Legislature(2013 - 2014)BARNES 124
02/04/2014 05:00 PM House RESOURCES
| Audio | Topic |
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| Start | |
| Overview(s): Update - Alaska Lng Project | |
| Adjourn |
* first hearing in first committee of referral
+ teleconferenced
= bill was previously heard/scheduled
+ teleconferenced
= bill was previously heard/scheduled
| + | TELECONFERENCED | ||
ALASKA STATE LEGISLATURE
HOUSE RESOURCES STANDING COMMITTEE
February 4, 2014
5:06 p.m.
MEMBERS PRESENT
Representative Eric Feige, Co-Chair
Representative Dan Saddler, Co-Chair
Representative Peggy Wilson, Vice Chair
Representative Craig Johnson
Representative Kurt Olson
Representative Paul Seaton
Representative Scott Kawasaki
Representative Geran Tarr
MEMBERS ABSENT
Representative Mike Hawker
OTHER LEGISLATORS PRESENT
Representative Andrew Josephson
COMMITTEE CALENDAR
OVERVIEW(S): UPDATE - ALASKA LNG PROJECT
- HEARD
PREVIOUS COMMITTEE ACTION
No previous action to record
WITNESS REGISTER
STEVE BUTT, Senior Project Manager
Alaska LNG Project
ExxonMobil Development Company
Houston, Texas
POSITION STATEMENT: Provided a PowerPoint update on the Alaska
LNG Project.
ACTION NARRATIVE
5:06:18 PM
CO-CHAIR ERIC FEIGE called the House Resources Standing
Committee meeting to order at 5:06 p.m. Representatives Seaton,
P. Wilson, Johnson, Saddler, and Feige were present at the call
to order. Representatives Tarr, Kawasaki, and Olson arrived as
the meeting was in progress. Representative Josephson was also
present.
^OVERVIEW(S): Update - Alaska LNG Project
OVERVIEW(S): Update - Alaska LNG Project
5:06:30 PM
CO-CHAIR FEIGE announced that the only order of business is an
update on the Alaska Liquefied Natural Gas (LNG) Project.
5:07:12 PM
STEVE BUTT, Senior Project Manager, Alaska LNG Project,
ExxonMobil Development Company, introduced himself, noting he
has been with ExxonMobil since 1985. He said he was in
operating, project, and technical roles in the U.S. until 1997,
after which he went to various countries for work in operations,
project startup, and LNG startup. Over the last two years he
has been working with the project participants under a "concept
selection agreement" in which BP, ConocoPhillips, ExxonMobil,
and TransCanada have been evaluating an LNG project in Alaska.
MR. BUTT displayed a slide entitled "The Alaska LNG Project" and
emphasized that this is an LNG project, not a pipeline project,
an important differentiation from previous pipeline projects.
He said a pipeline project takes gas from one place to another,
has a different regulatory environment, has a different business
model, and very different alignment factors. In an LNG project
an infrastructure must be built to transport, treat, and liquefy
the resource - gas on the North Slope - so it can be sold to
buyers. While a pipeline is an integral part of this project,
it is not a pipeline project. It is a project where resource
owners need to work together to create infrastructure to be able
to monetize that resources.
5:10:44 PM
MR. BUTT said three important filters are used when considering
an LNG project: alignment, risk reduction, and cost - the "ARC"
of success. Alignment is used to ensure that all the parties
are working together. Risk reduction is developing an
understanding of the uncertainty and driving down that
uncertainty. Not as much resources are at risk early in the
life of a project, but the levels of uncertainty are much
higher. As a project is matured the uncertainty must be reduced
to reduce risk; as larger investments of time, people, and money
are made there is a lot of confidence in what is being done.
Through that process, cost is driven down. Cost of supplies is
the single most important metric in evaluating the
competitiveness of an LNG project because the gas market is a
commodity business. The buyers of LNG are trying to buy the
utility value of the gas. While discussing the project, putting
on a buyer's hat will provide an understanding of what it is
that a buyer wants. A buyer wants reliable delivery of LNG to
its re-gasification system for 30 years. Every couple days a
buyer wants to see an LNG carrier delivering energy so that the
buyer's economy can grow. Mr. Butt explained he will discuss
the Alaska LNG Project in terms of the ARC of success: getting
alignment amongst the parties, facing the risks and managing
uncertainty, and driving down costs of supply to make the
project competitive in a broader global market.
5:13:12 PM
MR. BUTT moved to the slide entitled "Accomplishments," noting
the Alaska LNG Project has an integrated concept. This is
important, he said, because it is the first time all of the
resource owners and the primary producers on the North Slope
have actually worked together to evaluate an LNG process. In so
doing, Prudhoe Bay, Point Thomson, and all the facilities
required, were looked at as an integrated system. Previous
pipeline projects had firewalls between those projects and the
producers. Thus, conversations between those projects and those
producers were under very restrictive terms and without a free
flow of information or a free exchange of ideas that would allow
looking for improvements. Regulatory and federal law require
this to be done to preserve a competitive environment because a
pipeline is about moving gas from one point to another and it
must be ensured that anybody wanting to move gas in that system
has a fair opportunity to access it. Access for others is still
wanted [in the Alaska LNG Project], but it is a different model
because the resource owners are creating an infrastructure to
sell a resource that they own and finding a way to get it to a
market. The parties have worked together to come up with an
integrated design with benefits from that integration.
Selection of the LNG plant site, the Nikiski industrial area on
the east side of Cook Inlet, has been finalized. In turn, this
allows finalization of the pipeline corridor from Prudhoe Bay to
the plant site, which allows all of the regulatory work to be
done to further reduce uncertainty. Answering the questions of
plant location and pipeline route allows for making decisions
that point toward the lowest cost of supply.
5:15:49 PM
MR. BUTT reported that a safe and successful summer field season
was accomplished in 2013. About 150 people worked on conducting
detailed assessments of the route for fisheries, waterways,
cultural heritage, and other elements to ensure that if the
pipeline is built there will be no environmental damage and
there is the right information for the regulatory environment.
About 100,000 hours of work was done without any incidents and
the goal is to preserve that incident-free record. Also
accomplished was confirmation of the ability to integrate into
existing operations at producing fields, an essential element of
this project and for being able to work together. The Prudhoe
Bay operator has done a good job of integrating the east and
west areas of the field, which has enabled identification of the
places to get the gas to source gas to this project. Much has
been done to progress the gas treatment facility. Some of the
routing work has been finished. Most importantly because it is
such a big project, it has been figured out how to move all the
elements of this project around, such as the sealifts and other
logistics that will be required.
5:17:41 PM
MR. BUTT turned to the slide entitled "Potential Benefits,"
noting that at $45-$65 billion the project will be the largest
single investment in Alaska's history. It will create 9,000-
15,000 jobs [for design and construction] and about 1,000 long-
term jobs [for operations]. Industrial jobs have a high
multiplier to create other jobs in service sectors and other
elements of the economy. The Alaska Oil and Gas Association
(AOGA) recently estimated the multiplier effect at 9:1. The
project will create an export market while also providing gas to
Alaskans. A unique benefit of an integrated project such as
this is the tremendous amount of tax revenues that are generated
from the sale of the gas to buyers. According to estimates by
Black & Veatch, consultant to the Department of Revenue (DOR)
and the Department of Natural Resources (DNR), $1.5-$2.0 billion
in tax revenue will be generated annually to the state. The
project's infrastructure will provide gas to Alaskans because
the pipeline will go from Prudhoe Bay to the east side of the
Cook Inlet with five offtake points contemplated. The locations
of these offtakes will be determined by working with the state.
MR. BUTT turned to the slide entitled "Safety, Health and
Environment (SHE)", saying the project is proud to be off to an
incident-free start and wants to stay that way. The project
developers are committed to safe and environmentally responsible
development. As the project is progressed effort will be made
to preserve Alaska's biodiversity, ecosystems, and traditional
knowledge. He displayed photographs of people conducting a data
survey, checking a burrow pit from an early prospector, Denali
National Park and Preserve, a waterway being surveyed by a crew,
and a highway area along which the pipeline would come down.
5:21:38 PM
REPRESENTATIVE P. WILSON inquired about the number of state and
federal permits that will be required for such a large project
and how this will work given the state's permitting backlog.
MR. BUTT replied hundreds of permits will be required. In 2013,
project developers had a good experience working with the State
Pipeline Coordinator's office, which did an excellent job
helping the project get all the permits it needed for doing the
survey work between Livengood and Prudhoe Bay. The project's
work could not have been done without that help. However,
knowing the office's capacity, the office would be overwhelmed.
As it moves into the more detailed design phase, the project
will have to assist in defining what kind of capacity is needed
at state and federal levels. It is likely that thousands of
small permits and hundreds of primary permits will be needed,
which all get triggered by the Federal Energy Regulatory
Commission (FERC) process under the Environmental Protection
Agency (EPA) where an environmental impact statement (EIS) must
be filed to receive the right authorizations to proceed. Once
that initial permitting process is done, hundreds of permits and
thousands of rights of way will be required.
REPRESENTATIVE P. WILSON surmised [the State Pipeline
Coordinator's office] will need to hire additional personnel.
MR. BUTT responded he thinks so and the project has some rough
estimates. The project has been trying to understand what the
framework of the federal regulators looks like and has had a
great experience with the state's regulators. Capacity needs to
be built, but it would be best if it is a collaborative process
where everyone works together to define what kind of permits are
required and what kind of capacity the regulators are going to
need to address it.
5:24:57 PM
MR. BUTT addressed the slide entitled "Challenges", pointing out
that the most important challenge is the project's scope.
Megaprojects, he explained, are traditionally defined in
industry as anything over $1 billion and sometimes $10 billion
is used as a cutoff. At $45-$65 billion the Alaska LNG Project
is on the order of five megaprojects being constructed
simultaneously in one place. It takes much planning to manage
the arctic challenges, remote challenges, and access challenges
of something this big. During the planning processes care must
be taken to ensure the right welders are available for the
pipeline and that those welders are not creating competitive
risk for the welding or the other craft skills required in the
other elements of the project. Another challenge is the very
complex commercial arrangements that need to be worked through.
Foreign buyers want to understand that LNG will be provided to
them reliably for 30 years. The complex buyer arrangements need
to be considered as a fundamental area in which it is
demonstrated that the risks have been contemplated and the
uncertainties managed because buyers want to know the project is
going to deliver. Long-term commitments are required because
LNG buyers do not want to build the infrastructure necessary to
have an economy that relies on LNG if they do not have a long-
term supply of LNG. Both buyers and equity owners of the
project have a very long-term view.
MR. BUTT continued his discussion of challenges, advising there
is tremendous uncertainty related to permitting. Exactly how
many permits will be needed is unknown because no one has
untaken a project this big before. Conversations have been held
with FERC and the State Pipeline Coordinator's office. Other
elements of the state have been very supportive and helped the
project to complete its work in 2013 and get off to a good start
in 2014. The complexity of the permitting scope is hard to pin
down until the project is further along and better understood.
Another big challenge, he said, is to understand the commercial
and fiscal issues, especially with the state. It is important
to remember that the state is one of the largest resource owners
in the state. It is important to remember that getting the big
three producers to work together is challenging, but is not
enough. All four primary resource owners in the state must work
together because they need to be aligned on hundreds of small
decisions. How to manage different elements of the project and
how to trade value across the elements of the project can be a
real challenge if folks are not aligned. Having different
drivers creates misalignment and misalignment creates
uncertainty, which compromises the ARC of success because
compromising risk and uncertainty usually increases cost.
5:28:12 PM
MR. BUTT said the legislation currently pending before the
legislature from the Department of Natural Resources (DNR) and
the administration can really help the Alaska LNG Project work
through this uncertainty. In doing that, the "three p's" must
be understood: participants, percentage equity, and process.
Who are the participants? Who are the participants from the
state? Who signs the agreements? What is the percentage
equity? What is the state's equity in the project? One of the
most important things going forward in the joint venture
agreement is, What equity does everybody hold and is the state
comfortable with it? What is the process to enable all the
little decisions, such that in moving from this legislative
session to the next nothing is binding? This gives everybody a
chance to get comfortable with things and move into Pre-FEED so
that uncertainty can be reduced. As uncertainty is reduced on
technical and commercial factors, everyone can make much better
decisions; plus, all the resource owners, including the state,
have multiple off-ramps along the way. Once Pre-Feed is
entered, which has never been done before in Alaska on a project
like this, there can be a tremendously deeper understanding of
the factors. Assumptions about the future are usually wrong;
decision makers are usually best served by defining a process
that allows the work to be done to understand the issues and
then make the decisions. Then, after those decisions have been
made, there are multiple offerings. Commercial issues get
worked concurrent to Pre-FEED. By the legislature defining the
"three p's," the state enables the project to move forward and
resolve these challenges. These challenges are important and
touch those primary elements of the ARC of success.
5:30:47 PM
REPRESENTATIVE P. WILSON noted the producers have experts who
know how to make these kinds of negotiations and have done so
for many years, whereas the state can only do its best. She
asked how the state can work with the producers while ensuring
that the best deal is being made for the State of Alaska.
MR. BUTT agreed the producers have lots of experience with LNG,
but said he views that as a benefit because the state has three
of the world's largest LNG producers and marketers as part of
the arrangement. The state has had confidential one-on-one
conversations with each party on how to manage marketing, he
related. The different producers cannot talk to each other
about marketing because that is collusion. Each producer has
talked with the state about ways it could help sell the state's
pro-rata share. He invited committee members to talk to the
folks at DNR and DOR about those conversations because they can
give a more complete answer than he can. By leveraging the
strength of those producers and their working with the state,
the state gets confidence that it can manage that. Every deal
must be fair and durable or it will not work for anyone, and
that is how conversations about the off-ramps are gotten into.
As the parties learn more, they can assess whether they are
still comfortable or need to make adjustments. As currently
written, the pending legislation does not presuppose any
decision that is irrevocable; it creates a process to get more
information as Pre-FEED is entered. The intent of that process
is different than any of its predecessors: to give folks in the
state and in the legislature time to learn more and get
comfortable with it because it is complex.
5:33:42 PM
REPRESENTATIVE KAWASAKI noted the producers participating in the
Alaska LNG Project will be making money, and said it is unfair
to talk only about the potential benefits to the state without
also talking about the potential rewards for the producers.
Along these same lines, he continued, there are the challenges
from the state's perspective versus challenges from the
producer's perspective. He asked to hear more about the upside
of the Alaska LNG Project for the corporations. He added he
would also like to hear about the challenges of the project; for
example, how small communities will be impacted by heavy traffic
or how schools will be impacted by having too many students.
MR. BUTT responded it goes back to the ARC of success. The view
of the producers, he related, is that they have resources they
would like to commercialize in a manner that can generate
returns commensurate with the risks. Looking forward, the
companies are trying to take the hydrocarbon resources they own
on the North Slope and find a way to create an infrastructure
that allows them to monetize those resources. In relation to
the alignment element, looking at those risks just for the
independent companies does not represent all of the resource
owners. Until a structure is created where all the resource
owners are working together, it is very unlikely that an
infrastructure of this scale can be successfully built because
it is so large. Alignment is necessary and all four resource
owners must have a shared risk profile and a shared return so
that selling LNG generates those benefits and distributes those
revenues against the equities and the project is structured such
that each of the owners owns capacity in the project. Owning
capacity in the project gives these owners flexibility. For
instance, each of the four owners owns some percentage of that
capacity. They have the ability to fill that capacity and they
have the ability to leverage that capacity by filling it with
the resources they own and then generating revenue from that.
There is language in the current legislature that gives those
parties unilateral opportunities to expand. If, for example,
one party wants to bring in more gas from other parties, it can
do that because it owns that capacity in the project. Alignment
has been created so that all four parties have shared benefits
and risks and those benefits and risks look a lot alike. That
is good for the producers because they own a resource that they
can commercialize if they can have the right infrastructure to
do it. If there is not an aligned infrastructure that allows
the producers to get the gas from the North Slope and liquefy it
to the tidewater, they cannot sell it. This is the same for the
State of Alaska's resource. Generating that alignment gets a
position where the parties work together and can win together.
5:39:12 PM
CO-CHAIR FEIGE said it should be noted that the state is taking
on a risk by being a venture partner with the producers and its
share of the gas.
MR. BUTT concurred.
5:39:28 PM
REPRESENTATIVE SEATON understood all the parties are equal
partners and any one of the partners can expand to put more gas
in and take the risk of the cost, but the requirement is that
all the other parties get a reduction in tariff. He asked how
that works.
MR. BUTT replied the structure is a little bit different than
the aforementioned. Words like tariffs, rates, and structures
talk about a pipeline, not an LNG project. In an LNG project,
he explained, [a party] owns capacity. In a pipeline, [a party]
owns some element and other parties are tariffed in to
compensate [the party] for the capital that [the party] has
invested. In this project, [the state] owns some portion of the
capacity and [the state] can fill that capacity as it chooses.
If [the state] wants to exceed its volume of that capacity, [the
state] can do it as long as it does not harm the other parties.
[In this project], it is okay for any one party to bring in some
additional gas as long as it benefits and does not harm other
parties. There is some expansion capacity in this proposed
system, but if that capacity is exceeded and a unilateral
investment in capacity is needed, parties have that option under
the Heads of Agreement (HOA). A party can expand or invest or
do what it chooses as long as it is not harming the other
parties. Expansion can be done with compression or other means.
However, it is not really changing tariffs. For example, the
three parties that are not expanding still own their capacity,
are still putting their gas through that capacity, are
liquefying that capacity, and are generating revenues against
that. "If another party wants to bring in more gas, then they
have a financial incentive to sell some of their space to other
parties. If they want to expand, they can invest and monetize
that space by charging other parties. But the anchor tenants -
the first four in - own capacity and fill that capacity and
generate revenue on that capacity. That is the right that they
are buying and that is why this project is different than a
pipeline and that is why the HOA as it is written allows a
higher level of alignment." It is an important difference and
that subtlety is what he is pointing out.
5:42:19 PM
CO-CHAIR FEIGE said the way he looks at this is that a person
can buy a seat on an airline or can have a fractional ownership
of an aircraft, in which case the person is entitled to a
percentage of hours that that aircraft flies over the season as
opposed to buying a spot on somebody else's plane.
MR. BUTT agreed with Co-Chair Feige's analogy.
5:42:45 PM
REPRESENTATIVE SEATON said [the Alaska LNG Project] allows a
fractional owner to expand its use of that aircraft. Previous
things have had requirements of shared benefits but not increase
in cost. Here, however, he is understanding that Mr. Butt is
saying there are not guaranteed shared benefits; that if a party
chooses to expand, the party only does not harm the others, but
the others that are not investors are not shared beneficiaries.
MR. BUTT answered he thinks Representative Seaton's language is
accurate. He invited Representative Seaton to set up an
appointment with the owners' committees, saying that those
fiscal representatives are excellent at this and helped write
the HOA. The key way to think about it, he continued, is that a
party maintains alignment in that capacity, the party owns its
fractional share, owns its element of capacity. If a party
chooses to expand its capacity, it can do so as long as it is
not harming the others.
5:44:18 PM
MR. BUTT addressed the slide entitled "Next Steps," pointing out
that the field studies and environmental baseline assessments
must continue since they are critical to managing the regulatory
uncertainty, given that regulatory uncertainty overlays all of
this. The hope is to do another field study in 2014, which will
be bigger than the one done in 2013. The engineering and design
work must also continue being done for an integrated project.
Moving into Pre-FEED is really about taking a much higher level
of commitment in terms of resources, primarily engineering and
technical resources, to make much more detailed decisions. The
analogy of building a house can be used. In concept selection,
a decision is made on where to put the house and how many
bedrooms and bathrooms it will have. When getting into Pre-
FEED, thought must be given about how big the joists are in this
house, how thick the walls are, and what the floors and heating
will look like, and evaluation of whether this house will work
as a place to live for the next 30 years. In FEED the level is
even more detailed, such as determining what fixtures, door
knobs, and cabinet hinges to use so that by the time this house
is about to be built there is no uncertainty in what it is going
to look like and what it will be like to live in. The Alaska
LNG Project needs to move into that and that is why the joint
venture agreement and Pre-FEED are being looked forward to.
5:46:10 PM
MR. BUTT continued his discussion of the next steps, saying the
project is hoping to move forward on state and federal licensing
applications. There are ways the project can work forward on
this that will provide better understanding through Pre-FEED and
help in evaluating the licenses that will be needed and help
address regulatory uncertainty. Also being worked on is a
durable [gas] fiscal regime. The HOA is specifically written to
give the legislature the time to think about it and to come back
in subsequent legislative sessions to work it further. That
time is important because as the engineering is progressed and
understanding is gained on what the project looks like, it will
also provide understanding on what is the regulatory environment
and what is the fiscal environment of the project. For example,
determination of the tax and interest rates will provide an
understanding of what the mortgage will be for the next 30 years
and provide confidence on the affordability of the project.
5:47:17 PM
REPRESENTATIVE KAWASAKI noted that much field work, engineering,
and permit preparation has been going on under AGIA or AGDC or a
combination of the two. He asked how many of the aforementioned
next steps would be done under any of those scenarios should a
bill be passed.
MR. BUTT responded the intent would be to progress them all.
REPRESENTATIVE KAWASAKI asked whether the aforementioned next
steps will be moved along if HB 277, or something like it, is
not passed and there is no HOA or Memorandum of Understanding.
MR. BUTT replied it is hard to envision folks being able to move
forward on the ARC because there would be no alignment, the
participants and their percentage of equity would be unknown,
and the process would be unknown. Not having alignment creates
a tremendous risk and compromises cost. Therefore it is hard to
envision moving forward without some better alignment and work
on those three elements.
5:48:43 PM
REPRESENTATIVE TARR inquired as to what factors would be deal
breakers for ExxonMobil moving forward on the project.
MR. BUTT answered that on behalf of the project he would like to
speak on behalf of all of the producers. He offered, if so
desired by Representative Tarr, to bring owner representatives
from the team to talk about each of the individual companies.
Far more important, he continued, is that the competitiveness of
an LNG project is measured by cost of supply, not internal
seriatim. If an LNG project has the right level of alignment
and right level of risk and uncertainty reduction, the cost of
supply can be driven down to the point where the project is not
competing with other projects internal to other portfolios.
Those are risk decisions and resource allocation decisions that
each of the owners must make. What is really being competed
with is the global LNG market. Natural gas demand is
anticipated to grow about 65 percent by 2040 and LNG is the
largest, fastest growing energy product in the world. If LNG
can be delivered at the lowest cost of supply, that LNG will
displace something else if it is not meeting new needs. As
economies in the Far East and other parts of the world grow,
they seek to increase their standard of living which grows their
demand for energy, and LNG is an excellent fit for that because
it has a low carbon footprint relative to other products. As
economies grow, they create an infrastructure that requires LNG
and, as more people are buying LNG, more demand for LNG is
created because the infrastructure on the other side of the
ocean is in place to use the LNG. When [ExxonMobil] first
started its LNG business 20 years ago, demand was very limited
because very few places could buy LNG since it must be warmed up
to return it to a gaseous state. More and more LNG has been
used over the last 20 years because it is a reliable fuel that
has helped economies grow, so more and more regasification
terminals have been built and the demand has grown. Regarding
competitiveness within any one corporation for resource
allocation, he said only the individual owners can answer that.
But more importantly, the resource owners are going to be much
more likely to want to invest in a project if they have
confidence in it, see alignment, and know the project will be
delivering gas at a cost of supply that is competitive. Mr.
Butt further noted that he has heard much conversation about
market timing -- that if LNG is not delivered by a certain time
window it cannot be delivered. He offered his belief that that
is untrue because the LNG business is a commodity business.
Folks want the utility of the gas, the gas is the same wherever
they get it, and what they want is the ability to heat their
homes and keep their lights on. He related he has spent 14
years overseas, most of them in places where the standard of
living is very different than what is taken for granted in the
West. Folks are hungry for that energy and want to increase
their standard of living and improve their economy. To help
those economies grow, corporations want to be able to deliver
gas in a more cost competitive and efficient manner than other
projects and that generates the success and that helps
corporations make resource allocation decisions.
5:52:49 PM
REPRESENTATIVE SEATON, regarding the next step of establishing a
durable gas fiscal regime, noted that a past problem has been
oil being a more valuable commodity than gas. He recalled there
was an absolute determination that a fiscal regime for gas had
to include a fiscal regime long-term for oil. He asked whether
that is still a portion of this project.
MR. BUTT responded that oil and gas are two sides of the same
coin. Mother Nature creates them together and puts them
together in the same place. A healthy oil business underpins a
gas business. To get low cost of supply, Alaska's big advantage
is that it has developed infrastructure that can be leveraged.
As long as that infrastructure is healthy, it is a benefit to
the project. But, if for any reason the oil industry is not
healthy and that infrastructure cannot be relied upon, it
becomes a disadvantage, which creates uncertainty and increases
cost. That oil and gas are bundled together is an owner issue
and the owner representatives would be happy to talk to members
about the fiscal structures.
REPRESENTATIVE SEATON requested this issue be addressed when the
owner representatives come before the committee because it is a
question that also needs to be heard by the general public.
MR. BUTT reiterated that the owner representatives will be happy
to do so.
5:54:42 PM
REPRESENTATIVE TARR related that many people have been
suggesting the state is operating within a window of time. She
understood Mr. Butt to be saying that the more accurate way to
approach this is to focus on the low cost of supply because
things will line up due to the predicted increase in demand.
MR. BUTT concurred and reiterated that it is the ARC of success.
Aligned parties that reduce risk and reduce cost will result in
success because there will be a low cost of supply that can
capture that market as it grows at whatever pace it grows.
Markets go up and markets go down and he has never met anyone
who can accurately predict them. But, he continued, something
he does know is that commodity businesses are driven by cost and
low cost always wins.
5:55:46 PM
MR. BUTT resumed his presentation, turning to two schematic
slides to show what the Alaska LNG Project will look like and
how it will be built [one slide labeled "Producing Fields" on
the left and "Gas Treatment Plant" on the right; the other slide
labeled "Storage and Loading" on the left and "Liquefaction
Plant" on the right]. He explained the Alaska LNG Project will
begin with the anchor fields of Prudhoe Bay and Point Thomson on
the North Slope and the gas will be moved down through the
Railbelt to Nikiski on the east side of the Cook Inlet where it
will be liquefied and exported. The anchor fields of Prudhoe
Bay and Point Thomson provide enough critical mass resources to
give investors the confidence that they can build this very,
very expensive megaproject. Point Thomson is a newer field
under development, while Prudhoe Bay has been on production for
decades. The Prudhoe Bay operator has done an excellent job of
preserving that asset and that gives the tremendous advantage of
integration. Being two sides of the same coin, oil and gas come
together and for decades the Prudhoe Bay operator has been
producing the reservoir fluids, separating out the gas, putting
the oil in the Trans-Alaska Pipeline System (TAPS), and
returning the gas to the reservoir, called cycling. The gas has
been taken out of the ground and reinjected three times. A big
advantage of the Alaska LNG Project is that the resource
location is known. That advantage is fundamentally tied to the
health of the existing infrastructure, that that oil business
continues to operate in a manner that allows the use of those
wells and the compression facilities for this project.
MR. BUTT elaborated in regard to integration, stating that by
being able to work together the LNG project is different than
pipelines. Through integration with the Prudhoe Bay operator,
it is known exactly where to get the gas. The central gas
facility has a 52-inch header that separates the low-stage
compression machines from the high-stage compression machines.
It is known exactly how to modify the existing facilities and
how to get the gas into an LNG project for export. No other
project could do that. By having that integration, it is also
known how to put the carbon dioxide back into the ground. It is
also known how to handle the power. That integration is so
fundamental that it has also been a huge benefit in the gas
treatment plant. This element of being able to work together
differentiates an LNG project from a pipeline project because
the resource owners own the resource and own the infrastructure,
whereas a pipeline company has to have conversations through
firewalled, regulated structures to maintain competition.
5:59:30 PM
MR. BUTT noted carbon dioxide is injected into the ground for
pressure maintenance, and is an extremely important element of
the Alaska LNG Project. For this project, he continued, about
3.5 billion cubic feet a day [of gas] is taken out of the
Prudhoe Bay and Point Thomson fields. About 25 percent of the
gas is at Point Thomson and about 75 percent of the gas is at
Prudhoe Bay. Prudhoe Bay is currently cycling 7-9 billion cubic
feet of gas every day. A portion of the cycled Prudhoe Bay gas
is taken off, Point Thomson gas is added, and is put into the
top of the pipeline. The 3.5 billion cubic feet of gas per day
is about 10 times what Alaskans use every day, so there is
plenty of gas for export. Work has occurred on an integrated
basis to ensure that the gas can be treated such that it can be
used by folks in the Interior. The term "gas," he pointed out,
creates a tremendous amount of confusion. Rich gas, wet gas,
and gas put in cars -- the same word is used to mean
fundamentally different things. The gas put in a car is nothing
like the gas in this pipeline. The word gas is used to describe
gas in a natural state produced from wells where it has a lot of
non-hydrocarbon components. The word gas is used to describe
treated gas that has only hydrocarbon components. The gas that
will be put into this project is a hydrocarbon product that can
be liquefied and used for utilities.
MR. BUTT reiterated that the integration of the oil business and
the gas business is a big advantage in this project. The wells
do not have to be drilled; they can just be leveraged for the
gas. Point Thomson is about 60 miles to the east [of Prudhoe
Bay], and is currently under construction. The Point Thomson
operator has invested about $1.8 billion to date and thinks
production will begin second quarter 2016. Point Thomson is
important because it is a gas field; it is different than
Prudhoe Bay because it has a lot of gas and a little bit of oil.
Prudhoe Bay, the largest oilfield in North America, has a lot of
oil and a little bit of gas. The difference can be compared to
getting the gas out of a balloon and getting the toothpaste out
of a tube. Gas can be moved much faster out of a balloon than
toothpaste can be moved out of a tube. If the tube is squeezed
too fast, a lot of gas will be left behind. So, in conjunction
with the Alaska Oil and Gas Conservation Commission (AOGCC), the
Prudhoe Bay operator has developed very careful depletion plans
to use the gas so that all of the oil is taken out. As the
production changes at Prudhoe Bay - as a higher percentage of
gas to oil is gotten - there is the opportunity to take some of
that gas off and put it into an LNG project, which is the
fundamental basis of this project. This project is completely
underpinned by those resources. Underpinning it with those
resources creates an infrastructure that other parties can use;
but this would never be created without these anchor tenants.
6:03:35 PM
REPRESENTATIVE P. WILSON said she was expecting that 75 percent
of the gas would be coming from Point Thomson, given it has more
gas than oil. She surmised, then, that more gas can be taken
out of Prudhoe Bay because oil has [already] been taken, so more
gas can be taken out of Prudhoe Bay than out of Point Thomson.
MR. BUTT replied it is also the relative size of the resources:
a smaller balloon of gas and a much bigger tube of toothpaste.
The volume of gas actually in Prudhoe Bay is three times the
volume of gas in Point Thomson. While Point Thomson is mainly
gas, it is much smaller than Prudhoe Bay. Prudhoe Bay is the
largest field in North America, and it is that size that has
generated that value for the state and the parties.
6:04:41 PM
MR. BUTT returned to his presentation, explaining that when the
gas arrives at the gas treatment plant it must first be treated
to remove impurities. The gas treatment plant required by this
project will be one of the largest plants in the world. The
plant will require about 250,000 tons of steel and will occupy
about 200 acres. This enormous amount of steel - equivalent to
the amount of steel in 140,000 Ford F150 trucks - must be
manufactured and moved to the Arctic and installed in the
Arctic. He displayed a photograph of the gas treatment plant as
originally designed, explaining that the plant has a spine where
it brings in the gas and trains on either side where the gas is
treated. "Train" means that things happen from front to back.
Gas goes in the frontend with impurities, comes out the backend
without impurities, and it happens in series. Any process done
in series is called a "train" by the industry. So, while LNG
trains and gas treatment trains are fundamentally different, the
word "train" is used because they both happen in series.
6:06:28 PM
MR. BUTT emphasized the gas treatment plant is important because
Prudhoe Bay has 12 percent carbon dioxide (CO). That is very
2
high and no one has ever developed an LNG project with a gas
resource that has that much carbon dioxide in it. Alaskans use
about 350 million cubic feet of gas a day on average -- about
250 million in the summer and about 450 million in the winter.
The 3.5 billion cubic feet per day of gas going into this system
is 10 times the amount of gas used by Alaskans. The volume of
carbon dioxide that must be handled in this project is 500
million cubic feet a day. So, the amount of carbon dioxide that
must be handled daily is 1.5 times greater than the amount of
gas used by Alaskans. Over the life of the project the total
volume of carbon dioxide is 4 trillion cubic feet. The way that
carbon dioxide is handled becomes very important and it gets
back to the integration issue. By working with the Prudhoe Bay
operator, it is known how the carbon dioxide will be moved back
into Prudhoe Bay to be reinjected to continue supporting the
production there. The gas treatment plant is only required
because there is so much carbon dioxide in Prudhoe Bay and 4
percent at Point Thomson. There is no market for carbon
dioxide.
6:08:52 PM
CO-CHAIR FEIGE pointed out that while there is no market for the
carbon dioxide, there is financial utility in it because it can
be reinjected into the Prudhoe Bay oil reservoir to generate
more recovery of oil over time.
MR. BUTT agreed the utility value of the carbon dioxide is
important. He qualified that when he says there is no value to
carbon dioxide, he is meaning there is no value in exporting it
because it cannot be sold to anybody. Reinjecting the carbon
dioxide gets value from it. This is different than previous
pipeline projects because those projects had no integrated view
and therefore had a high level of uncertainty on what to do with
the carbon dioxide since it is environmentally irresponsible to
vent it. Because it is an integrated project, it is known
exactly what will be done with the carbon dioxide and it does
have utility value. That said, he continued, given a choice of
handling or not handling all of the carbon dioxide, he would
choose not handling the carbon dioxide.
6:10:16 PM
REPRESENTATIVE TARR related that AOGCC documents discuss the
delicate balance between reinjecting the gas and optimal oil
recovery. Given the high levels of carbon dioxide, which are
not seen in other locations, she asked whether reinjection is a
proven method that will not cause risk or cause disruptions with
oil recovery.
MR. BUTT responded reinjection is a proven method, saying it is
used in other parts of the world to improve recovery. Sometimes
called miscible recovery, it is injected where there is very
heavy or more viscous crude because in that environment the
carbon dioxide bonds with the oil, reduces its viscosity, and
improves recovery. However, that is not what would happen at
Prudhoe Bay. Instead, the energy of the carbon dioxide will be
used to displace hydrocarbon gas and oil to improve recovery.
The Prudhoe Bay operator has come up with some excellent ideas
on how to do this and to manage the reservoir in a responsible
manner so that this volume of gas can be moved, which was a big
uncertainty. Going back to the question of alignment, risk,
uncertainty, and cost, the question of what to do with all this
carbon dioxide, and whether there was a mechanism to use it,
needed to be answered early in concept. The folks with the
Prudhoe Bay operator are smart, he continued, and if given more
time to work this through Pre-FEED and additional design they
will come up with some even better ideas.
6:12:06 PM
REPRESENTATIVE P. WILSON requested further elaboration on the
reinjection of carbon dioxide to provide better oil recovery.
MR. BUTT answered the pressure is about the same, but, while
compressible, carbon dioxide behaves differently in reservoirs
than other gases and must therefore be treated very differently.
In some places in the world, using carbon dioxide instead of
another gas provides benefits beyond the pressure and depletion
benefits. But that is not seen at Prudhoe Bay. Instead what is
seen is purely the energy benefit and carbon dioxide is just
another gas that behaves a little bit differently. Responding
further, he explained that miscible flooding is used in parts of
west Texas where there are very deep reservoirs, more viscous
oils, and higher pressures. The carbon dioxide physically
reduces the viscosity of the oil, allowing the oil to move
easier. So, in addition to the pressure benefit, there is a
viscosity reduction benefit, and viscosity reduction means the
oil moves easier. However, in Alaska, that viscosity benefit is
not seen, only the pressure benefit is seen. He reiterated his
optimism that the Prudhoe Bay operator will come up with
something better over the next couple years. He further
confirmed that Prudhoe Bay has 12 percent carbon dioxide and
Point Thomson has 4 percent.
6:14:04 PM
MR. BUTT resumed his discussion of the gas treatment plant,
noting there are two streams after the gas is treated and
impurities removed: a hydrocarbon stream that is put into the
pipeline and a carbon dioxide stream that is put back into the
ground. The hydrocarbon stream in the pipeline is purely a gas
of primarily methane, a little bit of ethane, and a few lighter
gas liquids, so the gas is not wet or water-rich. This gas will
be put into a 42-inch line with eight compression stations and
moved from the North Slope to the east side of the Cook Inlet.
Important in designing a pipeline is ensuring that the pipeline
does not move. The pipeline moves through three distinctive
regimes: north of Atigun Pass is discontinuous permafrost where
it is always cold; between Atigun Pass and the Alaska Range is
discontinuous permafrost where the ground can be quite warm in
the summer and quite cold in the winter; and south of the Alaska
Range is soils that do not move quite as much. From a pipeline
design perspective, it is very important to size the pipeline
and space the compression stations to always keep the gas at the
right pressure and right temperature, 30 degrees Fahrenheit (F),
so the pipe does not move. North of Atigun Pass everything is
cold and the gas in the pipe is consistent with the temperature
outside the pipe, so it is very solid. Between Atigun Pass and
the Alaska Range, care must be taken in design to keep the gas
at the right temperature so the pipeline does not move even
though the ground is moving. This will allow safe delivery of
the gas to the LNG plant as well as to Alaskans. The project
has developed a hydraulic model that contemplates five offtake
points for Alaskans.
6:16:44 PM
MR. BUTT informed members that the route of the pipeline is
about 800 miles and will take about three years to build. The
key is to use the right arctic construction techniques. Once at
the Cook Inlet, the gas will be taken into a liquefaction plant.
Here is where an LNG project really differentiates itself from a
pipeline project. In an LNG project, the gas temperature is
made very cold. The 30 degree F arrival temperature of the gas
is lowered to minus 260 degrees F, the temperature at which the
gas converts itself from a gas to a liquid. Liquid gas is 600
times smaller, or denser, than when in the gaseous state. This
difference in volume justifies the cost and risk of building a
liquefaction plant because liquefaction allows for safer and
more efficient delivery of the gas. Instead of 600 cargos of
gas, only one cargo of LNG is put on the water. To do that, it
is estimated that about three trains are needed for the
liquefaction plant. The gas is dehydrated at the liquefaction
plant to remove anything that is not methane because anything
not methane freezes first, causing operability problems. At the
end of the process, very cold methane will be had with a little
bit of ethane, allowing the project to sell a rich LNG spec at
about 1,100 British Thermal Units (BTUs). This is important
because it gives a very wide market appetite since a lot can be
done with rich LNG. The ethane can be removed for other
industrial uses and a little bit hotter gas can be burned.
Regarding gas to Alaskans, he noted that the gas in this line
will burn a little bit hotter than the traditional utility spec
of 960 to 1,000 [degrees F]. So, gas taken directly out of this
pipeline into a home utility service without some form of
correction would be too hot. However, straddle plants are not
needed because there are no liquids to remove. Rather, the
thermal content of the gas needs to be adjusted for residential
users and there are many ways to do that. As the project works
with the state and other parties to define where exactly to
place the offtakes, the thermal content of the gas at each
offtake will also need to be defined.
6:19:49 PM
REPRESENTATIVE JOHNSON inquired about what other byproducts will
come out of the LNG plant.
MR. BUTT responded almost all of the gas is methane because,
through cycling over the last 30 years, most of the liquids have
already been removed and sold. Responding further, Mr. Butt
said byproducts at the LNG plant are a little bit of ethane, the
carbon molecule used in plastics and polyethylene, a little bit
of propane, and a little bit of butane. The LNG plant will
maybe generate about 1,000-1,100 barrels a day of liquids; while
not a huge number, it is enough to provide fuel to places that
do not get gas. Responding again, Mr. Butt confirmed that
propane and butane are very marketable.
6:21:09 PM
REPRESENTATIVE P. WILSON surmised the amount of methane varies,
but asked what approximate percent of the gas is methane.
MR. BUTT confirmed it varies, but said about 98 percent of this
gas is methane.
6:21:25 PM
REPRESENTATIVE TARR inquired how much capacity increase is
provided by compression stations versus looping.
MR. BUTT replied the system as designed with a 42-inch pipeline
and 8 compression stations is intended to handle about 3.5
billion cubic feet of gas per day: about 2.5 billion cubic feet
[per day] for liquefaction, 250-450 [million cubic feet per day]
for Alaskans, plus another 400 [million cubic feet per day] for
fuel. The pipeline as designed with 8 compression stations has
about 25-30 percent expansion capacity, which is about another
800 million to 1 billion cubic feet of gas without having to do
anything to the size of the line. Gas is compressible, the more
it can be compressed the more gas that can be moved into a very
small place. The first alternative is always to use compression
to add capacity. However, at some point the pressures get so
high that the cost of the pipe thickness is prohibitive and then
more expensive alternatives must be looked at. The project is
trying to come up with a sizing design for these facilities that
gives about a 20-year plateau; LNG buyers want to know there is
the ability to deliver LNG for 20-30 years because they want to
tie their economy to that ability to deliver that energy. If
the project has a very high [price] rate, it can only deliver
gas for a very small period of time, so this must be balanced
and a 20-30 year life is the balance that the project has come
up with.
6:23:40 PM
REPRESENTATIVE TARR understood that the final investment
decision will be based on the long-term contracts and the
predicted in-state demand, and that the eight compression
stations will provide an additional 30 percent capacity going
forward 30 years.
MR. BUTT answered that is the best engineering judgment based on
what is known now. Until there is high confidence that the
other resources that are out there will be produced, it would be
imprudent to build something that can never be filled because
that would be very expensive.
CO-CHAIR FEIGE said the expansion capability of the actual pipe,
which would require more compression stations, is going to be
there for some future expansion; it does not have to be filled
right now.
MR. BUTT concurred.
6:24:40 PM
REPRESENTATIVE TARR inquired what the maximum number of
compression stations is for this pipe.
MR. BUTT responded many compression stations could be added, but
they are very expensive. At some juncture it does not make
sense to add compression, so it is a balancing act as to whether
to keep adding compression or to do something else. The eight
compression stations are spaced about every 90 miles. Getting
stations inside of every 60-50 miles is probably too many
compression stations; it is a balancing act of putting in 50 or
60 miles of pipe or putting in a lot more compression. The
ultimate goal is to always keep that pressure and temperature
stable so the line does not move at its given capacity. Plus,
at some juncture, the pressure limits on the pipe will be
reached, which on this system is 2,100 pounds [per square inch].
6:25:38 PM
REPRESENTATIVE SEATON offered his understanding that if pressure
is elevated in the pipe, then all the compressor stations would
have be able to satisfy that newer pressure in the expansion.
MR. BUTT replied it depends on spacing, arrival pressures, and
departure pressures at each of the station's changes. A nice,
even system at about 2,050 pounds is wanted. However, the
system can be designed such that the departure pressure from one
compression station drives the arrival pressure at the next
compression station depending on the length, the hydraulics, the
friction losses, and other elements.
REPRESENTATIVE SEATON surmised that to get more throughput and
to not increase the pressure, the system will only be looking at
pressure differential between stations so the stations that
would be built are capable of handling that expansion.
MR. BUTT confirmed this to be correct and said the design
contemplates that capacity.
6:27:22 PM
MR. BUTT returned to his presentation, noting that once the LNG
has been created a jetty needs to be built since there can be
10-15 tankers per month, which means delivery of a cargo every
two days. That frequency is important because the buyer wants
to see a new carrier in its harbor every two days so the buyer
knows it can keep its utilities running. The specially designed
LNG carriers are much different than crude oil carriers; for
example, LNG carriers draft differently. Crude oil is much
heavier than gas. An important difference is that LNG is not
under pressure in the ships, it is only very, very cold. If the
top of a container holding LNG was removed, the LNG would slowly
vaporize as it heated up. The ships carry the LNG in specially
designed tanks to keep it very, very cold so it will not go from
a liquid state to a gaseous state that would lose the density
value while moving it across the ocean. Understanding the scope
of this project helps in understanding the importance of
alignment, risk reduction, and cost reduction. Delivering gas
at the lowest cost is what is trying to be done and the way to
do that is to get that gas really, really cold - to liquefy it -
so it can be delivered in 1 ship instead of 600 ships.
6:29:43 PM
MR. BUTT stated that another element of the project is modular
construction. In an arctic environment work cannot be done
outside during all 12 months of the year. Some of the work is
therefore moved to places where there is overhead capacity.
Moving the 250,000 tons of steel needed for the gas treatment
plant requires very big cranes and overhead lift capacity. He
played a video showing how a module is built upside down to
access everything and an overhead lift is then used to pick up
the module, flip it over, reset it, and position the module in
place. The most important thing in modular construction is the
ability to pick things up. Modular construction techniques were
pioneered in Alaska and are how Prudhoe Bay, Alpine, and
Northstar were built. Over the last 20 years those techniques
have been further improved in Russia and other Arctic locations.
Once the modular facility is built and put in place, each
facility is layered in one at a time just like a layer cake.
Overhead capacity is necessary for this because, for example, a
piece of deck weighs about 45,000 tons, which is about one-fifth
of what has to be built for the North Slope gas treatment plant.
Once built, the modules are weatherized and put on a boat for
sailing to the destination. They are driven off the boat on
specially designed carriers called crawlers that have up to 18
wheels per axle and can move the modules great distances. Once
at its final location, the module is put on a specially designed
pad and all the pieces are put back together, which is called
"plug and play." The modules, and making them all fit together
and work, underscore the importance for doing Pre-FEED and the
very special design work.
6:33:06 PM
REPRESENTATIVE P. WILSON asked how big the modules are, how many
acres it takes to build the modules, and whether the modules are
being built in Anchorage.
MR. BUTT answered that Point Thomson is using these module
construction techniques. Many of the modules are small enough
to put on a truck and be driven and all of the camp and support
modules were built in Alaska. The really heavy modules that
require big overhead cranes are being built in shipyards which
have the capacity to pick up really heavy things; these modules
are then sailed in. Compression facilities are being fabricated
right now. All of the historic projects in Alaska used these
same techniques. The module is always built as close as
possible because moving it is a risk; however, there is
sometimes not the overhead capacity and a new shipyard cannot be
created just to build one project. A balance must be struck in
what modules can be built locally and the bigger heavier modules
that cannot be built locally. As well, there must be a balance
in the craft skills required to do this work: the 9,000-15,000
workers must all be working on the right things. Responding
further, Mr. Butt confirmed there are no shipyards in Alaska big
enough to do this work.
6:35:13 PM
REPRESENTATIVE TARR inquired whether shipyards in the U.S., such
as the one in Louisiana, could be used.
MR. BUTT responded that as the project moves forward in design,
procurement strategies are defined to determine the right place
to build. A yard's productivity, safety, and cost to put the
modules together are looked at. A disadvantage of Gulf of
Mexico shipyards is the long distance of moving constructed
modules through either the Panama Canal or around Cape Horn.
However, that is the same advantage that Alaska has with market
access -- LNG from Alaska can be moved to the markets much
shorter distances than suppliers in the Gulf of Mexico. The
location of the shipyard is not of as much concern as ensuring
that the right facilities are built. The facilities must be
built safely and with good integrity. The desire is to have
them built as close to where they are needed as possible because
of having to move them. That is why all the truckable modules
for Point Thomson are built right here in Alaska. This will be
the same thing for the Alaska LNG Project, but there is the
balance of finding that big overhead lift, who can do it the
right way, and moving the modules. Each module will likely have
a different procurement strategy on who builds it and where it
will come from. This project is so big that no one yard will be
able to it; multiple yards will be engaged across the globe.
6:37:22 PM
MR. BUTT returned to the topic of integration, saying this kind
of work is unique to this project because all of the producers
are working it together. With the state discussing becoming a
part of the project, the state can be a part of this bigger,
aligned, and integrated process. Displaying photographs, he
said it is known how to reinject the carbon dioxide, how to
swing the power grid at Prudhoe Bay, and exactly where to get
the gas, things that have not been done before. Other projects
all had communication, but there were firewalls and they were
built in isolation. Moving into Pre-FEED, looking to advance
the project, the designs begin getting much more detailed, such
as what kind of transformers and step-downs, and ways to manage
carbon dioxide content.
MR. BUTT displayed a slide entitled "Point Thomson," pointing
out the photograph of the central pad with modules built in
Alaska and noting the pad has an airfield. He drew attention to
the design drawing of what the facility will look like with all
the gas compression facilities on it, saying work has been done
to understand how the equipment will be moved in and out. He
brought attention to a photograph of the kind of pipe that will
be needed to handle 10,000 pounds per square inch (psi), noting
the pipe is several inches thick and the diameter quite small.
To provide reference, he said the tip of a person's finger is
one square inch and would need to balance two [Ford] F150s to
have the kind of loads associated with 10,000 psi. Because the
walls must be really thick, the cost and design work at Point
Thomson are important. Made of multiple materials, this thick
pipe requires specialty welders with the right craft skills to
weld together. He displayed the integrated design for gas sales
at Point Thomson, which includes the kind of compression and
injection facilities that are required.
6:40:40 PM
MR. BUTT turned to a slide entitled "Gas Treatment Plant,"
saying the last power of integration is at the gas treatment
plant. He explained that the photo on the right shows where the
plant will be placed in proximity to the Prudhoe Bay gas
treating facilities and the Prudhoe Bay dock, the roads that
will be required to move the facilities, and the lines that will
be required. Enough design work has been done to know where the
gas treatment plant will go, but more importantly, much work has
been done to design the size of the gas treatment plant. To
highlight the importance of this, he explained that Denali-The
Alaska Gas Pipeline and the Alaska Pipeline Project (APP)
designed their gas treatment plants based on what they knew
about the Prudhoe Bay gas composition, which was incomplete due
to firewalls. Based on the best science and understanding that
they had, it was thought four gas treatment trains were needed,
meaning four facilities to handle this gas. Each of these gas
facilities would require the capacity to separate the gas
impurities: carbon dioxide impurities would be separated one
way and hydrocarbon impurities another way. They designed the
packing inside the towers for the products that strip out the
impurities, called aiming, which blend with the gas and are
boiled off. The towers were 128 feet tall, 28 feet in diameter,
and made of steel up to one foot thick. Each of the four trains
would require three vessels for the interaction and handling of
the gas. However, by having an integrated view, it has been
learned that the same functionality can be done with the same
volume of gas with only three trains, which means moving less
steel and saving a lot of cost. More importantly, the system
can be balanced. There would be three treating [trains] in the
north and three liquefaction trains in the south. This reduces
risk over the life of the Alaska LNG Project; for example, when
doing maintenance work on one treatment train, work can be done
on one liquefaction train. Over the life of the project it is
balanced, whereas it was not balanced before and that created a
risk and created cost. An integrated viewed has allowed a much
better understanding of the gas composition and carbon dioxide
content, as well as a much better understanding of the packing
inside the vessels, and ability to design it much more
thoughtfully to come up with a three-train design. This huge
step change, and the value of that, has been extended in that it
was previously thought three sealifts would be needed to move
four trains. Now it has been learned that four sealifts are
needed to move three trains. So, now the utilities have been
pulled forward and the gas treatment trains staged. By doing
that, gas can probably be moved sooner. This integrated view
has resulted in a much better solution that reduces cost,
reduces risk, and moves gas quicker because there is less to
build. This integrated view shows why alignment is so important
and achieves the ARC of success.
6:44:22 PM
REPRESENTATIVE P. WILSON observed from the photograph that the
planned facility's footprint is on top of areas with water.
MR. BUTT replied the yellow outline depicted in the photo is
much larger than the footprint of the plant. Drawing attention
to the diagram left of the photo he explained that within the
bigger footprint, the actual place where the trains are located
is much smaller. The orange, yellow, and green shapes are the
gas treatment trains and the blue shapes are all of the
utilities, all of which take up about 20 percent of the total
space. Large spaces must be cordoned off for the plant because
there must be a long distance between the plant and the flares
that are shown at the top of the diagram. No facilities will be
put on the marshy areas and a gravel pad for the plant will be
placed on top of the area that is dry during the summer. In
further response, Mr. Butt confirmed the yellow outline on the
photograph is less than 200 acres and that the actual footprint
is much less, but that with the roads it is about 200 acres.
6:47:16 PM
MR. BUTT continued his presentation, moving to the slide
entitled "Pipeline" and reporting that much progress has been
made on the pipeline. He explained that once the site was
designed, the route could be finished south of Livengood and a
couple really critical special design areas figured out. How to
pass Atigun Pass is important because it is very tall and
already has a pipeline in it, so thought is needed in how to put
a gasline near TAPS. Drawing attention to the picture in the
lower left of the slide, he said care is needed near Denali
National Park and Preserve; three alternative routes go through
Glitter Gulch, which has many valleys and chasms that present
challenges for ensuring that the pipeline does not move. Also
being worked on is how to cross the Cook Inlet, but the decision
on how to cross the Cook Inlet is driven by whether the Susitna
River is crossed.
MR. BUTT related that the lead LNG and marine plant site is the
Nikiski industrial area located on the east side of the Cook
Inlet. Ocean data gathering equipment has been put into the
inlet to gather data on tides, current, and ocean conditions; a
skid measures all of the data in a very non-intrusive manner by
sitting on the sea floor. The Nikiski area was chosen after
looking at the entire coastline and knowing that there are lots
of other good sites in Alaska. A good site needs adequate
geotechnical stability and access to the shoreline for export.
The current site was chosen because the civil work required to
make a large enough flat spot for the plant is much less than
for some of the alternatives. Additionally, this site has much
less snowfall, allowing a little bit higher labor productivity
and a little bit higher operability since work must occur there
12 months of the year. A very transparent work process is
currently ongoing with the plant owners at this site, he said.
The team's goal is to come up with fair and durable transactions
to acquire the land, although there are alternatives to work
with in the event that enough land cannot be acquired.
6:51:19 PM
MR. BUTT, responding to Representative P. Wilson, said the LNG
and marine site will take up between 400 and 800 acres, but the
actual plant itself is a much smaller footprint. A lot of space
is needed for construction and moving in the modules. Actually
defining a specific number [of acres] is not done because that
number is unknown until Pre-FEED is completed. Pre-FEED is
where layout is finalized, which is driven by the question of
hydraulics, which is driven by elevation. The ups and downs of
the site must be known for the hydraulics since gravity always
wins and fluids run downhill. That must be known when designing
the layout so when things are put on the ground it is known what
is above what. The layout must be designed to make the process
as efficient as possible so none of the energy is lost.
6:52:58 PM
MR. BUTT addressed the slide entitled "Plans for a safe 2014
field season," reporting that the focus of surveys for the 2014
field season will be between Livengood and the east side of the
Cook Inlet. To be environmentally responsible, work will be
done on ice profiling and data gathered in fishery areas. Much
help is needed from the state and federal agencies because the
permitting must be worked in an integrated manner.
MR. BUTT concluded by saying he has shared thoughts on what an
LNG project would look like, why the proposed Alaska LNG Project
is very different than previous pipeline projects, and provided
ideas on how to filter the things that are being talked about.
Anything that aids alignment between the resource owners and the
folks who build the project helps. Anything that helps identify
and reduce risks, anything that helps reduce uncertainty, will
help advance the project. An environment needs to be created
where folks are confident that they can invest $45-$65 billion
in the project and folks are willing to put their economy at
risk for 30 years and buy the product. There must be the
confidence that that can be done at a low enough cost of supply
that the project can be competitive.
CO-CHAIR FEIGE complimented Mr. Butt for providing an excellent
presentation.
6:55:23 PM
CO-CHAIR SADDLER inquired as to how many other projects of this
size are near this stage around the world.
MR. BUTT answered several big projects are coming on-stream in
Australia, as well as projects being discussed in east Africa,
British Columbia, and the Gulf of Mexico. Regarding the Gulf of
Mexico, he said a range of folks are trying to permit LNG to
arbitrage the differences, but they do not own the gas; they are
just trying to buy cheap gas and sell it, which is a very
different model.
CO-CHAIR SADDLER asked whether Alaska is ahead or behind the
schedule of the aforementioned projects.
MR. BUTT responded some of those other projects are expected to
come on-stream in the next couple years, some are still on the
drawing board, and some are just hopes. He reiterated that
competitiveness is driven by cost of supply. If Alaska has a
reliable project where all the parties are aligned and deliver
at a low enough cost of supply, there can be confidence in
finding a way to get it to market.
6:57:01 PM
REPRESENTATIVE SADDLER recalled the history of the Trans-Alaska
Pipeline System (TAPS), which was stalled for a number of years
in its early phases due to legal environmental challenges. He
inquired whether part of the scoping process for the Alaska LNG
Project includes any evaluation of whether those who oppose
hydrocarbon fuel of any kind can drag out the project in its
early stages with legal challenges.
MR. BUTT replied that is considered one of the project's primary
uncertainties. While everything possible is done to assess
that, it is just an estimate until moving closer to design and
testing some of the feasibilities. The project is very aware of
those challenges, but natural gas as a fuel is advantageous and
has a lot of benefits to Alaskans. The project is pleased to
see Alaskans discussing the opportunity to be part of the
project and invest in the project. This is something that gets
alignment, so if there is a challenge then that challenge can be
worked together.
CO-CHAIR SADDLER asked whether reasons to not do this project
are being looked for, or whether ways are being looked for to
make it happen.
MR. BUTT answered that he hesitates to speak for all the owners,
but is employed for one of them and can speak to the commitment
of that one owner to trying to find this work. Speaking for the
folks he works with, he said he thinks they are an excellent
team and their behaviors demonstrate a level of commitment that
gives him confidence this can be done. The state's decision to
come to the legislature in a relatively transparent process and
engage the legislature in trying to get alignment and take
equity is the only way it will work because everybody must be in
the boat. Everybody must be pulling on the oars in the same
direction or things will continue going in a circle; the
question before everyone is whether everyone is ready to move
past that. The best way to decide is to move forward through
the gated process. Everybody has off-ramps, but also everybody
will have much better decisions. It is his experience that
folks having better information and doing the work before they
make the decisions are usually a lot more successful.
6:59:37 PM
REPRESENTATIVE SEATON inquired whether the other large projects
throughout the world that Mr. Butt is engaged in are under the
similar situation of no royalty and no taxes and only in-kind
gas taken by the sovereign. In other words, he continued, he
would like to know whether this proposed structure is normal
throughout the world or unique.
MR. BUTT responded getting alignment with the host government is
fundamental and characteristic of most, although not all, LNG
projects. That alignment is always critical because of wanting
to work things together, rather than cross purposes, when
challenges are encountered.
REPRESENTATIVE SEATON understood Mr. Butt to be saying that
alignment is only achieved through gas in-kind and not by
royalty or gas or production-sharing agreement.
MR. BUTT replied he does not think the implication of no tax and
no royalty is quite accurate. Value elements are there. He
recommended bringing the owner representatives to speak to the
fiscals. Alignment between a sovereign and the project is a
fundamental characteristic of most successful LNG projects
because it is wanted to work together, have everybody benefit,
and have an alignment to make the project work. He said he
cannot speak for the other owners and even hesitates to speak
for the owner that he works for, but speaking for himself as an
individual with a lot of LNG experience he can say that if there
is not that alignment, the chances of success are very limited.
When he looks at the challenges associated with this project, it
is very difficult for him to understand how these challenges can
be overcome without that level of alignment.
7:02:01 PM
REPRESENTATIVE SEATON understood the aforementioned, but
maintained it is the committee's obligation to see that this
particular model being proposed works and is generally
incorporated around the world or why it is not. He requested a
chart be provided to the committee by the owners that shows
which of the big LNG projects around the world are set up in a
similar situation as Alaska's.
CO-CHAIR FEIGE suggested the committee should talk with its own
consultants.
MR. BUTT concurred with Co-Chair Feige's suggestion, saying data
provided by the legislature's consultants would be considered
more objective.
7:03:11 PM
ADJOURNMENT
There being no further business before the committee, the House
Resources Standing Committee meeting was adjourned at 7:03 p.m.
| Document Name | Date/Time | Subjects |
|---|---|---|
| HRES AK LNG 2.4.14.pdf |
HRES 2/4/2014 5:00:00 PM |
|
| Steve Butt Bio 2.4.14.pdf |
HRES 2/4/2014 5:00:00 PM |