Legislature(2001 - 2002)

07/17/2001 09:11 AM NGP

Audio Topic
* first hearing in first committee of referral
+ teleconferenced
= bill was previously heard/scheduled
                        ALASKA LEGISLATURE                                                                                    
             JOINT COMMITTEE ON NATURAL GAS PIPELINES                                                                         
                         Anchorage, Alaska                                                                                      
                           July 17, 2001                                                                                        
                             9:11 a.m.                                                                                          
SENATE MEMBERS PRESENT                                                                                                        
Senator John Torgerson, Chair                                                                                                   
Senator Rick Halford                                                                                                            
Senator Pete Kelly                                                                                                              
Senator Donald Olson, alternate                                                                                                 
SENATE MEMBERS ABSENT                                                                                                         
Senator Johnny Ellis                                                                                                            
HOUSE MEMBERS PRESENT                                                                                                         
Representative Joe Green, Vice-Chair                                                                                            
Representative Brian Porter                                                                                                     
Representative Scott Ogan                                                                                                       
Representative John Davies                                                                                                      
Representative Hugh Fate, alternate                                                                                             
HOUSE MEMBERS ABSENT                                                                                                          
Representative Mike Chenault, alternate                                                                                         
Representative Reggie Joule, alternate                                                                                          
OTHER MEMBERS PRESENT                                                                                                         
Representative John Davies                                                                                                      
Representative Drew Scalzi                                                                                                      
Representative Ken Lancaster                                                                                                    
COMMITTEE CALENDAR                                                                                                            
FEDERAL ISSUES                                                                                                                  
PIPELINE ACCESS ISSUES                                                                                                          
REPORT ON MARKET CONDITIONS                                                                                                     
UPDATE ON SB 158 & ECONOMIC MODELS                                                                                              
ROYALTY IN-KIND ISSUES & PIPELINE STUDIES                                                                                       
RIGHT-OF-WAY PIPELINE APPLICATIONS                                                                                              
ALASKA HIGHWAY NATURAL GAS POLICY COUNCIL                                                                                       
PREVIOUS COMMITTEE ACTION                                                                                                     
WITNESS REGISTER                                                                                                              
Mr. Mike Henry                                                                                                                  
Resources Aide to Congressman Young                                                                                             
United States House of Representatives                                                                                          
2111 Rayburn Bldg.                                                                                                              
Washington D.C. 20515-0201                                                                                                      
Mr. Mike Menge                                                                                                                  
Aide to Senator Murkowski                                                                                                       
United States Senate                                                                                                            
322 Hart Bldg.                                                                                                                  
Washington D.C. 20510-0202                                                                                                      
Mr. Justin Stiefel                                                                                                              
Aide to Senator Stevens                                                                                                         
United States Senate                                                                                                            
522 Hart Bldg.                                                                                                                  
Washington D.C. 20510-0201                                                                                                      
Mr. Randy Methura                                                                                                               
Office of Energy Projects and Pipeline Certificates                                                                             
Federal Energy Regulatory Commission (FERC)                                                                                     
888 First St. NE Rm. 11A                                                                                                        
Washington D.C. 20426                                                                                                           
Mr. Robert Cupina                                                                                                               
Director of Energy Projects                                                                                                     
Federal Energy Regulatory Commission                                                                                            
888 First St. NE Rm. 11A                                                                                                        
Washington D.C. 20426                                                                                                           
Mr. Robert Petrocelli                                                                                                           
Office of Energy Markets, Tariffs and Rates (OMPR)                                                                              
Federal Energy Regulatory Commission                                                                                            
888 First St. NE Rm. 11A                                                                                                        
Washington D.C. 20426                                                                                                           
Mr. John Katz                                                                                                                   
Director of State/Federal Relations and                                                                                         
  Special Counsel                                                                                                               
Office of the Governor                                                                                                          
444 N. Capitol NW, Suite 336                                                                                                    
Washington DC 20001-1512                                                                                                        
Mr. Anthony Scott, Staff                                                                                                        
Regulatory Commission of Alaska (RCA)                                                                                           
Department of Community and Economic Development                                                                                
1016 W 6th Ave.                                                                                                                 
Anchorage AK 99501                                                                                                              
Mr. Will Abbott, Commissioner                                                                                                   
Regulatory Commission of Alaska                                                                                                 
Department of Community and Economic Development                                                                                
1016 W 6th Ave.                                                                                                                 
Anchorage AK 99501                                                                                                              
Mr. Ed Small                                                                                                                    
Cambridge Energy Research Associates, Inc. (CERA)                                                                               
Charles Square, 20 University Road                                                                                              
Cambridge MA 02138                                                                                                              
Commissioner Wilson Condon                                                                                                      
Department of Revenue                                                                                                           
PO Box 110400                                                                                                                   
Juneau AK  99811-0400                                                                                                           
Mr. Roger Marks, Economist                                                                                                      
Department of Revenue                                                                                                           
PO Box 110400                                                                                                                   
Juneau AK  99811-0400                                                                                                           
Commissioner Pat Pourchot                                                                                                       
Department of Natural Resources                                                                                                 
400 Willoughby Ave.                                                                                                             
Juneau AK  99801-1724                                                                                                           
Mr. John Goll, Regional Director                                                                                                
Mineral Management Service (MMS)                                                                                                
U.S. Department of Interior                                                                                                     
949 E. 36th Ave.                                                                                                                
Anchorage AK  99508                                                                                                             
Mr. Jerry Brossia                                                                                                               
Bureau of Land Management                                                                                                       
U.S. Department of Interior                                                                                                     
Address not provided                                                                                                            
Mr. Bill Britt, Pipeline Coordinator                                                                                            
Department of Natural Resources                                                                                                 
411 W 4th Ave., 2nd Floor                                                                                                       
Anchorage AK 99501                                                                                                              
Mr. Frank Brown, Co-Chairman                                                                                                    
Alaska Highway Natural Gas Policy Council (AHNGPC)                                                                              
Office of the  Governor                                                                                                         
550 W. 7th Ave., Suite 1700                                                                                                     
Anchorage AK   99501                                                                                                            
Mr. Mike Navarre, Chairman                                                                                                      
Subcommittee on Alaska Hire/Buy/Build                                                                                           
Alaska Highway Natural Gas Policy Council                                                                                       
Office of the  Governor                                                                                                         
550 W. 7th Ave., Suite 1700                                                                                                     
Anchorage AK   99501                                                                                                            
Mr. Bill Corbus, Chairman                                                                                                       
Subcommittee on State Pipeline Ownership and Tax Structure                                                                      
Alaska Highway Natural Gas Policy Council                                                                                       
Office of the  Governor                                                                                                         
550 W. 7th Ave., Suite 1700                                                                                                     
Anchorage AK   99501                                                                                                            
Mr. Jack Roderick, Member                                                                                                       
Subcommittee on Access for In-State Gas Use and                                                                                 
 Future Opportunities                                                                                                           
Alaska Highway Natural Gas Policy Council                                                                                       
Office of the  Governor                                                                                                         
550 W. 7th Ave., Suite 1700                                                                                                     
Anchorage AK   99501                                                                                                            
Ms. Ronda Boyles, Member                                                                                                        
Subcommittee on Access for In-State Gas Use and                                                                                 
  Future Opportunities                                                                                                          
Alaska Highway Natural Gas Policy Council                                                                                       
Office of the  Governor                                                                                                         
550 W. 7th Ave., Suite 1700                                                                                                     
Anchorage AK   99501                                                                                                            
Mr. Ken Thompson, Chairman                                                                                                      
Subcommittee on Access for In-State Gas Use and                                                                                 
 Future Opportunities                                                                                                           
Alaska Highway Natural Gas Policy Council                                                                                       
Office of the  Governor                                                                                                         
550 W. 7th Ave., Suite 1700                                                                                                     
Anchorage AK   99501                                                                                                            
Mr. Harold Heinze                                                                                                               
Special Assistant to the Legislative Majority                                                                                   
Alaska State Capitol                                                                                                            
Juneau AK  99811                                                                                                                
Mr. Scott Heyworth                                                                                                              
Citizens for the All-Alaskan Gasline Initiative                                                                                 
P.O. Box 100531                                                                                                                 
Anchorage AK   99510                                                                                                            
ACTION NARRATIVE                                                                                                              
TAPE 01-1, SIDE A                                                                                                             
Number 001                                                                                                                      
CHAIRMAN JOHN  TORGERSON called the  Joint Committee on Natural  Gas                                                          
Pipelines  meeting to  order  at 9:11 a.m.  and  announced that  the                                                            
committee  would  first  take testimony  from  Washington,  D.C.  He                                                            
stated  that President  Bush,  Senator  Murkowski,  Chairman of  the                                                            
Resources Committee in  Energy, Senator Bingaman, and Representative                                                            
Young  have introduced  separate bills  in Congress  that deal  with                                                            
energy packages.                                                                                                                
Federal Issues - Congressional Staff                                                                                          
MR. MIKE  HENRY, Resources  Aide for Congressman  Young, said  since                                                            
President  Bush  released  his  energy  policy,  Congressman  DeLay,                                                            
Majority  Whip,  formed a  group  entitled  HEAT (House  Energy  Act                                                            
Team),  which  meets  weekly  or  more  often.  Each  committee  has                                                            
jurisdiction over various  parts of the energy policy and is marking                                                            
up bills this week. He said:                                                                                                    
     By   Wednesday,   leadership  hopes   to   have  all   the                                                                 
     committee's   reporting  bills  relating  to  the  energy                                                                  
     policy. Next  Wednesday, leadership plans to bring  a bill                                                                 
     to the House  floor that has put all the various  measures                                                                 
     into  one  comprehensive  energy bill.  After  the August                                                                  
     recess,  if not later, there  will be various other  small                                                                 
     components  come forward that were left out, but  no other                                                                 
     large comprehensive bill.                                                                                                  
MR.  HENRY said  that most  of the  energy  bills have  been in  the                                                            
Resources Committee.  Several Congressmen, including  Representative                                                            
Young, authored HR 2436,  which contains a right-of-way provision to                                                            
study  current   rights-of-way  for   new  pipelines.  The   Alaskan                                                            
Congressman  has also introduced  ANWR legislation  similar  to what                                                            
passed the House and Senate  in the FY 95 budget. He said the Senate                                                            
bill is likely to get reported  this afternoon or evening, depending                                                            
on how long the amendment process takes. He commented:                                                                          
     The  one possible  obstacle  is  the ranking  member,  Mr.                                                                 
     Emerson  Rayhall (D-West Virginia),  who has introduced  a                                                                 
     committee  substitute that is  very different. It has  the                                                                 
     democratic  philosophy  on some of the  energy issues  and                                                                 
     also  excludes  ANWR,  which  is  an important  component                                                                  
     obviously for Mr. Young  and committee members, as well as                                                                 
     the  President  and  Vice  President.   What  it  does  do                                                                 
     specific  to natural gas is that  it recognizes the  ANGTA                                                                 
     route. It  basically just instructs folks to look  at that                                                                 
     and work towards  the ANGTA route and nothing  prohibitive                                                                 
     or nothing  that requires that  route, but highlights  and                                                                 
     revalidates   the  more  current  ANGTA  route.   It  also                                                                 
     provides right-of-way  conditions for any new  natural gas                                                                 
     pipeline that  crosses public lands, which is  going to be                                                                 
     problematic.  It's not specific  to a large pipeline  that                                                                 
     we think of  in bringing gas through the state  and to the                                                                 
     Lower  48 or to ships  for an LNG facility.  It's for  any                                                                 
     natural  gas pipelines. So in  that sense, it is so  broad                                                                 
     that it  is going to be problematic,  but it specifically                                                                  
     says  that  the  pipeline  must  have  a  "buy  American"                                                                  
     component  of it while the steel would have to  be created                                                                 
     in  the U.S., which  obviously [is]  an issue considering                                                                  
     there  isn't any  one that makes  the pipe  that we  would                                                                 
     need to  build a pipeline of  this type. It also requires                                                                  
     project  labor agreements.  Those are  the two - ANWR  and                                                                 
     the  gas  pipeline  components  that Rayhall's  amendment                                                                  
     would  have. In the  end, I don't think  it's expected  to                                                                 
     pass  and  the  full  measure,   as  it stands   now,  the                                                                 
     Resources  Committee bill should  be able to be moved  out                                                                 
     pretty easily today.                                                                                                       
     Specific  to  the gas  pipeline,  which  I think  is  your                                                                 
     focus,  Chairman Young's bottom  line is that he wants  to                                                                 
     bring gas to market.                                                                                                       
MR. HENRY said  that bringing natural gas to Alaskans  is key in the                                                            
way they  look at  a gas  pipeline project  or any  gas project.  He                                                            
     The  over-the-top  route  is  certainly  something that's                                                                  
     problematic  for Mr.  Young and  one that he  has a  great                                                                 
     deal of heartburn  over. Ideally, we want to see  this gas                                                                 
     delivered to the Lower 48,  but in the process want to see                                                                 
     it come  through the state to  the benefit of the state's                                                                  
     economy, as well as Alaskans in general.                                                                                   
MR. MIKE  MENGE, aide  to Senator  Murkowski, said  in his  position                                                            
working with  the Senate Energy Committee,  he deals primarily  with                                                            
public  lands, Bureau  of Land Management  issues,  and to a  lesser                                                            
extent, mineral  management, and any issues related  specifically to                                                            
coal and  energy in Alaska.  He noted he worked  in Alaska  for many                                                            
years with the BLM and  USGS and spent most of his career working on                                                            
pipeline  or  pipeline  related   issues.  He  said  the  change  to                                                            
Democratic control has  really slowed down Senator Murkowski's plans                                                            
to  move  and   expedite  an  energy   package  out  of   committee.                                                            
Essentially, the Senate  has been shut down while the reorganization                                                            
takes  place and  is  just beginning  to  hold hearings  on  Senator                                                            
Murkowski's  and Senator Bingaman's  energy bills. Discussions  with                                                            
Democrats  have  revealed  that they  are  in  a position  to  start                                                            
marking  up  legislation  next  week.   They  will  start  with  the                                                            
Bingaman bill  and try to blend it with the Murkowski  bill and then                                                            
amendments will  be added. He thought that next week  is optimistic,                                                            
since it seems that every  time they start, something else comes up.                                                            
He reminded  the committee  that they would  be working on  the non-                                                            
taxed portion  of the energy  bill. Their goal  is to have  it ready                                                            
for floor debate by September. The House is moving quicker.                                                                     
MR.  MENGE said  that  [Congress]  confirmed  the appointment  of  a                                                            
number of Department  of Interior officials last Thursday  night and                                                            
he  feels there  are  now enough  people  to  begin looking  at  the                                                            
various gas line proposals.  He stated that, no matter what happens,                                                            
the  Department   of  Interior,  Pipeline  Safety,  Federal   Energy                                                            
Regulatory Commission (FERC)  and other federal agencies will play a                                                            
pivotal role in determining  the route and specifications related to                                                            
bringing the gas south.                                                                                                         
MR. MENGE  said although  there is  a lot of  disagreement with  the                                                            
Democrats  about  the various  proposals  the Republicans  have  put                                                            
forward,  just  about everyone  supports  the  concept  of  bringing                                                            
Alaskan gas south. He pointed out:                                                                                              
     I  think   it  is  very  encouraging   that  all  of   the                                                                 
     participants,  both in the major environmental  community,                                                                 
     our organizations  and in the Democratic Senate,  now have                                                                 
     expressed  a desire  to work  together to  bring that  gas                                                                 
     The President has already  directed the agencies to assist                                                                 
     in  any  way  they  can  in  configuring  a  bureaucratic                                                                  
     organization  that will  support bringing  this gas  south                                                                 
     and  we'll  be  working  with  them  to  try  to  work  in                                                                 
     organizational  structures  to  facilitate  that.  As  you                                                                 
     know,  Senator Murkowski  has gone on  record on numerous                                                                  
     occasions in support of  the Alaska route bringing the gas                                                                 
     south. He does not believe  that the permitting hurdles of                                                                 
     the over-the-top  route could  be addressed in a way  that                                                                 
     could satisfy  the Native community and the environmental                                                                  
     community  in  a  way  that  would  allow  us  to proceed                                                                  
     expeditiously.  I don't  think there's  any question  that                                                                 
     would  address the major hurdles  related to bringing  gas                                                                 
     south in both the TransAlaska  gas system (TAGS) right-of-                                                                 
     way  and also the work  that was done  on ANGTA. So  we're                                                                 
     kind of going across familiar  territory there. In neither                                                                 
     one of  those exercises were  any single flaws identified                                                                  
     that  would  prevent  the  gas  from  coming  south  in  a                                                                 
     terrestrial route.                                                                                                         
MR. MENGE  said the gas going  out of Alaska  will be very  wet gas.                                                            
He  thought  serious consideration   should be  given  to  potential                                                            
problems  that  might occur  under  the ice  given  an over-the-top                                                             
route. He noted the Senate  believes those kinds of things will make                                                            
permitting the over-the-top route extremely difficult.                                                                          
He has  asked  the producers  and a  representative  from the  ANGTA                                                            
route  to suggest  language they  would like  to see  in the  energy                                                            
package that would facilitate  the project, but he hasn't heard from                                                            
them yet. He offered to answer any questions.                                                                                   
9:30 a.m.                                                                                                                       
MR. JUSTIN STIEFEL,  staff to Senator Stevens, said  Senator Stevens                                                            
supports Senator Murkowski's  efforts to move a comprehensive energy                                                            
bill  out  of  the  committee  that  would  include   the  necessary                                                            
provisions to build the gas pipeline. He said:                                                                                  
     Everyone  should know that Senator  Stevens is supportive                                                                  
     of the  highway route, the southern  route, and he wanted                                                                  
     me to  stress this specifically.  Senator Stevens sees  no                                                                 
     reason not  to realize that the producers have  to analyze                                                                 
     all reasonable  alternatives if they are going  to prepare                                                                 
     a  future  EIS.  They  have   to do  this   both  for  the                                                                 
     environmental  side  and  possibly  because  they  have  a                                                                 
     fiduciary  responsibility to  their shareholders. If  they                                                                 
     decide to  choose a route, they are going to have  a basis                                                                 
     for that  route decision. He  wants to recognize up  front                                                                 
     that  there  is  a  reason  they  are  probably  pursuing                                                                  
     multiple  routes. While  the producers  need to do an  EIS                                                                 
     for route  selection and for permitting and construction,                                                                  
     Alaskans  are not going  to need an EIS  when they make  a                                                                 
     selection  and voice their preference for that  selection.                                                                 
     He wanted  me to note that there is a specific  difference                                                                 
     between an EIS and an Environmental  Impact Study and what                                                                 
     Alaskans would  perceive to be an economic analysis.  That                                                                 
     economic analysis  is that when you have instate  gas, you                                                                 
     can  have  more   gas  for  residential,  for  commercial                                                                  
     purposes and  for industrial purposes and because  gas can                                                                 
     be  used to  make anything  from  nylons to  Frisbees,  as                                                                 
     we've  all  talked  about  on  previous  occasions.   It's                                                                 
     important  that Alaskans have the gas and they  can use it                                                                 
     for  themselves.  So,  supporting the  Highway  route  and                                                                 
     looking for the opportunities  for instate use is going to                                                                 
     be a critical determining factor, in his opinion.                                                                          
     If we  have an abundant  supply, that  means that we  have                                                                 
     more  economic  development  and more  jobs.  The Senator                                                                  
     thinks  that if we stay  together as  a state, we stand  a                                                                 
     better  chance  of seeing  the  pipeline  constructed  and                                                                 
     following the southern route.                                                                                              
     In  summary, I  can say  his  closing remarks  were  that,                                                                 
     because   the  gas  belongs  to  the  people  of  Alaska,                                                                  
     ultimately  he thinks their preference  is the one that's                                                                  
     going  to be selected and, if  not, there will be several                                                                  
     roadblocks  to taking the gas  out of state without  being                                                                 
     able to use it for Alaskans.                                                                                               
REPRESENTATIVE  GREEN asked, with the change in the  Middle East oil                                                            
supply  in Iraq, and  prices going  down, whether  there might  be a                                                            
change in the  attitude of those people who support  the pipeline in                                                            
that they might decide  that timing is not as much of an issue as it                                                            
has been.                                                                                                                       
MR. MENGE  replied that  because of  the Democratic  control  in the                                                            
Senate and  the fact  they have made  such a  huge issue of  Alaskan                                                            
export of oil,  it would be very difficult  for them to turn  around                                                            
and not push for domestic supply.                                                                                               
     It's  becoming a  recurring  theme, particularly  for  the                                                                 
     West  Coast  Democrats   of  developing  secure  domestic                                                                  
     supplies   in   areas  they   feel  are   environmentally                                                                  
     acceptable.  Certainly,  the  Alaska  gas at  Prudhoe  Bay                                                                 
     could  fit that category, not  to suggest that they  might                                                                 
     not  change their  tune, but  right now it  would be  very                                                                 
     difficult for them because  of the arguments they have put                                                                 
     on the record for the export  of Alaskan oil. I think they                                                                 
     will stay with us for the domestic gas supply....                                                                          
MR. HENRY  said that  low gas prices  shouldn't  stop us from  going                                                            
forward with  something necessary  to create this energy  policy for                                                            
the country.                                                                                                                    
CHAIRMAN TORGERSON  asked if that  is the message the [President's]                                                             
administration  was trying to put  out.  He stated, "It seems  to me                                                            
that they  are almost in  a panic mode the  way they fanned  out all                                                            
their secretaries  across America to talk about the  energy policy."                                                            
MR. HENRY responded  that low gas  prices caught the administration                                                             
by  surprise, but  he said  it  had already  been  planned for  many                                                            
months. He  thought they  were, in part, trying  to drum up  support                                                            
for the  energy policy. They  were focused  on tax cuts earlier  and                                                            
they are planning for the  future and not worrying about how low the                                                            
prices are today.                                                                                                               
REPRESENTATIVE  FATE informed the  committee that a discussion  took                                                            
place at the National  Energy Council meeting in New  Orleans with a                                                            
representative from Alberta. He stated:                                                                                         
     It was quite  aggressive in that he wanted Alberta  to try                                                                 
     to supply  the needs on a regional  high use basis in  the                                                                 
     Lower 48 of  the United States, very aggressively  meeting                                                                 
     the  demand  to  the  United  States  and,  if necessary,                                                                  
     through NAFTA, which was a surprise to me.                                                                                 
He asked Mr. Menge if he  has heard anything about it in Washington,                                                            
MR. MENGE responded:                                                                                                            
     The  Alberta crew comes  through here  on a regular  basis                                                                 
     and  we have  an on-going  dialogue  with them.  They  are                                                                 
     certainly  interested  in marketing  Alberta  gas and,  in                                                                 
     particular,  Alberta oil. Based on their calculations  and                                                                 
     ours, there's  not going to be any concern about  stranded                                                                 
     product, at  least in Alberta, with the increased  demand.                                                                 
     They  are  going   to  very  aggressively  protect   their                                                                 
     interests,  but  they  also  recognize  the  best  way  to                                                                 
     protect  that interest  is to lock in  North American  gas                                                                 
     into the  market. That way, if  they start developing  LNG                                                                 
     projects around the country,  that's going to lock out not                                                                 
     only  Alaska   gas,  but  their  gas  as  well.   So  they                                                                 
     understand,  better than  most, the need  to start moving                                                                  
     northern  gas  south  early  on so  that  we  protect  the                                                                 
MR. HENRY agreed and said,  "LNG facilities are being planned and if                                                            
the domestic market isn't  self sufficient, then entries from abroad                                                            
will come in and it's not good for anyone."                                                                                     
MR. STIEFEL said he didn't  have any comment on that issue but noted                                                            
that people in Congress  have been clamoring for some kind of public                                                            
action on  the administration's  part, similar  to the tax  cut, the                                                            
state based  initiatives and other  things the President  put on the                                                            
top of his  agenda. He stated,  "The timing  with the gas prices  is                                                            
not what people had hoped for necessarily."                                                                                     
CHAIRMAN TORGERSON  asked Mr. Henry  if he had been asked  by any of                                                            
the major producers  or anyone to add incentives or  provisions into                                                            
the bill they are currently working on.                                                                                         
MR. HENRY replied no one  had approached him, but the delegation had                                                            
requested them.                                                                                                                 
CHAIRMAN TORGERSON  asked if provisions for incentives  in the House                                                            
have to be added  in the Revenue Committee and not  in the Resources                                                            
Committee, as they would in the Senate.                                                                                         
MR. HENRY replied that  it is largely the same. They could introduce                                                            
a bill  that includes  incentives  that would be  referred to  other                                                            
committees, but a bill  with tax incentives would have to go through                                                            
the Ways and  Means Committee. Since  Congressman Young doesn't  sit                                                            
on that committee,  there would be a little less control.  He noted:                                                            
     A  lot of people  on Capitol  Hill do realize  that a  gas                                                                 
     pipeline is certainly beneficial  to the country and would                                                                 
     be a lot more  helpful and would help us work  through the                                                                 
     process than  on some of the other issues that  they might                                                                 
     have to fight  with them on development issues.  There's a                                                                 
     lot  of support here.  Some of the  jurisdictional issues                                                                  
     might be a problem, but we'll have to deal with them.                                                                      
CHAIRMAN  TORGERSON  asked Mr.  Stiefel if  he is  aware of  Senator                                                            
Stevens'  perspective  on  adding  tax incentive  provisions  to  an                                                            
energy bill.                                                                                                                    
MR. STIEFEL  replied that any tax  measure would have to  go through                                                            
the Finance Committee,  which Senator Murkowski sits on. A couple of                                                            
the producers  mentioned  the need  for incentives  or streamlining                                                             
processes,  but they haven't brought  forward any specific  request.                                                            
It's hard to move forward without them.                                                                                         
CHAIRMAN TORGERSON  asked Mr. Henry, regarding the  right-of-way for                                                            
pipelines across  federal lands, if there are additional  provisions                                                            
for limited environmental  or judicial review in the bill that would                                                            
mirror provisions of ANGTA.                                                                                                     
9:47 a.m.                                                                                                                       
MR. HENRY replied that  as far as a gas pipeline project, there is a                                                            
very general  provision authorizing  a study for rights-of-way.  The                                                            
ANWR provision has a limitation on judicial review.                                                                             
CHAIRMAN  TORGERSON  asked if  Mr. Henry  had any  discussions  with                                                            
Ottawa  or Canadian  officials  on the  national energy  plan as  it                                                            
relates to gas lines.                                                                                                           
MR. HENRY replied  that he hadn't  been involved in those  talks but                                                            
that people from Ottawa have talked with Congressman Young.                                                                     
MR.  MENGE commented  that  they have  had meetings  with  a lot  of                                                            
officials  from provinces  who have  expressed  their positions.  An                                                            
official  position  from  Ottawa  has  been  noticeably  absent.  He                                                            
thought there may be competing  interests within Canada and they are                                                            
not eager  to take a position  until they  know a pipeline  is going                                                            
CHAIRMAN TORGERSON asked  Mr. Menge what interaction he has had with                                                            
the Bureau  of Land Management (BLM)  or the Department of  Interior                                                            
on any routes.                                                                                                                  
MR. MENGE  responded that  he worked in that  agency for many  years                                                            
and knows  almost  everyone involved  in energy-related  issues.  He                                                            
said  folks   within  the   agencies  are   working  on   timelines,                                                            
organization structures  and potential budgets and  regulatory needs                                                            
but nothing official has come forward yet.                                                                                      
CHAIRMAN TORGERSON  asked if he has  heard anything about  opening a                                                            
federal inspector's  office, "that would be some kind  of a big boss                                                            
over all the  other bureaucrats that  we've got running around  back                                                            
MR. MENGE  replied that  people are  looking at  what and how  their                                                            
specific agencies  might contribute, but no formal  discussions have                                                            
taken place.                                                                                                                    
CHAIRMAN TORGERSON  asked Mr. Henry if the bill being  marked up now                                                            
contains a provision for an oversight agency.                                                                                   
MR. HENRY replied  that it doesn't.  He added that the large  energy                                                            
bill is expected  to move in the next  week or two and, although  it                                                            
won't be the only thing  the House does on energy this year, it will                                                            
be the largest.                                                                                                                 
REPRESENTATIVE  GREEN asked  if the resolutions  sent by the  Alaska                                                            
Legislature to Congress  are doing any good and if there is anything                                                            
else the  Legislature could  do to help spur  people who are  on the                                                            
fence on some of these issues.                                                                                                  
MR. HENRY  replied  that the resolutions  are  helpful because  they                                                            
show the Legislature is  advocating a unified position. Also, having                                                            
members come to Washington,  D.C. from time to time, especially when                                                            
there is a big push, is helpful.                                                                                                
MR. MENGE added  the resolutions show unity as a state  and head off                                                            
a lot of  trouble at the  pass. He said,  "It's much more  difficult                                                            
for people to dismiss us  if there's a person or they can conjure up                                                            
a vision  of an individual  who has  come and made  a solid  case in                                                            
their office."                                                                                                                  
MR. MENGE also said that  Senator Murkowski asked him to express his                                                            
personal  appreciation  for leading  this  group in  advancing  this                                                            
CHAIRMAN TORGERSON  asked if Mr. Henry had the votes  in hand on the                                                            
ANWR provision in the House.                                                                                                    
MR. HENRY said  it would take work,  but all indications  look good.                                                            
MR.  STIEFEL  concurred   with  Mr.  Menge  and  Mr.  Henry  on  the                                                            
resolutions. He  said that he sees there are two lines  being drawn.                                                            
 He didn't know  of any real opposition to allowing  the pipeline to                                                            
go forward and be constructed  from the executive perspective or the                                                            
congressional perspective.  The second is the decision the producers                                                            
make, which is  based on economics.  Whatever the  state could do to                                                            
encourage construction  of the pipeline  by altering economics  with                                                            
incentives would help get gas to market.                                                                                        
CHAIRMAN TORGERSON  said he appreciated  their comments and  thanked                                                            
them. He announced the committee would take a short recess.                                                                     
10:00 a.m.                                                                                                                      
PIPELINE ACCESS ISSUES                                                                                                        
CHAIRMAN TORGERSON  called the meeting  back to order and  said they                                                            
were  going to  hear  remarks  from the  Federal  Energy  Regulatory                                                            
MR.  ROBERT  METHURA,   Office  of  Energy  Projects   and  Pipeline                                                            
Certificates,  FERC, said he  would have to  speak in general  since                                                            
there was no specific project for Alaska yet.                                                                                   
MR. JOHN KATZ,  Office of the General  Counsel, FERC, said  they had                                                            
received  Senator Torgerson's  letter of June  25 and had  discussed                                                            
his questions.  They didn't have any  formal comments and  asked him                                                            
how he wanted them to present their information.                                                                                
CHAIRMAN TORGERSON  said he could  go through the questions  to stay                                                            
MR. KATZ  reiterated  that it was  inchoate for  them because  there                                                            
weren't  any specific  proposals in  front of them  now. They  would                                                            
move as expeditiously as possible when that happened.                                                                           
CHAIRMAN  TORGERSON  said the  first  question is  the relationship                                                             
between the Regulatory  Commission of Alaska (RCA) and FERC over the                                                            
jurisdiction  of a  gas pipeline  from Alaska  to the  Lower 48.  He                                                            
noted that  this question at least  got the two agencies  talking to                                                            
each other.                                                                                                                     
MR. METHURA  said they  normally are  interested  in being open  and                                                            
cooperative  with  the  state  that  is  affected  with  a  pipeline                                                            
MR.  CUPINA added  that as  helpful  as it  would be  for Alaska  to                                                            
coordinate its entities,  a project's regulation would be under FERC                                                            
jurisdiction as an interstate pipeline.                                                                                         
CHAIRMAN TORGERSON said  that his open season question and providing                                                            
access to Alaskan  communities seems  to be a joint responsibility.                                                             
His second question  was about the process and timeline  for handing                                                            
in an application  under  either the Natural  Gas Act or the  Alaska                                                            
Natural Gas Transportation Act.                                                                                                 
MR. METHURA  replied that there are  so many variables, he  couldn't                                                            
even speculate  on a time frame.   Typically for large gas  pipeline                                                            
applications   under  section   7  of  the   Natural  Gas   Act  the                                                            
environmental analysis  is the critical path. They have gotten to be                                                            
very efficient  at managing and completing that process  having done                                                            
a number of major  projects in up to a year and a  half. A couple of                                                            
projects have taken longer  than that, but it's the exception rather                                                            
than the rule.                                                                                                                  
MR.  KATZ  responded  that  he  didn't  think   that  processing  an                                                            
application  under ANGTA  would take  any longer,  but it's hard  to                                                            
speculate beyond that.                                                                                                          
CHAIRMAN  TORGERSON  said  his third  question  was whether  such  a                                                            
pipeline  would have  a common  or contract  carriage, who  controls                                                            
when the  open season occurs  and how and  when Alaskan communities                                                             
sign up for service.                                                                                                            
MR. CUPINA  responded that  their approach  to interstate  pipelines                                                            
they regulate  is that they are contract carriers  on an open access                                                            
basis,  which  means they  can't  unduly  discriminate  against  any                                                            
shipper in terms of rates,  conditions and duration of service, etc.                                                            
The common  carriage  characterization  is more  closely  associated                                                            
with the oil pipelines under the Interstate Commerce Act.                                                                       
As  to who  controls  the open  seasons,  he  said the  sponsors  of                                                            
projects  are  encouraged   to  conduct  open  seasons  as  part  of                                                            
designing   the  pipeline   and  properly   sizing   it  and,   more                                                            
importantly, for  open access purposes to insure that  all potential                                                            
shippers are aware of the  availability of a new project and have an                                                            
opportunity to respond to an open season in order to get served.                                                                
The third part  of the question seems to assume that  there would be                                                            
mid-point  delivery points  along the way and  that would depend  on                                                            
what the  design of  the project  is. He said  the Alliance  Project                                                            
from Western  Canada down to Chicago  has two points, the  receiving                                                            
point and the  delivery point in the  states. In an open  season, he                                                            
would expect any and all  potential shippers to express an interest.                                                            
CHAIRMAN TORGERSON asked  if the open season requested by the owners                                                            
of  the line  does  not  correspond  with actual  resource  data  on                                                            
resources  that  may  be available,  for  instance,  if  some  wells                                                            
haven't  been delineated,  so another  producer may  not be sure  of                                                            
what's  there, whether  we could force  that timeline  back or  they                                                            
could  force it back  for a  period of  time on the  open season  or                                                            
whether they  are locked into  the time asked  for by the owners  of                                                            
the line.                                                                                                                       
MR. CUPINA  answered that they typically  don't have information  on                                                            
the open season  until the application  is filed, unless  there were                                                            
problems with  it, for instance, if  potential shippers were  denied                                                            
access  or it wasn't  advertised  sufficiently  in the publications                                                             
available to  them. That's when FERC  becomes involved in  resolving                                                            
disputes  regarding open  seasons. "We  are not  in the position  up                                                            
front to  control the open  season because  we wouldn't be  aware of                                                            
the details of it until after the application came in."                                                                         
CHAIRMAN TORGERSON asked  if the open season was generally a part of                                                            
the application.                                                                                                                
MR. CUPINA  said it is quite a bit  ahead of time, because  it helps                                                            
inform the design of the pipeline; it helps in the sizing of it.                                                                
REPERSENTATIVE  GREEN  said he  understood  that the  line might  be                                                            
designed  initially for 4  BCF/D and since  it's compressible,  that                                                            
could be increased  later by adding more compression.  He asked if a                                                            
producer  who  missed  the  first  open  season  would  be  able  to                                                            
participate in the next open season when adding compression.                                                                    
MR. CUPINA  explained  that they  encourage open  seasons for  every                                                            
REPRESENTATIVE  GREEN said that mid-point  delivery points  might be                                                            
affected if a  discovery was made down the line someplace.  He asked                                                            
if that would trigger another open season.                                                                                      
MR. CUPINA  replied that it could,  especially if it created  a need                                                            
for  additional capacity  as  opposed  to simply  providing  another                                                            
point of input  into existing capacity.  "If existing shippers  were                                                            
getting gas from  an additional source, perhaps not.  We don't think                                                            
of that as  an expansion. But if the  additional source has  created                                                            
expansion  to add  new  shippers,  that would  probably  be an  open                                                            
season event."                                                                                                                  
CHAIRMAN TORGERSON  said his fourth  question was how access  to the                                                            
pipeline would  be determined initially and how access  will be made                                                            
later. He asked if there were additional comments on that.                                                                      
MR.  CUPINA responded,  "Once  a pipeline  becomes  operational,  it                                                            
operates under a FERC tariff,  an open access tariff, which controls                                                            
the  types of  service  that it  offers, which  are  usually a  firm                                                            
transportation  service and an interruptible  service and  the terms                                                            
and conditions of that service."                                                                                                
He said, "This assures  that shippers are getting some uniformity as                                                            
far  as balancing  penalties,  nominations,   etc. On  a  continuing                                                            
basis,  the pipeline  is  under  their open  access  requirement  to                                                            
advertise  capacity  and sell  that  capacity  under the  terms  and                                                            
conditions of its FERC tariff."                                                                                                 
CHAIRMAN TORGERSON asked  the fifth question: How will the expansion                                                            
of  the pipeline  be  handled and  how  will the  Commission  handle                                                            
incremental costs?                                                                                                              
MR. ROBERT PERTOCELLI,  Office of Energy Markets, Tariffs and Rates,                                                            
FERC,   responded  that   generally   expansions   come  under   two                                                            
categories.  If they fall  under a certain  dollar amount,  they are                                                            
considered under  the blanket and all of their costs  are rolled in.                                                            
If they  exceed the  blanket amount,  they have  to file a  separate                                                            
application   and  the  extension   would   be  treated  as   either                                                            
incremental  or rolled  in. If  they raised  the rate  at all,  they                                                            
would be treated  as incremental. If the rates with  the new volumes                                                            
and costs together  were the same,  they would be treated  as rolled                                                            
in. If they lower the rates, they would also be rolled in.                                                                      
REPRESENTATIVE  GREEN  asked  how  FERC  worked  with  the  pipeline                                                            
traverse in Canada.                                                                                                             
MR. KATZ replied  there are pipeline treaties in effect  between the                                                            
United   States  and   Canada  that   deal  with   coordination   of                                                            
international  efforts. That's  probably more  under the purview  of                                                            
the Department  of  Energy. The  Commission would  certificate  that                                                            
portion of the line that is in the U.S. territory.                                                                              
MR. METHURA  followed up  saying that while  they don't have  direct                                                            
responsibilities  with  respect  to  the Canadian  portions  of  the                                                            
pipeline, they  are in informal communication  and cooperation  with                                                            
the staff  of the  National  Energy Board  so they  keep each  other                                                            
updated about the project.                                                                                                      
MR. KATZ agreed,  but said they wouldn't have any  jurisdiction over                                                            
any portion of the line that wasn't in the U.S.                                                                                 
REPRESENTATIVE GREEN said  there has been some concern as to how the                                                            
TAPS  rate was  established and  how it  considered  maybe too  many                                                            
things. "With  FERC dealing with a gas line like this,  what sort of                                                            
process does  that go through  to ensure the  net back is on  a fair                                                            
MR. PETROCELLI  answered,  "The rates  are generally  calculated  in                                                            
accordance  with cost  of  service methodology.  We  use a  standard                                                            
formula to  determine the  rate base, the  investment, the  expenses                                                            
are generally  estimated.  Then we apply  a rate  of return  that is                                                            
within the bounds  that's been accepted at the Commission  for other                                                            
pipelines of similar risks."                                                                                                    
CHAIRMAN TORGERSON  asked if adding the conditioning  plant into the                                                            
base  rate   was  a  standard  policy   since  and  if  that   would                                                            
automatically be added to the tariff.                                                                                           
CHAIRMAN TORGERSON said it was his understanding that it would                                                                  
MR. KATZ said  the circumstances around [TAPS] were  a little unique                                                            
because  they resulted  from  some presidential  waivers  and  other                                                            
things that related  to ANGTS at that time. He couldn't  say whether                                                            
a conditioning plant would  be included in the rates of the pipeline                                                            
as a whole.  Typically, such  a plant is included  in rates  only if                                                            
it's part way down the pipeline.                                                                                                
10:25 a.m.                                                                                                                      
CHAIRMAN  TORGERSON  referred  to  Representative  Green's  question                                                            
about a future discovery,  for instance in the Big Delta area, where                                                            
another conditioning  plant would  be necessary. He said  he assumes                                                            
they  could put  provisions in  the tariff  to where  they  wouldn't                                                            
automatically  add in the one conditioning plant on  the North Slope                                                            
if you had your own or  were required to build your own further down                                                            
the line somewhere.                                                                                                             
MR. METHURA said it seems  like he is asking if FERC plays some role                                                            
in  requiring an  existing  pipeline to  expand  in the  event of  a                                                            
discovery.  Typically, they don't  do that; it's up to the  pipeline                                                            
owner and new  customers to get together  and decide if there  is an                                                            
opportunity for expansion.                                                                                                      
MR. CUPINA observed  that the way they regulate pipelines  now, they                                                            
only  perform the  transportation  function.  In the  Lower 48,  the                                                            
processing activities and  preparing the gas for pipeline quality is                                                            
part  of the  producing,  gathering,  and processing  function  that                                                            
happens  in the  producing  field at  the producer's  expense.  Some                                                            
issues  he  is raising  may  be  the  producer's  or  the  shipper's                                                            
CHAIRMAN TORGERSON said  he didn't want the state to be regulatorily                                                            
locked out of the expansion and that:                                                                                           
     We  basically have  one field  that this gas  is going  to                                                                 
     come  out  of to  begin  with  and we  have  never,  until                                                                 
     recently, drilled looking  for gas on the North Slope. So,                                                                 
     we have  a vast area where it's  projected to be a lot  of                                                                 
     reserves,  but there's no incentive  for other companies,                                                                  
     besides the  ones who own the resource and who  may end up                                                                 
     owning  the line,  to allow  other people  into the  line.                                                                 
     That's  a huge issue  in the State of  Alaska, as well  as                                                                 
     the other producers that may want to drill up there.                                                                       
He wanted to know what  FERC and the State could do to control that.                                                            
MR. CUPINA said:                                                                                                                
     The  Commission has  nothing in their  statutes requiring                                                                  
     expansion  of a pipeline. However, several months  ago, in                                                                 
     response  to  a court  remand,  the Commission  issued  an                                                                 
     order on pipeline interconnection  that permitted shippers                                                                 
     to hook  into a pipeline. As  a result of that, it became                                                                  
     more difficult  for a pipeline  to refuse to tap into  its                                                                 
     line. We expect there will  be tariff provisions and we're                                                                 
     seeing  more and more of them  that set out the terms  and                                                                 
     conditions  under which the pipeline  will consider  these                                                                 
     requests for someone to tap into their line.                                                                               
     What I'm  getting at is that  it's getting more difficult                                                                  
     for  a pipeline  to turn anyone  down than  it would  have                                                                 
     been  before.  Having said  that,  under open  access,  if                                                                 
     there's  no capacity available  on the main line, even  if                                                                 
     you  get  hooked up,  you  may not  necessarily  get  firm                                                                 
     service  and the pipeline is  not required to prorate  any                                                                 
     other capacity as would a common carrier…                                                                                  
MR. KATZ agreed  and said that typically  the way these matters  are                                                            
dealt with  as a  matter of business  negotiations.  Everyone  has a                                                            
role to play in the certification  procedure whether they support or                                                            
oppose the  project and general concerns  about how a pipeline  will                                                            
be built, other routes, etc.                                                                                                    
10:31 a.m.                                                                                                                      
CHAIRMAN  TORGERSON said that  brought him  back to the question  of                                                            
the  open  season  and  how  that  can   be  controlled,  if  it  is                                                            
controlled. For example, he said:                                                                                               
     What if they had an open  season that met the requirements                                                                 
     and specifications  they just  laid out and do it well  in                                                                 
     advance of anyone having  a field developed, can we or you                                                                 
     postpone  the  open  season  to a  later  time  line  that                                                                 
     wouldn't  necessarily  affect  the  overall start  of  the                                                                 
MR. METHURA  said that would  be a policy  call for the Commission.                                                             
Their general  policy is that if someone  has an acceptable  project                                                            
on environmental  and other grounds, and if they are  willing to put                                                            
up the money  to pay for  that project, the  Commission is  going to                                                            
consider it.  An argument against  it could be that it is  too early                                                            
and the area is not developed  and it's not in the public's interest                                                            
to  approve  a  project  at this  time.  He  didn't  know  what  the                                                            
Commission would do.                                                                                                            
SENATOR  KELLY  said FERC  couldn't  assure  that anyone  could  get                                                            
access to the  pipeline on a firm  basis and asked if it's  worth it                                                            
for someone to develop  a gas field and have their transportation be                                                            
on an interruptible  basis. "Practically speaking,  are they able to                                                            
go  out   and  market   their  gas,  if   their  transportation   is                                                            
One of  the FERC officials  replied that would  be a business  call.                                                            
There are other options  in addition to interruptible, like capacity                                                            
release. Under  that provision, existing  firm shippers who  may not                                                            
be using their capacity  or all of it are authorized to sell it like                                                            
a sublease.  That is just as firm  as pipeline firm. Another  way to                                                            
look at it is  that the pipeline makes its profit  by transportation                                                            
gas. So, its got a business  incentive to expand and to take on more                                                            
business and increase it's revenues.                                                                                            
REPRESENTATIVE GREEN said:                                                                                                      
     Up here  there are  occasions when the  oil pipeline  gets                                                                 
     spiked  with gas  liquids -  an undersaturated  oil  could                                                                 
     take more gas liquids and  stay stable and be shipped to a                                                                 
     refinery  to be worth  more. There is  a possibility  with                                                                 
     this high pressure line  that there may be shipping of gas                                                                 
     liquids from the start,  but if down the road the producer                                                                 
     was  to be  on the road  system,  find some  gas, go  with                                                                 
     methane  only,  and the  original  producers may  say  no.                                                                 
     That's what we don't want  in our pipeline. To what degree                                                                 
     does FERC get involved in something like that?                                                                             
One of the FERC officials replied:                                                                                              
     The only thing that comes  to mind is the Alliance system,                                                                 
     which  at one point  was wetter than  a typical pipeline.                                                                  
     Those kinds of things would  be spelled out in its quality                                                                 
     standards in its tariff.  Those issues would be considered                                                                 
     and resolved  up front, before  we approve that pro  forma                                                                 
     tariff   that's   filed  along   with   the  construction                                                                  
     certificate application.                                                                                                   
REPRESENTATIVE  GREEN asked,  if there was  to be a subsequent  open                                                            
season  for a mid-point  delivery  point from  a mid-point  delivery                                                            
point,  the contract  would originally  have provided  for that  and                                                            
there would  be some sort of adjustment  for that on a BTU  basis or                                                            
some other thing, whether it would be a FERC problem.                                                                           
The  FERC  official  responded  that  the  pipeline's  tariff  would                                                            
provide for that.                                                                                                               
MR.  METHURA  added  that  at  some   point  in  the  future  a  new                                                            
prospective shipper and  the existing pipeline owner could negotiate                                                            
something  different,  like  amended tariff  provisions  that  would                                                            
allow for dry gas.                                                                                                              
REPRESENTATIVE  GREEN asked if there  was capacity and the  original                                                            
owners said they didn't  want dry gas, whether that would be grounds                                                            
to prevent another producer from getting in.                                                                                    
MR. PETROCELLI  replied  if they  can't meet  quality standards  for                                                            
delivering gas, that could be grounds to refuse entrance.                                                                       
SENATOR KELLY asked if  capacity release would be found mostly in an                                                            
environment where they had demand that was low.                                                                                 
MR. METHURA  said it varies.  There might  be capacity available  at                                                            
different  times during  the  year. There  are various  reasons  why                                                            
capacity might  be released. He explained if every  shipper is using                                                            
it's own capacity  at maximum load factor every day,  there won't be                                                            
any available  to  be released  but, on  many systems,  capacity  is                                                            
released every  day throughout the year, even in the  peak season in                                                            
the winter.                                                                                                                     
10:40 a.m.                                                                                                                      
SENATOR KELLY  said it seems if you  were in a business environment                                                             
where  demand   was  very   high,  you  wouldn't   have  a   lot  of                                                            
opportunities  for those who  do not own the  pipeline to get  their                                                            
gas transported  through it on anything but an interruptible  basis.                                                            
He asked,  "If there  was a  period of  high demand,  why would  the                                                            
people who  own the pipeline  have any incentive  to allow  space on                                                            
their pipeline for those?"                                                                                                      
One  of  the  FERC officials   replied  they can  only  sell  on  an                                                            
interruptible basis if  some firm shipper is not using capacity. The                                                            
interruptible capacity,  itself, is a consequence of unused firm. It                                                            
adds an incentive to expand.                                                                                                    
MR. PETROCELLI said:                                                                                                            
     You  seem  to be  operating  on the  assumption  that  the                                                                 
     pipeline  owners  would  be the  transporters.  There's  a                                                                 
     whole  class of rules  that apply  to affiliate shippers,                                                                  
     but first of all, under  our unbundling rule, the pipeline                                                                 
     owners  generally  don't do  the transporting.  They  just                                                                 
     sell  transportation  to other  shippers.  Those shippers                                                                  
     have fair  access rights unto themselves. So,  any shipper                                                                 
     who wants  access should be able  to gain it. He wouldn't                                                                  
     be  competing  supposedly  against  the  pipeline owners.                                                                  
     Although  affiliates can transport,  there are rules  that                                                                 
     apply  so that everybody  has equal  access including  the                                                                 
CHAIRMAN TORGERSON  asked if that  brings them back to the  question                                                            
of  whether  or not  whoever  files  for  this  - it  could  be  the                                                            
producers - has to be a common carrier.                                                                                         
MR. PETROCELLI  asked if  he meant common  carriage in the  sense of                                                            
talking about open access of contract carriage.                                                                                 
CHAIRMAN TORGERSON indicated yes.                                                                                               
MR.  PETROCELLI  said,  "You can't  unduly  discriminate  under  the                                                            
Natural Gas  Act so you are  open to all  shippers whether  they are                                                            
affiliates or not."                                                                                                             
CHAIRMAN TORGERSON added,  "As long as you go through the provisions                                                            
of the open season and the rest of that."                                                                                       
MR. KATZ responded:                                                                                                             
     It  comes down  to business  choices. If  they conduct  an                                                                 
     open season  and affiliates of folks who are proposing  to                                                                 
     build the pipeline want  to sign up for 100 percent of the                                                                 
     capacity,  the question is whether  there are other  folks                                                                 
     who  want  to sign  up  for capacity,  too.  Usually  what                                                                 
     happens  then is  that it  gets allocated….  The question                                                                  
     remains, are  you willing to pony up the money  to reserve                                                                 
     space  on  that pipeline,  and  that  becomes  a business                                                                  
MR. CUPINA said  the committee was imagining when  an application is                                                            
filed, there's going to  be some tension. They want to slow down the                                                            
open season  versus those  who are  exhorting them  to speed  it up,                                                            
their general direction.                                                                                                        
10:45 a.m.                                                                                                                      
CHAIRMAN TORGERSON  responded, "Not necessarily. The  open season of                                                            
the example  I gave  you may  be two  or three  years before  you're                                                            
He then asked  Mr. Cupina if he knew of any regulations  under their                                                            
purview that  would create a hub,  such as coming down to  Fairbanks                                                            
and spinning  off to other projects  in the state. He asked  whether                                                            
FERC or the RCA would regulate that.                                                                                            
MR. CUPINA responded:                                                                                                           
     We  don't regulate  hubs. We  kind of stand  back and  let                                                                 
     hubs develop  and market centers. While we don't  regulate                                                                 
     hubs per se, there might  be some services within that hub                                                                 
     that the  pipelines that interconnect  there perform  that                                                                 
     we  do regulate  and that  are additional  services  under                                                                 
     their tariffs....                                                                                                          
REPRESENTATIVE DAVIES said  he is concerned about the common carrier                                                            
aspects of  FERC's regulatory  framework. He  asked how much  of the                                                            
regulatory environment  is set by the pattern down  south where most                                                            
producers  do not own the  pipeline. He noted,  in Alaska,  we might                                                            
have a situation in which  the producers are the dominant owners and                                                            
there  is  a serious  possibility  of  anti-competitive   situations                                                            
developing  on the North Slope. He  asked how that might  affect the                                                            
way they regulate an Alaskan gas pipeline.                                                                                      
TAPE 01-2, SIDE A                                                                                                             
MR. CUPINA replied  that there are some producer-owned  pipelines in                                                            
the Gulf of Mexico and that:                                                                                                    
     Although  they transport some  of their own gas, they  are                                                                 
     open access  pipelines like we've  been describing.  We've                                                                 
     held them to the same standards  as the pipelines that are                                                                 
     not producer  owned or producer affiliated....  If you had                                                                 
     a story to tell to persuade  the Commission that something                                                                 
     should  be different, the burden  would be on the sponsor                                                                  
     to do that, or interveners,  for that matter, in the case.                                                                 
10:50 a.m.                                                                                                                      
REPRESENTATIVE  DAVIES asked  if he  could provide  an example  of a                                                            
producer-owned  pipeline that  transports other  folks' gas  at this                                                            
MR. CUPINA  said that Shell's (Gordon  Banks, now) initial  business                                                            
plan was to move its own  gas. "They came in on a prefiling basis to                                                            
discuss some  of these things  and we advised  them accordingly  and                                                            
they have open access tariffs."                                                                                                 
CHAIRMAN  TORGERSON thanked  everyone in Washington  D.C. for  their                                                            
testimony and said they would now hear the RCA presentation.                                                                    
10:52 a.m.                                                                                                                      
MR. METHURA  said they appreciate  being involved and want  to leave                                                            
the  committee  with  the  impression   that  they  are  anxious  to                                                            
CHAIRMAN TORGERSON  assured them that the Alaska Legislature  is not                                                            
trying to slow the project down, but "to understand a little bit                                                                
more of what your function is compared to what we have to do with                                                               
in-state functions...."                                                                                                         
Regulatory Commission of Alaska                                                                                               
MR. ANTHONY SCOTT, staff to the RCA, said that the FERC is in                                                                   
charge if there is one molecule of interstate pipeline and on the                                                               
TAPS they have joint jurisdiction with the FERC. He stated:                                                                     
     Under the  Natural Gas Act, there is a large body  of case                                                                 
     law, which says that if  molecules that are interstate and                                                                 
     molecules   that  are  intrastate   mingle  in  the   same                                                                 
     pipeline,  all  the  gas in  the  pipeline  is considered                                                                  
     interstate  even  though some  of  it comes  off earlier.                                                                  
     There's  a  lot  of  case  law suggesting   [indisc.]  Bob                                                                 
     Maynard, when he was Attorney  General back in 1976, wrote                                                                 
     an  opinion  in which  he suggested  that  authority  over                                                                 
     intrastate  movement of natural  gas would pretty much  be                                                                 
     preempted  by the feds. Finally, there's express  language                                                                 
     in the Alaska Natural Gas  Transportation Act, which seems                                                                 
     to  say pretty  clearly that  the feds  have jurisdiction                                                                  
     over tariffs  for intrastate gas. What that means  is that                                                                 
     it looks  like the RCA in terms  of tariff setting and  so                                                                 
     on is pretty much out of the picture.                                                                                      
MR. SCOTT said he would provide the committee with some background                                                              
as to what the RCA's authority is. He said that FERC's authority to                                                             
border access is not as strong as RCA's appears to be.                                                                          
     We  have two different  statutes under  which we regulate                                                                  
     intrastate   natural  gas  pipelines   and  we  have   gas                                                                 
     pipelines  in the state that  are under both. We have  gas                                                                 
     pipelines  that are under  the Pipeline  Act and they  are                                                                 
     considered  pipeline  carriers  and  are  common carriers                                                                  
     similar to the situation  that we have with TAPS. Then, we                                                                 
     also  have gas  pipelines, both  the Beluga  line in  Cook                                                                 
     Inlet  or Enstar System, which  are regulated under  Title                                                                 
     42.05,  our public  utilities  legislation.  They are  not                                                                 
     common  carriers. They're also  not contract carriers.  We                                                                 
     don't  have such a thing as contract  carriers for public                                                                  
     The   Commission  powers   insure  access   or  [indisc.]                                                                  
     depending  upon the particular statute the pipeline  falls                                                                 
     under. For  intrastate pipelines that are certificated  at                                                                 
     the   pipeline  areas   of  the  public   utilities,   the                                                                 
     Commission  does have prorationing  authority, so that  if                                                                 
     space  on  a  line  is  limited  and  nominations  exceed                                                                  
     capacity, we can proration  or we can decide - our statute                                                                 
     doesn't  require that  we can strictly  proration, but  we                                                                 
     can decide  how to allocate that  capacity. We don't  have                                                                 
     that clear authority for public utility pipelines.                                                                         
     The  Commission  also  can order  a facility's  expansion                                                                  
     under  [indisc.] by  statute. Our expansion  authority  is                                                                 
     actually  a  little  bit  clearer   and  stronger  on  the                                                                 
     pipeline side than on the  public utility side. So, unlike                                                                 
     with the FERC, if we have  a [indisc.] gas pipeline, which                                                                 
     is  certificated  as  a pipeline,  we  can order  them  to                                                                 
     expand  capacity. We also, under  both our statutes,  have                                                                 
     interconnection  authority  and  the language  under  both                                                                 
     statutes  is identical.  Finally,  for  pipeline carriers                                                                  
     during construction,  the state can order the  pipeline to                                                                 
     install  offsite  facilities.  The state  has  to pay  for                                                                 
     that, but  nevertheless, if it was determined  that it was                                                                 
     cheaper  to  do  up  front,  they  could order  [indisc.]                                                                  
     facilities installed.                                                                                                      
An  unidentified  person  interrupted,  "You  had prefaced  this  by                                                            
saying  the  state  would  not  be  involved.   It  was  purely  the                                                            
jurisdiction  of FERC.  Is that  true about  during construction  as                                                            
MR. SCOTT answered:                                                                                                             
     That's  a good question.  I think so.  I mean I think  our                                                                 
     ability  to order that  would probably  be preempted.  I'm                                                                 
     less  clear on  that, though.  What  is clear  is that  we                                                                 
     wouldn't  be able during  construction  to order off-site                                                                  
     facilities  unless the  pipeline was  certificated by  our                                                                 
     Commission  and there would be  no need for an intrastate                                                                  
     certificate  if  there are,  during  the open  season,  no                                                                 
     nominations for intrastate  shipment of gas. So, if nobody                                                                 
     steps to the plate within  the state and says we want some                                                                 
     gas  and  we're  willing  to  commit  to  it  now, during                                                                  
     construction,  they  wouldn't  need  an  RCA certificate.                                                                  
     There  would be no  intrastate sales.  So, our ability  to                                                                 
     exercise that authority clearly does not apply.                                                                            
An  unidentified  person  asked if  FERC  would  have to  make  that                                                            
determination, anyway,  "If there is a molecule of interstate gas in                                                            
that line, you're out of the picture, right?"                                                                                   
MR. SCOTT replied that is correct.                                                                                              
REPRESENTATIVE  FATE asked  if, with construction,  there is  such a                                                            
thing as  a change order  while in progress,  rather than having  to                                                            
plan ahead.                                                                                                                     
MR.  SCOTT replied,  "I'm  not  familiar  with the  language  change                                                            
order,  but for pipelines  that are  certificated  by the RCA,  it's                                                            
conceivable that we would  be able to require during construction to                                                            
order offsite  facilities. If they're  not certificated by  the RCA,                                                            
it's  very  clear we're  out  of  the  picture.  Even if  they  were                                                            
certificated by the RCA,  we might not have that authority. We might                                                            
be preempted."                                                                                                                  
REPRESENTATIVE OGAN said,  "So, FERC regulates from the well-head to                                                            
wherever the pipeline connects to the hub somewhere?"                                                                           
MR. SCOTT answered, "Yes."                                                                                                      
REPRESENTATIVE OGAN said  there had been some discussion about a hub                                                            
concept in  Alaska and,  although it's probably  not an appropriate                                                             
term because  there's only  one spoke coming  from the supply  side,                                                            
there might  be two or three spokes  coming out of the demand  side,                                                            
and  [indisc.].    He said  that  basically  they  were  moving  the                                                            
wellhead  to the hub point.  He asked if that  concept was  put into                                                            
statute,  would the RCA have  authority over  who's in or who's  out                                                            
and then  the FERC regulates  from that wellhead  that's moved  from                                                            
the North Slope to Delta or wherever from there on down.                                                                        
MR. SCOTT said that was  an excellent question, but they didn't have                                                            
an answer for it yet.                                                                                                           
REPRESENTATIVE OGAN said  the House Oil and Gas Committee intends to                                                            
explore that possibility in statute before next session.                                                                        
MR.  SCOTT said  he  was disappointed  that  the FERC  people  left,                                                            
because he was interested to hear their input.                                                                                  
REPRESENTATIVE GREEN said he was confused and asked:                                                                            
     Let's  go from  the hub  down to  some other  market  that                                                                 
     would by its nature be under  FERC, but that in route some                                                                 
     gas  is pulled off for  one or more  utilities. There  was                                                                 
     prior  testimony in the  Oil and Gas  Committee that  that                                                                 
     portion  would be under  RCA - that  portion that went  to                                                                 
     the  utility.   So,  you  would   actually  have  a   dual                                                                 
     regulation.  Any,  yet,  I  just heard  you  say  that  if                                                                 
     there's  a molecule of FERC gas  in there, it's all  FERC.                                                                 
MR. SCOTT replied:                                                                                                              
     Even though  there was off take of gas in Fairbanks,  it's                                                                 
     all regulated by FERC....  Even though those molecules are                                                                 
     produced instate  and they're taken off instate,  the line                                                                 
     to  get  it from  the  North  Slope to  Fairbanks  is  all                                                                 
     instate, it's treated as interstate shipment of gas.                                                                       
REPRESENTATIVE  GREEN  said, "So,  that  earlier testimony  was  not                                                            
right. There wouldn't be dual oversight?"                                                                                       
MR. SCOTT said,  "That's right....  If you commingle molecules  that                                                            
are bound for  intrastate market, the molecules that  are intrastate                                                            
all become interstate."                                                                                                         
MR. ABBOTT,  RCA Commissioner, said  another scenario is  getting it                                                            
off the  pipe and taking  it to  a distribution  center and  then it                                                            
goes  into [indisc.].  We don't  know where  that cut  off valve  is                                                            
going to  be that says  that belongs  to the  state to regulate  and                                                            
this belongs to FERC to regulate. [indisc.]                                                                                     
SENATOR KELLY  said he thought he  understood that they are  talking                                                            
about a  federal molecule  of gas  that has gone  to a distribution                                                             
center where it becomes  someone else's - a whole separate pipeline.                                                            
CHAIRMAN TORGERSON said:                                                                                                        
     Assuming  that access  is going  to be  voluntary, I  know                                                                 
     you're talking  about your power to demand an  increase in                                                                 
     capacity,  I don't necessarily think you're going  to have                                                                 
     to do that,  but in the hub, my definition of  a hub might                                                                 
     be different  than yours. A hub is just a valve  where you                                                                 
     have  a price  set. Is  that  your definition,  too?  From                                                                 
     Prudhoe  to  Fairbanks,  that  hub  -  you  have  a  price                                                                 
     predetermined  at  that particular  location.  So, if  you                                                                 
     spun off that....                                                                                                          
MR. ABBOTT  responded that it would  be nice if it worked  that way,                                                            
but they  needed  to look  at that  further. His  understanding  is,                                                            
"Absent the market, where  ownership of gas changes hands and so on,                                                            
that's  a hub concept.  Just  the idea of  a valve  doesn't get  you                                                            
where you would like to go."                                                                                                    
CHAIRMAN TORGERSON asked him to explain the process to him.                                                                     
MR. ABBOTT  replied they have had  preliminary discussions  with the                                                            
Department  of Law who  indicated that their  authority to  regulate                                                            
tariffs looks to be preempted [by FERC].                                                                                        
CHAIRMAN TORGERSON said:                                                                                                        
     If  this is  federal  law, what  Representative  Ogan  was                                                                 
     talking about, state law,  really has no bearing on it. Is                                                                 
     that  correct?   Tell  me  how  this  would  affect   your                                                                 
     jurisdiction  over  an all-Alaskan  route. It  may be  for                                                                 
     export  or maybe to  the Lower 48 or  somewhere else.  Are                                                                 
     you  the main players  in an all Alaska  route or is  that                                                                 
     also FERC?                                                                                                                 
MR. ABBOTT answered  that he thought that would be  FERC, because of                                                            
interstate commerce.                                                                                                            
REPRESENTATIVE  PORTER said, "An Anchorage spur that  was not at its                                                            
terminus  for export,  would the  RCA have  the line  from where  it                                                            
hooked up to the line to its distribution in Anchorage?"                                                                        
MR. ABBOTT answered, "Generally, I believe, yes, we would."                                                                     
REPRESENTATIVE   OGAN  asked,   "It  looks   like  the  FERC   would                                                            
hypothetically  get involved in an LNG line to Valdez,  for example,                                                            
when the ship leaves the  port, when the ship arrives, or would they                                                            
be involved in it for the whole thing?"                                                                                         
MR. ABBOTT  replied, "I think the  whole thing from the North  Slope                                                            
CHAIRMAN  TORGERSON asked,  "Who's looking  after FERC if they  have                                                            
all this  responsibility?...You're  starting  to worry  me a  little                                                            
MR. ABBOTT replied:                                                                                                             
     It strikes me, in terms  of policy, we're supposed to take                                                                 
     care  of  pipelines  that  are within  our  jurisdiction.                                                                  
     Insuring  that pipelines  are within  our jurisdiction  is                                                                 
     probably  a  matter  for  you  folks  to  take  up either                                                                  
     directly or  through the congressional delegation  or what                                                                 
     have you. I'm not sure.  It's not clear to me that we want                                                                 
     the RCA running around trying to grab turf.                                                                                
CHAIRMAN  TORGERSON   agreed,  at  least  until  they  get  a  legal                                                            
analysis.  "As an Alaskan,  I'm territorial  as all  get out.  And I                                                            
want Alaskans  to make decisions  on what's  happening. Not  back in                                                            
MR. ABBOTT said he thought  that concept had served them well on the                                                            
TAPS.  He used  the Golden  Valley tariff  as an  example for  joint                                                            
jurisdiction where it helps  secure lower tariffs.  He said they had                                                            
discussions  with FERC regarding  who pays  for capacity  [indisc.].                                                            
RCA doesn't have existing  precedent on the gas side. In general, if                                                            
everyone  benefits from the  capacity expansion,  the cost of  it is                                                            
generally shared.                                                                                                               
CHAIRMAN TORGERSON  asked if he had  any interaction with  Canadians                                                            
on how they are going to handle this.                                                                                           
MR. ABBOTT  replied that  they hadn't.  He said  RCA would handle  a                                                            
distribution system.                                                                                                            
CHAIRMAN TORGERSON  asked if FERC would set the price  at the valve.                                                            
MR. ABBOTT  said that was right and  it was a real concern  in terms                                                            
of Fairbanks off-take having to pay the Henry Hub price.                                                                        
CHAIRMAN TORGERSON thanked  them for joining the committee and asked                                                            
to get copies  of any legal opinions  on this subject. He  announced                                                            
the committee  would  break for  lunch at  11:19 am  and they  would                                                            
start again at 12.45 pm.                                                                                                        
12:45 p.m.                                                                                                                      
CHAIRMAN TORGERSON  called the meeting  back to order and  asked Mr.                                                            
Ed Small to testify.                                                                                                            
Cambridge Energy Research Associates (CERA)                                                                                   
MR. ED SMALL, CERA, made the following statement.                                                                               
     ...I intend to be as realistic  as possible to describe to                                                                 
     you  the fundamentals  as  we understand  them  and as  we                                                                 
     expect  to   see  them  unfold.  There  is  a  window   of                                                                 
     opportunity  for Alaskan gas.  It is just that, though,  a                                                                 
     window  of  opportunity.  It is  not a  done deal  by  any                                                                 
     stretch of the imagination.                                                                                                
     That window of opportunity  is probably larger than it has                                                                 
     been  at any time  in the past.  We have  seen windows  of                                                                 
     opportunity for Arctic gas  come and go. We think there is                                                                 
     a reasonable probability  or possibility of seeing Alaskan                                                                 
     gas within the course of  the next decade. I would have to                                                                 
     suggest  that, as  one of  my colleagues  says, he's  been                                                                 
     suggesting  that  will  be the  case  for the  last  three                                                                 
     decades. So, again, it's not a done deal.                                                                                  
     What I do  want to talk about is what some of  the drivers                                                                 
     and  what has  created this  window of  opportunity,  what                                                                 
     some  of  the opportunities  are,  and  what some  of  the                                                                 
     pitfalls as we see them will be.                                                                                           
     One of  the biggest factors in  creating this opportunity                                                                  
     as you  can see is we have gone  to a point in time  where                                                                 
     the  pricing level  is significantly  higher  than it  has                                                                 
     been at  any time in the past.  We have gone from a  level                                                                 
     of below  $2 to a  level where we're  going to see prices                                                                  
     averaging  over $4, taking the  average of 2001 and  2002.                                                                 
     Again, I have to point out,  though, the weak link in that                                                                 
     is the  2002 price. It is being  propped up by the prices                                                                  
     we have seen over the past  winter. We don't expect to see                                                                 
     prices go down to those  lower levels in the past. We also                                                                 
     don't expect to see them staying in that $4 range.                                                                         
     The biggest  driver behind the prices we see today  is the                                                                 
     demand.  We  see  a  situation   in  the  Lower  48  where                                                                 
     installed  capacity has increased  but it has not kept  up                                                                 
     with peak  demand. The situation has been created  whereby                                                                 
     we've  seen  capacity  margins, which  have  dropped  down                                                                 
     below  10  percent,  are  slowly  coming  back  up  to  10                                                                 
     percent, for which the conventional  thinking is that they                                                                 
     need  to  be around  the  15  percent level  in  order  to                                                                 
     adequately  handle peak demand  and demand needs, because                                                                  
     of  whatever.  We're  a  long way  from  that  15 percent                                                                  
     It is  that narrowing gap between  the installed capacity                                                                  
     and the  peak demand that is  creating the need for  a lot                                                                 
     of the natural  gas demand going forward. We saw  close to                                                                 
     30 gig watts of capacity  installed last year. We're going                                                                 
     to see between 45 and 50  gig watts this year and probably                                                                 
     a similar  number next year. Those are almost  exclusively                                                                 
     gas fired. This graphic  only shows the projects going out                                                                 
     to 2005 and it looks like  a declining number. That's only                                                                 
     because a  lot of the projects close to 2004 have  not hit                                                                 
     the books,  yet. So, we do expect to see power  generation                                                                 
     being one  of the strong drivers of gas demand  throughout                                                                 
     the next decade.                                                                                                           
     What this  picture shows is the  two areas the Arctic  gas                                                                 
     would  target are two  of the strongest  growing regions,                                                                  
     the  Midwest and  the West. One  of the things  we do  not                                                                 
     subscribe  to, though, is the  32 percent growth. We  have                                                                 
     heard  a  lot about  that  potential  growth  level,  that                                                                 
     demand  level  by  2010.   We view   that  as  being  more                                                                 
     plausible than probable.  If you look at the upper line in                                                                 
     this picture,  it shows an unprecedented  level of growth                                                                  
     required  to  get there,  growth  both  in supply  and  in                                                                 
     infrastructure. We just  do not see it happening. With the                                                                 
     demand structuring  and high prices we have seen  over the                                                                 
     past  winter,  this   makes  a  32 BCF  world   even  less                                                                 
     probable, in 2015 perhaps, but not in 2010.                                                                                
MR. SMALL explained three different bars on his graph. CERA sets                                                                
out different paths that the world may evolve on. They are                                                                      
separate,  have  their  own  drivers and  are  all  plausible.  "Gas                                                            
favored  the world  we were in  up until  two years  ago. It is  one                                                            
where supply  and demand grow  in lock step.  It was a very  healthy                                                            
economy and a robust world.  It is the least likely at this juncture                                                            
going forward."                                                                                                                 
Supplier  realignment is the  path that we  are on currently.  It is                                                            
the one where  supply has failed to  keep up with demand.  MR. SMALL                                                            
     It  is  also  a world  of  strong  growth  going forward,                                                                  
     though.  Lower  GDP's  and gas  favor  a  strong economic                                                                  
     growth.  It is  the world  that requires  gas supply  from                                                                 
     other  sources. Those frontier  sources could be offshore                                                                  
     Canada, they  could be LNG, they could be a resurgence  in                                                                 
     existing  areas…What it does  show in this world, on  that                                                                 
     path we are  on, we do not even achieve a 32 BCF  world by                                                                 
MR. SMALL continued:                                                                                                            
     The aftershock  is the scenario that we developed  about a                                                                 
     year and  a half ago that said,  "Well okay, what happens                                                                  
     if we see a recession starting  in the second half of 2001                                                                 
     going into 2003?"                                                                                                          
     It  is one where  we see  a slow  down in  growth in  both                                                                 
     supply and demand, but peaking  out towards the end of the                                                                 
     period  when  both  of  them  get  back  to  a comparable                                                                  
     realignment with supplier realignment.                                                                                     
MR. SMALL explained that  the producers' idea of the price softening                                                            
[to $3] is almost amusing,  because that's almost double what it was                                                            
two years ago. Perspective can change quickly he said.                                                                          
     What  has brought  the price  down from the  highs we  saw                                                                 
     this  last  winter  has been  the  resurgence  in storage                                                                  
     refills in the Lower 48…It  was extremely doubtful whether                                                                 
     they  could be filled  to even last  year's levels,  which                                                                 
     were considered  low by the end of this injection  season.                                                                 
     That  has  turned  around  substantially.   We  have  seen                                                                 
     injections  that will  put us not only  above last year's                                                                  
     levels, but will probably  approach 1999 levels. That will                                                                 
     probably  be adequate  to prevent significant  or serious                                                                  
     price spiking that we saw  over the past winter again this                                                                 
     What that  means in the short term, in a pricing  context,                                                                 
     is we saw  prices spike at over $9 last winter,  which was                                                                 
     significantly  higher  than  we had  seen on  a sustained                                                                  
     basis  before. We do  see softening  next year. We expect                                                                  
     next  year's average  to  be $3.53  Henry Hub  versus  the                                                                 
     $4.45  that we're seeing for  this year. So, this year  is                                                                 
     probably the peak.                                                                                                         
MR. SMALL  reiterated  that CERA  didn't expect  to see prices                                                                  
dropping  down to  the previous  levels  of 1998-99,  but  they                                                                 
should be significantly  lower than  the past winter. The  same                                                                 
dynamics  are at  play with  the Alberta  price.  "Even though                                                                  
there is excess  capacity out of Alberta  currently, we expect                                                                  
to see a wide differential  in prices between Henry Hub,  which                                                                 
is the  U.S.  prime pricing  point,  and AECO  (Alberta Energy                                                                  
Company) of almost 70 cents."                                                                                                   
They expect to see an Alberta price of $2.85.                                                                                   
He said the two target  markets for Arctic gas are the  Midwest                                                                 
and  the West  Coast,  areas  that command  a  slightly larger                                                                  
premium from the  Henry Hub price, although he didn't  know how                                                                 
sustainable that was in the long run. He said:                                                                                  
     It   is  subject  to   supply.  Currently,   there  is   a                                                                 
     significant  premium  in California  to  Henry  Hub and  a                                                                 
     modest premium in Chicago.  For the purpose of Arctic gas,                                                                 
     it is probably best to think  in the context of Henry Hub,                                                                 
     at least for planning purposes.                                                                                            
     One  of the reasons  that we  got through  last winter  is                                                                 
     that the system is flexible.  There wasn't a crisis. There                                                                 
     was  a shock to the  system, definitely.  What we saw  was                                                                 
     6.5 BCF of demand come off  the market. That's how we made                                                                 
     it through the winter. The  price controls [indisc.]. That                                                                 
     is going  to have a long lasting  impact. As you can  see,                                                                 
     switching  to residual  fuel oil and  distillate fuel  oil                                                                 
     took off almost  4 BCF. Ammonia, methanol - the  cessation                                                                 
     of creation of those products  - resulted in a demand drop                                                                 
     of about  .8 BCF/D. We saw ethane  not being taken out  of                                                                 
     the gas  stream, but sold as  gas, which had an impact  on                                                                 
     the   petrochemical   industry   and  we   saw  decreased                                                                  
     manufacturing of .7 BCF/D.                                                                                                 
     Go  to today's world,  specifically the  third quarter  of                                                                 
     this year,  and the outlook that  we expect to see is  one                                                                 
     where  there is still  demand that has  not come back  on.                                                                 
     Seven hundred  million per day of decreased manufacturing                                                                  
     we don't  expect to come back.  There is a question  as to                                                                 
     whether  that was  due to the  high prices  or due to  the                                                                 
     soft economy.  The answer is  probably both, but we  don't                                                                 
     expect to see that manufacturing  come back on in the near                                                                 
     We  expect  to  see residual  fuel  oil  priced  into  the                                                                 
     market, in other words,  displaced gas demand for at least                                                                 
     the  next year,  if not  two years.  There is  700 MCF  of                                                                 
     ammonia that is not being  manufactured. That may not come                                                                 
     back. Due to high prices,  that product may go overseas or                                                                 
     offshore of North America permanently.                                                                                     
     The same with methanol.  Distillate, we probably don't see                                                                 
     that being  in the market until next winter. If  demand is                                                                 
     strong enough next winter,  you will see gas priced out of                                                                 
     the market and distillate  priced in. Ethane will probably                                                                 
     be above  that point. Those dynamics  will continue  to be                                                                 
     in play going forward depending  on the price. So, this is                                                                 
     a structure  one could expect to see not only  in the past                                                                 
      winter, but going forward. This just shows one aspect.                                                                    
     I  wanted to pick  one aspect  to show  what has happened                                                                  
     with the  high price today. You  can see when natural  gas                                                                 
     prices spike,  ethane production drops dramatically.  This                                                                 
     is something  to keep in mind if there is any  interest or                                                                 
     intention  of  developing  a  petrochemical   industry  in                                                                 
     Alaska.  When you see the gas  prices spiking, the source                                                                  
     of the supply for the petrochemical  industry is gone. So,                                                                 
     your  petrochemical  industry  is  [indisc.].  That  is  a                                                                 
     significant factor going forward, as well.                                                                                 
     Do  we expect  to  see softening  going  forward?  Am I  a                                                                 
     pessimist?  We expect  to see prices  that are above  what                                                                 
     we've  seen  in  the past,  but  not  anywhere  like  what                                                                 
     occurred  in the  past winter.  We expect  to see through                                                                  
     2005 prices  that will begin  in the low to mid $3 range.                                                                  
     The  volatility  will  be  more on  the  upside  than  the                                                                 
     downside   simply  because  that   residual  fuel  oil   I                                                                 
     mentioned  is providing  a floor for  gas prices and  will                                                                 
     probably  continue  to  provide that  floor  until supply                                                                  
     picks  up. So, over the next  five years we expect to  see                                                                 
     minimum  downside spiking  and potential  upside spiking,                                                                  
     but with  a price that's in a  range of $3 - $3.25 level.                                                                  
     On  the  supply side,  which  is  the other  side  of  the                                                                 
     equation  that gets  you to  price, the  demand being  one                                                                 
     side and the  supply being the other, what is  the picture                                                                 
     in a North American context?  We see both coming from four                                                                 
     specific  areas - western  Canada, the  U.S. Rockies,  the                                                                 
     Gulf  Coast and  U.S.  Gulf of  Mexico, and  Sable Island                                                                  
     offshore  east Canada.  A lot  of the other  areas in  the                                                                 
     Lower 48 are mature, are  having trouble keeping their own                                                                 
     and the record  drilling levels in the U.S. probably  will                                                                 
     only support a limited amount of growth.                                                                                   
     We  are seeing  record drilling  both in the  U.S. and  in                                                                 
     Canada. It  is starting to have an impact. We  finally got                                                                 
     the actual  numbers in for 2000 and supply decline  in the                                                                 
     Lower 48 was lower than  we anticipated. The supply growth                                                                 
     this year, largely because  of the high drilling, is going                                                                 
     to be  higher than the recent  estimate. We expect to  see                                                                 
     growth in the Lower 48 of  between 500 and 700 MCF/D going                                                                 
     to  between  700  and  800  MCF/D  next  year.  The  large                                                                 
     percentage  of the drilling  activity  in the Lower 48  is                                                                 
     gas directed.  We don't think that the current  prices are                                                                 
     low enough  that that is going  to disrupt or discontinue                                                                  
     the current  drilling activities  that we are seeing.  So,                                                                 
     we  expect to  see robust  drilling  over the  next  year,                                                                 
     which should  support the growth levels that I  mentioned.                                                                 
     One of the  factors that opened the window for  Arctic gas                                                                 
     was  the gas  production  in  the U.S.  has been  flat  to                                                                 
     declining  (referring to graph  illustration). What  we do                                                                 
     see,  though, is for  the Lower 48, we  feel 2000 was  the                                                                 
     bottom  point. We see  the capacity in  the U.S. Lower  48                                                                 
     growing.  What is interesting  though, is that it's  going                                                                 
     to take until almost 2005  to get back to 1995 levels. So,                                                                 
     there's  still  a  need  when you  couple  that  with  the                                                                 
     growing demand.                                                                                                            
     Onshore  production in  the U.S. is a  bit of a different                                                                  
     story.  It is going  to grow through  about 2005, 2006  at                                                                 
     which  time we see it  flattening out.  So, even with  the                                                                 
     drilling  levels we see, the  conventional areas in  Lower                                                                 
     48 onshore  have limitations.  What is going to happen  is                                                                 
     that  growth in the  Rocky Mountains,  as one example,  is                                                                 
     going  to offset declines  in the  Anadarko and [indisc.]                                                                  
     The other  offsetting factor is the Gulf of Mexico.  There                                                                 
     are  two dynamics  at play  here.  The one  has been  most                                                                 
     responsible  for the decline in the Lower 48 for  the last                                                                 
     several  years  and has  been  the steep  decline  in  the                                                                 
     shallow   shelf.   That  is   an   area  that   has   high                                                                 
     productivity,  but high decline. With the low  prices that                                                                 
     we  saw in both  oil and  gas in 1997,  drilling activity                                                                  
     almost  ceased in this  area. That steepened  the rate  of                                                                 
     decline. It's  an area, because of the high decline,  that                                                                 
     you  have  to continue  drilling  to replace  production.                                                                  
     We're  starting to see that turn  around. We don't expect                                                                  
     to see the  decline displaced or discontinued,  but we see                                                                 
     the rate of decline becoming  more shallow. It is going to                                                                 
     be offset  by the deep water  Gulf, though. Those are  the                                                                 
     projects  that  have been  committed  to, that  have  been                                                                 
     under way  for the past four or five years, that  are just                                                                 
     coming  on stream  this year.  So, we see  the deep  water                                                                 
     Gulf  not only offsetting  the shallow  Gulf decline,  but                                                                 
     providing positive growth.                                                                                                 
1:03 p.m.                                                                                                                       
     The Canadian story is an  interesting picture. The western                                                                 
     Canadian  sedimentary basin is  not a mature basin in  the                                                                 
     same  context  as the  Lower 48.  It still  has  a lot  of                                                                 
     potential.  What has  happened and what  is the result  of                                                                 
     the less production  we saw last year, was that  the focus                                                                 
     has been  on shallow gas drilling.  That does a couple  of                                                                 
     things.  It increases your rate  of decline, it decreases                                                                  
     your initial  rate of production, you get on a  treadmill.                                                                 
     You have to  drill more and more just to stay  in the same                                                                 
     spot.  What   has  happened  in  the  past  year   is  the                                                                 
     significant  increase  in drilling  that has  occurred  in                                                                 
     western Canada,  as well. Last year, while there  wasn't a                                                                 
     percentage  increase  in exploratory  activities, just  by                                                                 
     the sheer  number of wells drilled, there was  an increase                                                                 
     in exploratory wells. We're  starting to see the impact of                                                                 
     that  now. After  significant  year  over year  growth  in                                                                 
     western  Canada throughout the  90's, last year was  flat.                                                                 
     This  year  it was  a slight  growth  for the  first  four                                                                 
     months. We're  now seeing growth in June and July  of over                                                                 
     1 BCF/D, which is significant.                                                                                             
     What  has  happened  in  this year  because  of  the  high                                                                 
     prices?  Exploratory well licenses  are up 23 percent.  To                                                                 
     give an example of the significance  of that, there is one                                                                 
     discovery,  a  relatively small  area  geographically,  in                                                                 
     northeast  B.C.  called   Lady  Burn  (ph).  It  had  zero                                                                 
     production as of the end  of the year. It is now producing                                                                 
     500 MCF/D  and probably going  to 800 BCF/D by the end  of                                                                 
     the year.                                                                                                                  
     Are there  other areas out there like that? The  answer is                                                                 
     probably  yes.  We expect  to see  significant  growth  in                                                                 
     western  Canada going  forward.  And while  this graph  is                                                                 
     very confusing,  what it attempts to show you  is the year                                                                 
     over  year change  from western  Canada. As  you can  see,                                                                 
     from '96  through '99 there was  annual growth. Last  year                                                                 
     was  flat,  declining  in  the  first  half  of  the  year                                                                 
     [indisc.].  What's really significant  is the growth  this                                                                 
     year. The growth in the  first four months of the year was                                                                 
     probably  in the  350 - 400  BCF/D, but  it is increasing                                                                  
     dramatically  so that the annual  average growth for  this                                                                 
     year is probably  going to be 700 MCF/D. We expect  to see                                                                 
     the  same, if  not more,  next  year. So,  western Canada                                                                  
     should not be counted out.                                                                                                 
     One of the other interesting  aspects of western Canada is                                                                 
     coal bed methane, which  is becoming a significant portion                                                                 
     of gas supply in the U.S.  It has not, in fact, in Canada.                                                                 
     There's  been  less than  70 wells  drilled  for coal  bed                                                                 
     methane in  all of time. The estimate of coal  bed methane                                                                 
     reserves  in western  Canada  alone are  double the  total                                                                 
     U.S.  Lower   48.  So,  it  could  substantially   be  the                                                                 
     replacement  for shallow gas  drilling in western Canada.                                                                  
     Having put  all that together, what it still says  though,                                                                 
     is that  there is  production required  from what we  call                                                                 
     frontier  areas  in the  future.  One  of those  areas  is                                                                 
     Atlantic  Canada. We  saw Sable Island  come on stream  at                                                                 
     the  end of 1999.  It is increasing  in production;  there                                                                 
     have  been new  discoveries. We  do expect  to see growth                                                                  
     from there.  The Arctic is another region. This  is just a                                                                 
     range  of  potential  gas  from  various   areas.  LNG  is                                                                 
     probably lower  than we would put it if we were  to redraw                                                                 
     this graph today.                                                                                                          
     The Scotian shelf, which  is offshore eastern Canada, Nova                                                                 
     Scotia, is currently producing  at about 500 MCF/D. We see                                                                 
     that growing to 1 BCF/D  by 2005 and 3 BCF/D by 2006. This                                                                 
     could even be higher. Similar  structures in geology could                                                                 
     develop in  Mexico. All that has been explored  to date is                                                                 
     the relatively shallow steep water areas.                                                                                  
     One of the  areas that used to be a wild card  and has now                                                                 
     become  significantly  more important  is  LNG. There  are                                                                 
     currently  four facilities in  the Lower 48, all of  which                                                                 
     were  mothballed until  last year. Two  of them have  come                                                                 
     back on stream;  Lake Charles last year; Everett  has come                                                                 
     back on; gas discoveries  in Trinidad are ramping up; Cove                                                                 
     Point  in Elba Island will be  coming back on stream  next                                                                 
     year.  We  see  not  only  these  facilities   running  at                                                                 
     capacity,  but we see expansion  of these facilities  such                                                                 
     that  we  see  3  BCF/D  being  imported   to  these  four                                                                 
     facilities  probably  by 2005.  The [indisc.]  capability                                                                  
     will be probably higher  than that, but because of storage                                                                 
     and ship turnaround requirements,  3 BCF/D is probably the                                                                 
     highest sustainable number.                                                                                                
     What is  really interesting though  is if you look at  the                                                                 
     world LNG  facilities. Not only are there significant  and                                                                 
     numerous  liquefaction  facilities throughout  the world,                                                                  
     there are significant plans  for more going forward in the                                                                 
     2005 - 2010 as you can see  in this graphic. So, we expect                                                                 
     to see the supply side of  LNG being very strong post 2005                                                                 
     on a global basis.                                                                                                         
     What  does  that  mean  for  the  Lower  48  and  for  the                                                                 
     potential  for Arctic gas? Over the course of  the winter,                                                                 
     we  started seeing more  and more  starting with monthly,                                                                  
     almost  going to weekly,  announcements  of new projects.                                                                  
     There  are at least three for  the Baja that are proposed                                                                  
     and a  year ago I would have  discounted any potential  of                                                                 
     LNG gasification  facilities on the West Coast.  There are                                                                 
     three  that are  being studied.  The ones  off California                                                                  
     don't sound as outrageous  as you might think because they                                                                 
     are  not located onshore.  They would  be gasified from  a                                                                 
     ship  that would  be tethered  to a buoy  probably out  of                                                                 
     sight  and out  of mind of  California. So,  it does  have                                                                 
     some feasibility.                                                                                                          
     The East  Coast has an area that's  being studied and  one                                                                 
     that has a  high potential. The Bahamas, Florida,  and the                                                                 
     Gulf Coast  all have projects that have been put  forward.                                                                 
     We see some  of these projects going ahead. Even  the Alta                                                                 
     Mira one that  has been announced in Mexico has  an impact                                                                 
     on the Lower 48 because  it reduces the amount of gas that                                                                 
     needs  to be imported  into Mexico from  the Lower 48.  We                                                                 
     don't  see  Mexico  as  exporting  gas  to  the  Lower  48                                                                 
     certainly  not within  a 2010 timeframe  and probably  not                                                                 
     until 2015.  Any facility that is built in Mexico  reduces                                                                 
     the requirement  for U.S. gas to flow into Mexico  thereby                                                                 
     having the same impact as new supply.                                                                                      
     To  touch on  the  Canadian side  of  things, one  of  the                                                                 
     things  I think  everyone  is finally  getting  around  to                                                                 
     realizing is that Canada  is not a market. As I showed you                                                                 
     on the  pricing page, the AECO  price is lower than  Henry                                                                 
     Hub price.  There's reason number one - you don't  want to                                                                 
     stop that  and here's reason number two - Canadian  demand                                                                 
     is more  than adequately supplied  by Canadian supply.  In                                                                 
     fact, more  than half of the Canadian supply is  on export                                                                 
     since the  early 1990's. The growth in Canada  is going to                                                                 
     continue  that. The majority  of the growth in production                                                                  
     in Canada  is going to export  to the U.S. Lower 48.  In a                                                                 
     sense, that is the competitor for Arctic gas.                                                                              
     What  I wanted  to do  is get away  from  sounding like  a                                                                 
     pessimist.  Here is the opportunity  for Arctic gas.  What                                                                 
     this shows is absent Arctic  gas and absent new LNG, there                                                                 
     is a requirement  that starts  growing in 2007 increasing                                                                  
     through 2010 for new supply.  One of the wild cards is the                                                                 
     demand  decrease that  we have seen. How  much of it  will                                                                 
     come back; are we going  to see a lower demand growth than                                                                 
     we  had  anticipated?   As  I  said  earlier,  the   power                                                                 
     generation demand is still  there and will still be there.                                                                 
     So, a good portion of it  will not go away. What this also                                                                 
     shows though, is new LNG  projects and Arctic gas both can                                                                 
     compete for  this shortfall between the supply  and demand                                                                 
     going forward.                                                                                                             
     One of  the things I find somewhat  curious is it doesn't                                                                  
     matter  which road  you take,  roughly two-thirds  of  the                                                                 
     pipe goes  through Canada. Very little attention  has been                                                                 
     paid to  that aspect. I think  that is something that  has                                                                 
     not demonstrated  its potential as an obstruction  in this                                                                 
     process,   but  may  very  well   occur.  Again,  on   the                                                                 
     optimistic  side, we  do see potential  for Arctic gas  in                                                                 
     the  three scenarios  I described before.  That potential                                                                  
     could start as early as  2007, although at this juncture I                                                                 
     think that 2008 is probably  the earliest. Under the three                                                                 
     scenarios  that we see there is an opportunity  for Arctic                                                                 
     gas starting  that early. Under  the supplier realignment                                                                  
     scenario  I described,  where we need  to see supply  from                                                                 
     frontier  regions as opposed  to conventional U.S. supply                                                                  
     sources, it  could be as early as 2008. In that  instance,                                                                 
     we would see  gas of probably about 2 - 2.5 BCF/D  in 2008                                                                 
     growing  to 3.5 BCF/D  by 2010 and probably  peaking at  4                                                                 
     BCF/D by 2015.                                                                                                             
     In the  recession scenario,  because of  the delay in  the                                                                 
     demand growth  we would see as a result of that,  we would                                                                 
     see  Arctic gas  being deferred  until probably  2009.  In                                                                 
     that  instance, it would  more likely  be Mackenzie  Delta                                                                 
     gas that would  precede Alaskan gas simply because  of the                                                                 
     lower  need  initially  and  the  greater  disposition  of                                                                 
     people to  spend less money on. Even in the case  where we                                                                 
     have  strong growth  in North America  meeting demand,  we                                                                 
     would  still be  in need of  more frontier  gas in Arctic                                                                  
     opportunities  starting  in 2011. None  of these exceed  4                                                                 
     BCF/D  by 2015.  What that  suggests  is that  there is  a                                                                 
     competition  going on even among Arctic gas. Depending  on                                                                 
     the  size of  either the Mackenzie  Delta  or Alaska  gas,                                                                 
     there  is  a  limited  opportunity.  Therefore,   I  would                                                                 
     suggest  that if  you saw an  Alaskan project  of 3  BCF/D                                                                 
     that  preceded  Mackenzie  Delta gas,  it  would probably                                                                  
     defer  that  development beyond  2015.  That would  be  of                                                                 
     significant concern to the  Canadian government. Again, in                                                                 
     our  work, we've looked  at the need  to meet the demand.                                                                  
     Four  BCF/D is probably  the highest  we could see Arctic                                                                  
     gas without having a significant  price impact in the 2015                                                                 
     timeframe.  What's  also interesting  in this  graphic  is                                                                 
     that  there is  a growing  commonality  between Mackenzie                                                                  
     Delta producers and Alaskan gas.                                                                                           
     Having suggested that Arctic  gas not stop in Alberta, how                                                                 
     does  it get  to market  and what  are the  markets? As  I                                                                 
     showed earlier,  a lot of the power generation  demand and                                                                 
     requirement  is in  the West Coast,  especially Northwest                                                                  
     California  and the  Midwest.  Those are  the two logical                                                                  
     markets  for  Arctic  gas just  as they  are  the logical                                                                  
     markets  for Canadian  gas. We  do not  expect that  there                                                                 
     will  be excess capacity  from existing  pipelines out  of                                                                 
     Canada  in any timeframe that  Alaskan gas can be brought                                                                  
     on  stream. It doesn't  mean that  there aren't expansion                                                                  
     potentials,  but the  infrastructure is  in place. What  I                                                                 
     mean by  that is that - this  isn't based on the Canadian                                                                  
     exchange  rate - what  this shows is  that for 4 BCF/D  of                                                                 
     Arctic  gas,  you need  to build  at  least 5  BCF/D  pipe                                                                 
     capacity  out of  western Canada.  The simple  reason  for                                                                 
     that  is we anticipate  the existing  pipe infrastructure                                                                  
     being full and at least  1 BCF/D of expansion required for                                                                 
     Canadian  supply within a 2010  timeframe. So, within  the                                                                 
     same  timeframe, you  would have  to see 5  BCF/D of  pipe                                                                 
     filled  out of  western  Canada. You  can do  that in  the                                                                 
     context  of  the existing  infrastructure  either  by  the                                                                 
     cheap expansion,  which very well may be gone  by the time                                                                 
     Alaskan  gas  comes on  stream,  or by  some of  the  more                                                                 
     expansive  expansions, all of  which will be cheaper  than                                                                 
     building a pipe.                                                                                                           
     In our opinion,  it is more likely you will see  expansion                                                                 
     of existing  structure for a number of different  reasons:                                                                 
     lower  costs and it goes to multiple  markets. Four  BCF/D                                                                 
     of Arctic gas to one market  is going to have a tremendous                                                                 
     impact. Spread  over different markets it's going  to have                                                                 
     a lesser  impact. One  thing I always  like to do is  tell                                                                 
     people,  when you're building  pipe, you're building  pipe                                                                 
     to capture  an opportunity. The bad news is building  that                                                                 
     pipe  destroys the opportunity  you thought  you had  with                                                                 
     it. What I mean by that  is regardless of which market you                                                                 
     build a pipe  to, it is going to have a depressing  effect                                                                 
     on  that  market's prices.  We  don't  see that  as  being                                                                 
     significant or insurmountable.                                                                                             
     Having  said that, there  is a window  of opportunity  and                                                                 
     competitive forces out there.  There are risks in northern                                                                 
     pipeline  development. We believe  you need a sustainable                                                                  
     price  around $3. The project  once built could survive  a                                                                 
     price  probably  as low  as $2.50,  but you're  into  cost                                                                 
     economics  then, but we believe you need a $3  sustainable                                                                 
     price to justify Arctic gas.                                                                                               
     Interestingly  enough, with technology  improvements,  LNG                                                                 
     is  economical  at $3.  LNG is  also a  competitive  force                                                                 
     because you  can build it in a short timeframe  and it has                                                                 
     a smaller environmental  footprint. But in favor of Arctic                                                                 
     gas, you have  to build the whole bunch of them  where you                                                                 
     only  have to  build one  pipeline  to fill  the need.  So                                                                 
     there  are  pros  and  cons to  both.  You  need  to  have                                                                 
     marginal  growth;  we need to  see that  power generation                                                                  
     requirement;  we need  to see  some of  the manufacturing                                                                  
     come  on line, such  that the demand  is there to justify                                                                  
     the  need for the  supply. We've talked  about the supply                                                                  
     potential in both the Lower  48 and Canada. There still is                                                                 
     expected  to be a shortfall between  lapsed supply growth                                                                  
     and  demand.  So, the  supply  growth is  a risk,  but  it                                                                 
     appears to be there.                                                                                                       
     The political side is something  that I think has not been                                                                 
     given   enough   attention.   Mackenzie   development   is                                                                 
     important to Canada. It  appears that what is happening is                                                                 
     that  lines are  being drawn  in the  sand  as opposed  to                                                                 
     developing  cooperation,   such that  a  project  of  this                                                                 
     magnitude  can  be  built. Two-thirds  of  the  pipe  runs                                                                 
     through  Canada.  The infighting,  the delays  that  could                                                                 
     result  from any  potential obstacle  could  be enough  to                                                                 
     close  the  window. While  there  is likely  to  be a  new                                                                 
     greenfield  pipeline to Alberta,  it is more likely  to be                                                                 
     existing infrastructure  expansion and looping beyond that                                                                 
     In   the   categories   of   ongoing,   once   you   start                                                                 
     construction,   delays  can  raise  your  cost.  Resource                                                                  
     development  is  something  that needs  higher  prices  to                                                                 
     sustain  itself.  I talked  about  coal bed  methane,  the                                                                 
     deeper drilling in western Canada, as an example.                                                                          
     One  of the  things that  I think  has to  happen is  that                                                                 
     there needs to be risk sharing.  This is a project of such                                                                 
     magnitude  that  it  is  unlikely   any  one player   will                                                                 
     undertake  the  risk.   It's  probably  going  to  take  a                                                                 
     cooperative   effort  between   markets,  producers,   and                                                                 
     pipelines to see this done.                                                                                                
     Liquids  is an  area that  is just  starting  to get  some                                                                 
     attention.  One  of the  ways of reducing  the  cost of  a                                                                 
     pipeline is to keep delivering  wet gas. What that does is                                                                 
     it  reduces your  heating  value cost  of transportation.                                                                  
     Taking the  liquids out increases that cost so  there is a                                                                 
     potential  opportunity  there. Once  you get  to Alberta,                                                                  
     though,  a  large portion  of  those  liquids need  to  be                                                                 
     extracted.  So,  that's  probably   the  last  point  that                                                                 
     liquids need to be extracted.  The reason for that is once                                                                 
     you've   [indisc.]   the  existing   infrastructure,   the                                                                 
     majority  is not capable of handling  high liquid content                                                                  
     gas.  One of the biggest  risks going  forward and one  of                                                                 
     the  reasons we  now think 2007  is unlikely  and 2008  is                                                                 
     probably  more likely, is you  need to see some contracts                                                                  
     before anything  goes ahead. You need to see a  commitment                                                                 
     made before you can use this analogy.                                                                                      
     I wanted to  just touch on natural gas liquids  because it                                                                 
     is a significant factor  here. Natural gas liquids are the                                                                 
     next heavier hydrocarbon  from methane, which is the prime                                                                 
     component  of natural  gas. You  get ethane,  propane  and                                                                 
     butane.  Those  three   components  need  to  be  at  high                                                                 
     pressure  to stay  in a gaseous  state, which  is why  you                                                                 
     need  a  high pressure  pipeline.  Once  the  pressure  is                                                                 
     reduced, propane  and butane especially, turns  to liquid.                                                                 
     The  uses   of  these  components   are  largely  in   the                                                                 
     petrochemical   industry.  Propane   you  may  know   from                                                                 
     barbeque  use, butane is used  in cigarette lighters,  but                                                                 
     the  majority of  the uses  are petrochemical.  Butane  is                                                                 
     also  used  to  enhance  the octane  of  gas.  Ethane  and                                                                 
     propane are  the prime components of ethylene,  propylene,                                                                 
     polypropylene and polyethylene  that plastics are made of.                                                                 
     To have  a viable industry in  Alaska would be difficult.                                                                  
     It  would also  add to  the cost  hurdle of  getting  this                                                                 
     project  built in  a narrow  window. Not  infeasible,  but                                                                 
     with a project in the size  of 3 - 4 BCF/D, you would have                                                                 
     enough liquids for one world  class ethylene manufacturing                                                                 
     facility.  You would have an  industry that would be  less                                                                 
     than  one third  the size  of existing  infrastructure  in                                                                 
     Alberta. You  would not have the same advantages.  The gas                                                                 
     supply  isn't on a tidewater.  It would  have to be  piped                                                                 
     there or the liquids would  have to be piped there. You do                                                                 
     not  have  necessarily  a  price  advantage.  One  of  the                                                                 
     reasons Alberta  developed an industry was twofold:  lower                                                                 
     priced  gas and  that  was largely  because  of the  price                                                                 
     differential  between Canada and the U.S. dollar,  both of                                                                 
     those  significant in  the manufacturing  and the product                                                                  
     cost for ethylene.                                                                                                         
     The part  I said I wanted to  end on was there is still  a                                                                 
     window of opportunity. We  see prices going forward, being                                                                 
     at  or above  that threshold  with  the exception  of  the                                                                 
     supply  realignment and  aftershock.  Aftershock, you  can                                                                 
     see  the reason  why we  don't see  Arctic  gas coming  in                                                                 
     until after  2010 or later. Prices just don't  support it.                                                                 
     Supply  realignment, you  see the price  drop in 2007  and                                                                 
     2008 simply  because of that  factor I mentioned earlier.                                                                  
     You  bring gas  into the market  in less  quantities;  you                                                                 
     will  have  a  dampening  impact  on  prices.  It  is  not                                                                 
     enduring  as long  as you continue  to have  some kind  of                                                                 
     growth, however. So, there is an opportunity.                                                                              
1:26 p.m.                                                                                                                       
CHAIRMAN TORGERSON  asked MR. SMALL  to comment on LNG to  the Asian                                                            
MR. SMALL  responded that  was not his area  of expertise,  but they                                                            
see  adequate  supply  at  a  lower  cost  than  Alaskan  LNG  being                                                            
available until 2015.                                                                                                           
SENATOR KELLY asked him  to further expand on the 2007 - 2010 window                                                            
for Arctic gas to be absorbed into the market.                                                                                  
MR. SMALL replied  that 2007 is the earliest from  two perspectives,                                                            
one being need  and the other being the ability to  get it in place.                                                            
The 2010 timeframe  is the outside  end of the window, depending  on                                                            
which scenario you're looking  at. He noted, "The offsetting factor,                                                            
though,  is LNG and  how many of  the proposed  projects we've  seen                                                            
over the last  six months are going to come to fruition.  That could                                                            
push it out further."                                                                                                           
SENATOR KELLY asked him  to expand on the Canadian position on their                                                            
Mackenzie Delta gas.                                                                                                            
MR. SMALL said:                                                                                                                 
     I  didn't mean  to  imply that  there is  a drive  by  the                                                                 
     Canadian  government to open  Mackenzie in any timeframe.                                                                  
     What I  meant to suggest is that  the Canadian government                                                                  
     should be concerned if there  was realistic probability of                                                                 
     Alaskan gas precluding development of the Mackenzie.                                                                       
SENATOR KELLY asked how  long he thought our gas line would preclude                                                            
development of that field.                                                                                                      
MR. SMALL replied  that 4 BCF/D of  Alaskan gas would probably  push                                                            
to beyond 2015.  He explained that  TAPS approval was predicated  on                                                            
the Canadian government  putting in the Dempster lateral, "So, there                                                            
has been a precedent set  as far as the Canadians are concerned over                                                            
the  linkage  between  the  two  projects  and  the  development  of                                                            
SENATOR KELLY  asked what the development of the Mackenzie  would do                                                            
to Alaska gas.                                                                                                                  
MR. SMALL  replied that the  current plans  for Mackenzie Delta  gas                                                            
range from  just under  1 BCF/D  to 1.5 BCF/D,  so, Mackenzie  Delta                                                            
development  would not preclude  Alaskan gas  development.   He said                                                            
they  could do  both, but  there would  be  a bigger  impact on  the                                                            
pricing here.  He pointed out, "If  Mackenzie goes first,  what that                                                            
really means  is a lower volume of  Alaskan gas or that Alaskan  gas                                                            
phased in over time would be more probable."                                                                                    
SENATOR KELLY  asked if there would  be a bigger impact on  price or                                                            
the window when those competitive forces are at work.                                                                           
MR. SMALL replied, "A bit  of both. If Mackenzie goes first, I think                                                            
it has more  of an impact on the volume  than the window.  They have                                                            
the same ultimate volume, but the window is longer."                                                                            
CHAIRMAN TORGERSON said  that Arctic gas needs a higher BCF in order                                                            
to be economical.  "In effect,  it could have  a slowing effect  for                                                            
many years - if you need  4 BCF/D out of Alaska and you're supplying                                                            
1.5 BCF/D out of Mackenzie."                                                                                                    
REPRESENTATIVE  PORTER asked  if the risk  factor in Arctic  natural                                                            
gas and LNG is about the same.                                                                                                  
MR. SMALL answered, "Yes."                                                                                                      
REPRESENTATIVE  PORTER asked  if that is  assuming no Asian  market,                                                            
but a Lower 48 market for either route.                                                                                         
MR. SMALL responded:                                                                                                            
     LNG  for existing  facilities  is economic  in [indisc.].                                                                  
     Arctic  gas  is probably  economic  and both  routing  and                                                                 
     market  destination have an impact  on it. It is economic                                                                  
     at  about  $3.  So,  they  are  very  comfortable  in  the                                                                 
     threshold  needs with  LNG probably having  a slight  nod.                                                                 
     Shipping is one of the biggest cost factors for LNG.                                                                       
He  said that  in  shipping  LNG to  the  East  Coast of  the  U.S.,                                                            
distance is such  that you could probably land it  for less than $3.                                                            
He  tried to  frame his  answer  in the  context of  North  American                                                            
demand. He  didn't know what the price  threshold was for  the Asian                                                            
SENATOR  HALFORD asked  about the chart  on page  33 that shows  the                                                            
breakdown  of ownership on  the Mackenzie Delta.  He asked  what the                                                            
alliances were between the companies.                                                                                           
MR. SMALL  answered  that those were  the net  acreage positions  of                                                            
those different companies.  There is some sharing of properties. For                                                            
instance,  BP  has  partial   ownership  in  Burlington/Chevron/BP.                                                             
Alberta Energy  is trading its land position in the  Mackenzie Delta                                                            
with  Anadarko,  which  has  land positions  in  Alaska.  He  noted,                                                            
"You're seeing a lot of consolidation."                                                                                         
SENATOR HALFORD asked if Exxon/Mobil was absent.                                                                                
MR. SMALL  replied that they  are absent  from the Mackenzie  Delta.                                                            
Imperial Oil is owned by  Exxon/Mobil - Imperial Oil is the Canadian                                                            
division of Exxon.                                                                                                              
SENATOR HALFORD asked if any others are Exxon/Mobil affiliated.                                                                 
MR. SMALL answered, "No."                                                                                                       
REPRESENTATIVE GREEN asked  if Canadian gas came on at 1.5 BCF/D and                                                            
Alaskan gas was phased in, whether that would be practical.                                                                     
MR. SMALL answered, "Yes."                                                                                                      
REPRESENTATIVE  GREEN asked  how "some" gas  could be phased  in, if                                                            
you're talking about economies of scale for a big line.                                                                         
MR. SMALL said  there are a couple of different ways.  He explained:                                                            
     Routing  is one  way. Construction  could be  done in  the                                                                 
     context of  fewer or more compressor stations.  It's going                                                                 
     to be difficult to phase  it in between a low volume and a                                                                 
     high volume simply because  the capital cost doesn't allow                                                                 
     you to do  that, but the difference between 3  BCF/D and 4                                                                 
     BCF/D   might  be  feasible.   I  don't  know.  I  wasn't                                                                  
     suggesting  starting ours  really low  and building up  to                                                                 
     the 4  BCF/D. I'm just suggesting  that if 4 BCF/D is  the                                                                 
     ultimate outcome, it's highly  unlikely that the Mackenzie                                                                 
     Delta  would start  out at  1.5 BCF/D.  It would probably                                                                  
     start  out at 1 BCF/D  building up to  1.5 BCF/D. I  would                                                                 
     think  the  same thing  with  Alaskan  gas. Even  with  an                                                                 
     ultimate  of 4  BCF/D, it  probably wouldn't  start  there                                                                 
     just  because  putting  into  service a  project  of  this                                                                 
     magnitude  would not be easy. Similar projects  have taken                                                                 
     a fair bit of time to phase  in. This would be doubling or                                                                 
     tripling the problem of even an alliance project.                                                                          
CHAIRMAN TORGERSON  said a large amount  of exploration activity  is                                                            
going on in  the Mackenzie and Alaska  is basically ready  to go. He                                                            
asked how long he thought  it would take to produce 1 BCF/D from the                                                            
Mackenzie Delta.                                                                                                                
MR. SMALL answered  that it is conceivable  for the Mackenzie  Delta                                                            
to be on stream in a similar timeframe.                                                                                         
CHAIRMAN TORGERSON  said they have  read a lot about the  Premier of                                                            
Canada  wanting  his cut  of  our liquids.  He  asked  how much  the                                                            
Alberta  petrochemical  industry is  in trouble  as  far as  getting                                                            
MR.  SMALL said  he  didn't think  it  was a  problem  and that  the                                                            
Premier's statement was twofold. He said:                                                                                       
     One, the province  will not allow itself to be  put into a                                                                 
     position  where it  did have  a shortfall  of liquids  and                                                                 
     two,  this is one  of the lines  in the  sand I've talked                                                                  
     about that  I think was one of - if you're going  to build                                                                 
     a pipeline, you have to talk to us.                                                                                        
He added:                                                                                                                       
     At this  point in time,  there are more  liquids than  are                                                                 
     being utilized in Alberta,  but that doesn't mean it's not                                                                 
     for industry.  As an example, there is a liquids  pipeline                                                                 
     that goes  to eastern Canada  through the Midwest where  a                                                                 
     lot of the liquids are dropped  off and sold. So, a lot of                                                                 
     the  liquids  that  aren't  used  for  the  petrochemical                                                                  
     industry are  shipped to both the U.S. and [indisc.].  So,                                                                 
     all  of the  liquids are  utilized.  Not all  of them  are                                                                 
     necessarily utilized in the petrochemical industry.                                                                        
SENATOR KELLY  said that some of this  would be predicated  on long-                                                            
term contracts.   He asked how much of the pricing  is going to spot                                                            
now  and  whether  that will  affect  the  long-range  contracts  he                                                            
perceives will be necessary before the project begins.                                                                          
MR. SMALL answered:                                                                                                             
     A  high percentage  of gas  is being  bought  on the  spot                                                                 
     market; prior  to this past winter, probably close  to 100                                                                 
     percent.  This past winter  has had  a profound impact  on                                                                 
     that psychology.  Up until last  winter, people were  even                                                                 
     acquiring  pipe space  on a  spot basis.  Hence the  price                                                                 
     runup.  We've seen power  generators,  such as Alpine  buy                                                                 
     producing  companies  so that  they would  have a secured                                                                  
     source of supply. We've  seen people bid for pipe capacity                                                                 
     signing [indisc.]  contracts. So, there's been  a dramatic                                                                 
     reversal  within  a  short  space  of  time  from  a  spot                                                                 
     mentality to a longer term.                                                                                                
     Because  of the  impact on  residential  consumers in  the                                                                 
     Lower  48 and Canada,  a lot of the  distributors are  now                                                                 
     getting  approval  from the  local government  regulatory                                                                  
     bodies to buy on spot [indisc.].  That's a whole different                                                                 
     attitude  than was  prevalent a  year ago.  I think  we're                                                                 
     seeing a shift because of  the high prices. Is it a strong                                                                 
     shift? It probably will  be in the context of a project of                                                                 
     this  magnitude.   The  buying  of  reserves  by  a  power                                                                 
     generator,  I think, it's the  implication that they  seem                                                                 
     to  need the long-term  supply.  So, I think  it's not  as                                                                 
     much of an obstacle as it used to be.                                                                                      
1:42 p.m.                                                                                                                       
Update of SB 158 and Economic Models                                                                                          
CHAIRMAN  TORGERSON thanked  Mr. Small  for his  testimony and  said                                                            
that last  year the legislature  passed SB  158, which directed  the                                                            
Department  of Revenue  to hire  an expert  to study  the  financing                                                            
possibilities  of a pipeline. He said  Commissioner Condon  was here                                                            
to  give an  update  on that  project.  Then,  Mr. Roger  Marks,  an                                                            
economist  with  the Department  of  Revenue  would show  models  of                                                            
different projects that have been discussed.                                                                                    
COMMISSIONER  WILSON  CONDON, Department  of  Revenue,  said SB  158                                                            
requires the  Department of Revenue  to prepare and submit  a report                                                            
by January 31,  2001 to the Legislature and the Governor  addressing                                                            
five issues:                                                                                                                    
     1. Should the state take an equity position in the North Slope                                                             
     gas line project?                                                                                                          
     2. Should the state participate in financing the project?                                                                  
     3. If yes, under what terms and conditions should it                                                                       
     participate? If the state does participate, will that                                                                      
     participation affect the state's ability to provide services                                                               
     or negatively affect the state's financial integrity or credit                                                             
     4. Would state participation assist or damage efforts to                                                                   
     complete and operate the enterprise?                                                                                       
     5. Could or should the state make it possible for individual                                                               
     Alaska residents to become shareholders in the project?                                                                    
COMMISSIONER  CONDON  said the  legislation waived  the competitive                                                             
bidding solicitation of  his department that would normally apply to                                                            
purchasing contractual  services. They canvassed a  number of people                                                            
and have offered  contracts to two  firms. Mr. David Gray  with CH2M                                                            
Hill  is one.   CH2M  Hill  does a  variety  of different  kinds  of                                                            
consulting, including energy  consulting, and it advises on a number                                                            
of different  kinds of issues including  rate making and  financing.                                                            
Mr.  Gray has  participated  in projects  with AIDEA,  AEA,  private                                                            
firms  and  public  entities  in  Alaska.  The  other  firm,  Petrie                                                            
Parkman, is in investment  banking, with principal offices in Denver                                                            
and Houston.  The principal  partners in that  firm were with  First                                                            
Boston  when they  became  Credit Suisse  First Boston,  but  formed                                                            
their  own firm shortly  after.  Petrie Parkman  specializes in  the                                                            
energy industry and was  the investment banker for the United States                                                            
government  when it sold  its interest in  the petroleum reserve  in                                                            
southern California. They  were recently investment bankers for half                                                            
of Saudi Arabia,  which privately  financed and developed  three gas                                                            
infrastructure  projects.  Petri  Parkman  is  experienced  in  both                                                            
upstream and midstream hydrocarbon projects and transactions.                                                                   
In preparing  the reports,  the department  looked at the  proposals                                                            
from 20 years  ago when ANGTS was front and center.  Many things had                                                            
changed and  many things  remained the same.  The studies that  were                                                            
particularly useful  for today's issues were done  by Dillon Reading                                                            
Company  in February  1978  and presented  to the  legislature.  The                                                            
legislature  commissioned a series  of studies in '78 and  '79 to be                                                            
performed  by Heiser at  the University of  Alaska. Affiliated  with                                                            
him at  the time  were Dr.  Arlen Tussing  and  Connie Barlow.  That                                                            
study was presented  to the legislature  in three separate  volumes,                                                            
one in October  '78 and two in '79. Finally, three  and a half years                                                            
later,  the  state  commissioned  another  study  to look  at  state                                                            
financial   participation,  specifically   by  Kidder  Peabody   and                                                            
Company.  He said he  had copies of  the studies  if they wanted  to                                                            
look at them.                                                                                                                   
COMMISSIONER CONDON said  the question of state participation is one                                                            
of weighing  competing considerations.  The  following reasons  have                                                            
been advanced for state participation (pros):                                                                                   
     1. [Indisc.]                                                                                                               
     2. If the state participates, it may provide the additional                                                                
     momentum required to get the project done.                                                                                 
     3. The major producers have too many competing opportunities                                                               
     and the only way we'll get our project done is if we do it                                                                 
     4. Seat at the table arguments: a) If we have a seat at the                                                                
     table, we will learn information that is important to us and                                                               
     we'll learn it soon enough to protect our interests than if we                                                             
     are not at the table; and b) by having a seat at the table,                                                                
     we would have the leverage to protect special state interests                                                              
     that are important for us to protect. The incomplete list of                                                               
     those are: routing decisions, local hire and buying, gas for                                                               
     communities along the route, potential gas availability for                                                                
     communities not on the route but which are closer than others                                                              
     (Southcentral Alaska), gas for industrial development along                                                                
     the route, the size and pressure configuration of the facility                                                             
     such that it would enhance the possibility of having chemical                                                              
     development in Alaska, and gas availability for petrochemical                                                              
     industry in Alaska.                                                                                                        
On the  other  side of  the scale  (the cons),  COMMISSIONER  CONDON                                                            
     1. State ownership or investment would compromise the main                                                                 
     responsibility for governing, which includes environmental                                                                 
     protection, health and safety protection, economic regulation                                                              
     and taxation.                                                                                                              
     2. State investment would concentrate state assets in the oil                                                              
     and gas industry. When given our dependence upon the industry                                                              
     anyway, we ought to take any money we have and invest it                                                                   
     somewhere else to diversify the investment portfolio of                                                                    
     3. Many people feel that governments don't do a particularly                                                               
     good job of running commercial enterprises. This is generally                                                              
     thought to be true around the world today and in Alaska, we've                                                             
     had some particularly bad experiences with government trying                                                               
     to act as a businessperson.                                                                                                
     4. State ownership or participation could easily involve the                                                               
     project in governmental red tape and institutional tugging and                                                             
     pulling, like confirming members of the Board and the                                                                      
     Executive Director, the question of how much of the financial                                                              
     activity would be put under the umbrella of the Executive                                                                  
     Budget Act, and the way the corporation would involve the                                                                  
     enterprise in governmental oversight.                                                                                      
     5. Finally, there are those who say the return to a pipeline                                                               
     would be regulated and, therefore, not really such a great                                                                 
     investment and the state would likely be able to make more by                                                              
     investing the same amount of money in THE Permanent Fund.                                                                  
CHAIRMAN  TORGERSON   asked  when   the  legislature  would   get  a                                                            
preliminary  report on the  interaction of  this committee  with his                                                            
group of  clients and  how many  of these questions  he anticipates                                                             
will be answered by his consultants' research.                                                                                  
COMMISSIONER  CONDON replied that  he doesn't anticipate  any of the                                                            
questions  to be answered,  but they would  help the state  evaluate                                                            
information it gets, if  any, if it has a seat at the table. He said                                                            
that they would  come to the legislature  at its pleasure  to report                                                            
on progress.                                                                                                                    
CHAIRMAN  TORGERSON  said  the committee  will  be  meeting  monthly                                                            
through October,  at least. He asked if he had signed  the contracts                                                            
since he said he "offered" them.                                                                                                
COMMISSIONER CONDON's answer was indiscernible.                                                                                 
REPRESENTATIVE  OGAN asked if he thought it would  be in the state's                                                            
best interest to have a seat at the table.                                                                                      
COMMISSIONER  CONDON replied  that he would  like to wait to  answer                                                            
that question until they  have finished the study. He noted, "In the                                                            
oil  pipeline  the things  that  were  important  to know  were  not                                                            
discussed at the table  we had a seat at."  He said the [department]                                                            
was  on  the Alyeska   Owners Committee   during  discussions  about                                                            
whether or  not the [department] was  complying with the  electrical                                                            
code in the pump  stations and what kind of request  it was going to                                                            
take back to the oil companies  to fix it. The person from the state                                                            
would  be  talking  about  how  much  money  the  legislature  would                                                            
appropriate to fix the  electrical shortcomings of the pump station.                                                            
The question about  economics and return and that  sort of thing was                                                            
internal  in each of  the companies  who were  participating  in the                                                            
TAPS. He stated:                                                                                                                
     Given  the fact that  the gas pipeline  is organized  very                                                                 
     differently,  I don't  know whether my  judgment would  be                                                                 
     the same.  By the way, I would  make the observation  that                                                                 
     if  we really  wanted  a  seat at  the  table on  the  oil                                                                 
     pipeline  today, I'm sure we  could persuade Amerada  Hess                                                                 
     to  sell us their  share of  that pipeline…They  tried  to                                                                 
     talk us into buying it.                                                                                                    
REPRESENTATIVE  GREEN said  two pro factors  are that we would  know                                                            
what was being discussed  and have lead-time, in which case we could                                                            
buy a very small  percentage. Having some say in what  was happening                                                            
would probably  require a fairly significant percentage  to have any                                                            
clout. He  asked if Commissioner  Condon saw  a need to wait  before                                                            
making that kind of analysis - going small rather than large.                                                                   
COMMISSIONER CONDON answered:                                                                                                   
     If folks think that in participating,  if we conclude that                                                                 
     there is some validity to  the notion that we could affect                                                                 
     a decision and that decision  can be affected better if we                                                                 
     take  a larger interest,  I think that  we could tell  you                                                                 
     whether or  not we think that's true. Certainly,  in terms                                                                 
     of state decision  making about what to do, it  seems it's                                                                 
     unlikely  that all  of the  institutions that  have to  be                                                                 
     mobilized  to do  something are  going to be  ready to  do                                                                 
     anything  before our  main report gets  due very early  in                                                                 
     the session.  We'd be in a position  to give you our  best                                                                 
     judgment  on the trade-offs on  that issue in a couple  of                                                                 
CHAIRMAN  TORGERSON   said  he  assumed  this  could  lead  us  into                                                            
additional studies.                                                                                                             
SENATOR OLSON  asked if any other  states have participated  to this                                                            
degree in other  natural gas pipelines  and, if so, what  the result                                                            
has been.                                                                                                                       
COMMISSIONER CONDON said  he wasn't aware of any state participation                                                            
in  a  natural  gas   pipeline  but  there  has  been  governmental                                                             
participation  in  natural  gas distributing  companies.  There  are                                                            
other  examples   of  state  participation   in  various   kinds  of                                                            
infrastructural  projects throughout  North American like  airports,                                                            
highways and canals.                                                                                                            
SENATOR OLSON  said those entities were utility-oriented  as opposed                                                            
to financial  investments  with considerations  that  would lead  to                                                            
business decisions.                                                                                                             
COMMISSIONER  CONDON said,  "There  are certainly  people who  would                                                            
argue that  a gas pipeline is a special  kind of highway  that hauls                                                            
gas." He doesn't  agree, but he thought it would be  a valid way for                                                            
some people to view it.                                                                                                         
REPRESENTATIVE  OGAN asked if he is looking at state  ownership of a                                                            
percentage or the whole  project, in reference to the three or four-                                                            
spoked hub they were talking  about and whether the state should own                                                            
the line going into the hub or the whole thing.                                                                                 
COMMISSIONER  CONDON  replied  that  they  would  look  at  as  many                                                            
possibilities that they  think people might be reasonably interested                                                            
in. He didn't think people  would be serious about owning the entire                                                            
project from Prudhoe Bay to Alberta.                                                                                            
SENATOR  OLSON  said he  wasn't  interested  in looking  at  partial                                                            
ownership  in a segment to  Fairbanks or Delta  or wherever  the hub                                                            
would be. He asked if that would be within his scope.                                                                           
COMMISSIONER CONDON said it would.                                                                                              
REPRESENTATIVE  FATE asked what kind of participation  he would have                                                            
with  the  firms  that are  doing  the  studies  based  on  specific                                                            
objective questions,  like annualized rate of return  of x number of                                                            
years, accounting  methods,  etc. He asked  if the Commissioner  was                                                            
going to be involved in that at all.                                                                                            
COMMISSIONER  CONDON said  yes, he would  be spending a substantial                                                             
amount  of his time  between now  and late January  working  on this                                                            
REPRESENTATIVE PORTER asked  if Alaska was interested in substantial                                                            
or total ownership of the  Alaska portion of the route, whether that                                                            
would affect  the regulatory authority  in terms of FERC  versus RCA                                                            
and would  a commitment  for  investment  of the  substance have  an                                                            
effect (and  what effect  it would have) on  the Permanent  Fund. He                                                            
asked, for example, if  it would require a constitutional amendment.                                                            
CHAIRMAN  TORGERSON said  he hoped the  Commissioner would  generate                                                            
some financial  principles that could  be adopted to any  one of the                                                            
questions  they  hear today  whether  it's  a  spur line  or  excess                                                            
capacity,  particularly  in response  to question  five: Is it  even                                                            
worth getting  into a regulated industry? He also  thought he should                                                            
be able to  establish whether it would  make the same or  more money                                                            
than the Permanent  Fund. He thought  he should establish  that as a                                                            
set principle before the  state would have ownership in any line. He                                                            
thanked the Commissioner  for joining the committee  and invited Mr.                                                            
Roger Marks, Department  of Revenue economist, who  has been working                                                            
with different  gas projects that  have been suggested and  created,                                                            
to address the committee.                                                                                                       
MR. ROGER  MARKS, Economist,  Department of  Revenue, said  he would                                                            
present the  department's  economic model to  the committee  for the                                                            
gas project. He said:                                                                                                           
     Our  model is  something  that evolved  over  a period  of                                                                 
     years and  was originally put together in 1995  looking at                                                                 
     LNG.  It has since evolved  to looking  at gas to liquids                                                                  
     and  now it  is looking  at the  North  American pipeline                                                                  
     project.  It's  been  reviewed  over  time  by  a  lot  of                                                                 
     entities  including  the North  Slope producers,  ARCO,  I                                                                 
     don't think Phillips has  officially reviewed it yet. ARCO                                                                 
     reviewed it back when we  were putting together our report                                                                 
     to the governor in 1997.  Foothills has reviewed it; Yukon                                                                 
     Pacific  has reviewed it along  with their parent company                                                                  
     [indisc.]  along  with  their  financial  advisors,  First                                                                 
     Boston;  Dr.  Pedro  van  Meurs'  chart  group;  the  Port                                                                 
     Authority and their financial  advisors, Taylor DeJongh. I                                                                 
     will  say it's a work  in progress and  continues to be  a                                                                 
     work  in progress.  It's  changing  and evolving  all  the                                                                 
     time. It is  also a public model; anyone who wants  it can                                                                 
     get a copy.                                                                                                                
     Like all  models, there are inputs  to it. Basically,  the                                                                 
     inputs  for this model are cash  flows. The main ones  are                                                                 
     volumes,  prices and  costs.  The main costs  are capital                                                                  
     costs,  operating costs  and taxes. The  state tax system                                                                  
     and federal  tax system are modeled  into it. The outputs                                                                  
     are financial capability  in terms of rate of return, what                                                                 
     the  tariffs  of  cost  of  service  would  be,  what  the                                                                 
     wellhead  values  would be  and  what the  state revenues                                                                  
     would be. These are in terms of cash flows.                                                                                
     There are  a lot of tariff methodologies on the  shelf. We                                                                 
     used one, but basically  they are all similar in that they                                                                 
     provide  a rate of return, cost  of service and a rate  of                                                                 
     return on  the costs. Again, this is a tool. What  it does                                                                 
     is  explain how  numbers work  together,  how things  work                                                                 
     together  and  you can  answer  budget questions.  If  the                                                                 
     input is so, what is the  output. It also can evaluate the                                                                 
     economics of different routing options.                                                                                    
MR. MARKS  said the numbers  he used were  not necessarily  what the                                                            
economics of the  project are, but what the economics  would be with                                                            
specific  inputs.   The  department  doesn't  claim   any  expertise                                                            
relating the capital costs.                                                                                                     
TAPE 01-03, SIDE A                                                                                                            
CHAIRMAN  TORGERSON  asked  what kind  of  interaction  he had  with                                                            
producer groups that they have shared this with.                                                                                
MR. MARKS  replied that the  producers reviewed  the basic  model he                                                            
put together  for the governor  in 1996. In  terms of the input,  he                                                            
said the producers  were still studying what they  thought the costs                                                            
and routing would be.                                                                                                           
REPRESENTATIVE  GREEN asked  if he had run  sensitivities to  see if                                                            
price or cost was the major factor.                                                                                             
MR. MARKS  responded that  was exactly  what he  was going to  cover                                                            
REPRESENTATIVE  GREEN asked  if the model  was set  up to run  for a                                                            
profit making organization.  He asked if it could be tweaked so they                                                            
could look  at various ranges of input  from the state's  standpoint                                                            
where at least the taxes would be different.                                                                                    
2:20 p.m.                                                                                                                       
MR. MARKS answered  that it could  be easily modified to  show that.                                                            
He pointed  out some  of the  sensitivities using  a less  favorable                                                            
scenario - a bare bones  project. He used a route along the Alcan to                                                            
Alberta, a $3 Chicago gas  price and 4 BCF/D. He explained that they                                                            
used  4 BCF/D  for  two reasons.  He  thought  they would  need  the                                                            
additional volume  to get the unit cost down to be  competitive and,                                                            
in terms of the Mackenzie  Delta, there may not be enough productive                                                            
capacity to build two pipelines  at once. So, if there's a niche for                                                            
4 BCF/D, it would perhaps come from only one project initially.                                                                 
MR. MARKS said  he used a $1 charge  from Alberta to Chicago,  which                                                            
represents  the combination  of new and  expanded pipeline  capacity                                                            
there. To create a least  favorable scenario, he used a $3 gas price                                                            
in Chicago at  4 BCF/D. If you assume that a minimum  rate of return                                                            
required to make a project  economic is 10 percent, he asked himself                                                            
what is the highest capital  cost you could have. That turned out to                                                            
be $14 billion. Given the  range of numbers he had seen, $14 billion                                                            
was very  high, but  he wanted  to illustrate  the sensitivities  of                                                            
what happens  when capital costs go  down or prices go up.  So, this                                                            
model is a  useful template to start  out with. Of the $14  billion,                                                            
$2 billion was  for a conditioning plant on the Slope  and the other                                                            
$12 billion is for the pipeline, itself.                                                                                        
MR. MARKS said there were  two other issues, oil losses for one, but                                                            
he  didn't factor  that  in nor  any  of the  economics  of the  gas                                                            
liquids mainly  because, at  this stage of  the game, the  producers                                                            
are trying to figure out  exactly what those are. He noted, "We [the                                                            
state] frankly have no idea."                                                                                                   
MR. MARKS  said that the  oil losses and  the liquids directionally                                                             
offset  each  other,  although  probably   not  exactly.  The  first                                                            
sensitivity  he  used  was  capital   costs  and,  given  that  less                                                            
favorable scenario [4BCF/D  and $3 Chicago gas price], produces a 10                                                            
percent  rate  of return  [at  least]. He  explained  that  scenario                                                            
produces  a  very low  wellhead  value  of  four  cents. He  used  a                                                            
representative  year of 2015 to see  what total state revenue  would                                                            
be and in that year with this project, it was $398 trillion.                                                                    
He explained  that the  overhead was  broken down  into elements  of                                                            
state revenue.  A big chunk  of it was property  tax, which  is high                                                            
because  the  cost  is high.  This  underscores  the  point  that  a                                                            
property  tax is regressive.  So, it is not  the best thing  for the                                                            
project. Another  element is royalties  and he noted that  it was $0                                                            
with a wellhead  value of five cents.  This is because the  wellhead                                                            
value represents  the Chicago  price plus  the pipeline in  Alberta,                                                            
plus the pipeline  from the conditioning plant and  the conditioning                                                            
plant.  Upstream of  the conditioning  plant and  downstream of  the                                                            
point of production,  which is the point of royalty  in taxation, is                                                            
the central  gas facility  where there is  a 20 cent processing  fee                                                            
deduction  for  royalty. He  stated,  "Any  netback going  into  the                                                            
conditioning  plant  less than  20 cents  will actually  negate  the                                                            
SENATOR  HALFORD asked  if it reduced  the tax  to the same  company                                                            
with regards to oil production.                                                                                                 
MR. MARKS answered,  "There is a 6.4  cent minimum severance  tax at                                                            
the field. So, you'll see  the next column over, the severance taxes                                                            
are positive, which reflects that 6.4 cents."                                                                                   
He modeled the  state corporate income tax on a separate  accounting                                                            
basis,  simply  9.4 percent  of  the net  income.  The  state has  a                                                            
modified  apportionment  type of  it, which  reflects  a variety  of                                                            
economics worldwide, impossible  to model. So, it will likely not be                                                            
9.4 percent.                                                                                                                    
MR. MARKS  said the next  column is state  corporate income  tax and                                                            
the pipeline  tariffs.  Whoever owns  the tariff  will pay taxes  on                                                            
their income,  which goes to the state. He said the  final column is                                                            
additional  severance  tax  from the  economic  limit  factor  (ELF)                                                            
increase. He stated:                                                                                                            
     For  oil, depending on  field size,  300 barrels per  well                                                                 
     per  day are more or  less tax-free.  For gas, it's  3,000                                                                 
     MCF per well per day tax-free.  For oil and gas coming out                                                                 
     of the  same well, which  is what will  happen at Prudhoe                                                                  
     Bay, the tax-free barrels  of oil and MCF for gas get pro-                                                                 
     rated. So, as a result of  having a gas field, there'll be                                                                 
     less tax-free barrels. So the above taxes will go up.                                                                      
MR. MARKS  went back to  the capital cost  sensitivities and  showed                                                            
what happened when one  goes from $14 billion to $12 billion leaving                                                            
everything  else  constant.  The rate  of  return  goes up  to  11.6                                                            
percent; the wellhead value  goes up to 29 cents and the total state                                                            
revenue goes up to $413 million. He pointed out:                                                                                
     There  are two  reasons the  state revenue  doesn't go  up                                                                 
     that  much. One  is the property  tax.  When you decrease                                                                  
     your  capital costs,  on one  hand, you've  increased  the                                                                 
     wellhead  values, which means  higher taxes and royalties                                                                  
     and you've increased the property tax.                                                                                     
He said the  wellhead value for anything  between four cents  and 20                                                            
cents for  the $14 billion  essentially has  the same severance  tax                                                            
royalties.  He took the committee  to the $10 billion scenario.  The                                                            
rate of return  goes up to 13.6 percent, the wellhead  value goes to                                                            
55 cents, and  the total state revenue goes up to  $440 million.  He                                                            
     One interesting  thing you can see with the sensitivities                                                                  
     is that  for every billion dollars  that you change  cost,                                                                 
     the wellhead  value changes about 13 cents. This  suggests                                                                 
     to him  that for investors  looking  at this project,  the                                                                 
     gas price  is very important. A small change in  gas price                                                                 
     has the same effect as a  very large change in the capital                                                                 
2:32 p.m.                                                                                                                       
MR. MARKS  said on  the state  revenue side,  once  you get over  20                                                            
cents on  the wellhead, every  billion dollars  in capital  costs is                                                            
about $13 million  instate revenue.  He said the reason that  number                                                            
is so  low  is that  when the  capital costs  go  one way,  wellhead                                                            
values  go down  and  the property  goes  up  as well.  The  reverse                                                            
happens when the costs go the other way.                                                                                        
He directed  the committee  to look  at overhead  number 8,  capital                                                            
cost sensitivities  and reviewed "the  same dismal case,"  $3 gas, a                                                            
$14 billion  project,  10 percent  rate of  return,  4 cents at  the                                                            
wellhead,  and $398  in revenue.  At  a $4  gas price,  the rate  of                                                            
return goes  up to 14.6 percent,  the wellhead  value goes up  to 96                                                            
cents and the state revenues  go up to $684 million. For $5 gas, the                                                            
rate of return  is 18.3 percent, wellhead  value of $1.89  and state                                                            
revenue  of $1.081  million. He  noted that  the change  in the  gas                                                            
price of $1 leads to a 92 cent change in the wellhead value.                                                                    
The reason that is not  a dollar-for-dollar change is that there are                                                            
some losses along the way in volume of about 8 percent. He said:                                                                
     If you put  100 MCF into the conditioning plant,  you only                                                                 
     get 92 MCF out. You still  get only 92 MCF in Chicago, but                                                                 
     have to  allocate that over the  100 MCF that went in  and                                                                 
     that works out to less than a dollar.                                                                                      
The $1  billion change  represents the  same change  as 13 cents  in                                                            
price. A one  dollar change in market  price has the same  effect as                                                            
$7 billion  in capital costs. The  change of 50 cents in  the market                                                            
price has the  same effect as $3.5 billion in costs  and underscores                                                            
the fact  that investors  are very  concerned about  the gas  market                                                            
The final sensitivity  beyond capital  cost and gas price  is volume                                                            
sensitivity. He  used the same dismal scenario again  of 4 BCF/D, $3                                                            
gas, 10 percent rate of  return, 4 cents wellhead and state revenues                                                            
of $398  million. If  you increase  the volume  and keep  everything                                                            
else constant, and you  go from 4 BCF/D to 5 BCF/D, economy of scale                                                            
raises the rate  of return to 12.3 percent, 40 cents  wellhead value                                                            
and total state  revenues of $532  million; going from 5  BCF/D to 6                                                            
BCF/D is 14.5  percent rate of return,  64 cents wellhead  value and                                                            
state revenues of $695 million.                                                                                                 
REPRESENTATIVE  GREEN asked why, in  going from 4 BCF/D to  5 BCF/D,                                                            
he used 36 cents  and, when he went up one more billion,  he used 24                                                            
MR. MARKS answered  because the ratio of total capital  costs is $14                                                            
billion to the volume is  on a percentage and changes those numbers.                                                            
"In reality, your costs would go up with your rate of volume."                                                                  
REPRESENTATIVE  OGAN asked  if the  feasibility of  the project  was                                                            
based more on price to market than routes.                                                                                      
MR. MARKS  responded that  a small change in  gas price will  have a                                                            
much more profound effect on the project than capital costs.                                                                    
CHAIRMAN   TORGERSON  asked   if   he  had  put   together   similar                                                            
sensitivities for LNG and PTL.                                                                                                  
MR. MARKS said  they had done that, but there are  limitations using                                                            
the models.  He noted, "What  really matters  in terms of  measuring                                                            
economics is how you can compete with competing projects."                                                                      
REPRESENTATIVE  GREEN  asked  if these  numbers  were  adjusted  for                                                            
MR.  MARKS said  he kept  inflation  out so  that,  "These are  real                                                            
CHAIRMAN TORGERSON  thanked Mr. Marks for his presentation  and said                                                            
the  committee would  next  hear from  the Commissioner  of  Natural                                                            
Resources, Pat Pourchot.                                                                                                        
2:50 p.m.                                                                                                                       
Royalty In-Kind Issues and Pipeline Studies                                                                                   
CHAIRMAN  TORGERSON announced  that  the committee  would next  hear                                                            
from Commissioner  Pat Pourchot, who would respond  to six questions                                                            
posed to him in a letter from the committee.                                                                                    
COMMISSIONER  PAT POURCHOT, Department  of Natural Resources  (DNR),                                                            
introduced Bonnie  Robson, Deputy Director of DNR's  Division of Oil                                                            
and  Gas, and  Kevin  Banks, a  petroleum  market analyst  with  the                                                            
Division of  Oil and Gas.  He explained  they have been responsible                                                             
for developing the Request  for Proposal (RFP) for the study that is                                                            
the  subject  of  one of  the  questions  posed  by  the  committee.                                                            
Commissioner  Pourchot noted he distributed  a handout to  committee                                                            
members  that covers  DNR's primary  objectives.   He said he  would                                                            
discuss  some of  DNR's broad  objectives  and then  respond to  the                                                            
COMMISSIONER POURCHOT  said the administration's work  on this issue                                                            
cuts  across both  his department  and  the Department  of  Revenue.                                                            
They are both  looking at maximizing income to the  state to benefit                                                            
Alaska  citizens  when  looking at  the  various  aspects  of a  gas                                                            
pipeline  project.  Their  first objective  has been to look  at how                                                            
Alaska  can maximize  its royalty  impact  value and  how that  will                                                            
affect tariffs, selling  prices, field costs, conditioning costs and                                                            
how gas may or  may not affect oil revenue loss.   In addition, fuel                                                            
dynamic  interaction  might take  place under  different  scenarios.                                                            
DNR is vitally  interested in all  of those topics and is  trying to                                                            
learn as much as possible  about them.  Regarding the benefit to the                                                            
people of Alaska,  the second objective, DNR is looking  at in-state                                                            
jobs and at state uses  of natural gas.  The third main objective is                                                            
to maximize benefits  to Alaska businesses and businesses  operating                                                            
in Alaska  and how   access  may or  may not  occur under  different                                                            
scenarios.    He pointed  out  those  objectives  are  not  mutually                                                            
COMMISSIONER  POURCHOT  stated  that  the  answers  to some  of  the                                                            
questions  are not as simple  as "yes" or  "no" because ultimately,                                                             
DNR is  keenly  interested in  developing  a common  project.   Some                                                            
things might  be traded so  that maximizing  one aspect could  be at                                                            
the expense of another.   At some point the viability of the project                                                            
will  be affected.   He briefly  covered  the "tools"  that will  be                                                            
necessary to accomplish  DNR's objectives, such as  legislation, and                                                            
noted  that both  federal and  state agencies  will  be involved  in                                                            
studies  and  permitting.   In  terms  of the  permitting,  a  whole                                                            
conglomerate  of entities will be  involved; DNR is trying  to bring                                                            
some of those entities together for some of those tasks.                                                                        
COMMISSIONER  POURCHOT said the first  question he was asked  by the                                                            
committee  concerned  the state's  rights  to take  gas in-kind  for                                                            
major gas sales,  commonly known as  overlifting, or alternatively,                                                             
the  state's right  to defer  taking  royalty gas,  commonly  called                                                            
underlifting.    There  is  no  expressed   ability  in  statute  or                                                            
regulation or in the terms  of any lease agreement that gives Alaska                                                            
the right to overlift  or underlift Alaska's royalty  gas in advance                                                            
of gas sales.   However, there are ways of accomplishing  that, most                                                            
notably,  if Alaska has implied  that if there  is a viable  market,                                                            
that producers under the  terms of the lease sales shall market that                                                            
gas.  If, for example,  there was a proposal to seek as-is gas right                                                            
off of the  North Slope at some market  rate and there was  a viable                                                            
purchaser  at a  credible market  rate,  there is  an obligation  to                                                            
market that gas.                                                                                                                
Alternatively,  if  there  was a  viable  proposal with  a  sensible                                                            
market  price,  the   state  should  work  cooperatively   with  the                                                            
producers  to overlift its  royalty gas on  the Slope, a  negotiated                                                            
The Alaska  Lands Act had a provision  many years ago that  gave the                                                            
DNR commissioner authority  to negotiate with companies to underlift                                                            
oil.  It was specifically  mentioned that there was a strategy prior                                                            
to bargaining  that allowed  DNR to  affect the  routing of  the oil                                                            
pipeline.  He believes  the likelihood of success of such a strategy                                                            
is debatable. The legislature  specifically put in that element, but                                                            
it  did  not  grant  a  lateral  authority  to  negotiate  with  the                                                            
CHAIRMAN TORGERSON  asked if the negotiations  with producers  fail,                                                            
the state  would  have no right  to assert  a claim  to overlift  or                                                            
COMMISSIONER  POURCHOT said  he believes that  is correct,  and that                                                            
DNR deals with the companies  on so many issues, such as development                                                            
plans, exploration  plans, lease terms,  participating areas,  etc.,                                                            
that overall  it is their  desire to cooperate  and to negotiate  in                                                            
good faith on  a variety of issues.  He said he believes  there is a                                                            
climate of cooperation.                                                                                                         
CHAIRMAN TORGERSON  asked Commissioner Pourchot if  he feels using a                                                            
legislative  route would constitute  a breach  of contract  with the                                                            
existing lease sales.                                                                                                           
COMMISSIONER  POURCHOT  replied that  in the  event of  a breach  of                                                            
contract,  the state  has  no lateral  expressed  right. That  could                                                            
potentially lead to legal action.                                                                                               
COMMISSIONER POURCHOT  said the second question the  committee posed                                                            
was  in relation  to the  state's  right to  control  access to  the                                                            
pipeline for potential  users that come later. He  acknowledged that                                                            
he  deferred  part  of the  answer  to  the  RCA and  to  the  FERC.                                                            
However, in  the area of state regulation  of pipelines,  there is a                                                            
big body of law  surrounding federal preemption in  this arena.  The                                                            
state has several  options.  It can go through the  FERC process. It                                                            
could  make  recommendations   for  how  an  open   season  will  be                                                            
conducted.    Alaska   statutes  and  permitting  procedures   could                                                            
conceivably be tried but,  in the end, the state can be preempted by                                                            
federal law or  federal regulatory action.  Conversely,  federal law                                                            
COMMISSIONER POURCHOT  said DNR is very concerned  about open season                                                            
and that there  be a fair nomination process both  initially as well                                                            
as ten years down the line  when a producer might discover large gas                                                            
reserves.  DNR is also  concerned about the possibility of a process                                                            
that barely  addresses a potential  looping expansion and  how costs                                                            
are allocated  and how  access to  facilities are  handled.   DNR is                                                            
concerned about  establishing a process that is as  open and fair as                                                            
possible.   More access  for potential  interests  means more  value                                                            
because  it will create  an incentive  for further  exploration  and                                                            
CHAIRMAN  TORGERSON asked  the commissioner  if he is continuing  to                                                            
seek legal  advice on those issues  and what process he is  using to                                                            
give the committee final answers prior to next session.                                                                         
COMMISSIONER POURCHOT said  DNR has received additional legal advice                                                            
but he has  not asked for a formal  legal opinion.  The question  is                                                            
whether the committee wants  the information in black and white.  He                                                            
could request  that  the advice he  has received  be formalized  and                                                            
made final  and available soon. Regarding  whether he is  continuing                                                            
to  seek  legal  advice,  he  would have  to  reframe  some  of  his                                                            
questions to the Department of Law and he has not done that.                                                                    
CHAIRMAN  TORGERSON  said the  open season  question is  one of  the                                                            
largest issues facing the state right now.  He asked:                                                                           
     If the producers build a  4 BCF line and won't let anybody                                                                 
     else  in there  for the  next 20  years, where  does  that                                                                 
     leave  any oil and gas sales  on the North Slope - or  gas                                                                 
     sales.   To me,  you can't  sell anything  up there.   Who                                                                 
     would buy  acreage or, if they did, it wouldn't  be at any                                                                 
     good price for the State of Alaska.                                                                                        
COMMISSIONER POURCHOT  said there are a couple of  options.  DNR has                                                            
asked that same  question of economists and believes  it always pays                                                            
to have more  people participate in  a project of this type  because                                                            
of  the per  volume  cost of  the  line and,  presumably,  once  the                                                            
upfront costs of the initial  line are incurred, the cost of running                                                            
a second  parallel line  for another  volume of  gas, if  necessary,                                                            
would be  cheaper. Pressurization  can move  significantly  more gas                                                            
and provide for a significant  increase in capacity.  The producers'                                                            
argument  is  that if  somebody  comes  with  more gas,  they  would                                                            
welcome that because  it would reduce the per volume  cost of gas in                                                            
the line.                                                                                                                       
CHAIRMAN TORGERSON  said he appreciated that statement  but he wants                                                            
some assurance  that  will happen.   He expressed  concern that  the                                                            
opposite could happen so,  if the producers let another producer in,                                                            
the market  price could  be affected  quite a bit.   He pointed  out                                                            
this situation  is different from  Calgary or other places  in which                                                            
10,000  wells  are being  drilled  each  year.   Alaska  has a  very                                                            
controlled resource  going into a very controlled  line that has the                                                            
potential of having other  players involved or left out for a number                                                            
of years.   He said he hopes that  DNR continues its legal  analysis                                                            
of that question and he  said he will recommend that the legislature                                                            
do some of that on its own.                                                                                                     
COMMISSIONER  POURCHOT  stated  the  third  question  posed  by  the                                                            
committee was  in regard to DNR's support for common  carrier versus                                                            
contract carriage of a  pipeline.  DNR would prefer a common carrier                                                            
status for all leases because  it would be easier to expand the line                                                            
for later  gas  reserve discoveries.   Again,  he said  that DNR  is                                                            
concerned  that there  be a  process for  expanding  the line.   The                                                            
Alaska  Natural Gas  Act provided  for  contract carriage  and  is a                                                            
matter of  federal law,  the argument being  that contract  carriage                                                            
provided  the kind of arrangement  necessary  to finance a  project.                                                          
Most gas pipelines  in the United States are contract  carriage but,                                                            
as  Chairman  Torgerson  pointed  out,  shipping  through  different                                                            
pipelines will not be an option on the North Slope.                                                                             
COMMISSIONER  POURCHOT,  in response  to the  fourth question,  said                                                          
DNR obviously  favors open seasons  for both initial nomination  and                                                        
for subsequent  nominations, as well  as for additional capacity  to                                                            
take on volumes of gas.                                                                                                         
COMMISSIONER  POURCHOT  said the  next  question [number  5]  raises                                                            
another element   - how to deal with  the export [indisc.]  capacity                                                            
volume  for coming  years.   That  question  is in  relation to  the                                                        
committee's  question  about  agreements  to  backstop non-pipeline                                                             
owner/producers  firm capacity obligation  with the state's  royalty                                                            
in-kind (RIK)  gas.  DNR  has been approached  by companies  who are                                                            
not producers,  but hope  to be producers  or owners  of gas  in the                                                            
future. They  are not in  a position now to  make a firm  commitment                                                          
for nomination  and do not know whether  or not they will  find gas,                                                            
but they do not want to  be locked out.  The committee asked whether                                                            
the state  would be  willing to take  their gas  in-kind at  a later                                                            
date and have  those companies make  a nomination for a quantity  of                                                            
gas but, if they did not  find gas or could not meet that commitment                                                            
to ship  that volume of gas,  they want the  state to take  that gas                                                            
in-kind and  sell it to the  people with the  reserved space  in the                                                            
pipeline.  DNR is open  to that notion.   DNR  wants to protect  its                                                            
ability to take  its gas in-value or take it in-kind  and be able to                                                            
use it for in-state  purposes.  The gas would still  be shipped out,                                                            
but  there may  be  some economic  value.   The  state  could get  a                                                            
premium for it; it could  get a tariff component for that off of the                                                            
state's netback.   It is a way of  meeting the goals of keeping  the                                                            
values high on the North Slope.                                                                                                 
COMMISSIONER POURCHOT  said it would be part of the  whole mix.  One                                                            
wouldn't presumably over commit if you only had 500 MCF per day.                                                                
TAPE 01-3, SIDE B                                                                                                             
CHAIRMAN TORGERSON  said he is not  sure that it would be  necessary                                                            
if the  open season  question on  additional access  to the  line is                                                            
solved.    He said  he posed the  question to  find out whether  the                                                            
commissioner  would be willing to  consider it.  He repeated  if the                                                            
open season is early, the state may not be prepared to respond.                                                                 
COMMISSIONER POURCHOT said  the next question posed by the committee                                                            
asked about  the current status of  discussions with Netricity.   He                                                            
said DNR took  the Legislature's resolution [HCR 17]  on this matter                                                            
seriously.  Not only is  the proposal intriguing, it is a good focus                                                            
for the larger question  of state in-kind gas. DNR is in discussions                                                            
with  Netricity.    He noted  he  provided  committee  members  with                                                            
specific  information  about  Netricity  that  DNR  is  looking  at,                                                            
regarding  the  dollar  amount if  the  state  accepted Netricity's                                                             
proposal of  36 cents per cubic foot.   He noted the worksheet  only                                                            
contains  Netricity's initial  offer.   In his  opinion, that  offer                                                            
does not  appear to be  in the state's  best interest, particularly                                                             
when  the state's  cost  of extracting  gas  on the  oil grounds  is                                                            
unknown.   There will  be some cost  associated,  if it is  computed                                                            
back in  terms of a gas price.   It could  amount to 10 or  20 cents                                                            
but, beyond that, the amount  could get to zero quickly on this kind                                                            
of a proposal.                                                                                                                  
CHAIRMAN  TORGERSON  asked  if DNR  is  still  in contact  with  the                                                            
principals of Netricity.                                                                                                        
COMMISSIONER   POURCHOT  said  DNR  is  participating   in  on-going                                                            
negotiations with  Netricity.   He then said DNR would  like to talk                                                            
about its study  for the component of this evaluation  of the values                                                            
associated  with  gas.  He  noted  that  Netricity   has  approached                                                            
producers  also.  DNR is  in  disagreement  with Netricity  on  some                                                            
issues.   Netricity  has  a methodology  for  how it  arrived at  36                                                            
cents.   It  used   a  fairly   aggressive   discounting   schedule.                                                            
Obviously,  there is some value in  selling gas in advance  of a gas                                                            
sale that might  be seven years down the line, but  DNR believes the                                                            
discounting would be less  than 18 years' worth; it might be four to                                                            
seven years, which would change the value considerably.                                                                         
3:26 p.m.                                                                                                                       
COMMISSIONER  POURCHOT   stated  that  the  last question   Chairman                                                            
Torgerson asked was in  regard to ongoing gas pipeline studies.  DNR                                                            
has  proposed  several  different  studies.   He  believes  DNR  has                                                            
figured out  how to pay for the in-state  demand study and,  pending                                                            
the upcoming  Legislative  Budget and Audit  (LBA) meeting,  he will                                                            
know more about  how and whether the  other studies will  be funded.                                                            
DNR has  published a request  for proposals  (RFP) for the  in-state                                                            
demand  study and  the deadline  is July 23.   DNR  is hoping  for a                                                            
completion date in early  or mid-November.  The study is designed to                                                            
determine  at  what  price  North  Slope gas  can  be  delivered  to                                                            
different  regions  of  the  state;  how can  it  be  used  in-state                                                            
relative to the price of  other fuels; and what new uses might arise                                                            
if natural  gas were more  readily available  from the North  Slope.                                                            
Other questions  regard where  a pipeline might  go and how  much it                                                            
will  cost to  access gas  in Southcentral  versus  Fairbanks.   The                                                            
study is designed  to try to get a  better handle on the  demand for                                                            
in-state gas, which directly relates to a price and route.                                                                      
COMMISSIONER POURCHOT  informed the committee that  a value study is                                                            
due  back next  week.   It will  review  various factors  that  will                                                            
impact netback  values of North Slope gas and will  identify pricing                                                            
policies  and practices used  elsewhere.  The  goal is to  determine                                                            
methodologies that provide  the most transparent ways of calculating                                                            
netback  value  and transportation   costs. DNR  has  had  a lot  of                                                            
experience  with oil  and has  spent a  lot of  time litigating  how                                                            
costs  should  be  calculated   to  arrive  at  a  netback.    Their                                                            
settlement  agreements   over  the  years  have  made   oil  netback                                                            
calculations easier and more clear.                                                                                             
DNR  wants  to  maximize  the  state's  resources   and  avoid  more                                                            
litigation, COMMISSIONER  POURCHOT said, and hopes to avoid having a                                                            
complex system  of calculating netback prices.  DNR  is also looking                                                            
at a  larger supply  structure and  trying to  assess the supply  of                                                            
other kinds  of gas, not just Prudhoe  Bay gas, and how those  might                                                            
come into play.  Obviously, transportation  makes other things  more                                                            
economical.   DNR hopes to do an in-house  effort and compile  known                                                            
information  describing  it by different  kinds of  gas sources  and                                                            
making assumptions relative to proximity to transportation.                                                                     
COMMISSIONER  POURCHOT said that DNR  has proposed a component  of a                                                            
reservoir study using the  economics of the impact of gas extraction                                                            
on Alaska's  oil reserves, primarily  at Prudhoe Bay. AOGCC  has the                                                            
major responsibility  for  this and  would be the  lead agency.   He                                                            
noted that  funding issues  in regard  to that  study have not  been                                                            
resolved because  of the way the budget  items were structured,  the                                                            
issue  being whether  the AOGCC  has the  ability  to reimburse  for                                                            
those costs.   Some of that  will be discussed  at the upcoming  LBA                                                            
meeting.  DNR would not  do its component of that without the Alaska                                                            
Oil and  Gas Conservation  Commission (AOGCC)  study, but DNR  views                                                            
that study as  very important.  It will provide the  information the                                                            
state needs to have going  into negotiations.  There is information,                                                            
but DNR  needs an evaluation  so that the  state's own views  can be                                                            
represented. He offered to answer questions.                                                                                    
CHAIRMAN  TORGERSON commented  that  regarding the  LBA meeting,  he                                                            
will  probably be  less  than friendly  towards  the Commissioner's                                                             
request until a method  is accomplished in which the Legislature and                                                            
administration work hand-in-hand  on this project instead of running                                                            
parallel courses.   He noted he has  had that conversation  with the                                                            
commissioner and with other  department and division heads.  He said                                                            
he has recommended  to the Chairman of Legislative  Council that the                                                            
Council  fund many of  those projects  so that  the information  can                                                            
flow to the committee.   He then announced the committee  would take                                                            
a short recess.                                                                                                                 
3:35 p.m.                                                                                                                       
Right-of-Way Pipeline Applications                                                                                            
CHAIRMAN TORGERSON  introduced John  Goll, Alaska Regional  Director                                                            
of U.S. Mineral Management,  and Jerry Brossia, the federal pipeline                                                            
coordinator with the Pipeline Office.                                                                                           
MR.  JOHN  GOLL,  Regional  Director  for  the Minerals   Management                                                            
Service  (MMS),  U.S. Department  of  the  Interior, said  he  would                                                            
present information  on the right-of-way  for an offshore  route and                                                            
that  Mr. Brossia  would answer  questions  afterward  in regard  to                                                            
onshore responsibilities of the Department of the Interior.                                                                     
MR. GOLL gave the following testimony.                                                                                          
     I know that  the offshore route is not the popular  route.                                                                 
     I  want  to emphasize   that we,  the  Department  of  the                                                                 
     Interior,  are new to a lot of  [indisc.].  It is not  our                                                                 
     job  to propose or  advocate the selection  of the route.                                                                  
     However,  we are required to  review any application  that                                                                 
     might  come before  us.   So, I  will try  to outline  the                                                                 
     right-of-way  process that  we would  use for an offshore                                                                  
     pipeline through federal  waters, but I would also like to                                                                 
     take  this  opportunity  to make  some  brief  remarks  on                                                                 
     future  gas supplies from the  perspective of our agency.                                                                  
     Our agency is one that is  deeply involved in the nation's                                                                 
     energy  production picture.   I think it might complement                                                                  
     some  of the things  that you heard  a little bit earlier                                                                  
     this afternoon.                                                                                                            
     Natural gas resources, including  those in the Arctic, are                                                                 
     very significant  and a visible part of the Department  of                                                                 
     the   Interior's  strategy   for  managing   U.S.  energy                                                                  
     resources.     So,  the issue  of  getting an  Alaska  gas                                                                 
     pipeline permitted and constructed  is a challenge for you                                                                 
     and for us and an opportunity.                                                                                             
     First  of  all,  I  would  like  [indisc.]  the  Minerals                                                                  
     Management   Service  and  who  we  are.    The  Minerals                                                                  
     Management  Service, also  known as MMS,  is an agency  in                                                                 
     the U.S. Department  of the Interior.  We are  responsible                                                                 
     for managing the mineral  resources on U.S. offshore lands                                                                 
     under  the jurisdiction  of the federal  government.   Our                                                                 
     jurisdiction  covers  nearly  1.7  billion  acres  of  the                                                                 
     submerged  lands  called  the  federal Outer  Continental                                                                  
     Shelf,  or the OCS.  This includes  about 1 billion  acres                                                                 
     offshore Alaska.                                                                                                           
     Along with managing the  leasing of OCS minerals resources                                                                 
     and  estimating  the  amounts  of resources  that  may  be                                                                 
     there,  our responsibilities  include regulating offshore                                                                  
     operations of the oil and  gas industry, helping to ensure                                                                 
     worker safety  and protecting the environment.   We have a                                                                 
     robust   technical   research  program,   which  includes                                                                  
     research   on  pipelines,  drilling   safety,  oil   spill                                                                 
     response,  and other  topics and we  are also responsible                                                                  
     for collection  of the revenues that are generated  by the                                                                 
     leasing  rights  to  produce  the minerals  owned  by  the                                                                 
     United  States and  individual  Indians and  tribes,  both                                                                 
     onshore  and offshore, and for  distributing the funds  to                                                                 
     the U.S. Treasury,  to the states, and to other  accounts.                                                                 
     For example,  the CARA bills  are totally funded from  the                                                                 
     revenue that we generate on the OCS.                                                                                       
     Today the  OCS, primarily in the Gulf of Mexico,  accounts                                                                 
     for  25 percent  of the  nation's  oil production  and  27                                                                 
     percent  of  its  natural  gas  production.    Our agency                                                                  
     provides oversight  there on about 31,000 miles  of seabed                                                                 
     pipeline.   And, over 50 percent of remaining  oil and gas                                                                 
     resources in the U.S. are located on the OCS.                                                                              
     I would like  briefly to review first what is  going on in                                                                 
     the Lower  48, part of it, again,  to complement what  was                                                                 
     said  a  little  bit  earlier  because  this,  again,  can                                                                 
     influence  some  of the  issues  that you're  facing  with                                                                 
     regard to the supply and demand in the future.                                                                             
     As I mentioned,  the Gulf of Mexico accounts for  about 25                                                                 
     percent  of the nation's oil  and gas production.  On  the                                                                 
     Gulf,  activity   is  going  gangbusters  with  continued                                                                  
     discoveries  in  the traditional  shallow  waters and  the                                                                 
     step out into the deeper  waters of the Gulf, as you heard                                                                 
     earlier.   The fact is some of the shallow waters  will be                                                                 
     more  likely to  produce the  gas in the  future than  the                                                                 
     deeper because it will take  a little bit longer to do the                                                                 
     production  from  the deep  water.  So, we'll  be talking                                                                  
     beyond  what  we have  here  on this  chart,  most likely                                                                  
     before  the  deep water  can  start  taking effect.    The                                                                 
     natural  gas potential  in the  Gulf remains  very high  -                                                                 
     around  190 TCF.   The  present  gas production  has  been                                                                 
     about 5 TCF,  but the future, as I mentioned,  is with all                                                                 
     predictions a little uncertain  as I've noted on the chart                                                                 
     depending   on  the  continuing  discoveries,  trying   to                                                                 
     stabilize the production  there and getting projects under                                                                 
     production  to shore which, again,  takes longer.  So,  we                                                                 
     really do see in the Gulf  things staying pretty much even                                                                 
     this  side of  the Gulf  - not  tremendous  rises as  some                                                                 
     people maybe have noted.                                                                                                   
     Looking  at the rest of the Lower  48, the picture is  not                                                                 
     as bright.  Most of the  Lower 48 of the Outer Continental                                                                 
     Shelf  is off  limits.   In the  Atlantic,  there is  very                                                                 
     likely prolific gas, with  estimates ranging from 24 to 34                                                                 
     TCF.    The  extension  of discoveries  off  Southeastern                                                                  
     Canada  most likely  go down  the eastern  seaboard.   The                                                                 
     Eastern  Gulf of Mexico's border  opposes development  off                                                                 
     the coast  and we just scaled back a proposed  sale in the                                                                 
     Gulf in  the Eastern Gulf of  Mexico.  On there, the  mean                                                                 
     estimate  is about 12 TCF.  On  the West Coast, gas  areas                                                                 
     are  likely  off  of  Washington,  Oregon,  and  Northern                                                                  
     California with a range  of 15 to 23 TCF.  Some production                                                                 
     does continue  off California, primarily oil.   Leasing is                                                                 
     unlikely   in  any   of  these  offshore   areas  in   the                                                                 
     foreseeable  future, although groups such as our  national                                                                 
     OCS  policy  committee is  trying  to get  the discussion                                                                  
     going by simply thinking  about what resources these areas                                                                 
     may contain.   But, right now most of these states  do not                                                                 
     want  production off  of their  coast even  though it  may                                                                 
     benefit  [indisc.- coughing]  the localities there.  It is                                                                 
     noted in the  national energy report, much of  the Rockies                                                                 
     have been off limits or  with great restrictions and there                                                                 
     the estimate is around 137 BCFs - again off limits.                                                                        
     The  point of this  overview  is that the  nation has  not                                                                 
     been exploring,  much less producing,  in many areas  with                                                                 
     good potential  and this does  give Alaska a step up  with                                                                 
     known  reserves.    We see  great  potential  offshore  of                                                                 
     Alaska  for  natural  gas.    This is  the  chart  of  the                                                                 
     potential  on  the Outer  Continental  Shelf.   These  are                                                                 
     [indisc.] undiscovered and  eventually recoverable so they                                                                 
     do not  include economics.  But  the Chukchi and Beaufort                                                                  
     Seas  look very  promising, as  noted on  the chart,  with                                                                 
     estimates  ranging on the Chukchi from 14 to 154  TCF and,                                                                 
     in the  Beaufort, perhaps  as high as  up to 163 TCF,  and                                                                 
     likewise, also favorable  for oil.  But we are a number of                                                                 
     years  away for  gas  development to  proceed  there.   Of                                                                 
     course   more  exploration   would  be   needed  and   the                                                                 
     infrastructure developed,  but the message is there can be                                                                 
     plenty  of gas in Northern Alaska  to sustain a pipeline,                                                                  
     or  pipelines,  well into  the future  if we  all want  to                                                                 
     pursue the  [indisc.] chance and develop those  resources.                                                                 
     Just a  few other side comments  on the Alaska offshore  -                                                                 
     maybe  not totally  on the  North  Slope but....   In  the                                                                 
     areas  off of Alaska's west coast,  from the Chukchi  down                                                                 
     into  the Bering  Sea, we  have indications  for good  gas                                                                 
     potential  that could  be used  for communities  in  those                                                                 
     areas, especially if onshore  sources of gas or some other                                                                 
     alternative  energy that  is being looked  for there,  are                                                                 
     not found or available.   The economics, of course, may be                                                                 
     the  limiting factor  but the potential  is there off  the                                                                 
     west coast.  Also for future  reference, and maybe this is                                                                 
     dreaming   more  wide  into  the  future,  there   is  the                                                                 
     potential  for  significant quantities  of  the presently                                                                  
     unconventional resource  of gas hybrids.  Estimates of 590                                                                 
     TCF  onshore  and,  what  I  would  call an  unbelievable                                                                  
     amount,  170,000 TCF  offshore around  the state.  That's                                                                  
     primarily  up in  the Beaufort  and even  along the  Shelf                                                                 
     break  south of the Aleutians.   This is probably not  for                                                                 
     us  but  maybe  for  our  children  or  grandchildren   or                                                                 
     something,  maybe to  look forward to  in the future  with                                                                 
     regard to  hybrid development.  But there are,  of course,                                                                 
     hybrids  on  the North  Slope  that may  be a  little  bit                                                                 
     easier in the nearer future.                                                                                               
     But  then  again,  the message  remains  that  the energy                                                                  
     sources are  likely there if we want to look for  them and                                                                 
     if we want to use them.                                                                                                    
     Let me  go into some of the regulatory  authorities  again                                                                 
     if an  offshore route  were ultimately  selected.  If  the                                                                 
     northern  offshore pipeline route  were selected, the  MMS                                                                 
     has specific  authorities to grant pipeline rights-of-way                                                                  
     and  maybe also to  approve oil spill  contingency plans.                                                                  
     Our  right-of-way authorities  are established  under  the                                                                 
     Outer Continental  Shelf Lands Act, the OCSLA.  Other than                                                                 
     the  right-of-way  permits,  MMS  exercises  approval  and                                                                 
     oversight    responsibilities   for   the   installation,                                                                  
     operation,  maintenance and abandonment  of the pipeline.                                                                  
     An oil spill contingency  plan may also be required if the                                                                 
     pipeline were  carrying naturally occurring condensate  or                                                                 
     if  condensate  is  injected   into  the  pipeline.    MMS                                                                 
     contingency  plan authorities  are established  under  the                                                                 
     OCS Lands Act and the Oil  Pollution Act of 1990 and would                                                                 
     apply  to all segments  of an offshore  pipeline, whether                                                                  
     around  the federal  OCS or the state's  submerged lands.                                                                  
     In  the  event  there  is  the  potential   for  a spill,                                                                  
     additional demonstration  of financial responsibility will                                                                 
     be required under the Oil Pollution Act.                                                                                   
REPRESENTATIVE GREEN asked if Mr. Goll was referring to condensate                                                              
as opposed to natural gas liquid.                                                                                               
MR. GOLL said  that is correct, but clarified that  these provisions                                                            
would likely come into  play for any liquids going into the pipeline                                                            
if  there  was  potential  for  a spill.    He  then  continued  his                                                            
     The MMS would  share management responsibilities  for this                                                                 
     pipeline  with the Federal Energy  Regulatory Commission,                                                                  
     the  U.S.   Department  of  Transportation's   Office   of                                                                 
     Pipeline  Safety,  and  the  State  of Alaska's  Pipeline                                                                  
     Coordinator's  Office and with  our Canadian counterparts                                                                  
     also.   MMS is also a new member  of the State of Alaska-                                                                  
     Federal  Joint Pipeline Office.   At this point, I'd  like                                                                 
     to mention that the Department  of Energy and the national                                                                 
     energy  report - there  was a provision  in there for  the                                                                 
     Department   of  Energy  to  pool  together  the  federal                                                                  
     agencies and  recently, over the last two or three  weeks,                                                                 
     the Department  of Energy has pooled together  themselves,                                                                 
     the  U.S.  Department  of State,  the  Department  of  the                                                                 
     Interior  with representation  from our  agency, Minerals                                                                  
     Management   Service,   and  from  the   Bureau  of   Land                                                                 
     Management,  and the Federal Energy Regulatory  Commission                                                                 
     to  get together again,  to investigate  ways to expedite                                                                  
     permitting   for  a   gas  pipeline   and  then  to   make                                                                 
     recommendations  to Congress  and the President on how  to                                                                 
     proceed.   So, that  work will be going  on over the  next                                                                 
     couple  of months  and I believe  they do  plan a trip  up                                                                 
     here, perhaps  in September.  I'll make sure that  you are                                                                 
     informed.   That would be the regulatory authority.  Other                                                                 
     agencies  would be involved  in the  project depending  on                                                                 
     the proposal  and issues, many in some indirect  ways with                                                                 
     regard to some other laws.                                                                                                 
     MMS  has  regulations   and  guidance  that  outline   the                                                                 
     information   requirements  in  detail  for  right-of-way                                                                  
     applications.   First we encourage the pipeline  permittee                                                                 
     to collect  information prior to submitting a  request for                                                                 
     a   permit.     This   allows   important   geotechnical,                                                                  
     geophysical,  archeological and biological information  to                                                                 
     be  available  earlier in  the  process.   The producers'                                                                  
     group  plans to collect  such information  this summer  as                                                                 
     part of its  study of the two routes.  MMS will  do a full                                                                 
     safety   and   engineering   design   review,   including                                                                  
     consideration  of site-specific  issues using data from  a                                                                 
     survey  and other sources.   We would  proceed doing  this                                                                 
     jointly with  the State Pipeline Coordinator's  Office and                                                                 
     in   coordination    with   the    U.S.   Department    of                                                                 
     Transportation.  The MMS  will also provide an opportunity                                                                 
     for  public comment  and would  conduct  an environmental                                                                  
     analysis   under   the   provisions    of  the   National                                                                  
     Environmental   Policy   Act.     In  the   event  of   an                                                                 
     environmental  impact statement, which is very  likely for                                                                 
     these  pipeline routes,  a lead  federal  agency would  be                                                                 
     designated.   Which agency  has the  lead would depend  on                                                                 
     the  scope and  the nature  of the specific  proposal  and                                                                 
     relative responsibility  of the various agencies.   In the                                                                 
     case of the over-the-top  pipeline proposal, MMS, the U.S.                                                                 
     Department  of  Transportation,  the  U.S. Army  Corps  of                                                                 
     Engineers  or FERC are all possible lead agencies  for the                                                                 
     I can  give an example  in the Gulf  of Mexico that  we've                                                                 
     just completed.   We worked with  the federal - with  FERC                                                                 
     on the Gulf  Stream gas pipeline that ran from  Mobile Bay                                                                 
     to  Tampa Bay,  across the  Gulf.   FERC was  the lead  of                                                                 
     contracting  the  EIS,  with  post-coordination  with  our                                                                 
     staff.    Our staff  within  MMS did  a  full engineering                                                                  
     review   that   considered    the  specific    route   and                                                                 
     environmental issues and  technical issues and it was also                                                                 
     doing inspections  as the pipeline was being constructed.                                                                  
     The project  would also be subject to coastal  consistency                                                                 
     review,  with the  State of  Alaska's  Coastal Management                                                                  
     Program.   [Indisc.] consultations would be required  with                                                                 
     the National  Marine Fisheries  Service and the U.S.  Fish                                                                 
     and   Wildlife  Service.      We  foresee   a  number   of                                                                 
     environmental   and   technical  considerations   for   an                                                                 
     offshore  pipeline and  I'm sure there's  more.  But,  the                                                                 
     paramount  environmental   consideration  is  the bowhead                                                                  
     whale and  associated subsistence hunting activities  that                                                                 
     occur  during the open water  periods across the Beaufort                                                                  
     Sea.   One  would  need  to ensure  that  construction  or                                                                 
     operation  of a pipeline would not unreasonably  interfere                                                                 
     with  the whales  or  subsistence.   Seasonal  broken  ice                                                                 
     conditions   in  the  fall  and  spring  will  also   pose                                                                 
     challenges  for  construction,  maintenance   and repair.                                                                  
     Permafrost,  ice gauging and  strudlescour (ph) are  other                                                                 
     design  considerations.   Metering  and lease  protection                                                                  
     would  be  of concern  even  though  this  is not  an  oil                                                                 
     pipeline.   Strudlescour can  be at spring break-up.  When                                                                 
     the water  is starting to come out of the rivers,  it will                                                                 
     go across  the ice and  it finds a hole;  it will go  down                                                                 
     like your  toilet flushes and it essentially moves  gravel                                                                 
     or  whatever   the  seabed  is.     Why  take  that   into                                                                 
     consideration when you [indisc.] a pipe?                                                                                   
     One  of the  main  efforts that  we or  any lead  in  this                                                                 
     project if, really, any  of these projects go forward, but                                                                 
     of  course  we're  talking  here  about the  over-the-top                                                                  
     route, would  be consult with all concerned parties,  such                                                                 
     as  the list  that I  have here.   We and  other agencies                                                                  
     would need  to work closely with the many stakeholders  to                                                                 
     make  sure  that  their  concerns  are  addressed  in  our                                                                 
     decision,  but  we would  also  want  to ensure  that  the                                                                 
     process  that we were working  under was done in a timely                                                                  
     So, in conclusion,  Alaska does have significant  untapped                                                                 
     natural  gas resources that can  go a long way to serving                                                                  
     the  nation's need for  natural gas  in the coming decade                                                                  
     and well  beyond.  It may be  a step ahead of other  areas                                                                 
     of  the U.S.  that have  good  potential, but  again,  the                                                                 
     country  [has] not developed  that way.  The right-of-way                                                                  
     procedures  do exist for offshore  permitting. But,  first                                                                 
     I'll  emphasize  again  that  the  route is  not  ours  to                                                                 
     propose or  advocate and, regardless of the route  that is                                                                 
     ultimately  chosen   we, within   the  Department  of  the                                                                 
     Interior, being MMS and  I think I can speak for BLM, that                                                                 
     we  would work  where we can  to assist  through whatever                                                                  
     route  is decided on.   The challenges  that face us  with                                                                 
     getting these  resources out of the Arctic while  ensuring                                                                 
     that it is done safely and  with maximum protection of the                                                                 
     environment.   Also, within the department, again  because                                                                 
     of the importance of Alaska,  I think it's - of course you                                                                 
     are  all very  aware  that Secretary  Norton  went to  the                                                                 
     trouble of  having two special representatives  for Alaska                                                                 
     to give  views to people back  in Washington and here  and                                                                 
     to  be  her  eyes and  ears  and  to  provide  advice  and                                                                 
     counsel.  So, you'll  also be  able to  work with Senator                                                                  
     Drue Pearce  and Cam Toohey as these projects  go forward.                                                                 
     So,   the  wrap   up.  If   you're  interested   in   more                                                                 
     information, of course we  can provide it.  We also have a                                                                 
     web page that goes into  much more detail in regard to our                                                                 
     rules, technical research  and environmental research that                                                                 
     we're  doing and other  information about  MMS. Thank  you                                                                 
     very much for your time.   I'm here to answer questions or                                                                 
     if Jerry would like to ....                                                                                                
CHAIRMAN TORGERSON asked Mr. Brossia if he would like to add to Mr.                                                             
Goll's presentation.                                                                                                            
3:54 p.m.                                                                                                                       
MR. JERRY BROSSIA  introduced himself  as the representative  to the                                                            
Secretary of  the Department of Interior,  located in the  Bureau of                                                            
Land  Management,  and  said  he  will  administer  the TransAlaska                                                             
pipeline, as  well as the Trans-Alaska  gas system right-of-way  and                                                            
the ANGTS right-of-way.                                                                                                         
MR. BROSSIA made the following comments on the status of rights-of                                                              
     Both  the ANGTS  route  and the  TAGS route  have federal                                                                  
     rights-of-way  in place.   They also  have a couple  other                                                                 
     important  documents  in place.   In  order  to get  those                                                                 
     federal   rights-of-way,  you're   essentially,  as   John                                                                 
     mentioned,   going  through  the  National  Environmental                                                                  
     Policy Act  or what will become the EIS process.   Both of                                                                 
     those  projects have  EISs in  place.   They have another                                                                  
     significant document in  place, they have under the Alaska                                                                 
     Natural  Gas Act,  they have  a presidential  claim.   And                                                                 
     that  presidential claim  [indisc.] for  both projects  so                                                                 
     those  are significant  documents. The  right-of-way  that                                                                 
     BLM  issued to the  TAGS project required  a presidential                                                                  
     decision - again, the process.                                                                                             
     The  third project that  we recently  started to look  at,                                                                 
     and  we're  not  fully  geared up  to  [indisc.]  but  the                                                                 
     owners,  Phillips, BP  and Exxon's gas  project.  We  just                                                                 
     recently started meeting  with those folks.  They would be                                                                 
     required  to go through a pretty  similar process to  what                                                                 
     John  outlined, with  the exception  that  instead of  the                                                                 
     Outer  Continental  Shelf  laws,  we would  be  using  the                                                                 
     Minerals Leasing Act of  1920.  Again, BLM would - once we                                                                 
     receive  an  application  that  would  trigger  the  legal                                                                 
     process it  would probably require an EIS.  Again,  as was                                                                 
     discussed,  any new project would  also look at some  kind                                                                 
     of a permit  with FERC.  The  other two projects have  the                                                                 
     usual  permits from  FERC. The  Corps of  Engineers  would                                                               
     also  want to be involved  and we would  also be involved                                                                  
     with  the state as far  as issuing a  right-of-way.   When                                                                 
     these projects come through  the Joint Pipeline Office, in                                                                 
     the  past, we've  looked at it  as one  process with  many                                                                 
     steps.   In this case, the two  primary drivers for  a new                                                                 
     project,  obviously  for  the  [indisc.]  as well  as  the                                                                 
     right-of-way,  both again would  trigger the EIS process,                                                                  
     both  would be  coordinated  with the  state right-of-way                                                                  
     process  as well  as the CZM  being done  by the Corps.  I                                                                 
     don't  have prepared  remarks  but I  am willing  to  take                                                                 
     questions  on how we've  worked on these  projects in  the                                                                 
3:57 p.m.                                                                                                                       
CHAIRMAN  TORGERSON asked  whether either  department has geared  up                                                            
for pipeline applications by hiring staff or doing studies.                                                                     
MR. BROSSIA said  that both the BLM and MMS have policy  quotes just                                                            
coming  out of  Washington,  D.C.   They  have formed  several  task                                                            
forces  to look  at  various  aspects of  the  project.   While  the                                                            
Department  of  Interior  issues  the  right-of-way  for  the  ANGTS                                                            
project and BLM was the  lead on the TAGS project, the Office of the                                                            
Federal Inspector may or  may not be resurrected as the overall lead                                                            
agency  on the  ANGTS  project.   That  is  being discussed  now  in                                                            
Washington, D.C.                                                                                                                
Locally,  BLM has been  looking at  the status  of each project  and                                                            
developing  a  project  RIK  plan,   a project   legend,  a  project                                                            
schedule, looking  at agreements with the State of  Alaska and other                                                            
federal agencies  and developing a  budget and organizational  plan.                                                            
BLM has met with the owners  three or four times and discussed their                                                            
need to  do field studies  in preparation  for EIS and right-of-way                                                             
work.   Some  of BLM's  district  offices  have issued  permits  for                                                            
stream studies.   BLM is in a very  preliminary stage of  looking at                                                            
this project.                                                                                                                   
MR.  BROSSIA said  if BLM  is chosen  as the  lead agency  on a  new                                                            
project  or on the  ANGTS, it would  use the  joint pipeline  model,                                                            
which has been  fairly effective over the last 12  years.  BLM would                                                            
probably  spin off of  [indisc.] and  work with  the state on  that.                                                            
However, they have not finalized any plans.                                                                                     
4:00 p.m.                                                                                                                       
MR.GOLL said, likewise,  the MMS has not hired anyone at this point.                                                            
MMS  met  with  the producers   who wanted  to  know  what  kind  of                                                            
information  they   would  need  to  collect  for   the  surveys  he                                                            
mentioned.   They plan  to do the  surveys this  summer and  need to                                                            
collect  information  for  alternative  plans.    MMS  does  have  a                                                            
representative on the Department  of Energy group but, overall, they                                                            
have  been  very  low-key  and will  continue  that  way  until  the                                                            
direction is decided  upon.  He noted the MMS has  a process so that                                                            
several models could be  used and can foresee taking the lead on the                                                            
CHAIRMAN TORGERSON  asked if one of the producer groups  filed under                                                            
the Natural  Gas Act or  anything besides  ANGTS, whether BLM  would                                                            
require  a  presidential   decision  before  proceeding   with  that                                                            
MR.  BROSSIA said  that has  been  the past  practice.   That was  a                                                            
condition  for   the  right-of-way  permit  for   TAGS.    He  would                                                            
recommend it.                                                                                                                   
CHAIRMAN TORGERSON asked about an offshore application.                                                                         
MR. GOLL  said he was  not sure.   That is one  thing the DOE  group                                                            
could look at.  He guessed the answer would be no.                                                                              
CHAIRMAN TORGERSON asked  if the original 1977 presidential decision                                                            
to deny the ANWR over-the-top  route that was onshore would hold for                                                            
the offshore  route,  or whether  the offshore  route substantially                                                             
differs enough that the original decision would not apply.                                                                      
MR. GOLL said he did not know.                                                                                                  
4:02 p.m.                                                                                                                       
REPRESENTATIVE  OGAN referred to an earlier slide  shown by Mr. Goll                                                            
about  limitations  in the  Lower  48.   He  added the  numbers  and                                                            
calculated  that 188  to 206  TCF  are off  limits.   He asked  what                                                            
percentage that is in comparison to the total reserves.                                                                         
MR. GOLL  explained those  are not  reserves in  the sense of  being                                                            
discovered, they are potential.                                                                                                 
REPRESENTATIVE OGAN asked if about one-half of it is off-limits.                                                                
MR. GOLL said that probably  20 to 25 percent is off limit.  He said                                                            
the point  he was trying  to make is that  the areas that  need gas,                                                            
particularly the  East Coast, are not looking to produce  local gas.                                                            
Alaska gas will  probably end up in the Midwest and  West, but right                                                            
now some of that could  be heading toward the East Coast where there                                                            
is a great peak.  Likewise,  there is gas off of the west coast, but                                                            
they are not  looking to use it.   He added that it would  be easier                                                            
to produce locally,  but many areas of the country  are not going in                                                            
that direction right now.                                                                                                       
REPRESENTATIVE  OGAN  asked  if  that  gas  is  off  limits  because                                                            
drilling  would  raise environmental  concerns.    He  noted gas  is                                                            
probably the safest thing to drill.                                                                                             
MR. GOLL said  that is correct, but  people are concerned  about oil                                                            
spills on beaches.                                                                                                              
CHAIRMAN TORGERSON  thanked Mr. Goll  and Mr. Brossia and  asked Mr.                                                            
Britt to testify.                                                                                                               
4:05 p.m.                                                                                                                       
MR. BILL  BRITT,  Gas Pipeline  Coordinator,  Department of  Natural                                                            
Resources, informed  committee members that he distributed  a packet                                                            
of  information,  including  his written  testimony.    He gave  the                                                            
following synopsis of that testimony.                                                                                           
There  are  three  modes  available  to  move  gas  out  of  Alaska:                                                            
pressurized natural  gas, LNG, and gas to liquids.   Four routes are                                                            
being discussed:  Prudhoe Bay to Prince  William Sound; Prudhoe  Bay                                                            
to Kenai; the highway route;  and the over-the-top route.  He counts                                                            
at least eight projects with groups of proponents:                                                                              
   · Yukon Pacific TAGS project;                                                                                                
   · ANGTS route;                                                                                                               
   · A producer group of North Slope natural gas producers (BP,                                                                 
     Phillips, Exxon Mobil);                                                                                                    
   · A sponsor group led by Phillips that includes Foothills and                                                                
   · The Alaska Gasline Port Authority;                                                                                         
   · The Cook Inlet pipeline terminus route;                                                                                    
   · The Municipal Energy Resource Group (MERG), which advocates                                                                
     the over-the-top route;                                                                                                    
   · BP gas-to-liquids plant.                                                                                                   
TAPE 01-04, SIDE A                                                                                                            
MR.  BRITT  emphasized  that  neither routes  nor  modes  are  being                                                            
exclusively considered  and that more than one project  is certainly                                                            
possible.  Two  of the pipeline projects have received  right-of-way                                                            
and other permits  from both federal and state agencies.   Foothills                                                            
has received various  permits for the ANGTS route.  BLM completed an                                                            
EIS for the TAGS  route and granted Yukon Pacific  a right-of-way in                                                            
1988.  The FERC EIS on  the Anderson Bay terminal was completed, the                                                            
presidential   finding  and  export  license   is  in  place  and  a                                                            
conditional  state right-of-way  was issued  and renewed.   He noted                                                            
that  Section   2  of   the  conditional   lease  pertains   to  the                                                            
requirements of the conditional state right-of-way.                                                                             
For the ANGTS  route, BLM completed  an EIS and granted a  right-of-                                                            
way in  Alaska in  1980.   A treaty  between the  United States  and                                                            
Canada  was  signed  in  1978,  which  sanctions  the  project,  and                                                            
Canadian permits  and approvals are  in place.  The state  right-of-                                                            
way process was begun, but is not completed.                                                                                    
The state  right-of-way  process is  described  in the Right-of-Way                                                             
Leasing Act (AS 38.35).   The steps are:                                                                                        
   · Public notice of an application;                                                                                           
   · Analysis of the application;                                                                                               
   · Negotiation of a draft lease;                                                                                              
   · Preparation of Commissioner's analysis and proposed decision;                                                              
   · Public notice of the availability of the Commissioner's                                                                    
      analysis, proposed decision and public comment period;                                                                    
   · Public comment period and public hearings;                                                                                 
   · Consideration of comments;                                                                                                 
   · Preparation of final decision; and                                                                                         
   · Execution of the right-of-way lease, if that is the final                                                                  
MR. BRITT said  the right-of-way lease is one of a  whole variety of                                                            
requirements  that would come into  play with a project this  large.                                                            
The  Producers'  Consortium  consultants  recently  issued  a  draft                                                            
report entitled,  "Data Review and Permitting Requirements."   Their                                                            
list of permits, approvals  and consultations for one or both of the                                                            
routes  contain   29  categories   of  federal  authorizations,   22                                                            
categories  of state authorizations,  and 8 categories of  local and                                                            
private  authorizations.    Each  of  these  categories  would  have                                                            
anywhere from  one right-of-way lease to many land  use or water use                                                            
permits.   These lists are  incomplete as  they only considered  the                                                            
pipeline  and gas  treatment  plant and  not associated  or  support                                                            
facilities, such as compressor  stations, construction camps, access                                                            
roads,  material sites,  disposal  sites, staging  areas, and  other                                                            
temporary use areas.                                                                                                            
MR. BRITT  noted another  frequently asked  question is how  long it                                                            
will take to permit  a project.  That will depend  on two variables:                                                            
the applicant's  ability to provide  information in a timely  manner                                                            
and the federal  approval process.  A reasonably ambitious  schedule                                                            
would be  in the 18  to 24 month  period.   On a project-by-project                                                             
basis, this will be highly  variable and will be based on the amount                                                            
of work that  has already been done  and the controversy  associated                                                            
with it.                                                                                                                        
MR.  BRITT said  regarding  what  is happening  now,  Yukon  Pacific                                                            
submitted  a refined  pipeline  centerline  alignment  for the  TAGS                                                            
project  on July  2.  It  is being  reviewed in  the Joint  Pipeline                                                            
Office and  it may or may  not result in  amendments to the  federal                                                            
and state rights-of-way.   Regarding  the Alaskan Northwest  Natural                                                            
Gas Transportation  Company  (ANNGTC) project,  they requested  that                                                            
the state proceed  with processing  their application, which  it did                                                            
on March 6.  He  requested ANNGTC to identify documents  relevant to                                                            
their applications.   ANNGTC responded  on July 2.  He said  he made                                                            
that request  because he  has no estimate  of the tons of  paperwork                                                            
relative to  the ANNGTC's project  that was processed 20  years ago.                                                            
It seemed  more expedient  to  ask ANNGTC  to let him  know what  it                                                            
considered  to  be relevant  in  this point  in time.    He has  not                                                            
finished  reviewing  those   documents  yet.    In  summary,  ANNGTC                                                            
completed  a large  amount of work  relative  to their right-of-way                                                             
MR. BRITT said  the Alaska Gas Producers Pipeline  Team (AGPPT), the                                                            
producers'  consortium,  has about  90 personnel.   They've  awarded                                                            
about $75 million  in contracts for feasibility work.  The contracts                                                            
they've  issued have been  for pipeline  engineering, gas  treatment                                                            
facility  engineering,  natural gas  liquids extraction     facility                                                            
engineering,  environmental  and  regulatory  work and  land  status                                                            
work.   The  number of  people  involved is  very,  very large.  For                                                            
example, the  two prime contractors  for the U.S. environmental  and                                                            
regulatory issue  have 11 specialized subcontractors  and, according                                                            
to the  producers, they  have over 500  full-time equivalent  people                                                            
engaged  in these  efforts  right now.   On  July  6, the  producers                                                            
provided  a list  of field studies  for  the summer.   There are  21                                                            
studies in  Alaska, several of which  have been completed,  some are                                                            
in  progress,  and  many  have  not begun.    The  state  has  begun                                                            
processing  the permits necessary  for them  to do this work.   They                                                            
need a  collection permit  from the  Alaska Department  of Fish  and                                                            
Game  (ADFG)  for   the  drain  work.    The  Pipeline   Office  has                                                            
communicated its expectations of the studies to the producers.                                                                  
MR.  BRITT  said the  sponsor  group  is continuing  to  assess  the                                                            
feasibility  of the Kenai  LNG project.  He  has proposed that  they                                                            
start assessing  markets for LNG,  exploring possible synergies  for                                                            
the highway  project  and working  to reduce  the contingencies  for                                                            
their project  plan and thus increase the commercial  viability.  He                                                            
has  also  been  told   their  consultants  recently   completed  an                                                            
environmental  and regulatory  evaluation  of the  project with  the                                                            
emphasis  on permitting of  the Parks Highway  Route.  Depending  on                                                            
the conclusion of that  study, he would expect to begin contact with                                                            
MR.  BRITT noted  the  State Pipeline  Office  has had  very  little                                                            
contact with  the Port Authority,  the Cook Inlet Terminus  Group or                                                            
the  over-the-top  route.  Regarding   a  brief  overview  of  state                                                            
government,  his specific  role is defined  by Administrative  Order                                                            
187.   He  has been  directed  to coordinate  state  permitting  and                                                            
authorization processes  and to lead communications and coordination                                                            
with  federal  and  Canadian  agencies  related  to  permitting  and                                                            
authorizing projects.   He included a document in  packets entitled,                                                            
"Gas Pipeline  Office - Anticipated Pre-application  and Application                                                            
Processing  Tasks for FY  2002."  It contains  a list of  short-term                                                            
tasks that are associated with the roles.                                                                                       
The point of these  tasks is to positively affect  the time required                                                            
to  permit  the  project  by  integrating   the  state  and  federal                                                            
government  processes, as was done  with the Joint Pipeline  Office.                                                            
They also want to make  the permit authorizations more responsive to                                                            
Alaskan interests  when they are issued  by others and they  want to                                                            
make the  financial  return on the  project greater  for the  state.                                                            
Progress on  these tasks has been  limited due to a lack  of funding                                                            
and lack of staff.  He  does not have a funding source at this time,                                                            
but perhaps will get one  during the upcoming Legislative Budget and                                                            
Audit meeting.   The  limited funding  provided  in the last  fiscal                                                            
year  allowed the  hiring or  assignment  of liaisons  from DEC  and                                                            
ADFG, an  ADFG field  leader and  his position.   Existing staff  in                                                            
several  state agencies  are performing  very  limited gas  pipeline                                                            
work,  paid for  with  discretionary  funding.   He  has  negotiated                                                            
reimbursement  MOUs with Foothills  and with  the producers  for the                                                            
tasks on  the list.   He cannot  execute those  agreements until  he                                                            
receives funding from LBA.                                                                                                      
MR.  BRITT noted  the  staff  at the  State  Pipeline Coordinator's                                                             
Office made remarkable  progress in collecting and  organizing ANGTS                                                            
files.    The Gas  Pipeline  Office  (GPO)  staff  is  working  with                                                            
Foothills and  the producers to move their efforts  forward.  He has                                                            
received expressions  of interest in GPO positions  from a number of                                                            
excellent candidates,  which he is  very happy about.  In  addition,                                                            
he has  found inexpensive  housing for the  office until the  end of                                                            
the year.  Hopefully,  they will move into those temporary,  but co-                                                            
located offices, in August.                                                                                                     
In conclusion, MR. BRITT  said a lot has been happening and the pace                                                            
of proponents'  efforts is increasing.   If general funding  for the                                                            
GPO  is  approved,  he  will  sign  reimbursement   agreements  with                                                            
Foothills and  the producers.  They will then begin  a detailed work                                                            
plan and  hiring to support  the work plan.   If general funding  is                                                            
not  approved,   the  state  will   continue  to  fall  behind   the                                                            
proponents,   both  in  the   staff  necessary   to  process   their                                                            
authorizations  and, of particular  interest to legislators,  in the                                                            
knowledge  necessary  to promote  state interests.    He offered  to                                                            
answer questions.                                                                                                               
CHAIRMAN  TORGERSON thanked  Mr. Britt for  doing such a great  job.                                                            
He noted  that he  participated  in the memoranda  of understanding                                                             
(MOUs),  as that  was part  of  the legislation  he  worked on  this                                                            
session.  He also does  not anticipate  a lot  of opposition  to Mr.                                                            
Britt's  request to  receive the funding  through  the MOUs as  they                                                            
relate to  what the producers  are willing  to pay for.  He  pointed                                                            
out the percent  the producers are  willing to pay for differs  from                                                            
the percent the  administration wants to fund and  that is what they                                                            
are trying to work through.   Another problem he has is in regard to                                                            
interaction  with the administration  is the  legislature's  lack of                                                            
access to documents  that it is funding.  The legislature  has found                                                            
it is running  a parallel course, to some degree.  He does not favor                                                            
putting more money  into that kind of a procedure.   He would rather                                                            
fund the studies directly  through the Legislative Council.  He told                                                            
Mr. Britt  the general  fund request  is above  and beyond what  the                                                            
producers  are willing  to pay for.  So, LBA is  questioning  why it                                                            
should fund  things that the producers  are not willing to  pay for.                                                            
He asked Mr. Britt  to be prepared to explain the  difference to the                                                            
LBA Committee.                                                                                                                  
4:21 p.m.                                                                                                                       
The committee took a short recess.                                                                                              
4:30 p.m.                                                                                                                       
ALASKA HIGHWAY NATURAL GAS POLICY COUNCIL                                                                                     
CHAIRMAN  TORGERSON called  the meeting back  to order and  welcomed                                                            
the members  of the  Governor's  Alaska Highway  Natural Gas  Policy                                                            
Council (GAHNGPC).  He  introduced Mr. Frank Brown, Co-Chair of that                                                            
Council,  and noted that Mr.  Sampson had to  be out of town  today.                                                            
He asked Mr. Brown to proceed.                                                                                                  
MR.  FRANK  BROWN,  Co-Chair,  Alaska  Highway  Natural  Gas  Policy                                                            
Council,  informed  committee members  that  Jim Sampson  could  not                                                            
attend  as  he was  called  out of  town  on  family business.    He                                                            
explained that Governor  Knowles appointed 28 Alaskans to the AHNGPC                                                            
in January.    The group's  mission  is to  develop recommendations                                                             
promoting  a  natural  gas  pipeline  project   that  maximizes  the                                                            
benefits  to   all  Alaskans.    The   AHNGPC  will  formulate   its                                                            
recommendations  and report back with  its findings on November  30.                                                            
Since January,  because the  group is so  large, members spent  time                                                            
getting  to know  each  other, learning  how  to work  together  and                                                            
educating each other.   The group's task is formidable so a key part                                                            
of the  early stage  has been educating  the group.   The group  has                                                            
also been  engaged in a public  process in  which it has been  going                                                            
out and sharing information  with, and listening to, the public.  To                                                            
handle   so  many   issues,  the   group  was   divided  into   five                                                            
subcommittees.  In addition  to the public meetings and subcommittee                                                            
work, the AHNGPC  has held statewide  hearings in Fairbanks,  Kenai,                                                            
Tok and Anchorage  and it will travel this summer  to Barrow, Juneau                                                            
and Southeast.   He  noted he would  introduce  the members  and ask                                                            
them to  discuss their work,  and then AHNGPC  members would  answer                                                            
questions.  Mr. Brown commented that the 28 members and four ex-                                                                
officio members  of the Legislature have no staff  so they have been                                                            
working very hard.                                                                                                              
MR.  BROWN  introduced  Bill  Corbus,  who  is  chairing  the  State                                                            
Pipeline  Ownership and  Tax Structure  Subcommittee;  Mayor  Rhonda                                                            
Boyles,  who  is  on  several  committees;  Jack  Roderick,  who  is                                                            
involved in the Access  of In-State Gas Use and Future Opportunities                                                            
Subcommittee; Charlie Cole, who is chairing the Federal-                                                                        
International   Action  Subcommittee;  and  Mike   Navarre,  who  is                                                            
chairing the Alaska Hire/Buy Subcommittee.                                                                                      
MR. MIKE NAVARRE  informed the committee  that he asked to  serve on                                                            
the AHNGPC because,  as a former legislator, he couldn't  resist the                                                            
opportunity  to keep  an eye on  the Administration  and because  he                                                            
wanted to be involved  on the policy level to make  sure the project                                                            
is  done right  and  will benefit  Alaskans.   The  Alaska  Hire/Buy                                                            
Subcommittee  is focusing  on several  things.   First, it wants  to                                                            
identify  what  type  of  training  will  be  needed  for  workforce                                                            
development and to identify  the numbers of the necessary workforce.                                                            
The Subcommittee  is also looking  at socio-economic studies  and it                                                            
is trying  to dovetail those  with other  studies related to  GARVEE                                                            
bonds,  and  other   work  and  at  the  potential   impact  to  the                                                            
communities  and   to  the  state.    The  Subcommittee   will  make                                                            
recommendations  and have  a report  ready that  the legislature  or                                                            
anyone else can use.                                                                                                            
MR. BILL CORBUS  informed the committee  that, in civilian  life, he                                                            
is the  President  of Alaska  Electric  Light and  Power Company  in                                                            
Juneau.  He  believes it is important  that everyone get  behind the                                                            
gas  pipeline.    He is  chairing  the  Subcommittee  on  the  State                                                            
Pipeline Ownership  and Tax Structure.  The Subcommittee  is made up                                                            
of  six  members  who  have  met  with  the  Alaska  Permanent  Fund                                                            
Corporation  (APFC), the  Alaska Industrial  Development and  Export                                                            
Authority  (AIDEA)  and  Department  of  Revenue  staff  to  discuss                                                            
various aspects  of financing the  pipeline.  The Subcommittee  will                                                            
also be gathering ideas for the tax structure.                                                                                  
MR.  JACK RODERICK  informed  committee  members  that  he has  been                                                            
helping Ken Thompson, who  chairs the Subcommittee on Access for In-                                                            
State Gas Use  and Future Opportunities.   He noted that  Carl Marrs                                                            
also had a  committee, but the two  were merged with a new  emphasis                                                            
on in-state  access  to gas.   The Subcommittee  heard testimony  in                                                            
Fairbanks about the use  of gas, which was quite impressive.  DNR is                                                            
doing a study  on in-state use.  The Subcommittee  is looking at LNG                                                            
and GTL  projects.   He said he  believes Ken  Thompson was  correct                                                            
when he suggested the subcommittee  should be thinking about the use                                                            
of this gas 50  years down the line.  He suggested  that legislators                                                            
put on their business  hats as the state will be in  the business of                                                            
gas and that negotiations  will be coming on down  the line with the                                                            
producers  and gas  owners.   He believes  it is  critical that  the                                                            
legislature  and administration use  a partnership approach  on this                                                            
issue. He pointed out that  the Governor has given the Council carte                                                            
blanche to  conduct its investigations  on a natural gas  line.  The                                                            
Governor has not given  the AHNGPC specific mandates or said that he                                                            
wants certain  results or  information that  exclusively favors  the                                                            
highway line.  The Governor has only  said that he believes  that is                                                            
the preferential  line.   Beyond that, the  AHNGPC will provide  the                                                            
state with the information  it develops.  The AHNGPC certainly wants                                                            
to work with  the legislature.  He  believes it would be  disastrous                                                            
for both bodies if they  do not cooperate fully. He pointed out that                                                            
no one on the  AHNGPC is getting paid for the time  they are putting                                                            
in on this  project. He noted that  two members of his subcommittee                                                             
are super lawyers, who  are getting a workout.  The subcommittee has                                                            
also  met with  Bob Loeffler  of the  Division of  Mining, Land  and                                                            
Water, and John Katz in Washington, D.C.                                                                                        
4:43 p.m.                                                                                                                       
MS. RHONDA  BOYLES informed  the committee  that  she serves  on two                                                            
subcommittees  and had  two points to  make today.  One is that  the                                                            
importance  of the gas pipeline  rises above  any party politics  or                                                            
the issue  of administration  versus  legislature  or Native  versus                                                            
non-Native.  She  said,  e HH"We  have  to worry  about  the  entire                                                            
state."  Second,  she said they need  to share good information  and                                                            
not spend time being redundant.                                                                                                 
REPRESENTATIVE  GREEN asked if sharing  of information includes  the                                                            
MR. BROWN replied that was his understanding.                                                                                   
CHAIRMAN  TORGERSON  said he  was concerned  with the  legal end  of                                                            
things  and that the  legislature  does not have  access to  studies                                                            
they have funded  for the administration. He said  they probably get                                                            
the same  paperwork from  the producers. He  asked Mr. Corbus  if he                                                            
was looking at incentives the producers might want.                                                                             
MR. CORBUS replied they would be looking at the tax structure.                                                                  
CHAIRMAN  TORGERSON asked  if he would  look at  the ELF or  royalty                                                            
tax. He  said that  experts in  the administration  would not  share                                                            
that data with the committee.                                                                                                   
An unidentified  person  said the  producers don't  really know  the                                                            
economics of the processing plant or the line yet.                                                                              
CHAIRMAN  TORGERSON said  his question  didn't have  to do with  the                                                            
plant. He stated, "We know  in the early '80's the cost of the plant                                                            
was included  as part of  the tariff. There  is no alliance  yet and                                                            
there is no tariff."                                                                                                            
His question  had to  do with  other companies  downstream that  may                                                            
have their own conditioning  plant. He wanted to make sure the state                                                            
was not locked into a tariff  on a conditioning plant where somebody                                                            
else can  probably build  their own. It's  a question that  has been                                                            
posed to him by other producers.                                                                                                
MR. NAVARRE said his committee  was looking at tax structure policy.                                                            
MR. KEN THOMPSON spoke to the issue of the processing plant:                                                                    
     That's an  important issue that we really need  to look at                                                                 
     legally  as  well  as  what  the  leases  allow  for.  For                                                                 
     example,  some North Slope leases  were modeled after  the                                                                 
     Texas  Oil and  Gas Lease Law.  No state  leases in  Texas                                                                 
     conditioning  gas for  market is often  considered on  the                                                                 
     lease  as  lease cost  and  is not  included  in pipeline                                                                  
     tariff  calculations.  However,  if  there's  a situation                                                                  
     where you have a lot of  leases and it's not economical on                                                                 
     one  to put that  plant, sometimes  a pipeline consortium                                                                  
     would build that and that can be included.                                                                                 
     I think  we'll need to review  the Prudhoe Bay leases  and                                                                 
     see, but I  think there may be some clauses in  there that                                                                 
     really  dictate that it not be  in the pipeline tariff  or                                                                 
     it  could  be the  other.  This  is an  issue  we haven't                                                                  
     examined yet, to my knowledge.                                                                                             
CHAIRMAN  TORGERSON  said he  understood that  an  amendment to  the                                                            
presidential decision  allows that so, it probably  will not show up                                                            
in a Prudhoe Bay  lease. He commented, "It still needs  to be looked                                                            
MR. THOMPSON informed  the committee that he chairs  the Instate Gas                                                            
Use Committee.  It has  looked at the Anchorage Economic Development                                                            
Corporation's  study  on Cook  Inlet gas  supply  for the  Anchorage                                                            
area. An Enstar representative  stated during testimony at an AHNGPC                                                            
hearing  that a major  concern for  Anchorage residents  is that  by                                                            
2007 or 2008,  deliverability of the  Cook Inlet reserves  will fall                                                            
below  the projected  needs at  that time.  While  reserves will  be                                                            
there,  deliverability  will fall short  of demand.  At that  point,                                                            
things have to  be done, such as storage or whatever.  He commented,                                                            
     Those solutions  will likely be costly and will  increase,                                                                 
     we  think from  our  committee's  viewpoint, the  cost  of                                                                 
     natural gas  in Anchorage. That will affect businesses  as                                                                 
     well as citizens.                                                                                                          
MR. THOMPSON  said that by 2017, the  deliverability problem  of gas                                                            
becomes even  more extreme.  To solve  that problem would  cost even                                                            
more  because  of  costs  associated  with  increased  exploration,                                                             
exploration incentives,  gas storage and bringing  in LNG. He noted:                                                            
     We  believe  bringing  natural  gas down  from  the  Slope                                                                 
     through  a spur line  off the line that  goes south  would                                                                 
     really  allow gas prices  to be much  more reasonable  for                                                                 
     all Anchorage residences  and businesses. This whole thing                                                                 
     of  south  or  north  interestingly  in  my  own  mind  is                                                                 
     becoming clean energy, self-sufficiency  for Alaska. If it                                                                 
     goes  north,   we  will  not  have  clean  energy,   self-                                                                 
     sufficiency  10, 20 or 30 years  down the road. If a  line                                                                 
     comes  south and we  can build spurs  off of to our  major                                                                 
     interior  cities, Anchorage  and other  locations, we  can                                                                 
     have that  self-sufficiency.  What a shame to have a  huge                                                                 
     resource  if our own  state cannot  be self-sufficient  in                                                                 
     energy ...                                                                                                                 
     Another thing - we have  this in the state of Texas to see                                                                 
     how they handle their royalty  state leases. We found that                                                                 
     they  market about  50 percent  of their  royalty gas  in-                                                                 
     kind,  market  it  themselves,  use  a portion  of  it  to                                                                 
     generate  electricity for state  government buildings  and                                                                 
     schools.  It's  trimmed  their   electricity  bill  by  30                                                                 
     percent for  the state. They also allow 50 percent  of the                                                                 
     royalty gas to be sold by  the producers. Fifty percent of                                                                 
     the time they're  able to get a higher netback  price than                                                                 
     the producers.  That's an interesting  observation and  we                                                                 
     will  examine  that as  kind  of an  option  for Alaska's                                                                  
     royalty share of gas, as well ....                                                                                         
REPRESENTATIVE FATE said  he noticed when reading a report on one of                                                            
the charts on  the chemical industry based on the  liquid components                                                            
of gas (ammonia  specifically), that it's either moving  overseas or                                                            
it's in  danger of  moving overseas  permanently.  He asked if  that                                                            
creates  a vacuum that  could be  filled by a  chemical industry  in                                                            
this state.                                                                                                                     
MR.  THOMPSON  replied  that they  are  looking  at that  issue  and                                                            
whether  there can  be value-added  processing  for petrochemicals,                                                             
expansion  of fertilizer  and potentially  some limited  LNG to  the                                                            
West Coast or  to very select Asian markets on a smaller  scale than                                                            
a  large  Valdez  project,  but  viable.  Petrochemicals,   such  as                                                            
olephins,  are made from  natural gas and  are used in feed  stocks.                                                            
Asia  has a  rapidly  growing  need  for more  olephins.  Japan  has                                                            
expressed  interest in DME  (dymethyl ether),  which is used  like a                                                            
propane butane  (LPG). Williams  Energy testified  that they  had an                                                            
internal study that assessed  a broader natural gas liquids business                                                            
within Alaska.                                                                                                                  
REPRESENTATIVE  GREEN said 20 years ago Dow Chemical  was looking at                                                            
the possibility  of a petrochemical  plant  at Fire Island  and that                                                            
met with a lot of resistance,  but he was thinking of something like                                                            
that. He asked  if it was within his committee's purview  to study a                                                            
line to Kenai.                                                                                                                  
MR. THOMPSON  replied  yes. They  are looking  at a  spur line  into                                                            
Anchorage for  domestic use and if that takes place,  there could be                                                            
an  additional spur  off  of a  hub that  would  go to  Kenai for  a                                                            
natural  gas refinery.  They  are assessing  whether  that would  be                                                            
economical.  He said the  Dow study looked  at an assessment  of not                                                            
shipping  natural  gas,  but  instead taking  all  the  natural  gas                                                            
liquids like propane and  butane out on the North Slope and shipping                                                            
down  a  separate  liquids  line  to  Fire  Island  and  some  other                                                            
locations.  His committee  is looking  at something  different  like                                                            
taking  the gasoline  itself  and manufacturing  some  of the  other                                                            
products he described. They are looking at the Kenai Peninsula.                                                                 
REPRESENTATIVE OGAN said, "Don't rule out Pt. Mackenzie."                                                                       
MR. THOMPSON said that was an excellent point.                                                                                  
MR. BROWN  added that everyone  needs to recognize  that there  is a                                                            
market  window  out there  and  it's  going to  get  subdivided.  He                                                            
     If we're not part of the  solution, something else will be                                                                 
     - nuclear, LNG from other  sources, plane coal technology,                                                                 
     whatever  ... We  should all  work together  to make  sure                                                                 
     Alaska's North Slope gas is ready.                                                                                         
CHAIRMAN  TORGERSON thanked  everyone  for their  participation  and                                                            
announced an at-ease from 5:03 p.m. to 5:06 p.m.                                                                                
MR.  HAROLD   HEINZE,  resource  consultant   for  the  Legislative                                                             
Majority,  said he  is under  contract  to help  evolve alternative                                                             
strategies  on the  gas issue.  There are  three  major areas  where                                                            
studies are not being done or they are way behind. He stated:                                                                   
     Number  one is, I was struck  by the fact that we need  to                                                                 
     seriously understand the  state of Alaska as a shipper and                                                                 
     in a  strategic sense,  what we would  achieve by being  a                                                                 
     shipper. Frankly, we need  someone in the state government                                                                 
     to kind of look at that  as almost an advocate and develop                                                                 
     that idea.  I think it is almost intuitively obvious  that                                                                 
     we would get  many of the same benefits from ownership  as                                                                 
     you  would to  be a  real shipper  in the  pipeline.  It's                                                                 
     something  you could probably  manage as a business  a lot                                                                 
     easier than  investing millions of dollars. It  would help                                                                 
     a lot  on the access  issue that we  were concerned  about                                                                 
     this morning. So, there are some real payoffs there.                                                                       
     Clearly,  being  a shipper  under  federal law  gives  you                                                                 
     special  standing before  FERC and what  I mean is if  the                                                                 
     State   of  Alaska  [was]  to   make  modified  contracts                                                                  
     contingent  on [indisc.] in Fairbanks,  [indisc.] city  of                                                                 
     Chicago,  for  instance.  That  might  be  an interesting                                                                  
     position to  be in as far as all the FERC proceedings  and                                                                 
     all  the other  things that  would happen.  The producers                                                                  
     would have to deal with  you as another shipper and not be                                                                 
     discriminated against in terms of [indisc.].                                                                               
     I also noted that the state  is not using a royalty board.                                                                 
     If you look  back, there's a reason the Royalty  Board was                                                                 
     put in place  and it would really be a pity if  the seller                                                                 
     of gas would  make the same mistakes we did on  [indisc.].                                                                 
     Whether it's  Netricity or whatever, it seems  to me those                                                                 
      are triggering provisions and we should be using that.                                                                    
CHAIRMAN TORGERSON  said the resolution  that required them  to look                                                            
at the Netricity proposal  directs them to use the process that's in                                                            
place,  which  is the  Royalty  Board. He  said,  "So,  we have  not                                                            
MR. HEINZE  said he  knew the Chair  had not  forgotten, but  he was                                                            
surprised that there was no mention of it. He stated:                                                                           
     The  second broad area  that I notice  is from a strategy                                                                  
     point  of view and trying to  look at the gas issue.  It's                                                                 
     obvious  that we're  trying to  maximize  the benefit  and                                                                 
     minimize,   eliminate   or  mitigate   the  impacts,   the                                                                 
MR.  HEINZ   said  that   there  are  human   impacts  as   well  as                                                            
environmental and the TAPS  experience is fully documented showing a                                                            
good  idea of  what all  the impacts  are  for a  large project.  He                                                            
didn't see anyone studying  them. He asked, for example, what is the                                                            
impact on  school systems  and public facilities  like airports  and                                                            
roads - and how to pay  for them. Those issues need to be reduced to                                                            
dollars so you know if they have a big or small price tag.                                                                      
Finally, MR. HEINZE  said he was struck by what he  didn't hear from                                                            
the AOGCC.  While FERC is  going to dominate  the regulation  of the                                                            
interstate molecules,  there's not one molecule coming  out of those                                                            
wellheads that  is going to be sold  until AOGCC changes  its rules.                                                            
The reason  that's important is that  the [indisc.] rules  right now                                                            
prohibit gas sale. He said  that creates a huge range of uncertainty                                                            
until this  gets resolved.   He  said he looked  forward to  working                                                            
with the committee on these issues to get something done.                                                                       
REPRESENTATIVE  GREEN said he thought he was right  on the gas sales                                                            
and asked  how they circumvented  that by  spiking the oil  with gas                                                            
MR. HEINZE replied  that the original definition of  oil in the TAPS                                                            
provided for 90  percent crude oil and up to 10 percent  natural gas                                                            
liquids. There are also  minor gas [indisc.] that occur in the field                                                            
right now, but no one has questioned those volumes.                                                                             
Public Testimony                                                                                                              
CHAIRMAN TORGERSON then took public testimony.                                                                                  
MR.   SCOTT  HEYWORTH,   Citizens   for  the   All-Alaskan   Gasline                                                            
Initiative, gave the following testimony.                                                                                       
     The  State of  Alaska,  both the  administration  and  the                                                                 
     legislature,  must insure  that the new  Prudhoe Bay  unit                                                                 
     operating  agreement is a public document and  here's why.                                                                 
     The  hydrocarbons at  Prudhoe Bay remain  Alaska's single                                                                  
     largest  and most  valuable  natural resource.  Right  now                                                                 
     nobody  outside  the  producer  companies  knows anything                                                                  
     about    the    underlying    intercompany    contractual                                                                  
     arrangements governing its  operation and development. The                                                                 
     Prudhoe  Bay  unit  members stated  in  1996  in hearings                                                                  
     before the AOGCC that the  Prudhoe Bay operating agreement                                                                 
     in  no way  inhibited  a major  gas  sale. In  2000,  they                                                                 
     announced that they had  totally realigned the oil and gas                                                                 
     interest   to  remove   all   the  major   conflicts   and                                                                 
     impediments which were not  even supposed to exist at all.                                                                 
     If it wasn't  broken in 1996, why was it changed  in 2000?                                                                 
     Is  realignment of  those interests  the  only thing  that                                                                 
     changed with  the new ownership arrangement and  operating                                                                 
     structure  and has realignment actually even taken  place?                                                                 
     The State  of Alaska simply cannot allow the basic  tenets                                                                 
     governing  future control  of its single  largest revenue                                                                  
     resource  to  be  confidential.  I  urge you  to  ask  the                                                                 
     appropriate industry witnesses  tomorrow when they testify                                                                 
     just  exactly when the  state and the  citizens of Alaska                                                                  
     will  have  our opportunity   to examine  and  judge  this                                                                 
     critical agreement. It is  the most important question and                                                                 
     one that you  must ask them tomorrow and hope  we will get                                                                 
     an honest answer.                                                                                                          
REPRESENTATIVE OGAN said he plans to follow up on that issue.                                                                   
CHAIRMAN TORGERSON thanked everyone for sitting through this                                                                    
marathon and adjourned the meeting at 5:17 p.m.                                                                                 

Document Name Date/Time Subjects