order to ensure that the project is being
diligently advanced. She said that she understands that the
legislature needs to have a mechanism by which it sees progress
is actually being made on the project. She then reiterated
concern with regard to a schedule-driven project.
4:48:14 PM
REPRESENTATIVE SEATON commented that the problem in the last
proposal was that funds were being spent without advancements.
He then asked if the 36 months to go to open season is a deal
killer for ConocoPhillips.
MS. KING reiterated that fixed dates are problematic. She again
stated that ConocoPhillips believes it can bring meaningful work
commitment proposals to the legislature.
4:50:01 PM
CO-CHAIR GATTO remarked that it would be helpful if Ms. King had
some suggested language to replace the specific date
requirements that are of concern for the company.
MS. KING reiterated that she has been involved in other areas in
which there were fixed-date requirements. However, they were
not mega-projects that were the largest private construction
projects in North America. She emphasized that she finds it
particularly problematic that comparisons are made to really
small projects. In further response to Co-Chair Gatto, Ms. King
clarified that ConocoPhillips is willing to make different
commitments. She then reiterated that the legislation includes
very prescriptive commitments, some of which will be paid for by
some parties while others will be passed through to the
shippers. Ms. King said that making these commitments variable
is one change that would address this concern such that the
various aspects of the proposals could be weighed.
CO-CHAIR GATTO said he seriously questions whether there would
be five votes from this committee to forward such a change.
4:52:57 PM
REPRESENTATIVE WILSON asked if Ms. King could provide the
committee with the language utilized in the mega-projects with
which she was involved.
MS. KING clarified that this proposed project is the largest
project she has worked on for ConocoPhillips. She informed the
committee that ConocoPhillips' market cap is about $100 billion,
but this project amounts to a firm shipping commitment of $26
billion. Sometimes the difficulty ConocoPhillips has in
attempting to bridge the gap such that ConocoPhillips can manage
the project most effectively is interpreted as stalling.
However, that's not ConocoPhillips' intent, rather it's
attempting to find a framework by which it can advance the
project.
4:56:31 PM
CO-CHAIR GATTO recalled from last year's presentations on a
proposed gasline, that one mustn't confuse high risk with high
value. Since this project is so risky and expensive,
ConocoPhillips doesn't want to establish firm time commitments,
he surmised.
MS. KING said that's exactly the concern of ConocoPhillips. She
questioned whether the legislature would want to at least see a
bid in which it didn't meet all the 20 requirements, but offered
creative alternatives to the few it didn't meet.
4:58:03 PM
MS. KING, continuing with slide 7, turned to the resource
package that begins on page 19 of CSHB 177(O&G). She opined
that the resource risks on this project have always posed the
greatest obstacle to a gas pipeline due to the nature of the
long-term shipping commitments. The predominant resource risk
that the state can control, she relayed, relates to taxes and
royalties. "Long-term clarity on the state taxes and royalties
is critically important to reducing the risk on these long-term
shipping commitments. Addressing these issues remains essential
to making this pipeline project a reality," she stated.
Although the administration doesn't want to negotiate on these
terms, there needs to be a vehicle to work through these
resource terms. Ms. King relayed ConocoPhillips' appreciation
of the recognition and importance of the resource issues for a
proposed gas pipeline project as well as the administration's
recognition of stability as a critical resource issue. Ms. King
specified:
We have always understood that the issue of fiscal
stability would likely be decided by the Alaska
Supreme Court. The specific resource provisions in
the bill ... do not provide adequate clarity or
predictability. The present bill makes some changes
to the royalty contracts but rather than negotiate the
changes to the contracts, the bill would force the
lessees to accept some future regulations. The bill
also promises a degree of protection against potential
changes to the gas production tax, which is a start.
However, it does not identify what the production tax
rate is going to be and the period of relative
stability is insufficient for a project of this
magnitude. In addition, there is no protection
against other taxes that might be aimed at
circumventing that protection. We suggest that the
resource package be converted to a bid variable where
resource owner applicants can propose the resource
terms and the public and the legislature can review
them. This will provide an option by where the public
and the legislature can see an entire package, both
the midstream and the resource, and provide the
foundation for the project to be advanced.
5:00:35 PM
MS. KING, in response to Representative Wilson, suggested that
it would be an alternative in which a resource package could be
bid or planned for the terms in proposed AS 43.90.300-43.90.320.
The public and the legislature could review that resource
package. She characterized the aforementioned as a good
starting point of a bid variable as part of a bid package.
REPRESENTATIVE WILSON, recalling similar situations in the past,
interpreted that to mean years of negotiation, which is
unacceptable.
MS. KING related her agreement that she didn't want to go
through that same duration of time that it took to go through
those issues before. She then related her belief that the
process by which resource issues are worked through can be sped
up. However, she said she struggled to see how that can be
accomplished in the format before the committee.
REPRESENTATIVE WILSON asked if ConocoPhillips wants to lock in
all the taxes and royalties for a certain amount of time.
MS. KING replied, not necessarily, adding that she is referring
to the package of tax and royalty terms. Ms. King opined that
there isn't one solution as each of the lessees are impacted
differently. Although ConocoPhillips may view things with an
exploration eye, it still is trying to find the fastest way to
reach a package that works for those who may be asked to make
long-term shipping commitments. She reiterated the need to find
a balance. Ms. King then expressed concern with making a long-
term shipping commitment if the state hasn't decided whether to
take its gas in-kind or in-value. Furthermore, the area of
production taxes is an area in which work will be required
because it's dependent upon the rate. Therefore, having a bid
variable allows a dialogue.
5:05:30 PM
REPRESENTATIVE ROSES said he could understand this conversation
and the concern of a producer as it impacts the costs. However,
he questioned how any other entity wanting to bid would be
helped by such a proposal if one of the three major producers
isn't involved in the pipeline. Therefore, it seems that two
different conversations are occurring. Firstly, someone needs
to obtain a license to begin the open season as opposed to the
producers wanting a fixed commitment before the gas gets out of
the ground. It seems, he opined, to be the conversations that
occur as part of the open season process rather than the
permitting process.
MS. KING opined that the aforementioned conversation needs to
occur prior to an open season because the issues are those that
sit behind whether a party can make a long-term shipping
commitment. The conversations related to whether the state will
take its gas in-kind or in-value and the production tax rates
over time are conversations that should occur prior to making a
20-year shipping commitment. Therefore, ConocoPhillips, she
opined, believes that the timing prior to an open season is
critical. Although the legislation talks about some of the
midstream issues, it also includes provisions about the resource
issues and at this time, the legislation provides the only
framework by which the resource issues can be worked through.
The challenge, she opined, is to find a way in which to work
both sides of the equation within this legislation.
5:07:21 PM
REPRESENTATIVE ROSES asked if it would be more predictable and
palatable if the state decided not to tax the gas or charge
corporate or production tax, but merely took a certain
percentage of the gas.
MS. KING responded that the aforementioned is one solution that
ConocoPhillips would definitely want to consider and work
through if the administration and legislature wanted to consider
that. She likened the situation mentioned by Representative
Roses to a fixed percentage system. If the project is becoming
more profitable or struggling, everyone would have an equal
percentage in the results. She mentioned that in some forums
people have interpreted fiscal predictability as fixing the
actual payments that would be made. The idea of the state
taking its gas and converting that as payment is something
ConocoPhillips is willing to explore.
5:09:09 PM
REPRESENTATIVE SEATON related his understanding that
ConocoPhillips would like to take the resource issues out of HB
177 entirely. Representative Seaton inquired as to whether
ConocoPhillips has specific [language/provisions] that it would
like removed from the royalty inducement section of the
legislation.
MS. KING said that her request wasn't to convert this to a
resource as she recognized that HB 177 is predominately a
pipeline proposal. In fact, the legislation attempts to
mitigate some of the risk on the pipeline side and proposed AS
43.90.300-43.90.320 attempt to mitigate some of the risk on the
upstream side. The aforementioned is very complex and a
framework to do so is still forthcoming. Ms. King clarified
that ConocoPhillips isn't proposing that AGIA be modified to
include all the terms into HB 177, but rather place it as a bid
variable that specifies that a resource owner applicant can
propose resource terms that the state can review. Furthermore,
a process can be established by which resolution of those terms
can be reached.
5:12:34 PM
REPRESENTATIVE SEATON surmised that only certain applicants, the
producers, will be able to use the line. The only bids that
would be acceptable to review for comparison would be from
resource owners. Therefore, it's a bid variable that only
applies to a few of the potential applicants and the others will
be "thrown away" because the applicants with that ability are
those with the ability to deny gas to any of the other
licensee's proposals. He questioned how making it a bid
variable results in any competitive bids from anyone for a
pipeline.
MS. KING pointed out that a pipeline bid can still exist and the
two components of the project can be compared. However, it's
particularly problematic with existing leases to have non-
resource owners bid on what should be the lease terms. Ms. King
reiterated that ConocoPhillips is trying to find a way in which
to use HB 177 as a vehicle, while work is still necessary on the
resource side. Again, ConocoPhillips views the resource terms
as a one-line item on which the resource owner applicants could
bid.
5:14:19 PM
REPRESENTATIVE SEATON opined that the problem with having it as
a bid variable is just that. As currently written, it's not a
bid variable but rather conditions on which all bids will be
equal. If the upstream [conditions] can be made part of the
bid, it means that the bids are no longer comparable.
MS. KING said, "I wouldn't even know how to bid with those."
She then pointed out that proposed AS 43.90.300-AS 43.90.320
doesn't include a production tax rate and no assurances with
regard to royalty in-kind and royalty in-value switching as the
legislation merely says that some regulations and a contractual
arrangement will be developed prior to an open season. She
opined that there are too many questions with regard to the
resource terms.
5:15:56 PM
REPRESENTATIVE SEATON asked whether ConocoPhillips would have
more comfort if the resource terms weren't part of the pipeline
bid, but were addressed separately before open season.
MS. KING said that she would have to talk with her team
regarding that possibility. The preference is, at this time, to
have the resource terms as a bid variable.
5:17:58 PM
MS. KING then moved on to the final area under the bid
variables, expansions and rolled-in rates. She directed
attention to slide 8, which illustrates the wells that
ConocoPhillips has drilled on the North Slope from 2000-2007,
the wells that were permitted, and non-ConocoPhillips wells.
She reminded the committee that ConocoPhillips is the state's
largest explorer and continues to explore in a region that's gas
prone, NPR-A. Therefore, ConocoPhillips wants to ensure that
the pipeline can accommodate new gas on a reasonable and fair
basis. ConocoPhillips believes, she related, that the most
effective way to encourage exploration on the North Slope is to
actually get a pipeline project built in the first place. She
then pointed out that it's clear that FERC will determine how
rates are set for the initial pipeline and the terms for
expansion for that pipeline.
MS. KING again highlighted that ConocoPhillips has actively
worked since 2000 to advance a gas pipeline project and put in
place the government framework. The explorer issues have been
debated once with the federal legislation, which resulted in the
Alaska Natural Gas Pipeline Act. She noted that the
aforementioned Act included a provision related to mandated
expansions. The explorer issues were also debated before FERC,
Orders 2005 and 2005A, but both times there has been no
drilling. The aforementioned is of concern. She questioned why
a company would drill when the state continues to push to
provide guaranteed subsidized rates for those deferring
drilling. If some of these companies had actually drilled wells
in their gas prospects, they may have been able to find gas that
would help improve the project viability now, she stressed. As
mentioned earlier, the U.S. Congress already created an
unprecedented provision with the mandated expansion provisions.
The Alaska Natural Gas Pipeline Act, Section 105, clearly states
that a shipper who is willing to sign up for firm shipping
commitments, pay for an expansion, and can demonstrate that such
an expansion won't require a subsidy; FERC has an unprecedented
right to order an expansion of this natural gas pipeline. The
aforementioned isn't the case for any other pipeline in the
Lower 48. She then pointed out that there is absolutely no
issue with an explorer taking a firm shipping commitment on spec
for a gas pipeline project if the explorer hasn't found the gas.
5:22:19 PM
MS. KING, in response to Representative Wilson, clarified that
under Section 105 [of the Alaska Natural Gas Pipeline Act] FERC
can mandate an expansion. Therefore, two vehicles by which
parties can obtain expansion of the pipeline already exist.
There is voluntary expansion and FERC can order expansion under
Section 105. Ms. King clarified that ConocoPhillips isn't in
opposition to Section 105. Therefore, she questioned why the
provisions in AGIA are necessary. Ms. King opined then that the
real issue isn't access to the pipeline but rather the cost for
the access and who will pay for it. ConocoPhillips, she
related, is concerned because it doesn't want the original
project to be loaded with additional requirements, such as
subsidies for others, that place additional commercial burdens
on the project. She related ConocoPhillips' interest in having
partners. Ms. King clarified that ConocoPhillips doesn't oppose
the application of rolled-in rates for some expansions, the
concern is mandating that application for all potential
expansions if a subsidy were to be found.
5:25:31 PM
MS. KING, in response to Representative Seaton, opined that to
her knowledge the language of CSHB 177(O&G) doesn't say anything
about subsidy. The language [page 6, line 21, subparagraph (A)]
refers to supporting and proposing rolled-in rates up to 15
percent. In further response to Representative Seaton, Ms. King
clarified that ConocoPhillips' position is that FERC should be
the adjudicator of any rate treatment for an expansion. The
pipeline [company] will propose something for rate treatment,
and if shippers aren't happy with that, they will protest it
before FERC, she said. The balance struck by FERC is related in
the quote from Order 2005 on slide 9.
5:27:39 PM
REPRESENTATIVE SEATON surmised that slide 9 is saying the same
thing as on page 6 [subparagraph (A)] of CSHB 177(O&G). He
related his understanding that the language says that the
pipeline owner/entity will propose to FERC rolled-in rates up to
but not more than 15 percent above the initial recourse rate.
MS. KING noted her agreement with Representative Seaton's
assessment, adding that the language specifies that the pipeline
entity is being obligated to propose rolled-in rates even if it
would be a subsidy. She highlighted the following from Order
2005: "to adopt rolled-in treatment up to the point that would
cause there to be a subsidy of expansion shippers by initial
shippers, if any subsidy were to be found." Ms. King specified,
"So, if the pipeline entity thought this looks ... like a
subsidy, this would still require the pipeline entity to propose
that even though it didn't meet this rebuttable presumption of
rolled-in rates." There is a mirror clause on the resource
terms, which attempts to obligate the shippers to not protest
the 15 percent rolled-in rate on the other side, she noted.
5:29:11 PM
REPRESENTATIVE SEATON related his understanding that FERC has to
determine whether there's a subsidy or not. Therefore, [the
language in subparagraph (A) on page 6] merely says that up to
15 percent, the pipeline company has to propose to FERC rolled-
in rates. The FERC, under its rules, will determine whether
it's a subsidy. If there is a subsidy, FERC may not approve
rolled-in rates.
5:30:14 PM
MS. KING opined that a pipeline entity would be able to
determine whether it believes there's been a subsidy and make a
proposal to FERC about how they think the rate treatment for the
pipeline should be handled. The aforementioned can be
accomplished with the language in Order 2005. Ms. King opined
that she could foresee scenarios in which the state might be
very uncomfortable with rolled-in rate treatment. She
explained, "What is attempting to be done here is to say the 15
percent becomes a 'proxity' for a defined term of what the
subsidy is." The FERC was very careful in the deliberations in
Order 2005 and 2005A to say that it doesn't have a clear
definition of a subsidy and will review the specific instances
in the future and weigh the incremental costs, systemwide
benefits, and the incremental cost of fuel of that expansion to
strike a balance. She indicated that FERC's bias will be that
for the Alaska natural gas pipeline, it's rolled-in rates.
However, if an entity can demonstrate that there's a subsidy,
the policy will be reversed, she said.
5:31:57 PM
MS. KING then moved on to slide 10, titled "ANS Exploration
Potential." She highlighted the 83 tcf in NPR-A, the 72 tcf in
the Beaufort Sea, and 210 tcf in the Chukchi Sea. Those are the
three largest exploration potentials shown on slide 10. She
pointed out that within NPR-A the state doesn't have a direct
royalty as those are federal lands for which there is a shared
federal royalty after the royalty is paid out to the federal
government. The state, she noted, would have the right to have
production taxes on NPR-A. Within the Beaufort Sea and the
Chukchi Sea there are no royalty or production taxes for the
state. She posed a situation with Prudhoe Bay gas in which the
state has a one-eighth royalty and some production tax revenue.
If the Prudhoe Bay toll that's going to Chicago is $4 and the 15
percent clause comes into play, the toll increases to $4.60. In
that scenario, it's clear that under the state's netback system
the state will receive less money from its Prudhoe Bay gas on
both royalty and production taxes. That might be acceptable,
she opined, if the field is coming from a state field. "The
reason there was an expansion that caused that rate to go up; if
that was coming from a state field, then you might be receiving
more royalties and production taxes from that state field, and
more gas," she said.
5:34:01 PM
MS. KING then posed an example in which the [expansion] comes
from the Beaufort Sea or the Chukchi Sea. The aforementioned
may result in the state receiving less money for the state's
Prudhoe Bay royalty gas and production taxes and the state
wouldn't receive any additional revenues from the Chukchi field.
Therefore, the state may question why it should subsidize the
federal government. "Why should the federal government get
higher value for its royalty based upon a rolled-in rate
treatment here, if there's truly a subsidy to be found," she
pointed out. Ms. King then turned to an example as an explorer
when the toll is $4. She posed a situation in which
ConocoPhillips and its partner in NPR-A find a field in NPR-A
that it wants to expand, and it's an [$]800 million a day
expansion on the pipeline. The toll then decreases to $3.80,
which ConocoPhillips and its partner review as an exploration
appraisal prospect. The two decide that for a toll of $3.80,
they can make that development decision and develop that field
due to the expected cost to get to market. However, if five
years later another expansion occurs from the Beaufort Sea, in
which ConocoPhillips doesn't have any equity, the toll could
increase to as high as $4.60. Ms. King emphasized that
ConocoPhillips may not have made that investment decision and
developed that field had it known the toll was going to
increase.
5:35:54 PM
CO-CHAIR GATTO pointed out that this gas is very expensive to
produce. Co-Chair Gatto opined:
If Prudhoe Bay and Point Thomson are delivering gas,
that anybody ... who even thinks there's a find
offshore is going to be exploring and not ... for five
to ten years. So, I'm not expecting that gas to come
in at zero royalty and no production tax because all
the low hanging fruit is there. Who wants to go out
for the top of the tree offshore?
MS. KING said that she wasn't going to anticipate what other
companies' exploration strategies might be. Slide 10
illustrates that some of these large figures are present based
on assumptions regarding what might be available in the Beaufort
Sea and the Chukchi Sea. The state may be in a position in
which it isn't the leaseholder because the field could be on
federal lands. Furthermore, the state may not even have the
right to get production taxes from some of [these fields].
5:37:02 PM
MS. KING provided another example in which during an initial
open season, consumers in Fairbanks decide that they would like
to take some short-haul service. Short-haul service means a
shorter toll is taken to take some gas off in Fairbanks. For
example, she suggested that it costs $.50 to get gas from the
North Slope to Fairbanks. There was then an expansion of the
pipeline and the rolled-in rate treatments caused the rates to
increase. Therefore, suddenly a customer in Fairbanks that was
paying $.50 may now be paying $.56. Ms. King opined that it may
be difficult to explain to consumers in Fairbanks that they're
paying more to subsidize someone else's exploration volumes that
may be in the pipe going to the Lower 48 markets. The
aforementioned examples illustrate how the state may want to at
least preserve the right to have a debate before FERC regarding
whether there has been a subsidy.
5:38:27 PM
MS. KING, speaking to expansions, specified that ConocoPhillips
has particular areas of concern, such as in the case of a small
marginally economic expansion for which the incremental costs of
fuel and capital costs could be higher. Therefore,
ConocoPhillips isn't sure that a small marginal expansion would
provide a systemwide benefit. She pointed out that the cost of
fuel at the cost of expansion is of concern because the fuel has
to be paid in-kind. Furthermore, the incremental capital and
operating costs [are of concern] because of the uncertainty with
regard to future costs of various items. Ms. King questioned,
"If everyone believed that the numbers ... always were going to
result in lower tolls ... why would everyone be pushing for this
language so hard? If it was always going to be rolled-in rates
that benefited the entire system, the FERC policy would cover
that." Therefore, ConocoPhillips proposes that FERC should be
the adjudicator with expansions. She mentioned that FERC has a
process by which parties can argue the rebuttable presumption of
rolled-in rates and the state has many tools to incentive
exploration while weighing the situation in regard to the full
impacts to the system.
5:42:09 PM
CO-CHAIR GATTO related his understanding that Ms. King is saying
that it's possible that rolled-in rates increase the rates.
However, he pointed out that rolled-in rates mean that more gas
is being sold and thus more money is coming in "on the bottom
end." If rolled-in rates reduce the shipping price, then it
results in more gas and a lower price per unit. Even if the
rolled-in rates increase, the entity would still have more gas.
"So, it isn't a one way where the rates just go up," he
surmised.
MS. KING pointed out that the new gas might be gas in which the
state or ConocoPhillips has no value [or interest]. She
reiterated the preference of preserving the option of debating
the issue before FERC.
5:43:07 PM
REPRESENTATIVE SEATON said that he doesn't see anything from the
perspective of ConocoPhillips, as a producer, that prohibits
ConocoPhillips from arguing before FERC that there's a subsidy.
Furthermore, he said that the legislation doesn't seem to
prohibit the state arguing against the rolled-in rates as a
subsidy. The legislation merely says that the pipeline has to
propose rolled-in rates so long as it's not 15 percent above the
initial recourse rate.
MS. KING directed the committee's attention to page 20, lines 26
through page 21, line 5 and on page 21, lines 31 through page
22, line 9. She specified that the legislation does include
provisions that specify that the 15 percent treatment of rolled-
in rates can't be protested if the inducement package is desired
on the resource side. Therefore, the legislation was drafted to
obligate the pipeline entity and the shippers to act a certain
way before FERC, she opined.
5:45:19 PM
REPRESENTATIVE SEATON directed attention to line 31 and said
that if FERC doesn't have the policy in effect, the presumed
rolled-in rates apply. Therefore, if there is a policy that
rolled-in rates do apply, [the pipeline entity] could argue
however it wants. If that policy has been terminated such that
there isn't a presumption of rolled-in rates, then [the pipeline
entity] would argue for it.
MS. KING noted her agreement, and reiterated that this
legislation is trying to obligate the parties, both as shippers
and as pipeline entities, to act a certain way before FERC that
isn't following FERC policy. The aforementioned is of concern
for ConocoPhillips, she reiterated.
5:46:23 PM
REPRESENTATIVE SEATON related his understanding that if FERC
reversed its rate, [the state] has the obligation and [desire]
to have exploration take place. If incremental rates are
utilized, the exploration and utilization won't go forward. The
language of concern for ConocoPhillips perseveres the expansion
and exploration capability of the state, she surmised.
MS. KING acknowledged that it's a policy call. She specified
that her hope is to provide examples by which the state may be
placed in a position that subsidizing an expansion may be
something that the state may want to reconsider. Ms. King then
mentioned that many have pointed out that the application of
rolled-in rates in Canada by the NEB is different from the FERC
policy and that [the NEB's policy] has proven a successful way
to open that basin. However, she opined that FERC's policy has
done a good job of opening up the Lower 48 basins as illustrated
by the existing interstate pipelines as well as those that are
being built and expanded. The legislation as currently written,
she reiterated, is trying to obligate [the pipeline entity and
the shipper] to argue before FERC for the application of rolled-
in rates, even if it's a subsidy.
5:49:38 PM
REPRESENTATIVE ROSES recalled that Mr. Palmer, TransCanada,
testified that in Canada rolled-in rates are used whether it
increases or decreases. He further recalled that Mr. Palmer
said that in the U.S. rolled-in rates are used when it increases
but not when it decreases. Therefore, if Mr. Palmer's statement
is correct, any savings are incremental and only increases are
rolled in. He asked if that's FERC policy.
5:50:32 PM
MS. KING said that she can't attest to what Mr. Palmer said.
However, she reiterated that FERC policy is that if there's a
systemwide benefit, then the expansion will be treated as a
rolled-in expansion. If the incremental costs outweigh what the
initial shippers are paying, then it will be treated as an
incremental expansion and the parties would have to pay the
incremental rate. That has been FERC policy since 1999.
However, she pointed out that with Order 2005A FERC deviated
from its policy by saying that for the Alaska natural gas
pipeline, FERC's bias will be a rebuttable presumption of
rolled-in rates up to the point of a subsidy. The FERC was
trying to strike a balance for the Alaska natural gas pipeline,
she opined. Ms. King clarified that ConocoPhillips is
requesting that the language [in Order 2005A] be the language
under which ConocoPhillips is able to operate. Although there
are a number of cross-border pipelines even though the NEB and
FERC have different systems, she pointed out that the U.S.
policy has been successful in opening basins as well.
Therefore, she said she is confident that pipelines are being
built today under FERC policy.
5:52:16 PM
CO-CHAIR JOHNSON asked if Canada caps its return on investments
for a pipeline company.
MS. KING said that she hasn't personally researched the return
on equities allowed by NEB. She offered to follow up on that
point if ConocoPhillips has information on it.
5:53:20 PM
CO-CHAIR GATTO opined if a rolled-in rate is offered, it's
difficult to compete with the old pipelines that are fully
depreciated. Therefore, the environment is different for an
existing pipeline in the Lower 48 and the proposed Alaska
natural gas pipeline.
MS. KING noted her agreement, but pointed out that new
interstate pipelines are being built with the policies of both
FERC and NEB.
5:55:28 PM
REPRESENTATIVE SEATON related his understanding that FERC
changed its policy in the Lower 48 where there are many
pipelines since new pipelines weren't being built because they
couldn't offer competitive rates unless incremental rates were
required in the old pipelines in order to create a competitive
environment. Therefore, the incremental costs had to be borne
by the gas going through the old pipeline so that there was
competition and new pipelines could be built. The situation,
however, in Alaska is trying to open a basin pipeline rather
than competition with an older existing pipeline. He related
his further understanding that the new FERC policy in Alaska is
present because of the lack of competition in Alaska. He
surmised that the aforementioned is why FERC had the rolled-in
rate presumption.
MS. KING said that she definitely doesn't have all the history
of every pipeline. However, she pointed out that some of the
older pipelines can use much fuel for their compression. She
highlighted that ConocoPhillips continues to carry a cost
estimate for the Alberta to Lower 48 part of the project in
order to know the next best alternative. The choices are as
follows: building new, expanding existing pipelines, and
utilizing existing capacity. To compare the aforementioned
choices one would review the incremental costs and incremental
fuel [costs] of each option at the time the commercial decision
is made.
5:58:14 PM
MS. KING continued with slide 11, titled "Suggested Changes to
AGIA." She highlighted that ConocoPhillips recommends
converting AGIA bid requirements to bid variables. The
aforementioned, she opined, will allow other proposals as well
as other commitments and inducements to be put forward for
consideration. Further, such a conversion would allow resource-
owner applicants to propose packages with resource terms and
foster greater quantity and quality of proposals. She then
pointed out that ConocoPhillips suggests amending the
exclusivity provisions to protect Alaska's options because the
treble damages provision is particularly problematic for the
state if it wanted to advance an alternative project if the
licensed project has stumbled. Moreover, the exclusivity
provisions impair the state's ability to agree on resource terms
in the future. She related that ConocoPhillips likes and
supports the state coordinator/streamlined permitting model with
the federal legislation and that should be something similar for
Alaska and it should be available to all parties.
5:59:54 PM
MS. KING concluded her presentation as follows:
We want to achieve a framework that promotes the
development of the ANS gas resources and addresses the
legitimate interests of all parties. The project is
difficult; it is a challenge for us to work through
these issues. ... we think it's important that we all
try to get on the same team and find a way to
compromise. Like most major decisions in life,
compromise is necessary for all parties to advance
things going forward. We have to keep focus on what
it takes to get the project moving forward, and we
can't lose sight that the costs are going up on this
project. I know from my own perspective, the recent
announcement of the McKenzie Delta project, the cost
increases on that, causes at least me to want to take
a step back and pause.
6:01:03 PM
MS. KING, in response to Co-Chair Gatto, said that she doesn't
know the exact wording being used by the McKenzie Delta
partnership. However, she related her understanding that the
project is on hold. To her knowledge, she didn't believe that
project has reached the point of laying pipe. In further
response to Co-Chair Gatto, Ms. King opined that the cost
increases have impacted the project. Therefore, ConocoPhillips
is concerned that costs for the Alaska gas pipeline project have
increased similarly. Ms. King emphasized the need to keep in
mind the real prize: the tens of billions of dollars in new tax
and royalty revenues, the countless jobs, and the new economy.
In order to achieve the aforementioned, the risks must be
realistically addressed and the risk and rewards balanced. "No
company will work harder than ConocoPhillips to make this
project a reality," she said.
6:02:57 PM
REPRESENTATIVE ROSES directed attention to the language on page
12, line 5, of CSHB 177(O&G) and asked if that would allow
ConocoPhillips to put in some of the criteria Ms. King has
discussed.
MS. KING said that the language might allow a company to provide
something additional. However, if that company hadn't met the
basic requirements, she still questioned whether [FERC] would be
able to reject the bid as a nonconforming bid.
6:04:01 PM
CO-CHAIR JOHNSON, regarding exclusivity, opined that there needs
to be a winner. He then inquired as to Ms. King's view of the
exclusivity if the resource terms were eliminated and the
coordinator and the state agencies were made available to anyone
interested, but the treble damages were maintained.
MS. KING said she would want to see the specific language and
how the elimination of the resource terms would link with the
treble damages clause. However, she stated that ConocoPhillips
supports having the coordinator and streamlined permitting to
apply to any project. She noted that Co-Chair Johnson's
proposal is intriguing. In further response to Co-Chair
Johnson, Ms. King said that she would be happy to work with him
on some language.
6:07:10 PM
REPRESENTATIVE SEATON related his understanding that if there
are too many evaluation criteria, the chances are that there
won't be very many bids because those interested won't know how
the project will be evaluated. He related his further
understanding that Ms. King disagrees with the aforementioned
notion.
MS. KING clarified that most of her testimony today has been in
regard to the list of requirements rather than the evaluation
criteria.
REPRESENTATIVE SEATON opined that Ms. King wants to move things
from requirements to bid variables for evaluation, and therefore
the requirements specified under proposed AS 43.90.130 (3)-(20)
would be moved into evaluation criteria and the only must-have
then is to complete an application. He questioned how moving
the conditions to bid variables creates an environment in which
no one knows what to put forward because it's based on the
subjective evaluation on 30 criteria.
MS. KING opined that bid variables clearly send a signal of
what's important to the state. Furthermore, bid variables allow
the discretion to the parties to say which variables they can
meet. Ms. King then emphasized that the state already has a
significant challenge in regard to how to evaluate [the
criteria]. Since the project hasn't been defined, it's likely
that there won't be exact apples-to-apples comparisons on these
projects. Therefore, the state will be left to develop criteria
that best fits the interest of the state.
REPRESENTATIVE SEATON pointed out that bid variables could be
evaluated in many different ways, which is different than
specifying that an entity must meet certain criteria and the
evaluation occurs on the net present value of the product and
the probability of success.
6:12:08 PM
REPRESENTATIVE SEATON recalled discussions regarding the gas
treatment plant (GTP) and the presence of carbon dioxide. He
asked if ConocoPhillips were bidding on the project, would it
consider reviewing the GTP. He further asked what
ConocoPhillips would do with the carbon dioxide, questioning
whether it would be sold to a field for enhanced recovery.
MS. KING explained that ConocoPhillips has always envisioned the
GTP being part of the midstream of the project. She opined that
the GTP is a critical portion of the project and is a
significant portion of the cost of the project. She recalled
that $2.5-$3 billion in 2001 for the project. The GTP would
offer the services to remove the impurities, find a location to
dispose of them, and would be the first compressor station where
it would compress and chill the gas. She then turned
specifically to the actual disposal of the impurities, and
pointed out that it's a process by which the GTP could make
arrangements with working interest owners in an existing field
and find a zone in which to inject [the impurities] in a
nonproductive zone. She highlighted that there is much
technical work to be done to determine whether it's worthwhile
to dispose [impurities] and the true cost of doing so. In
further response, Ms. King confirmed that it may have value or
it may be a cost.
6:14:38 PM
REPRESENTATIVE SEATON drew attention to the resource components,
and asked if Ms. King viewed those as being linked to initial
firm transportation or available to everyone that comes along at
any other time.
MS. KING related her understanding that the administration has
tied it to the signing of a long-term shipping commitment. If
there was going to be a stability provision, then some type of
mechanism to tie it to some volume or component of gas is
necessary, she opined. As mentioned earlier, Ms. King opined
that there is value in having the terms apply to all working
interest owners as it creates more alignment across the North
Slope. She said that there will have to be a discussion with
regard to the breadth of the resource issues and ConocoPhillips
is open to those discussions. "Clearly, for the initial
shipping commitment period, in order to get those long-term 20-
year shipping commitments is what's going to kick-start this
project," she said.
6:16:32 PM
REPRESENTATIVE SEATON referred to page 6, lines 3-5, and asked
if ConocoPhillips has a problem with a two-year reassessment
through nonbinding solicitations or other means in order to
determine if there is additional gas that needs to be shipped.
MS. KING encouraged the committee to change that particular
requirement to a bid variable. She then said that she would
like to think through this requirement a bit more because she
anticipated that as soon as an expansion or new discovery is
found under the normal course of action the pipeline would be
contacted right away. A voluntary expansion process would seem
to be the first course of action, she opined.
6:18:27 PM
REPRESENTATIVE SEATON posed a scenario in which the language on
page 6, lines 3-5, is maintained, and asked if Ms. King would
prefer the language to refer to "binding, nonbinding, or other
means."
MS. KING reiterated that her focus is on making it a bid
variable, and she offered to give it more thought and provide
the committee with her thoughts.
6:19:10 PM
REPRESENTATIVE ROSES asked if ConocoPhillips would or would not
have an interest in bidding on this project if CSHB 177(O&G)
moves forward as currently written.
MS. KING answered that she would not recommend to the management
of ConocoPhillips to bid on the project unless some changes are
made to the legislation.
6:19:36 PM
CO-CHAIR GATTO opined that bid variables are troubling. The
[goal] is to obtain some qualified applications, which means
[fulfilling] 20 requirements. From that group, the desire is to
have bidders. The commissioners will take the variables in
those proposals from the qualified applicants and will weigh the
bid variables in order to choose the licensee. At that point,
there's only two requirements: the net present value to the
state and the likelihood of success. Co-Chair Gatto opined that
this isn't a bad plan. Co-Chair Gatto suggested that Ms. King
provide the committee with a plan under which ConocoPhillips
would be able to bid and specifies what a bid variable is. Co-
Chair Gatto concluded by expressing the hope that ConocoPhillips
will be a strong player.
[HB 177 was held over.]
6:27:04 PM
ADJOURNMENT
There being no further business before the committee, the House
Resources Standing Committee meeting was adjourned at 6:27 p.m.
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