Legislature(2007 - 2008)KETCHIKAN
07/08/2008 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
Ketchikan, Alaska
July 8, 2008
1:12 p.m.
MEMBERS PRESENT
HOUSE RULES
Representative John Coghill, Chair
Representative Anna Fairclough
Representative Ralph Samuels (AGIA Subcommittee)
SENATE SPECIAL COMMITTEE ON ENERGY
Senator Charlie Huggins, Chair
Senator Bert Stedman, Vice Chair
Senator Kim Elton
Senator Lyman Hoffman
Senator Donald Olson
Senator Joe Thomas
MEMBERS ABSENT
HOUSE RULES
Representative John Harris (AGIA Subcommittee, Chair)
Representative Craig Johnson
Representative Beth Kerttula (AGIA Subcommittee)
Representative David Guttenberg
SENATE SPECIAL COMMITTEE ON ENERGY
Senator Lyda Green
Senator Lesil McGuire
Senator Gary Stevens
Senator Bill Wielechowski
Senator Fred Dyson
Senator Thomas Wagoner
OTHER LEGISLATORS PRESENT
Representative Nancy Dahlstrom
Representative Mike Doogan
Representative Berta Gardner
Representative Mike Hawker
Representative Lindsey Holmes
Representative Kyle Johansen
Representative Mike Kelly
Representative Gabrielle LeDoux
Representative Kurt Olson
Representative Bob Roses
Senator Hollis French
Senator Gene 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: HB 3001
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
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07/02/08 (H) BILL CARRIES OVER TO FOURTH SPECIAL
SESSION
07/08/08 (H) RLS AT 1:00 PM KETCHIKAN
BILL: SB 3001
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
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06/20/08 (S) 9am - 5pm - Testimony <Invitation Only>
06/24/08 (S) ENR AT 1:00 PM MAT-SU
06/24/08 (S) Heard & Held
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07/01/08 (S) BILL CARRIES OVER FROM 3RD SPECIAL
SESSION
07/08/08 (S) ENR AT 1:00 PM KETCHIKAN
WITNESS REGISTER
TONY PALMER, Vice President
Alaska Business Development
TransCanada Alaska Company, LLC ("TransCanada")
Calgary, Alberta
POSITION STATEMENT: Presented TransCanada's proposed pipeline
project and answered questions.
PATRICK GALVIN, Commissioner
Department of Revenue (DOR)
Juneau, Alaska
POSITION STATEMENT: Answered questions related to the proposed
TransCanada project during the hearing on HB 3001 and SB 3001.
BOB WEINSTEIN, Mayor
City of Ketchikan
Ketchikan, Alaska
POSITION STATEMENT: Testified during the hearing on HB 3001 and
SB 3001.
JOE WILLIAMS, Mayor
Ketchikan Gateway Borough
Ketchikan, Alaska
POSITION STATEMENT: Testified during the hearing on HB 3001 and
SB 3001.
DOUG WARD, Director
Shipyard Development
Alaska Ship & Dry Dock, Inc.
Ketchikan, Alaska
POSITION STATEMENT: Testified during the hearing on HB 3001 and
SB 3001.
J.C. CONLEY
Ketchikan, Alaska
POSITION STATEMENT: Testified during the hearing on HB 3001 and
SB 3001.
JOEL L. JACKSON
Ketchikan, Alaska
POSITION STATEMENT: Testified during the hearing on HB 3001 and
SB 3001.
FRANCES YOUNG
Ketchikan, Alaska
POSITION STATEMENT: Testified during the hearing on HB 3001 and
SB 3001.
RICHARD "DICK" L. COOSE
Ketchikan, Alaska
POSITION STATEMENT: Testified during the hearing on HB 3001 and
SB 3001.
JOE JOHNSTON
Ketchikan, Alaska
POSITION STATEMENT: Testified during the hearing on HB 3001 and
SB 3001 in opposition to AGIA.
ANDREW STEVENS
Juneau, Alaska
POSITION STATEMENT: Testified during the hearing on HB 3001 and
SB 3001.
BYRON CHARLES
Ketchikan, Alaska
POSITION STATEMENT: Testified during the hearing on HB 3001 and
SB 3001.
DON LUDWIGSEN
Craig, Alaska
POSITION STATEMENT: Testified during the hearing on HB 3001 and
SB 3001.
ED ZASTROW
Ketchikan, Alaska
POSITION STATEMENT: Testified during the hearing on HB 3001 and
SB 3001.
RUTH DULIN
Ketchikan, Alaska
POSITION STATEMENT: Testified during the hearing on HB 3001 and
SB 3001.
JACKIE DURETTE
Ketchikan, Alaska
POSITION STATEMENT: Testified during the hearing on HB 3001 and
SB 3001.
ACTION NARRATIVE
VICE CHAIR BERT STEDMAN called the joint meeting of the House
Rules Standing Committee and the Senate Special Committee on
Energy to order at 1:12:20 PM.
HB 3001 - APPROVING AGIA LICENSE
SB 3001 - APPROVING AGIA LICENSE
1:13:32 PM
VICE CHAIR STEDMAN indicated that the hearing would begin with a
presentation by Tony Palmer from TransCanada Alaska Company,
LLC; followed by comments from the commissioner of the
Department of Revenue, Patrick Galvin; followed by public
testimony.
1:21:45 PM
TONY PALMER, Vice President, Alaska Business Development,
TransCanada Alaska Company, LLC ("TransCanada"), explained that
TransCanada has 3,600 employees, is the largest [natural] gas
pipeline company in North America, owns 36,500 miles of
interstate and interprovincial gas pipeline, and has submitted
an application under the Alaska Gasline Inducement Act (AGIA),
which sets forth the state's requirements and process for
selecting a licensee to pursue a gas pipeline. He noted that
TransCanada has been pursuing this project on the Canadian side
for some 30 years; has the rights to the project in Canada; and
has "some $2 billion worth of pipeline in the ground for the
Alaska prebuilt." After AGIA was enacted, TransCanada then
considered the question of whether to pursue the project in
Alaska under AGIA as well. TransCanada thinks that the project
has strong economics and will provide satisfactory returns to
its stakeholders: the producers, the state, and the pipeline
sponsors. Most parties would project that [natural] gas prices
will increase over time, and those prices are very high even
today.
MR. PALMER indicated that TransCanada also considered whether
the state - its legislative body and its citizens - were
committed to a gas pipeline project. This was a key factor in
TransCanada's decision because no commercial party could provide
this project without the cooperation of the governments
involved. The proposed project would involve having a pipeline
extending 1,715 miles - from Prudhoe Bay to Alberta - and no
commercial party owns that land or has access to all that land.
TransCanada also took into consideration the state's
requirements, and then filed its application accordingly. The
rights and responsibilities of both parties - the licensee, or
potential licensee, and the state of Alaska - are set out in
AGIA and TransCanada expects to have to live with the
commitments it made under the AGIA application process.
TransCanada believes that if it submits a strong application,
then the legislature will ratify it and not play TransCanada as
a stalking horse to advance the project in a different fashion.
TransCanada submitted its application in good faith, and
believes that the state has the same good faith.
1:28:25 PM
MR. PALMER said that the proposed project is a strategic fit for
TransCanada: TransCanada is a gas pipeline company, this is the
largest gas pipeline investment opportunity in North America for
any company, it's within TransCanada's core competency, it's
within TransCanada's geographic footprint, and it's synergistic
with TransCanada's existing businesses. TransCanada has been in
the pipeline business for 50 years, it started constructing a
longer pipeline than [the proposed pipeline] at the company's
inception, and he personally has been working on this project
"this time" for 7 years and was involved in the project in the
1980s; TransCanada, and he, have thought long and hard about the
very, very tough issues associated with moving this project
forward. It's a complex and large project, it will take
collaboration, it will take compromise, and it will take
cooperation. Anyone can review TransCanada's application and
responses, he noted, adding that TransCanada thinks it is
aligned with what it thinks the state's objective is, that being
to promote basin development - both short-term and long-term.
MR. PALMER, mentioning the process the Murkowski administration
engaged in, characterized the AGIA process as an open and
transparent [request for proposals (RFP)] process in which
interested parties could participate. The interested parties
reviewed that process last fall and did so on a competitive
basis. When TransCanada submitted its application, it competed
vigorously even though it did not know what companies it would
be competing with. In addition to seeking competition with
regard to who would own the proposed pipeline, he opined that it
is important for the state to also seek competition with regard
to the "upstream region"; in other words, competition with
regard to who will produce Alaska's gas and who will develop
Alaska's basin over the long run. Alaska currently has 3
principal players on the North Slope, whereas TransCanada, in
contrast, in Alberta, has 450 players "in the upstream region";
450 players, he relayed, generally compete more vigorously than
3 players, and it is generally the smaller players who, over
time, develop a basin. Large players usually have a big
position that they take initially: they take a large land
position, and they open the basin. Again, however, with regard
to long-term development, small players and future players are
at least as important as the original players - this has been
TransCanada's experience both in Alberta and across North
America.
1:32:49 PM
MR. PALMER surmised that the same will be found in Alaska if the
state is successful in constructing a pipeline that provides
complete open access. There are no inherent conflicts with
TransCanada's other businesses should it be chosen to construct
the proposed pipeline, he remarked. He added:
We think we've filed a strong AGIA application ...,
and we've indicated that it will cost our corporation
... north of $600 million to get to a certificate from
the [Federal Energy Regulatory Commission (FERC)], ...
the federal body that regulates and approves natural
gas pipelines as well as oil pipelines. And, yes, we
will seek, and we'll be using, if we're granted the
license, the state's $500 million that you've
proposed. That's part of the "gives" that the state
has provided in AGIA, and that's counterbalanced
against what you've asked of us. ... In any business
deal or any transaction, you would expect parties to
have some gives and takes. This is one of the "gives"
by the state of Alaska. ... I can assure that
TransCanada is not pursuing this project, to invest
more than a $100 million of our corporation's money,
to find that we don't succeed. Now, we don't succeed
at every project that we pursue, but we have a strong
track record. ...
MR. PALMER, on the issue of TransCanada's U.S. presence, said
that TransCanada owns 12,000 miles of pipeline in the U.S.; that
the Alaska portion of the proposed pipeline, when completed,
will be 750 miles long; and that TransCanada runs an integrated
business across North America, similar to how the oil business
is run.
1:36:02 PM
MR. PALMER said that although TransCanada has many offices in
the U.S., he came himself, from the Alberta office, because he
thinks that the Canadian example is most similar to the Alaska
example in that Calgary and Alberta are also, just as is Alaska,
far from New York, Chicago, and California. He surmised that
one could also find that Alaska has other circumstances similar
to that of TransCanada. For example, TransCanada started out as
a small local business with just 3 customers in Western Canada -
but currently has more than 300 customers - and had a very high
potential basin, a basin that could, in addition to producing
the initial volume, be developed across Western Canada and grow
the market to the benefit of the people of Alberta in the form
of in-state gas, employment, and revenue. He indicated that
some of the slides in his PowerPoint presentation will
illustrate that point. A fair question to pose to TransCanada,
he remarked, is whether TransCanada can obtain the necessary
approvals, build this project, and successfully capture
customers.
1:39:35 PM
MR. PALMER relayed that TransCanada is the largest natural gas
transmission company in North America and moves 20 percent of
North America's natural gas - one in five molecules that move
every day across North America moves in TransCanada's pipeline -
but doesn't own any of the gas. TransCanada is proposing to do
in Alaska exactly what it does across North America, that being
to transport other peoples' natural gas. It is unusual for
producers that own the natural gas to also own the interstate or
interprovincial gas pipeline; they normally put their gas into
third-party, independently-owned pipes like those owned by
TransCanada. TransCanada has the technical engineering and
operating skills to complete this project, he remarked, adding
that he would argue that TransCanada is the best in the
business. Furthermore, third-party, "benchmarking" studies
conducted on TransCanada's operating costs show that they were
25-30 percent lower than those of TransCanada's competitors, and
TransCanada's internal examinations of capital costs between
1990 and 2003 for 42-48 inch diameter pipelines show that they
were 19 percent lower than TransCanada's competitors in Canada
and 38 percent lower than TransCanada's competitors in the U.S.,
and none of these numbers have been challenged by any of
TransCanada's competitors.
MR. PALMER opined, therefore, that when one hears statements
asserting that TransCanada is not motivated to control costs,
one should consider both TransCanada's performance [to date] and
the fact that growing Alaska's basin won't be possible if
TransCanada overspends. It is TransCanada's goal to have low
costs and low tolls - that's how TransCanada attracts more
customers; no business attracts more customers by overcharging.
Referring to a slide in his PowerPoint presentation, he
indicated that it illustrates TransCanada's completed projects
of similar size, with regard to distance and complexity, as the
project being proposed for Alaska. In addition to engineering
and technical competence, in order to complete a project of this
nature, the entities involved must also do what's required when
crossing international, interstate, and interprovincial borders;
must gain regulatory approval; must work with Native
corporations, First Nations, and communities; and must address
environmental issues, climate-change issues, and commercial and
financial issues.
MR. PALMER said that TransCanada has the rights to this project
in Canada and competed for that right 30 years ago; that right
is enshrined in Canadian legislation, and TransCanada has
responsibilities as a result because one doesn't obtain rights
without also incurring responsibilities. TransCanada has been
having discussions with the Canadian government about this
project for 30 years, and the project has some unique
attributes: it will cross an international border; it will
consist of 1,000 miles of pipe from the Alaska-Yukon border to
Alberta, a longer distance than from Prudhoe Bay to the Alaska-
Yukon border; and it could run into some significant issues
because of the fact that a different sovereign nation is
involved. However, 30 years ago a treaty was struck between the
U.S. and Canada specifically for this project, and this treaty,
which remains in place to date, sets out the rights and
responsibilities of both nations for this project, and
stipulates that TransCanada is the project's Canadian sponsor.
And although TransCanada is seeking collaboration and
cooperation on this project, it still has a responsibility to
its shareholders, so in the event that other parties attempt to
take away its assets in Canada, it will, as should be expected,
defend its rights to those assets.
1:45:23 PM
MR. PALMER said that TransCanada believes that the best project
for all parties - Alaskans, the producers, and TransCanada - is
one that will move the gas to the Lower 48 through Canada; it
will provide the best "netback," which he described as the
revenue remaining after the gas is sold in the marketplace less
transportation costs. TransCanada believes that the review
completed by the administration and its consultants concludes
the same thing, he added, but noted that TransCanada is also
aware that there are some proponents of a liquefied natural gas
(LNG) project at Valdez. When TransCanada prepared its
application, it stipulated that when it holds the initial open
season, the parties that want to be customers - the shippers -
can stipulate a delivery point anywhere along the pipeline and
at Valdez at the same; so, in the event that an LNG project is
superior and customers can pull together a viable project at
Valdez instead of having to go to Alberta [as the gas makes its
way to] the Lower 48, they will still have that opportunity.
1:46:44 PM
MR. PALMER offered that for its $500 million investment, if
TransCanada is granted the license, the state will get a
reliable and capable partner committed to advancing the project
and aligned with the state's interests. TransCanada will be
obliged to hold an open season, a process whereby pipeline
companies go out and solicit customers; it's called an open
season because it's open and transparent, and the pipeline
company seeks customers and provides commercial terms in a
public forum. Furthermore, voluntarily, TransCanada will hold
an open season every two years, to seek new customers, and will
expand every two years in the event that it acquires sufficient
customers; TransCanada will promote long-term development of the
basin and is committed, even in the event of an unsuccessful
open season, to obtaining Federal Energy Regulatory Commission
(FERC) certification; and TransCanada is committed to delivering
gas in-state to Alaskans and to an LNG project should such prove
successful.
1:48:17 PM
MR. PALMER said he'd like to relay how TransCanada has developed
the basin in Western Canada, how it has fostered upstream
competition, what its motivation is as a pipeline owner, and
where long-term employment comes from. On the latter point, he
offered his understanding that Alaskans are seeking both revenue
and long-term employment; that long-term employment doesn't come
from operating the pipeline on a long-term basis; that during
the construction phase there will be thousands of jobs for two-
four years; that over the long run, operating the pipeline is
what he characterized as a low-manpower operation. TransCanada
has 3,600 employees and owns 36,000 miles of pipe; each
employee, in effect, is running 10 miles of pipe. Again, Alaska
will have 750 miles of pipe when the project is completed, so
the state could expect to have about 50-75 permanent employees
to operate the pipeline - that's all that will be needed for
efficient operation of the pipeline. He surmised that that is
what the state would want, just as would any company or
sovereign; as a tax collector, the state will want an efficient
and low-cost operation. [Long-term] employment will come from
expanding the pipe, from drilling, and from associated services
- in other words, from finding more gas and completing more
wells.
1:50:42 PM
MR. PALMER turned attention to his PowerPoint presentation, and
said that TransCanada seeks early "in-service" for the project;
that the project will be TransCanada's largest investment
opportunity in its core business; that the project will utilize
some spare capacity, which is advantageous both to Alaskans and
to Western Canadians; that there's some spare capacity in
TransCanada's pipeline systems leaving Canada; that by the time
the project is completed, TransCanada anticipates having
sufficient spare capacity leaving Western Canada to transport
Alaska's entire volume all the way to the Lower 48 without any
incremental facilities; and that there will be no need for a new
pipeline leaving Western Canada in order for Alaska to deliver
its gas to the Lower 48 market. On the issue of encouraging
long-run basin development, he offered his belief that
successful pipeline expansions can create a virtuous circle that
leads to more drilling, which, if also successful, can lead to
more expansions, which is where [long-term] employment will come
from and where long-term, in-state gas deliveries will come
from. Furthermore, TransCanada is in favor of equitable
treatment for all customers, and has a 50-year track record [of
providing that].
1:52:28 PM
MR. PALMER referred to a map of TransCanada's pipeline system
across North America, and offered that when built 50 years ago,
the original 2,300 miles of pipe leaving Western Canada and
going to Eastern Canada was longer and more challenging [to
build], from an engineering standpoint, than TransCanada's
proposed pipeline going from Prudhoe Bay to Alberta.
Furthermore, that original pipeline was built at TransCanada's
inception, and, as it passed through Northern Ontario, was built
on solid ground, so TransCanada had to blast its way through
that area; in contrast, the proposed pipeline will not have to
traverse that sort of terrain. Then, in the 1990s, TransCanada
constructed 7,000 miles of pipe, more than four times the
distance the proposed pipeline will traverse, and did so on
schedule and within .06 percent of budget - no other company has
a similar track record in building North American interstate
pipelines.
MR. PALMER said that TransCanada is also currently constructing
an oil pipeline - illustrated by the dashed, red line on slide 3
of the PowerPoint presentation - in conjunction with
ConocoPhillips as the 50 percent partner; this pipeline, also
longer than Alaska's proposed project, will move heavy oil out
of the oil sands in Western Canada down into the Midwest and on
to Cushing, Oklahoma. And if that pipeline and another pipeline
that will be built between Alberta and the Gulf Coast are
successful, the [cost of the] two projects together would total
some $13 billion, half the capital costs of the Alaska's
proposed pipeline. TransCanada hopes to have those two oil
pipelines completed by 2012. With regard to the aforementioned
oil pipeline, between Alberta and Winnipeg, TransCanada is
intending to convert 50-year-old pipe from gas service to oil
service and then continue to use it for the next 30-50 years;
TransCanada's ability to do this type of conversion illustrates
some measure of TransCanada's maintenance record.
1:55:27 PM
MR. PALMER, with regard to Alaska's proposed pipeline, said that
there will be two major components: the "within Alaska"
component, and the component between Alaska and the market in
Alberta and onto the Lower 48. Referring to slide 4 of the
PowerPoint presentation, he indicated that it illustrates
TransCanada's development of the basin in Western Canada over
the last 50 years - a 250-mile pipeline system serving 3
customers is now a 15,000-mile pipeline system serving over 300
customers via 1,100 receipt and delivery points. Consider what
this means for in-state gas development, he remarked. Slide 5
illustrates the pipeline going from Western Canada to Eastern
Canada. A pipe can be expanded by adding compression - this
means adding more pump stations to compress the gas more and
thus increase the amount of gas that can be moved through the
same-sized pipe. However, at some point it becomes more
efficient to simply add what are called pipeline loops -
parallel pipelines on the same right-of-way as illustrated via
slide 6; there are now six parallel pipes moving gas east out of
Western Canada. Parallel loops don't have to be constructed all
at once if expansions are small in scale, they can instead just
be partial loops, and that's the kind of expansion that
TransCanada has been successful with over the last 50 years in
getting its product out of Western Canada.
1:58:38 PM
MR. PALMER referred to slides 7 and 8 illustrating what he
called the "must-haves" required by the Alaska Gasline
Inducement Act (AGIA). TransCanada is of the belief that it was
through these "must-haves" that the state intended to advance
the project, and so submitted its application in good faith on
that basis. TransCanada is gratified that the administration
has indicated that TransCanada has indeed met all the state's
"must haves." He went on to say:
I described to you earlier that TransCanada competed
under AGIA, and I've heard some parties in the press
speculate that there's been no competition because
TransCanada is the only party that made it through the
first test that had a complete application. I think
many of you will have asked contractors to bid on your
house - either [for] renovations or ... to construct a
house - and when you do that, whether you've been on
the buyer's side or on the contractor's side, you know
that the competition occurs in advance of the bid. If
you ask for a best and final offer from your
contractor, which is what the state did under its RFP
process, parties don't get a second chance - they must
put their best foot forward, they must put a best and
final ... offer on the table not knowing what their
competitors will do. TransCanada did exactly that.
We expected that there would be other parties that
submitted complete bids, and we filed accordingly. ...
And by the way, after we learned that we were the
party with the only complete application, we did not
come back to the state and seek to amend our
application and improve it from our standpoint - we
did not have the right to do so, and we did not seek
to do so.
MR. PALMER, in response to a request, explained that in order to
transport gas, it has to be what is known as "pipeline quality,"
and so impurities must be removed; in this case it is primarily
carbon dioxide that will have to be removed because Alaska's
natural gas contains significant volumes of it as it comes out
of the wellhead in Prudhoe Bay. Rending Alaska's gas pipeline
quality will require that a $6 billion gas treatment plant (GTP)
be built on the North Slope. TransCanada has proposed that this
GTP be owned by other parties rather than TransCanada. The
logical parties to own the GTP are the three producers that
currently produce gas at Prudhoe Bay; they have common
facilities there as well as other huge operations, and so could
probably save money by owning a GTP at that location, though
other parties might wish to own such a facility. The cost of
building a GTP on the North Slope is about 22 percent of the
total cost of the proposed pipeline project, a nice investment
opportunity should the three producers not wish to own it, and
the GTP will probably be regulated by the FERC. In the event
that no other party wishes to [build and] own a GTP on the North
Slope, then TransCanada will do so, though it would prefer not
to because it is primarily a pipeline company; TransCanada has
constructed facilities of that nature before, though not on the
scale proposed.
2:02:53 PM
MR. PALMER, in response to another request, explained that in
any business there are generally two forms of risk: the
inherent business risk, and the financial risk. The latter form
of risk pertains to how one finances one's business. Most small
businesses "run with something close to 100 percent equity"; in
other words, it is essentially the owner's funds that finance
the business. There are other businesses, however, that have
some significant amount of debt that supports the business or
supports the project. In the gas pipeline business across North
America, particularly in the Lower 48, one can see a spectrum of
how much equity, versus debt, that a particular business has -
and debt plus equity, of course, makes up 100 percent of a
project's or business's "capitalization." Under AGIA the
licensee is required to have a minimum of 70 percent debt, a
very high debt ratio for a pipeline company, and for a project
of this complexity and risk. In contrast, in the Lower 48, many
pipeline companies only have a debt ratio of between 40-60
percent.
MR. PALMER explained that the aforementioned high debt ratio is
achievable [for TransCanada] primarily because the U.S.
government, almost four years ago, passed legislation that
provided a federal loan guarantee mechanism for up to $18
billion for "this project." Because of this financial support,
TransCanada, regardless that the state is only requiring a 70
percent minimum debt ratio, has actually offered to go as high
as a 75 percent debt ratio when in service. This is important
for TransCanada because as a sponsor, it earns money only on the
equity component of a project, and so going as high as a 75
percent debt ratio results in a toll reduction of $.09/mmBtu -
$150 million per year in toll reduction. This means less return
for TransCanada than it would normally expect. He elaborated:
Debt usually has a cost. On a project like this, it
will likely be ... [at a] 5 to 7 or 8 percent interest
rate - that's about what you can borrow money [for] on
a project of this nature in this market. ... Equity,
on the other hand, costs more money because it has
risk, and ... [TransCanada's proposal] assumed that
the equity return would be 14 percent. And in
addition to receiving a return, there is a collection
of income taxes on the equity; the nature of the
business, both in the Lower 48, here, and in Canada
[is that] governments collect taxes on income that you
earn as a shareholder. That means that equity is much
more costly to customers than debt, and customers
always want you to have more debt, and pipeline
companies always want to have more equity. So that's
a component we put on the table.
2:07:46 PM
VICE CHAIR STEDMAN asked who has the authority to set the limits
on debt to equity.
MR. PALMER relayed that the FERC and Canada's National Energy
Board (NEB) have that authority. He noted that with regard to
other parties and pipelines, there has been a range of
debt:equity ratios. For example, there are a number of projects
in which companies have 30-60 percent equity, though those
projects didn't have the same risks as Alaska's proposed
project. He suggested that legislators should review the legal
and regulatory complexities of this project, adding, "Certainly
this project is as risky or more risky than any other project
that I can describe that we have looked at over the last several
years." He noted that although the producers have expressed an
interest in being owners in the project, currently TransCanada's
proposal has TransCanada owning the entire project; however, in
its application, TransCanada has also proposed that parties
which commit their gas in the initial open season will have the
option of becoming TransCanada's equity partners [in the
project].
MR. PALMER, in response to a question, indicated that if the
state grants TransCanada a license, those parties that do chose
to become equity partners must adhere to AGIA's 20 must-haves.
The question producers must consider, therefore, is whether they
can live with that as opposed to advancing a different project
on their own. He predicted that if the producers do decide to
advance a different project, even without the various
concessions from the state that they've always asked for
previously, they will still have significant challenges to
overcome, both in Alaska and in Canada; for example, producers
don't have the benefits of a treaty and or of a specific Act of
parliament or of the rights that TransCanada has or of a "single
window" regulatory agency.
MR. PALMER, in response to another question, indicated that
advancing TransCanada's proposed project carries risk for the
state just as does not advancing any project. With regard to
the latter option, he added, "We've seen some of the results of
that over the last several years; as we've all pursued this
project and tried to move it forward, we've seen some
international competitors advance other projects that are [now]
in the market place in advance of Alaska." With regard to
advancing TransCanada's proposal, the state will face the risk
that it will invest $500 million only to have this joint venture
between the state and TransCanada be unsuccessful, the risk that
regulators won't approve the project, and the risk that in a few
years the state may decide that it doesn't like "this deal" and
therefore wants to change it. In the event that the latter
occurs, the state has specific limitations to its obligations to
TransCanada; in contrast, if TransCanada breaches the agreement,
it has no limitations to its obligations to the state.
MR. PALMER offered that the possible benefits of approving
TransCanada's license include improving the state's chances of
advancing the project and improving the state's chances of
capturing value in terms of in-state gas, employment, and
revenue. The legislature must consider whether the possible
rewards of approving TransCanada's license are balanced with the
risks of doing so. He said that TransCanada believes that it
has put forward a proposal that can succeed, with the state as
its partner.
2:15:52 PM
MR. PALMER, in response to a question, explained that since
filing the application last year, TransCanada has expended about
$2 million; that the assets "in Yukon and North BC" are about
$20 million combined; that that figure is .1 percent of the
estimated capital costs of the proposed project; that Foothills
Pipe Lines Ltd., owns significant facilities in Alberta,
southern British Columbia, and Saskatchewan worth several
hundred million dollars; and that TransCanada, if successful [in
obtaining a license under AGIA], is obligated to fully fund the
equity component of the project. In response to further
questions, he indicated that TransCanada stipulated in its
application a toll rate of $2.41; that TransCanada's current
right-of-way payments for "the Yukon" is $30,000 per year; that
TransCanada has spent some $750,000 in total over the past 25
years for that right-of-way; and that the aforementioned $20
million includes "those numbers."
The committees took an at-ease from 2:20 p.m. to 2:27 p.m.
REPRESENTATIVE FAIRCLOUGH asked whether an in-state bullet line
between Cook Inlet and the Interior would be considered
competition to the proposed project.
MR. PALMER relayed his understanding that that would involve a
20-inch pipeline with a volume of less than .5 Bcf/day. In
response to a further question, he explained that a provision in
the AGIA allows for the state to provide fiscal assistance to a
competitive pipeline that moves less than .5 Bcf/day of in-state
gas. He added that TransCanada doesn't have an issue with that
bullet line proposal as long as that pipe doesn't exceed that
size or volume. In response to another question, he pointed out
that any pipeline can be expanded via compression and looping,
but surmised that the volume of gas moving through such an in-
state pipeline will remain under .5 Bcf/day until [TransCanada's
pipeline] is in service, because those are the provisions of
AGIA. He offered his belief that a 20-inch pipe is the
appropriate size pipe for moving up to, or less than, .5
Bcf/day. He went on to say:
What we would be very concerned about, of course, is
if someone were building a 48-inch line and then
dribbling through [.5 Bcf/day], or slightly under it,
on a long-term basis, expecting a subsidy from the
state and then wanting to compete with me the day
after we went in service. That clearly would not be
in compliance with AGIA, in our view.
2:36:41 PM
VICE CHAIR STEDMAN asked what volume of gas is anticipated in
TransCanada's proposal, and why TransCanada is concerned with a
.5 Bcf/day limit.
MR. PALMER responded that the proposal and application that was
filed anticipated 4.5 Bcf/day transported from Prudhoe Bay to
Western Canada and to the Lower 48. At this point, however, the
ultimate volume will only be known at the time that customers
actually nominate in the open season - what customers request,
either in Alberta or to Valdez. He indicated that AGIA's
treble-damages clause - which precludes the state from providing
fiscal assistance to a competing pipeline project, that being
one involving a pipeline capable of moving more than .5 Bcf/day
- does two things: it ensures that North Slope gas is not
diverted from the TransCanada pipeline, and it ensures that
TransCanada's obligations to the state won't be unfairly
burdensome should the state still choose to subsidize a
competitor. He relayed his understanding that the state intends
to provide up to .5 Bcf/day of in-state gas only to Alaska's
local markets and not to a competitor of TransCanada's pipeline.
MR. PALMER, in response to a question, stated that TransCanada
is prepared to move smaller volumes of less than 3.5 Bcf to
Western Canada. However, due to economies of scale, the
economics of the project could be significantly impaired if
volumes drop below 3.5 Bcf/day to the AECO Hub - a large
diameter pipeline, compared to a small diameter pipeline, can
save significant costs. He offered that having a pipeline
capable of moving more than 3.5 Bcf/day would be the most
economical. If, however, customers were interested in a 2.5
Bcf/day pipeline, then the tariff would be significantly higher
due to the lower volume.
2:39:56 PM
MR. PALMER, referring to a slide in his PowerPoint presentation,
mentioned that TransCanada proposes that in the event of a
capital cost overrun, it would take a reduction in the rate of
return, which is unusual in the pipeline industry because of the
low level of equity. He noted that Fort Nelson, along the
[proposed] pipeline route, is midway through British Columbia.
TransCanada has significant spare capacity in its systems in
Western Canada and anticipates more at the time that Alaska's
gas would be online. Due to its charging methodology
TransCanada, as a pipeline owner, does not make less money when
it has spare capacity in its system and won't make more money
when it refills its pipeline with Alaska gas; instead, the unit
cost to TransCanada's customers increases and decreases based on
the volumes in the pipeline. Thus, if TransCanada refills the
pipeline as a result of moving Alaska's gas, not only does
Alaska benefit from receiving better prices for gas, more
liquidity for gas, and more diversity, but Western Canadian
producers will benefit as well.
MR. PALMER referred to projections that Western Canadian
producers would benefit by a reduction of tolls in the amount of
$10 billion over the first 15 years that Alaska gas moves into
that system. TransCanada proposes a structure, called the Fort
Nelson option, in which TransCanada would seek authority from
Canadian regulators to shift about $3 billion of that $10
billion to "Alaskan shippers' accounts," thus benefiting Alaska
additional to what's currently proposed in TransCanada's
application.
2:42:31 PM
MR. PALMER - referring to slide 10, which shows a map of the
proposed pipeline system - pointed out that Alaska would gain
access to the AECO Hub, represented by the blue lines, and that
once Alaska has access to that system, Alaska can trade its gas
for free once the receipt toll is paid. This system provides
significant liquidity and so Alaska may wish to trade its gas
[at the AECO Hub]. Others would then take possession of the gas
and continue to move it on to the Lower 48 to U.S. consumers.
He said that he's heard in the press that all of Alaska's gas
will end up in the Alberta tar sands.
MR. PALMER assured members that that statement is not correct.
Western Canada today has surplus gas and has had surplus gas for
40 years and exports 9 Bcf/day to the Lower 48, double the
volume of the proposed Alaska pipeline. He relayed that the
Western Canadian supply will be "relatively flat going forward"
and that demands are increasing, which is why the spare capacity
will increase. He said he anticipates that by the time Alaska
gas flows, Western Canada will still have 6 to 7 Bcf/day of
surplus gas even after meeting the "oil sands demand." So
although "you can't paint your molecules with your flag and
Canadian molecules with a Canadian flag," he said, Alaska's gas
will be exported to the Lower-48 market after serving Alaska's
markets first.
2:45:09 PM
REPRESENTATIVE KELLY posed a hypothetical example in which a
small-diameter spur line was completed from Anchorage to
Fairbanks to deliver Cook Inlet gas, and the TransCanada's 48-
inch pipeline was delayed. He asked whether, in that example,
TransCanada would be willing to build a pipeline to Fairbanks or
Delta Junction provided gas was available from the producers.
If TransCanada did so, he surmised, then that pipeline would
bring new gas to Fairbanks.
MR. PALMER, noting that that example assumes that a 48-inch pipe
to Delta Junction could get constructed, said yes, so long as
TransCanada has enough customers to allow TransCanada to recover
its capital. He indicated that the volumes would be small, and
therefore either the tariffs would be high or TransCanada would
need to have capital contributions, since a large pipe can move
4.5 Bcf/day would only be moving volumes under .5 Bcf/day.
REPRESENTATIVE KELLY agreed that [in that case] some
contribution would be necessary for the project. He asked what
Mr. Palmer would project as the "absolute floor" on its first
open season before "you take a hike."
MR. PALMER pointed out that AGIA does not allow TransCanada to
"take a hike"; instead TransCanada must continue through FERC
certification, even if zero volumes are committed in the initial
open season, and must also hold a second open season two years
later.
MR. PALMER referred to a slide labeled, "Project Schedule," and
said the timeline for the first open season is set at 2010 and
that the second open season would be held at the same time that
TransCanada would file its FERC application. He offered that if
TransCanada obtained a FERC certificate and still did not have
customers, then the project would not appear viable. In
response to other questions, he offered his understanding that
customers may be reluctant to commit to the pipeline for less
than 3.5 Bcf/day to the AECO Hub, and that TransCanada would
[build a pipeline] handling less than 3.5 Bcf/day if there were
sufficient customers willing to pay the resulting higher tariff.
2:50:31 PM
REPRESENTATIVE LeDOUX asked why TransCanada would continue
through the FERC certification process to a second open season
if the initial open season is unsuccessful, except that AGIA
requires TransCanada to do so.
MR. PALMER indicated that is why - under AGIA, one of
TransCanada's obligations is to proceed to FERC certification.
Thus, if the license is granted, TransCanada will continue
seeking customers and FERC certification, and if TransCanada is
successful in capturing customers at a later open season, the
project will be advanced which, he opined, is the intent of
AGIA.
2:52:24 PM
REPRESENTATIVE FAIRCLOUGH offered that she has heard discussions
about projects that would move a lot of gas from the North Slope
to the AECO Hub. She asked about building a gasline or a bullet
line without there being proven reserves. She relayed her
understanding that the predictions for gas have already been
made, and asked Mr. Palmer to speak to the proven reserves that
can be demonstrated to the financiers.
VICE CHAIR STEDMAN asked Mr. Palmer to also explain the concept
of oil and gas off-take.
MR. PALMER explained that natural gas often comes in "non-
associated fields" that contain only natural gas. However, in
an "associated gas field" such as at Prudhoe Bay, gas is
associated with oil in the reservoir. In such fields, the oil
is often produced first, with the natural gas being re-injected
to maintain pressure in the reservoir. At some point, though,
it is better to stop producing the oil or the oil and gas
together. The gas in Prudhoe Bay has been re-injected to
maintain reservoir pressure for 30 years thus far. Most of the
gas contained in the North Slope, including Prudhoe Bay and
Point Thompson, is associated gas, he said, adding that he is
not aware of anyone exploring solely for non-associated gas. He
said he anticipates that there will be some exploration for
associated gas, and although most reservoirs in North America
contain non-associated gas, since oil production results in the
most profit, gas is being re-injected into the reservoir to
assist in the production of oil. In other instances, where
there is no gas pipeline, the reservoir has to be capped because
there's no market for the gas.
2:56:32 PM
VICE CHAIR STEDMAN relayed his understanding that as the basin
ages, the off-take amounts could finance gasline construction.
2:57:06 PM
MR. PALMER said that the North Slope contains approximately 35
trillion cubic feet (Tcf) of proven reserves, which represents a
very substantial initial reservoir, and that in its application,
TransCanada is requiring customers to have 10 years of proven
reserves for a 25 year contract. That's relatively standard.
In order to finance the project, one generally doesn't need 25
years of proven reserves before starting. He offered his belief
that independent studies confirm that the North Slope is a
prolific basin, and calculated that 10 years of proven reserves
at 4.5 Bcf/day represents about 1.6 Tcf per year. So if the
pipeline flowed full every day, that it would represent 16 Tcf
over 10 years, the amount needed to "backstop" customer
contracts under TransCanada's application.
MR. PALMER relayed that Prudhoe Bay contains 24 Tcf in proven
reserves, with an estimated additional 8 to 10 Tcf at Point
Thompson, though that may not be available initially. Not only
does [the state] need to know how much initial and future gas is
in the reservoir, but also how much can be delivered from the
reservoir, he stated, and this will be determined by government
officials and the leaseholders. Government officials have
projected initial gas volumes of 3.5 Bcf/day or 4.0 Bcf/day, so
Point Thompson, he opined, will be needed to increase that
amount to 4.5 Bcf/day.
REPRESENTATIVE FAIRCLOUGH surmised that Alaska's ability to
successfully monetize its gas relates to the economic
feasibility of the project and the involvement of the producers.
She also surmised that he question before the legislature is
whether Alaska will invest in an AGIA license with TransCanada.
3:01:27 PM
REPRESENTATIVE ROSES asked to revert back one slide to examine
the Fort Nelson option upside [slide 9, labeled TransCanada's
Competitive Response to AGIA]. Representative Roses recalled
that TransCanada's proposal would be submitted the NEB without
any guarantee of approval.
MR. PALMER, in response to comments and questions, clarified
that if TransCanada is successful in getting the NEB to approve
the aforementioned Fort Nelson option, the tolls would fall from
$2.41 to about $2.25.
REPRESENTATIVE ROSES asked why the Mackenzie River pipeline must
be brought to the AECO Hub prior to the Alaska line, and whether
TransCanada would have enough excess capacity to handle Alaska's
gas without Alaska paying expansion prices inside Canada.
MR. PALMER answered that the 4.5 Bcf/day to 5 Bcf/day of spare
capacity assumes that Mackenzie River gas is flowing prior to
Alaska gas; if not, then only about 1.5 Bcf/day of spare
capacity would be available.
3:05:13 PM
REPRESENTATIVE HAWKER asked whether TransCanada would be willing
to undertake the pipeline without the state's $500 million, and
what the state and TransCanada's financial obligations would be
in the event that TransCanada were to proceed with the Alaska
project beyond a failed open season.
MR. PALMER explained that agreeing to move forward beyond a
failed open season was difficult for TransCanada, and so views
the $500 million as one of the values it will receive from the
state for doing so. He relayed his understanding that in terms
of the allocation of the $500 million, prior to the open season
and if TransCanada is granted a license, the state would
reimburse TransCanada for up to 50 percent of its cost, which,
he estimated, would be about $84 million. After the open
season, whether successful or not, TransCanada would pursue a
FERC certificate, and the state would pay up to 90 percent of
the cost, up to the $500 million cap, with TransCanada being
responsible for any costs beyond that.
3:10:23 PM
REPRESENTATIVE HAWKER questioned whether its reasonable for the
state to spend $500 million to pursue FERC certification after a
failed open season.
MR. PALMER reiterated that a portion of the state's $500 million
would be spent prior to the open season, pointed out that
pursing FERC certification even after a failed open season is an
aspect of AGIA that was approved by the legislature, and
mentioned that TransCanada has hopes for a successful open
season. In response to comments, he acknowledged that the
legislature is not obligated to approve TransCanada's
application.
3:15:59 PM
SENATOR THERRIAULT noted that although normally a pipeline
company would not proceed with FERC certification after a failed
season since such would indicate that there's no need for a
pipeline, in this case, Congress has taken action telling the
FERC that this pipeline is in fact needed. Thus, that first
hurdle has already been addressed.
MR. PALMER concurred.
SENATOR THERRIAULT said that although TransCanada might be
reluctant to proceed with the FERC certification process [if the
first open season fails, from the state's point of view,
continuing to advance the project is of value to the state.
Additionally, the state's $500 million investment would lower
the tariff, so after recouping its investment the state would
receive an additional $200 million.
MR. PALMER concurred with that summation.
3:18:14 PM
SENATOR THERRIAULT - noting that the Denali project, proposed by
BP Exploration (Alaska) Inc. ("BP") and ConocoPhillips Alaska,
Inc. ("Conoco"), is proposing a volume of 4.5 Bcf/day - asked
Mr. Palmer whether he has heard anything that leads him to
believe that the gas will not be there when the proposed
TransCanada pipeline is completed.
MR. PALMER said, "I have heard testimony from a number of
parties that would lead me to believe that the volume may be
more like 3.5 to 4 Bcf/day initially rather than 4.5 [Bcf/day]."
SENATOR THERRIAULT surmised that's still enough volume to make
the TransCanada project financially successful.
MR. PALMER concurred.
VICE CHAIR STEDMAN, noting that it's necessary to have a design
before obtaining a FERC certificate, asked how TransCanada can
proceed with a design without knowing what amount of gas will be
available.
MR. PALMER answered that if sufficient gas to advance the
project - either to the Lower 48 or to an LNG project - is not
available, then TransCanada will have a judgment call to make
with regard to what it will apply to the FERC for. However,
it's too early to describe what that might be. He said, "That's
a very unhappy circumstance, where I have an open season and I
get zero gas committed in two years time - I don't expect that
to happen, but it's always a possibility."
3:21:10 PM
MR. PALMER referred to slide 25 of his PowerPoint presentation,
and offered that TransCanada believes that AGIA was structured
to encourage construction of the base project; long-run basin
development; and open access terms for initial and future
shippers and in-state, Lower 48, and LNG markets. A critical
point to consider, and one that impacts the probability of
success, is that AGIA obliges TransCanada to voluntarily expand
the pipeline. He suggested that when considering any "non-AGIA"
pipeline proposal, the legislature should question those making
such a proposal regarding how they would pursue expansion. He
noted that TransCanada is in favor of providing gas for in-state
use, gas to the Lower 48, and gas to LNG markets.
MR. PALMER said that TransCanada believes that it has the
credentials and capacity to build, own, operate, and expand the
project. He said, "We think our objectives are aligned with
AGIA; we want early in-service, we want long-run basin
development, and by that I mean we're not here to just move your
35 Tcf of gas - we think you have 235 [Tcf of gas] or beyond."
He noted that in Western Canada, the original proven reserves
quadrupled in the first 10 years of in-service. If that were to
happen in Alaska, there would be more than 100 Tcf available 10
years after in-service. He concluded by stating that
TransCanada wants open access and equitable treatment for all
customers.
The committee took an at-ease from 3:24 p.m. to 3:29 p.m.
3:30:25 PM
PATRICK GALVIN, Commissioner, Department of Revenue (DOR),
explained that under the AGIA process, he shares responsibility
with Commissioner Tom Irwin, Department of Natural Resources
(DNR); together they make a number of decisions associated with
AGIA and advancing the gas pipeline. In 2000, as the North
American natural gas prices began to increase, North Slope
companies and the state began to anticipate a change in the
natural gas market and the resulting opportunity to bring
Alaskan gas to the North American market. He characterized AGIA
as the culmination of the state's work in trying to advance a
gasline. The state has struggled to surmount the hurdles that
have delayed the project, and has tried to identify the factors
which have done so. In 2002, for example, BP indicated that
production of Alaska's natural gas was not yet economically
viable for it, and so the previous administration underwent
extensive negotiations with the three North Slop producers
regarding what changes the state needed to make in its fiscal
and tax systems and its management of oil and gas leases, and to
determine what level of contractual certainty and stability was
necessary to advance a gasline project.
COMMISSIONER GALVIN noted that both the legislature and the
public reacted adversely to the previous administration's
proposal. The AGIA proposal, in contrast, is based on a
recognition that the project is economic and will make money for
its participants. He opined that what the state needs to do to
advance the project is to instill a sense of urgency in order to
attract the competition necessary to drive a gasline project
through the number of hurdles that any big project must
overcome. The state needs to be the project's catalyst, but
does not need to carry it all the way to completion, taking on
all the risks and forwarding all of the money associated with
the project. He opined that AGIA was designed to do just that,
to be the catalyst getting the competition necessary to drive
the project forward.
3:36:52 PM
COMMISSIONER GALVIN said that the state looked to the private
sector as being the primary driver of the project, and offered
inducements in exchange for some agreement by the successful
applicant. He added, "Competition was put forth, both in terms
of competition to get the state inducements and also competition
to move the project ahead." Not all interested parties,
however, were willing to submit an application to move a gasline
project forward under the then-existing framework. He
characterized AGIA as "about creating competition and unleashing
the power of the private sector to move this project ahead."
Under AGIA, the state will provide matching funds upfront to get
past the initial design and regulatory process in order to
"prove up the economics" and provide the opportunity for other
participants to join in the project, and to allow the project's
economic potential to ultimately drive it to fruition.
COMMISSIONER GALVIN noted that in return, the state wants to
protect its long-term interests since it not only desires a gas
pipeline, but also a gas pipeline that meets the state's long-
term goals, which are to create exploration and development
opportunities on the North Slope - even for companies that may
not yet be in Alaska - to get the gas to market as quickly as
possible for a reasonable cost. The state wants a gas pipeline
that has genuine "open-access provisions." He explained that
provisions in federal law govern the regulation of this proposed
pipeline, but don't guarantee the outcome, and so AGIA is
intended to increase the likelihood that the state will have a
pipeline that will provide a competitive environment on the
North Slope which ultimately drives more development that in
turn leads to more jobs and revenue for the state.
3:40:28 PM
COMMISSIONER GALVIN offered that the state solicited applicants
to accept the state's matching funds in return for making the
commitments required under AGIA, some of which primarily entail
a commitment to a timeline to move through the initial design
and regulatory process with the FERC, and to move through the
open season process and the FERC certificate process.
Additionally the [successful applicant] would commit to manage
the project and to provide open access - the long-term
opportunity for exploration - and structure financing in such a
way so as to lower [tariff] rates. He explained that 90 percent
of the state's revenues are based on the taxes and royalties
from the state's oil and gas leases and are derived from the
value of oil and gas at the wellhead. The wellhead value is
derived from taking the market selling price and subtracting the
transportation cost to get the gas to market - the tariff. He
The lower the tariff on the pipeline, the greater the "netback"
value, which results in an increase in revenue to the state.
Additionally, lower tariffs also result in an increased value
for the producer. The state did receive applications in
response to its request for applications, and the state
evaluated the applications in terms of whether they met AGIA.
The only applicant that met all the requirements was
TransCanada. Under AGIA, the state needs to evaluate whether
the application maximizes the benefits for Alaskans. That
evaluation will allow the state to examine other opportunities
with regard to a gasline.
COMMISSIONER GALVIN said it was necessary to examine the
TransCanada project and compare it with all other opportunities
that the state might have, including LNG options and the Denali
Project. The state, therefore, focused on four areas, with one
top priority being to get a gas pipeline moving through the
process.
3:46:00 PM
REPRESENTATIVE FAIRCLOUGH asked whether Commissioner Galvin
could explain the analysis the state used regarding the
aforementioned BP/Conoco proposal.
COMMISSIONER GALVIN said that the Denali Project is not yet
fully defined, and so the state has not been able to perform
much of an economic analysis. The little bit of an analysis
that was performed focused more on where state wanted to
position itself in terms of advancing a gas pipeline. The
questions to consider are, does the state go forward with
issuing the license to TransCanada, how does that compare to the
Denali project, does the Denali project give the state a reason
not to pursue TransCanada's license and instead rely on the
Denali Project, and how would that determination be made. In
response to comments, he clarified that the state examined
hypothetical questions, one of which was what would the economic
impact be on the state's revenue stream if the Denali project
goes forward - particularly under a range of debt:equity ratios.
However, in terms of an performing an actual economic analysis,
the state just doesn't have enough information yet. In response
to a comment, he explained that all analyses, including
associated documentation, are contained in the state's findings.
3:52:47 PM
VICE CHAIR STEDMAN recalled that the consulting firm of Black &
Veatch had indicated that one can't make a meaningful comparison
between AGIA and the Denali project with the information
currently available.
COMMISSIONER GALVIN relayed that Black & Veatch developed an
economic model for the state so that it could perform some
sensitivity analyses, and surmised that the Denali project could
come in with "the exact same economics" since the Denali project
has no specifications as of yet, and particularly since both
projects are nearly the same in that they are going to the same
markets and are using similarly-sized pipe. The state, however,
has commitments with TransCanada, regardless that the Denali
project has the potential for a wider range of possible economic
outcomes.
SENATOR THERRIAULT asked whether the administration has a slide
that details the benefits the state derives from the $500
million investment. He offered his understanding that that
investment could potentially lower the tariff by up to $1. He
indicated, therefore, that what needs to be considered is
whether any value is left as each unit if gas is shipped.
COMMISSIONER GALVIN acknowledged that there are a number of ways
to view the potential value to the state in moving forward with
an AGIA license. He continued:
In comparison to, for example, the Denali Project, you
can look at it ... from ... sort of a ... strategic
aspect ... - we get somebody to commit to move a
project forward, to commit to have certain economic
commercial terms that are going to be beneficial to
the state. And we can put a price tag on some of
that, but that price tag is not fixed; it's just
looking at it in terms of the potential value if we
have a project instead that comes forward with what
would still be considered an industry-acceptable
tariff structure.
And that is what Senator Therriault was directly
referring to, that we did analyses that said if you
had ... a debt to equity ratio that is 50:50, which is
within industry standards, that that alone -
everything else being equal - that change alone would
... have an effect of ... raising the tariff by $1,
lowering the value to the state [by] ... $8 billion.
And that's completely out of context because I'm not
talking about value to the state yet, but suffice to
say it would have a big impact on the potential value
to the state.
Now, that is [one] aspect of it. The other way of
looking at the $500 million is by having that
contribution go in by the state early on in the
process. We end up lowering the amount of the costs
that have to be recovered by the pipeline - lowers the
tariff itself; that only lowers the tariff by $.06.
However, that $.06 reduction in the tariff ...
[results in an] increase in the value to the state of
$200 million. So even if you consider the state
having put in $500 million, we end up getting our $500
million back and increasing the value of this project
to the state by $200 million. So, the economic
analyses was important. ...
3:59:49 PM
REPRESENTATIVE SAMUELS asked how long it will take for the state
to recoup the $500 million and obtain the $200 million.
COMMISSIONER GALVIN offered that the gas pipeline will result in
revenues to the state for years to come. Thus, to evaluate that
in comparison to other potential projects - with each project
having money coming in at different times - a calculation of net
present value (NPV) is used to determine what those dollars are
worth today. For example, if $1 billion is earned 20 years from
now with a 5 percent loss of value per year - essentially a 5
percent discount rate - that $1 billion earned 20 years from now
will be worth substantially less than $1 billion in today's
dollars. In contrast, the state's $500 million investment today
would - under an NPV calculation - increase the value of the
project to the state by $200 million in the first 25 years;
essentially, the state would receive $700 million in value for
its $500 million investment. In response to a comment, he
acknowledged that his example assumes there is a viable project.
When doing the analysis under AGIA, the state has to factor in
both the NPV to the state and - as a separate analysis - the
project's likelihood of success.
4:03:21 PM
COMMISSIONER GALVIN, with regard to evaluating the project's
likelihood of success, indicated that the major hurdle of
getting gas committed to the pipeline must be considered. So
the state examines the economics of the project, the NPV to the
producers, in order to analyze whether the project will attract
customers willing to provide gas commitments, which in turn will
lead to financing and result in a successful project. He opined
that in this instance, there is the potential for the state and
the producers to earn a lot of money, and this gives the
administration confidence that the project has a reasonable
expectation of attracting gas commitments and providing revenue
to the state.
COMMISSIONER GALVIN referred to slide 27 - labeled, "Denali
Project Is More Risky For the State" - of his PowerPoint
presentation illustrating some comparison. He opined that the
analysis is not only about the revenues to the state, but about
the range of possible outcomes. With the Denali project, the
state does not have commitments with regard to the timeline and
advancing the project to the open season and through the FERC
certification process; in contrast, the state does have such
commitments from TransCanada. Furthermore, with the Denali
project, the state can't anticipate the actual financing or the
rates that will be charged. However, the state can still
compare the possible outcomes of the two projects.
COMMISSIONER GALVIN elaborated:
That's where you see the references to the $8 billion
change in NPV. That's just simply saying that it's
possible that this would be the difference between the
Denali project and the ... [proposed TransCanada]
project. Similarly, when we look at the other values
that the state is anticipating to get out of the AGIA
license with regard to the open access provisions,
these have tremendous value to the state in the long-
term. This is the difference between being able to
get just the known gas off of the North Slope, in
terms of the gas that's currently being produced on a
daily basis in the oil fields, versus ... being able
to get all of the expected gas that should be found
once explorers are out there looking for gas. If they
know they can get their gas into a pipeline and
ultimately to market at a reasonable rate, then it
will incentivize that activity, which leads to the
jobs and the revenue to the state.
4:07:33 PM
REPRESENTATIVE SAMUELS surmised that an 80:20 debt to equity
ratio would increase the state's NPV.
COMMISSIONER GALVIN agreed.
REPRESENTATIVE SAMUELS highlighted that in terms of expansion,
no certainty exists for either project or for any of the
producers because there is no guarantee that the FERC will
approve any such proposals. The state's $500 million investment
only ensures that TransCanada will ask the FERC for particular
expansion provisions and debt:equity ratio.
COMMISSIONER GALVIN, turning attention to slide 36 of his
PowerPoint presentation, said that the purpose of the AGIA
process is to get a project moving and keep it moving and to
ultimately end up with a pipeline that meets Alaska's long-term
needs, and that the DOR's analysis has revealed that the
TransCanada application meets that objective. TransCanada has
committed to move the project under terms that will provide the
state the best chance for meeting its long-term needs.
Additionally, the aforementioned analysis allows the state to
examine its opportunities as they relate to the advancement of
an Alaska natural gas pipeline. Thus the administration has
reached the conclusion that TransCanada is the best option for
the state to advance such a pipeline. He noted that all the
information provided by the administration is available on the
DNR's website. He specifically suggested that the executive
summary of the findings provides a comprehensive overview of
each aspect of the DOR's analysis and conclusions.
The committees took a recess from 4:12 p.m. to 5:00 p.m.
5:02:29 PM
BOB WEINSTEIN, Mayor, City of Ketchikan, commended the governor
for her persistence in turning the dream of a gasline into a
reality. He said he realizes that the administration believes
that TransCanada made an excellent proposal through AGIA which,
with a $500 million state investment, will be of long-term
benefit to all Alaskans; and that ConocoPhillips Alaska, Inc.,
and BP, on the other hand, have made a proposal outside of AGIA
that they claim will result in a pipeline without a similar
state investment. He questioned, though, whether the proposal
by Conoco and BP is a real proposal, whether Prudhoe Bay can
sustain a 4 Bcf/day rate of gas production without Point Thomson
gas, and whether there is a risk that reservoir pressure will be
lowered to the point where there is an unacceptable drop in oil
production.
MAYOR WEINSTEIN offered his understanding that despite the time
that has elapsed since TransCanada first made its proposal,
there is no contract document available for the legislature's
review. He questioned how AGIA will benefit the citizens of
Ketchikan, and opined that at a minimum, the legislature should
be able to review something containing all the major terms and
conditions that would be incorporated into a final contract.
Referring to slide 36 of Commissioner Galvin's PowerPoint
presentation, he said he is not sure that TransCanada's proposed
pipeline will increase the chances of obtaining affordable
energy in Ketchikan. For example, despite record oil revenues
accruing to the state through high oil prices and the new oil-
tax regime, Ketchikan is still experiencing difficulties
accessing funds through the appropriations process.
MAYOR WEINSTEIN - after offering comments regarding some of
Ketchikan's capital projects, the state's budgetary process, and
the administration's various proposals to provide Alaskans with
some short-term energy relief - offered his understanding that
the governor has proposed a gasline from Cook Inlet to the
north, and that that project would cost between $2 billion $3
billion, and that the state would likely have to underwrite much
of that cost because the demand in the Interior of about 50
million cubic feet (Mcf) per day would not amortize an
investment of that magnitude. He continued:
If that makes sense to you - so people in the Interior
who are reeling from high energy costs can have long-
term access to low-cost energy - great. However,
Southeast Alaska in general, and Ketchikan in
particular, will not benefit directly from the
construction of the TransCanada line, a Denali line,
or a bullet line. We're not going to get a gasline
here. We do, however, have hydro resources that we
have developed, and more on the drawing board, to meet
our future needs, both short- and long-term.
5:14:04 PM
MAYOR WEINSTEIN asked the legislature to consider providing debt
relief for electric utilities throughout the state, with the
understanding that such relief is to directly benefit customers
through a corresponding reduction in rates. He relayed that
he'd been given a figure of $800 million as the cost of debt
service for the interconnected utilities from Fairbanks to
Homer, and surmised that there are probably additional costs of
another $200 million outside of that. He said that's not a
giant sum, particularly given that the state is accruing a $1
billion a month in oil revenues. He also asked the legislature
to consider increasing state funding for alternative energy
projects, including hydro, wind, and other technologies. The
time to invest in those alternatives is now, he opined.
Furthermore, while cheap energy is great, in and of itself it
does not mean much if it does not go hand-in-hand with
investments and economic development - such as Ketchikan's ports
and shipyard projects - as well as investments in critical
public infrastructure, including health care and public safety.
MAYOR WEINSTEIN, in conclusion, said he hopes that a gasline
project will happen one way or the other and that the issue of
both short- and long-term energy will be addressed, and he
recommended that the state develop a capital project process
that the legislature - as the appropriating branch of government
- insist be applied fairly and consistently.
5:16:13 PM
JOE WILLIAMS, Mayor, Ketchikan Gateway Borough, questioned what
the proposed natural gas pipeline would mean for Ketchikan, and
noted that the legislature is charged with making sure that any
resulting benefits would be equal for everyone. In terms of
delivering North Slope gas, the people of Ketchikan recognize
the complexity of [building] a gas pipeline and is aware that
debating TransCanada's proposed project compared to [the Denali
project] presents a major challenge. He said the southern-most
communities of Southeast Alaska must consider the issue of
energy and whether a gas pipeline could provide benefit. He
commented on the rising price of fuel oil, and, with regard to
those funds that [the legislature and the administration have
been saving] for "a rainy day," emphasized that "it's been
pouring for the last three years."
MAYOR WILLIAMS said fuel oil is needed by individuals who are
paying what he characterized as an insurmountable amount of
money. For example, he noted, filling his own 250-gallon oil
tank just last week cost him $1,000. Again, how is a gas
pipeline going to affect households in the communities of
Saxman, Metlakatla, Craig, Klawock, and Hydaburg - those
communities that are so far away from the proposed gasline? He
then suggested that a possible short-term solution might be for
residents to convert to electric heat - thereby using
hydroelectric power - and mentioned the Swan Lake and Tyee Lake
projects.
MAYOR WILLIAMS said he appreciates the legislature's commitment
to a gas pipeline project and to the communities of Alaska, and
asked legislators to remember those families that have had to
move from the communities of Craig, Klawock, and Hydaburg, into
Ketchikan, because they could no longer afford the $8-$10 a
gallon for fuel just to heat their homes. Heating homes is a
necessity, he emphasized, and encouraged the legislature to
ensure that the proposed gas pipeline meets the needs of all
Alaskans so that the entire community of Alaska may benefit. In
conclusion, he offered his thanks to the members for coming, and
then sang a Tlingit song of welcome, followed by a Tlingit gift-
giving song.
5:28:37 PM
DOUG WARD, Director, Shipyard Development, Alaska Ship & Dry
Dock, Inc., explained that his company is the private-sector
operator of the State-owned Ketchikan shipyard - which is
managed by the Alaska Industrial Development and Export
Authority (AIDEA) - and has a 30-year operating agreement with
AIDEA to do so. He went on to explain:
We are ... in the early phases of nearly an $80
million publicly-funded, expansion/improvement program
to provide the physical infrastructure at the shipyard
to create an enduring maritime and manufacturing
enterprise. We are also investing, with [the]
participation of the [Department of Labor & Workforce
Development (DLWD)], in our human resources to ...
create a globally-competitive, agile, manufacturing
workforce. Together, with a multi-skilled, globally-
competitive workforce and a very modern and advanced
manufacturing facility, we will be able to support
both the exploration of Alaska's oil and gas - the
construction of any gas pipelines - and the operation
of refining and transmission facilities that are built
in Alaska.
MR. WARD offered his understanding that the AGIA training plan
currently lists 113 priority occupations that will be required
in constructing the gas pipeline. The knowledge, skills, and
abilities that are being given to Alaskan shipyard workers will
enable them to fill a vast majority of those 113 priority
occupations. The Ketchikan shipyard represents an opportunity
for Alaska, including Ketchikan, to participate in the
exploration, construction, and operation of Alaska's oil and gas
infrastructure, and some of the ways that that participation can
take place is through offering a family of products such as
pumping and power-conduction modules, and rapidly-deployable
port and harbor structures where beachheads are needed to
provide additional heavy manufacturing capabilities to support
the oil and gas industry.
MR. WARD, in conclusion, relayed that Alaska Ship and Dry Dock,
Inc., is looking forward to working with the constructors of the
gas pipeline to diversify and strengthen Alaska's economy
through long-term, heavy and agile manufacturing employment.
5:32:19 PM
VICE CHAIR STEDMAN remarked:
We have sent the message out to the oil industry that
the community has ample land available and
manufacturing site here. So, hopefully the community
will get targeted for some infrastructure-support help
in construction of that gasline, even though I
recognize we're not real close to Haines or Anchorage.
But we are pretty close to Prince Rupert [which] ...
has a fabulous railway network. So, hopefully we'll
be able to participate in the construction.
5:32:51 PM
J.C. CONLEY spoke of high energy costs, the use of hydroelectric
power in many Southeast communities, and Ketchikan's
deteriorating economy, and asked the legislature to provide
assistance in solving the energy problems facing the rural
communities of the state.
5:36:36 PM
JOEL L. JACKSON - after speaking about the use of wood, oil, and
electricity for home heating needs, the rising cost of home
heating oil, the need for some energy relief now, the condition
of the roads in Ketchikan compared to those on Gravina Island,
and the detrimental effect of fuel costs on Ketchikan's fishing
industry and economy - observed that since a gas pipeline via
the AGIA process is closer to becoming a reality, there has been
increasing movement from the producers. He said he trusts the
legislature to make a decision that will be in the best interest
of all Alaskans, and intimated that construction of a gas
pipeline will benefit the younger generation of Alaskans in that
they will be able to afford their own homes.
5:40:39 PM
FRANCES YOUNG questioned why the state is considering giving
[TransCanada] $500 million to [build a gas] pipeline. She said
she could imagine what the City of Ketchikan could do with just
one-fifth of that money. She then spoke of some local projects,
and concluded by reminding the legislature that Ketchikan is
part of rural Bush Alaska and to not forget those who live
there.
5:43:40 PM
RICHARD "DICK" L. COOSE said he supports the building of a
natural gas pipeline, stressed the importance of doing so as
soon as possible, and urged the legislature to make the right
decision soon. A gas pipeline project, he opined, will require
the involvement and cooperation of the state, the AGIA licensee,
and the leaseholders, and currently there appears to be some
people being left out, he added. He also opined that there
seems to be a lack of a fair evaluation by the administration of
the Denali project. He added:
While the gasline construction doesn't really directly
affect Ketchikan in the form of cheap power or jobs,
it does affect us in the way we're going to get money
back into the state budget. The way you folks are
going to distribute that money can affect us greatly
in our infrastructure projects, our economic
development - and I'm talking about hydropower, ...
roads, [and] bridges. ...
MR. COOSE indicated that he would be converting his own
household heating system to electric power, and surmised that
hydropower will be the way that those in southeast Alaska will
benefit from cheaper energy. The DNR is currently focused on
AGIA, he remarked, to the exclusion of all other projects, and
is claiming a lack of sufficient personnel and funding as the
reason. In conclusion, he opined that the money really is
there, and so he would like the legislature to [support the
various needs of the state] with that money.
5:48:15 PM
JOE JOHNSTON said economic indicators show that Americans will
likely be paying up to $6.00 a gallon for gasoline by the end of
2008, but noted that the timeline for AGIA shows that it will be
2016-2017 before one cubic foot of gas is produced out of that
proposed gasline. He stated, "I don't think the American public
is going to wait that long for energy relief." He said he does
not think that AGIA is the right idea, or that former Governor
Murkowski's proposal was the right idea. He indicated that he
interprets today's testimony to mean that a pipeline cannot be
built without TransCanada and the producers and the Denali
project. He continued:
Well, maybe third time's a charm. I think since your
only choice is to vote AGIA down, if the producers and
TransCanada sit down at the table, build a pipeline,
go to [the] FERC, and tell the American public and the
U.S. Congress to expedite it, I think you can have a
pipeline in less than 10 years. I think it can be
done; I think it [will] ... be profitable for
everyone, including the state of Alaska and the
American public.
MR. JOHNSTON surmised that T.B. Pickens is going to be investing
in a wind farm in Texas because Americans are not going to pay
$6.00 to $8.00 a gallon for fuel for very long. He said
Americans will change the way they live and the way in which
they use energy, and if the gas pipeline is not functioning
until 2016, there probably won't be much of a use for Alaska gas
by then, particularly given that technology seems to advance
exponentially every 10 years. Mr. Johnston concluded, "I don't
think we should invest $500 million in AGIA; I think we should
invest $5 billion in a gasline as part of the state, and own
it."
5:51:20 PM
ANDREW STEVENS relayed that 20 years ago he read in a National
Geographic that there is enough natural gas in Alaska to support
the world for 100 years, and he has never forgotten that. Mr.
Stevens spoke about information he's read over several years
regarding the producers, and expressed disbelief that the
producers will be able to reclaim any land that they've
previously abandoned, or that it is possible, at today's prices,
to build a 1,700 mile pipeline for only $30 billion. He
surmised that even if sold for only $1 a cubic foot, 100 Tcf of
natural gas would amount to a lot of money; that using Canada's
resources to build the proposed pipeline would deprive U.S.
citizens of a better way of life and thus go against the
constitution; and that building an all-Alaska pipeline could
provide the whole country with a better way of life and decrease
current [energy] costs.
5:58:40 PM
BYRON CHARLES surmised that the testimony thus far has pertained
to "how much money's going to be spent, and where it's going to
be coming from, who can do what, [and] who can't do what." He
said that in response to the question of why doesn't Alaska
build its own gas line, he'd heard the answer, "We can't," but
expressed disbelief of that concept. He elaborated:
Why are we spending all this money to bring somebody
else in here to do something [that] ... our people can
do? What's wrong with this picture? We're still
going to be paying - digging deep in our pockets -
when it comes to transportation. ... I'm not good at
marketing, but it doesn't take a genius to figure out
that our oil and gas will have no trouble hitting the
market.
I would like to see the people get together and say,
"Let's deal with this on a government-to-government
level, so let's see what we could do about the ...
cost of transportation." But in the meantime, instead
of giving me ... an additional $1,200 through the
permanent fund -- I don't want it. I want to see what
you can do when you come to the table [and] say, "Mr.
Charles, we're doing everything in our power to make
it affordable to you and to the public."
MR. CHARLES reminded legislators that they are deciding the fate
of future generations, and that it is up to them to make
positive change right now.
6:04:08 PM
DON LUDWIGSEN, after noting that he is a fisherman who at one
time worked up on the North Slope, expressed disfavor with [the
recent U.S. Supreme Court decision regarding the Exxon Valdez
Oil Spill]. He said big industry seems to think they own
Alaska, but they are wrong. He stated his support of a gas
pipeline and of it being constructed as soon as possible. He
characterized the gas line as "something we definitely have to
do" because [access to natural gas] its needed all over the
state. He said drilling in the Arctic National Wildlife Refuge
(ANWR) would not help at all; furthermore, he warned, the Arctic
is so fragile that people must be really careful in their
interaction with it.
MR. LUDWIGSEN stated:
To me, Exxon has shown their colors - The Exxon Valdez
and Point Thomson - and if it were up to me, Exxon
wouldn't have the contract to clean the fishermen's
bathroom in South Cove in Craig. ...
MR. LUDWIGSEN, in conclusion, opined that those who do not
respect Alaska and do not try to take care of it do not belong
here.
6:06:43 PM
ED ZASTROW, on the issue of a natural gas pipeline, advised
legislators to do what's best for the State of Alaska and what
their constituents would like. He noted that he is on the
Alaska Commission on the Aging and has served as chair of the
advisory board for the Alaska Pioneer Homes, and then provided
comments on the senior care program, a $1.5 million grant
program, and winterization programs.
6:11:43 PM
RUTH DULIN opined that because Alaskans are also citizens of the
world, it is incumbent upon them to consider the larger picture.
She said she really thinks the legislature should invest more
funds, thought, and effort into renewable energy. [On the issue
of a natural gas pipeline] she said, "I think all this is pretty
short-sited, and I think probably a lot of other people agree."
6:13:34 PM
JACKIE DURETTE asked all legislators to remember that those
living in Southeast Alaska are Alaskans, have pioneer spirit,
and intend to be part of the equation. Regarding AGIA, she
characterized the accompanying documentation as cumbersome, and
opined that there is no reason why Alaska labor and contractors
cannot build the gas pipeline. She said she sees no provision
in AGIA that guarantees a high percentage of Alaska jobs or
contracting opportunities for Alaska's businesses, adding, "that
has got to be part of the equation - we're not going to sit back
and let the building of this gas line be done by other folks and
other businesses from another country." Ms. Durette thanked
legislators for their time, and asked them to consider
everything carefully because they are making decisions on behalf
of their constituents. She acknowledged that the task before
the legislature is difficult; however, she said, "I think in
this part of our world, here in Alaska, we're going to hold your
seat to the fire on this one."
[HB 3001 and SB 3001 were heard and held.]
[Members then thanked the participants and those who helped
organize the meeting.]
ADJOURNMENT
There being no further business, the joint meeting of the House
Rules Standing Committee Subcommittee on AGIA and the Senate
Special Committee on Energy was adjourned at 6:21 p.m.
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