Legislature(2001 - 2002)
08/19/2002 10:15 PM Senate NGP
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* first hearing in first committee of referral
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= bill was previously heard/scheduled
+ teleconferenced
= bill was previously heard/scheduled
ALASKA LEGISLATURE
JOINT COMMITTEE ON NATURAL GAS PIPELINES
August 19, 2002
10:15 a.m.
SENATE MEMBERS PRESENT
Senator John Torgerson, Chair
Senator Johnny Ellis
Senator Pete Kelly
Senator Don Olson (Alternate)
SENATE MEMBERS ABSENT
Senator Rick Halford
HOUSE MEMBERS PRESENT
Representative Hugh Fate
Representative John Davies
Representative Reggie Joule (Alternate)
Representative Joe Green (Alternate)
HOUSE MEMBERS ABSENT
Representative Brian Porter
Representative Scott Ogan
COMMITTEE CALENDAR
Committee recommendations to the 23rd Legislature
Energy Policy Act of 2002
WITNESS REGISTER
Mr. Patrick Coughlin, Consultant
Senate Resources Committee
Alaska State Capitol
Juneau AK 99801-1182
Mr. Mark Myers, Director
Division of Oil and Gas
Department of Natural Resources
550 W. 7th Ave. Ste 800
Anchorage AK 99501-3560
Mr. Alan Sharp
Director of Northern Business Development
EnCana Marketing USA Inc.
1200 Smith Suite 900
Houston TX 77002
Mr. Mark Hanley, Public Affairs Manager
Anadarko Petroleum Corporation
1201 Lake Robbins Dr.
The Woodlands TX 77380-1045 USA
Mr. John R. Ellwood
Vice President, Foothills Pipe Lines, Ltd.
CEO, Foothills Pipe Lines Alaska, Inc.
3100 707 Eighth Ave. S.W.
Calgary, Alberta T2P 3W8
Canada
Mr. Joe Marushack, Vice President
Alaska North Slope Gas Commercialization
Phillips Petroleum Corporation
POB 100360
Anchorage AK 99510
Mr. Dave Dingell, Manager
City of Valdez, Port Authority
POB 307
Valdez AK 99686
ACTION NARRATIVE
TAPE 02-7, SIDE A
CHAIRMAN JOHN TORGERSON called the Joint Natural Gas Pipelines
Committee meeting to order at 10:15 a.m. and announced that Patrick
Coughlin, consultant to the Senate Resources Committee, would
testify first.
MR. PATRICK COUGHLIN, consultant to the Senate Resources Committee,
said he would provide the committee with a brief overview of how
the federal energy legislation came to be, what's in the bill and
then focus on the bill's provisions relating to an Alaska natural
gas pipeline. He began:
Shortly after assuming office, President Bush established
a National Energy Policy Group to develop a national
energy policy. That group was headed by Vice President
Cheney and they put out a report. That report contained
numerous recommendations regarding national energy
ranging from electricity deregulation to capping
standards, but it did contain some focus on increasing
gas supplies and this was especially true given, of
course, what we all know is the runup in gas prices in
the winter of '00 and '01. The report noted that 'the
most significant long term challenge relating to natural
gas is whether adequate supplies can be provided to meet
supply which is sharply projected to increase over the
next 20 years.'
To meet this problem, the Bush Administration recommended
that we look at ways to expedite construction of a gas
line from Alaska and it recommended that the President
direct the agencies to work with various interested
parties including Canada and the State of Alaska and it's
recommended that Congress look at changes to ANGTA, which
was the existing law providing for the construction of a
pipeline from Alaska. Following the report, the House of
Representatives took up an energy policy bill and they
passed that August of last year. Then the Senate took up
the bill and that bill is referred to as HR 4 and as this
committee knows, that process took place in the fall of
last year and ultimately led to the passage of the Senate
version of the bill in the April/May timeframe of this
year.
Both houses have passed two distinct versions of the
energy bill. It's the first attempt by the U.S. Congress
to pass a comprehensive energy bill in the last 10 years
and there are substantial differences between the two
bills and, just by way of background for members of the
committee, I included in your packet a table, which was
prepared by staff for the Congress listing the major
provisions of the bills and the differences. As you can
see, there's provisions relating to electricity
restructuring and we're all familiar with ANWR and the
differences between the Senate and House version. The
average fuel economy standards are there; there's many
differences between taxation policy and incentives in the
two bills and the list goes on and on. As a result there
has been a conference committee appointed. That was done
this summer and Representative Tauzin is the chair of
that committee and Senator Murkowski and Representative
Young from Alaska are members of that committee also.
During the summer the committee has done work and tried
to identify issues, which are major discrepancies between
the House and the Senate version and ones that they have
similarity on. Our best information is that they expect
to get back together in September and first take up
provisions that there may not be any significant
disagreement between the two bodies and then later take
up the other more difficult provisions.
With that background I wanted to focus on the provisions
in the bills related to the Alaska Natural Gas Pipeline.
Both versions, that is the House and Senate versions,
both contain a provision relating to route selection,
which is they both preclude the over-the-top route and,
in fact, that is basically the only provision in the
House version of the bill that really deals with the
issue. The Senate version provides an alternative
framework to ANGTA that allows for the expedited
construction and operation of a natural gas pipeline from
Alaska. That bill also reaffirms ANGTA and allows the
ANGTA system to be modernized. Significantly, there are
two financial incentives contained in the Senate version
of the bill for the Alaska pipeline. One authorizes the
Department of Energy to provide loan guarantees to the
project up to the amount of $10 billion. The second one
provides a tax credit at an inflation adjusted price that
is, if the gas goes below this price, the seller of the
gas will get a credit to the extent that the price of gas
is below $3.25 at a place referred to as the AECO Hub,
which is in Alberta, Canada. It is this later incentive
that has caused the stir in Washington D.C. and in
Canada.
MR. COUGHLIN said he prepared a side-by-side comparison, which
simply shows what the House has done with the Senate version of the
bill with respect to the Alaska natural gas pipeline (in members'
packets). He also noted where, in the Senate version of the bill,
the proposals adopted by the committee last fall are located. He
explained that HJR 44 said the Alaska Legislature supported the
bill that was pending in the Senate as long as certain conditions
were met. Those conditions were:
· A ban on the over-the-top route (in the Senate bill).
· Provisions for access to gas for Alaskans and for a role for
the state in setting the tariffs (in the Senate bill).
· A fair and open process to allow explorer groups (oil and gas
companies without an ownership interest in the pipeline) to
have access to space in the line and the ability to expand
the pipeline in the future (in the Senate bill). He said
there were provisions for the establishment of procedures by
FERC for an open season, a new condition that the Alaska
Legislature asked for. It also allows an explorer or the
State of Alaska to seek expansion if they believe it is
justified, another unique provision.
· That Congress affirm ANGTA to assure that just because an
alternative framework in which someone could get a
certificate to build a pipeline could be created does not
mean that ANGTA would be done away with, but that it could
also be modernized (in the Senate bill).
· Tax credit incentives (in the Senate bill). He explained that
the tax credit is given if prices go below $3.25 and the bill
contains a repayment provision if prices go above $4.87. It
does not have accelerated depreciation, but it does contain a
loan guarantee provision.
· No exclusion for gas-to-liquids or for LNG. There are no
provisions that prohibit that from happening, but it's fair
to say that there is no support for it. It maintains Yukon
Pacific's permit status, because as part of reaffirming
ANGTA, it said pervious decisions under ANGTA are still
valid.
MR. COUGHLIN said another provision in the Senate bill that was not
in HJR 44, but was put forth in the committee's proposals last
October, was that Congress provide for a project labor agreement.
The Senate version of the bill does not mandate a project labor
agreement, but says it's the sense of the Senate that the project
sponsors are encouraged to enter into a project labor agreement.
The committee also asked that Congress provide for Alaska hire and
Alaska contracting. The bill has no provisions mandating that, but
it does contain a $20 million grant for the Department of Labor to
conduct a study of training programs that could be provided in
Alaska to train Alaskans to get pipeline related jobs. Once the
study is completed, those training centers would be established
within Alaska for that purpose.
MR. COUGHLIN said the bill provides an alternative framework to
ANGTA for an expedited process to have a pipeline completed
quickly. For example, it requires FERC to expedite consideration of
issuing a certificate if an application is filed and it sets
expedited timeframes under which the EIS process is to be
completed. It also designates a lead agency in the federal
government so that there's no dispute among the agencies about who
is going to be in charge of preparing the EIS and it provides for a
federal coordinator to oversee the whole process and to make sure
that any disagreements between the agencies get resolved promptly.
Last, it provides for a limited judicial review and expedited court
consideration if there is a lawsuit.
CHAIRMAN TORGERSON asked Mr. Coughlin if, in his opinion, the
provisions in the Senate version reflect the will of the
Legislature that was laid out in HJR 44.
MR. COUGHLIN answered they do and added:
There are many parties to this proceeding and I wouldn't
say word for word that the Alaska Legislature got 100%
what we wanted, but in general, there are provisions that
deal with and address every issue that the Alaska
Legislature wanted in the bill.
REPRESENTATIVE GREEN said there has been some objection to the
incentives and asked Mr. Coughlin if he thought they would
remain.
MR. COUGHLIN replied that he wasn't enough of an insider to give
a fair answer to that question. He pointed out:
They're on the table and I can only tell you what I've
read in the press and that is, if the bill passes, and I
think people think there's a likely chance that it will
pass, there will be some kind of incentives - whether
they will be exactly the same I can't say.
CHAIRMAN TORGERSON said that is what he has been hearing also. "It
has some problems, but it appears they have the votes for it to
go."
SENATOR OLSON said the Senate version of the bill contains $20
million to train people throughout Alaska. He asked why the House
version does not contain a similar provision.
MR. COUGHLIN replied that the only provision the House included was
the ban on the over-the-top route. He thought that was due to a
timing issue because the producers put forward their proposal for
this alternative framework in the summer of last year. By then the
House was pretty far along in the process.
SENATOR OLSON asked if the ban on the over-the-top route was going
to remain.
MR. COUGHLIN replied that he has heard that it's not a
"conferencable" item, because the same provision appears in both
versions. He noted, "If a bill passes, it will be in the bill."
SENATOR OLSON asked if he was expecting any amendments to reverse
that.
MR. COUGHLIN replied that he is being told that can't be done.
CHAIRMAN TORGERSON said he understands that provision could be
changed, however Chairman Tauzin did not put that on his list of
things that were accomplishable.
He said a gentleman's agreement was made between everyone involved
that amendments wouldn't be offered. He thought opening up the bill
to amendments would kill the bill because nobody got exactly what
they wanted. He surmised, "But overall it's not a bad bill."
REPRESENTATIVE FATE asked about the labor contract agreement that
is in the Senate bill.
MR. COUGHLIN replied that there is a provision in the Senate
version of the bill that deals with two subjects: the use of U.S.
steel and a project labor agreement. He explained:
It basically encourages the project sponsor to use U.S.
steel to the extent that they can [and] to try to
negotiate project labor agreements to expeditiously
construct the project.
CHAIRMAN TORGERSON noted that is a non-binding agreement.
MR. COUGHLIN agreed that it's not mandatory.
CHAIRMAN TORGERSON asked if there were any more questions of Mr.
Coughlin and there were none. He noted that he had given the
committee a report (paid for by Phillips Petroleum) by Charles
River and Associates that talks about other incentives, the impact
on consumers and answers a lot of questions. He also included a
paper called "The Joint Committee on Taxation Report" dated May 23.
He hadn't received a copy of the OMB report yet.
MR. MARK MYERS, Director, Division of Oil and Gas, Department of
Natural Resources (DNR), said he was here today to represent the
Administration. He stated:
I want to, for the Administration, thank the committee
for the work they have done. You have taken on a very
complex issue of great importance to the state and I
believe you have turned over a lot of rock and looked at
a lot of hard issues and have gotten a good grasp of the
complexities and issues involving the pipeline including
how the open season process works, how access works, etc.
So, I just personally and for the Administration want to
thank you guys for a job well done in your analysis and
also thank you for the input that you have provided to
the congressional delegation in D.C. and I'd just like to
personally urge you to continue on in the good work.
Here today, you've asked a series of questions to me and
I think if I could just address those questions and get
through them rather quickly and then be here for
questions. The first question the committee wanted
thoughts on - whether the credit provisions in Section
25.03 would be beneficial or harmful to construction and
operation of an Alaska gas line - that basically refers
to the tax credit mechanism that Patrick has talked
about. I think to break that question down, basically to
look at it in terms of beneficial to Alaskans and then to
the North American market, in general and then also to
other producers would be the appropriate way to look at
the question.
First of all, I think if you look at the pipeline project
itself and you want to look at risks to the project, the
primary risk to the project isn't the fact that gas is
there. It isn't the technology needed to bring it to
market, it isn't the demand in the markets, it's
fundamentally a prices issue if you look at risk and
commodity price on the low end. It's a lot of capital to
invest; it's a lot of modifications to production of oil
on the North Slope and it's a lot of effect on future
exploration based on having this line present and having
certain baseline economics. So, if you strip away
everything else, I think an objective person would say
that that tax credit gets to the core risk involved with
the project. That is if you would have periods of low
prices. I think no one expects the price to maintain
levels of less than $3 or so an MCF, but it certainly is
possible given the volatility of the market that there
are short periods of time, in which case the price could
drop down below threshold markets.
My experience with economists predicting prices,
forecasting, it's more art than science and there's
certainly risk - in the predicting on a short-term period
for several months of commodity price. So, this floor
stabilizes that. As mentioned, it's been scored as
revenue neutral. So, I think this particular provision is
extremely valuable in that it takes a lot of the risk out
of the project and it sort of - with the floor - then
would guarantee if you calculate everything else giving
you a guaranteed base level of rate of return that you
could always count on for the project, again, huge if
you're investing capital, huge if you're exploring for
new resources for gas in the future - so, I think it's
clearly going to be beneficial for the project itself.
And the project, I think, of course, is beneficial to
Alaskans... producers and the explorers, as well, and
also for a pipeline company - obviously, the less risk in
the project in terms of the pipeline consortium if they
are building it. So, a tremendous mechanism in
alleviating risk - again scored as neutral - so, a lot of
value there.
Now, whether it's beneficial to the consumer in the Lower
48 was one of the other questions. If you look at that, I
think you really have to look at the gas market in the
Lower 48 and in North America in general and then that
determines having to calculate out what you think the
supply deliverability will be in the future as well as
the demand. So, you have to look at both those elements
and I think one of the encouraging things for the Alaska
project is in fact the projected growth. Everyone
projects growth in the market beyond existing capacity.
The EIA numbers show by 2020 an additional 7 - 11 TCF of
gas needed. There are studies that show slightly less and
some that show more, but, in general, a very significant
increase in demand in gas and I don't think anyone is
disputing that. And the long-term perspective is
independent of the short-term recession that we might be
under.
The second - that is more dear to my heart because I'm an
explorationist and I look at supply issues in particular
If you look at deliverability of gas in the system, the
supply available, I think there are serious questions.
And if you look at it from more of a geological
perspective, you reach much higher levels of concern than
you might from strictly an economic perspective. Kind of
two facts to support that is between 1990, typical wells
put on line had about 40 months of production before they
started to decline - gas wells. In 1999 it was down to 24
months. So we're seeing about a 50% increase in decline
rate. That typically over a large scale looking at
multiple basins is an indication that your supply is not
as robust - that you're finding and developing smaller
gas accumulations. So, that's one thing in the long-term
supply, even with the increased amount of drilling that
we're seeing, we're not seeing sustained long-term
success rates. We're seeing gas delivered, but again,
less bang for the buck, less return for each well being
drilled.
The next, and more specifically focusing in on the market
that this would compete against in Alberta, look [at] the
western Canadian sedimentary basin. We're seeing almost
every party's projections showing between 2010 and 2015 a
decline in the availability of gas and deliverability in
the basin. That basin is a very mature sedimentary basin
for the production of conventional gas and that gas is in
decline. They expect an increase in completions from
3,000 - 5,000 per year, yet expect the basin to decline.
So, again, if your supply side is declining and your
demand is increasing, it's going to be a lot of work to
keep that supply level stable.
And then there's incremental amount of demand there. That
would indicate a potential shortage for the customers,
particularly in the Midwest where this gas line would be
tending to go. So, again, from the consumer standpoint, I
think there's extreme value in North America and in the
United States in particular. So we have a long term
guaranteed supply that will not make up for the existing
supply, but compete in the market for that new expansion
capacity, which will be needed. So, I think again the tax
credit, if it gets this project built, has tremendous
potential.
Another really positive element is Alaska's gas potential
beyond the known 35 TCF on the North Slope. We've seen a
recent USGS report that says technically recoverable gas
- as much as 59.7 TCF of gas in their mean case in the
NPRA, alone. Then we have state lands of equivalent
geology just to the east of there. We have the known gas
hydrates on the Slope, which again, exceed the known
discovered conventional gas. So, we're looking at a
tremendous amount of gas that could provide a long term
deliverability to the United States for a 50-year plus
period of time at 4.5 - 6 BCF/D. So, again, long-term
stability and supply for the United States could be
achieved by this gas line so it's clearly in the nation's
interest. So, again, I think from the Administration's
standpoint, we see the tax credit as very valuable.
MR. MYERS said that a letter from the Governor to the conference
committee dated May addressed several issues, one of which was the
importance of the tax credit. He explained:
The other question is how it would affect other existing
gas producers. Certainly, you can't argue that it would
have some market effect. Realistically, the success of
the project one way or the other will affect the markets
there in Alberta and will affect deliverability in
Chicago. Again, with the supply and demand situation, we
expect that not to be a competitive thing, but basically
that multiple progress can go, that Canadian coal bed
methane projects will need to go, that this project does
not threaten the Mackenzie Delta area and its upside
potential and it's deliverability of gas. So, I think
we're in a situation from a supplier side that's enviable
in that there's enough demand or will be enough demand in
the market that the Alaska gas should not threaten
Canadian production. Therefore the floor should not be a
terrible threat to other producers and you may hear
differently today.
REPRESENTATIVE DAVIES said he thought the Bush Administration
was on record supporting this.
MR. MYERS said he meant the Knowles Administration.
SENATOR OLSON said he had an optimistic point of view.
MR. MYERS replied:
If you look at the economics they [the producers] have
presented based on the three price in Chicago, and you
look at what an equivalent netback would be with a
minimum $3.25 floor, you can calculate your own rate of
return and I'll let them do it, but it will be a very
positive rate of return. In addition, it does one other
thing. When companies need a higher rate of return, it's
usually associated with the risk of the project. So, if
you've eliminated or minimized the commodity risk, one
would believe that a project would have better economics
at a given rate of return if the risk is lower in terms
of lower financing costs, in terms of risk to the
shareholders. So, again, I think the floor is a very
positive mechanism. It does multiple things. It
eliminates risks and I think it actually - depending on -
to know what their projected rate of return for the
project will be, you will have to know what their costs
are, which we really don't. We have a kind of a general
idea, but very crude and you would also have to know what
their internal price projections are, which you can ask
them to share if you want, but they generally don't share
that information with us. So, this is being discussed
with public numbers and the earlier calculations were
done at a lower value price than this would provide at a
base level. So, again, very positive I think…
SENATOR OLSON asked him to expand on the perspective that if the
trillion cubic feet of gas that's coming out of our area is
developed, it will not affect or negatively impact the supply
coming off the Mackenzie Delta in any way.
MR. MYERS responded:
The way I would come to that conclusion is not that
individual projects don't compete. Obviously, every oil
field competes against every other, every company
competes, it's a healthy competition. The question is
does it really impede the development. And to that I
think you have to look at supply and demand issues.
Again, if there is a net increase in supply of 11 TCF and
you're doubtful whether you can maintain production at
existing levels and [I] think it's very doubtful that
Canada can, in fact, unless offshore really produces or
unless coal bed methane just goes hog wild, which will
require higher sustained prices. So, under most likely
producing scenarios, the demand would be there in Canada
to use that gas for Mackenzie and, depending on timing,
it might compete for the sum of the pipeline capacity.
But, on the flip side, as Canada produces more and more
of its heavy oil reserves, they are requiring more and
more gas to get that heavy oil out of the ground. They
intend on using their gas and have incremental oil
supplies similar to what we've already done on the North
Slope by our gas cycling and our tertiary water recovery
mechanisms. So, if you look at the demand, it can eat up
1 TCF of gas from Mackenzie without much problem and
still have plenty of room in the market for the 4.5 - 6
TCF of gas coming off the North Slope. You have to look
at will there be short-term. If you bring all that supply
on at one time incrementally, it might have some short-
term effects. And that's delayed by how long and how well
a market can absorb that, but I think most people think
the market will absorb it relatively quickly because of
the interconnectability of the Hub system of pipelines.
That gas can be distributed over a large number of
markets, but that's something again the committee might
want to look at in terms of the details of the
forecasting mechanism.
CHAIRMAN TORGERSON asked if he had seen the producers' model in
terms of their netback.
MR. MYERS replied that he hadn't.
REPRESENTATIVE GREEN said that the risk has been downplayed because
of the floor and they are now hearing that the cost continues to
climb much faster than inflation. He asked if his models use the
original costs inflated at a reasonable rate or whether they use
higher inflated costs.
MR. MYERS replied that they hadn't costed-out the pipeline
independently. They aren't really able to, because they don't know
the exact details of the project, the size of the pipe or pipes,
the gas treatment plan, etc. He surmised, "There's clearly a whole
lot of data out there that we don't have access to and so you just
have to somewhat look at their values... to see if they are
realistic."
He said one of the positive things from the state's perspective is
that the over-the-top route costs are now nearly equal to that of
the highway route. For the overall costs, there is a tremendous
amount of variance in the B to C route from Alberta to Chicago and
the amount of additional capacity that will add to the existing
capacity. The answer lies in the amount of available capacity at
the time Alaska gas is about to enter the market. The state doesn't
have a firm idea about it because it doesn't control the timing of
when the gas line would start.
MR. MYERS said question number 2 was whether DNR supports the open
season provision, Section 704(e), and whether it supports the
pipeline expansion provision, Section 706(a)-(e). He clarified:
Basically, 704(e) puts in the ability to expand the
pipeline for non Point Thompson and Prudhoe Bay gas. So,
in other words, it actually puts under certain
conditions, which protect the economic rights of the
pipeliners and the other producers: can you have a
mandatory expansion of the line?
The Administration - again, and the access issue - if you
go back to the letter in May - clearly the Governor
thought it was very important that that provision be in
there. I think the provision we have is a compromise
provision that is acceptable to the producers, the
explorers, the pipeline and the state. So, it's a
balanced proposal. As it is we strongly support it. The
need for it became relatively apparent us in that we want
to see expansion of exploration outside the existing
areas. Along that line, I will give the Governor a fair
amount of credit on the fact that we got the line south
of the 64-degree latitude. And again, I know it was an
exclusive concern and this committee was concerned with
the same issues, but one of the issues - there was other
gas than just the barrel arch on the North Slope, not the
foothills, but the Yukon flats, the Nenana, the Kangik
that some of these other basins to almost south of
Fairbanks had a potential to get gas into that line under
the credit mechanism. So, again we clearly recognize the
need to expand for gas other than the North Slope.
Prudhoe and Thompson gas was an absolute requirement by
the state and so we clearly support that - those
mechanisms. And again, if you look at the Governor's
letter that follows through very clearly that the access,
both in the lines of access for new, explored for, and
discovered gas, but also the access to communities to get
at that gas were priorities.
TAPE 02-07, SIDE B
[MR. MYERS' TESTIMONY ON QUESTION NUMBER 3 WAS NOT RECORDED.]
MR. MYERS said the Administration clearly supports the Alaska
royalty gas provisions in Sections 704(g) and (h) and 709(c),
recognizing that they are a compromise. He explained:
The need to have the RCA look at in-state we think is a
very good idea. It's consistent with the policy on oil
lines and we think they provided a very valuable, more
localized perspective and also for the RCA to have input
to FERC is equally important. Again, we value having an
independent, quasi-judiciary approach intrastate....
MR. MYERS said the fifth question about supporting other incentives
in the Pipeline Act is related to the loan guarantee. DNR thinks
that should lower financing costs, which should lower their overall
number so whatever it is, is positive. The combination of events
should make the pipeline much less risky. Anything that lowers the
cost does multiple things. It lowers the risk of the project on the
construction issues; it also potentially lowers the tariffs on the
line, which is very valuable. As the royalty owner and for tax
purposes, the state's netback for gas increases, so it has a vested
interest, and consumers have a vested interest, in a lower tariff,
which will ultimately bring a lower price to the market. Those
incentives are very positive since they add stability to the
project and potentially lower the cost of tariffs.
CHAIRMAN TORGERSON asked if a document he showed Mr. Myers was a
public document and how he got it.
MR. MYERS replied that it was public and that three major producers
provided the state with information for a discussion on terms of
clarity and certainty of the project. He told members:
Fundamentally, they had talked about the state needing to
provide a clearer, better fiscal understanding of what
the conditions and terms were for the pipeline. We had
particularly asked them primarily what they meant by that
- multiple times. We had a bit of frustration quite
honestly trying to figure out what in the world that
meant. This document, I think, is the first attempt to
look at those issues and to answer that question for us.
So I very much appreciated, and the Administration
appreciated, the producers coming forward and saying
these are the kinds of things we would look at to create
that environment.
So, what the producers presented was basically a
different way of valuing gas, a different way of taxing
gas, a different way of looking at the royalty terms in
terms of the lease form, basically a total overhaul of
the current way we value gas on the North Slope or in
other areas. So, this document suggests some very radical
changes to our public policy. That is in a sense a power
point presentation representing their view of the perfect
regulatory environment.
CHAIRMAN TORGERSON asked what the Administration's next move will
be with regard to the document.
MR. MYERS replied that the Administration would like to have
further discussions with the producers on this point. He said it
was clear that they would hold discussions, not negotiations, about
fleshing out what they mean by the various terms. There are eight
major royalty terms in there and probably an equal number of tax
terms. The Administration wants some clarifying discussions. He
thought it was a good faith effort by the producers to start the
dialogue and the discussion. The issues are complicated and need to
be looked at in terms of are they appropriate now or later or ever.
He concluded:
So, again, from our perspective it's sort of a producer
wish list of the things you would like to have. The state
would, I think, not agree to many of those as things it
would like to have... So, they would rely ultimately on
negotiations if the new administration, whoever that be,
and the legislature thought that was appropriate.
CHAIRMAN TORGERSON asked what inspired the producers to come
forward now when they had been asking for this for a couple of
years. He also asked whether the [Administration] is initiating any
studies to work through the producers' list.
MR. MYERS said that part of the issue is fully understanding what
the producers are asking for and what they mean so the state isn't
confused. He continued:
...then the supporting data as to why certain incentives
would be necessary. So I think the background data, and
the studies, of course, we have some ongoing gasline
studies. I think you'll see a CIP request to the
legislature this next year to further on the issues and
more attune with the issues. One of the issues, royalty
valuation, are we going to get involved with trying to
develop a market basket approach like we have for oil and
when is it appropriate and how would you do it. So it's
clear that if the legislature asked us to do that, we
would definitely need outside resources and outside
support to do that. So that's one issue - not
understanding where the gas is going, how it's going to
be valued. To do a mechanism now, you would have to look
at a surrogate mechanism. You would have to hopefully
know more about the project, but also know more about how
gas would, in fact, be valued so we're making sure we're
getting fair market value for the gas.
The same issue with tariff issues. A lot of issues affect
the lease form. You know, do we want to do these things
and what's the large impact in oil production on the
North Slope? What's the effect of potential fallout from
gas elsewhere like Cook Inlet. So you can develop from a
list like that, a list with a lot more questions and we
clearly would need external support if we did it in the
negotiating stage on these. I guess the first thing is to
start the dialogue and then the second thing is, if the
new administration and the legislature deems it
appropriate, that we enter negotiations, that we get the
outside help that we need. Certainly, that discussion
would not be limited to the Administration.
CHAIRMAN TORGERSON asked if the state needs a bill like the
Stranded Gas Act to tell the Administration to start negotiating
before you start negotiating.
MR. MYERS replied, "I'm on real thin ice here." He thought the
dialogue should go on, but the challenge would be when you enter
negotiations, which he thought would be more appropriate for the
new administration since it would be unfair to start now.
CHAIRMAN TORGERSON said they are working on recommendations to the
next legislature and asked if they should put in a timeline for
negotiations to start on January 18 and finish on April 1.
MR. MYERS said he didn't think that was necessary. The list that
the state negotiates has to be decided very clearly. Certain items,
if you're looking at production in the 2008 - 2014 time range,
there is time on many of the issues. The question is do you want to
negotiate them now or wait until they have more data.
CHAIRMAN TORGERSON said they are waiting for Mr. Myer's report on
potential reserves on the North Slope and asked where he was on
that.
MR. MYERS replied that the division is frantically working on it
and will try to get the committee something by the end of
September. The report will not contain a lot of original work, but
will be more of a synopsis. There are still a lot of questions in
the foothills so there would be a very broad range of numbers. They
hope to compile a report with some positive results as they have
the new NPRA numbers and some preliminary USGS data from some of
the interior basins.
CHAIRMAN TORGERSON said he intends to have one more meeting before
this group disbands to finalize its recommendations to the next
legislature. He thought that report might be good to have when
dealing with the conference committee to show the potential reserve
on the North Slope instead of being hypothetical. He asked what the
division is doing in Cook Inlet for an upgrade reserve analysis.
MR. MYERS said the division has the demand study, but hasn't
focused on any kind of new supply study. The division is trying to
save the state a few dollars since the USGS is starting a major
assessment of Cook Inlet.
REPRESENTATIVE DAVIES asked if he meant this is the perfect
regulatory environment from the standpoint of the oil companies.
MR. MYERS replied that is correct. The oil companies might
characterize it as a compromise position, but they presented the
state with a wish list and it is clearly not to the state's maximum
economic advantage.
REPRESENTATIVE GREEN said that prior to the startup of Prudhoe
there was good cooperation between the operators and the state as
far as subsurface geology, values, transmissibility, etc. and asked
if he anticipated that same degree of cooperation in the future.
MR. MYERS replied that he is optimistic that will occur. Although
there has been a period of time in which there hasn't even been
alignment within Prudhoe Bay with various owners. They are almost
there with the producers in terms of them "speaking off different
sheets of music in terms of their technical interpretation and the
effects." He added:
Until you have ultimately their commercial agreements in
place and you have multiple issues between Pt. Thompson
and Prudhoe, I think it's not going to be clear to us
where their commercial positions are. As far as the
exchange of technical data, we've had in the last eight
months a couple of very very good meetings. We had
initially a very slow start in terms of the effects of
gas sales on Prudhoe and the mitigation measures that
might be performed and the same with Pt. Thompson initial
discussions. Those discussions have been much more
fruitful as of recent. So, I'm optimistic there will be
good dialogue and good discussion.
The alignment is helping somewhat. The alignment has
pluses and minuses in terms of data, because when the
parties weren't aligned, you'll hear multiple technical
interpretations, which, again, they're all within the
legitimate range of just variable. When you have a
unified front, you'll get a single interpretation. So,
that creates some challenge to the interpretation of
basic data, but there seems to have been more willingness
to share the effects of gas on oil production, which
again, has been very useful. They have some very good
models out there. They've done a lot of the work. It's
not just us involved with the issue; it's the Alaska Oil
and Gas Conservation Commission. We have a strong
relationship with them. They are committed to doing this
reservoir study on the effects of Prudhoe and following
over to Pt. Thompson. I think that's a very important
piece of work for the state to do to have their own
independent assessment. The cost and scope of that study
will be largely dependent on the cooperation of the
transference of data. So, again, I'd say that I'm
cautiously optimistic…
REPRESENTATIVE GREEN asked if Mr. Myers was using a USGS-type of
approach in that reserves on the Slope would be available and,
assuming there's so many cubic miles of sediment, there's a
probability and an upper and lower or would he be more specific.
MR. MYERS replied:
The honest assessment is there's a wide range. We looked
at two approaches. Initially, we even went in for the
supply side CIP for the North Slope and we asked for a
lot more money than we've got and we scaled it back. We
were going to do a USGS-type assessment where we ran the
full risk values. We decided not to go that way. We
didn't think at this point it gave a lot of value,
particularly with the new data. We have folks shooting 3-
D seismic in the Foothills; we have a lot of changes; we
have a lot of new approaches in terms of the issues
involving the reservoir rocks.
Fundamentally, on the foothills, the most difficult issue
to get your arms around is the size and distribution
economics of fields. We know the gas has been generated;
we know the reservoir rocks are there, but they're
relatively low quality - just how low quality is the real
question. Is there enough porosity and permeability in
the rocks for large sustainable fields? Are we looking at
a cluster of 200 million barrel fields or are they larger
- some of them up in the TCF range? How do you cluster
it? I will say that there are also, in terms of
development, what the development costs, how many fields
we have to cluster to develop in the foothills. What
terms are you going to put on exploration? Are you going
to allow year-round exploration? There are a myriad of
issues that go in that make it very difficult to quantify
a meaningful economically recoverable number.
So, what we intend to do is put a synopsis of the
existing data together with maps of basically a compiled
version that could be useful. In talking with Patrick,
that is more what the committee had in mind - could be
useful to policymakers showing where the basins are,
showing the current numbers, showing where the
transportation route and how it might affect it and then
looking at some of the new technologies that might be
involved. So, what we're going to give you is a
compilation of existing data. I think any of these
surveys give you - it's like the ANWR issue, any of them
give you a large enough number. The question is, is it
meaningful to say there's 100 TCF versus 150 TCF? Our
opinion now is our crystal ball isn't clear enough and we
don't have the data to do it properly. We probably will
in a couple of years, but right now we don't.
CHAIRMAN TORGERSON thanked Mr. Myers and said they would next
hear from industry and Mr. Alan Sharp.
MR. ALAN SHARP, Director of Northern Business Development, EnCana
Marketing USA, Inc., said he was here today on behalf of EnCana to
submit testimony on the Alaska Natural Gas Pipeline Act of 2002
and, more specifically, the Alaska gas floor price credit
provisions. He gave the following testimony:
I'd like to start my testimony by explaining who EnCana
is. We are one of North America's largest independent
natural gas producers and North America's largest
independent gas storage owner operator, which includes
the AECO Hub, which was earlier mentioned as the
reference price for the floor price provision. Our oil
and gas production is located in the U.S. Rocky Mountain
states, western Canadian sedimentary basin and the United
Kingdom's North Sea, with recent significant discoveries
in the North Sea, the Gulf of Mexico, and off-shore East
Coast of Canada. We are an aggressive explorer on our
North American lands focusing on natural gas. In
particular, Alaska's lands are, in our view, highly
prospective and offer potential to become a future
production platform for our company and also North
American. Clearly, EnCana has a vested interest in the
efficient operation of the North American gas market
which is why EnCana appreciates the opportunity to
testify here today.
EnCana has an extensive land position of over 4 million
gross acres of land in Alaska and we're referred to as
the explorer as we do not have proven gas reserves, yet.
The earliest we expect to have proven gas reserves in the
Foothills is 2005. For this reason, access and expansion
on the Alaska gas pipeline is critical for our success.
Without future pipeline access on reasonable terms and
conditions and especially timing, we will not be able to
'monetize' the gas we find and, therefore, EnCana would
have to reevaluate spending money on gas exploration in
Alaska. The purchase of leased land is inexpensive
relative to the cost of seismic surveys, drilling wells
and commercial development. It is these later
expenditures that create significant jobs and monetary
benefits within and for the State of Alaska. One
successful commercial gas discovery in the foothills is
estimated to generate 3300 new jobs and $6.4 billion of
in-state benefits.
MR. SHARP said he would address the committee's questions, but he
wanted to present EnCana's overall position first. He stated:
EnCana firmly supports the White House's position as
stated by the Secretary of Energy in his letter to the
Energy Conference, dated June 27, 2002. It states: 'The
Administration strongly opposes the price floor tax
subsidy provision in the Senate bill and any similar
provision because it would distort markets, could cost
well over $1 billion in annual lost revenue, and would
likely undermine Canada's support for construction of the
pipeline and thus set back broader bilateral energy
integration.
EnCana has publicly stated that the gas floor price
subsidy is an ill conceived and flawed proposal and that
the market should be allowed to determine when it's
economic for northern gas to flow. A gas floor price
would provide an advantage to an Alaska gas producer to
the detriment of all other North American gas producers
and ultimately the consumer. The flow of subsidized
Alaska natural gas would distort the gas price and
disrupt the efficient operation of the market.'
MR. SHARP said he would now answer the committee's questions.
The first one was whether the Alaska floor price tax
credit provision would be beneficial or harmful to the
construction and operation of the gas pipeline.
The credit provision may or may not be beneficial to the
Alaska gas line construction. The credit is payable to
the shipper on the gas line, not directly to the pipeline
owner. It's the pipeline owner who will construct and
operate the pipeline. The pipeline toll would roughly be
around $1.25 per million btu while the floor price is
$3.25 per million btu. The credit provision is not meant
to build the pipeline, but to insure the producers who
are shippers are guaranteed a profit for the gas that
they produce. What is important to realize is that there
are three different roles being performed: the producer,
the shipper and the pipeline owner. When these roles are
performed by one party, the potential for conflicts of
interest and anti-competitive behavior can arise. When
you ask, will the credit provision benefit the pipeline,
it's important to note that it will depend on how the
party performs these three specific roles and if
conflicts of interest arise that may benefit one role
over another. I think the real question that really needs
to be asked is what do we want the future Alaska gas
industry to look like? If there's limited access and
capacity, there will be a limited number of players;
there will be limited competition and limited exploration
development. There will also be limited jobs. State
revenue will mainly be from royalties of existing gas
reserves such as Prudhoe Bay and Pt. Thompson and
pipeline taxes. In a multi-player competitive free
market, there will be access in capacity on the pipeline.
There will be sustained growth, exploration and
development. There will be more companies meaning more
jobs in Alaska. The state revenue will be diversified
with royalties coming from new yet-to-be-discovered gas
pools and the creation of new support industries. This is
what a vibrant Alaska gas industry could look like.
Building the pipeline does not guarantee a vibrant gas
industry. We must have a future vision that defines the
regulations on access, expansion, open seasons and
pipeline tariffs. That kind of clarity will help create a
competitive and vibrant gas industry.
The second question in the first section was whether the
Alaska floor price tax credit provision would be
beneficial or harmful to the Canadian gas industry.
EnCana does not agree with Section 704(2)(b), which
presumes that sufficient downstream pipeline capacity
will exist to transport Alaska gas past Canada to U.S.
markets. The Alaska gas floor price removes the natural
incentive for Alaska producer and shipper to insure
adequate capacity will exist. As the credit provision
stands now, it will be harmful to the Canadian gas
industry. There is not enough export pipeline capacity to
leave EnCana to handle both Canadian gas exports and
Alaska gas volumes. This means Alaska gas will be
stranded in Canada leading to an oversupply of gas and
lower Canadian gas prices. Since the Alaska gas has a
Canadian based floor price, it has an unfair competitive
advantage over Canadian gas resulting in Canadian gas
being shut in. It will also be detrimental to Canadian
gas exploration and development. Alaska gas will continue
to flow while the Canadian gas industry suffers.
The next question was dealing with the Alaska floor price
tax provision and would it be beneficial or harmful to
the Lower 48 gas industry. It's really broken into two
sections. During times when Canadian export pipeline
capacity is restricted there will be no incremental gas
flowing to the Lower 48, thus there will be very little
impact to the Lower 48 gas industry. However, if the
Canadian export pipeline capacity is expanded, then the
Lower 48 gas industry will face the same competitive
disadvantage and detrimental impacts as the Canadian gas
industry. The risk in cost will essentially be
transferred further downstream from Canada to the Lower
48.
The next question was dealing with the Alaska floor price
tax provision and would it be beneficial or harmful to
the Lower 48 consumer. Prior to the Canadian export
pipeline expansion, the incremental gas supply will not
reach the Lower 48 consumer. The consumer will be
disadvantaged in two ways and will have to pay twice. The
first is paying high gas prices as new incremental gas
supply cannot reach them and the second is paying higher
taxes due to the floor price credit provisions. The
incremental gas trapped in Canada will cause low gas
prices and trigger the Alaska floor price credit
provision. After the Canadian export pipeline is
expanded, the Lower 48 consumer should see a benefit.
However, this is on the premise that the Canadian export
pipeline expansions are delivering gas to an area where
that gas can reach the Lower 48 consumer. If this is not
true, then there will be localized areas of high gas
prices for consumers and low gas prices for the producer,
a detriment to both.
The last question in Section 1 was what there type of
incentives would you support.
A key principle that must be met is to allow free market
forces to work, provide a fair and equitable competitive
environment. EnCana would support incentives that meet
this key principle. However, EnCana is not convinced that
a subsidy is required to support the construction of the
Alaska gas pipeline. Prior to any consideration of a
subsidy or credit, EnCana believes that an independent
study should be undertaken to establish the economic
viability of the natural gas pipeline and the need for
such a subsidy or credit. The pipeline should also be
built all the way through to the U.S. market to insure
incremental gas supply is not trapped in Canada.
The second set of questions was, starting with the first
one, do you support the open season provisions in Section
704(e)? EnCana supports the guiding principles provided
for the open season. FERC has been mandated to establish
and govern the open season regulations based on Section
703(2), which states 'to establish a process for
providing access to such transportation project in order
to promote competition in the exploration, development
and production of Alaska natural gas.'
Before EnCana can fully endorse FERC's open season
regulations and procedures, we'd like to insure that all
gas industry players have provided their input and their
interests have been met. Some examples of concerns that
we have in this area are the initial Alaska gas pipeline
volumes must have adequate downstream facilities to
deliver incremental gas to U.S. markets. This means
initial open season holders should be treated the same as
expansion open season holders as per Sections 706(b)(8).
The next concern we have is how competition will be
created as per the purpose provided under Section 703(2).
The last concern is - is 120 days enough time for FERC to
create fair and equitable open season rules?
The second question in that section was, do you support
the pipeline expansion provisions as per Section 706?
EnCana supports the guiding principles provided for
pipeline expansion and we would like to insure that the
expansion rules are based on Section 703(2), which is the
creating of competition and that expansion shippers are
treated the same as initial open season shippers. We
would also like to recommend that expansion wording in
the open season Section 704(e) [be] repeated in expansion
Section 706 to clarify the intent of future expansions,
which we believe will help promote competition. The
wording in this Section 704(e) that we'd like to repeat
is: 'For an open season for capacity beyond initial
capacity provide the opportunity for transportation of
natural gas other than from Prudhoe Bay and Pt. Thompson
units.
The third section of questions were do you support
instate needs such as under Section 704(g)(h) and 709(c)?
EnCana supports the instate needs, instate rate
coordination and the Alaska royalty gas provisions.
However, there are some areas the state might want to
consider such as under Sections 704(g) - to insure the
tie in points referred there are for both receipt and
delivery points and also under 704(h) to clarify who has
jurisdiction over gathering and processing facilities.
The last set of questions dealt with do you support other
incentives in the Pipeline Act? EnCana believes that
incentives should apply to all parties in an equitable
and fair manner, which enhances competition and free
market forces. The other incentives within the Pipeline
Act that EnCana supports are the expedited process,
Section 703(2), which promotes competition, having FERC
as the leading agency with the power to govern open
seasons and expansions and Section 710, which is the loan
guarantees for the pipeline.
To conclude, I will reemphasize EnCana's position. EnCana
is not convinced that a subsidy is required to support
the construction of the Alaska gas pipeline. Prior to any
consideration of a subsidy or credit, EnCana believes
that an independent study should be undertaken to
establish the economic viability of the natural gas
pipeline and the need for such a subsidy or credit. If
the U.S. government believes that there is a requirement
to access additional gas supplies to market intervention,
then EnCana suggest that any support go directly towards
the development of transmission infrastructure, meaning
the Alaska gas pipeline and corresponding gas pipelines
to the U.S. markets. Thank you for inviting EnCana to
testify today and I'd be happy to answer any questions
you may have.
CHAIRMAN TORGERSON said he was perplexed by his comments that
this might strand Canadian gas. He explained:
Two points. The first one is that we've sat through a lot
of presentations from the Alberta government that the Hub
that is currently established in Alberta can with a few
modifications, handle the gas now. Personally, I question
that on a 4.5 billion bcf/d volume, but they have still
made those presentations and still stand by the fact that
there would be very little infrastructure needed if we
use the existing hub. That's one issue that I probably
don't believe it's stranded gas, if you believe the
Alberta government.
The second one is that the producers own the plans to
build the additional line from Alberta to the Midwest so
it would be just a flow through except for maybe some
liquids that may or may not come out in Alberta. So,
having those two things out there, how could I make the
assumption that we would strand Canadian gas?
MR. SHARP replied:
I'll answer the second question first which is the
building of the additional line. My understanding of the
Act is that it's not mandatory that they what they refer
to as the B to C line has to be built. If that line was
built, then the gas would not be stranded in Canada and
it would not impact the market. So, that would be
definitely something we would be in favor of, but there
is nothing as far as I am aware that actually would force
that to happen. If that B to C line is not built, then it
really comes down to looking at how much gas supply is in
Alberta, such as Alaska gas coming in, Mackenzie gas, the
existing production from the western Canadian basin,
subtracting off the intra-Alberta demand and then
whatever supply is left over, is that amount greater than
or less than the ex-Alberta take away capacity or
essentially the export pipeline capacity to the U.S.
markets. And our projections show that if 4 BCF/D of
Alaska gas comes down, you will strand gas in Canada.
REPRESENTATIVE DAVIES said they have heard statements about the
supply and demand in the Lower 48 U.S. market and the numbers were
that the market is expected to grow 7 - 11 TCF in a 20-year
timeframe and that the supply of gas is pretty limited and asked
him if he disagreed with that characterization of the U.S. market.
MR. SHARP replied that they believe the market demand will grow and
are working internally as to whether it will be 4 BCF/D or 6 BCF/D
of incremental gas. Their main issue is the bottleneck that would
be created if you bring down the incremental gas and the U.S.
consumer is expecting to receive that gas and it just can't get
there because there's not enough pipeline to take away capacity
from Canada to the U.S. They are working on the demand projections
and think that 4 BCF/D could probably be absorbed, but it you go
higher than that, there could be some issues.
It's difficult when you're forecasting supply and demand,
because it really comes down to many assumptions both on
the supply side as well as demand, especially on the
economic growth and we're talking out in 2010. It's quite
difficult with the number of assumptions you're making to
narrow that down.
REPRESENTATIVE DAVIES wanted to ask him a general question about
the issue of government subsidy of these things.
On a really big project like in any version of an Alaska
gas pipeline would certainly be classified as among the
biggest in the world, just getting something like that to
happen because of the huge risk involved, it seems like
it's almost going to have to involve some kind of
assistance beyond just the normal marketplace. I guess
I'd just like you to compare that to a much smaller, but
closer to home example and I think in terms of the
Alliance Pipeline. It's my impression that there was some
governmental participation in that to begin with and then
they phased it out. Is my recollection correct on that
and could you comment on the appropriateness in general
of governmental assistance in getting some of these
bigger projects to happen?
MR. SHARP replied:
With the Alliance Pipeline I'm not aware of any
government assistance. I can check into that for you. I
know that when the Alberta gas industry was first
created, there was governmental support on the trans-
Canada pipeline back in the 50s. It was in the form of
loan guarantees over the Canadian shield part into
eastern Canada. So, that has happened. Alliance Pipeline,
I'm not aware of that.
REPRESENTATIVE DAVIES asked if the government has no role in
developing frontier gas provinces.
MR. SHARP replied that he wouldn't say that. He told members:
If a subsidy or credit is going to be provided, then I
think all the information should be on the table. If we
specifically talk about Alaska, the producers had a $125
million study. There's a lot of information out there
that has to be shared. I think when I answered the first
question about is it beneficial to the pipeline or not,
really the floor price is benefiting the producer and if
it's really the pipeline that you want to go ahead, then
shouldn't the subsidy or the credit be directed towards
the pipeline owner and the pipeline itself? That's really
where we're coming from. We want to make sure the
pipeline infrastructure is in place. So, provide the
credit directly to the pipeline if it's the pipeline you
want to proceed. If it's having to do with security of
energy, then maybe the subsidy should go more in a
general sense to those that provide energy so that you're
creating more supply of energy from that credit.
REPRESENTATIVE DAVIES followed up saying:
Obviously those issues can't be separated. People can't
get money to build a pipeline independent of being
assured of some shipment and production of gas. Those
things are clearly tied together.
MR. SHARP replied that yes, they are tied together, but he would
ask if the proposed floor price is the proper amount and is it the
proper mechanism.
If you look at a $3.25 floor price versus a roughly $1.25
toll, there's a $2 price that goes to the producer. What
is the rate of return on that price and what is the price
that they need for a rate of return? What is that minimum
acceptable amount? I think that's the question that has
to be answered.
REPRESENTATIVE DAVIES agreed, but asked, assuming those numbers
were correct, whether he would support it.
MR. SHARP replied, "No, it would harm the Canadian industry. It
really is unfair advantage that the Alaskan producer would have
over…"
REPRESENTATIVE DAVIES said his point of view is that it is not
correct.
MR. SHARP replied:
I was trying to answer your question. With that type of
subsidy, I think one of the questions I would ask is what
type of rate of return is the producer making with [that]
type of a floor price? If you think about Prudhoe Bay, it
was an oil pool that basically found all the profit - all
the infrastructure has been paid off on the oil side and
you're basically going down the gas side. It should have
one of the lowest supply costs of gas, because you can
utilize a lot of the existing infrastructure to produce
the gas cap.
REPRESENTATIVE GREEN asked if a major 4 BCF gas field were
discovered in the area of the hub, would that pose the same
concerns to him about a problem with other Canadian gas fields as
the subsidized gas coming from the North Slope.
MR. SHARP asked if he meant would the 4 BCF/D compete.
REPRESENTATIVE GREEN replied:
Yes, would that create a problem against other Canadian
gas entities? That's what I understand your concern is.
When you're saying unfair competition, you're talking
about Canadian competition.
MR. SHARP answered:
If someone discovered a large amount of gas in the
western Canadian sedimentary basin, kind of within the
existing supply basin, there would be gas and gas
competition and essentially if that large quantity of gas
was discovered, it would compete without a floor price
against all the other gas. So, then the free market
competition and environment force is at play. So, if that
large quantity of gas had a lower supply cost, it may
delay other gas exploration and development if it had a
higher supply cost.
REPRESENTATIVE GREEN said if that's the case 10 years from now and
there is a demand and supply in the Lower 48 area, did Mr. Sharp
think the free market forces would supply additional pipelines out
of Canada to take either the discovered gas in the western
sedimentary basins or the Alaska gas that ends up at the hub. He
thought this would enhance the gas situation.
MR. SHARP replied, "I would agree if there was no floor price in
effect."
He explained if the Alaska gas is flooding the Canadian market with
gas and can't get out of that market area, it would share the same
price risk. There would be a natural incentive for the Alaska gas
producer and some Canadian gas producers to expand the pipeline
past capacity to move it to the Lower 48 market. However, in regard
to an Alaska gas producer with a floor price, he asked:
Why you would take on the additional risk to expand
pipelines downstream and that long-term commitment to do
so if you've already got a floor price in the market that
you can dump it off into?
REPRESENTATIVE GREEN said there has to be some sales for them to
dump it off.
TAPE 02-8, SIDE A
MR. SHARP explained that each country keeps selling the gas and the
price gets lower and lower until eventually the Alaska gas
displaces the Canadian gas that's being produced.
It would be the Alaska gas that would flow in the
existing pipeline infrastructure and existing markets,
because if they sold it for a very low gas prices, they
are still guaranteed that higher floor price. So, they
don't really care how low the Canadian gas price goes and
you're backing out the Canadian gas, which would have
flown on the existing pipeline infrastructure.
REPRESENTATIVE GREEN said he was talking about 10 years down the
road when the demand is at a significantly increased number.
MR. SHARP replied that is correct. They have projections, but
unfortunately they weren't ready for this meeting. He stated, "We
have shown that it can absorb the full 4BCF/D in the year 2010 so
there will be displacement."
CHAIRMAN TORGERSON said he was assuming that he opposed the
deepwater Gulf credits and other credits that other competition has
against the Canadian gas.
Clearly, we're not on the leading edge here with
incentives or the downside risk protection or whatever
you want to call this. It's happened all over the world
and certainly the Canadians have been one of the leaders
in it as far as subsidizing remote areas or oil sands or
Hibernia or some of the others. Now you're saying you
don't like this Alaskan gas because it apparently impacts
you, but we're okay with all the other incentives that
are out in the world - just don't like what Alaska is
doing. I'm having a hard time connecting the dots.
MR. SHARP replied that he wasn't aware of the type of the credits
that exist in the Gulf of Mexico. In Canada they use royalty
holidays, tax credit provisions, but those have mainly been
directly to the producer if you want more energy supply and you
apply the credit directly to that source. He used an analogy of
what would happen if there was farmed salmon off the coast of
Anchorage and the owners, who have a subsidized price, dump it for
what they can get for it in Alaska. It kills the Alaska salmon
price, but they'll keep dumping their fish into Alaska, because
they don't care what the price is because their government has
guaranteed them a floor price for their salmon. He continued:
But what it's done to the Alaska salmon industry is
decimated it, because there's no longer a price there
that the existing infrastructure and existing salmon
industry can survive on. That's kind of the analogy I
would use for the Alaska gas coming down to Canada. If we
don't insure that there's that infrastructure to insure
that it gets out of Canada and to the U.S. consumer,
you're going to end up decimating or having significant
negative impact to the Canadian gas industry.
CHAIRMAN TORGERSON asked why they didn't oppose all of Section 29
credits that are in the energy bill [H.R. 4]. It's the same thing
and has the same effect of subsidizing the gas price.
MR. SHARP replied, "I think with the floor price it only applies
to Alaskan gas."
CHAIRMAN TORGERSON responded that he was making a comparison to
other things that are happening in the industry on both sides of
the border. It's no different than subsidizing through a royalty or
whatever else is going on. He said the producers have called the
royalty in kind (RIK) sale a subsidy to Canada and asked him his
opinion of that.
MR. SHARP replied that they view the RIK sale as a competitive bid.
CHAIRMAN TORGERSON said although he didn't want to go into it at
this time, an RIK sale is considered a subsidy to them "in our own
back yard."
MR. SHARP replied, "I guess I don't see it as a subsidy in the
sense that we competed for the royalty in kind sale and that's at a
premium to the alternative, which would be to royalty in value."
CHAIRMAN TORGERSON replied, "We're competing, too, with Section 29
of the deep water Gulf and imported LNG."
SENATOR OLSON said that EnCana is a very sizeable company and asked
how much energy they are putting forth to advance extracting
resources off the North Slope compared to their other holdings
throughout the world.
MR. SHARP replied:
We're quite serious about it. As I mentioned, we have 4
million acres of land in Alaska. Essentially, the biggest
issue that we have for Alaska gas exploration is really
access to the pipeline. If we can get access to the
pipeline, we're fully there. The royalty in kind sale
that Senator Torgerson had mentioned, we view that as
kind of something within the power of ourselves and the
state to insure that we actually do have access and
capacity on the pipeline. Failing that, we're looking at
this Pipeline Act through the open season and the
expansion provisions to provide us access to the
pipeline. So, we're very serious. It's just a matter that
we have to have access to the pipeline to be able to
'monetized' whatever we find.
REPRESENTATIVE FATE said the Alberta Minster of Energy mentioned
NAFTA to gain market share of Canadian gas and asked if they
entertained any of that in their proposals or statements here.
MR. SHARP replied that he hadn't and he wasn't aware of the
Minister's comments, but he would look into that.
REPRESENTATIVE FATE said they are concerned the excess gas coming
down is in competition with the North Slope gas and he noted the
statement was made in Washington D.C.
CHAIRMAN TORGERSON said there was an article in the Canadian Herald
a couple of months ago related to Alberta government attorneys'
view of whether or not the subsidy violated NAFTA. They determined
that it did not on the basis that Americans would be moving a
product from one market to another that happened to travel through
a foreign country.
REPRESENTATIVE CHENAULT asked how long the Canadians entertained
negotiations with the Canadian groups about pipeline costs and
incentives from the Mackenzie down.
MR. SHARP replied that he wasn't aware of any talks of that nature.
He thought one of the pipeline owners had been talking to the
government about that. He reiterated that EnCana is an explorer on
the Mackenzie side as well and conversations like that would be by
the producers or the pipeline owners with the government.
CHAIRMAN TORGERSON said he heard there was a request to borrow $1
billion for the aboriginal part of the ownership and there's some
talk about royalty relief.
REPRESENTATIVE DAVIES said he felt a certain amount of tension in
his position as an explorer and wanting access to a pipeline that
doesn't exist yet. He asked, "Don't you feel a little bit of a
tension on the one hand testifying against some subsidy that would
help make a pipeline exist and on the other hand asking for access
to the pipeline?"
MR. SHARP replied:
I think what it comes down to is we want to make sure
that the Alaskan gas supply comes on in basically a
manner that does not back out other gas supply, which
maybe should have from a supply cost or kind of a free
market environment come on first because you can kind of
look at the existing basin development. It should have
the lowest supply cost and, in this case, including the
pipeline infrastructure to get it to market. And then as
you progress out to say, coal bed methane, deep water
Gulf of Mexico, it could be off shore eastern Canada,
each one of these supply areas that could supply gas to
meet the future needs of North America will have a
certain supply cost on it. So, if you go through that
supply cost order, if you subsidize one over the other,
you're disadvantaging, I think, the market.
REPRESENTATIVE DAVIES granted him that argument, but asked if he
wasn't at the same time advantaging their particular investment on
the North Slope.
MR. SHARP replied that they would, but they look at it as a
portfolio of supply all over North America, which will get
developed over time.
If one disadvantages another, they have a vested interest
to insure that it doesn't hurt our portfolio. We'd like
to see the free market forces bring that on in an orderly
and cost efficient manner.
CHAIRMAN TORGERSON thanked Mr. Sharp for his testimony and said he
would like to finish the industry testimony before taking a break.
MR. MARK HANLEY, Public Affairs Manager, Anadarko, said Anadarko is
a very large independent with a lot of acreage that believes there
is a lot of prospectivity in Alaska. He told members, "We are
excited to be here."
He said Anadarko is comfortable with the proposed resolutions.
Whether the credit provisions are harmful or beneficial, Anadarko
believes that if they reduce the cost or the risk, they will
improve the economics of construction of a pipeline and increase
the chances that it will be built. Whether they help or hurt the
industry depends on one's position in it and ultimately on the
actual price of gas when it is brought to market. He continued:
Clearly there are different opinions on what it will do
to the market. Some have scored it that prices will
remain above that level and it will not impact the
market. So, it's a judgment call, I guess, in some
respects. We do think that having this amount of gas
coming into the market will have some dampening effect on
prices and that doesn't mean they'll drop, but clearly
not having this gas in the market - it's a significant
amount. It's either going to slow the growth in prices or
it could have a slight decline in the prices as Mr. Myers
has suggested. Some reports suggest it could decrease the
price for a short time before it actually grows again.
That could be bad for a gas producer if you have gas
existing elsewhere, because relative to everything else,
you would have received higher gas prices for your gas. I
think clearly for the consumer, if it has that dampening
effect, it's a benefit. So, it's a matter of what you
think the crystal ball is going to say out there a few
years from now.
When you evaluate the potential impacts of the incentives
in this bill, it's important to recognize that Alaska gas
does compete with gas from other regions. Those regions
have other incentives; some are existing and some are
being proposed and which incentives are worth more is
often a judgment call, but they all affect the economics
of the projects. So, as you said, Section 29 - different
people have different royalty rates; that's a straight if
you have a 20%, somebody else is at 10; is one a subsidy?
I don't know; it's a difference in relative economics,
but one can make a big difference in how you propose it.
So, I think it's important as you have pointed out to
recognize that there are a lot of these things out there
and it's not just an apples-to-apples comparison a lot of
times.
You've asked about the open season provisions as well as
the expansion provisions and I think we've been pretty
adamant about access. That's where we've really focused
in Congress, particularly as having fair access at a
reasonable price. So, we do support those provisions...
To be brief the in state needs, rate coordination and
royalty gas provisions we're supportive of those as well.
As far as the other incentives in the Pipeline Act, I
guess we would say it's up to public policy makers to
look at those and see how much in the way of incentives
are necessary to get this project built and that's really
a policy call for folks like you and people in Congress.
We would like to see a gas line built that will allow
commercialization of Alaska gas. We do believe that there
is going to be increased demand for gas and that the
decline of U.S. production will create a favorable
fundamental for commercializing both Alaska and Arctic
gas in the Canadian Arctic and that both can be viable.
Consumers are going to need this gas to prevent possible
gas spikes as demand outgrows supply and particularly the
administrative portions of the bill should help expedite
the pipeline's construction and help insure reasonable
access to the pipeline. Your letter suggests that you are
going to look at things for future recommendations and I
guess we would just continue to request that the state
insure and encourage continued Alaska gas exploration by
doing what it can to provide fair pipeline access at a
reasonable price to new gas as well as already discovered
gas.
CHAIRMAN TORGERSON asked if Anadarko was going to actively try to
advance any amendments to the energy bill [H.R.4].
MR. HANLEY replied no. He said they are comfortable with the
agreements represented in the bill. "As you said, the minute
everybody tries to push one little work or change to that, it can
be a free for all."
REPRESENTATIVE GREEN asked if Anadarko has a feel whether the
market will be able to absorb 4 BCF of gas in 10 or 15 years.
MR. HANLEY replied that his company believes that both Canadian and
Arctic gas are going to be needed. They see a growth, particularly
in the U.S., for demand and an increase in the decline rate in some
of the existing fields. They see the fundamentals as being very
strong for this kind of volume plus more.
REPRESENTATIVE GREEN said that it may be that concerns about the
incentives being a deterrent to free market trade might be a bit
overplayed.
MR. HANLEY said he didn't want to oppose someone else's arguments.
They see the demand in the U.S. for significant volumes of gas
above and beyond 4 - 5 BCF/D.
CHAIRMAN TORGERSON thanked him for his testimony and noted that
they had written testimony from BP and Robbie Schilhab with Exxon
and Yukon Pacific Corporation.
MR. ELLWOOD, Executive Vice President and CEO, Foothills Pipe Lines
Alaska Incorporated, said before he responded to the questions he
wanted to emphasize the principles that have guided their
participation in this process in Washington, Alaska and Ottawa.
Foothills and its shareholder companies believe
unequivocally that the North American energy markets will
need both Alaska natural gas reserves as well as the
reserves to be unlocked in the Mackenzie Valley in the
Canadian Northern Territories. We have never approached
the development of these resources as competitive or
exclusive; we have devoted resources and continue to
devote resources to develop the necessary transportation
infrastructures to access both regions. We have
consistently advised federal, state and provincial
governments to very carefully consider how to assist in
the approvals and financing for the infrastructure that
will be needed to process and transport these remote mass
resources to the market. Beginning in the mid 1970s, all
levels of government in the United States and Canada have
recognized that the enormity of the capital commitments
and risks associated with developing hydrocarbon
resources in these frontier areas require very focused
coordinated efforts to assure prompt and reasonable
regulatory approvals and oversight. ANGTA here in the
United States, the Northern Pipeline Act in Canada, and
the agreement on Prince of Wales between Canada and the
United States are examples of such coordinated efforts.
Attention has been paid over the years to understanding
and resolving some of the economic and financial risks
which face producers, transporters, marketers and
ultimately consumers as they undertake the investments
and commitments necessary to finally access these much
needed supplies.
The North Slope producers have identified the need for
federal enabling legislation or some mechanism of risk
sharing or risk mitigation. Producer commitment to this
project is necessary if it is to become a commercial
reality. What has evolve through the legislative process
in Washington is a significant degree of consensus
between all interested parties on the types of risks that
face the project and the need to address them. We believe
this project is in the national interest and, therefore,
we do not oppose the provisions in the current version of
H.R. 4.
Relating to the specific questions Mr. Ellwood said:
Specifically relating to the market risk provision in
Section 25.03, we certainly respect the efforts of
Phillips Petroleum, in particular to think creatively and
to come up with a mechanism, which would be triggered
only if gas prices at the given pricing point were to
fall below some value. If this mechanism is sufficient to
obtain shipper commitments, then it will definitely
assist development of project since the producer
commitment is what has been missing for the past 30
years.
The provisions of Section 704 (e) relating to the
regulation of open seasons for capacity on any
transportation system are acceptable to us. Regulated
interstate pipelines in the United States, and
increasingly in Canada, as well, are routinely conducting
open seasons for development of new projects and for the
allocation of their capacity. We are familiar with the
efforts of FERC under its open access regulations and
those are promulgated pursuant to the Natural Gas Act.
[Indisc.] those efforts to assure that adequate pipeline
capacity is developed and that such capacity is allocated
without undue discrimination. We are comfortable that
given this precedent, FERC will implement these new
provisions in a manner that will not impose unreasonable
or unnecessary risks on the project nor impair its
financability.
With respect to the pipeline expansion provisions of
Section 706(a) - (e), it's widely known that as pipeline
companies, we do not believe these provisions were
necessary. If a pipeline expansion is economic, then the
pipeline companies will make the investment necessary to
build that infrastructure. After all, that is how we earn
a return on our investment. However, it became clear to
us that if certain market participants, particularly the
explorers, as well as State of Alaska, wanted additional
assurances that economic expansions could be ordered.
Such powers resting in a regulatory body is somewhat
unique, certainly not in our view, a hallmark of the
pipeline industry in the United States. But in an effort
to forge a compromise, we worked closely with the Senate
Energy Committee staff and representatives of other
interested parties and groups to hammer out the
compromise mechanism that's reflected in Section 706 as
it presently stands. We, therefore, have indicated our
acquiescence to these provisions and we would disfavor
any effort to change it.
With respect to provisions governing instate needs,
Section 704(g) and the Alaska Royalty Gas Section 704(h)
and the instate rate coordination in Section 709 (c), the
provisions as written are consistent with the general
requirements of ANGTA and the president's decision
selecting ANGTS. However, these provisions if implemented
reasonably, should not impose unnecessary burdens, risks,
or costs on the project. As written, they are acceptable
to us. Again, we would likely oppose any effort to modify
these provisions, which were very carefully drafted not
to impose debilitating risks or costs on the project. And
with respect to all other aspects of the bill, Foothills
has previously indicated its support for those. Thank you
for the opportunity and I'm prepared to answer questions.
CHAIRMAN TORGERSON asked, based upon his last testimony, does he
not intend to advance any amendments on behalf of Foothills or
Duke. Mr. Ellwood indicated that was right for Foothills and that
he couldn't speak for Duke, but he understood that they didn't
intend to.
MR. JOE MARUSHACK, Phillips Petroleum, said they have a long-
standing plan that they are going to implement to the extent they
have the ability to do so. He commented:
That includes continuing to pursue federal enabling
legislation as in the Senate version with no
modifications. It includes pursuing federal fiscal
legislation with a few technical corrections that we
could talk about if you wish later on. If we're
successful there, we will move forward and try to address
state fiscal legislation similar to that that was in HB
519 last year.
Let me expand on these points a little bit in some
detail. For two years Phillips has been working hard to
commercialize gas via the Lower 48 pipeline. Obviously
there is a lot of benefits to the state. There's huge
benefits to the governments; there's a lot of benefits to
other industries out there and consumer groups. Let me
start out by saying that I've met with a lot of consumer
groups and once they understand what we're trying to do,
I've not met a single consumer group that has a problem
with the tax mechanism. It doesn't mean they don't exist;
it just means the people I have talked to, after they
understand that more gas is good for the Lower 48
consumer, they are supportive.
Last spring, Alaska's D.C. delegation asked what it would
take to progress a project. With partners, I should say
with BP and Exxon Mobil, we developed the enabling
legislation. Separately, we addressed a federal tax
mechanism to share the risk with the ultimate
beneficiaries and we pointed out that at that point in
time, if we were successful, we would move forward with
state fiscal issues. Assuming there were no more risk
mandates, the next step would be to initiate the
permitting process on the southern route. That's where
we've been and that's where we still are. We continue to
favor the southern route. It has fewer unknowns; that
means lower risk. It has timing advantages; again, that
means lower risk. It has less opposition and less
contentious issues in permitting overall less commercial
and technical risk, although the risk is still high. In
fact, yesterday on the TV I heard someone say there was
no risk with this project if you got to take the Senate
tax mechanism. That is not true! This is a $20 billion
project. The last big project like that had an overrun
seven or eight times. We can't afford anything like this.
There's huge construction risks associated with that and
I don't think you've met any industrial or engineering
firm up here who has said there weren't, but we have
addressed an important risk and that's the risk
associated with volatile markets.
This year we have been focused and almost solely focused
on the legislation that will make the project viable.
Within the enabling legislation, I agree with most of the
comments that you've heard before hand. We originally
proposed language that we thought was clear and limited
to federal action. Throughout the process other parties
participated in that and there was some modifications in
the Senate debate. I don't think anyone is completely
happy with the Senate version, but we have a delicate
compromise and we don't think that it's appropriate at
this point in time to try to be making changes no the
conference floor. In terms of the federal enabling
legislation, I've heard a lot of misstatements about it,
even today.
But let's be clear on Phillips with you on this. This
federal fiscal legislation is absolutely critical to
moving a project ahead. If we don't have that, there's
really no need in our view to address any state issues.
So, we haven't attempted to address those.
The key thing to recognize, it provides a risk mitigation
mechanism to an income tax credit at unexpectedly low
prices. There is not a floor price. The market will be
what the market is. What happens is when you hit the
$3.25 AECO mechanism, you get a federal tax credit to the
extent that you are a taxpayer in the U.S. If you don't
have sufficient income taxes, the credit is not worth
that much. Hopefully, we'll be a taxpayer in the Lower
48. The joint tax committee did score it at no cost. That
means that they had a mechanism out there, a price score
cast that they thought looked reasonable that had no
associated government revenues associated with it. Other
price forecasts may have a cost associated with it; this
one does not. The legislation provided for repayment in
high-priced periods to the extent you have ever used a
credit.
The North America consumers will absolutely benefit from
another source of clean, stable, domestic energy. And we
can talk a little bit about what 4 BCF means and where it
comes from and what kind of commitment it takes to make
that happen to the Lower 48 market. The loss of supply
and demand will still set the market price of the gas.
This is not a floor on the price.
What's needed, Phillips will be pursuing some technical
corrections to the fiscal part of the bill. Otherwise,
general support from Alaska in the Senate will be
helpful. We're not advocating any alternatives at this
point in time. We're advocating the position we've had
for well over a year. We're committed to making progress
on state fiscal issues to the extent that we get the
legislation that we need in Washington. Those, again,
would be clear, they'd be certain, and regarding state
incentives, we will be seeking some modifications on the
tax side.
Senator Torgerson, that presentation you had there was a
BP presentation. It was not a Phillips presentation; I
was invited to sit in on that and I did sit in on that,
but I do not agree necessarily with all the points that
are in there. Clearly, there is nothing in there about
state fiscal incentives, but we think we would be
pursuing those. But there are other issues in there that
we think are probably not our view of how those things
should be done in the future. Nonetheless, it is a
starting point and there are a lot of things in there
that we would agree with. Again, we don't think the
timing is necessarily appropriate.
We will be pursuing a version of something similar to HB
519. We thought that was a good approach. We thought it
made use of existing state processes to enter into
confidentiality agreements to share information, yet
there would still be a public process and a way of
negotiating and ultimately bringing forward a contract or
some sort of mechanism that the legislature could look at
and make comments and hopefully approve. And finally,
strategic incentives when most needed by the project, we
would be pursuing those in the future, too.
So, in conclusion, other than a few dot points I'd like
to make at the end, we will continue to pursue success
along these lines. There's nothing new here. We've been
here well over a year and we've been consistent in this.
We ask the committee's support for this strategy. It's
one that we believe can progress in the Alaska pipeline
project.
Just a couple points that I may not have addressed in the
ultimate dot points here beforehand - cost overruns -
cost overruns are still a certainty. There is nothing in
the tax mechanisms that would keep that from happening.
Representative Green, you asked about inflated costs. The
cost of the pipeline project that we see now, including
gas treatment plant, NGL facility, and a mechanism to go
all the way into the Lower 48 is $19.4 billion in 2001
dollars. That would be inflated for dollars of the day
and depending on the timing of that, it's $25 - $27
billion. It's important to note that Phillips, BP and
Exxon did design a pipeline all the way to Chicago. The
idea that we're going to strand Canadian gas is nonsense.
We have looked at either building a line ourselves to get
it to market, but a better solution and one that's
win/win for everybody, is that the Canadian
infrastructure, the pipeline companies, TransCanada,
Foothills, Duke, Williams - all those companies expand
their systems so we're not just going to Chicago, but
we're going to other places. That's how we potentially
get the best price for that gas. But, we're not going to
strand Canadian gas.
Furthermore, Phillips is on record as supporting two
pipelines. We believe an Alcan pipeline needs to happen;
we believe an Alaska southern route project needs to
happen. The Mackenzie Delta line has got to be an easier
thing to do than we're trying to do. It's 900 miles; it's
small diameter; it's ready-made steel; it should be able
to be done if you can get through the regulatory
processes sooner than our project simply because of the
size of the magnitude. We're four times as big as that.
In any regard, we think there is room in the market for
both of those projects and regardless if Alaska gas comes
first or if Mackenzie Delta gas comes first, we are going
to have to have expansion out of Canadian infrastructure.
Again, we'll do it if we have to; we hope the Canadian
infrastructure will see a better way of doing it
themselves.
I think that's most of what I wanted to talk to you
about. In terms of the mechanisms, what we've been
pursuing is something similar to a trigger mechanism such
as the AECO mechanism that we've talked about here. The
other items that we think are necessary to move this
project along from the petrol standpoint. But actually,
the idea of the tax mechanism is you don't want to use
that tax mechanism. It's a safety guard, if you will; it
protects in cases of a low price environment. It doesn't
affect the economics of the project except if you did
ever have a very low price scenario, and then, of course,
it does provide a tax credit to the extent you can use
that to get up the $3.25 AECO price, but this still
leaves us with a very, very challenging project. So,
we'll be pursuing investment tax credits on the gas
treatment facility and seven-year depreciation on at
least the U.S. portion of the pipes. We'd also like
seven-year depreciation in Canada. So, hopefully the
Phillips position is clear; it's not new and I'd be happy
to answer any questions you may have.
CHAIRMAN TORGERSON said he understood that the White House wasn't
too keen on a tax credit and asked BP to come up with an
alternative. He asked if BP has proposed any alternatives to the
floor and if so, what his position is on them.
MR. MARUSHACK responded that they had been asked for alternatives,
not only by the Administration, but by the Senate Energy Committee,
but they stand committed to where they are right now.
The reason for that is because we have been pursuing this
for over a year. We've been very clear on how to move the
project forward, the tax mechanisms that are necessary.
We recognize that the more that you have confusion about
what works and what doesn't work, it gives people the
opportunity to say, 'This one I can do; this one I can't
do. This one costs; this one doesn't cost.' And we just
try to be crystal clear on what it takes to make a
project happen. The worst thing in the world that can
happen is we throw up a bunch of alternatives there. In
conference committee, people pick and choose a few things
and Phillips would say if it doesn't meet the basic
requirements, we're not there guys. We do have a plan of
how to do it; we've been clear on how to do it, but we're
concerned about giving people the opportunity to cut and
paste, pick and choose.
So, our position is that we do not support changes right
now. We have evaluated all the mechanisms and frankly I
can tell you some of them probably could work so long as
they are a package that's put together that makes sense.
But the concern is who knows what's going to happen on
the floor out there. So, we think the prudent course of
action is, 'You asked us what we needed; we've told you
what we've needed; we're pursuing that strategy.'
CHAIRMAN TORGERSON said he wanted to focus on the BP proposal,
which uses wellhead values. That was originally Phillips' proposal.
MR. MARUSHACK said it was very close to what they developed.
CHAIRMAN TORGERSON asked if that ends up being the mechanism, would
he be all right using it.
MR. MARUSHACK replied:
Senator, I think what's important to be clear here is we
have worked this project all the way to our most senior
management levels, to our chairman's level. When we've
said here's a plan on how to move forward, what we're
also telling you is if all these things happen, we'll
invest another several hundred million dollars in this
project. Now, that takes a lot of guts and takes a firm
commitment on someone's part. So, at this point in time,
Senator, I understand what the BP proposal is and I
understand the economics of that. We continue to say,
'Let's stick with what we've got; let's pursue what we've
got and let's be successful there.'
CHAIRMAN TORGERSON responded that he agreed that they had been
crystal clear about what they needed and he was trying to get a
handle on what was going to surface at the top. He asked, "Does the
BP proposal have more votes than yours?"
MR. MARUSHACK replied that he didn't know what was going to happen
ultimately.
I think it's going to be a tremendous struggle. We're
going to do everything we can to make it happen. I don't
think it's a slam dunk. My hope is that many of the
consumer states will understand the value of this and
pursue it. I think it's very, very dangerous for
producing states to be saying we don't support a
mechanism like this when we have got benefits of royalty
credits in the Gulf, when we've got Section 29 credits; I
think it's very very difficult in my view given the
Hibernia situation, given the Northwest Territories
situation, given the oil sands. I think folks need to be
very careful in saying that they don't support this,
because this is not for the three big producers. This is
for all Alaska gas that comes in for a certain period of
time and the Lower 48 wants more gas. They see the
benefit of more gas not less gas. To the extent this
mechanism doesn't happen, this project won't happen, I
believe. So, I think people need to be very careful of
what they say, especially producers.
CHAIRMAN TORGERSON said he understands and his recommendation to
the committee is to support the price floor, but he also knows that
they aren't going to have time to meet again if the BP thing
happens to be the one that comes to the top. "That's why I'm
pursuing this line of questioning."
MR. MARUSHACK said they had been clear with the delegation that the
AECO mechanism is where they need to go and the reason is primarily
so they don't get into a confusing situation where people cut and
paste and something doesn't happen. "The folks in Washington will
be able to tell exactly what Phillips has said. There is nothing
different."
CHAIRMAN TORGERSON said he talks to them a lot and this is for
our record, not for their record.
REPRESENTATIVE GREEN said he was impressed with Mr. Marushack's
statement that once the gas gets to the hub there are several
markets that would be ready and willing to take the additional gas.
TAPE 02-8, SIDE B
MR. MARUSHACK said:
This is a once in a generation opportunity for Canadian
pipeline companies. To have 4 BCF/D is small in terms of
the 76 BCF/D that the Lower 48 needs, but in one slug to
come through at a specific period of time is highly
unusual and it's a lot of opportunity for the Canadian
infrastructure there. The win/win I've long claimed on
this was that, yes, through conventional means of
expansion, twinning, looping, whatever it is, that there
be the opportunity for a lot of companies to participate
in this in the Lower 48 infrastructure. I believe that
there's a way of doing that cheaper. I don't believe at
the end of the day frontier pipeline always requires the
major producers to make a commitment to make that happen.
But in the infrastructure, I think there's tremendous
win/win there, plus the market issues you addressed.
CHAIRMAN TORGERSON wanted to make it clear that he had no
regulatory changes, but only financial changes to the bill,
tweaking the floor.
MR. MARUSHACK said that was correct.
12:35 p.m.
REPRESENTATIVE JOULE said in his North Slope district they strive
for working partnerships and he hopes that as legislation is
developed, people are brought to the table earlier as opposed to
being drug into the partnerships kicking and screaming:
Because there were some concerns with that in particular
by the people of the North Slope who in different aspects
of developing the resources of the North are constantly
looked at and asked for their blessing on certain things.
I know that was not the case with HB 519…
REPRESENTATIVE FATE said his comment was also on HB 519 and how Mr.
Marushack alluded to, if not the necessity, certainly a favorable
position the state might enter into relative to a bill similar to
HB 519. He asked what happens if there is a final solution to the
congressional conference committee and they get the incentive
package that they are looking at. "Is there still going to be a
necessary companion piece of state legislation with an incentive in
it?"
MR. MARUSHACK responded to Representative Joule by saying the HB
519 was not a Phillips' bill, but they weighed in on it when it
became public. He commented, "I agree with you. This needs to be a
process that's vented much more timely. More people need to
understand that and that needs to be worked to a much broader
degree next time."
He said with regard to Representative Fate and the state tax
mechanism, they have a plan, which consists of mitigating the risk.
He explained:
It's not a floor; it's a tax mechanism that triggers at a
certain price on tax credits. When we say floor, that
means things to people in the Lower 48 that they are
going to have to pay a higher price for gas and they
will. In any regard, the plan is to mitigate some of the
market risk through the AECO mechanism and then work on
how to make the economics of the project better and
there's a number of ways we're going to make the project
better. We're willing to invest several million dollars,
again, into trying to improve the technical aspects of
the project and I think we can reduce that cost somewhat,
but I don't know how much. I do know it's going to
require tens of millions of dollars in work to do that.
The second way we're going to do that is try to pursue
federal mechanisms that do help the economics. That's the
gas treatment plant, investment tax credit and
accelerated depreciation. The third would be other
mechanisms similar to what we see coming from the state.
And I point out that in my experience, when I'm in
Washington that is an issue that keeps coming up. What is
Alaska doing to positively make the project happen, too.
So, what we're doing is we're building building-blocks
here so that ultimately we're going to have a project
that is a reasonably competitive project and we've got a
plan to do that and the state being part of that is part
of that plan, yes sir.
REPRESENTATIVE DAVIES asked about his comment that the tax credit
is useful only if you pay taxes and wondered to what extent that
provides an incentive to make sure that the gas is marketed in the
Lower 48. Was it his point that if gets stranded in Canada, taxes
won't be paid on gas in the Lower 48.
MR. MARUSHACK replied:
The point I was trying to make is that even the tax
mechanism itself, if it comes through, is not foolproof.
You've got to assume you're in a taxpaying position,
which we are currently a U.S. taxpayer and we expect to
be a taxpayer. The only point I'm trying to make there is
when people talk about a floor, that means that the
market would pay no less than $3.25. That's not correct.
We're going to be higher than that and we're going to be
lower then that. All we're talking about here is when you
get a tax credit, that kicks in.
This is unique because other tax mechanisms like Section
29 and royalty relief, those are an absolute grant of
credit that the government has provided. We're not asking
for that. Actually, the number is just too big; the
project is too big. We think on a national energy policy
basis, that it makes sense to have something that takes
away that risk. The ultimate beneficiary of low prices is
the Lower 48 consumer. The only point I'm trying to make
here is this particular mechanism has that; that's the
way it works, but not anything having to do with the
market. The gas has to land in the Lower 48, because it
can't be accepted into Canada and we've understood that
and designed that system from day one. There is no reason
for the U.S. to do this if it doesn't land in the Lower
48 and some national energy policy question we've got to
resolve here.
CHAIRMAN TORGERSON asked if their merger was complete with Conoco
yet.
MR. MARUSHACK said it wasn't.
CHAIRMAN TORGERSON asked if there were rumblings among the Conoco
Board that they're not in favor of price floors.
MR. MARUSHACK said he couldn't speak for Conoco, because they're
not one company. The Phillips Chairman is going to be the new
senior executive of the new company and his view is that they need
two pipelines. He has been clear with everyone that the tax
mechanism is necessary and it needs to happen now.
CHAIRMAN TORGERSON said he didn't expect Conoco to oppose anything
that they are working on.
MR. MARUSHACK replied that he did not.
MR. DAVE DINGELL, Manager, City of Valdez, said he was speaking
today on behalf of the Port Authority. He didn't have any specific
comments on the questions that were asked on the credit provisions
or other incentives. Their economic model indicates that no federal
or state legislation is needed to help their project. But if there
are incentives, they should apply to any project and not be
specific to a route such as the Alaska highway project.
REPRESENTATIVE GREEN said his program is predicated on a federal
tax free project and asked if he didn't consider that an incentive.
MR. DINGELL replied that they have a letter from the IRS that says
they are exempt from federal income tax.
REPRESENTATIVE GREEN said he had a little problem separating those.
MR. DINGELL reiterated if they were going to make recommendations
to the next state legislature on any incentives, they should for
any project that commercializes Alaska gas.
CHAIRMAN TORGERSON said he thought they were broad enough to cover
anything, but he didn't think the federal taxation would ever get
there again.
REPRESENTATIVE DAVIES said his understanding of the Port Authority
project is that it's a Y-line.
MR. DINGELL said that is correct.
REPRESENTATIVE DAVIES asked if these credits were enacted, would
his project be benefited.
MR. DINGELL replied that it would benefit a portion of one possible
project.
REPRESENTATIVE DAVIES said he understood that they get the biggest
benefit from the Y-line approach and that the LNG stand alone
doesn't work. So, it seems unlikely that that would go first.
MR. DINGELL replied that at the present configuration, the Port
Authority supports the Y-line concept, but they are looking at
other options. "A lot of people look at the project as the main
line is going through Canada and the spur is to tide water and it
could be reversed."
CHAIRMAN TORGERSON said he had been number crunching and didn't
know if a Y-line would be competitive with some of the cheaper gas
that the companies are bringing into the Lower 48. He announced
that they would next discuss the committee's two recommendations
beginning with proposal 1, supporting the tax mechanism.
REPRESENTATIVE GREEN moved to adopt proposal 1.
CHAIRMAN TORGERSON said the justification for adopting proposal 1
was heard in today's testimony.
REPRESENTATIVE DAVIES said it should probably say the "tax credit
mechanism" and specifically refer to the Alaska Natural Gas
Pipeline Act of 2002 or H.R. 4.
MR. MARUSHACK recommended that they use a general term that would
allow them the ability to accept things like a gas treatment
facility investment tax credit and seven-year depreciation also to
help improve the project on a federal basis.
CHAIRMAN TORGERSON suggested: "The Joint Committee on Natural Gas
Pipelines supports the tax mechanism in Section 25.03 of H.R. 4
including provisions for accelerated depreciation and investment
tax credits."
REPRESENTATIVE GREEN said he thought Mr. Marushack wanted the
wording "such items as" inserted in front of accelerated
depreciation.
REPRESENTATIVE GREEN said he wanted to withdraw his prior motion
and start over again. There were no objections and it was so
ordered.
REPRESENTATIVE GREEN moved proposal 2, that the Joint Natural Gas
Pipelines Committee supports federal incentives to promote the
timely construction of an Alaska natural gas pipeline such as…
CHAIRMAN TORGERSON announced an at-ease to write up proposal 2.
REPRESENTATIVE DAVIES read the proposal:
The Joint Committee on Natural Gas Pipelines supports
federal tax mechanisms to promote construction of an
Alaska natural gas pipeline such as the tax mechanisms in
Section 25.03 of H.R. 4, accelerated depreciation and
investment tax credits.
REPRESENTATIVE FATE suggested changing "to promote" to "that
promote."
CHAIRMAN TORGERSON asked if there were any further questions or
debate. There were none and it was adopted.
CHAIRMAN TORGERSON announced the second proposal to be up for
discussion and said it supports the Senate version of the energy
bill on the regulatory side of things. He explained that there was
a gentlemen's agreement that there would be no amendments to it.
REPRESENTATIVE GREEN moved to adopt proposal 2.
REPRESENTATIVE DAVIES noted that they didn't necessarily support
each individual one, but collectively as written, a compromise.
CHAIRMAN TORGERSON said he would like to add the word "regulatory"
because that is what they are quizzing everyone on. He said there
was an amendment to the second proposal so it would read, "The
Joint Committee on Natural Gas Pipelines supports the regulatory
provisions of the Alaska Pipeline Act without amendments."
There were no objections to the amendment to proposal 2. There were
no objections to adopting proposal 2 and it was so ordered.
REPRESENTATIVE DAVIES said he thought they should advance the other
items in the resolution.
CHAIRMAN TORGERSON said they could advance those in conversation
with individuals with FERC or others, but if it requires an
amendment, they have just said they will not advance anything that
requires that.
He announced that they would take about an hour break and would
then take up item 7, discussion of the lobby effort and item 8, a
general discussion on recommendations.
1:15 p.m. - 2:38 p.m. - BREAK
TAPE 02-9, SIDE A
CHAIRMAN TORGERSON called the meeting back to order at 2:38 and
said that he would keep the committee appraised of what his travel
plans are for going back to Washington D.C. and that they would
work through C.J. Zane on the issues. He said the first trip back
would be around September 9.
CHAIRMAN TORGERSON said that the recommendations were very
preliminary. Mr. Dingell wanted these provisions to apply to oil
projects and he thought they already did, but he has made a note to
check that in final form. He asked the committee members to return
their comments to him by September 20 so he could put it in packet
form and maybe send it out for comments from the major players.
RECOMMENDATIONS
1. Continue banning the over-the-top route.
2. Before considering fiscal incentives, the legislature should
require data from the producers.
3. The Legislature should consider the property tax, severance tax
and others.
4. Have discussions with local governments about the ad valorem tax
instead of "cramming it down their throats."
5. More cohesive communication between the Administration and the
Legislature.
6. Look at the fiscal system.
7. Examine methods for state financial participation in the
project.
8. Continue the committee's existence. There should be another
resolution so that the interim work can continue. Hopefully,
they are finished with Congress, but haven't started work with
the Canadian government or First Nations in Canada.
9. Continue and expand the international committee to help work out
some of the perceived regulatory problems crossing borders. He
said they have put together a good team this year with Patrick
Coughlin and others.
10. Continue to assess state needs and gas reserves
11. Provide more access for explorers.
12. Keep Alaska's royalty-in-kind in the same state it is in right
now.
13. Provide access to communities.
14. Tie local consumption in with the Right-of-way Leasing Act.
15. Streamline permitting.
16. Include Alaska hire provisions
17. Provide training and labor in Alaska.
REPRESENTATIVE DAVIES asked if they should consider what will
happen if the initiative passes.
CHAIRMAN TORGERSON said if they wait until after the election, they
would know what they are dealing with. He told members, "I envision
a couple day meeting…if we're that serious about making
recommendations to the next legislature."
CHAIRMAN TORGERSON adjourned the meeting at 2:55 p.m.
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