Legislature(2007 - 2008)SENATE FINANCE 532
04/30/2007 01:45 PM Senate FINANCE
| Audio | Topic |
|---|---|
| Start | |
| SB104 | |
| Adjourn |
* first hearing in first committee of referral
+ teleconferenced
= bill was previously heard/scheduled
+ teleconferenced
= bill was previously heard/scheduled
| += | SB 125 | TELECONFERENCED | |
| += | SB 104 | TELECONFERENCED | |
| + | TELECONFERENCED |
MINUTES
SENATE FINANCE COMMITTEE
April 30, 2007
1:57 p.m.
CALL TO ORDER
Co-Chair Bert Stedman convened the meeting at approximately
1:57:15 PM.
PRESENT
Senator Lyman Hoffman, Co-Chair
Senator Bert Stedman, Co-Chair
Senator Charlie Huggins, Vice Chair
Senator Kim Elton
Senator Donny Olson
Senator Joe Thomas
Senator Fred Dyson
Also Attending: RON BRINTNELL, Director, Gas Development,
Enbridge; BRIAN WENZEL, Vice President, ANS Gas
Commercialization, ConocoPhillips; WENDY KING, Manager, Alaska
North Slope Gas Development, ConocoPhillips;
Attending via Teleconference: There were no teleconference
participants.
SUMMARY INFORMATION
SB 104-NATURAL GAS PIPELINE PROJECT
The Committee heard from representatives of Enbridge and
ConocoPhillips. The bill was held in Committee.
SB 125-PERS /TRS CONTRIBUT'NS; UNFUNDED LIABILITY
This bill was scheduled but not heard.
1:58:57 PM
CS FOR SENATE BILL NO. 104(JUD)
"An Act relating to the Alaska Gasline Inducement Act;
establishing the Alaska Gasline Inducement Act matching
contribution fund; providing for an Alaska Gasline
Inducement Act coordinator; making conforming amendments;
and providing for an effective date."
This was the twelfth hearing for this bill in the Senate Finance
Committee.
RON BRINTNELL, Director, Gas Development, Enbridge, testified,
making the following opening statement.
My responsibility with Enbridge includes positioning the
company to play a lead role in the development of an
Alaskan natural gas pipeline project - a project which has
been a high priority for our company for a number of years
and it's a high priority for our senior executives.
Enbridge is a leading North American energy transportation
company. We're a public company. Our stock is traded on
both the New York Stock Exchange and the Toronto Stock
Exchange. We supply a significant amount of the oil that's
required in the Lower 48 and we have pipeline businesses
that take all over the world.
I've been to Juneau several times and testified before a
number of committees. But this is the first time in front
of Senate Finance, so I look forward to the opportunity. My
hope is that this will be a dialog not a presentation.
That's my preference. I think we can probably address a lot
more of your questions and issues if we make it a dialog.
I would like to start by first reiterating a message that
my colleges and myself have made several times over the
last few years. North American supply and demand is very
fragile. I know you all know that but it's worth repeating
again and again. If Alaska gas is to find a market in North
America, time is truly of the essence. We need the gas but
expediency is important. Real progress, not just the
appearance of progress is got to happen.
We've been asked about the market window theory. If we
believe that Alaska gas will hit the market, when and where
it's needed. When we answer this it's not so much about the
timing of the market, but is it still going to be there? We
are genuinely concerned about the fact that the market may
be moving on, that it may be leaving Alaska gas behind.
We've seen market degradation due to supply issues, due to
cost issues, due to price issues. We see coal plants being
contemplated. I know there are lots of environmental issues
associated with coal but the reality is demand and supply
will match. If gas can't supply the demand other sources of
electricity will come into play. We'll also see LNG
[liquefied natural gas] come on.
Mr. Brintnell utilized a presentation titled, "Alaska Natural
Gas Pipeline" [copy on file.]
2:01:39 PM
Page 2
[Maps of North America, Columbia, and although not
identified, likely Spain. On these maps locations of
Liquids Transportation, Gas Transmission, Gas Distribution,
and Wind farms/developments are identified.]
· Interest in 50,000 miles of pipelines
· Own and operate the world's longest liquid petroleum
pipeline
· Deliver 70% of WCSB crude oil production
· Deliver half of deep water Gulf of Mexico natural gas
production
· Canada's largest natural gas local distribution
company
· Employ 4,900 people
· One of the Global 100 Most Sustainable Corporations in
the World
Mr. Brintnell stated that the company that eventually became
Enbridge was founded in 1949. The company had "grown steadily
though development and acquisition" and "operated at the highest
levels in the business community." He proceeded to speak to the
bullet points.
Mr. Brintnell identified the Liquids Transportation pipeline
between Norman Wells and Zama as the first pipeline built in
permafrost in Canada. It was constructed over 20 years prior and
has been operating since.
2:02:19 PM
Mr. Brintnell declared that Enbridge operated in the arctic,
which was significantly different than "cold weather" that a
different company testified as its area of experience. No other
pipeline company operating in North America had the level of
arctic experience of Enbridge.
2:02:55 PM
Mr. Brintnell pointed out the Alliance gas pipeline traversing
from Fort St. John in British Columbia, Canada to Chicago and
further east. This pipeline "has significance" to the proposed
Alaska natural gas pipeline.
Mr. Brintnell continued detailing locations on the map of North
America. Enbridge provided gas to approximately 1.7 million
customers. It operates gas transmission lines in the southern
and mid-western United States.
Mr. Brintnell remarked, "And, yes we're always looking for new
supply." He added that "Along with looking for an interest in
the pipeline, Enbridge may be looking for Alaska to be a supply
of gas. We may take a shipping commitment."
Mr. Brintnell advised that the company's inclusion as a Global
100 Most Sustainable Corporations in the World was based on its
performance on social, environmental and governance issues.
Enbridge took "pride in being good corporate citizens."
2:04:05 PM
Page 3
Unparalleled Experience in Recent Pipeline Development
· $15 billion over the next 10 years
o Unmatched recent experience managing labor,
construction, procurement, environment,
regulatory and cost-control challenges
o Today's development environment is substantially
different than 10 years ago
· Alliance Pipeline
o Technical and commercial similarities
[Map of North America depicts Proposed Pipeline Development
with Canadian Supplied and Not Canadian Supplied
Refineries, Enbridge Pipelines, Enbridge Energy Partners,
and Potential Projects identified. Major Announced Projects
are identified on the map and also listed with
corresponding In-Service date as follows:
Spearhead Q1 2006
Gulf Coast (XCM) Q1 2006
Southern Access Expansion 2009
Southern Access Extension 2009
Southern Lights 2009
Alberta Clipper 2009
Gateway 2012/14]
Mr. Brintnell claimed that the "resource owners, producers and
shippers that we deal with on a day-to-day basis continue to
express their confidence in us." Recently, the company concluded
a successful open season on an extension from metropolitan
Chicago to Cushing, Oklahoma. This comprised part of the $15
billion North American expansion which was planned for
completion over then next five to ten years. Most of the growth
was associated with development in the Alberta "tar sands".
Mr. Brintnell spoke about the "current" "cross-border
permitting" and other experience in large scale North America
pipeline projects that Enbridge would achieve through its
expansion efforts.
Mr. Brintnell assured that adequate jobs would be available for
Alaskans contrary to some concerns. Enbridge would employ "all
Alaskans that want to come across the border to be trained up"
for pipeline construction projects for the next five to ten
years. The workforce is in short supply.
2:05:43 PM
Mr. Brintnell told of many changes in the pipeline industry over
the past ten years, including the labor market. Additionally
steel prices had increased substantially. Also changed was the
"dynamic of who steps up to take capacity on pipelines." More
marketing companies would have been involved five to ten years
ago, but because of the issues regarding Enron, "that all
changed."
Mr. Brintnell pointed out that in the current projects, Enbridge
was interacting with the U.S. Federal Energy Regulatory
Commission (FERC) and the Canadian National Energy Board (NEB),
as well as environmental groups, Canadian First Nations, US
Native organizations and other stakeholders.
2:06:37 PM
Mr. Brintnell emphasized the "recent experience, knowledge and
training" gained from Enbridge's efforts that would be available
for the Alaska natural gas pipeline project.
2:06:47 PM
Page 4
Alliance Pipeline
[Dateline depicts the process of obtaining a NEB
certificate and a FERC certificate as follows:
NEB {Canadian}
Preliminary Submission Dec. 31, 1996
File Application July 3, 1997
Public Hearing Jan. 1998
Public Hearing May 1998
Draft CSR June 30, 1998
Final CSR Sept. 30, 1998
Certificate Dec. 3, 1998
FERC {United States}
File Application Dec. 24, 1996
Preliminary (non-environmental
Determination Aug. 1, 1997
Draft EIS Dec. 24, 1997
Final EIS Aug. 24, 1998
Certificate Sept. 17, 1998]
Mr. Brintnell utilized this as an example of the timeframe in
which certification from Canadian and US agencies could be
secured. He noted that the process for the Alliance Pipeline was
completed in less than 24 months.
Mr. Brintnell recounted the initial participation of 22 owners
in the Alliance project. All parties remained involved until
each became "comfortable" that the project would progress, that
sufficient financing was obtained and commitments of gas were
secured from producers.
2:08:22 PM
Page 5
Moving the Project Forward
· No producers No pipeline!
· Project is too risky - too big, too complex, too
expensive - to move forward without producers
· Potential gas buyers see no producers as no progress
o Buyers' dilemma, switch to coal, go off-shore or
wait for Alaska?
Mr. Brintnell had followed the progress on the AGIA legislation
through both bodies of the legislature and had not heard any
organization that had previously constructed or operated a
pipeline refute the statement that the project must include the
producers. Some had expressed need for a five-party negotiation,
others required fiscal stability, and others had testified to
different requirements.
Mr. Brintnell opined, "If you legislate a process unworkable to
the producers, it's our view that [it would] put the project at
risk [be]cause you're excluding the necessary participants,
further delaying the project and signaling to potential gas
buyers [that] Alaska's just not ready."
Mr. Brintnell spoke to the earlier presentation to the Senate
Finance Committee by Sullivan and Cromwell regarding "financing
in the face of risk." Enbridge agreed with the conclusion that
the North Slope producers were the "best positioned companies"
to assume the level of risk and make the shipping commitments.
Mr. Brintnell considered the producers as possibly "the only
companies" capable for such undertaking.
2:09:36 PM
Mr. Brintnell announced that Enbridge would not submit an
application for AGIA. Until the producers were prepared to make
a shipping commitment, which would require a resolution of the
tax issues, "we don't see how it moves things forward for anyone
else to submit an application either."
Mr. Brintnell clarified, "We anticipate ultimately being part of
the project, as part of a consortium." Enbridge was interested
in participating.
2:10:07 PM
Mr. Brintnell reiterated his job duty was to involve Enbridge in
an Alaska natural gas pipeline project, potentially as an equity
owner, an operator, and a shipper. However, this would not occur
with the current uncertainty associated with the producers.
2:10:18 PM
Mr. Brintnell asserted that Enbridge could add value to the
project, but until the producers "were on board and signaling a
willingness to make shipping commitments that will underpin the
financing of the project, this project is simply too risky for a
pipeline company like Enbridge to spend the hundreds of millions
… of dollars up front." The issue was not that the company took
risks; it was currently investing billions of dollars into
projects. However, "this one's in a whole new category."
2:10:51 PM
Mr. Brintnell characterized the "pipeline business" as a "really
small group" with few companies operating in North America. The
companies attend many functions together and discuss customers,
which in the case of the Alaska natural gas pipeline, are the
North Slope producers. Customers would be required to advance
the project. Although utility companies could participate, they
would not have the ability to be significant contributors.
2:11:38 PM
Mr. Brintnell informed that potential buyers of Alaska natural
gas "have been hearing for a long time that Alaska gas is ready,
ramping up, and more recently there was negotiations with
producers." An election was held, and the negotiations ceased.
At this time the State was taking an alternate approach, which
was its right. However, this caused uncertainty in the
marketplace as to when the gas would "arrive" "or even if it's
going to arrive".
2:12:13 PM
Page 6
Moving the Project Forward
Don't Just Focus On The Pipeline
· As drafted, AGIA is unlikely to produce significant
commercial results.
· AGIA introduced as a catalyst to expedite the
construction of a natural gas pipeline
· AGIA focus is on the pipeline and not entire project
which requires Producer alignment
· AGIA adds unnecessary regulatory complexity
o FERC process well defined and effective
Mr. Brintnell stated the following.
We believe the Governor and her team deserve recognition
for the priority they placed on the project. We believe
they appreciate how important Alaska gas is to North
America. However, Enbridge is concerned that as written
AGIA is unlikely to result in the movement of Alaska gas.
AGIA's focus seems to be 90 percent pipeline, ten percent
producer-shipper. We think that's the reverse of what is
needed.
We believe that 90 percent of the focus should be on
getting a shipper and ten percent on the pipeline. Now,
whether it's 90/10, 80/20, what we're trying to say is the
focus is wrong. The majority of the focus right now seems
to be on the pipeline not on the project, and in order to
get a project you need shippers, which means you need to
talk to producers.
2:13:10 PM
Mr. Brintnell "took the risk of talking legislation"
hypothesizing that before a committee chairperson would consider
granting a hearing on a matter, legislation must be drafted and
the bill referred to the committee. To pipeline developers,
builders and operators, AGIA appeared as legislation that had
not been drafted or referred to a committee. He stated "without
shippers there is no bill; someone has to agree to ship the
gas."
2:14:19 PM
Mr. Brintnell commended the Legislature for the time and effort
devoted to the Alaska natural gas pipeline project. However,
ultimately a shipper was required. The goal was to "move the
gas" not just build the pipeline.
2:14:32 PM
Mr. Brintnell made the following statement.
Enbridge believes that AGIA adds unnecessary regulatory
complexity especially with respect to rolled in rates. …
The potential for rolled in rates to go up is not only a
negative for North Slope producers, and I know you've heard
that over and over again, but it's also a negative for
utilities like Enbridge's. …
It is very difficult to get regulatory people to give us
permission to take any long term contracts period these
days. We're not unique in that. All of the Lower 48
utilities face the same thing. It's a difficult task to get
the local regulatory bodies to give you the ability to take
a long term commitment to take a long term supply.
Part of that just as a history I talked about before, five
ten years ago the utilities bowed out the marketers stepped
in, the Enrons stepped in and the regulators got used to
the fact that utilities didn't have to take long term
contracts.
With the demise of the marketers - some of them are coming
back, but generally the demise of the marketers - utilities
are now trying once again to be able to look at being able
to take long term contracts. But the regulators are pushing
back.
Enbridge has spent a fair a bit of time over the last
couple years in dialog with NARUC, the National Association
of Regulatory Utility Commissioners, the IOGCC, and others
to try to do an educational process with some of the
regulators to let those utilities take long term
commitments, for example on an Alaska pipeline. But it's an
uphill battle.
It's even more uphill when you have to go to your regulator
and say "I'm going to make a commitment and I'm agreeing to
pay x - oh, buy the way, in 15 years from now it might be x
plus 15 percent." So it's not just the producers who are
going to have trouble with this. It's other shippers as
well.
2:16:24 PM
Page 7
Moving the Project Forward
Promote, Don't Stymie Innovation
· Absolute requirements may result in not having the
opportunity to evaluate creative solutions that add
value in different ways
· This is not a standard RFP project
Mr. Brintnell expressed concern with the language of Section
43.90.130. Application requirements., of Article 2. Alaska
Gasline Inducement Act License., added by Section 1 of the bill.
The State would "end up further ahead by clearly stating what it
is they want, and then allowing the best companies in the world
to pose the best way to get there." The current language was
tantamount to a "command and control arrangement" in which
"companies could not leverage their experience to the State's
advantage even if they apply at all."
Mr. Brintnell failed to understand why "Alaska would want to
create a process that might stymie innovation and result in the
best project not moving forward, or more concerning, result in
no project moving forward." He asked why the Senators would
support a process in which they would not have an opportunity to
consider a proposal that "doesn't check all the boxes, but
potentially could offer more significant value to the State." He
predicted a situation could occur in which an application that
failed to meet all criteria would not be furthered for
legislative review and approval.
Mr. Brintnell spoke of experts with an ability to assist the
State in determining successful and unsuccessful project
applications. Fair judgment of all proposals was "absolutely
possible" albeit more difficult. He was unsure "what the bill
drafters are afraid of here and why they insist on a potential
developer meeting all the requirements or not show up."
Mr. Brintnell shared that pipeline developers compete against
other developers and "make pitches" to potential shippers about
their innovative methods. This process involves collaboration
with shippers to achieve solutions and flexibility is necessary.
2:19:01 PM
Mr. Brintnell advised that "what you negotiated today may not
ultimately be what ends up being the best project in the long
term, or the ultimate solution." He acknowledged that the
government request for proposals (RFP) practice was specific,
and intended to facilitate an "easier apples to apples
comparison" of proposals. However, the gas pipeline project was
not a standard project. Rather it was unique in many ways, with
the "sheer scope" being only one. The State must "assume a non-
traditional role" and engage in non-traditional processes "in
order for this to work. Insistence on utilization of the same
processes used for procurement of office supplies and equipment
would result in failure to achieve a pipeline.
2:20:06 PM
Page 8
Canadian Oil Sands Development
Valuable Lessons
· Investment of $125 billion
o Significant new employment, tax revenue, long
term growth
o Extensive new pipeline development
· Resulted from proactive progressive political vision
that facilitated development
o Worked cooperatively with industry
o Generating greater returns for all
Industry Capital Spending
Cdn $billions
[Map of Canada with the following information superimposed:
The oil & gas industry will invest over $40 billion in
capital in Canada in 2006
Northern Canada
'03 $0.3
'04 0.3
'05E 0.5
'06F 0.5
Oil Sands
'03 $5.0
'04 6.2
'05E 8.5
'06F 8.8
WCSB
'03 $21.4
'04 24.5
'05E 27.0
'06F 29.0
East Coast Offshore
'03 $2.2
'04 1.9
'05E 1.0
'06F 1.7
International
'03 $5.5
'04 10.4
'05E 5.0
'06F 6.8
Note: Spending in Canada excludes spending associated
with mergers and acquisitions. International and
acquisitions net of divestures.]
Canadian and U.S. Crude Oil Pipeline Alternatives
Growing oil sands production will require new pipeline
capacity to existing and expanded markets
[Map of contiguous United States and the southern half of
Canada with Potential Pipeline Expansion Routes, and
Extensions to New Markets delineated.]
Mr. Brintnell read from his testimony as follows.
I mentioned earlier that if moving the resource is
commercially viable, investment dollars will flow in
Alaska. That very thing is happening right now in
Enbridge's own backyard and it's called the Canadian Oil
Sands.
We believe that you have to look at the gas pipeline as
just the first stage of developing a bigger project just
like they did in Alberta.
You've got tremendous potential here. You've got 35 tcf
[trillion cubic feet], but that's still 20 tcf short of a
pipeline. But indications are there's much, much more. I
mean if you look at the sheer potential of gas side rates
it's staggering. But it's not possible to tap into that
without a pipeline.
Alberta recognized the potential of its oil sands when it
started negotiating with its producers. At the time they
didn't come up with the ultimate solution; but they showed
they were willing to be flexible, come up with innovative
solutions and right now we're looking at $125 billion in
investment.
2:21:20 PM
Mr. Brintnell continued.
That's something like four times the Permanent Fund. Did
the original people that negotiated those deals think they
might have $125 billion in investment? I doubt it. I wasn't
there but I doubt it. But what happened was that they got
the snowball rolling.
We think the same thing can happen here in Alaska. Don't
look to get the ultimate solution first. Get the snowball
rolling and it will keep rolling.
2:21:52 PM
Page 9
Moving the Project Forward
Understand What Is Achievable
o Binding or shipper commitment is required prior to
spending significant $'s on regulatory applications
o Not commercially prudent to assume producers will
show, or that gas can be "acquired"
o Risk too high even with government cost sharing
o Even binding shipper/pipeline agreements will have
conditions including:
o An acceptable FERC Certificate
o Acceptable Financing
o Shipper resolution of Alaska state taxation
issues
o Defined project milestones/timing
o An unconditional commitment to proceed will not happen
o Regulatory certificates may have conditions
making project uneconomic
o Events between application and certificate could
make project uneconomic
Mr. Brintnell overviewed the information on this page. The State
would not receive an unconditional commitment for this project
to proceed, despite the intent of Alaskans. However, too many
uncertainties exist with any pipeline project, especially the
proposed Alaska natural gas pipeline. Concerns include
conditions imposed by U.S. and Canadian regulatory agencies, the
labor market and the steel market could change in the time
following submission of an application.
2:23:28 PM
Page 10
Moving the Project Forward
Understand Canada
No company has the exclusive right to build a pipeline to
ship Alaska gas in Canada
o 2 Options to Permit the Project Through Canada
NPA
Northern Pipeline Act passed in 1977
Socio-economic baseline impact developed in
late 1970s
Certificates of Public Convenience and
Necessity issued to Foothills Pipeline to
build the Cdn portion of the Alaska Natural
Gas Transportation System proposal.
Enshrines a 30-year old project never
undertaken that has now significantly
changed
NEB - CEAA
Modern, efficient and transparent regulatory
process
Dove-tails with FERC
Consistent with NAFTA
Contemporary, well understood processes:
First Nations participation
Environmental assessments and practices
Economic benefits through open
competition
Mr. Brintnell emphasized this information. Neither the National
Energy Board (NEB) nor the Northern Pipeline Act (NPA) contains
a provision to grant exclusive rights to transport natural gas
from Alaska through Canada. Enbridge had prepared a document to
further this argument, which he offered to provide to the
Committee [copy not provided].
Mr. Brintnell remarked on the benefit the prohibition on
exclusivity. If allowed, the competition would be limited to the
construction of the Alaska portion of the pipeline and would
lack the "same level of competition and creativity on the
Canadian side."
Mr. Brintnell opined that the only viable route on which to
transport natural gas from Alaska would be through Canada.
2:25:11 PM
Mr. Brintnell surmised that the Canadian government understood
the value of this cooperative yet competitive approach.
Page 11
Moving the Project Forward
Understand Canada
"As we move forward, I am guided by five principles that I
believe can be applied to all pipeline decisions:
o First, the must not interfere with market forces. We
will let the market decide.
o Second, our decisions must be supportive of a modern
regulatory regime
o Third there must be a project management approach
o Fourth, the pipelines must support Aboriginal
economic development
o Finally, decisions must ensure that Canadian
benefits are realized
Honourable Jim Prentice
Minister of Indian Affairs and Northern Development
Presentation to Canadian Energy Pipeline Association
Annual Dinner
May 2006
Mr. Brintnell read this quote into the record. Mr. Brintnell
added that Mr. Prentice had "also got the Alaska pipeline,
McKenzie gas pipeline portfolio."
Mr. Brintnell associated Mr. Prentice's comment regarding the
market forces with his statements about the necessity of
competition.
Mr. Brintnell defined project management approach as "no
different that what we're trying to achieve here; a step by step
process in which we go through each of the gates and make sure
that this project makes sense."
2:26:29 PM
Mr. Brintnell recounted Enbridge being approached by the Yukon
First Nation requesting information regarding pipelines. The
company educated these residents with the basic fundamentals of
pipeline construction and environmental impacts. The Yukon
Territory government, the Canadian federal government and other
agencies have also participated in dialog with First Nations.
Many Native Alaskans had also never seen a pipeline.
2:27:20 PM
Mr. Brintnell acknowledged the "alarm bells" expressed by Alaska
legislators upon learning of Mr. Prentice's expectation of
Canadian benefits from an Alaska natural gas pipeline. Mr.
Brintnell explained that the costs could not outweigh the
benefits. Roads, bridges and other infrastructure would be
constructed in Canada to accommodate the pipeline and Canadians
must receive some benefit in exchange.
2:27:49 PM
Page 12
Moving the Project Forward
Final Thoughts
Enbridge believes:
o Outstanding fiscal issues are the project's "elephant
in the living room."
o An unconditional commitment to advance the project is
not achievable
o AGIA will best serve Alaskans if it allows for the
creativity and innovation that drives the market
place.
o Governmental financial assistance is not essential
o Government can achieve key goals without adding to
regulatory process
o Canada will be ready for this project, but claims of
exclusivity will be denied
o Alaska should ensure that it does not create a process
that is all about process
Mr. Brintnell remarked that until the State could address issues
with producers regarding taxes, the project would experience no
tangible progression.
Mr. Brintnell overviewed the bullet points on this page. He
cautioned against creation of a process that would not accept
proposals that did not meet every criteria, but that could
provide value in different ways.
2:29:20 PM
Mr. Brintnell stated that governmental financial assistance on
the pipeline project was not essential, although it could be of
value to a potential applicant and should therefore be
considered. Additionally, undue "regulatory complexity" should
not be added to the process to create difficulty for potential
shippers.
Mr. Brintnell recognized the "fear" and potential "fear
mongering" that Canada would not be prepared for an Alaska
natural gas pipeline. However, Canadian officials understand the
importance of this project and were making preparations.
2:30:30 PM
Mr. Brintnell concluded his presentation.
2:30:33 PM
Co-Chair Stedman announced his intent in considering this
legislation to identify solutions. He clarified that Enbridge
did not deem the proposed $500 million reimbursement incentives
necessary to accomplish the project.
2:31:02 PM
Mr. Brintnell affirmed. Financial assistance was beneficial, but
usually "comes with attachments". AGIA had attachments, and
those attachments were of greater cost than $500 million. The
State funding would not necessarily be required to finance the
project.
2:31:44 PM
Co-Chair Stedman spoke of the AIGA condition that if an AGIA
licensee held an unsuccessful open season it would still be
required to secure FERC certification. He asked Enbridge's
opinion on this clause.
2:32:11 PM
Mr. Brintnell responded that Enbridge would not be placed in
such a position that FERC certification must be pursued
regardless of whether a successful open season occurred.
Enbridge would not apply for a FERC certificate without
knowledge of "where the producers were at."
Mr. Brintnell pointed out that the project would also require
certification from the Canadian National Energy Authority (NEA).
Achievement of the specificity necessary to convince shippers
and producers to commit gas in a binding open season would cost
"hundreds of millions of dollars". It could be possible to
expend less and secure commitments in a nonbinding open season.
Enbridge would not expend this amount to progress to an open
season "beforehand not knowing the answer."
Mr. Brintnell identified two types of pipelines as "producer
pushed" and "market pull". The proposed Alaska gas pipeline
would be a combination.
2:33:46 PM
Mr. Brintnell explained that the Alaska gas pipeline would
likely be producer pushed from the North Slope to Alberta
Canada, and market pulled to the Lower 48 by utility companies.
Regardless, if Enbridge were to engage in this project, it would
have upfront knowledge of the shippers and whether those
shippers would commit.
Mr. Brintnell characterized an unsuccessful open season as
"career limiting". A pipeline company should always know upfront
that an open season would be successful. Under the provisions of
AGIA an open season could be held with no advance knowledge of
whether shippers would commit.
2:34:57 PM
Co-Chair Stedman understood that Enbridge would not apply for
the AGIA license.
2:34:59 PM
Mr. Brintnell affirmed that Enbridge would not be a sole
applicant for the AGIA license under the current legislative
provisions. Enbridge "hoped" to participate in a consortium. A
consortium that included the producers would be required to
undertake the project.
Mr. Brintnell qualified that if sufficient changes were made to
AGIA that allowed "the producers to see their way to potentially
make an application" Enbridge would "create enough value" to
become part of the consortium.
2:35:38 PM
Co-Chair Stedman requested the witness identify the sections of
this bill that were "troublesome" to Enbridge as well as
solutions. Co-Chair Stedman commented, "It's easy to tear things
apart; it's much harder to build things." Additionally, he asked
Mr. Brintnell the provisions of AGIA he supported.
2:36:21 PM
Mr. Brintnell agreed, although expressed he was reticent to
provide significant detail because Enbridge did not deem AGIA to
be necessary. His greatest concern with the bill was the State's
"must haves" listed in Section 43.90.130.
2:36:55 PM
Mr. Brintnell opined that this provision would create a
situation in which the Legislature could not have the
opportunity to view "the most creative solution, and the one
that may in fact add more value." An application that failed to
comply with one criterion could offer value in other forms, but
would not be considered. This would be a "mistake".
2:37:32 PM
Senator Huggins, referencing Page 12 of the presentation, noted
the statement that "Canada would be ready for this project, but
claims of exclusivity would be denied." He requested an
explanation.
2:37:47 PM
Mr. Brintnell asserted, "There is no exclusive right to build a
pipeline in Canada." Whether the pipeline was constructed under
the provisions of the Northern Pipeline Act or the NEBC Act,
would be decided by the shippers and the market.
AT EASE 2:38:26 PM / 2:39:01 PM
2:39:32 PM
Co-Chair Stedman requested an elaboration of the argument that
the project was "too risky - too big, too complex, too expensive
- to move forward without producers". He asked the amount of the
project that could be financed by the "downstream market".
2:39:57 PM
Mr. Brintnell replied that potentially hundreds of millions and
possibly one half billion dollars could be committed from
utility companies. He told of past dialog between Enbridge and
utility companies on the topic. The actuality would depend upon
approval from the regulatory authorities that governed the
utility. Utilities need new gas supplies; however they require
regulatory approval to make long term commitments. Because of
the substantial funds involved, regulatory agencies must give
applications careful consideration because "in the end, it's not
the owners that necessarily going to bear the risk, it's moms
and dads." The utility companies could increase supply for its
customers, but if "they're wrong" the customers would be
required to pay higher rates.
2:41:31 PM
Co-Chair Stedman asked the gross capacity of one-half bcf per
day.
2:41:42 PM
Mr. Brintnell indicated a scope of a pipeline capacity of
approximately 4.5 bcf per day. The producers would "step up for"
the majority of the capacity. The utilities would not be able to
"fundamentally underpin the project." Although the utilities
could "top up" at the open season, they would be required to
acquire the transport and the supply.
2:42:34 PM
Co-Chair Stedman noted the witness relayed that Enbridge was not
"100 percent" supportive of the requirement for rolled-in rates,
which was a FERC presumption. Co-Chair Stedman understood that
Canada had rolled-in rates and asked the reason for Enbridge's
lack of support for this.
2:43:05 PM
Mr. Brintnell informed that the "three most recent" cross border
pipelines constructed between the United States and Canada
involved negotiated rates. The shippers negotiated with the
pipeline companies and secured fixed tariffs or tariffs that
excluded a rolled-in presumption. While most of the gas
transported through Canada was subject to rolled-in rates, this
was not indicative of recent negotiations.
2:44:02 PM
Co-Chair Stedman relayed that discussions had occurred regarding
a gas treatment plant, which would be necessary to allow a
natural gas pipeline to be "usable". He asked if Enbridge had an
interest in owning the gas treatment plant.
2:44:38 PM
Mr. Brintnell answered that the company engages in gas
processing. Much of Enbridge's activities in the Lower 48
involved gas processing, mostly occurring in the state of Texas.
"If the opportunity presented itself" he stated that Enbridge
would consider partaking in gas treatment of Alaska natural gas.
Mr. Brintnell understood preference to locate the plant in
Alaska to create a petrochemical complex and new industry. This
was a "laudable goal". However, the distance from the market was
substantial and capacity was available in Alberta, Canada to
process the liquid gas. As a resource owner, the State could
find that its ability to "create greater wealth for the liquids"
might entail selling the liquid in Canada rather than
construction of new facilities in Alaska.
2:45:51 PM
Mr. Brintnell furthered that the "midstream extraction business"
was "highly volatile". Although "things look rosy today" as few
as five years ago, the situation was not favorable. Oil prices
and gas prices fluctuated and economically affected gas
treatment operations.
2:46:10 PM
Senator Huggins identified the issue of a producer-owned or
producer-partnered pipeline. The producers of the gas
transported by the Alliance pipeline initially had part
ownership of that pipeline with Enbridge owning 11 percent. As
the pipeline project progressed, the producers divested from the
partnership.
2:46:45 PM
Mr. Brintnell affirmed and detailed that the Alliance pipeline
was the concept of the producers, intended to create more
competition for the transport of the gas from western Canada to
Chicago, Illinois. Enbridge "joined the process" and initially
owned 11 percent of the project. As the design process and
tariff negotiations progressed, the producers "stepped up" to
participate in the open season along with Enbridge Utility. The
producers eventually determined that partial ownership of the
pipeline was no longer necessary "to get what they wanted",
which was progression of the pipeline project and certainty of
tolls and tariffs. At the time the pipeline was completed, no
producers held ownership in the pipeline.
2:48:11 PM
Senator Huggins asked Enbridge's "experience" with the
"boundaries" of debt-equity ratios. The current language of AGIA
would provide for a ratio of 70:30, and suggestions had been
made to adjust the ratio to 80:20 or 75:35.
2:48:31 PM
Mr. Brintnell replied that the debt-equity ratio of the Alliance
pipeline was 70 to 30. This ratio would be "achievable" for the
Alaska pipeline project. The Maritime pipeline had a 75 to 25
debt ratio.
2:49:02 PM
Senator Elton asked if the witness's statement that Enbridge
would not submit an application for the AGIA license pertained
only to the current provisions of the bill and whether the
company might participate if the language were amended.
2:49:37 PM
Mr. Brintnell responded that Enbridge would not make a proposal
in which it was the sole owner. The project must include the
participation of the producers at least initially as equity
owners. If the provisions of AGIA were modified to be
"palatable" to the producers, Enbridge would consider submitting
an application as one part of a consortium.
2:50:30 PM
Senator Elton concluded that the "best possibility" for Enbridge
participation would be a scenario in which the producers
constructed the pipeline rather than another pipeline company.
2:50:53 PM
Mr. Brintnell affirmed and reiterated that Enbridge did not
envision the project progressing without the producers. The
producers would have to bear the risk.
2:51:33 PM
Senator Elton clarified Mr. Brintnell's definition of
"participation of a producer" as an equity stakeholder in the
pipeline.
2:52:16 PM
Mr. Brintnell again affirmed and explained that in discussions
with producers over several years about the proposed Alaska
natural gas pipeline, the producers "want to be part of it"
because they would bear the risk as equity owners. The producers
have expressed, "If we're going to be bearing the risk as
shippers" they should have control as equity owners. This was
the "premise" of the Alliance pipeline. The producers' intent
was to have input in the development of the pipeline.
2:53:36 PM
Senator Thomas spoke to the witness's concern that the "market
may be moving on" and asked if Mr. Brintnell had an estimated
timeframe in which this would occur.
2:53:59 PM
Mr. Brintnell answered as follows.
The reality is that some of that market [had] moved on
already in terms of some of the fertilizer plants and other
things. The power plants were moving on. I think that some
of the environmental issues that are coming to the
forefront will slow some of that down. But you and I and
the rest of the North America haven't slowed our hunger for
power, for electricity. So it's going to have to
[indiscernible] somewhere. LNG may fill the gap but it's
not the panacea right now either. I mean two or three years
ago, the fear was Alaska gas has to get moving because LNG
is going to eat its lunch. The reality is LNG is not moving
that fast either because they're facing the same hurdles;
the cost and labor and a whole bunch of other things
including foreign control. So if it isn't LNG, it's going
to have to be something else and it may well be coal.
2:55:06 PM
Senator Thomas next asked the capacity of the Alliance pipeline
and whether it would have space available to transport any gas
from Alaska.
2:55:22 PM
Mr. Brintnell informed that the Alliance pipeline was "fully
contracted and full" to the year 2015. He did not anticipate
that gas from Alaska would be available to transport before that
date and production was declining in Alberta. Therefore, space
would be available and the pipeline would be "easily expandable
fairly cheaply" in the future "when the time comes".
2:56:10 PM
Co-Chair Stedman asked the "magnitude" of the cost of the
Alliance pipeline project.
2:56:20 PM
Mr. Brintnell reported the cost in US dollars was approximately
$5 billion.
2:56:27 PM
Co-Chair Stedman surmised that Enbridge was therefore capable of
undertaking a project of the magnitude of the Alaska natural gas
pipeline "all else being equal".
2:56:48 PM
Mr. Brintnell requested clarification of the implied ability to
construct the pipeline or the financial capability.
2:57:02 PM
Co-Chair Stedman specified that if firm transportation (FT)
commitments were secured sufficient to proceed to application
for a FERC certificate, Enbridge would be capable of undertaking
the project. Testimony from other companies had asserted those
companies were "the only ones in the world that can build it."
2:57:22 PM
Mr. Brintnell acknowledged that Enbridge would have the
capability to build the Alaska natural gas pipeline but stressed
the company did not have the "desire" to undertake the project
independently. The project would be too big. Enbridge's "market
cap" was approximately $15 billion US dollars and this project
would be "a bet the farm project if we were the sole owner".
Instead, Enbridge would likely hold ten to 20 percent equity in
the pipeline.
2:57:49 PM
Senator Thomas referenced Page 3 and the map depicting Proposed
Pipeline Development in Canada and the contiguous United States.
He directed attention to a route marked between Kimat, British
Columbia and the state of California and asked if this reflected
a proposed natural gas pipeline to central California.
2:58:14 PM
Mr. Brintnell corrected that the marking was an indicator of the
proposed Gateway project to transport oil from the Alberta Tar
Sands to offshore British Columbia with some oil shipped to
Asian markets and some shipped to California.
2:58:39 PM
Senator Thomas asked if Alaska natural gas could be utilized to
"assist in" this project.
2:58:45 PM
Mr. Brintnell replied that that the Alberta Tar Sands had a
"growing need" for additional gas to produce oil. However,
uncertainty of gas supply also existed, including uncertainty of
whether natural gas from Alaska would be produced and
transported. Therefore, the producers operating in Alberta were
considering alternatives.
2:59:16 PM
Senator Thomas next noted the two year time period between
application for the FERC certificate for the Alliance pipeline
and issuance of the certificate as demonstrated on Page 4. He
asked the "overall" timeframe between the "serious concept" of
the project and construction completion.
2:59:45 PM
Mr. Brintnell answered that he would research and provide a
response.
2:59:54 PM
Senator Thomas recalled the witness testified that the
construction period was approximately two years.
3:00:00 PM
Mr. Brintnell stated that calculation of the total time period
would require a definition of "serious concept".
3:00:12 PM
Co-Chair Stedman requested Mr. Brintnell expedite his
identification of the "positive aspects" of the AGIA legislation
as well as suggested language changes.
AT EASE 3:00:37 PM / 3:02:07 PM
3:03:06 PM
BRIAN WENZEL, Vice President, Alaska North Slope Gas
Commercialization, ConocoPhillips, introduced himself and gave
the following testimony.
3:03:33 PM
Mr. Wenzel:
Although ConocoPhillips supports and very much applauds the
Governor for her efforts to move the gasline project
forward we do not support AGIA as originally introduced. We
do not support the CS [committee substitute] recently
adopted by Senate Judiciary.
Rather we believe that AGIA needs a critical change; a
change in approach. AGIA should be changed to allow an
applicant to submit an application that achieves AGIA's
intent but does so with a different mix of commitments and
terms and conditions.
As a potential applicant, we need the ability to propose a
comprehensive package - including critical resource terms
that I'll talk about in a moment - a package that
appropriately balances the risk and returns associated with
the project while still providing the necessary maximum
benefits to Alaska.
3:04:33 PM
Mr. Wenzel continued.
Now let me be clear that from ConocoPhillips' standpoint we
very much want to develop our ANS [Alaska North Slope] gas
resources. If we collectively can find a way with the
legislature, with the Administration, with the public of
Alaska, to make this project economic, those gas resources
will be developed.
3:04:55 PM
Mr. Wenzel cautioned the following.
But conversely, if our upstream resources - the terms for
developing our upstream gas resources - are not sufficient
to make the project economic, it won't get developed.
We need to find a way to essentially balance the risks -
the massive risks - associated with this project and the
development of those resources with the needs of Alaska.
3:05:28 PM
Mr. Wenzel shared:
The real question in my mind, the real question before us I
believe, is not "what does it take to make a gas pipeline
happen". Rather, I think the real question before us is
"how do we make sure that Alaska's gas resources are
developed."
We believe there's been too much focus on the pipeline and
not enough focus on the upstream fiscal terms that are
necessary to make the development of those resources
economic.
We should all be focused on the upstream, on the resource
side, where the vast majority of the project risk lies. I
thing you've had prior testimony and it's definitely come
up before other committees about the nature of this project
and how this project will get presented and put together.
The fact that not only does the geologic risk - to the
extent there is any risk with the upstream - but the
upstream infrastructure risk , the price risk, the mid-
stream, the pipeline infrastructure cost risk, lies with
the upstream.
3:06:32 PM
Mr. Wenzel emphasized:
The vast majority of all risk associated with this project
of developing ANS gas resources will rest with the
upstream. We need to understand those upstream fiscal terms
such that we can assure ourselves that the project is
economic.
3:06:48 PM
Mr. Wenzel offered the following.
One way to essentially come to ground on those upstream
fiscal terms would be to enter into a dialog, a discussion
around our needs, our objectives and those of the State. In
fact you've heard not only the producers but many of the
third-party pipeline companies indicate [that] we've got to
solve the upstream resource issues first and the pipeline
project gets much easier.
From ConocoPhillips' standpoint, we definitely agree. We
believe the best way to resolve these upstream fiscal terms
is to sit down and have that dialog.
3:07:31 PM
Mr. Wenzel qualified:
Now admittedly that dialog, that discussion, has been
characterized as just another negotiation by the
Administration. AGIA is not about negotiation. We
understand that.
By the same token, the Administration has indicated there
unwillingness to discuss and adjust the upstream - the
resource terms. So it seems this first avenue for resolving
the appropriate fiscal structure for the resources is
closed.
3:08:03 PM
Mr. Wenzel continued:
So then we turn to maybe a second alternative to resolve
the necessary upstream resource terms, and that would be to
essentially ask the business decision makers - those who
need to make the investment and develop these resources -
to put on the table, a comprehensive proposal of what it
takes in terms of resource terms and pipeline terms, to
make this project a reality.
3:08:30 PM
Mr. Wenzel made the following remark.
Unfortunately AGIA does not provide that flexibility. AGIA
stipulates the exact upstream resource terms, in a limited
fashion, that are available. Again as indicated, [AGIA]
provides no flexibility for an applicant to propose a
different set of resource terms.
3:08:53 PM
Mr. Wenzel summarized:
So again with the two best methods for resolving this issue
- for resolving the necessary changes to the fiscal terms
for the resource side - you can appreciate the quandary
we're in, in terms of how to proceed with the project; how
to move this forward.
3:09:13 PM
Mr. Wenzel informed:
Now I'll admit at the same time that we have many of the
same concerns that you heard presented to you, I think
yesterday, by BP around some of the other issues with AGIA.
I don't want to discount those. But at the same time, for
us the heart of the issue is how do we get comfortable with
the upstream resource terms.
The inadequate resource terms stipulated in this piece of
legislation causes the uncertainties associated with the
project to outweigh the potential returns. That in turn
prevents ConocoPhillips from participating in the AGIA
process.
3:09:52 PM
Mr. Wenzel asserted:
If AGIA is not changed, we will not be able to make an
application under the AGIA process. I said more generally,
the lack of flexibility in AGIA will prevent ConocoPhillips
from making an AGIA application.
3:10:11 PM
Mr. Wenzel communicated:
I also want to address a claim that came up just this
morning in the paper where an Administration representative
suggested the return on this project was in excess of 50
percent. I have to tell you from my standpoint, looking at
internal project models; I've never seen a return on this
integrated project anywhere close to 50 percent. In fact
again my problem is rather that the returns on the
integrated project are closer to zero than they are to 50
percent.
Our problem is the project as described through AGIA is not
economically viable. We need different fiscal terms.
The claims that the project is wildly economic are simply
misleading. This project is not wildly economic. If it
were, it would be moving ahead.
The claims that it's wildly economic are based on a set of
assumptions, which no one can guarantee. They're also based
on an assumption that $100 billion plus financial
commission can be ignored when doing your project
economics.
3:11:22 PM
Mr. Wenzel advised:
I would urge you to be very careful about the set of
assumptions behind the claims of the economics of this
project.
At the same time, if any one can step up and guarantee some
of those assumptions, this project's ready to go. No doubt.
If we could guarantee gas prices will always be high,
capital costs will never increase, gas will discovered in
sufficient quantities to fill this pipeline, this project's
ready to go.
3:11:55 PM
Mr. Wenzel characterized the aforementioned:
Those are the very risks that we as producers of gas
lessees need to get comfortable with in order to advance
this project.
3:12:09 PM
Mr. Wenzel reiterated:
Again from our standpoint we need to address some of those
key risks and try to mitigate those with an upstream
resource fiscal package to help us advance the project.
That the easiest way for the State to help mitigate those
risks.
3:12:27 PM
Mr. Wenzel pointed out the following.
Now resource risk has always posed the greatest obstacle to
a gas pipeline. Long term clarity on State taxes and
royalties is critically important to reducing those risks.
3:12:45 PM
Mr. Wenzel relayed:
The other thing I wanted to delve into a little bit is our
other concerns on AGIA. You may have had the opportunity to
hear my college, Wendy King, testify on numerous occasions
over the last few weeks on AGIA. She repeatedly indicated
that ConocoPhillips is very concerned with the AGIA process
and the overly prescriptive approach. She strongly
suggested that a mechanism be introduced into the bill to
allow for resource lessees to propose alternate resource
terms. She's recommended that the Committee make amendments
to change AGIA's bid requirements to bid variables or broad
objectives to provide the flexibility for an applicant to
respond to those variables or those objectives in a way
that presents the best package proposal. And she's
frequently warned about the dangers of the exclusivity
provisions that exist within AGIA and the danger that it
could hamstring the State's ability to advance the project
in the event that a licensee is chosen who cannot or will
not advance the project for some reason.
Behind all of her testimony, lay numerous issues that
concern us within AGIA. There are rigid deadlines, there
[are] requests for initial shippers to subsidize future
shippers or subsidize third-party pipeline companies.
[AGIA] requires the waiving our due process rights. It
requires parties to accept FERC certifications without the
ability to negotiate any conditions on those certs.
There's a requirement that makes all project changes to the
project subject to State approval and control. And again
most importantly, AGIA as structured provides inadequate
clarity and predictability around resource terms.
3:14:46 PM
Mr. Wenzel posed:
In the end all of our suggestions and concerns,
recommendations can be boiled down to a request that AGIA
be changed sufficiently that we can submit our best
proposal and know that it won't be rejected simply because
it doesn't meet all of the exact requirements - the must
haves, the terms and conditions of AGIA.
As currently drafted AGIA would require that a proposal be
rejected immediately if it doesn't exactly meet the terms
and conditions of AGIA.
The Administration has indicated that if AGIA process does
not produce enough bids or bids of sufficient quality, that
they'll repeat the process; we'll start over. Our view is
that both we as producers, you as the Legislature, the
Alaskans, do not have the latitude - can't afford to wait a
year to see if we get enough bids or get the right bids.
Rather we should find a way to make the process flexible
enough to make sure all bids come in up front; all bids are
put on the table and evaluated.
We're not suggesting ours will be the only bid. We're
suggesting we want our bid on the table. We want to be
evaluated and considered next to all other bids upfront as
opposed in some later iteration.
3:16:09 PM
Mr. Wenzel expressed the following position of ConocoPhillips.
We believe that if AGIA - if the AGIA process - is truly to
allow open and transparent competition it will allow each
applicant to propose a set of work commitments,
inducements, terms and conditions, which that applicant
believes are best for all stakeholders.
In such an arena, where AGIA has been changed, we will bid.
We will put on the table our best proposal, which we
believe best meets the needs of Alaska.
3:16:36 PM
Mr. Wenzel:
And in terms of the process forward, I also want to point
out in ConocoPhillips' view the most efficient, the most
expeditious way forward on this project is for
ConocoPhillips to work with BP and Exxon Mobil to advance
this project. We can't ignore the expertise and the
knowledge of these three producers. That consortium, in our
view, needs to be the key or the core behind our proposal
through AGIA if and when AGIA is adjusted to allow us to
bid.
3:17:16 PM
Mr. Wenzel announced:
At the same time we've also indicated, not only before
various committees, but also to other entities, that we are
open to the possibility of including other entities in our
consortium bid. To the extent that there are entities out
there - be they third-party pipeline companies or other
entities - who bring meaningful additions to our proposal
to the table, we're happy to include those. For instance,
to the extent that there are entities who could bring
better ways to mitigate risk; better particular assets to
the table, cash - cash is always welcome - all of these
things. There are other assets that other entities could
bring to the table and provide a meaningful contribution to
a joint proposal.
3:18:12 PM
Mr. Wenzel began his summarization as follows.
In closing, ConocoPhillips very much want to develop our
ANS gas resources. We want to do that by winning the AGIA
license and constructing the ANS gasline. We want to
participate in this process and truly compete by putting
our best proposal on the table for administrative,
legislative and public review.
However, in order to get that proposal on the table - and
in fact other creative proposals on the table - up front,
AGIA needs to be amended to allow and indeed encourage
applicants to submit their very best proposal regardless of
whether it actually conforms to each of the requirements -
the must haves, the terms and conditions of AGIA.
3:19:02 PM
Mr. Wenzel informed:
Neither the producers, nor the Legislature, nor Alaska
itself, want another delay that might from an overly
prescriptive process.
We need to encourage the greatest quantity and the greatest
quality of bids in this first bid process. We need all
proposals on the table and open for review.
3:19:25 PM
Mr. Wenzel concluded his presentation as follows.
We believe that Alaska deserves to see comprehensive
proposals from companies that are already doing business
here in Alaska and have the expertise and resources to make
the project happen.
Alaska deserves to see the best proposals. At
ConocoPhillips, we believe we can make a proposal that
gives Alaska a project with the most jobs and the highest
revenues.
But most of all, at this stage of the process, we want to
be able to compete. We want to be able to put our proposal
on the table and know that it won't be rejected.
In order for us to do that, AGIA needs to be amended to
allow bidders to address the total risks of the project by
proposing a comprehensive package including resource terms.
3:20:22 PM
Co-Chair Stedman commented on the appearance that ConocoPhillips
was "reluctant" to become an applicant under the current
provisions of AGIA. He requested that the provisions considered
problematic by the company be identified and that suggestions of
solutions be proposed. He sought constructive recommendations to
advance the project.
3:21:18 PM
Mr. Wenzel responded that ConocoPhillips had suggested during
previous hearings in other committees, various methods to amend
the bill. He offered to provide those recommendations to the
Senate Finance Committee. However, the "volume of the changes
required to allow us to bid, to deal with the flexibility we
need to put a competitive viable economic project on the table,
is so great that we fear it can't be dealt with in the time
allowed." Consequently, his testimony was intended to instead
suggest "another way, which is to focus on amendments, which
would allow the flexibility for [an] applicant to come in with a
new mix of terms and conditions and commitments."
3:22:16 PM
Co-Chair Stedman spoke to the witness's mention of cash. The
State would offer $500 million to further the AGIA process. He
was "getting mixed signals" in reaction to this proposal and
asked if ConocoPhillips was "interested" in this incentive if it
were to apply for the AGIA license.
3:22:40 PM
Mr. Wenzel answered, "Respectfully yes." The company would
always accept cash contributions. However, this incentive was
not in the best interest of Alaska nor would it be necessary in
a competitive bidding process. Rather the State should obtain an
equity position as its contribution.
3:23:25 PM
Senator Elton understood the Mr. Wenzel spoke in "umbrella
terms" given his determination that the amount of necessary
changes to the bill was significant. However, the testimony
supported a "default" to the proposed contract negotiated
between ConocoPhillips, BP and Exxon Mobile, and the Murkowski
Administration and rejected by the previous legislature. Senator
Elton asked how an application under the terms Mr. Wenzel
suggested would differ.
3:24:31 PM
Mr. Wenzel replied that the involvement of competitive bidding
would be the "critical" difference. His proposal would allow the
State to benefit from an environment in which ConocoPhillips, BP
and Exxon Mobile, if the companies formed a consortium and
submitted an application, would be required to compete against
bids from other entities. The consortium would have to consider
the possible incentives and commitments other applicants would
propose. However, each applicant would have the option of
proposing the best possible project.
3:25:30 PM
Senator Elton asked if AGIA was amended favorably for
ConocoPhillips, whether the witness expected that the company
would submit an application package that included specifics
relating to taxes and other conditions needed to accomplish the
pipeline.
3:25:57 PM
Mr. Wenzel affirmed that the objective would be "to stay as
close as possible to the original terms of AGIA" and that the
only variations would be those necessary to ensure a competitive
project and that were acceptable to the company's board of
directors.
3:26:33 PM
Senator Elton repeated his question, asking if ConocoPhillips
would submit a bid that included resource tax structures for oil
and gas.
3:26:39 PM
Mr. Wenzel answered, "Yes we would definitely."
3:26:44 PM
Senator Dyson posed a scenario in which an applicant was allowed
to submit two bids, one that complied with the conditions of
AGIA and another that the applicant determined would meet its
goals "but had better ways of doing it."
3:27:14 PM
Mr. Wenzel would not oppose a provision to submit one or two
applications "so long as we could do either-or".
3:27:19 PM
Senator Dyson clarified that an application compliant with the
AGIA terms would be required before a noncompliant application
would be accepted.
3:27:30 PM
Mr. Wenzel expressed concern that the conforming bid would
propose a non-economic project that could not be financed or
completed.
3:27:57 PM
Senator Dyson asked if ConocoPhillips was involved with any
projects located in North America that had the degree of
upstream fiscal certainty that was requested of AGIA.
3:28:18 PM
Mr. Wenzel answered in the negative. The outstanding element of
the Alaska natural gas pipeline project was its "absolute size".
Additionally, the company operated in no other location in North
America that has a "regime where it is so dependant on oil and
gas revenues for its future" earnings. He recognized
ConocoPhillips' responsibility to provide revenue for the State
for the long term and the issues that would arise "should the
State run short of funds."
3:28:59 PM
Senator Dyson announced, "I just heard him say that they've got
us over their hip because we've got to have the money."
3:29:13 PM
Mr. Wenzel viewed the situation in reverse as "the State has us
over the hip."
3:29:20 PM
Co-Chair Stedman referenced a letter from dated July 24, 2006 to
former Commissioner Bill Corbus of the Department of Revenue
from Shell Exploration and Production [copy on file] that
included the topic of FERC regulations and the presumption of
rolled-in rates. He cited from the letter, "FERC regulations
should not be prospectively limited or conditioned in any
contract or other agreement with the State of Alaska." He
understood that Shell would not be an applicant for the AGIA
license partially due to concerns on this issue. He asked the
concerns of ConocoPhillips as a resource holder.
3:30:19 PM
Mr. Wenzel replied that ConocoPhillips did not oppose rolled-in
rates. It was supportive of FERC regulations and its continued
regulation of the "appropriate tariffs". The FERC process was
"very established".
3:30:52 PM
Co-Chair Stedman indicated that his question was not answered
explaining that language in the bill pertained to "appeal".
3:30:59 PM
Mr. Wenzel deferred to Ms. King.
3:31:04 PM
WENDY KING, Manager, Alaska North Slope Gas Development,
ConocoPhillips, testified to the concern expressed on the issue
of rolled-in rates. The FERC adopted regulations to provide that
it would have a "rebutable presumption of rolled in rates up to
the point that there was a subsidy." The current language of
AGIA would limit a pipeline entity and shipper from "proposing
an incremental rate if they believe that there is a subsidy."
FERC was the "appropriate adjudicator" of issues relating to
subsidies.
3:32:21 PM
Co-Chair Stedman next spoke to the debt to equity ratio of 70:30
percent. The State preferred a lower tariff. By lowering the
equity requirement, the tariff could be reduced. He asked if the
ratio should be changed to 60:40 percent or 80:20 percent.
3:32:53 PM
Mr. Wenzel opined that the State should not stipulate the debt
to equity ratio, but rather set a preference for "more debt
where possible". The State should recognize the difficulty to
secure financing for this project. The licensee would be
required to utilize "every possible lender out there" to finance
a project of its size. The licensee would not have latitude to
require a specific debt to equity ratio. The licensee would
possibly be required utilize a different ratio for tariff
purposes than the actual ratio. This represented a "commercially
unreasonable situation".
3:33:58 PM
Ms. King identified the greatest variable that would influence
the toll was the capital cost of the project. She reiterated Mr.
Wenzel's recommendation to provide the maximum flexibility to
allow the "most financially reasonable financing" for the
project.
3:34:32 PM
Co-Chair Stedman recounted the intent of the proposed project
negotiated by the previous Administration, included an 80 to 20
percent debt to equity ratio.
3:34:59 PM
Ms. King affirmed "in the context of our intent." She explained
the intent to utilize the federal loan guarantees, which were
"drafted" with an objective of 80 percent debt to 20 percent
equity. However, uncertainties existed as to the implementation
of the federal loan guarantees. ConocoPhillips had intent to
qualify for the loan guarantees and therefore comply with the 80
to 20 percent ratio.
3:35:46 PM
Senator Huggins utilized the assumption of the project cost of
$25 billion with gas production commencing in the year 2020. He
recalled testimony that without the gas treatment plant, the
tariff was predicted to be $1.65. He asked the "bandwidth of
desired, predicted, hopefully-will-be, tariff".
3:36:21 PM
Ms. King reminded of previous testimony in which she indicated
ConocoPhillips would utilize a "gated decision making process".
As the project continued to advance, the cost estimate would be
updated. Currently the cost estimate was uncertain. She recalled
"the previously public figure back in 2002 was a total of about
$2.00 to $2.40" depending on the calculation of the gas units.
Steel and labor costs had increased, and the toll could actually
be $3 to $4. Further engineering must be conduced and a better
indication of the financing and capital costs must be obtained
prior to the first open season. At open season parties would
"make a best estimate" of the toll.
3:37:37 PM
Senator Huggins asked if the $3.00 tariff estimate included gas
treatment.
3:37:48 PM
Ms. King responded that toll figures included "GTP, the mainline
to the Alaska/Canada border, includes to Alberta and also to the
Lower 48". She furthered, "It is a necessary cost to get that
gas moved from the markets in Alberta to [the] Lower 48 so we
include all in cost estimates in the calculation of the toll."
3:38:06 PM
Senator Huggins expressed concern that the amount was twice the
amount quoted to the Committee by the Department of Natural
Resources, although it excluded the gas treatment plant. This
"further underscores" the uncertainty of the tariff amount
despite modeling efforts.
3:38:44 PM
Senator Thomas referenced Mr. Wenzel's complaints about the lack
of flexibility and asked if issues other than those identified
in response to Senator Elton's query existed.
3:39:12 PM
Mr. Wenzel added the concern about "the clarity of the
predictability of upstream resource terms". He specified the
"absolute production tax rate" and the stability of those rates
over a period of time.
3:39:30 PM
Senator Thomas reviewed the provisions of Section 43.90.140.
Initial application review; additional information requests;
complete applications, and Section 43.90.150. Proprietary
information and trade secrets, as well as the language
pertaining to the initial application review, and failed to
understand "that concrete of a rejection of any proposal based
on such rigid details that are defined in the items." Instead he
considered the provisions to contain many similarities to
provisions of most requests for proposals (RFP). He acknowledged
that the Alaska natural gas pipeline was larger than any project
for which he had reviewed an RFP. The intent of this legislation
was to minimize potential problems and to address matters in a
"shorter period of time". He cautioned against "getting it so
off track with too many incidentals or small things that people
would like to see fixes but may not necessarily be a big
problem."
3:41:04 PM
Mr. Wenzel informed that the upstream resource terms addressed
in the provisions of the bill relating to inducements, "were
very prescribed" and "hard fixed in AGIA" with no ability for an
applicant to propose different inducements or different
certainty on State taxes. Potential applicants need the ability
to adjust "some of the terms of AGIA, never mind the
requirements." The requirements were also an issue.
Senator Thomas understood Mr. Wenzel's original concern. Senator
Thomas reminded that he had posed two separate questions.
3:41:46 PM
Senator Elton posed a scenario, in which AGIA was amended as
suggested to provide for a competitive process without rigid
guidelines, and ConocoPhillips submitted an application but
failed to be awarded the AGIA license; an open season was held
and ConocoPhillips did not participate; then, without
exclusivity, ConocoPhillips had the option to leverage the State
to "get what you want". He requested assurance that this would
never occur.
3:42:43 PM
Mr. Wenzel disagreed with the characterization of ConocoPhillips
leveraging the State. He proposed that the AGIA licensee
selected through the competitive process, regardless of whom,
should be able to compete with any project. The licensee should
be forced to always be competitive against other projects. This
would be in the best interest of Alaska. He expected that the
licensee would have an advantage given that its project was
started first. If ConocoPhillips were granted the AGIA license
under the aforementioned scenario, he assured that it would
continue to compete if other projects were proposed.
3:43:33 PM
Senator Elton opined that, "one ways you would demonstrate that
is [to] not participate in [the] open season" because
ConocoPhillips' project would be more tangible than the project
sponsored under AGIA.
3:43:52 PM
Mr. Wenzel asserted that the decision to participate in an open
season would be dependant upon whether ConocoPhillips deemed the
project economically viable. The company would evaluate and
determine if the risks were offset by the potential returns.
This effort would be undertaken regardless of the project.
The bill was HELD in Committee.
ADJOURNMENT
Co-Chair Bert Stedman adjourned the meeting at 3:45:05 PM
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