Legislature(2007 - 2008)TERRY MILLER GYM
06/08/2008 01:00 PM House RULES
| Audio | Topic |
|---|---|
| Start | |
| HB3001|| SB3001 | |
| Adjourn |
* first hearing in first committee of referral
+ teleconferenced
= bill was previously heard/scheduled
+ teleconferenced
= bill was previously heard/scheduled
| + | HB3001 | TELECONFERENCED | |
ALASKA STATE LEGISLATURE
JOINT MEETING
HOUSE RULES STANDING COMMITTEE
SENATE SPECIAL COMMITTEE ON ENERGY
June 8, 2008
1:06 p.m.
MEMBERS PRESENT
HOUSE RULES STANDING COMMITTEE
Representative John Coghill, Chair
Representative Anna Fairclough
Representative Craig Johnson
Representative Ralph Samuels (AGIA Subcommittee)
Representative Beth Kerttula (AGIA Subcommittee)
SENATE SPECIAL COMMITTEE ON ENERGY
Senator Charlie Huggins, Chair
Senator Bert Stedman, Vice Chair
Senator Fred Dyson
Senator Kim Elton
Senator Lyda Green
Senator Lyman Hoffman
Senator Donald Olson
Senator Gary Stevens
Senator Joe Thomas
Senator Thomas Wagoner
Senator Bill Wielechowski
MEMBERS ABSENT
HOUSE RULES STANDING COMMITTEE
Representative John Harris (AGIA Subcommittee, Chair)
Representative David Guttenberg
SENATE SPECIAL COMMITTEE ON ENERGY
Senator Lesil McGuire
OTHER LEGISLATORS PRESENT
Representative Buch
Representative Chenault
Representative Crawford
Representative Dahlstrom
Representative Doll
Representative Doogan
Representative Edgmon
Representative Gara
Representative Gardner
Representative Gatto
Representative Gruenberg
Representative Holmes
Representative Johansen
Representative Joule
Representative Kawasaki
Representative Kelly
Representative Lynn
Representative Meyer
Representative Neuman
Representative Olson
Representative Ramras
Representative Roses
Representative Seaton
Representative Stoltze
Representative Wilson
Senator Bunde
Senator Davis
Senator Ellis
Senator French
Senator Therriault
COMMITTEE CALENDAR
HOUSE BILL NO. 3001
"An Act approving issuance of a license by the commissioner of
revenue and the commissioner of natural resources to TransCanada
Alaska Company, LLC and Foothills Pipe Lines Ltd., jointly as
licensee, under the Alaska Gasline Inducement Act; and providing
for an effective date."
- HEARD AND HELD
SENATE BILL NO. 3001
"An Act approving issuance of a license by the commissioner of
revenue and the commissioner of natural resources to TransCanada
Alaska Company, LLC and Foothills Pipe Lines Ltd., jointly as
licensee, under the Alaska Gasline Inducement Act; and providing
for an effective date."
- HEARD AND HELD
PREVIOUS COMMITTEE ACTION
BILL: HB3001
SHORT TITLE: APPROVING AGIA LICENSE
SPONSOR(s): RULES BY REQUEST OF THE GOVERNOR
06/03/08 (H) READ THE FIRST TIME - REFERRALS
06/03/08 (H) RLS
06/03/08 (H) WRITTEN FINDINGS & DETERMINATION
06/04/08 (H) RLS AT 9:00 AM CAPITOL 120
06/04/08 (H) Heard & Held; Assigned to Subcommittee
06/04/08 (H) MINUTE(RLS)
06/04/08 (H) RLS AT 10:00 AM TERRY MILLER GYM
06/04/08 (H) Heard & Held
06/04/08 (H) MINUTE(RLS)
06/05/08 (H) RLS AT 9:00 AM TERRY MILLER GYM
06/05/08 (H) Heard & Held
06/05/08 (H) MINUTE(RLS)
06/06/08 (H) RLS AT 10:00 AM TERRY MILLER GYM
06/06/08 (H) Heard & Held
06/06/08 (H) MINUTE(RLS)
06/07/08 (H) RLS AT 10:00 AM TERRY MILLER GYM
06/07/08 (H) Heard & Held
06/07/08 (H) MINUTE(RLS)
06/08/08 (H) RLS AT 1:00 PM TERRY MILLER GYM
BILL: SB3001
SHORT TITLE: APPROVING AGIA LICENSE
SPONSOR(s): RULES BY REQUEST OF THE GOVERNOR
06/03/08 (S) READ THE FIRST TIME - REFERRALS
06/03/08 (S) ENR
06/03/08 (S) REPORT ON FINDINGS AND DETERMINATION
06/04/08 (S) ENR AT 10:00 AM TERRY MILLER GYM
06/04/08 (S) Heard & Held
06/04/08 (S) MINUTE(ENR)
06/05/08 (S) ENR AT 9:00 AM TERRY MILLER GYM
06/05/08 (S) Heard & Held
06/05/08 (S) MINUTE(ENR)
06/06/08 (S) ENR AT 10:00 AM TERRY MILLER GYM
06/06/08 (S) Heard & Held
06/06/08 (S) MINUTE(ENR)
06/07/08 (S) ENR AT 10:00 AM TERRY MILLER GYM
06/07/08 (S) Heard & Held
06/07/08 (S) MINUTE(ENR)
06/08/08 (S) ENR AT 1:00 PM TERRY MILLER GYM
WITNESS REGISTER
TOM IRWIN, Commissioner
Department of Natural Resources
Anchorage, Alaska
POSITION STATEMENT: Presented a summary of the findings and
determination of the TransCanada Alaska Company, LLC
("TransCanada") project.
PATRICK GALVIN, Commissioner
Department of Revenue
Juneau, Alaska
POSITION STATEMENT: Answered questions related to the proposed
TransCanada project during the hearing on HB 3001/SB 3001.
CLARK "CLICK" BISHOP, Commissioner
Department of Labor & Workforce Development
Juneau, Alaska
POSITION STATEMENT: Offered an introduction preceding a
PowerPoint presentation regarding jobs and training related to
the TransCanada project.
GUY BELL, Assistant Commissioner
Director
Central Office
Division of Administrative Services
Department of Labor & Workforce Development
POSITION STATEMENT: Gave the first part of a PowerPoint
presentation regarding jobs and training related to the proposed
TransCanada project.
BRYNN KEITH, Research Chief
Research & Analysis
Central Office
Division of Administrative Services
Department of Labor & Workforce Development
POSITION STATEMENT: Gave the second part of a PowerPoint
presentation regarding jobs and training related to the proposed
TransCanada project.
CONRAD MULLIGAN, Consultant
ARCADIS
Denver, Colorado
POSITION STATEMENT: Presented a PowerPoint on modeling of
short- and long-term employment generated by construction and
operation of an Alaska Natural Gas Pipeline Project.
G. ALLAN VAN FLEET, Attorney
Greenberg Traurig, LLP
Houston, Texas
POSITION STATEMENT: Presented legal issues affecting producer
participation in TransCanada's proposed gasline.
SPENCER HOSIE, Attorney
Hosie McArthur LLP
San Francisco, California
POSITION STATEMENT: Presented legal issues affecting producer
participation in TransCanada's proposed gasline.
ACTION NARRATIVE
CHAIR CHARLIE HUGGINS called the joint meeting of the House
Rules Standing Committee Subcommittee on AGIA and the Senate
Special Committee on Energy to order at 1:06:01 PM.
HB 3001-APPROVING AGIA LICENSE
SB 3001-APPROVING AGIA LICENSE
1:06:59 PM
CHAIR HUGGINS announced the joint committees would commence
today's presentations by hearing an overview from Commissioner
Tom Irwin, followed by an overview of the labor process by
Commissioner Clark Bishop.
1:07:51 PM
COMMISSIONER TOM IRWIN, Department of Natural Resources,
presented a summary of the findings and determination of the
TransCanada Alaska Company ("TransCanada") project. He stated
that it is known that development of Alaska's natural resources
is the cornerstone of the state's economy. The North Slope is a
world-class natural gas basin. He said, "Right now, we're
looking at 224 trillion cubic feet of undiscovered, technically
recoverable reserves, in addition to all the known reserves."
There are significant volumes of natural gas, which Commissioner
Irwin described as "economically clean energy for Alaska, for
the United States, for the world." He said the following
factors are "right": time, quantities, and clean material.
COMMISSIONER IRWIN offered an historical review. In the '70s
and '80s, he relayed, Alaska "worked hard and dreamed of getting
natural gas to market." Considered at the time were an overland
route, an "over-the-head" route from Alaska to Canada, and
liquefied natural gas (LNG). He said, "Frankly, gas prices
stopped it all - drum price." In 1998, he continued, the
Stranded Gas Development Act was passed, which Commissioner
Irwin said was a good Act. At the time, gas was around $2 per
thousand thousand British thermal units (MMBtu). The idea
behind the Act was to work with interested companies to bridge
the economic gap. Five groups submitted applications in 2004,
one group was selected, and, through negotiations, a draft
fiscal contract was released in May of 2006. At the conclusion
of the negotiations, he recalled, the major North Slope
producers essentially committed to only considering a gas
pipeline, in exchange for substantial concessions by the state,
which included: more than $10 billion in future royalty
revenues from the state to the producers on quantifiable losses
of production taxes, and conceding sovereignty of state in
judicial, legislative, and administrative issues. Nothing in
that contract ensured development. By 2006, the price of
natural gas had gone up to $6 per MMBtu - a significant value.
He stated that it seems incredible that gas was at that price,
huge volumes of it were available, there was a market for clean
energy, yet "nothing was moving forward."
COMMISSIONER IRWIN reviewed that the Alaska Gasline Inducement
Act (AGIA) was passed by the Alaska State Legislature in 2007
with a nearly unanimous vote. The purpose of AGIA was to
encourage an expedited construction of a natural gas pipeline
through an open, transparent process that allows competition.
In exchange for commitments required in AGIA, the legislature
offered a package of inducements. The legislature made the
inducements available to an AGIA licensee, if that licensee
would agree to meet the requirements and make the commitments
that the legislature deemed necessary to protect the state's
interest, which Commissioner Irwin said he believes was a wise
decision.
1:12:30 PM
COMMISSIONER IRWIN recollected that in July 2007, when AGIA
became law, the state issued a request for application for a
license to be issued under AGIA. Five applications were
submitted, and only the TransCanada application was found to be
complete. Commissioner Irwin said he and Commissioner Pat
Galvin decided that TransCanada's net present value and
likelihood of success could not be evaluated fairly without also
looking at the LNG option and the BP, ConocoPhillips Alaska,
Inc., Denali projects.
COMMISSIONER IRWIN said technical, legal, commercial, financial,
and hydrocarbon reserves team[s] were formed in order to make
clear, fair evaluations of the projects. He stated that the
teams were counted on to independently review the existing
information and issue an opinion. He emphasized the integrity
and expertise of those involved, and said all the reports are
available to the legislature. He also emphasized that the job
of [the administration] is not just to study all the
information, but to make itself and its consultants available to
each legislator to ensure "right answers" are provided.
1:15:07 PM
COMMISSIONER IRWIN said he and Commissioner Galvin found that
the "path" offered by TransCanada is likely to succeed. That
company presented a work plan that is technically reasonable,
feasible, and specific, he said. The plan would include the use
of technology that TransCanada is currently using to operate
pipelines in climates similar to Alaska's. Regarding the
schedule, he said, "Including the timing of U.S. and Canadian
regulatory approvals is aggressive but reasonable and
appropriate." He stated that TransCanada has the financial
ability to contribute equity to the project, as well as to
obtain the financing necessary for construction. TransCanada
has a strong record of performance in developing other large
projects, and positive records of integrity and business ethics.
Commissioner Irwin said commissioners also considered whether
sufficient natural gas exists on the North Slope to fill the
capacity of TransCanada's proposed pipeline for 25 years.
1:16:18 PM
COMMISSIONER IRWIN relayed that the conclusion made is that
Alaska has enough natural gas resources to fill the TransCanada
pipeline for 25 years and "for decades longer." He added that
this is true even though Point Thompson natural gas may not be
available for any project during its initial years "due to the
area geology." Commissioner Irwin said the state hired
PetroTel, Inc. to do modeling to evaluate what is really going
on at Point Thompson. He said the modeling showed that not only
are there likely several million barrels of liquid condensate at
Point Thompson, but there are also several hundreds of millions
of barrels of oil. He mentioned the way that the Alaska Oil and
Gas Conservation Commission (AOGCC) works, and said, "Any
reasonable state or sovereign would want that recovered first."
Commissioner Irwin said, "What we have been told in the past and
what we know today is significantly different. We have learned
this state needs to continue to understand things from its own
basis." He talked about being honest and letting [the
legislature] know when things have changed. He continued:
Now, let's say we, as a sovereign, said, "We will
waste that energy; we will waste the liquids from the
gas condensate; we will waste the oil; we'll just pull
the gas off." Our problem is this field is called a
retrograde field. [There are] over 10,000 pounds per
square inch pressure. The experts say if we start
dropping that pressure, the liquid condensates start
falling out; we can literally plug the field where
we'll certainly lose the liquids, but we can also
start plugging conductivity so we lose the gas. Point
Thompson is a tremendous area. We have a lot of
liquids. We need to recover them first.
But let me tell you, when that news hit the gasline
team, it was a shock. We immediately thought, "Do we
have a gasline project? What are we going to do?"
And we went back to the modeling. We modeled
different volumes, different timelines, different
scenarios. Our conclusion: we have significant gas
for the producers, for the [federal government], for
the state, and for TC Alaska to make significant money
and to move this project forward.
COMMISSIONER IRWIN said additionally the commissioners
considered the claim by the major North Slope producers that
TransCanada cannot succeed because of the risk that if it builds
a project it would be sued by former partners. He said after
speaking with TransCanada, the commissioners had their own
consultants consider whether this is a legal issue and what the
ramifications might be, including whether or not the issue would
impact financing. The commissioners found that the potential
claims against TransCanada and its affiliates are "extremely
weak," and that the producers have "failed to support their
speculative theory." As a result, the commissioners concluded
that the risk litigation of this issue "does not present the
significant barrier" to the likely success of the TransCanada
project, including its ability to obtain financing.
1:20:59 PM
COMMISSIONER IRWIN stated that the commercial terms proposed by
TransCanada are reasonable. The proposal provides the major
North Slope producers with several significant, commercial
opportunities. He said, "They can construct and own the gas
treatment plant in the North Slope; they can own an equity share
in the TC Alaska pipeline." Although there are project risks,
he noted, none of them are significant enough to outweigh the
TransCanada project's likelihood of success. Natural gas prices
are not likely to climb enough to make the project uneconomic,
he said. Furthermore, he related that the risk that there are
insignificant resources on the North Slope to fill the proposed
pipeline is low. He stated that the commissioners anticipate
that the state's current fiscal structure will allow companies
that develop North Slope gas and transport it on TransCanada's
pipeline to earn a significant profit.
COMMISSIONER IRWIN stated that the TransCanada project is
viable, will provide positive economics to the state and federal
governments, as well as the North Slope producers and
TransCanada, and "is clearly, and in our minds, likely to
succeed." He noted that the legislature has "seen those numbers
through other presentations." To help determine whether
TransCanada's pipeline proposal maximizes benefits and is in the
best interest of the state, the commissioners felt that LNG
project options needed to be evaluated. He noted that later in
the hearing schedule experts would testify. He mentioned the
North Slope, an LNG plant in Valdez, and "the producer plant."
He continued:
Using the same assumptions used to analyze the TC
Alaska project, all LNG project options resulted in
less value to the state and the major North Slope
producers. In cases, it showed clearly economic, but
all cases were less than the North Slope producers'
route.
COMMISSIONER IRWIN said that although an LNG project would be
able to tap the higher prices that are seen in Asian markets,
the LNG projects have significantly higher costs, and thus
result in lower market potential value (MPV) to the state or to
the major North Slope producers. He said he and Commissioner
Galvin did not find comparative benefits in either timing or
costs associated with an LNG project. He highlighted that even
if LNG had demonstrated MPV comparable to that of the
TransCanada project, the LNG projects would still not be
preferable to the TransCanada project. He explained, "Our
analysis reveals that the LNG projects have a much lower
likelihood of success compared to TC Alaska's project." An LNG
project, he continued, will face unique financing and commercial
challenges for several reasons, including the need to negotiate
multiple and concurrent agreements for the purchase, pipe
transport, liquefaction, shipping, "regasification," and the
sale of natural gas. He said LNG also faces significant
challenges, and the North Slope producers have stated clearly
that the Asian market is not their preferred market.
Additionally, the LNG project will face significant risk of not
being permitted to export the gas to its primary market in Asia.
He stated, "That's a clear and evident, real risk, getting that
type of export license, particularly if we don't have energy
going to the United States - to the Lower 48 - first."
1:25:22 PM
COMMISSIONER IRWIN stated that when compared to an exclusive LNG
project, the overland gasline proposed by TransCanada provides
an opportunity for a successful LNG "Y" line. The big line, he
explained, takes care of the upstream gas pipeline plant, as
well as a big line to Delta Junction. He stated, "The door is
wide open to someone who wants to come in and do an LNG
project." The likelihood of success in an LNG project, he
noted, is greatest when it is constructed as a "Y" line.
COMMISSIONER IRWIN stated:
The dynamics of a producer-owned and operated pipeline
are very different, as you've heard in the last few
days, than those of a third party-owned pipeline. An
entity that produces natural gas and owns the
pipeline, like the producer project, earns revenues
through sales of natural gas and shipment of the
natural gas. Such an entity is not necessarily as
driven to keep costs low. We have learned that. We
have learned that all the way through the Supreme
Court. If you own the pipeline and the costs are
high, you pay yourself if you're the upstream
producer. If the upstream producers own the pipeline,
as we have seen, we pay the higher tariff, and we pay
the producer. We've heard about all the exploration
potential. We can get to a point, as you've seen on
the charts: Why would someone come explore in this
state for those type of high tariffs?
COMMISSIONER IRWIN continued:
Consequently, there's a reduced economic driver to
explore for and develop additional resources until
such time in the producer's [emphasis on "producer's"]
mind it is necessary to maintain shipping volumes
through the pipeline.
Now, we heard a bit of talk yesterday about, "Well,
they might want to go bigger; they might want to move
gas from somewhere else in the world and do their part
here later." A pipeline company is in sync with the
goals of the state; it is not necessarily true with a
producer-owned pipeline.
As the state, as I've mentioned, has experienced with
[the Trans-Alaska Pipeline System] (TAPS), combining
pipeline and shipper responsibilities can truly cause
significant harm to the state's interest. This is
significant. For many of the same reasons, the
producer project suffers the risk of being stalled by
anti-trust challenges. It's reality.
COMMISSIONER IRWIN stated that AGIA clearly was not designed to
preclude the major North Slope producers from owning and
operating the natural gas pipeline; its goal was to ensure that
"if they did, they would act like an independent pipeline
company, rather than an integrated gas producer and pipeline
company."
1:28:48 PM
COMMISSIONER IRWIN said, "We were told negotiations of fiscal
conditions were a precondition to moving forward with the
project. What are those conditions? We do know what the
conditions were from stranded gas." He said the administration
chose to continue the competitive AGIA process, in favor of
exclusive negotiations. He suggested the legislators ask
themselves why BP and ConocoPhillips Alaska, Inc. announced the
pursuit of another gas pipeline project, Denali, and to question
the timing of that announcement. He asked, "Why are they
running so many ads to convince the public this is a good
thing?" He asked the legislature to respectfully ask the
following question: "Is their goal to destroy AGIA in the
competition, or is their goal to get gas to market in the favor
of the state's interest?" He said "we" tried to analyze the
Denali plan, using the same "12 pages" that the legislature has
seen. He related that none of the important commercial terms of
the producer plan are defined. Furthermore, unlike TransCanada,
the producer plan makes no enforceable commitments, such as
adhering to a state timeline or achieving additional milestones,
such as applying for a Federal Energy Regulatory Commission
(FERC) certificate. He said there is no information on tariffs,
let alone an enforceable commitment to provide genuine, open
access. He said, "This makes their option, currently presented,
extremely risky for the state. The producer plan was offered
outside the AGIA process and may continue ... parallel to TC
Alaska's efforts. We love it; the competition is great."
COMMISSIONER IRWIN said someone suggested that the state should
save its $500 million, because the producers are going to spend
their $600 [million]-plus and don't need the state's money. He
asked:
Have you ever been around a business that has to make
money - for its board, its stockholders, their
individual pay, their bonuses - that would turn down
$500 million? I would propose that they feel that if
- and I can't speak for them - if AGIA fails, they are
in a position to get much more. But no one would turn
down $500 million.
COMMISSIONER IRWIN said the key is for the state to invest in
its resources and start "moving things forward." He warned the
legislators not to forget history. He stated, "This state
rudely threw out a bunch of companies and negotiated behind
closed doors." Regarding the $500 million, he said an important
factor is risk and reward. He opined that the risk is so small
compared to the reward, which is so huge.
1:32:43 PM
COMMISSIONER IRWIN summarized his presentation, by reviewing the
following points: the TransCanada project is economically
viable, sound, and feasible; TransCanada has a proven track
record; extreme positive economics of TransCanada's project,
combined with the legal and political context, provide favorable
conditions for attracting shipping commitments; and overall the
TransCanada project is likely to succeed. Exclusive LNG
projects do not compete, but a "Y" line is significant and is an
opportunity for the state to "work between market options." He
stated, "The key for adding the real long-term jobs for Alaskans
is a pipeline that encourages exploration and development. The
TransCanada project will not preclude construction of a smaller
pipeline." He stated that if anyone wants to challenge his
numbers, he would encourage them to look at a report by Econ
One, which is available to LB&A.
COMMISSIONER IRWIN said that similar to the failed Stranded Gas
Development Act contract, the producer plan is not guaranteed to
continue to advance the project. He stated that it is his and
Commissioner Galvin's conclusion that "this is clearly a correct
way to go." He encouraged the legislature to consider that this
is the right thing to do for the state.
1:34:55 PM
COMMISSIONER IRWIN stated that ultimately the matter comes down
to a decision of "yes" or "no." He continued:
Here's what you get with "yes": a company that I
believe is the best in Northern America doing
pipelines. It's a company that works with these other
companies every day; they know how to get gas into
their pipeline. And remember Mr. Palmer saying, "We
don't own any gas, and yet we have 36,000 miles of
pipeline." We get a premier company in North America.
We get firm timelines to open season; we get firm
timelines to FERC certification. We are clearly
moving forward. Now, when Alaska makes a new law, and
in effect, by saying yes, you have told the whole
world, "Alaska is now going to protect open access,"
companies adjust, companies understand. But until you
do that, they will rather defeat AGIA, because then
you get to the no answer.
What happens if it's "no?" In simple terms, last week
I said, "They own us." That's what you get if you say
no. We will wait and hope they do something, but
understand ... they're not here because they love
Alaska. They're here to make money. And they will
look worldwide at their decisions. Alaska, it's okay
to stand up for what's right for Alaska - it's
business. We have a clear path. But "no" means we're
subservient to them; they own us.
COMMISSIONER IRWIN expressed appreciation for the time the
legislature is giving to this matter.
1:36:54 PM
CHAIR HUGGINS noted that he did ask one of the proposers of the
aforementioned Denali project "why they were doing that," and
their answer simply was, "The price of gas." He stated that it
appears that in talking with some of the consultants that no
matter what the scenario, "the price of gas is the variable that
is the most different."
1:37:24 PM
REPRESENTATIVE FAIRCLOUGH stated that she is present to listen
to facts and figures in order to make a successful decision on
moving a project forward. She said she wants to know why the
Monte Carlo approach was chosen over the Wood Mackenzie report
if "best practice" is involved, and whether the Wood Mackenzie
report "was not using as safe type of criteria."
COMMISSIONER IRWIN said the administration's consultants are
qualified to answer that question and could address it during
their upcoming testimony.
REPRESENTATIVE FAIRCLOUGH indicated that [the legislature] was
told during this special session that the administration gave
TransCanada a 1 [to] 2 percent inflation factor, but in
Anchorage, the administration's consultants spoke of a 4 percent
cost inflation factor. She questioned the discrepancy.
COMMISSION IRWIN explained that the administration asked
TransCanada for specifics in order to compare one project to
another "on the same basis." He continued:
When we went to our consultants, we wanted to expand
that analysis for huge ranges, so in a Monte Carlo
system we can see the variances of best-case/worst-
case, and there's hundreds of items - maybe thousands
of items - that have to be evaluated. We wanted to
check all the permutations, combinations of best-
case/worst-case, and that's what a Monte Carlo system
allows you to do. One was to compare applicants; the
other was we didn't, frankly -- let me put it this
way: trust and verify. We're learning as a state, no
matter what you're told, trust and verify, and that's
why the significant difference with our consultants.
1:40:52 PM
PATRICK GALVIN, Commissioner, Department of Revenue, expanded
upon Commissioner Irwin's response by noting that the
assumptions that TransCanada used in its application were the
same assumptions used by all the applicants. The reason, he
said, is because [the administration] asked the applicants to do
"a project planning effort" - to identify what their costs were
according to a single point assumption given to them by the
administration. He explained that the administration was not
asking its experts to determine what gas would cost on a
particular day and determine the economics from that, but rather
"to look at the sensitivities across a number of these
variables." He said the administration was trying to convey the
range of possibility to the legislature. The consultants
present the "mid-case" and then "explain the sensitivities
around that."
1:42:53 PM
REPRESENTATIVE FAIRCLOUGH said she understands the
sensitivities, but she stated concern that the public may not,
through the media, get an in-depth definition of a 4 percent
cost inflation factor versus a 1 percent cost inflation factor.
She said the legislature also has the understanding that
construction costs have been rising at close to 30 percent every
year for the last four years. She said, "As you're turning
those toggles, we need a sense of reality on where the gas is
coming from."
REPRESENTATIVE FAIRCLOUGH asked whether the commissioners have
sent a letter of inquiry to the Alaska Oil and Gas Conservation
Commission (AOGCC) about "what could be extracted off of Prudhoe
Bay," and whether there is an answer related to the 2.5 billion
cubic feet (bcf) amount that was "presented in Anchorage as a
way to make this project successful."
COMMISSIONER IRWIN responded as follows:
We have asked, and that is not complete, but from all
of the information we have: Point Thompson ... will
be out for years; Prudhoe Bay will be available for
draw down. ... All of our expert advise we've been
given is: we have the gas resources to make this
project happen.
REPRESENTATIVE FAIRCLOUGH noted that Commissioner Irwin has had
the TransCanada application in his possession since November,
and she asked him when he asked AOGCC "how much you could draw
down for your economic analysis."
COMMISSIONER IRWIN said he does not have that information at
hand.
COMMISSIONER GALVIN stated his belief that the inquiry was
started a year ago, after the AGIA bill passed, because at that
time, the issue had surfaced regarding potential off-take.
Continual efforts have been made to "try to refine that." He
said the issue faced by all is the fact that AOGCC doesn't
operate along the decision-making framework where it chooses
what the off-take should be; it is an adjudicatory body that
merely grants a yes or no to requests that may come in. He
continued:
And so, the exercise that they've been sort of
undertaking is providing us with ... the range of what
they think may be within the possibility of what might
get a yes vote, but it would be based upon the request
and the data that would be presented.
... Kathy Forrester, I think the current chairman of
AOGCC, has spoken publicly about ... her comfort level
with discussion of an off-take in the 3.5 range that
we discuss in our finding. And so, that's, I think,
the furthest AOGCC is likely to go before they get an
actual application.
COMMISSION IRWIN added that the producers, with their proposal,
certainly feel comfortable that they can move forward.
Furthermore, TransCanada really understands "this information"
and feels comfortable to move forward. He stated, "When it
comes close to a gasline really moving forward, the exploration
we'll have in this state will significantly increase gas
availability." He named the Wyoming and British Columbia charts
as examples of that growth. He added, "And don't forget, most
of our gas is found in oil basins, not in the gas basins."
1:47:09 PM
REPRESENTATIVE FAIRCLOUGH said she is trying to make an
evaluation on the licensee before the legislature. She said
although she can appreciate hearing about the readiness of
producers, the purpose of the legislature currently is to find
out why the administration is supporting [TransCanada]. She
said TransCanada has convinced her that it is qualified to
undertake a gasline project. Additionally, she said, the
administration has convinced her that a $10 billion liability is
a remote possibility. She clarified, "But what I don't want to
hear is spin - telling me where product is available." She
indicated having been told by Ms. Forrester that AOGCC was
"getting ready to retract a previous statement that they had gas
available." She continued:
Again, I just would ask everyone who's presenting to
talk about the project that's before us and not
throwing darts at a project that we don't know
anything about, as has been said by the producers. I
don't care why the producers are moving a project
forward; I care that this administration is saying,
"This is the next step for Alaska." And I want to, on
behalf of the people that have chosen to put me in my
seat, ... make the best decision possible for Alaska.
And so, it is important whether we have gas on the
line to go into the line. ... I'm not trying to be
disrespectful; I want to be able to push the green
button and vote yes for what you're presenting, but
please tell me why we have gas from our position going
forward and not about other people's.
1:49:08 PM
COMMISSIONER IRWIN expressed appreciation of Representative
Fairclough's study of the issue and her desire for Alaskan's to
hear the facts. He said his intent was not to convey "spin,"
but to convey, from his position, why he feels Alaska has enough
gas. He explained that he shared other issues that he and
Commissioner Galvin had to address in getting to their present
position, because he thinks not talking about why they don't
think the Denali project is better or mentioning LNG would be
hiding information from the legislature.
1:50:27 PM
CHAIR HUGGINS requested that Commissioner Irwin provide a visual
aid that shows risk allocation related to the TransCanada
project timeline and decision-making process, and to include
downsides or conflicts, not just "the positives."
1:52:09 PM
COMMISSIONER IRWIN said he thinks he can readily do that with
the information at hand.
CHAIR HUGGINS clarified for those listening that he is
requesting from the commissioner an overview of risk allocation
and "where you allocated those in your consideration," and is
requesting that the commissioner "reemphasize that as we go
through the points in the documents."
1:53:34 PM
SENATOR STEDMAN said there was a reference made - not only by
Commissioner Irwin today, but by other presenters in the last
couple days - to $10 billion "on gives from the state to the
major oil producers under the previous administration's proposal
in the Stranded Gas Act." He recalled that quite a bit of that
calculation had to do with a 20 percent capital credit. He
asked if that is correct.
1:54:34 PM
COMMISSIONER IRWIN responded that "all of those numbers are
defined in" the Econ One report. He said he remembers the
amount of $10 billion specifically, "because when we calculated
ourselves we came up with $13 billion, but we chose to go with
Econ One."
1:55:02 PM
COMMISSIONER GALVIN offered further information:
Econ One, at the time, as they are now, was working
for the legislature and [on] the legislative analysis
of that contract. And that was the number that they
came up with, in terms of the value of the project
under the existing scenario versus the value of the
project under what was proposed in the contract.
1:55:26 PM
SENATOR STEDMAN reiterated that part of that calculation had to
do with a 20 percent capital credit, which he noted is in place
currently. He remarked, "So, ... I'm not quite sure that a
tight parallel with those numbers to what we're dealing with
today is even a legitimate issue to have."
COMMISSIONER GALVIN said he agrees with Senator Stedman that "it
does change when you compare it with where we are today." He
continued:
Because when we look at the issue today, what we
recognize is that under that analysis there actually
was a gas production tax that was based on a gross
rate ... in the neighborhood of, I think, 7 percent.
If you compare that to, for example, the ACES end
result, you're going to end up with probably a larger
cost that would be associated with the Stranded Gas
contract from what we have in place today than the $10
billion. And we wanted to use the $10 billion just
because it was the number from ... that particular
time, based on legislative consultants.
SENATOR STEDMAN, regarding the last administration's dealing
behind closed doors, recollected, "The Stranded Gas Act was set
up to do just that - to get a stranded gas basin and oil basin
open."
COMMISSIONER IRWIN told Senator Stedman he is correct.
1:57:02 PM
SENATOR STEDMAN, regarding FERC, recollected that there had been
a reference to TAPS. He said a majority of legislators feel
that it would have been nice if the state had been in a better
position dealing with TAPS over the years, because there are
concerns regarding the tariff. He said, "We all understand:
the higher the tariff [is], the lower our net back to us as a
state [will be]." He asked, "How correlated is the gasline to
oil line in dealing with access issues?"
COMMISSIONER IRWIN replied that the two are not regulated the
same; "one is common carrier and one is a contract carriage."
SENATOR STEDMAN asked if that is a substantial difference, one
that the legislature should tune in and pay attention to, or if
it is just a minor technicality, in which case the legislature
could only have TAPS to think about.
COMMISSIONER IRWIN responded as follows:
It's actually much more important, in my mind, for a
pipeline - in the gasline. In an oil line, ... if the
line is full, room can be made for others on a
proportional basis. On a gasline, when it's full,
room isn't made for the new individuals. So, that's a
critical step.
The reason I referenced TAPS is because of the cost of
the tariff, also. Getting into the line, if it's
full, is one major issue for our future gas
exploration, but also, the value of what it's costing
to put gas down the line. And this, here, is now a
similar circumstance: If you have an upstream
producer who owns ... an oil line, and if you have an
upstream producer who owns a gasline, they are not
incented, as a pipeline company, to keep low tariffs,
because at the end of the year, the extra tariffs they
paid go back ... to the producers. If it's a pipeline
company, their incentive [is] to keep it low for new
exploration.
SENATOR STEDMAN offered his understanding that this matter would
be covered in a few days by means of representation of FERC. He
indicated that future discussion would attempt to answer why,
for example, ExxonMobil Corporation does not "own all the
pipelines in the world if it's such a sweet deal." He said it
is his impression that mid-stream players like TransCanada
concentrate in building and managing gaslines in a regulated
return environment, while other companies - for instance, BP or
ConocoPhillips Alaska, Inc. - enjoy the arena of unregulated
returns and seek higher rates of return than they would get in
an unregulated pipeline.
2:00:45 PM
COMMISSIONER IRWIN echoed Senator Stedman's remarks that a
company like ExxonMobil Corporation - one that is so capable of
making money - most likely chooses not to do small projects or
projects with low rates of return, because it can invest its
money other places to get a much higher return.
2:01:23 PM
SENATOR STEDMAN recalled that Commissioner Irwin had warned that
if the legislature does not adopt the proposal before them, the
three major companies - ExxonMobil Corporation, BP, and
ConocoPhillips Alaska, Inc. - will, in affect, own "us," and
that subsequently he had said the state would be subservient to
those companies. He stated that he personally does not agree
with that sentiment. He said he has "two oil people" in his
entire district.
COMMISSIONER IRWIN clarified that he is not talking about any
individual legislator, but rather is talking about the state.
He said the state knows that its oil production is declining.
He predicted that Alaska, as a state, is going to become
increasingly desperate to figure out how to pay its bills. He
emphasized:
When you're in a desperate situation, and someone
comes to you and says, "I will get your gas to market,
but you need to help me," you're position at that time
is much, much harder than it is today with the
competition we're seeing.
2:04:03 PM
SENATOR STEDMAN issued a reminder that roughly half of the
state's tax is coming from progressivity, "... which the last
administration didn't like, and the current administration
wanted to lower." The legislature is the entity that stood up
for [progressivity].
2:05:00 PM
REPRESENTATIVE ROSES, regarding Commissioner Irwin's previous
description of what the state would get by saying yes versus no,
asked what the state would gain or lose if, should it vote yes,
TransCanada subsequently is not able to get firm commitments and
says no to the state.
2:05:41 PM
COMMISSIONER IRWIN responded, "That is why we felt so firm in
AGIA that we develop past open season toward certification." He
offered further details, concluding that it is obviously the
choice of the company, but he thinks rational companies will
participate.
2:08:10 PM
REPRESENTATIVE ROSES said he would like Commissioner Irwin to
state for the public's benefit, what Alaska may stand to lose if
TransCanada says no.
COMMISSIONER IRWIN said the biggest risk would be if Alaska
bails on TransCanada, in which case it risks $875 million.
Furthermore, he said, the state would lose an open-access
pipeline and basin, which he said would be a tremendous loss.
REPRESENTATIVE ROSES noted that Commissioner Irwin had said he
is "relatively comfortable that they are going to come to an
open season and that they will make a commitment." Regarding
that commitment, he recollected discussions related to AOGCC -
that "what they recommend be taken off" has a direct impact on
whether or not the pipe will be built. The amount of bcf
determines not only financial success and the viability of
investment, but also has a direct impact on "whether or not
they're going to be able to get the financing in order to be
able to do the project." He said he heard Commissioner Irwin
say this morning that he is not considering the undiscovered gas
that will be brought on through new exploration. He asked, "How
is TransCanada going to be able to take that unexplored,
undeveloped, unfound gas when they go to try to get money to
finance this pipeline? That's a speculative issue; that's not a
firm commitment."
COMMISSIONER IRWIN responded that because of the potential in
the basin, and in addition to the large known reserves, "their
board has made the decision, based on significant spending, that
it's worth the risk to be here." He continued:
I think it's important to note that we have asked for
and have the money - through the governor's request
through the legislature - that we will also be
modeling Prudhoe Bay as we did Point Thompson. We
need to know, and we're pursuing, those issues, but to
the very best knowledge of our team - the experts - we
feel ... TransCanada is voting - with their talent and
with their money that they also could go elsewhere
with - ... that it's worth being here and it's worth
taking that risk.
REPRESENTATIVE ROSES said the legislature has heard repeatedly
that what drives the economics is the commitment; therefore, if
there is a lower commitment than anticipated, the only way to
build capacity is through "the proposition of the undiscovered
gas being put into that pipeline." He asked how much the
economic specialists with whom the administration has held
discussions are willing to finance based on speculation on what
may be put in the line.
COMMISSIONER IRWIN replied that the determination was that "it
can be financed."
COMMISSIONER GALVIN said this issue is one that has been
discussed in relation to Point Thompson, as well as both the
off-take and total reserve at Prudhoe Bay. A 4 bcf line,
financed over 25 years, results in 40-50 tcf, "whether you're 4
or 4.5." He asked, "We only have 24 known in Prudhoe and 5 or 6
outside of that - outside of Point Thompson - where's the rest
of the gas? Are these guys ... betting on the come?" He said
the answer to that is yes - "if they want to assume maximum
profit." He described a scenario in which no additional gas is
found or nobody else finds additional gas that "they can sell
their capacity to," and "they end up with unused capacity as the
Prudhoe Bay production ends up going through its normal
decline." He concluded, "They'll still make sufficient profits
on this to justify making that investment, even if they do not
find any additional gas." Commissioner Galvin said that was a
significant finding.
REPRESENTATIVE ROSES said he is glad Commissioner Galvin brought
up the Point Thompson issue, because he thinks it shows how
"that point and that field plays into all of this."
COMMISSIONER IRWIN said the administration was very surprised to
discover how economic the gas at Prudhoe Bay is, but he
explained that it makes sense because so much of the development
is there already. He said he suspects that when individual
companies, such as TransCanada and others "look at that," they
know "there's a real strong foundation to make those risk
decisions."
2:15:43 PM
COMMISSIONER GALVIN, in response to Representative Roses'
previous question regarding what the risk to the state would be
if, during open season, TransCanada decides it will walk away,
offered two answers. The first answer would be determined by
answering what the obligations are that TransCanada's making in
its application and what remedies are available to the state if
that company should breach those obligations. If that should
happen, he said, the state would get back not only all its
money, but also all the work product the company provided, and
it would be able to "pursue other remedies available at law for
damages and breach of contract." Second, as Commissioner Irwin
pointed out, TransCanada has significant commercial interest in
participating in the project that would continue to "drive them
to live up to their obligations."
COMMISSIONER GALVIN, regarding financial risk exposure, said if
the state wanted to "jump off of the AGIA track ... and go in a
different direction," it is important to recognize that treble
damage exposure will grow only as the expenditures that are
actually made to the project grow. He continued:
Given that it's tied to the TC Alaska expenditure
separate from what the state reimburses them for, and
after an open season, as it has been discussed, the
expenditure profile changes to 90 percent state/10
percent TC Alaska. But that treble damages exposure
goes down as well; they're expending much slower. ...
At the end of the day ... [when] we get the first
certificate and all the money's been expended by both
the state and TC Alaska, ... the total exposure to the
state, including the $500 million, plus the treble
damages, is ... $875 [million]. But ... when we get
to an open season, at that particular point in time
the state will have expended our ... $42 million, half
of the $84 [million] that's been projected, the costs
to get to that point, and our treble damage exposure's
been three times the 42. And so, our total exposure
at that point is $166 million across the board.
That's everything. That's our investment; that's our
contribution and our treble damage amount. So, I
think it's important for the folks at home and
legislators here to understand that we don't
immediately get on the hook for our $500 million, plus
some calculation of three times the same amount.
2:18:57 PM
REPRESENTATIVE ROSES offered his understanding that in the event
that TransCanada withdrew, the state would be reimbursed by the
company only if a mediator determined that the project was
economic and thus the company should not have been allowed to
back out of the contract.
COMMISSIONER GALVIN confirmed that is correct. He said a year
ago there was much debate to determine when a project would be
deemed uneconomic. Various factors go into the determination.
He stated, "The world would have to change dramatically in order
for them to conclude that this project is uneconomic." He
clarified that if, during the open season, TransCanada were to
conclude that the project was uneconomic, then the State of
Alaska would have to seriously consider the project as worth
pursuing.
REPRESENTATIVE ROSES stated:
The amount of commitment you get for the gas is going
to determine whether or not they get the financing;
whether or not they get the financing and how much
risk is involved determines the interest rate that
they're going to have to pay on that money. So, even
though you say that you're going to have people out
there that are willing to finance on the speculation,
the more speculative it is, the higher the interest;
the higher the interest, the higher the cost; the
higher the cost, the less economic it becomes. So,
this is all tied together. So, when people in the
audience hear us talking about whether or not ...
companies will commit, how much gas is available from
the North Slope - with or without Point Thompson, how
much we're going to have to depend on that speculation
drilling to be able to fill that pipe, it's all tied
to the economics which drive whether or not this is
going to be a pipeline that will succeed or a pipeline
that will fail. All of those dynamics play together;
even though they appear to be separate issues, they
aren't.
COMMISSIONER IRWIN said Representative Roses is absolutely
correct. He continued:
I took the top number that were at risk. Pat
mentioned 166. This depends on spending rate,
obviously. We hope it goes faster, ... but on what we
anticipate, that 166 goes to 2007. The next year,
376. I should round these off in big quantities:
550, 725, and the 873.60 I round off to 875. So, that
gives you an idea as you're asking the progression on
it.
COMMISSIONER GALVIN clarified that the information Commissioner
Irwin was citing was from slide 38 of the commissioners'
findings packet distributed a couple days ago.
2:22:54 PM
REPRESENTATIVE GARA expressed concern that in waiting until the
end of the 60 days of the combined special sessions, the
legislature may delay the start of a gasline. He asked the
commissioners by which date the legislature would need to vote
in order not to miss another field season.
COMMISSIONER GALVIN noted that two days ago, Tony Palmer had
"put the schedule that's in his application out 10 months,"
because of the trade-off of the lost summer schedule from April
to August. He relayed that yesterday morning Mr. Palmer said
that if the decision was made in July, that would save time. He
said Mr. Palmer's knowing now that a decision will be made in
July is much more valuable than knowing on July 1 that a
decision is going to be made that day.
COMMISSIONER IRWIN added, "We will also take that opportunity to
work with TransCanada and reaffirm with Mr. Palmer so he can
also speak for his company."
REPRESENTATIVE GARA requested a follow-up in writing from the
commissioners showing the following: when a vote would save
time, how much time might be saved, and "when knowing when that
vote's going to be would also help." He said then the
legislature can make a decision, and he would be encouraging
that decision to happen sooner than later.
2:26:19 PM
CHAIR HUGGINS asked the commissioners for the original objective
the administration had in bringing its proposal to the
legislature, and when that actually happened. He explained that
he would like to "see what's happened to the timeline."
COMMISSIONER IRWIN said he believes the date was in April. He
continued:
Understand when we had the issue of determining the
LNG contract was not complete, we understood we would
be delaying the project or the timelines, but we just
determined it was absolutely critical before we could
come to the legislature and to Alaskans and say we
made a determination without evaluating the LNG
options. We felt it was appropriate to do that, and
it also required time.
2:27:24 PM
SENATOR GREEN stated that she does want anyone to think the
legislature would in any way delay hearings. She suggested that
if anyone is to be blamed, it could be the process and
extensions on various dates. She opined that the legislature
has been forthright in the amount of time taken for its
hearings. She indicated that information requested by the
legislature was never received. She stated, "So, I don't think
we're at a point where we need to expedite our hearings in light
of the schedule we've been placed on." She said she thinks the
legislature's reason for having these hearings is not only to
get the legislators up to speed on this issue, but also to
ensure that the public has access to all the information
available, as well as the opportunity to testify and ask
questions.
2:28:30 PM
SENATOR FRENCH, regarding gas ownership, said he knows a lot of
Alaskans believe that choosing TransCanada as a pipeline builder
is a bad idea, because the company does not own any gas. He
said he would like to know how many miles of existing pipelines
were built by resource owners versus pipeline companies, and
whether higher gas prices shift the balance and make pipeline
construction and ownership more attractive to a resource owner,
or whether the regulated rates of return always serve as a
disincentive to a production and exploration company when it
comes to building pipelines.
SENATOR FRENCH stated that the North Slope is a separate and
isolated basin. He asked:
How will the fact that there will ultimately probably
only be one tube of steel - one gas pipeline - coming
out of that basin to bring that gas to market ... lead
to anti-trust problems should the producers elect to
build the pipeline ..., particularly given that
they've chosen to operate outside the framework of
AGIA?
SENATOR FRENCH said he would like the answer to that question
made available to everybody present.
COMMISSIONER GALVIN said Senator French's first set of questions
would be answered by "the folks who are actually in the pipeline
business," while his anti-trust questions would be answered by
the administration's legal counsel.
2:30:50 PM
SENATOR WIELECHOWSKI, regarding availability of gas and gas off-
take, asked the commissioners if they put any weight in the fact
that the producers put in a bid under the Stranded Gas Act and
are now preparing their Denali project, which is similar to the
bill before the joint committees. He asked if that gives the
administration any sort of confidence that there is enough gas
and gas off-take available.
COMMISSIONER IRWIN said it gives him a lot of confidence. He
said he takes comfort in seeing a company like TransCanada
looking at this proposal and being willing to take such risks
itself after have its board discuss the issues at great length.
Furthermore experts involved with the United States Geological
Survey (USGS), from the Division of Geological & Geophysical
Services (DGGS), and some company representatives are saying
huge gas amounts are available.
2:32:28 PM
CHAIR HUGGINS stated that in the request for application (RFA)
is a sentence that read: "The provisions of the license may not
be explained, supplemented, or qualified through parallel
evidence."
CHAIR HUGGINS said that after a break he would like Commissioner
Galvin to explain what that sentence means and what effect it
has on what the legislature is doing here today.
The committee took an at-ease from 2:33:04 PM to 2:52:47 PM.
CHAIR HUGGINS noted that Commissioner Galvin had asked during
the break to defer answering Chair Huggins' question.
CHAIR HUGGINS announced that the joint committee would hear next
from Commissioner Clark Bishop.
2:53:19 PM
CLARK "CLICK" BISHOP, Commissioner, Department of Labor &
Workforce Development, offered an introduction preceding a
PowerPoint presentation regarding jobs and training related to
the TransCanada project. He spoke of his experience in his
field. He noted that when AGIA was passed, AS 43.90.470
mandated that a workforce must be trained. He stated that he
brought together industry, labor, education, state government,
and federal government to pull a training plan together that was
presented to the legislature in February. That is phase one.
Phase two, he explained, is the project implementation by
schedule/time and by strategy. Phase three, yet to be
completed, will be training capacity throughout the state.
Phase three, he indicated, will help identify training centers
and define "what their exact training capacity is for a very
specific area of expertise."
COMMISSIONER BISHOP announced that another thing that is being
done inside the AGIA training plan is the integration of
training programs. He said he is accomplishing this task by
bringing training providers together in the state that have
never communicated with each other. He said it will take
everybody pulling together in a unified front to accomplish the
mission of having the best educated, best trained workforce in
the state. He concluded, "I can't do it alone; I need your
help; I need everybody's help to pull this assignment off."
2:57:02 PM
GUY BELL, Assistant Commissioner, Director, Central Office,
Division of Administrative Services, Department of Labor &
Workforce Development (DLWD), gave the first part of a
PowerPoint presentation regarding jobs and training related to
the proposed TransCanada project.. He stated that the workforce
goal for AGIA is: "a trained and available workforce for gas
pipeline-related occupations." He relayed that with the help of
the steering committee and the research and analysis section,
the department identified 113 occupations that are the focus for
the gas pipeline training plan.
MR. BELL described the workforce development process, as shown
on slide 4 of the PowerPoint presentation. He said the first
step is to identify "skills gaps," which are occupations for
which there are no Alaska workers available. He said Brynn
Keith would expound on that issue. He said the department makes
efforts to minimize those gaps by various means, including:
awareness; effective labor exchange, including web-based
services and the job center network; and making training
services accessible and affordable.
MR. BELL directed attention to slide 5, "Training System at a
Glance," which he described as a collaborative, dynamic system."
He said that as Commissioner Bishop noted, it takes a number of
partners to develop a workforce, starting with partners involved
in the secondary education system and proceeding into the
postsecondary education system, and including those in
employment services. Often, he said, workers find it necessary
to return to postsecondary training in order to enhance their
skills while they are working.
MR. BELL turned to slide 6, which address "Challenges."
Economic cycles are one challenge. While Alaska has had 20
years of consecutive and steady employment growth, he said,
there has been significant fluctuation within industries during
that period. Another challenge is the ebb and flow of workers.
Mr. Bell reported that 70,000 people move in and out of Alaska
each year. 113,000 Alaskans are Baby Boomers, ages 51-65, and
will begin leaving the workforce, while 11,000 Alaskans turn 18
each year - an indicator of the number of people entering the
workforce. A third challenge is basic awareness, the
understanding of the jobs available, not just professional but
significant opportunities in blue collar jobs, as well. A
fourth challenge is the cost and accessibility of training. The
last challenge relates to job barriers. For example, employees
need to be drug-free, often a driver's license is required,
basic skills are necessary to be employable, and certification
needs to be meaningful and transferrable.
3:00:17 PM
MR. BELL noted that Commissioner Bishop had mentioned the AGIA
training plan, which was derived with the assistance of a high-
level steering committee; phases one and two of which have
effectively been completed. He referred to information on
slides 7-11 of the PowerPoint, which addresses and describes the
"Four AGIA Strategies." The first strategy, he noted, is to
increase awareness of and access to careers in natural resource
development. The second strategy, he said, is to improve the
career and technical education system. Regarding the second
strategy, Mr. Bell said the state needs to do the following:
ensure that by the time Alaska's students graduate from high
school, they are "work ready," with a career plan, and basic
employability skills, as well as applied skills in math,
reading, and locating information; improve vocational technical
education opportunities, to add basic skill development; and to
work towards "comprehensive and consistent industry skill
standards to guide training entities, so that students have the
skills to enter employment once they exit training." He noted
that there is a program that is funded this year and next, which
offers basic skills training in the construction industry to in-
school and out-of-school youth and adults.
MR. BELL said the third strategy is to increase registered
apprenticeships and on-the-job training opportunities.
Registered apprenticeship offers a program of work and training,
which leads to a skilled and high-paying career. The
[department] is working with employers and - through the
educational process - workers around the state to meet the goal
of the third strategy. He said, "We do offer financial support
for training, as well as partial payment of wages, subject to
agreement by employers, to train and retain workers." The
department measures the outcomes. Those measurements include
the number of people who successfully complete training and pre-
and post-training wages. The fourth strategy, Mr. Bell said, is
"to increase training for operations, technical, and management
workers." He shared that another success story was the almost
doubling in size of the engineering program at the University of
Alaska, thanks to funding from the legislature. Mr. Bell said
other goals toward meeting strategy number four are to do a
better job of recruiting Alaskans to high skill training
opportunities and to focus on the state's incumbent workers to
ensure they have the opportunity to access training for
advancement opportunities, as well as to keep pace with
technological change.
3:03:35 PM
BRYNN KEITH, Research Chief, Research & Analysis, Central
Office, Division of Administrative Services, Department of Labor
& Workforce Development (DLWD), gave the second part of a
PowerPoint presentation regarding jobs and training related to
the proposed TransCanada project. She stated that the
department's charge, as it relates to the AGIA project, is to
quantify employment needs. She addressed the issue of focus, as
shown beginning on slide 12 of the PowerPoint presentation. She
said because it is too early in the process for Research &
Analysis to develop solid employment estimates for the gasline
project, the department has focused its research efforts on
identifying preliminary measures of current and possible skills
gaps, as they relate to both the gas line and the economy.
MS. KEITH said that, as shown on slide 13, the department,
working with industry partners, identified 113 AGIA occupations,
which ranged from those working in the camps, on logistics,
safety, or craft, and those operating equipment. The department
used a great deal of existing data received from employers
around the state, based on unemployment insurance, quarterly
reports, and annual employer surveys. Furthermore, it
considered data derived from the permanent fund dividend (PFD)
to the potential skill sets of individuals in the labor market.
As shown on slide 14, Ms. Keith said to determine the current
gap, the department looked at the number of nonresidents in
Alaska's labor market. She said there are a lot of reasons an
employer would hire a non-Alaskan, but one of the primary ones
is the lack of a locally available skilled workforce. She noted
that in 2006, over 16 percent of workers were nonresidents of
the state, which represents a significant opportunity loss for
Alaskans. The future gap, she said, is much more difficult to
quantify. She said one factor that can be considered is the age
of the incumbent workforce, on the assumption that as workers
age they will need to be replaced. Again, looking at the
figures from 2006, she noted, more than 37 percent of
individuals working in AGIA occupations were 45 years old or
older.
3:06:48 PM
REPRESENTATIVE GRUENBERG asked what percentage of the 37 percent
is included within the 16 percent. He clarified that he wants
to know whether a majority of the older people are Alaskans or
nonresidents.
MS. KEITH said she does not have that statistic at hand.
Notwithstanding that, she said younger workers tend to move;
therefore, generally speaking, a higher percentage of the
nonresidents would be in the younger age groups. In response to
a request from Representative Gruenberg, she agreed to provide
that information in writing to the members.
MS. KEITH turned to slide 15, which lists seven of the core
occupations involved in the gasline project, and "arrayed the
data that we've been discussing for the last couple of slides."
She said she used the PFD definition to determine whether or not
an individual is a resident, which is a restrictive definition
of residency. The column referring to worker age is taken from
2006, as previously noted. The hourly wage data shown on slide
15 was gleaned from surveys produced with Alaska employers
annually. The occupations listed range from relatively highly
skilled, to very skilled, to high wage. She noted that the
reason there is no wage listed for surveyors in 2007 is because
the survey response was not adequate; however, she noted that
the 2006 wage was approximately $28.00 per hour. In terms of
nonresident workers, Ms. Keith said an interesting point is that
Alaska has always borrowed or stolen workers from the Lower 48
when needed, whether it is due to the seasonality of its labor
market or employment growth needs. However, the aging of the
state's workforce is not a problem unique to Alaska, but rather
is a national and global occurrence. She said that depending on
what goes on in the economic scene, globally and nationally,
Alaska may find it much more difficult to meet the state's labor
needs by recruiting workers from out of the state or country.
She said that indicates a need for Alaska "to grow our own."
Assuring that Alaskans have the skills needed for the
occupations not only helps residents find good career options
and make a living wage, but ensures, to some degree, that the
needs of Alaska's employers are being met.
CHAIR HUGGINS said there are multiple engineers concerned that
the state currently has an initiative to modify the licensing of
Canadian engineers to operate in Alaska, but without
reciprocity. He asked what the status is of that initiative.
MS. KEITH said she does not know the status of that initiative.
She said she could try to get the information, but explained
that that is something her office does not follow.
3:10:33 PM
CONRAD MULLIGAN, Consultant, ARCADIS, presented a PowerPoint on
modeling of short- and long-term employment generated by
construction and operation of an Alaska Natural Gas Pipeline
Project. He relayed that ARCADIS was asked to complete a
modeling exercise to determine short- and long-term employment
impacts of the construction and operation of a natural gas
pipeline project in Alaska. He pointed out that any time he
references the pipeline, he will be referring to the 48-inch
pipe or larger pipe and not a bullet line within the state. He
offered that the figures are those generated by ARCADIS and not
DLWD. He opined that this early in the process it is difficult
to generate employment figures for a project of this size that
will not start for several years. Thus, he stated that the
figures he is providing are estimates and not "by any stretch of
the imagination, an exact number."
MR. MULLIGAN, in response to a question by Chair Huggins,
explained that ARCADIS is neither an acronym nor an
abbreviation. He offered his belief that ARCADIS is derived
from the Greek name, "Arcadia," which is a place in Greek
mythology in which earth and water were in harmony and balance.
He stated that ARCADIS is an engineering consulting firm.
MR. MULLIGAN referred to slide 2 and stated that ARCADIS
projected employment for the following three phases: the
construction phase of the pipeline, including the installation
of compressor stations, the gas treatment plant, and LNG
facility; the operation phase; and the exploration and
development phase, to include work on the North Slope that would
be spurred by the operation of a natural gas pipeline. He
referred to slide 3, labeled "Sources of Data/Model Used," and
reviewed the sources of its data. He stated that ARCADIS used
information from TransCanada's AGIA application, from the
state's consultants, and from the state Division of Oil and Gas.
He noted that the model used is called "Implan" and was
originally developed by the U.S. Forest Service, which has since
been privatized.
3:14:34 PM
MR. MULLIGAN stated that "Implan" is a cost-driven model that
uses Alaska-specific labor factors. Thus, it did not rely on
information from the Lower 48 to assist in generating its
figures.
MR. MULLIGAN referred to slide 4, labeled "Construction Phase
Assumptions," and reviewed his assumptions. He stated his
assumption that the gas treatment plants in Prudhoe Bay and any
LNG facility would be constructed outside the state and sea-
lifted in, and that major equipment and materials would be
purchased outside the state, primarily to eliminate any chances
for "shadow" or "false returns" on large expenditures for items
such as turbines and the pipe itself. He highlighted that the
labor force for construction of an LNG facility in Valdez would
be constrained by the size of the camp that could be installed
in Valdez, since the area is a geographically limited area. He
referred to slide 5, labeled, "Construction Phase Employment
Results," and stated that any natural gas pipeline project will
create thousands of short-term jobs throughout the state. He
offered that the largest numbers of these construction jobs
would be available during a very brief peak period. He
suggested that for an overland pipeline, the peak would be
approximately three years long. He opined that the state could
expect three to four years of "employment in the hundreds
range," followed by a couple years of employment "in the low
thousands," followed by a massive spike in employment reaching a
peak, after which the numbers would drop off suddenly. He
relayed that the state might expect a peak of 16,000 jobs in the
year in which construction of the LNG project took place, which
would consist of a 48-inch pipeline from Prudhoe Bay to Valdez
and construction of an LNG facility to handle 4.5 bcf per day.
He pointed out that the LNG would have a longer peak
construction period due to the sequential installation of the
processing trains that go into an LNG facility. He explained
that for an overland pipeline, as proposed by TransCanada or the
producers, there would be slightly fewer jobs - approximately
15,000 jobs in the peak year - with approximately a 3-year peak
period.
MR. MULLIGAN referred to slide 5, labeled "Operations Phase
Employment Results," and estimated that the state could expect
200 operations jobs on an overland pipeline to run the pipeline
itself within Alaska and operate the gas treatment plant in
Prudhoe Bay. He opined that the LNG facility would be a large,
world class facility and ARCADIS estimates that approximately
400 jobs would be created for a facility of its size. He noted
that an LNG option would offer approximately 600 operations jobs
in Alaska.
3:17:59 PM
SENATOR WIELECHOWSKI inquired as to whether Mr. Mulligan could
provide a breakdown of the jobs in Canada versus the jobs in
Alaska for each one of his projections.
CONRAD MULLIGAN answered that all of the jobs he is referring to
are jobs in Alaska and that ARCADIS did not project any jobs in
Canada.
3:18:19 PM
CHAIR HUGGINS inquired as to whether including LNG would create
five times as many jobs in Alaska.
MR. MULLIGAN answered that from an operations standpoint,
approximately 600 jobs would be created in Alaska versus 200 new
jobs for an overland pipeline. In response to a further
question by Chair Huggins, Mr. Mulligan clarified that the
estimated 400 jobs at the LNG facility are included in the
overall 600 jobs figure.
3:18:47 PM
MR. MULLIGAN, referred to slide 6, labeled "E&D Employment - How
we generated our results - Scenarios," and stated "that the
modeling really shows the crown jewel exists." He stated that
ARCADIS developed two scenarios. One scenario was based on a
non-open access pipeline, which assumed no capacity expansions
from the initial 4.5 bcf per day capacity. That scenario also
assumed no new natural gas production for associated exploration
and development work on the North Slope until currently
producing fields began to fall off their plateau. The second
scenario was based on TransCanada's plan which includes capacity
expansions and also assumes that the pipeline would offer
reasonable tariffs. He opined that ARCADIS deduced that this
project would incite explorers to work on the North Slope in
search of new natural gas to ship on the pipeline. Referring to
the graphs, he stated that the green area in the graph on the
left shows production from current fields at 4.5 Bcf per day,
while the blue area shows the gas under each scenario. Thus,
under a non-open access pipeline, new natural gas would begin
production in approximately 2031, while under an open access
pipeline - which assumes reasonable tariffs and a vibrant
natural gas exploration and development industry beginning in
the North Slope - exploration and development jobs could be
generated to produce the larger blue shaded area [illustrating
some jobs beginning in 2020, with the bulk of the new jobs
commencing in 2037].
3:20:53 PM
CHAIR HUGGINS asked for clarification of non-open access. He
offered his understanding that under FERC, the gas pipeline
would be open-access.
MR. MULLIGAN, using an LNG project as an example, offered his
understanding that FERC would not require the liquefaction
facility at the end of pipe to be operated in an open-access
manner; therefore, "it would serve as a bottleneck to the
pipeline capacity." He said, "And so, we assumed no ...
capacity expansions on the pipeline upstream of the LNG facility
in that case." In response to a follow-up question from Chair
Huggins, he said non-open access would apply to "any pipeline
that was not operating capacity expansions as amended by new
explorers and/or that did not offer tariffs that were
sufficiently low to encourage folks to ... explore for new
natural gas and request expansions."
CHAIR HUGGINS advised that during the first day that the
legislature will meet in Anchorage, Alaska, further discussions
would delineate this and bring greater definition to these two
courses of action.
3:22:27 PM
REPRESENTATIVE NEUMAN noted that some people might be confused
as to whether this refers to TransCanada's proposal or the
Denali proposal. He pointed out that each one is an open-access
pipeline and would have negotiated terms. Thus, in reviewing
the scenario of transporting natural gas from Alaska, he said he
felt it was important to note that both the TransCanada and
Denali proposals are for open-access pipelines.
MR. MULLIGAN explained that ARCADIS is trying to convey, from an
employment point of view, a best-case/worst-case scenario and a
best-case scenario.
3:23:29 PM
REPRESENTATIVE NEUMAN related his understanding that Mr.
Mulligan's presentation is based on the assumption that value-
added processing plants would not be created in Alaska. He
pointed out that value-added processing plants would create many
long-term jobs. He inquired as to whether Mr. Mulligan could
also include some information based on [value-added processing
plants]. He further inquired as to Mr. Mulligan's perspective
if an in-state gas pipeline was developed to provide cheaper gas
to Alaskans.
MR. MULLIGAN answered that ARCADIS did not consider any
employment impacts from industries that may be developed as a
result of the development of a natural gas pipeline.
REPRESENTATIVE NEUMAN inquired as to what effect an instate
gasline would have on employment.
MR. MULLIGAN answered that he would hesitate to answer the
employment effects of an in-state gas pipeline since he did not
examine that aspect. He offered to examine exploration and
development jobs on the North Slope for members.
3:25:19 PM
CHAIR HUGGINS related his understanding than any gas-to-liquids,
value-added jobs would potentially happen in Alberta. He opined
that "we owe it to Alaskans" to find out how having that sort of
facility in Alaska might affect its job base. He asked Mr.
Mulligan to look at that so the legislature would understand the
numbers for the labor force.
COMMISSIONER BISHOP said he believed that his department could
provide that information before the body reconvenes.
3:26:15 PM
MR. MULLIGAN referred to slide 6 labeled, "Operations Phase
Employment Results," and noted that ARCADIS assumed that new
production facilities would be constructed on the North Slope.
He reiterated that fields would be brought on line to keep the
pipeline full at a given capacity, which for the best case
scenario assumed 5.9 bcf per day and for the worst case scenario
used 4.5 bcf per day.
MR. MULLIGAN referred to slide 7, labeled "Results: E&D
Employment," and explained that the results from the modeling
runs were - for the TransCanada scenario assuming a 5.9 bcf per
day throughput - approximately 72,000 exploration and
development jobs during the 2015 to 2045 timeframe. He offered
that a non-open access project with a 4.5 bcf per day throughput
would produce approximately 47,000 exploration and development
jobs over the 2015 to 2045 timeframe. He opined that job
creation may be delayed in a non-open access pipeline due to the
characteristics of natural gas production and fields coming off
plateau that could extend as late as 2026 versus a more
optimistic timeframe of 2015 as exploration development begins
in anticipation of that pipeline being available to carry the
natural gas to market.
3:28:16 PM
CHAIR HUGGINS asked for the rationale for the 2026 date.
MR. MULLIGAN answered that the date is a function of when
natural gas fields on the North Slope would begin their gradual
decline. The non-open access project scenario assumes that
exploration and development work would not begin until the
fields began to fall off of plateau. He referred to that point
as a "capacity wedge" that would be available in the pipeline.
Thus, that is how the timing of the exploration and development
jobs was assessed.
3:29:10 PM
MR. MULLIGAN referred to his final slide labeled, "Results: E&D
Employment," and opined that the timing of exploration and
development job creation is likely to be a function of a
pipeline's characteristics. Thus, an open access pipeline with
reasonable tariffs and capacity expansions is likely to
translate into jobs sooner, rather than a more restrictive
scenario, which could cause a delay in job creation as noted in
the previous slide. He stated that the importance of creating
the new natural gas basin related jobs in Alaska is to help
offset job losses likely to occur as existing oil fields
decline. He pointed out that Prudhoe Bay production continues
to decline. Additionally, he offered that creation of new jobs
will also help to maintain the existing skill sets and talent
pool in Alaska.
3:30:41 PM
REPRESENTATIVE FAIRCLOUGH inquired as to whether law enforcement
will be geared up and ready to combat crime since it takes a
long time to train Alaska State Troopers or train law
enforcement personnel.
COMMISSIONER BISHOP answered that the department has identified
occupations, including law enforcement, fire safety, and health
as part of AGIA.
3:32:11 PM
REPRESENTATIVE FAIRCLOUGH noted that all types of crime spiked
during construction of the Trans-Alaska Pipeline System. She
inquired as to whether the planning process outlines educational
opportunities to offset unemployment issues that arise at the
end of the construction cycle.
COMMISSIONER BISHOP answered that some jobs will be transferable
from construction to the exploration field. He noted that
future training of incumbent workers is part of the plan.
REPRESENTATIVE FAIRCLOUGH pointed out that some of the
infrastructure, such as the Haul Road, needs massive
improvements. She further pointed out that Alaska's ports will
need additional infrastructure.
CHAIR HUGGINS inquired as to the number of new jobs that are
anticipated to be filled by non-Alaskans, which he opined will
be necessary.
3:35:06 PM
SENATOR STEVENS expressed his concern that Alaska has had a
pretty poor record with assisting students with financial needs.
He acknowledged that the state has done a reasonable job
assisting high achievers. However, he recalled that the
National Conference of State Legislatures (NCSL) gave Alaska the
grade of an "F" in terms of fiscal assistance for its students.
He offered his desire to provide grants and scholarships to
assist students and adults. He inquired as to what the
department plans to do to help students financially.
COMMISSIONER BISHOP answered that his department will ask the
legislature for financial assistance. He agreed with Senator
Stevens that students seeking an Associate Degree or Vocational
Education have not received much assistance. He stated that
providing that assistance is one of his priorities and plans
will be forthcoming that will expand scholarships for post-
secondary students in the state.
SENATOR STEVENS acknowledged that the present system does not
work. He pointed out that if the state continues on this same
path, the problem will not get solved. He opined that it will
take an enormous amount of money.
COMMISSIONER BISHOP summarized that this legislature,
administration, and training plan all are coming together at a
point in time in Alaska in which the state has the ability to
set an historical standard. He pointed out that this training
plan is not just about a pipeline. He noted that the funding
this legislature appropriated for the training plan is good for
mining and health care. This funding has been well spent by
the department, he opined. He thanked the legislature for its
action. He offered that this plan is not unlike "the Marshall
Plan," which provided good foreign policy in its day. He
asserted, "I think this training plan can be ... the legacy of
our work here going forward." He noted that much work is yet to
be accomplished. He further opined that the one reason this
country is the most successful country on the planet is that it
provides the best educated and best trained workforce on the
planet. He asserted that - with the legislature's help, with
his help, and with his staff's help - "we're going to put Alaska
back on that map." He further pledged that Alaska's 8,000 high
school seniors and 1,500 general education development (GED)
recipients will "get the first shot at these jobs."
3:38:48 PM
REPRESENTATIVE DOLL applauded Commissioner Bishop's efforts.
She expressed concern with the timeframe and noted that it takes
time to complete apprenticeship programs. She inquired as to
whether the department can address that issue. She further
inquired as to whether the workforce needs could be met even if
the programs were fully functioning right now since the state
might only be eight years out.
COMMISSIONER BISHOP acknowledged that the state is behind the
curve. He related that the "baby boomers" represented a large
labor force which has been diminishing. Furthermore, he urged
that collectively Alaska needs to encourage employers to allow
Alaskan children the opportunity to gain entry level jobs. He
stressed the need for Alaska to make every effort for its kids,
incumbent workers, older workers, and all races of people to
have a shot at the pipeline jobs. He agreed with Representative
Fairclough, that Alaska must train its workers to be eligible
for upstream jobs in exploration and development, petrochemical
jobs, or distribution jobs in Fairbanks. He stated that it
should be Alaska's job to train its workers so that they can
acquire the long-term legacy jobs.
3:41:15 PM
SENATOR DYSON, with respect to reciprocity for engineering
credentials, noted that [the United States/Canadian forum],
Pacific NorthWest Economic Region (PNWER), has been performing
some work on reciprocity. He opined that some progress has been
made on engineering reciprocity and credentials. He indicated a
degree of reciprocity exists for welder certification. To
Commissioner Bishop he offered to provide contacts for people
who have been working on this issue. He opined that organized
labor will provide a huge asset to help facilitate that process.
He noted that Alaska's Canadian neighbors have large
construction projects in process and are very interested in
working together on projects.
3:42:42 PM
CHAIR HUGGINS challenged Commissioner Bishop to assist the state
in facilitating cross-border projects.
COMMISSIONER BISHOP noted his plans to meet with the Premier of
the Yukon Territory to seek ways in which Alaskans can work in
the Yukon Territory and vice versa.
3:43:55 PM
CHAIR HUGGINS inquired as to whether the Commissioner Bishop
sees the potential for the Alaska to be able to get the U.S.
Jobs Corps to modify its training approach if necessary to
produce workers for a pipeline proposition.
COMMISSIONER BISHOP answered, "Yes, absolutely." He offered
that he has personally been involved in the U.S. Jobs Corps for
over 17 years. He said, "They are definitely on the radar
screen for sources." He noted that he has already held
discussions with the organization.
3:45:03 PM
CHAIR HUGGINS announced that the next presenters would be
Spencer Hosie, Hosie McArthur LLP, who is online, and Allan Van
Fleet, Greenberg Traurig LLP, for a panel discussion.
3:45:47 PM
G. ALLAN VAN FLEET, Attorney, Greenberg Traurig, LLP, presented
legal issues affecting producer participation in the proposed
TransCanada gasline project. He stated that the panel would
focus on, "How do you get the gas?" Mr. Van Fleet proffered
that asking how to get the gas is kind of like asking for the
recipe for bear stew: For the stew, first get a bear; for the
gas, first get a pipeline proposal that is attractive and can
offer transportation services at commercially reasonable rates.
He said although TransCanada was on the schedule to address the
issue, Mr. Palmer has addressed all the questions about
TransCanada's ability to build a pipeline that can offer
transportation at commercially reasonable rates. He noted that
along with Spencer Hosie, he would address legal issues that he
is assured the producers will have in mind when making their
decisions. He noted that he and Greg Hopper would provide
information regarding producer and pipeline relationships and,
in particular, would address some of the previous questions that
Senator French asked the body. Mr. Hosie, he related, would
discuss the issues that affect the relationship between the
state as the owner of the land and the producers as the lessees
of that land. He provided some background information on Mr.
Hosie, such as that he has advised many state governments on the
aforementioned relationship between the state and the producers
He said he believes it is fair to say that Mr. Hosie is the
country's expert on these issues. He offered further details
regarding Mr. Hosie.
3:48:44 PM
SPENCER HOSIE, Attorney, Hosie McArthur LLP, presented legal
issues affecting producer participation. He stated that he has
practiced oil and gas for over 25 years. He noted that he was
the lead trial lawyer for the State of Alaska for what was then
known as the Alaska North Slope (ANS) royalty litigation, which
established the "right method" for computing royalties on North
Slope oil. He offered that for the past 10 years he has been
the lead outside lawyer for the State of Louisiana in energy
matters, and that he has worked with state attorneys general and
the federal government. He said that it is fair to say that he
has been involved in dozens and dozens of oil and gas matters,
not just in Alaska, but throughout the Lower 48. He asserted
that through those cases, he has had the opportunity to read
millions of pages of oil company documents. He opined that this
has given him a fairly detailed knowledge of how the oil
industry thinks about upstream decisions, what factors matter,
which ones don't, and why the producers are willing to spend
money in certain locations. He stated, "It's that sort of
gritty, real-world, in-the-trenches experience I bring to this
very important question of the North Slope gasline."
MR. HOSIE asked to begin with the "duty to develop." He offered
that 40 years ago, producers came to Alaska with the suggestion
that oil might exist on the North Slope. He stated that the
producers recognized that the landowners did not have the
expertise for exploration and development, to market
hydrocarbon. However, the oil companies had that expertise.
Thus, the oil and gas producers reached an agreement captured in
the oil and gas lease. The oil companies committed to the state
to use their expertise to diligently explore, develop, and
market any hydrocarbons found. As a consequence, he pointed
out, the oil companies are entitled to 87.5 percent of the value
of any oil and gas found and sold. The state's royalty share is
12.5 percent. He acknowledged that they got the "lion's share
of the royalty stream" due to the very promises just outlined.
Under the oil and gas leases for Alaska, which is true of oil
and gas leases, generally, the parties have what the courts call
"a relationship of mutual benefits." Once the oil companies
entered into the lease, they were no longer free to make
decisions based on their unilateral economic best interests.
Instead, the law is clear that the companies have an obligation
to make decisions, including investment decisions, based on the
mutual interests of the oil companies and the state as
landowner. Thus, in making decisions, the producers must
demonstrate due regard for the interests of the state as the
royalty owner. He offered that to conceptualize this is to
appreciate that the oil companies don't have any obligation to
treat the state better than they treat themselves, but they
should never treat the state worse.
3:52:23 PM
MR. HOSIE pointed out that in many situations the economic
interests of the oil companies and the state are aligned, such
as that everyone benefits from higher oil prices. He stated that
the one key area in which the economic interests of the oil
companies tended to verge from those of the landowner is related
to ongoing or future development and the obligation to spend
money. He opined that a landowner almost invariably wants the
field developed in production immediately since the landowner
benefits through royalty share of the hydrocarbon sale.
Sometimes the oil companies may not want to develop a field
immediately, due to a cash problem or the opportunity to put
investment dollars in more lucrative projects elsewhere in the
world. For example, if an oil company's return is 40 percent in
Qatar and 20 percent in Alaska, it would rather make the
investment in Qatar and, in doing so, act as a rational economic
business. However, under existing oil leases the oil companies
are not free to make decisions on their interest alone and must
consider the state, their partner.
MR. HOSIE offered that the courts have addressed this inherent
conflict through a court rule, which is straightforward, such
that if a given project in a given field is economic, based on
its own merits, the oil companies have an obligation to move
forward. He asked, "Why is that?" He answered, "Because that's
the deal they made to get the lease. When they came to Alaska
45 years ago, they promised to use their expertise and their
money to develop the field." Thus, he explained, the courts
review the question of whether additional development dollars
had to be spent and weigh in that if it is economic and
reasonably profitable, the oil companies have an obligation to
move forward. He noted that given the producers' duty, the
Alaska gasline or any Alaska project does not have to be the
most profitable project available to the producers. The state
is not in competition for the development dollars given the pre-
existing lease obligation. He opined that if the state was
attempting to initially attract the oil industry, it would be a
different question. Under Alaska leases, the oil companies
agree to take risks, which is why the companies are entitled to
87.5 percent [of the value of the oil and gas] without any
guarantee of profitability.
3:56:07 PM
MR. HOSIE said:
And so, the extent that there's a notion that they're
entitled to a reduced risk deal in Alaska - that is
contrary to the obligations they undertook so many
years ago. ... What's happened in Alaska? Well, many
years ago the state went to the producers and said,
"We'd like a gasline." And the producers said, "We'd
like a gasline, too, but we've looked at it and we
don't think it's economic without substantial
concessions - financial concessions from the state."
Since they did not find it economic, absent
substantial economic concessions, the oil industry
effectively said, "We don't think it's economic."
That led to the Stranded Gas Act, the protracted
negotiations, [and] the contract that was not approved
several years ago.
When that contract failed to come to fruition, the
state was left with three alternatives, three options,
none good. The first option is that they could have
simply accepted the producers' insistence for
concessions and "sweeten the pot," ... but the state
was not willing to do that at the time. The second
option is that they could have said, "Well, we will
live with your decisions on timing, producers. You
tell us when you're ready to build, and we'll wait
patiently until you are ready to go forward, for
whatever complex of your own reasons might project
when it's time to 'pull the trigger'. And since the
state wants a gasline, needs the jobs, wants the
resource produced - turned into money - that wasn't a
very palatable alternative either. The third option
would have been to sue the producers to prove the
gasline economic and try to compel them to build it.
... Of the three options that was, I think, far and
away, the least appealing. You never want to compel
someone to be a partner of yours, and a litigation to
try to prove a gasline economic would have been
extremely protracted, maybe as long as a decade, and
it would have given the producers the very thing that
some felt they wanted, which was delay. So the notion
of suing them to try to make a gasline a reality
really was a nonstarter from the get-go.
And so, this administration found a fourth way, and
that's AGIA. Essentially they said, "Well, you know,
if the producers don't find the line economic, if they
don't want to build it, let's find somebody who might
think about it differently, who might say, "You know
what, we're willing to build that line." And they
found that party, and of course it's TransCanada.
Now, the TransCanada bid is - in terms of the "duty to
develop" analysis - really a game changer. It really
changes everything, and here's why: It moved the
entire argument with the producers about whether they
think the gasline is economic. It doesn't matter what
their internal hurdle rates are. It doesn't matter,
for instance, that Exxon - it was reported in the Wall
Street Journal last Friday - has an upstream internal
hurdle rate of more than 35 percent. All those
questions are moot because there is a third party
willing to spend the money and build the pipeline.
And that changes everything.
3:59:27 PM
MR. HOSIE concluded that the "duty to develop" question boils
down to whether, if TransCanada goes forward, it's producers can
say they really don't want a third party to own or operate the
pipeline, that they will not tender gas, thereby essentially
stopping the project. In other words, Mr. Hosie said, the
question is whether the producers have veto power over a third-
power pipeline by refusing the tender their gas. He stated,
"The answer is: under the duties they have under the leases -
no, so long as they have the opportunity to tender to
TransCanada on reasonably commercial terms." He said ExxonMobil
Corporation has already recognized that it would tender the gas
to TransCanada on reasonably commercial terms, and he said he
thinks the company has stated as much because "that is its
obligation under its leases." He stated that that is equally
true for ConocoPhillips Alaska, Inc. and the other North Slope
producers.
4:00:34 PM
SENATOR WAGONER offered that the legislature has heard a lot of
talk about a gas treatment plant, who should pay for it,
et cetera. He inquired as to whether it is customary industry
practice for producers to deliver gas that is marketable gas and
meets all pipeline gas quality specifications prior to
delivering that gas to the transporting pipeline.
SPENCER HOSIE answered yes.
4:01:21 PM
SENATOR WIELECHOWSKI offered that the legislature has heard a
lot of discussion about instate gas, that an instate bullet line
would not provide low-cost gas. He stated that what has
happened in Cook Inlet is that producers or gas developers set
the gas rate - for example, at Henry Hub. He related his
understanding from Regulatory Commission of Alaska (RCA)
hearings that the rate to produce the gas in Cook Inlet is about
a dollar per million cubic feet (Mcf), but that the producers
sell the gas at $6.80 per Mcf, which is nearly a 700 percent
profit. He inquired as to whether the state can compel
producers to provide low-cost gas.
MR. HOSIE answered that the state can take its gas in-kind and
then could sell it at whatever price it elects. He noted that
it is interesting that Senator Wielechowski referenced Cook
Inlet since the producers in the Cook Inlet have publically
stated that they are not making enough money from the sales
levels at Cook Inlet to warrant future exploration and
development. He opined that it is hard to believe this is true,
given the figures Senator Wielechowski pointed out, because
these are older fields with the current sales realization. He
opined that what has happened in Cook Inlet is essentially what
has happened with the state in the Stranded Gas negotiations,
which are negotiations that say, "We want you to make our
economics better and, of course, conversely yours worse."
4:03:29 PM
REPRESENTATIVE GARA related his understanding that sophisticated
companies - the major producers - are not going to tell the
state that they are going to sell gas if they have an interest
in building their own line or in blocking this gasline. He
opined that it is in their corporate best interest not to advise
the state affirmatively that it will sell its gas. He surmised
that it could lead to litigation and at some point the producers
might acquiesce and tell the state they will sell the gas. He
further surmised that they would do so because they might not
just lose the litigation, but may lose their leases worth
possibly 20 billion dollars. He opined that they are "playing
with fire by pushing this issue." Thus, he opined that if the
state finds a pipeline project that it likes, it seems "smart to
us not to flinch when the producers don't necessarily commit to
publically selling their gas. It is our expectation that that's
what they should be doing." He inquired as to whether that is a
fair assessment and, if not, why it is not.
MR. HOSIE answered that Representative Gara makes an accurate
statement. He stated that power means leverage and leverage
means a better deal for the producers. He opined that one would
not expect a party in a negotiation to inform another party of
its future plans or true intent, if that knowledge would
strengthen its opponent. He pointed out that this process is a
negotiation and is all about money. He pointed out the
importance of the state's understanding the preexisting legal
relationship and the producers' preexisting obligations. He
stated, "No party writes on a clean slate here. They have
obligations. The state has rights." He pointed out that one of
the state's rights is to insist that a project that is economic
on its own terms moves forward. He opined that if the
producers, after years of effort, simply decline to do so,
without the state substantially "sweetening the pot," the state
has every right to find a third party to do the very thing the
producers have refused to do. And that third party is AGIA, he
opined, and it raises questions, he said, "about what the proper
rate of return is and how much money is sufficient and how much
money is too much."
REPRESENTATIVE GARA related his understanding that if we dump
everything else and just go [the producer's] way, at that point
[the producers] have an incredible amount of leverage over the
state to try to obtain tax concessions.
MR. HOSIE agreed that Representative Gara's assessment is
correct. He opined that once the state has left only one party
standing, the party - in this case the producers - would have
enormous negotiation leverage. He further opined that what
happened to the state in the Stranded Gas negotiations would
happen again, with ever escalating requests for concessions.
4:06:56 PM
SENATOR BUNDE inquired as to the projected length of time
litigation would last if litigation were to occur as a result of
the producers' refusal to commit gas to the line or to commit to
what the state would define as "what's reasonably profitable."
Furthermore, he asked if Mr. Hosie could offer examples of how
long suits have lasted elsewhere under similar circumstances.
MR. HOSIE answered that the precedent the state should hope to
avoid is the ANS royalty case he previously mentioned which
spanned a decade of active litigation. The state had the
obligation to essentially prove all the economic underpinnings
of the producers' business, including what it cost to produce
and ship oil. He recalled that it became an enormously
complicated factual fight and "that's their sandbox." He opined
that that case represents exactly the fight the state would be
engaged in if it were to sue the producers to say the state
believes the pipeline is economic and wants the producers to
move forward. That option would be least appealing because,
after all, if the producers' goal is to delay, then the state's
suing them would give them exactly what they want.
MR. HOSIE described AGIA as a "game changer," because if AGIA is
willing to spend its money and build a pipeline, to back the
project with its equity, the only question for the producer is,
"Can I tender in on commercially reasonable terms?" Mr. Hosie
said that is a far simpler question than asking whether building
the pipeline in the first place is economic or asking about the
cost of fuel or the "widget costs" or deciding how many laborers
to utilize. He estimated that "that piece of litigation, should
the state ever get there, would be much shorter" - perhaps two
years rather than ten. That said, Mr. Hosie noted that the
larger point is to try to avoid any litigation whatsoever and to
try to get a pipeline built. "That," he opined, "is why this
sort of public process ... is so tremendously beneficial,
because it gives transparency to the process." He noted that
Representative Gatto had asked the straightforward question:
"Are the producers willing to ship over a third-party line?" He
also noted that ExxonMobil Corporation was kind enough to
answer, "Yes, we are." He added that the corporation said that
because "that is their obligation." Once TransCanada is willing
to bid, the question is whether gas can be shipped on reasonable
terms, which Mr. Hosie opined is a much simpler and easier
question to answer.
SENATOR BUNDE inquired as to whether another governmental
agency, such as FERC would intervene in the event that there is
not a commitment to ship [the gas] and the state doesn't want to
sue.
4:11:16 PM
MR. HOSIE answered yes and offered that Mr. Van Fleet would
address that question.
4:11:22 PM
SENATOR STEDMAN noted that it appears that BP and Conoco are
moving forward with the Denali project - their version of a
gasline. He related his understanding that the producers intend
to spend up to $600 million and pre-apply with FERC. He
inquired, "So, how does ... this play when it appears that we
actually have two of the producers that are moving forward to
build a line, versus all three of them just flat not showing up
to build the line under your 'duty to produce'?"
MR. HOSIE offered that it represents a "wonderful development"
for the state. He echoed Commissioner Irwin's comment that
"competition is a wonderful thing." He opined that if the
producers are serious, commit to deadlines, and move forward,
that is a "good thing," because competition between two pipeline
entrants can only benefit the state. He opined that the
overarching question is whether the Denali project is real or is
an attempt to derail AGIA. He said he does not think that
anyone knows the answer to that question, but that it is a
relevant one.
SENATOR STEDMAN recalled that Mr. Hosie mentioned the process
that did result in a gasline. He pointed out that the
legislature did not act on the matter and it did not move
forward. He inquired as to whether that would "strengthen or
weaken the producer's hand" especially if the state claims the
producers are refusing to build the line when the legislature
was the entity that "refused to bless that past agreement."
4:13:36 PM
MR. HOSIE responded that he thinks it would neither strengthen
nor weaken the producers' position, since AGIA moved the
question, and since the state is not trying to force the
producers to build the gasline. He opined that the state has
simply accepted the producers' word that [building the pipeline]
is not economic and TransCanada is willing build it. He noted
that the state can sidestep all those questions about whether it
can compel the producers to come forward since TransCanada is
willing to do the very thing that the producers have refused to
do.
SENATOR STEDMAN inquired as to whether this process of "duty to
produce" has ever gone forward before.
MR. HOSIE answered that it has not occurred in Alaska but has
happened in the Lower 48, and some cases go back 50 years that
ask the question as to when an oil producer has an obligation to
move forward. He acknowledged that sometimes it is a small
matter such as drilling a couple of development wells. However,
he noted that it sometimes has been a matter of installing a
line to connect a stranded field to a preexisting pipeline. He
pointed out that the legal answer is always the same, which is
as long as the project is reasonably economic and measured
objectively, the producers have an obligation to proceed.
However, he cautioned that he was not aware of any case in which
a royalty owner sued producers to try to compel them to spend
$30 billion. He opined that would be "a recipe for disaster."
He offered that the "beauty of AGIA" is that the state has found
someone willing [to build the gasline].
CHAIR HUGGINS offered that Mr. Hosie will be available tomorrow
to answer questions.
4:16:23 PM
SENATOR DYSON related that he appreciates that the anti-trust
implications will be covered. He recalled his conversations
with FERC commissioners, who reminded him that this project is
different than any other FERC reviews because Congress has acted
and declared that it is in the national interest and in essence
"must be done." He offered that the legislators have often
heard the threat of delaying lawsuits. He inquired as to
whether any venue could compel the shipping of gas while legal
questions are still being decided. He recalled that Mr. Hosie
said that a refusal to ship would be a breach of contract and
far less extended and convoluted than other lawsuits. He
further inquired as to whether that might be within the purview
of FERC.
MR. HOSIE suggested that Mr. Van Fleet would address that
concern.
4:18:14 PM
MR. VAN FLEET, Shareholder, Greenburg Traurig, LLP, noted that
several legislators, as well as Mr. Hosie, identified what are
essentially the contract rights between a landowner and a
producer who leases that land, although he noted that in this
case, the landowner is the state, and the state has
responsibilities to its citizens that make the issue much
broader. He pointed out that the gasline creates a great deal
of interest, including that of those in the Lower 48 who want
gas to heat or cool their homes. He offered to speak about the
broader public interest that is reflected in federal and state
anti-trust laws and also federal legislation that addresses
energy market manipulation.
MR. VAN FLEET shared his background practicing anti-trust law
for 30 years. He stated that he has represented oil and gas
companies and pipelines, and he has sued oil companies for
withholding supply from the market. He noted he has defended
[companies] and advised them on how to avoid anti-trust laws.
He said, "Out of longevity, more than anything, I've been
honored by my peers in the American Bar Association." He
announced that he will be chair of the ABA anti-trust section in
2010. He referred to a slide labeled, "Standard Oil Monopoly,"
and he noted that ironically, 2010 is the one hundredth
anniversary of the breakup of Standard Oil.
4:20:08 PM
MR. VAN FLEET referred to a slide labeled, "Anti-trust
Statutes." He explained that the anti-trust acts are the
Sherman Act, Sections 1 and 2, which are enforced by the U.S.
Attorney General acting through the Assistant Attorney General.
The Federal Trade Commission Act (FTCA), Section 5, broadly
prohibits all unfair means of competition. He offered that has
been interpreted over many years to include violations of the
anti-trust laws, and through that vehicle, the Federal Trade
Commission (FTC), as well, has the authority to enforce the
anti-trust laws of the United States. He pointed out that each
state has its own anti-trust laws. The Alaska Restraint of
Trade and Monopolies Act, contained in AS 45.50.562 - 596, is
largely the same as Sections 1 and 2 of the Sherman Act, and is
enforced by the state's attorney general. He further noted that
the state's attorney general is empowered to act on behalf of
the people of Alaska in bringing actions under federal anti-
trust statutes. He said what that means is that Alaska's
attorney general can act under state and federal anti-trust
laws. Essentially, Section 1 and 2 of the Sherman Act, and AS
45, prohibit exclusionary conduct in order to maintain monopoly
power and joint action by competitors to withhold supply from
the market. He related as an example that at the turn of the
century, Standard Oil controlled 90 percent of the petroleum in
the United States. Standard Oil maintained its monopoly through
severe exclusionary conduct, such as blowing up its competitors'
pipelines.
MR. VAN FLEET referred to his next slide, which shows that in
1910, Standard Oil was broken up into the "Seven Sisters," and
action affirmed by the U.S. Supreme Court. The Seven Sisters,
as shown on the slide, include: Standard Oil of New Jersey
(Esso), Royal Dutch Shell (Anglo-Dutch), Anglo-Persian Company
(APOC), Standard Oil Company of New York (Socony), Standard Oil
of California (Socal), Gulf Oil, and Texaco. He related that
Exxon and Mobil Oil merged to become ExxonMobil Corporation, and
Chevron now includes Gulf Oil and Texaco. He pointed out that
the reason to break up the monopoly was to turn it into
competing businesses. Thus, instead of jointly deciding how
much production ought to be on the market to control prices,
companies compete with one another. He offered that with
competition in place, if Esso kept its product off market, Mobil
Oil could sell its product and make that money.
MR. VAN FLEET said:
If there is an attractive pipeline that is there and
available on commercially reasonable terms to ship
North Slope gas to the Lower 48 or to Alberta to be
sold elsewhere, and the producers say "no," one might
ask, "What's going on here?" And if they all do it
together, one might ask, "What's going on here? Are
they withholding this supply from the market because
they're concerned about how that Alaska gas will
affect the prices of natural gas and LNG in the Lower
48 and around the world where these three producers
have significant ... gas and LNG holdings?" We do
know this: they've looked at the question together.
MR. VAN FLEET referred to his next slide, which shows a printout
of the web site for ICF International, Inc., a highly respected,
large consulting firm. He noted that the web site highlights
the firm's projects to attract business.
MR. VAN FLEET referred to his next slide, which shows fuel
market studies, and he cited a sentence at the lower
portion of the slide, which read as follows:
For producers on the Alaskan North Slope, ICF
International evaluated the effect of Alaskan and
MacKenzie Delta gas on U.S. and Canadian gas markets,
prices, and pipeline flows.
MR. VAN FLEET said, "So, any of these anti-trust enforcers
might want to be asking if all the producers together are
declining to commit gas to a viable pipeline, what s going
on here?"
MR. VAN FLEET moved on to a series of slides labeled, "Market
Manipulation Statutes," and said that in addition to the anti-
trust laws, Congress, in recently years has passed specific
market manipulation statutes. He said FERC, specifically
empowered by the Energy Policy Act of 2005, was given enhanced
enforcement powers over natural gas and electricity markets to
identify and punish any attempts to manipulate those markets.
He noted two recent cases which are pending, on appeal. In one
case, FERC imposed a $200 million penalty, and it imposed a
nearly $100 million penalty in another case, which is in
addition to the requirement that the gas companies return the
profits that were unjustly earned through market manipulation.
MR. VAN FLEET stated that the Energy Independence and Security
act of 2007 prohibits any manipulative or deceptive device or
contrivance in connection with the purchase or sale of crude
oil, gasoline, or petroleum distillates. It authorizes the
Federal Trade Commission (FTC) to investigate those instances
and to prescribe regulations.
MR. VAN FLEET referred to his next slide labeled, "FTC Advance
Notice of Proposed Regulation." He pointed out that even though
this deals with the liquid side of the petroleum market, a
recent advance notice of proposed regulations gives some insight
into how the FTC looks at these issues and how it might look at
the liquids market, or perhaps the gas market, as to what it
considers might constitute manipulation. He offered that this
notice identifies "potential practices" that might constitute
market manipulation. The FTC wants comments on the
circumstances, if any, "under which a firm's decision regarding
supplying a market - whether to reduce, increase, or ...
maintain unchanged the amount it supplies - should be considered
manipulative or deceptive." He added, "So, in addition to being
a potential anti-trust problem, they're considering that under
their new powers to prohibit market manipulation."
4:27:46 PM
MR. VAN FLEET referred to his next slide labeled, "FTC Advance
Notice of Proposed Regulation," and he explained that the FTC
notes that regulated petroleum pipelines may not allow new
shippers a share of a pipeline's capacity when historical
shippers seek to transport more petroleum products than the
pipeline is capable of transporting. Thus, the commission is
currently seeking comments on whether pre-announcements that
pipelines are approaching capacity constraints might be a
conduit for market manipulations or deceit. He added, "And it's
interesting the commentary that they add to this particular
question.
MR. VAN FLEET referred to his next slide labeled, "FTC on BP in
Alaska North Slope," and offered that the FTC discusses its
investigation of BP's acquisition of ARCO. He recalled that the
big three producers in the North Slope used to be ExxonMobil
Corporation, BP and ARCO. He noted that BP acquired ARCO and
the FTC, in order to approve that merger, required BP to divest
ARCO's North Slope holdings. The holdings were divested to
Phillips, which is now Conoco Phillips. The FTC said, in its
investigation, that "the commission had reason to believe that
BP occasionally had exported ANS crude oil to the Far East in
order to increase spot prices for ANS crude on the West Coast,
and that BP benefitted from those higher spot prices because of
its status as a merchant marketer." He opined that the kinds of
things that are being discussed that the state fears might be
happening are precisely the kinds of things the federal
government, FERC, the FTC, and the U.S. Department of Justice's
Antitrust Division are concerned about and review. He offered
that these agencies would be the appropriate venues to raise
questions about what may be happening.
4:29:56 PM
MR. VAN FLEET referred to his next slide labeled, "Competition
Law 360," and stated that at about the same time of the
Anchorage presentations, someone pointed out to him that the
U.S. Commodity Futures Trading Commission (CFTC) had announced
an investigation. He related that Conoco Phillips revealed it
was subpoenaed. The CFCT is investigating possible fraud in the
trading of crude oil futures. He acknowledged that doesn't mean
the companies are guilty of any wrongdoing. However, he pointed
out that the CFCT generally reviews particular trader
transactions and investigates any company that it believes is
fraudulently bidding up prices on contracts, which is deceptive
trading.
4:31:11 PM
REPRESENTATIVE NEUMAN pointed out that some of the information
provided, such as whether ANS crude oil is shipped to the Far
East, seems to discredit some of the larger producers. He
inquired as to whether Mr. Van Fleet could comment on the effect
of lawsuits.
MR. VAN FLEET responded that his testimony is not meant to "bash
producers." He related that he has worked with general counsel
of major oil companies such as ExxonMobil Corporation and
ConocoPhillips Alaska, Inc. He opined that the state does not
want to rely on federal or state agencies to force [producers]
into taking action on the pipeline. He surmised that the
producers will be aware of the possibility of federal or state
action if they do not have a rational economic explanation for
their actions "except for keeping product off the market or
delaying it as long as possible."
MR. VAN FLEET, in further response to Representative Neuman,
answered that he is working for the attorney general.
4:33:36 PM
REPRESENTATIVE OLSON inquired as to whether he could name the
two companies that are currently under appeal.
MR. VAN FLEET answered that the producers are not any of the ANS
producers.
4:34:24 PM
CHAIR HUGGINS noted that that in the interest of time, he would
bring up that question tomorrow for presenters to address.
4:34:34 PM
SENATOR BUNDE pointed out that [producers] booking reserves
before the U.S. Securities Exchange Commission would be helpful
for the producers' stock portfolios. He opined that booking the
reserves would represent a de facto acknowledgment that the gas
is marketable or profitable. He recalled that some attempt has
been made to book reserves. He inquired whether producers could
hint at reserves since actually booking the reserves would be
illegal unless the producers could bring the gas to market.
MR. VAN FLEET responded that it not his area of expertise, but
stated his understanding that the producers cannot book reserves
in order to boost their balance sheets while simultaneously
acknowledging that it is not economically feasible to get the
reserves to market. He recalled Mr. Hosie's testimony such that
the prospect of losing the reserves because they are not being
developed would have a greater impact on the financial records
of the producers. He spoke of an expectation for rationality,
"not to lose both the Wall Street benefit as well as the
physical gas."
4:36:25 PM
REPRESENTATIVE GRUENBERG inquired as to whether improvements are
needed to update Alaska's statutes.
MR. VAN FLEET answered that he has reviewed the Alaska statutes.
He stated that in recent years, Congress has increased penalties
to a maximum of up to 10 years in prison and fines of up to $100
million for violation of federal anti-trust statutes. He said
Alaska's statutes provide for a misdemeanor and small fines for
violation of anti-trust statutes. He opined that while the
civil consequences and civil recovery for violation of Alaska's
anti-trust statutes could be huge, the criminal penalties are
weak.
4:37:50 PM
REPRESENTATIVE GRUENBERG related his understanding that a new
series of federal laws have been adopted. He asked, "Does that
preempt the field; should the state be looking at filling any
gaps there?"
MR. VAN FLEET answered that the state could always look at
"filling in the gaps." He stated that approximately 15 years
ago, the U.S. Supreme Court held that the nationwide purview of
federal anti-trust statutes does not preempt the states from
enforcing their own laws. He said this occurred in the context
of a merger that the federal anti-trust authorities had approved
and were not going to challenge. However, he offered his belief
that this did not prevent California from raising its own
objections under its Cartwright Act, even though that would have
had immense national implications. He related that the states
are free to act under their own anti-trust laws, regardless of
whether the feds act under theirs. Mr. Van Fleet noted that
since the Reagan Administration, when there is a matter of
national importance that is also particularly important to an
individual state or group of states, very often the federal
anti-trust authorities will work with the states' attorneys
general, either one or several, through the National
Associations of Attorneys General, which has a specific anti-
trust committee. So, he said, the cooperation of federal and
state governments is something that is well entrenched and a
tradition in anti-trust enforcement.
4:39:36 PM
REPRESENTATIVE KERTTULA inquired as to whether Mr. Van Fleet's
quote that the FTC believes that BP is occasionally exporting
ANS to increase spot prices came from the FTC decision.
MR. VAN FLEET answered that he was not sure if that information
was contained in the decision on the merger, whether that
information is in the consent order in which BP agreed to divest
the ANS holdings of ARCO. He recalled that the information is
described in the live request for comments on their advanced
notice of proposed rule making. He offered that the FTC pointed
out that that was the type of market manipulation that it saw
during its investigation of the merger, and is something it
wants to consider as "being within their enforcement powers
under the new market manipulation statute." In response to
Representative Kerttula, he noted that notices of advance
proposed regulations can be found on the FTC web site.
4:40:57 PM
REPRESENTATIVE FAIRCLOUGH recalled that Mr. Hosie stated that
Alaska could take its royalty in-kind in oil and then sell that
oil or gas onto the market for any price it so desires. She
inquired as to whether that's true since she further recalled
that the state previously researched that matter during the
closing of the Agrium plant and found that the state did not
have that ability.
MR. VAN FLEET answered that he is not prepared to answer that
question without first conducting significant research. He
said:
Alaska, like other landowners in other states, has the
option - and, as I recall, under the Stranded Gas Act
was going to have the requirement - to take gas in-
kind. Now, if the state has the option or the
requirement to take gas in-kind and it can't sell it,
well, that's not a very good deal and clearly there
must be some opportunity to dispose of that. But as I
say, that is not something I've researched and [I]
would be misleading this body if I were to pretend
expertise on that ....
4:42:54 PM
REPRESENTATIVE FAIRCLOUGH recalled that it was on record from
Mr. Hosie that Alaska could sell the commodity for any price it
wants. She offered her belief that in Alaska it would have to
be at a competitive price to others in the market.
CHAIR HUGGINS interjected that he will follow up with the
administration and Mr. Hosie.
MR. VAN FLEET elaborated that the anti-trust laws display basic
faith in the market. He said that the anti-trust officials
don't want to be in the business of setting prices. Thus, it is
extremely rare that anti-trust laws will examine the prices at
which a particular company is selling its goods, its products,
and its services, he stated. He pointed out that the anti-trust
officials become involved only when a company has monopoly power
or a dangerous probability of gaining monopoly power and sells
its product below cost. He offered that when it is clear that
the company's motive is to put someone out of business at that
below-cost price, it is then that the anti-trust officials
become involved in pricing.
4:44:37 PM
REPRESENTATIVE FAIRCLOUGH expressed her concern that if the
state could offer its gas at below market value, that action
might create anti-trust problems for the state. She stated on a
separate matter that one of her constituents informed her that
the Texas Railroad Commission based an allocation for access to
a pipeline off proven reserves. She related her understanding
that access to pipelines is based on contract versus common
carriers. She inquired as to whether Mr. Van Fleet could speak
to the issue of access to pipelines based on proven reserves.
MR. VAN FLEET responded that is not fundamentally an oil and gas
lawyer and is not familiar with those commission regulations He
added, "It would be strictly intrastate pipelines, and I don't
think we have many of those anymore." He said that regulation
would be up to FERC.
4:45:55 PM
CHAIR HUGGINS inquired as to whether there were other questions
and there were none.
MR. VAN FLEET concluded his presentation by offering that he is
not here "to bash oil companies and gas producers." He noted
that he has worked for them, has advised them, and has many
personal friends in the industry. He said:
These are serious matters that come into play beyond
the simple private relationship between the state as
landowner and the producers as the contracting
producer and are something that make this of interest
beyond Juneau, beyond Alaska, and of interest to us in
the Lower 48, as well, and I do thank you for your
time and your attention.
4:46:56 PM
CHAIR HUGGINS announced that this concludes the presentations
for the day. He noted that the meeting would resume at 10:00
a.m. tomorrow and that the committee would take up follow-up
questions for Mr. Hosie, followed by regulatory and commercial
issues, and LNG economics.
ADJOURNMENT
There being no further business before the committee, the Joint
meeting of the House Rules Standing Committee and the Senate
Special Committee on Energy was adjourned at 4:47 p.m.
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