Legislature(2001 - 2002)
01/16/2002 12:07 PM Senate NGP
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* first hearing in first committee of referral
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= bill was previously heard/scheduled
ALASKA LEGISLATURE
JOINT COMMITTEE ON NATURAL GAS PIPELINES
January 16, 2002
12:07 p.m.
SENATE MEMBERS PRESENT
Senator John Torgerson, Chair
Senator Rick Halford
Senator Pete Kelly
Senator Johnny Ellis
Senator Donald Olson, Alternate
SENATE MEMBERS ABSENT
All Members Present
HOUSE MEMBERS PRESENT
Representative Joe Green, Vice Chair
Representative Brian Porter
Representative Scott Ogan
Representative John Davies
Representative Mike Chenault, Alternate
Representative Reggie Joule, Alternate
Representative Hugh Fate, Alternate
HOUSE MEMBERS ABSENT
All Members Present
OTHER LEGISLATORS PRESENT
Senator Georgianna Lincoln
Senator Gary Wilken
COMMITTEE CALENDAR
Natural Gas Pipeline Project Updates
· Chairman's Update
· Northern Economics: Dr. Doug Reynolds
· Department of Revenue: Larry Persily, Deputy Commissioner
· Department of Natural Resources: Commissioner Pat Pourchot
· Foothills Pipe Lines Ltd: John Ellwood
· Alaska Gas Producers' Pipeline Team: Dave MacDowell
· Phillips Alaska Inc: Michael Hurley
· Committee Member Comments
ACTION NARRATIVE
TAPE 02-1, SIDE A
Number 001
CHAIRMAN JOHN TORGERSON called the Joint Committee on Natural Gas
Pipelines meeting to order at 12:07 p.m. He said the Alaska Highway
Pipeline Committee is about the International Pipeline Committee
that this committee advocated when they went on their mission to
White Horse, Yellow Knife, Edmonton and Vancouver. They had a first
preliminary meeting in White Horse on December 5 between Alberta,
Yukon and himself. The Alberta government has appointed MLA Mark
Hlady to the committee; in White Horse, Minister Scott Kent is on
the committee. British Columbia will make their appointment today
or tomorrow. He also sent another invitation to the Northwest
Territories to join them. Their next meeting is this weekend in
Vancouver, B.C. and they have assurances that the Director of Oil
and Gas in the Northwest Territories will join them. He said their
mission statement is in his office.
On the federal legislation issue, Senator Murkowski has called a
meeting in Washington D.C. on February 4 and 5 and the idea is to
get the producers, pipeline folks, the legislature and others at
that meeting and try to work through some of the differences. The
House has passed HR 4, their energy package, which has pipeline
provisions in it. The Senate has introduced S 1766, which is
different than the House version. He hopes to be able to achieve
some consensus on what we want the federal government to do.
The Legislative Council in December approved $300,000 for this
committee to let an RFP for an economist or firm and they hired
someone who would do an introduction today. At the next Council
meeting he will ask the Chair, Representative Green, to broaden the
authority on the $300,000 to authorize the committee to hire a FERC
attorney who would deal with open season and access issues through
ANCA that we may be losing through filing under the Natural Gas
Act. They also might need a tax attorney or economist to deal with
the implications of federal tax issues. He said he would ask to
broaden the authority so the state can enter into agreements and
have information on hand as they go through the debate on the lines
anticipating that the producers are going to give them some numbers
when their studies are completed.
CHAIRMAN TORGERSON said that Arctic Research Corporation filed a
preliminary information packet (PIP) for the over-the-top and
through the Mackenzie Delta route. They believe that Alaska is
going to allow that:
I am now in the process of another piece of legislation
that will put the final nail into the over-the-top route.
Since the producers and pipeline companies aren't paying
attention to what this legislature wants done through the
bills we have passed blocking it, we're in the discovery
mode to see what we can do to do that.
He announced there would be two Department of Energy people and one
FERC representative in Anchorage next weekend and he would meet
with them on Sunday.
It's the intent of the Secretary of Energy to reinstitute
that office at some time. This is kind of an exploratory
meeting up here. They are going to meet with the Joint
Pipeline Office and, I would assume, some people in the
administration. I'll be with them some time on Sunday.
He thought that was good news, because of the recognition that the
Joint Pipeline Office was a part of ANGTA and represents at least
initially the following of the laws that are currently on the books
that dictate the highway route. They have had an interagency task
force in Washington D.C. working on this for about six months made
up of about 25 representatives of the Department of Energy,
Department of Interior, FERC and other agencies that have been
gathering information and going through a discovery on what may be
out there and what they have to react to.
CHAIRMAN TORGERSON said he is considering using the Resources
Committee meeting time on Wednesday for the Joint Committee on
Natural Gas Pipelines meetings. He said they put out an RFP for an
economic firm and Dr. Doug Reynolds with Northern Economics
responded. He will be in Juneau four days per week. He is also a
professor with the UAF and would have to be there sometimes.
DR. DOUG REYNOLDS said he was a Professor of Oil and Energy
Economics and works for Northern Economic Research Associates while
in Juneau. He would be doing the modeling on the natural gas
project economics and would extend on Mr. Roger Marks' models,
which he thought were pretty good, and try to find any new cost
advantages.
I think the main thing for Alaska, as far as I can see
is, the United States needs energy security and we've
gone through this with oil and we've got a pretty
competitive oil market, but when it comes to natural gas,
it's a lot less diverse sources when you get outside the
United States. You start depending on one source and you
have very little leeway to switch to other competitors.
So, once you start depending on one source outside the
United States, I think the energy security issue becomes
a big deal. I think Alaska, not only can we compete on
the natural gas market, but I think we give the United
States a lot more energy security and I think that's
going to be a big deal especially in five or 10 years
from now. I don't think the Gulf of Mexico is going to be
able to meet the United States energy needs and I think
Alaska is going to be needed. Sooner or later I'm very
confident Alaska gas is going to be used and I think it
should go through the southern route and I think the
costs of the over-the-top route aren't as great some
estimates suggest.
CHAIRMAN TORGERSON explained that Dr. Reynolds would model the all-
Alaska route, as well. Roger Marks already did a number of models,
but they must make sure their numbers are correct and that what
they are doing is going to work. They will be presenting a business
plan on the operation of an entity, which an initiative asks to be
put together.
REPRESENTATIVE GREEN asked him what he meant about the cost of the
northern route.
DR. REYNOLDS responded that he didn't think the southern route was
significantly more expensive than the northern route, depending on
how it's modeled.
CHAIRMAN TORGERSON said, "We're not going to spend a lot of time on
the over-the-top route, because it's not ever going to happen. I
don't want to waste a lot of the state's printer ink printing off
the paper work on that…"
Last year they passed SB 158 directing the Department of Revenue to
start looking at whether or not the state should take any, all or
part of the ownership interest in building the pipeline. They
appropriated $200,000 for the study and the department would
comment on that next.
MR. LARRY PERSILY, Deputy Commissioner, Department of Revenue, said
they were directed to prepare a report on the merits of state
ownership and/or financing of a natural gas pipeline. He said that
the report is now 117 pages and they would have an executive
summary. They are continuing to work with the consultants.
CHAIRMAN TORGERSON said he expected the report to get longer as
they gained more information.
MR. PERSILY said:
To discuss the merits of state ownership and/or
financing, we talk about the history of gas line
development, history of state financing of projects,
getting into tax exempt bond, finance issues, equity,
modeling, as your consultants talked about. So, there's
quite a bit in there. We're continuing to work with our
consultants, with the state debt managers, state
financial advisors, state bond counsel and others to
finish the report by the January 31 deadline in statute.
We will present copies to the committee that week and we
can also post it on the web if that would be okay with
you to make it widely available.
One aspect of the legislation that we have not commented
on previously that I would like to take a few minutes for
today is the directive in the legislation that we look at
the possibility of establishing a private corporation of
Alaska citizens to own a gas line. We believe that
approach would raise a number of questions that would
warrant further in-depth analysis. The concept was
proposed first, we think, in a report back in 1978 by a
firm, Dillon Reed and Company. They modeled that
structure in the report in 78 on the structure of the
Alberta Energy Corporation, which at the time was owned
half by the government of the province of Alberta and
half by the citizens of Alberta. In looking at the Dillon
Reed report, looking at the Alberta Energy Corporation,
looking at how that might translate into a corporation
where Alaskans would own the shares, some of the issues
that we'll be discussing the report, if you try to limit
shareholder exclusively to Alaska citizens, that might
present practical problems and, perhaps, even legal
problems. As a practical matter, the residency
requirement for shareholders might be difficult to
monitor and enforce. It would almost certainly diminish
the market value of those shares, because resale could
only be to the select group of residents. As far as the
legal system is concerned, within the United States it
would be unprecedented. We're not aware of any other
state forming a private corporation where the
shareholders are limited to state residents, the purpose
being to advance a development project in that state. So,
we believe legal challenges to this could be possible.
Among other things, if you had a residents only
shareholder's rule, that might be challenged as lacking a
legitimate public purpose. It might be challenged under
the privilege and immunities clause of the Constitution.
We're not saying that it would be or that it would fail
that - some of these issues that we'll be discussing.
One significant aspect that this approach - we believe it
would fail to offer any tax or financial advantage over
the development of a project by private corporations.
Dillon Reed based their assumptions on the tax code that
existed in 78. The U.S. tax code underwent significant
revision in 86, which we believe would block the issuance
of tax-exempt bonds the state to raise funds for the
initial capitalization for this project, which is
something Dillon Reed suggested in 78. That's no longer
allowed.
A couple of other quick issues to consider is if the
purpose of the private corporation is to provide Alaskans
an opportunity to share in the benefits of the North
Slope gas, they could certainly do so with much less risk
just by owning shares in the producers or pipeline
companies that would be building it. And if another
purpose of having a private corporation owned by citizens
is to influence the pipeline route or other issues, as
the Senator has explained, the pipeline route is already
against the law in Alaska and through right-of-way
permits and other existing statutes, we feel there are
other less risky ways to influence decisions in the
project. But we will have more on this in the report.
It's just something we haven't talked about before.
CHAIRMAN TORGERSON asked if he was on schedule for January 31.
MR. PERSILY answered they are on schedule.
CHAIRMAN TORGERSON thanked him for his testimony and announced they
would next hear Commissioner Pourchot comment on the royalty sale
to Netricity and Bill Britt, Joint Pipeline Office, give a quick
update.
COMMISSIONER POURCHOT, Department of Natural Resources, asked if he
could reorder the four topics he was given. Chairman Torgerson said
that was okay.
12:30
COMMISSIONER POURCHOT said:
Since the end of the last session, we have had several
meetings with the company, Netricity, which the
legislature had taken quite an interest in and passed a
resolution concerning their proposal to utilize North
Slope gas on the North Slope to fuel an electric
generation to run a computer server facility up there. We
met with them a couple of times this summer and upon
legal advice which we've shared with the Joint Committee
over the interim. The legal advice we got was that we
really lacked the good ability to so-call overlift our
gas, the state's royalty gas, without the producers also
producing their gas on the North Slope and we discussed
this with Netricity. They started direct discussions with
the producers. We suggested that the way forward would be
to have gas produced that was composed of both the
state's royalty and the producers' gas. They engaged in
negotiations and I don't know what the outcome of that
was, but then subsequently, which was also alluded to in
the legislative resolution was that we initiated a
royalty in kind gas sale process early last fall.
The Netricity proposal was clearly something that was out
there that could conceivably utilize the RIK (royalty in
kind) process, but additionally, we were hearing from
other companies for several different uses. One company,
is, like Anadarko, interested in having a back stop plan
for bidding in a potential open season, which now doesn't
look quite so pressing, but moving back to last summer
early fall, we were believing from what the producers
said that there could be an open season to bid gas for a
gas line as early as now, this first quarter of this
calendar year. So, knowing that a royalty gas sale would
have to go to the legislature for approval and that this
legislative session would be the window for that, we
started a process to solicit bids, at least, without any
predetermined decision on whether to accept a bid, submit
a bid to the legislature. But we started that process
that's called for in statute for an RIK.
There was other interest, too, for different types of
purposes. Williams, for example, was looking at possible
petrochemical development in the Interior utilizing gas.
They are also looking potentially at marketing North
Slope gas through their marketing system - just
transporting gas that they would own and putting it in
the pipelines to serve their customers. So, there were
several different interests out there. We concluded the
best interest findings here at the end of December and
put out formal invitation for proposals for any and all
potential bidders. That period is now open. It closes at
the end of January and we will see if and what it looks
like for bidders. We will do a determination then if any
of those fit into a best interest finding of the state
and whether it makes sense to then develop a contract and
submit it then to the legislature for debate and
potential approval. Again, we don't know the results of
that; we don't know whether or not we would accept bids.
Clearly, at some point in that process, if we get bids,
we would want to consult with the legislature to see if
there was interest in even considering a royalty gas
sale. That's kind of where we are on that.
I will add, because you may know, Mr. Chair, I just
became aware today the Commissioner of DNR received a
letter form the Joint Producer group requesting a
reconsideration of our decision to go forward with a
proposal. That does not affect the time frame we are in
for soliciting bids. I don't know what the legal
implications are, but they clearly are not supportive of
an RIK sale at this time. So, I would report that for
your information.
CHAIRMAN TORGERSON asked if it was an official appeal.
COMMISSIONER POURCHOT answered that since he made the original
decision, he has either an appeal or a reconsideration, not both,
and this is a reconsideration of the Commissioner's decision to
solicit bids for a RIK sale.
REPRESENTATIVE PORTER asked if he said the state's ability to sell
gas over the top of the producers' is a legal question or has it
been legally determined that we can't.
COMMISSIONER POURCHOT answered that legal advice from the Attorney
General's Office is that under the lease terms, the state lacks the
legal authority to unilaterally produce its gas to the exclusion of
their gas.
There are also some technical issues that arise if we
were to do that. Without the companies doing additional
work on the oilfield, we could actually adversely affect
oil production because of the way gas is used now. If it
was a joint program and the producers are selling, there
are other things they might do in terms of the production
facilities and processes to reduce the amount of oil loss
that might occur.
CHAIRMAN TORGERSON said:
It's my understanding that the overlift or underlift
question can't be accomplished without the permission of
the producers, but it could be accomplished if the
producers said it is okay.
COMMISSIONER POURCHOT said that was their understanding also.
He said the next topic was the studies that were funded in a
complex way last year.
Some were direct appropriations through the capital
budget by the legislature, some we supplemented from
Governor funds for that. We basically in DNR have
undertaken three studies, two fairly significant studies,
one on assessing in state demand and supply scenarios,
with obvious concentrations on the Interior and also in
Cook Inlet. We contracted out both that study and a
royalty valuation study to a firm called Econ One. We
would hope to hand to you a week from today, next
Wednesday, the final studies on both of those.
The royalty valuation was to evaluate the structure of
North American gas markets and to look at how our gas
would be valued in that process - something, by the way,
we're learning a whole bunch about - the way gas is
marketed, the way gas is priced. This is going to be new
if something happens here. We are building expertise on
that whole valuation process. It's proven to be quite
educational and potentially very valuable.
The third study that we undertook, and we only received
modest funds for this and that was a gas supply study.
What we did to maximize the value there - we contracted
out to our own Division of Geological and Geophysical
Survey, which had an on-going North Slope oil and gas
evaluation program. We asked them to look more intensely
and more specifically at gas resources on the North
Slope. They do this through rock outcrop and other more
superficial methods and the results of that should be
available. They've done the field work; they need to pull
together results which should be available within several
weeks and again we will provide that information to the
committee.
REPRESENTATIVE DAVIES asked if the DGGS was restricted to the North
Slope or did it include other basins.
COMMISSIONER POURCHOT answered that this component was North Slope.
The division envisioned a more statewide approach, but the funds
weren't sufficient. He hoped to look further in the future. Another
study by the Alaska Oil and Gas Conservation Commission (AOGCC) was
the Prudhoe Bay reservoir modeling for the impact of gas extraction
on the oil rim. They are still trying to get the bulk of the
funding for that. His department collaborated with them on a
scoping study and has a better feel for the direction to go.
However, the bulk of the study is still in the future.
The commissioner said that they haven't started the last study, but
they did get some money through the Governor's contingency fund and
the appropriation the legislature identified for this kind of work.
This will be the Pt. Thompson reservoir simulation.
Pt. Thompson is on a development track. As we talk about
the 35 tcf of reserves on the North Slope, 5 or 6 tcf of
that is in the Pt. Thompson unit. It is the key component
of any gas line development. It also has condensates and
oil. We have expanded the unit. We have some very
specific kinds of development obligations under the
expanded unit. It is on a development track. We need to
know more about that reservoir and the impact of gas
extraction on other things. We do have some money to
begin that and will be starting that during the second
half of this fiscal year.
REPRESENTATIVE GREEN said that was a reservoir study, not a sales
study. The Commissioner agreed saying that they were understanding
the reservoir mechanics and the size of the resource.
REPRESENTATIVE DAVIES asked if there were similar AOGCC concerns
about the impact of gas development on the liquids.
COMMISSIONER POURCHOT said he would give them a layperson's
understanding. "The pressure in that Pt. Thompson field is very
high. It doesn't need gas reinjection to produce condensate or
oil."
He said that Bill Britt would give them a status report of their
gas pipeline office.
MR. BRITT, Gas Pipeline Coordinator, said he sent them a copy of
his monthly report this morning. He prepares the report monthly for
his commissioner and his three funding sources.
We are working on a second half budget. In our work plan,
we have one proponent, AGPIT, the producers who have
informed us that at the end of November they do not
anticipate having any work for us other than permitting
for trenching trials. We have one proponent, Foothills,
who want us to move as fast as possible in processing
their right-of-way lease application.
With AGPIT, the Division of Governmental Coordination, a
representative in my office propagated a draft proposed
consistency determination yesterday. The permitting
should be completed by next week. The trials, ice road
construction will begin immediately and the trenching
trial, themselves, are scheduled to begin in early
February. They will take place first on the North Slope
and then in Fairbanks. The trenching machine which I look
forward to seeing should arrive in the state any day now.
With Foothills, we are doing both work planning and work.
We're working with them to finalize a list of required
submittals and expectations for each. We're collaborating
on a schedule and we're reviewing aggressively the
existing submittals that Foothills has given us. A couple
of examples are the Yukon River bridge risk assessment
that was done some time ago and river and flood plain
crossing plan. There's a whole series of plans and these
have been given to various departments to review and
critique and give feedback to Foothills on.
Staffing and recruiting, our staffing remains stable at
12 state employees, two of which are shared with the
Joint Pipeline Office, two federal liaisons for the
office plus support from Department of Law and other DNR
divisions and others. We are ready to go on our right-of-
way chief and engineering chief and a public information
officer. We may pass actually filling one and possibly
two of those positions due to budget and reduced work
load as a result of the producers ratcheting back on
their expectations.
In terms of office space, we're moving to new offices
this weekend. As everybody knows, we're looking forward
to that as anyone would. Other news on the march -
Senator Torgerson mentioned the Department of Energy and
FERC visit later this month. Presuming as well that
everybody knows that there was a Canadian cooperation
plan promulgated by a variety of federal, provincial and
other authorities in Canada describing how they intend to
approach permitting about a month ago and we're having a
look at that. We've had issues: our e-mail - we're on the
Department of Interior server, which everybody reads
about weekly in the newspaper. So, we haven't had e-mail
coming in or out… I guess this is one of the unintended
consequences of the cost savings associated with
intending to share the servers with the Joint Pipeline
Office and System Administration. I guess if you live
with those cost savings, you live with the downside of
them as well.
Finally, we received the first pilots from DGGS in
support of us. They have produced a database of
geological construction materials and surficial and
engineering ecology from Prudhoe to Livengood. In the
second half of the year they will continue from Livengood
to the Canadian border. That's my summary real quickly.
MR. JOHN ELLWOOD, Foothills Pipe Lines Ltd., reported that last
fall they had signed an MOU to reconstitute the Alaska partnership
with TransCanada Pipelines, West Coast Energy and seven of the
major U.S. pipeline and energy companies. Foothills committed to
put a commercial proposal to the producers by the end of the year
and that was done. They have had some initial discussion with the
producers with respect to that proposal and will have ongoing
discussions.
The proposal is somewhat different than what I have
talked to your committee about in the past. At the
request of the producers and after some earlier
discussions in the fall, we decided to take a look at a
somewhat larger project, larger in terms of both volume
and pipe diameter. We did put forward a proposal that
would initially move about 4.5 bcf/d at the receipt point
of the North Canada pipeline and could be economically
expanded up about 5.4 bcf/d. This would require, in our
view, probably it's best done with a 48 inch diameter
pipe as opposed to the 42 inch diameter pipe that I had
described to you during your various hearings last year.
As you have heard from Mr. Britt, we continue our efforts
to acquire right-of-way on the state lands in Alaska.
We're quite pleased with how that is going and with the
cooperation and progress that's being made here.
I think you had asked our view with respect to
legislation and what I might say about that really is
that it's a bit too early for us to come to any
conclusions here. We are, as I said, in the initial
discussions with North Slope producers and until those
discussions progress a little farther, it's difficult for
us to determine what might be most useful in the way of
legislation either on the federal or the state front. So,
we would just like to have a little more time here to
continue our discussions and we will report to you
periodically. Are there any questions, Mr. Chairman?
CHAIRMAN TORGERSON asked for their timeline with the future
discussions and if they were reworking their proposal. "I've heard
your same report about five times, I think. I'm ready for some
action."
MR. ELLWOOD responded that they had a very constructive meeting
with the producers earlier this year and as a result of those
discussions they are investigating other matters of interest.
Foothills left material with them that they had not seen before and
he understands that they are reviewing it now. They are planning on
another discussion with them within the next few weeks. They don't
have a date pinned down. He expects the discussions will be ongoing
as they progress to some resolution of how they might work
together.
CHAIRMAN TORGESRON thanked him for the update.
12:52
MR. DAVE MACDOWELL, External Affairs Manager, Alaska Gas Producers
Pipeline Team, said he would provide an update on what they had
done, where they are currently and what some of the next steps are.
To be clear, I am speaking on behalf of the producers'
team. I'm not speaking for any one of the individual
sponsor companies. You'll recall those are BP, Phillips
and Exxon Mobil. Last year at this time, our joint
feasibility effort was just barely getting under way.
Since then, we have spent over $100 million and invested
almost 1 million man hours of work in an effort to
identify a commercially viable project to move Alaska
gas. At our peak, there were about 800 contractor
employees working alongside about 100 sponsor company
employees split one-third, one-third, one-third on the
team.
Just a quick recap of the some of the major
accomplishments and milestones we had from quarter to
quarter. In the first quarter of 2001, we established
offices in Anchorage and in Calgary, Alberta, and began
the assembly of our company team in earnest. We also
released RFPs - 10 big chunks of work in the first
quarter. In the second quarter, we awarded those
contracts and as you'll recall, there was a significant
Alaskan component to those awards. We also initiated
full-scale field surveys. The third quarter, things
really took off. Our contractors who worked for us peaked
at 800. The three producers proposed federal regulatory
enabling legislation in D.C. We also rolled out our
attribute study of the seven elements, conducted a
Beaufort scan survey and completed our field surveys. We
also had a meeting with potentially interested shippers.
There were about 50 representatives who attended that, I
believe in September.
Fourth quarter, our conceptual design was completed as
planned. We received contractor cost estimates as planned
and began economic modeling of those inputs in earnest.
I'd have to say throughout that whole year, we also
engaged in ongoing discussions with a wide range of
interested parties, governments, pipeline companies,
community leaders…
TAPE 01-01, SIDE B
12:55
MR. MACDOWELL continued:
From my perspective it's been a really excellent
experience. It's not every day somebody gets a chance to
work on a world class effort with top notch folks from
three really good companies. That's kind of what's past.
What's happening now, the studies are essentially
complete. The team is now focusing on final documentation
and we continue to make dialogue with interested parties
as you've heard earlier in this meeting, including
pipeline companies and we'd expect that such
conversations will continue to occur with any pipeline
company that feels it can add value to a project. The
results of our study effort have been submitted to the
sponsor companies, the three I mentioned earlier for
evaluation and the joint team is winding down, as
planned. We're now at about 65 company staff; remember we
were at 100 at peak. We've got about 200 contractors and
by the end of February we'll be close to zero when the
joint work is complete.
As we move forward into 2002, our common priority is
creating a viable efficient government framework. Federal
enabling legislation is a must-have. You've heard that
before from us, I think. We also need to progress State
of Alaska fiscal clarity and stability, as well as
monitor the Canadian First Nations regulatory process.
Most of our effort is going to be in support of those
activities. We do expect that the pace of our future work
will be influenced to a great extent by progress towards
this efficient governmental framework, but I do want to
add we heard some of it from Mr. Britt earlier. We are
undertaking some targeted cost reduction studies in the
first quarter later this winter. For example, we plan to
conduct trenching trials in Alaska this winter to test
new innovative ways of trenching through permafrost. We
think there's a potential to increase that trenching
productivity and thus save potentially significant
construction costs.
I'd have to say we didn't accomplish everything we wanted
in 2001 especially in the area of creating that viable
governmental framework, but I think I can speak for all
the sponsor companies when I say we remain very committed
to taking the appropriate steps to see what we can do to
make it happen. With that, I'll stop…
CHAIRMAN TORGERSON asked when they would do an open season.
MR. MACDOWELL replied, "We have no plans to hold an open season in
2002."
REPRESENTATIVE DAVIES asked if they would formally disband the team
at the end of February or did they anticipate a continuation.
MR. MACDOWELL replied, "I don't know the formality question. For
all intents and purposes, the joint work will have been completed
at that point."
REPRESENTATIVE DAVIES said he noted that there was some ongoing
need to do things like the enabling legislation and asked if that
would be done through the joint approach or as individual
companies.
MR. MACDOWELL replied, "I expect the focus would be individual
companies."
CHAIRMAN TORGERSON asked regarding fiscal certainty, if they had
made any proposals to the administration.
MR. MACDOWELL replied that they hadn't made any specific proposals,
although they have said for quite a while that certainty and
stability are important. "We are in conversations with the state
and expect those conversations to continue and come to a common
agreement on the need for that."
CHAIRMAN TORGERSON said that the committee is engaged in hiring an
economist and he recommended that at some time, the producers
engage them so they can work toward this instead of them having to
imagine what they need.
I understand that as close as you're trying to get is a
guarantee that the fiscal regime won't change over the
period of the line, but that's as close as I can get to
what you're asking for…We're spending a lot of money
hiring the right people to help us do that and to help
you through the problem and also the state through that
problem. But you're going to have to step up to the plate
here, too.
REPRESENTATIVE OGAN asked if the fact that there is a budget gap
problem and that the governor is talking about taxes cause some
concerns in the realm of fiscal certainty.
MR. MACDOWELL replied that they are interested in a solid fiscal
program moving forward. "It doesn't cause concern."
CHAIRMAN TORGERSON asked if that was a factor they considered when
contemplating on investing in Alaska.
MR. MACDOWELL replied, "I think it doesn't impact directly the
joint study effort that we're now finalizing, but it's something
that folks are watching very carefully."
CHAIRMAN TORGERSON said that the message is clear, "…You have a
state that has a billion dollar problem and you're a cash cow."
REPRESENTATIVE GREEN asked if they had selected a route.
MR. MACDOWELL replied that they had sent results of the work so far
to the sponsor companies and they would conduct an evaluation
individually. The results of the evaluation would determine the
next steps.
REPRESENTATIVE GREEN asked if they didn't at least have a good feel
for cost differential.
MR. MACDOWELL said he was not in the position to speak about that
yet and he hoped as a joint team they could produce high level
results similar to what they did during the summer after the year-
long work effort.
CHAIRMAN TORGERSON thanked him for his presentation.
1:05
MR. MICHAEL HURLEY, Phillips Petroleum, said he would give them a
short update on their efforts to progress the development of a
pipeline to the Lower 48 to commercialize Alaskan North Slope gas.
Phillips' goal is to develop an economically viable
pipeline project. We believe that a pipeline project
along the southern route has the best chance of being
developed in a timely fashion and will be the one most
supported by the various stake holders, but this project
will require federal permitting, fiscal legislation as
well as some measure of state fiscal certainty to
proceed.
As you know, Phillips has been an active participant in
the Alaska gas producers pipeline team since its
inception and as you heard from them, the team is in the
process of finalizing the results of their over $100
million feasibility work program and forwarding those
results to the three sponsor companies.
Phillips is in the process of evaluating those results
internally. Several months ago, Phillips articulated our
strong desire to progress a project and the requirements
we saw as necessary to make development of the project a
reality. Our work to date has not changed those
conclusions. Federal enabling legislation is required to
bring certainty and expediency to the regulatory
permitting process and federal fiscal legislation is
needed to mitigate the substantial risks inherent in a
project of this magnitude which has the potential to
bring so many benefits to consumers and governments. The
cost and risk of this project are such that relief is
needed through a federal income tax credit, but one
limited to those situations where North Slope gas prices
dropped to uneconomic levels.
Phillips is hopeful that the necessary federal
legislation can be achieved early in 2002, after which we
would proceed to the next phase of permitting for the
southern route. We are committed to pursuing diligently
those efforts in Alaska, Canada and at the U.S. federal
level. We believe they will contribute to a successful
economically viable gas commercialization effort.
Mr. Chairman, thank you for this opportunity to update
the legislature on our efforts and I'd be happy to answer
any questions you might have.
CHAIRMAN TORGERSON said:
I know Phillips has advocated for the floor and a royalty
switcharoo sort of system, but I hadn't heard of the
federal income tax or have I?
MR. HURLEY answered, "That is the floor mechanism….There has been
some discussion about that some time back, but the proposal that I
think you're referring to is one that strictly works with federal
income tax."
REPRESENTATIVE DAVIES said they are asking the federal government
to provide a floor protection if the price drops to a certain level
and asked if they were willing to consider sharing benefit on the
up side, too.
MR. HURLEY replied, "We're willing to consider any kind of proposal
that tries to mitigate that substantial risk that we see both from
the standpoint of market price and cost over run that we see in
this project."
REPRESENTATIVE DAVIES said, "It might help sell it if there were
some carrot as well as sharing of risk."
He asked Mr. Hurley to elaborate on what Phillips views as the
requisite assurances of fiscal stability from the state.
MR. HURLEY replied that they are struggling with that, too. They
look at it as a need for fiscal clarity on how the rules of the
game are going to be played. Then there is a question about how
certain those rules are over time.
We have struggled with the spectrum of certainty that you
can have going through everything from simple regulatory
changes that departments can change simply with notice
and public hearings over time all the way to ideas that
were advanced several years ago of fiscal contracts.
Where along that continuum we need to be is a discussion
that we need to have with the state and we're not sure
where that is, yet. That is something we need to continue
our discussions to get to. The fiscal clarity piece is
something that is extremely important to us.
REPRESENTATIVE DAVIES said he shared the Chairman's desire to get
those discussions started.
MR. HURLEY responded that he could appreciate it.
REPRESENTATIVE PORTER asked if he would be correct in assuming if
the federal legislation became route specific with the southern
route, it would not interfere with Phillips' plans.
MR. HURLEY replied, "That is correct."
CHAIRMAN TORGERSON asked where the $10 billion dollar loan
guarantee provision (in federal legislation) instead of tax credits
come from and did Phillips want that.
MR. HURLEY said that was part of the Senate energy bill and
Phillips had not discussed that with anyone in Washington and was
surprised to see it.
CHAIRMAN TORGERSON said assuming that the big three are going to
build a pipeline together, only Phillips is asking for tax
incentives and he asked how they proposed that would work.
MR. HURLEY replied that he would have to ask the other companies.
"From our standpoint, we see the risks out there with both gas
market pricing and construction cost overrun on a project of this
magnitude to be of such a nature that we see that as being
necessary."
CHAIRMAN TORGERSON said the Conoco merger changed their financial
position and asked if they anticipate still having to ask for a
floor if they become the third largest oil company in the United
States.
MR.HURLEY said he couldn't answer that.
CHAIRMAN TORGERSON thanked everyone for their participation and
adjourned the meeting at 1:13.
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