Legislature(2001 - 2002)

11/08/2001 09:00 AM NGP

Audio Topic
* first hearing in first committee of referral
+ teleconferenced
= bill was previously heard/scheduled
                     ALASKA STATE LEGISLATURE                                                                                 
             JOINT COMMITTEE ON NATURAL GAS PIPELINES                                                                         
                         November 8, 2001                                                                                       
                             9:00 a.m.                                                                                          
SENATE MEMBERS PRESENT                                                                                                        
Senator John Torgerson, Chair                                                                                                   
Senator Johnny Ellis                                                                                                            
Senator Donald Olson                                                                                                            
SENATE MEMBERS ABSENT                                                                                                         
Senator Rick Halford                                                                                                            
Senator Pete Kelly                                                                                                              
HOUSE MEMBERS PRESENT                                                                                                         
Representative Scott Ogan                                                                                                       
Representative John Davies                                                                                                      
Representative Mike Chenault                                                                                                    
Representative Hugh Fate                                                                                                        
HOUSE MEMBERS ABSENT                                                                                                          
Representative Joe Green, Vice-Chair                                                                                            
Representative Brian Porter                                                                                                     
Representative Reggie Joule                                                                                                     
COMMITTEE CALENDAR                                                                                                            
Department of Natural Resources, Oil and Gas Division                                                                           
     Bill Van Dyke, Petroleum Manager and Tim Ryherd - Geologist                                                                
     Will Nebesky - Cook Inlet gas usage and demand                                                                             
Agrium, Inc.                                                                                                                    
     Chris Tworek, Vice President, Supply Management                                                                            
Phillips Alaska, Inc.                                                                                                           
     George Findling, Manager, External Strategies and Scott                                                                    
     Jepsen, Manager, Cook Inlet Asset                                                                                          
UNOCAL Alaska                                                                                                                   
     Dan Thomas, Land Advisor                                                                                                   
Citizens Initiative for the All-Alaskan Pipeline                                                                                
     Scott Heyworth, Chair                                                                                                      
Foothills Pipeline, Ltd.                                                                                                        
     John Ellwood, President                                                                                                    
ANGTL Co.                                                                                                                       
     Richard Peterson, President/CEO                                                                                            
ENSTAR Natural Gas Company                                                                                                      
     Tony Izzo, President                                                                                                       
Evergreen Resources                                                                                                             
     Mark Sexton, President/CEO                                                                                                 
Committee meeting                                                                                                               
ACTION NARRATIVE                                                                                                              
TAPE 01-25, SIDE A                                                                                                            
CHAIRMAN  JOHN TORGERSON called  the meeting  to order at 9:00  a.m.                                                            
and gave a brief introduction.                                                                                                  
MR. BILL  VAN  DYKE, Petroleum  Manager,  Division of  Oil and  Gas,                                                            
Department of  Natural Resources (DNR), said he would  cover the gas                                                            
reserves  and production,  Mike  Ryherd  would cover  would  address                                                            
exploration for  gas in the Cook Inlet area, and Will  Nebesky would                                                            
cover  the gas  supply and  demand fundamentals  and  gas value.  He                                                            
referenced a map in their  18-page packets and explained each of the                                                            
slides, which indicated  Cook Inlet gas production and reserves: 217                                                            
trillion cubic  feet (tcf) was net production; 201  tcf was sold and                                                            
16 tcf was used  in field operations - no big changes  from previous                                                            
years.  Most  of the  gas  came from  the  old  gas field  that  was                                                            
discovered  in the 1960's.  He said there  were no surprises  on the                                                            
reserve side.  The numbers are down  a little bit from the  previous                                                            
year, but that's mainly due to production. He explained:                                                                        
     We haven't  added any significant  new reserves this  year                                                                 
     from new  discoveries or new  developments and with  round                                                                 
     numbers,  200 bcf  [billion  cubic feet]  production,  the                                                                 
     number  naturally  drops year  to year  until  we add  new                                                                 
     reserves.  That hasn't  happened  yet, but  I expect  that                                                                 
     picture  to change  over  the next  decade.  We can  start                                                                 
     adding  some  reserves to  that  column rather  than  just                                                                 
     subtracting production every year.                                                                                         
An  unidentified   speaker  asked  if  this  was  his   estimate  of                                                            
recoverable reserves or total reserves.                                                                                         
MR. VAN  DYKE replied his  definition of reserves  is the amount  of                                                            
recoverable gas remaining  to be produced. Of the remaining 2 tcf in                                                            
Cook Inlet, he said:                                                                                                            
     It's important  to understand  what this table is and  the                                                                 
     assumptions  that go with it and some of the caveats.  The                                                                 
     dates  are   hypothetical.  I  don't  know  when  certain                                                                  
     operations  are going to shut  down, when and why. I  just                                                                 
     picked things. The dates  aren't unreasonable, but they're                                                                 
     not  based on  gas supply  contracts or  specific reserve                                                                  
     estimates.  The consumption numbers are based  on how much                                                                 
     gas  is   being  consumed  today   for  LNG,  the  Agrium                                                                  
     operation, for field operations.                                                                                           
He explained  his  slide further.  He assumed  that  Agrium used  55                                                            
bcf/year,  LNG  used  80 bcf/year,  and  field  operations  used  15                                                            
bcf/year.  Assuming   those  three  industrial  uses   continue,  he                                                            
theorized how much gas is left for the utilities.                                                                               
If all the  industrial gas users and  oil fields shut down  in 2009,                                                            
there would be about 1  tcf of gas left for the utilities, a 17-year                                                            
supply. He noted,  "That's great for the utilities,  but it's pretty                                                            
harsh with  respect to  the industrial  operations. That's  scenario                                                            
He  walked  the committee  through  scenarios  two  and  three.  One                                                            
scenario  assumes  that Agrium  continues  operations  like it  does                                                            
today until  2015 [so  that] LNG is  extended out  to 2015.  He told                                                            
members, "That  scenario breaks the  bank. There's literally  no gas                                                            
left for the utilities.  In fact, the utilities sort of quit burning                                                            
gas  two years  ago if  you  want to  supply that  much  gas to  the                                                            
industrial uses."                                                                                                               
He  said scenario  four  is an  exploration  success  case in  which                                                            
another tcf  of reserves  is added. It assumes  there's going  to be                                                            
discovered  gas, it's  going to  be produced  and it's  going to  be                                                            
produced within that time period, which is a leap of faith.                                                                     
MR. TIM RYHERD,  geologist, Division  of Oil and Gas, Department  of                                                            
Natural Resources  (DNR), said he  would talk about exploration  for                                                            
oil and  gas supplies in  Cook Inlet. He also  used slides  with his                                                            
presentation  showing  where exploration  activities  are  occurring                                                            
right  now  and  by whom.  He  noted  that  exploration  is  on  the                                                            
He said that  basically exploration  activity in the Cook  Inlet was                                                            
done in the 60s  and he showed a graph of the exploration  wells for                                                            
oil and gas  drilled by year. The  gas in Cook Inlet was  discovered                                                            
in the process  of looking for oil. He pointed out  that in the last                                                            
four or five years four  exploration wells were drilled per year and                                                            
this year it looks like there will be more.                                                                                     
9:23 a.m.                                                                                                                       
MR.  WILL NEBESKY,  Commercial  Analyst, Division  of  Oil and  Gas,                                                            
Department of Natural Resources  (DNR), said he was going to discuss                                                            
the composition  of the demands for  gas produced in Cook  Inlet and                                                            
pricing relationships for  gas distribution. He started with a chart                                                            
of  historic  patterns  of gas  demand  in Cook  Inlet  and  pricing                                                            
evaluation  slides  and  then   went  to  the  outlook.  Five  major                                                            
components were represented.  LNG, which represents about 36 percent                                                            
of the  total consumption  of  gas in  Cook Inlet,  has been  fairly                                                            
steady  over  the   past  five  or  more  years.  The  ammonia-urea                                                             
consumption  of gas  represents about  24 percent  of the total  and                                                            
that's been fairly steady  also. Next are gas utilities, essentially                                                            
the Enstar  system, plus some gas  consumption to direct  users such                                                            
as Tesoro  and  that currently  stands at  about 13  percent of  the                                                            
total  and has  been  steady  also. Power  generation  with  Chugach                                                            
Electric  Association   and  the   Matanuska  Electric  Association                                                             
accounts  for about 17 percent  of the total  demand. Together,  the                                                            
gas utilities,  power generation and utilities account  for about 30                                                            
percent of  the total. The last category  shown is field  operations                                                            
and other gas consumption  for about 9 percent. Field operations use                                                            
of gas has come down quite a bit and flaring has been cut back.                                                                 
MR. NEBESKY  next  showed a  chart comparing  gas  produced in  Cook                                                            
Inlet with some  Lower 48 benchmarks from August '97  through August                                                            
'01. The next charts showed  royalty values. He pointed out that the                                                            
values are also  driven by settlement agreements that  the state has                                                            
with  producers, which  supercede  the lease.  He  said the  balance                                                            
between demand and supply  of gas is interrupted around 2003 or 2004                                                            
pending  no further  discoveries.  If  1 tcf  of gas  is  discovered                                                            
between now and  2004 and comes on line, that will  add 4 to 5 years                                                            
of supply that  is capable of meeting  the demand delivery  amounts.                                                            
In 2009, the imbalance between supply and demand kicks in again.                                                                
Regarding pricing  relationships, he said the Regulatory  Commission                                                            
of Alaska (RCA)  recently approved a proposed contract  agreement to                                                            
supply gas to Enstar from  UNOCAL, which includes indexing the price                                                            
to the Henry Hub.  He said they are seeing signals  of rising prices                                                            
in Cook Inlet by virtue of those contracts.                                                                                     
The  next  chart   compared  gas  supply  and  demand   for  various                                                            
situations  in Alaska.  The Prudhoe  Bay Unit is  recycling about  8                                                            
bcf/day.  The proposed  gas  line [indisc.]  and  the state  royalty                                                            
share  of a  major  gas sale  greater  than 4  bcf/day  would be  .5                                                            
bcf/day, which is not too  different from the total area-wide demand                                                            
of Cook Inlet, which is about .6 bcf/day.                                                                                       
TAPE 01-25, SIDE B                                                                                                            
9:45 a.m.                                                                                                                       
REPRESENTATIVE DAVIES asked  what kind of use he assumed in the last                                                            
MR.  NEBESKY   replied  basically   uses   for  space  heating   and                                                            
electricity  generation.  He stated,  "Right  now there's  a  modest                                                            
amount of natural gas use  in Fairbanks based on a small scale local                                                            
gas  distribution  company  effort. His  estimate  is  based on  the                                                            
potential for  expanding and reaching a fairly extensive  community-                                                            
wide space heating demand for Fairbanks."                                                                                       
REPRESENTATIVE  DAVIES asked  him to estimate  the total demand  for                                                            
MR. NEBESKY answered at least 50 percent.                                                                                       
SENATOR OLSON asked, regarding  all the utility cost spikes in slide                                                            
17,  if he  foresaw legislation  coming  that would  stabilize  that                                                            
volatile market.                                                                                                                
MR. NEBESKY replied:                                                                                                            
     In the RCA's decision, the  public advocacy section made a                                                                 
     proposal  that would involve  a different kind of pricing                                                                  
     mechanism  that would take into  account local Cook  Inlet                                                                 
     prices  to   a  greater  extent  than  the  UNOCAL/Enstar                                                                  
     contract.  The RCA decided against that proposal.  I can't                                                                 
     speak  for the RCA, but the volumes  of gas that would  be                                                                 
     involved in  that particular supply contract would  be one                                                                 
     piece  of a  bigger  pie of  gas supply  from  the Enstar                                                                  
     system,  which would involve  a variety of pricing points                                                                  
     and  mechanisms  that,  banded  together,  would  tend  to                                                                 
     provide  some  stability  and,  over  time,  some  of  the                                                                 
     contracts  of earlier vintage will expire and  be replaced                                                                 
     by new ones. This is an example of a new one.                                                                              
SENATOR OLSON  responded, "I guess my real question  is what kind of                                                            
effect will that have on production."                                                                                           
MR. NEBESKY  said he  knew it was  a major incentive  for UNOCAL  to                                                            
explore.  He noted  that  exploration  activity  in Cook  Inlet  was                                                            
stepped up, which he believes  was due to the anticipation of higher                                                            
REPRESENTATIVE  OGAN  asked  at  what  date  we  couldn't  meet  gas                                                            
MR. NEBESKY replied in 2004.                                                                                                    
REPRESENTATIVE OGAN asked what will happen then.                                                                                
MR.  NEBESKY  said  he anticipates  that  the  export  license  that                                                            
permits LNG exports will  probably undergo a stringent review by the                                                            
U.S. Department of Energy.  The LNG exports are licensed to continue                                                            
through 2009.  In the event that LNG operations cease  to export gas                                                            
additional  volumes might be available  for local use. He  said, "If                                                            
you take  the LNG  component out  of the total  demand picture,  you                                                            
drop consumption of gas  in Cook Inlet from 2010 bcf/year to perhaps                                                            
130 to 140 bcf/year less."                                                                                                      
He said  the likely  outcome of  the forecast  is continuing  upward                                                            
pressure on prices,  which is going to put economic  pressure on the                                                            
industrial uses of gas. He added:                                                                                               
     It's going to affect the  economics of both fertilizer and                                                                 
     LNG production,  and electric  power generation and  local                                                                 
     utility  gas use for  [the] state's  heating will also  be                                                                 
     affected  and we  are actually  in the  course of looking                                                                  
     more closely into the instate  demands for gas. Currently,                                                                 
     we  have  a  contractor  employed  with  the  division  to                                                                 
     investigate instate demand  uses and part of that analysis                                                                 
     is to  examine the sensitivity  of consumption to changes                                                                  
     in prices  - something we hope  to get a better sense  of.                                                                 
REPRESENTATIVE  DAVIES  asked  a question  about  page  18, but  his                                                            
question was indiscernible.                                                                                                     
MR. NEBESKY responded that  he assumed they could get the gas out of                                                            
the ground fast enough:                                                                                                         
     The gas is  there as far as gross reserves, but  you can't                                                                 
     get  enough out in  a given year.  That's the difference.                                                                  
     Just one comment  on the graph that's up there  - the gray                                                                 
     area does  not assume some of the production from  some of                                                                 
     the areas  that are under development today and  so it's a                                                                 
     pretty conservative  production forecast, because  we know                                                                 
     that Marathon  is developing  new areas today - Anadarko,                                                                  
     Aurora,  UNOCAL is doing some  work. It was based on  some                                                                 
     smaller  pools on production  soon, which will extend  the                                                                 
     gray area on that graph  outward. We really think that one                                                                 
     way or another,  there will not be a production  shortfall                                                                 
     in 2004 and 2005…                                                                                                          
REPRESENTATIVE  DAVIES asked what  the typical utility pays  for gas                                                            
now, including delivery.                                                                                                        
MR. NEBESKY replied  that the red line in cell 13  shows the average                                                            
royalty values for gas  dispositions to electric utilities, "So it's                                                            
about $2.50 currently."                                                                                                         
REPRESENTATIVE  FATE said he heard  Mr. Nebesky say the consumption                                                             
in Fairbanks  is .045  bcf. He asked  if he modeled  demand  given a                                                            
flat production  without any other gas coming in from  the North and                                                            
had he  done any  modeling for  future demands  of  the rest of  the                                                            
MR. NEBESKY replied that effort is currently underway:                                                                          
     As  part  of  the  study  of  instate  gas demand,   we're                                                                 
     exploring  the potential demand and the potential  for gas                                                                 
     related  fuel switching  opportunities  in communities  in                                                                 
     the   proximity  of   the  pipeline   route  as  well   as                                                                 
     communities  further  away that  could in  fact utilize  a                                                                 
     propane product generated  from processing of natural gas.                                                                 
     We're   exploring  the   nature  of   demand  in  smaller                                                                  
     communities  as  well  as  Fairbanks  in  and  around  the                                                                 
     Fairbanks  area and the different kinds of energy  options                                                                 
     that may be available that  are tied to the major gas sale                                                                 
     and  the gas line project.  We hope to  have more on  that                                                                 
     topic before the end of the year.                                                                                          
CHAIRMAN TORGERSON said:                                                                                                        
     I'm not totally thrilled  by RCA's decision to tie this to                                                                 
     the  Henry  Hub.  For  Kenai  Peninsula  folks,  with  the                                                                 
     industry  base  use of gas,  and now  to have  it reflect                                                                  
     sales  in the Lower  48 instead  of Cook  Inlet, puts  our                                                                 
     industry  potentially in  jeopardy if  we are a long  term                                                                 
     high priced…. We're reminded  constantly - in fact I got a                                                                 
     note from past Mayor [indisc.]  that Agrium is our largest                                                                 
     employer  and  a  great  corporate  citizen,  as  well  as                                                                 
     Phillips.  Those industries are on the line. I'm  not sure                                                                 
     the RCA in  their decision, just based upon their  wording                                                                 
     that  they  want  to  drive prices  up  so  it  will  spur                                                                 
     production  is  the proper  way to  work with  supply  and                                                                 
     demand  curves through  a regulatory agency.  I can see  a                                                                 
     prudent contract  and other merits, not on the  merit that                                                                 
     we  want  to drive  the  price  up. Having  said  that,  I                                                                 
     wondered  if  you  can  chart  out  the  price  using  the                                                                 
     historical  price  in the 92  slide, using  the Henry  Hub                                                                 
     pricing and let us see the  difference in that with Agrium                                                                 
     and LNG so we could see what that increase would be.                                                                       
CHAIRMAN TORGERSON  said he was trying to understand  what using the                                                            
Henry  Hub would  mean regarding  what  the legislature  can do,  if                                                            
An unidentified  representative  of the Department  of Revenue  said                                                            
Enstar's  demand substantially  swings  between  summer and  winter,                                                            
"So, they are a hard customer to satisfy."                                                                                      
CHAIRMAN TORGERSON said that a low commodity like fertilizer would                                                              
not survive high prices, unless one could drive the commodity                                                                   
market up to compensate.                                                                                                        
10:02 - 10:11 a.m. BREAK                                                                                                        
MR. CHRIS TWOREK, Vice President, Supply Management, Agrium, Inc.,                                                              
said the simple message behind his presentation is:                                                                             
     Agrium makes a significant  contribution to this community                                                                 
     and  we'd  certainly  like to  expand  and  maintain  that                                                                 
     contribution.  We  realize  we are  in  the international                                                                  
     commodity   business  and  it  requires  us  to   be  more                                                                 
     efficient  to find ways  of expanding  our production.  We                                                                 
     realize  this is a  very complicated  situation on how  to                                                                 
     improve  our  situation here.  We  would like  to propose                                                                  
     solutions and not just talk  about problems. We think that                                                                 
     there  is a partnership  that  can be had  here among  the                                                                 
     producers, government and  ourselves to seek that solution                                                                 
      and that's what my presentation is about this morning.                                                                    
He  said  he would  talk  about  Kenai  Nitrogen  Operations,  world                                                            
competitiveness  and issues  that other speakers  have brought  up -                                                            
the Alaska situation  specifically and potential solutions.  He told                                                            
     Agrium  today is  one of  the world's  largest fertilizer                                                                  
     producers.  We've got 14 production facilities  stretching                                                                 
     from  Alaska  down to  Argentina  through Canada  and  the                                                                 
     Lower  48.  While  we're primarily  a  wholesaler  in  the                                                                 
     world, we  do have a retail division in the states,  which                                                                 
     is  the second  largest, about  226 outlets  that stretch                                                                  
     from  California to  the eastern seaboard.  Our sales  are                                                                 
     above $2 billion. While  we're primary in all the nutrient                                                                 
     groups - phosphate, potash,  sulfate - we're predominantly                                                                 
     a  nitrogen company.  Today we  are the  largest nitrogen                                                                  
      company in the world with all of our ammonia and urea.                                                                    
     Generally  speaking, very large  world scale facilities  -                                                                 
     we  really thrive  on efficiency,  low cost.  Most of  our                                                                 
     plants  are very strategically  located  near key markets                                                                  
     and  lately  what we've  been  doing  is moving  from  the                                                                 
     continental  North America into the offshore.  This is why                                                                 
     we want this  facility here in Kenai and why we  built the                                                                 
     one we  did in Argentina. Also,  a highly skilled force  -                                                                 
     we've got about 5,000 employees  worldwide and we've got a                                                                 
     very   strong   commitment   to  both   safety   and   the                                                                 
     Let's  just turn to the Kenai  nitrogen operations.  There                                                                 
     might be some facts that  you don't quite appreciate about                                                                 
     this facility.  This facility produces six percent  of all                                                                 
     the nitrogen  that is made in  all of Canada and the  U.S.                                                                 
     So,  it's a  very major  facility  here. You  can see  the                                                                 
     products - ammonia and urea  - and we do consume that 50 -                                                                 
     55 bcf/y  of gas. We've got 300  full-time highly skilled                                                                  
     employees  at  any point  in  time; we  have at  least  30                                                                 
     contractors  on  site, also.  Our  primary markets  -  and                                                                 
     here's what's  very important - and you'll see  this as we                                                                 
     get into  competitive study a  little later on - but,  our                                                                 
     primary    markets   for   ammonia   are   Pacific    Rim,                                                                 
     predominantly  Korea.  Our  urea  goes  to  Mexico,  South                                                                 
     America, Taiwan and Korea.                                                                                                 
     I'll talk about this a little  later on, but you'll notice                                                                 
     that the Lower 48 and Canada  are not in that marketplace.                                                                 
     Our competition comes from  the former Soviet Union, South                                                                 
     America, Trinidad  and the Pacific Rim. There's  been many                                                                 
     new  plants. They're  slightly  more efficient  than  what                                                                 
     we've  got here. They've  been built  in the last decade.                                                                  
     Generally  speaking, the world  product prices tend  to be                                                                 
     capped by trapped gas economics.                                                                                           
     I do want  to focus on what Kenai  does contribute to  the                                                                 
     local  economy.  Obviously,  we're  probably  the largest                                                                  
     local  employer. If  not first, we  are definitely second                                                                  
     and again  we've got those 300  highly skilled employees.                                                                  
     We've  got various donations  and sponsorships because  we                                                                 
     really  do care  for  our communities  -  everything  from                                                                 
     caring for  the Kenai United Way, the Challenger  Learning                                                                 
     Center,  the Boys  and Girls  Club and,  again, we've  got                                                                 
     that commitment to safety and environment.                                                                                 
     I want to focus on the chart  on the right of us. We spend                                                                 
     something  like $130 million  and most  of that is on  gas                                                                 
     power and  pipeline, at least $70 million. This  year it's                                                                 
     a little bit more than that,  because some multipliers are                                                                 
     gas contracts.  You can see the  wages and benefits  - $25                                                                 
     million that  our people earn here. Property tax  is about                                                                 
     $3 million,  federal taxes and, yes we do pay  tax, is $18                                                                 
     million and other local spending $14 million.                                                                              
     What we've done here is  we've only pointed out what we've                                                                 
     spent. Most economists will  talk about a local multiplier                                                                 
     affect and  depending on the category, it's anywhere  from                                                                 
     2 - 6 times. The simplest  way of thinking about it is the                                                                 
     wages  and benefits  where $25 million  in this community                                                                  
     supports  a lot of  other businesses  surrounded by  other                                                                 
     Let's  turn  to world  competitiveness.  What  we have  to                                                                 
     appreciate  is that nitrogen is a world-traded  commodity.                                                                 
     It is really  one of the easiest ways to monetize  gas and                                                                 
     move it around the world.  In fact, once you've built your                                                                 
     ammonia  and urea  plant, and  if it's  on tidewater,  for                                                                 
     $15  - $50  per ton,  you can  move that  commodity  right                                                                 
     around the  world very quickly. You'll see a little  later                                                                 
     on in  this presentation what  that really means in  terms                                                                 
     of  world  trade. The  reason  high  gas prices  in  North                                                                 
     America   caused  a  lot  of  stress  on  the  nation   in                                                                 
     production,  a lot of it became uneconomic. North  America                                                                 
     does produce 14 percent  of the world's nitrogen. However,                                                                 
     when  you  saw  some of  those  peak  prices  in previous                                                                  
     presentations  that  caused  up  to 50  percent  of  North                                                                 
     America production to shut  in. The other thing you'll see                                                                 
     in the balance is that not  only was U.S. industry hurt in                                                                 
     terms of having  to shut down, but market was  replaced by                                                                 
     imports  from offshore.  The other  key thing, especially                                                                  
     concerning  royalties and other multiplier affects  on the                                                                 
     economy  is  that gas  producers  lost sales  during  that                                                                 
     period. Some of the demand  destruction is still happening                                                                 
     in the Lower 48.                                                                                                           
     Why does  that happen? Let me  explain in more detail  why                                                                 
     gas price is very key. Ammonia  takes about 33 - 34 MMBTUs                                                                 
     per  ton of  gas at  any point  in time depending  on  its                                                                 
     price,  about 75 - 90 percent  of the cost of producing  a                                                                 
     ton of ammonia.  This chart displays what really  happened                                                                 
     in  the Lower 48  in the past  year or  so. [He continued                                                                  
     explaining the chart.]                                                                                                     
He said that  plants in Saudi Arabia  and Malaysia can make  ammonia                                                            
for  about  $60. One  of  the columns  on  the  chart shows  what  a                                                            
dramatic  impact a $5 gas  price has. On  the average, that's  where                                                            
the price has been in the Lower 48, notwithstanding a $10 spike.                                                                
MR.  TWOREK continued  to  review his  slides of  the international                                                             
competition, and  said that the new plants being built  in Indonesia                                                            
and Malaysia  are in the  $1 range. He reiterated  the message  that                                                            
their prices are based  on international markets and not some higher                                                            
prices in the  Lower 48. One of the reasons they are  not selling to                                                            
the U.S. is the  Jones Act, which requires a U.S.  flagged vessel to                                                            
move between U.S.  ports. Today there is no U.S. flagged  vessel for                                                            
conveying ammonia. He explained:                                                                                                
     So,  even if we wanted  to sell ammonia,  there are  other                                                                 
     restrictions…. It is easier  for us to take ammonia out of                                                                 
     our other  plants, ...buy it on the world market  and move                                                                 
     it to the  states than take it out of here. Urea  is still                                                                 
     one or two  sea-going barges, but there's really  no other                                                                 
     long carriers.                                                                                                             
MR. TWOREK said  that Agrium wants to continue to  move ahead and do                                                            
something  positive  about  the  business  and  there  is  expansion                                                            
opportunity. Cook  Inlet is close to the Pacific Rim  markets, has a                                                            
very good business  climate, a very  skilled work force and,  today,                                                            
Agrium has  world scale clients.  However,  if Agrium leaves  it the                                                            
way it is, it's  not going to be competitive. This  plant is not the                                                            
most  efficient  plant  in  its  circuit.   It's  about  10  percent                                                            
defensive  in terms of efficiency  just because  of the year  it was                                                            
built. It needs  to be updated. Today they use 50  - 55 bcf and have                                                            
drawn up  various expansion  plans for over  a five-year period  and                                                            
could easily add another 30 bcf. He explained:                                                                                  
     From the forecasts we've  seen today, we'd be hard pressed                                                                 
     to commit another $2 - $3  MM to the plants based on those                                                                 
     gas  outlooks.  If you're  going  to  spend that  kind  of                                                                 
     money,  you expect 15 - 25 years  of economic life out  of                                                                 
     your  facility.  So, we  do have to  find a  solution  for                                                                 
     this. Also,  from what you've seen [indisc.],  our base of                                                                 
     50 - 55 means a long-term extension.                                                                                       
     What  are the benefits  to Alaska if  we do some of  this?                                                                 
     Well, obviously we're going  to continue that contribution                                                                 
     of $130 MM and grow it;  we're going to increase the sales                                                                 
     and exports;  we're going to  expand the field employment                                                                  
     base; we've  got greater community investment;  as much as                                                                 
     I hate  to pay taxes, it does  increase the tax base;  and                                                                 
     it  encourages gas  exploration  and more  importantly  it                                                                 
     also  opens  up other  industries  to the  export market.                                                                  
     Every  time we put an  Alaskan name  on that molecule  and                                                                 
     send it  around the world, it  opens up markets for  other                                                                 
     products.   However,   unfortunately,   we   are  in   the                                                                 
     international   commodity  business.   We've  got  to   be                                                                 
     competitive.  I'd love  to be able to  pay extremely  high                                                                 
     gas prices,  but you've seen  the charts. It's not to  be.                                                                 
     So, we have to figure out a path to get there.                                                                             
MR. TWOREK said  a possible long-term solution would  be a spur from                                                            
the gas pipeline.                                                                                                               
     Coal  bed methane  could add another  8 -  250 tcf and  if                                                                 
     nothing else,  could augment the utility supply  or be the                                                                 
     utility  supply.  Escopeta -  no one  is sure  about  that                                                                 
     today. There could be another  5 - 18 tcf there if they're                                                                 
     even  half ways right.  Even if they're  only right by  20                                                                 
     percent, that's  still a significant amount of  additional                                                                 
     gas that's not in today's estimates.                                                                                       
He said they're trying to set up a partnership; Agrium is willing                                                               
to put up some preinvestment. It has to have the appropriate                                                                    
risk/reward ratio.                                                                                                              
     What   we  have  done  in  the   past  is  bought  pregas                                                                  
     production.   We've   invested  in   infrastructure   like                                                                 
     pipelines.   We  have   done  exploration   and  drilling                                                                  
     partnerships.  This is  a way to reduce  the risk for  the                                                                 
     explorer.  It is a way of putting  some more cash flow  on                                                                 
     the table  to allow them to do  that kind of exploration.                                                                  
     It's extremely helpful [indisc.].                                                                                          
     There's  other  things. We've  noticed  that some  of  the                                                                 
     larger   producers  have   approached   the  state   about                                                                 
     potential royalty relief,  something about three years for                                                                 
     new  drilling.   We  would  certainly  be  supportive   of                                                                 
     something like that for any explorer.                                                                                      
     The  point  we  also like  to  make  is we've  got  to  be                                                                 
     careful. You've seen the  charts where the gap between the                                                                 
     utility gas and the industrial  gas has opened up and with                                                                 
     paragraph  36, that could expose  industrials to a higher                                                                  
     royalty  load than they now pay.  We've got to be careful                                                                  
     that extra  tax does not reduce  the competitiveness.  So,                                                                 
     we'd  really like  to see that  royalties be  kept at  the                                                                 
     existing  level and  be based  on actual  contracts or  at                                                                 
     least  some volume weighted price  rather than just  being                                                                 
     exposed to the highest possible  prices in the Cook Inlet.                                                                 
     The other thing that we  talked about, and this works more                                                                 
     for  North  Slope gas,  but  it's the  purchase  of  state                                                                 
     royalty   gas  for  industrial   purposes  and  obviously                                                                  
     supporting  that North Slope  spur line. All those things                                                                  
     and  anything  else that  the  department  suggests  we're                                                                 
     willing to work in a cooperative  partnership to see if we                                                                 
     can come  to a solution to this  rather ticklish problem.                                                                  
     In closing,  we really feel that successful partnering  is                                                                 
     going  to continue  Alaska's  development for  all of  its                                                                 
     sectors  and really when you  think about it, building  in                                                                 
     the  Cook Inlet  strengthens  the base  for mega-projects                                                                  
     such  as  the Alaska  pipeline.  Anything  you can  do  to                                                                 
     increase your  skilled worker base, you're better  off. We                                                                 
     have certainly  seen that in some of our other  situations                                                                 
     with  these  demographics  and things  of  this nature…We                                                                  
     obviously want to contribute  to Alaska's export position.                                                                 
     We want to  not only maintain, but [would] like  to expand                                                                 
     our contribution to this community.                                                                                        
REPRESENTATIVE  DAVIES asked  if coal  bed methane  was just  in the                                                            
Inlet area.                                                                                                                     
MR. TWOREK answered yes.                                                                                                        
CHAIRMAN TORGERSON  asked how the NOLA (New Orleans)  price compares                                                            
to Henry Hub.                                                                                                                   
MR. TWOREK  replied that  in over  20 years there  hasn't been  much                                                            
correlation, but  over the last few years the gas  price finally got                                                            
so high that  it overpowered any other  economic factor for  ammonia                                                            
and urea.                                                                                                                       
     The  reason the North  American industry  got into a  shut                                                                 
     down situation was they  really tried hard to pass through                                                                 
     the  NOLA price into  the price of  fertilizer. There  was                                                                 
     almost  a  one-for-one  correlation;  you  could  take  my                                                                 
     simple  formula  of the  btu value  times  whatever  their                                                                 
     price  was, add  $25  and that  was essentially  the  NOLA                                                                 
     price. Even today, it's pretty much there....                                                                              
CHAIRMAN TORGERSON asked him to explain paragraph 36.                                                                           
MR. TWOREK said he would  try; paragraph 36 is what royalties in the                                                            
state are based on. It says:                                                                                                    
     Royalties will be no less  than the highest three contract                                                                 
     prices in  the state. It basically has nothing  to do with                                                                 
     how  much volume.  So, you  could have  a peaking utility                                                                  
     contract at $5 and your  royalties, although you're paying                                                                 
     $1.20 or $1.50  would be based on the $5 rather  than what                                                                 
     you're actually paying to your producer.                                                                                   
CHAIRMAN   TORGERSON   asked   what   system   their  international                                                             
competition uses to value royalty.                                                                                              
MR. TWOREK replied  that it is a hodge-podge system  that depends on                                                            
how sophisticated  [a country's] internal  economic development  is.                                                            
Trinidad  is the most rigorous  and closest  to what Agrium  is used                                                            
to. There would  be a bench price  called at .90 - $1, then  oil and                                                            
gas  contracts  in Trinidad  would  have  escalators like  ours.  He                                                            
further explained:                                                                                                              
     If you head off into Saudi  Arabia, it becomes an equation                                                                 
     of we  have no value for the  gas that was sitting in  the                                                                 
     ground. Somebody,  either under government sponsorship  or                                                                 
     whatever,  built one  of these  plants,  and so, whatever                                                                  
     their  well-head  price  is  .50 -  $1,  their  sum  token                                                                 
     royalty  is around that,  but it will  slide usually  with                                                                 
     some  sort of investment  curve on the  plant. If you  put                                                                 
     $600  MM in  the  ground, you  get  some sort  of sliding                                                                  
     royalty and gradually you  will start picking up over time                                                                 
     to something that looks  like ours. But it gets very messy                                                                 
     over there  when you start digging  into it, because  they                                                                 
     really  try to extend  some monetization  of that trapped                                                                  
CHAIRMAN TORGERSON thanked him for his presentation.                                                                            
10:38 a.m.                                                                                                                      
MR. GEORGE FINDLING and MR. SCOTT JEPSEN, Phillips Petroleum                                                                    
testified next.                                                                                                                 
TAPE 01-26, SIDE A                                                                                                            
MR. JEPSEN told members:                                                                                                        
     Mr. Chairman,  for the record, my name is Scott  Jepsen. I                                                                 
     am employed by Phillips  as the manager for our Cook Inlet                                                                 
     assets.  I reside  in  Anchorage,  Alaska. Thank  you  for                                                                 
     giving Phillips an opportunity  to provide its perspective                                                                 
     on  the  matters  requested  in  the  attachment  to  your                                                                 
     October 22, 2001 letter.                                                                                                   
     For clarity,  my testimony is  structured in question  and                                                                 
     answer format,  addressing the 10 questions asked  in your                                                                 
     letter.   These   answers   also   provide   our  overall                                                                  
     perspective  on Cook Inlet, as  requested in your letter.                                                                  
[TRANSMISSION DIFFICULTIES TEMPORARILY SUSPENDED MR. JEPSEN'S                                                                   
TAPE 01-27, SIDE A                                                                                                            
11:00 a.m.                                                                                                                      
MR.  DAN THOMAS,  UNOCAL Land  Advisor,  said Cook  Inlet  producing                                                            
assets are  climbing rapidly.  Over the last  40 years there  hasn't                                                            
been much exploration for  gas as gas prices have been very low, but                                                            
that  is  changing.  UNOCAL  believes  that  the  minimum  long-term                                                            
requirements for  Cook Inlet can be met, but there  has to be higher                                                            
gas prices. He pointed out, "This is not a bad thing."                                                                          
He  referenced  one of  the  committee's  questions  about  UNOCAL's                                                            
projection  for demand and  supply in Cook  Inlet. His slide  showed                                                            
that there is  about a 5 tcf demand through 2022.  This large demand                                                            
will  not be  met  with  North Slope  gas;  there  will have  to  be                                                            
exploration.  He noted,  "North Slope  gas is not  going to  get you                                                            
here in time to  meet this opening that's very imminent.  This slide                                                            
clearly indicates an opening as early as 2003."                                                                                 
MR. THOMAS said, in response  to the committee's question about coal                                                            
bed methane:                                                                                                                    
     Coal  bed methane  was a  play that  UNOCAL  had an  owner                                                                 
     interest  in  a few  years  ago.  We were  the  owner  and                                                                 
     operator  of the  Pioneer Unit.  It was a  large coal  bed                                                                 
     methane unit up in Matanuska  Valley. We spent millions of                                                                 
     dollars   and  drilled  several   wells.  It  was  not   a                                                                 
     successful program for UNOCAL,  but the gas is there, coal                                                                 
     is there.  However, it's very  expensive, the pressure  is                                                                 
     very low;  the cost to drill the wells and the  technology                                                                 
     is just not where it was  a successful program for UNOCAL.                                                                 
     We  sold  out  our  interest  in  the  Unit  to Evergreen                                                                  
     Resources  wishing them  the best of  luck. We spoke  with                                                                 
     several   coal  bed  methane   companies;  Evergreen   has                                                                 
     expertise;  they have their own  completion rigs. We  hope                                                                 
     for above  Cook Inlet and Evergreen's  sake they are  very                                                                 
     successful.  But  we  did  choose  to exit  the  coal  bed                                                                 
     methane area.                                                                                                              
     The committee also asked  about the typical consumption by                                                                 
     the  various   users.  This  slide  was  developed   using                                                                 
     information   provided  to  the   Department  of  Natural                                                                  
     Resources.  They  do  a  very good  job  of  tracking  and                                                                 
     projecting  the use.  I use  their information  here  and,                                                                 
     again,  I don't go into  the detail as  DNR did that  this                                                                 
     The  next slide,  however, is  a very important  and  very                                                                 
     telling  slide. This one shows  the average daily demand,                                                                  
     peak  day demand  and then the  reserves that  we have  in                                                                 
     place and  what reserve additions might look like  and how                                                                 
     they might help us. If you  look at this slide, the points                                                                 
     where  the known  reserves cross  the peak  day demand  is                                                                 
     about  in 2003.  That  indicates that  by the  year  2003,                                                                 
     we'll  have a shortage  on the very  coldest day. Where  I                                                                 
     can  see  that the  rate  the  gas can  be  developed  and                                                                 
     produced  today  is just  about equal  to the  rate  we're                                                                 
     consuming   the  gas.  These  old  fields  are  declining                                                                  
     pressure,  so we're going  to have to  have new resources                                                                  
     added  or we're going to have  to move into some storage.                                                                  
     UNOCAL this  year for the first time put in place  the gas                                                                 
     storage   facility   to  help   facilitate   meeting   the                                                                 
     customer's  needs this winter. We injected gas  all summer                                                                 
     and we're  drawing gas from that field. We see  additional                                                                 
     gas  storage facilities  being required  in the very  near                                                                 
     term.  However,  if we look  out on  this slide  a little                                                                  
     further,  about  2005  or  2006 is  the  point  where  the                                                                 
     reserves cross the average  use. So this is the year where                                                                 
     you  can't produce  enough gas  in the summer  and put  it                                                                 
     into storage to meet the demands of the winter.                                                                            
     The line here  will indicate about 1 tcf addition  and the                                                                 
     line  out here is a  2 tcf addition  to the current  known                                                                 
     reserves. These are numbers  that we've seen from the U.S.                                                                 
     G.S. and  other sources as being  very viable and options                                                                  
     and opportunities that could  be in the Cook Inlet. UNOCAL                                                                 
     is  committed to  go out  and explore  for  these, but  we                                                                 
     can't do so and we don't  believe any company can do so at                                                                 
     current  prices. The  reason UNOCAL activities  in 1999  -                                                                 
     2000,  UNOCAL has been attending  the lease sales and  has                                                                 
     been negotiating  with private  land owners such as  CIRI,                                                                 
     other  Native corporations  and individual  owners on  the                                                                 
     Kenai  Peninsula.   We've  acquired  a  significant   land                                                                 
     position on the Kenai Peninsula.                                                                                           
     In 2000 we sold the fertilizer  plant to Agrium. [Indisc.]                                                                 
     was a corporate initiative  worldwide to sell off business                                                                 
     like  the  fertilizer   plant,  placer  mining   and  coal                                                                 
     divisions in other parts  of the world and focus worldwide                                                                 
     on oil and gas.                                                                                                            
     Later  in 2000,  the new contract  with  Enstar to supply                                                                  
     Enstar's  gas  needs  for  the  coming  year  -  that  was                                                                 
     presented  to the Regulatory Commission last December  and                                                                 
     for the past year we've  been going through the regulatory                                                                 
     approval process. In 2001  we've drilled three exploratory                                                                 
     wells here  on the Kenai Peninsula. We've also  been doing                                                                 
     some  innovative   step  out  programs  on  some   of  the                                                                 
     platforms  and some of the West Sac properties,  but these                                                                 
     exploration  wells that I'm talking about here  are on the                                                                 
     Kenai Peninsula and in the Ninilchik area.                                                                                 
     Two  weeks  ago the  Regulatory  Commission  approved  the                                                                 
     Enstar  contract as  you're aware of  and the exploration                                                                  
     wells that we have entered  into and the exploration wells                                                                 
     that we  have designed and scheduled  are as a result  and                                                                 
     directly because  of the Enstar contract. Had  it not been                                                                 
     for  the contract,  UNOCAL would  not have  been drilling                                                                  
     these exploration wells  and not be having the exploration                                                                 
     programs scheduled  that we currently have. We  anticipate                                                                 
     two additional exploration  wells to be drilled by the end                                                                 
     of this year within the  next couple of months. In 2002 we                                                                 
     have  eight  exploration  wells  scheduled  on  the  Kenai                                                                 
     Peninsula.  There  is  another  well  scheduled  in  South                                                                 
     Ninilchik;  we  will  then  go  to  Deep  Creek;  we  have                                                                 
     multiple wells  scheduled in the Anchor Point  area and we                                                                 
     will be  back up in the Deep  Creek area. So, we are  very                                                                 
     gradually exploring for gas on the Kenai Peninsula.                                                                        
     We also have  an extended seismic program. The  next slide                                                                 
     shows prices  in Cook Inlet that we have seen.  The bottom                                                                 
     line is the average utility  price; this is the Department                                                                 
     of Revenue's average weighted  price for utilities and you                                                                 
     see it fairly  constant and fairly flat. This  is the land                                                                 
     of  old contracts  dating  back  into  the 80s  and  these                                                                 
     contracts  are for gas that was discovered in  the 50s and                                                                 
     60s.  Again,  it is  a big  bubble  - the  hundred years'                                                                  
     supply. Most studies see  the tail end of that, but that's                                                                 
     what  this slide is  reflective of.  Recently, UNOCAL  has                                                                 
     gone  out on  the  market and  had to  buy some  spot  gas                                                                 
     occasionally  to supply  our  customer. We  have a supply                                                                  
     contract to  Agrium to sell them gas at a fixed  price. We                                                                 
     bought  gas  at a  very  high  price, but  again  this  is                                                                 
     reflective  of new current market  price. We recently  saw                                                                 
     in May  of last year  when Anadarko  and Phillips entered                                                                  
     into  new contracts with  Enstar to  supply some of  their                                                                 
     needs that  was at $2.75 price with an escalator  and this                                                                 
     price would  be the Enstar/UNOCAL price. These  are skewed                                                                 
     a little  bit. These two lines  should appear out in  '03.                                                                 
     These  are what these contracts  would be selling gas  for                                                                 
     out in '03,  because we're not currently selling  product.                                                                 
     This was put on here for comparison purposes.                                                                              
     The reason  for higher prices  is that it just costs  more                                                                 
     to  do  business  here  in Alaska.  The  labor  costs  are                                                                 
     higher;  there's not an oil and  gas supply store down  at                                                                 
     the corner like you would  find in Midland or anywhere out                                                                 
     in West  Texas. It just costs  more to get parts up  here.                                                                 
     Milk costs more and labor  costs more. There's a high risk                                                                 
     of doing  business here. We're  in a very undefined  area.                                                                 
     Down  in West Texas  there's a lot of  wells drilled,  so,                                                                 
     one has a  good idea of what may or may not be  out there.                                                                 
     Our  utilities  have a huge  swing  that we  don't see  in                                                                 
     other   parts  of  the   country  or   that  they  manage                                                                  
     differently   because  they  have  many,  many  different                                                                  
     sources  of supply. So, there's  a lot of redundancy.  You                                                                 
     don't  see the eight  to one swing that  we enjoy here  in                                                                 
     Alaska.  I talked about  the cost of  doing business -  we                                                                 
     drilled  a $15 million  dry hole two  years ago. That  was                                                                 
     actually a $4 million dry  hole and an $11 million road to                                                                 
     get to the dry hole. So, it just costs more.                                                                               
     There   are  environmental   issues.   This   is  a   very                                                                 
     environmentally sensitive  area. We're going to use things                                                                 
     that are necessary  to protect the environment  when we go                                                                 
     out and drill these wells, but that costs money.                                                                           
     Very  important   and  becoming  more  important   is  the                                                                 
     competition  for capital  with other  worldwide projects.                                                                  
     It's tough  to go down to the  corporate offices in  other                                                                 
     parts  of the country  and convince  management that  they                                                                 
     should  spend tens or hundreds  of millions of dollars  in                                                                 
     Alaska   when  they're  going   to  get  a  price  that's                                                                  
     significantly lower than  if it were invested in the Lower                                                                 
     48 or in another part of the world.                                                                                        
     Finally,  there's the royalty  value uncertainty. When  we                                                                 
     enter  into  contracts for  lower  value markets  such  as                                                                 
     industrial use where they  have a flat profile, where they                                                                 
     don't  have this swing that is  very expensive to develop                                                                  
     deliverability  to provide that  market such as Enstar  or                                                                 
     Chugach,  that  market   is a  lower  value  market   that                                                                 
     competes worldwide  as Mr. Tworek explained to  us. Again,                                                                 
     that swing  is flat; they use  the same amount of gas  day                                                                 
     in and  day out and  they use very  large volumes. So,  it                                                                 
     doesn't cost as much to  provide that gas to that customer                                                                 
     as  it   does  the  utility.   However,  when  the   state                                                                 
     calculates  royalties, again as Mr. Tworek indicated,  the                                                                 
     royalty is calculated on  highest prices paid to send fuel                                                                 
     to  the area.  So, the  producers  are exposed  to paying                                                                  
     royalty  on a  high price  for gas  that was  sold to  the                                                                 
     utilities  for  that  same gas  being  sold to  the  local                                                                 
     industrial users.                                                                                                          
     All  this gets us  is what UNOCAL  is up  to for the  next                                                                 
     couple  of years. Many people  have asked if we are  still                                                                 
     in  business.  Absolutely  we  are. UNOCAL  is  very  much                                                                 
     dedicated  and rededicated  itself here  to Alaska and  to                                                                 
     the Cook Inlet.  In 2001 we spent $8 million on  the Kenai                                                                 
     Peninsula  exploration  program.  In 2002  we're going  to                                                                 
     spend $49 million and in  2003 we've budgeted and approved                                                                 
     in   our  budget  $55   million.  These   again  are   for                                                                 
     exploration  wells on the east  side of Cook Inlet up  and                                                                 
     down  the road,  the Sterling  Highway between  Kenai  and                                                                 
     Palmer,  down in Anchor  Point area.  The dollars you  see                                                                 
     here are a combination of  dollars that we expect to spend                                                                 
     on  exploration  wells  and in  an equity  position  of  a                                                                 
     pipeline.  We envision a pipeline  being constructed  from                                                                 
     Kenai  to Anchor Point. The dollars  here again are  about                                                                 
     50  percent equity  ownership.  If the ownership  of  that                                                                 
     pipeline  structure changes,  the budget for UNOCAL  would                                                                 
     increase by about $20 to $25 million.                                                                                      
     This is the  area again where we're looking at  exploring.                                                                 
     This is  the Ninilchik unit.  We've heard some discussion                                                                  
     earlier  that  Marathon was  drilling  a couple  of  wells                                                                 
     there  to go  to number  1 and  2. These  are also UNOCAL                                                                  
     wells. We  are in a partnership arrangement with  Marathon                                                                 
     with Marathon as the operator.  We will then be going down                                                                 
     to  Deep  Creek.  We  submitted  an  application   for  an                                                                 
     exploration  unit to the Department  of Natural Resources                                                                  
     just yesterday  as well as the  south Ninilchik prospect.                                                                  
     These two prospects are 100 percent owned by UNOCAL.                                                                       
MR. THOMAS  indicated other  prospects on a  map and said  they                                                                 
envision  a pipeline  being built  all the way  down to Anchor                                                                  
Point as a  main transportation line.  From Anchor Point  south                                                                 
will be a distribution  line constructed  by Enstar taking  gas                                                                 
to the  residents of  Homer.  They  do not focus  on the  North                                                                 
Slope and see exploration in the Cook Inlet  for the next 15 to                                                                 
20 years  as what is necessary  to meet  the needs here.  There                                                                 
will be a shortage before then.                                                                                                 
     UNOCAL  has picked up  a significant  acreage position  in                                                                 
     the  Foothills.  We're very  interested  in the  area.  We                                                                 
     would  like nothing more  than to see  that come forward.                                                                  
     However, it's not going to be the near-term solution.                                                                      
     As far  as the legislation to  consider, royalty is  going                                                                 
     to be a big  factor. We would encourage this committee  to                                                                 
     consider a  royalty valuation on arms-length transactions                                                                  
     and  make  this  consumer  based.  We're  not  looking  at                                                                 
     shorting the State of Alaska  on its royalties. We want to                                                                 
     pay  the State  of Alaska  a very  fair price  on royalty                                                                  
     valuation.  However, it would appear abundantly  unfair to                                                                 
     require  the producers  to pay a higher  royalty than  the                                                                 
     price that  we receive for the products. We encourage  the                                                                 
     committee  to consider investment tax credits  for new gas                                                                 
     based  industries  such  as  the  expansion  project,  the                                                                 
     Agrium  facility, or  investment tax  credits for new  gas                                                                 
     exploration  and  development in  the Cook  Inlet. Again,                                                                  
     it's one thing to take money  out from a large country and                                                                 
     let  them export it  to other parts of  the world, but  we                                                                 
     believe  that if a company is  committed to spending  tens                                                                 
     of  hundreds of  millions of  dollars putting  it back  in                                                                 
     Alaska  and back into the local  economy, there should  be                                                                 
     some sort of tax credit to encourage them to do so.                                                                        
     Finally,  we would encourage  you to simplify the royalty                                                                  
     valuation.  Being able to understand and predict  what the                                                                 
     royalty  is going to  be on the gas that  we sell when  we                                                                 
     enter  into a  contract is  very important.  It's hard  to                                                                 
     estimate  what the value might  be of gas that's going  to                                                                 
     be sold or  transferred 10 - 15 years from now  on a long-                                                                 
     term contract.  With that, we  would finally request  your                                                                 
     support for  the Kenai Homer pipeline. There's  nothing in                                                                 
     particular  that I ask  for in terms  of legislation,  but                                                                 
     there  is a significant  proceeding that  will have to  be                                                                 
     undergone.  We'll   have to  go  through  the  Regulatory                                                                  
     Commission's  approval  process again  for that pipeline;                                                                  
     we'll  go with the  State Pipeline  Coordinator and  there                                                                 
     will be a  couple of dozen permits that will be  required.                                                                 
     We're looking at a very  aggressive program. We're looking                                                                 
     at if  the pipeline  does go forward,  having gas all  the                                                                 
     way to the south end of  the Peninsula by the end of 2003.                                                                 
     We're looking at a two-year construction.                                                                                  
AN UNIDENTIFIED  REPRESENTATIVE  said  one  of his  slides showed  a                                                            
decline in  2009 to 2010 of daily  demand and asked why the  decline                                                            
would occur then and what it signifies.                                                                                         
MR. THOMAS replied that  represents the export extension exploration                                                            
for the LNG.  He pointed out, "We  don't know whether Phillips  will                                                            
extend their LNG  export fabrication or not. There  was no reason to                                                            
assume that they would  or they wouldn't. It's simply a state of the                                                            
contract as it exists today."                                                                                                   
The same  Representative asked  if they had  decided on the  size of                                                            
their line.                                                                                                                     
MR. THOMAS replied  that they are working under the  assumption that                                                            
the  pipeline will  be 16  inches,  but there  are wells  yet to  be                                                            
drilled and they are hoping  to get to 20 inches. The terminus would                                                            
be at the Kenai gas field.                                                                                                      
CHAIRMAN TORGERSON thanked  him for his testimony and said they were                                                            
ready to  resume testimony  from Mr.  Jepsen. The  following  is Mr.                                                            
Jepsen's written testimony, which includes the committee's                                                                      
questions and Mr. Jepsen's responses:                                                                                           
     1)   Provide  the committee  with an  update on Phillips'                                                                  
     LNG  facility  activities  and its  Cook Inlet  gas  field                                                                 
     Phillips  is the operator  of the Beluga  River Field  and                                                                 
     the North  Cook Inlet Unit (NCIU).  Phillips' interest  in                                                                 
     the  Beluga River Field  is 33% and in  the NCIU is  100%.                                                                 
     The  Beluga  Field primarily  provides  gas to  the  local                                                                 
     utility market  with some sales of gas to the  Agrium urea                                                                 
     plant.  Total gross  yearly production  out  of Beluga  is                                                                 
     approximately  38 BCF  per year. Gas  from the North  Cook                                                                 
     Inlet   Unit  is  produced  from   the  Tyonek  Platform.                                                                  
     Currently,  100% of the gas from Tyonek is used  to supply                                                                 
     the  Phillips  portion of  the  feed requirements  to  the                                                                 
     Phillips-Marathon  LNG plant.  The yearly production  from                                                                 
     the  NCIU is  approximately  53  BCF. Phillips'  plan  for                                                                 
     these   fields  is  to  maintain   deliverability  within                                                                  
     economic constraints. Phillips  also has a 50% interest in                                                                 
     the Moquawkie  gas field, a small, one well, undeveloped,                                                                  
     l998  discovery on the  west side of  Cook Inlet near  the                                                                 
     Beluga River Field.                                                                                                        
     The  Kenai LNG plant  is jointly owned  by Phillips  (70%)                                                                 
     and Marathon (30%). Total  feed to the plant from Phillips                                                                 
     and Marathon  is approximately 77 BCF per year.  The plant                                                                 
     produces  on average about 1.5  million tons per annum  of                                                                 
     liquefied   natural  gas,  which   is  sold  to  Japanese                                                                  
     utilities.   Our  current  plans   do  not  envision   any                                                                 
     significant changes to the  operation of the LNG facility.                                                                 
     2)   What  is the expected length  of time Phillips  plans                                                                 
     to  continue current  levels of LNG  production under  the                                                                 
     most   recent  production  estimates   from  natural   gas                                                                 
     resources in the Cook Inlet?                                                                                               
     On April  2, 1999,  Phillips and Marathon  were granted  a                                                                 
     renewal of the export license  for the Kenai LNG plant for                                                                 
     the  period:  April,  2004  to March,  2009  by  the  U.S.                                                                 
     Department  of Energy,  Office of Fossil  Fuels. For  that                                                                 
     renewal,  a  thorough  analysis of  reserve  adequacy  was                                                                 
     conducted and substantial  hearings were held. The results                                                                 
     of  that process demonstrated  that  reserve capacity  was                                                                 
     sufficient  for  LNG  exports  to  continue   through  the                                                                 
     approved  period.  It  was  also  found  that  export  was                                                                 
     consistent  with the public interest and would  not result                                                                 
     in a local  or regional gas supply shortfall on  an annual                                                                 
     Phillips  hopes to operate the  Kenai LNG plant well  past                                                                 
     2009.  However, it is  premature to  determine whether  we                                                                 
     will seek  another extension, but if we do, there  will be                                                                 
     adequate  gas reserves  to do so, as  well as provide  for                                                                 
     the state's needs.                                                                                                         
     3) What,  if any, expansion  plans are  being made in  the                                                                 
     event  that a natural  gas supply is  made available  from                                                                 
     the North Slope?                                                                                                           
     Phillips   is  focusing  its  ANS  gas  commercialization                                                                  
     efforts  on a pipeline to the  Lower 48/Canadian markets.                                                                  
     On  the general  topic of  LNG, we  would also  note  that                                                                 
     Phillips  has  been part  of the  Alaska North  Slope  LNG                                                                 
     Sponsor  Group since  its inception  in  1999. A detailed                                                                  
     review of  the Sponsor Group work was given to  the Senate                                                                 
     Resources  committee in April 2001. That review  indicated                                                                 
     that  the Nikiski  area and  a pipeline  from Prudhoe  Bay                                                                 
     would provide  a technically feasible and permittable  LNG                                                                 
     plant   site/route   configuration.    However,   a   cost                                                                 
     competitive,  economically viable  Alaska LNG project  has                                                                 
     yet to be identified.                                                                                                      
     4)  Do you  plan to  apply for  an extension  of your  LNG                                                                 
     export authorization  past 2009 if North Slope  gas is not                                                                 
     available?  Is your  answer different  if North Slope  gas                                                                 
     were available?                                                                                                            
     As mentioned  in my previous  answer, Phillips would  like                                                                 
     to extend  the operation of its  LNG operation past  2009,                                                                 
     if  the dedicated  gas supply  available  to Phillips  and                                                                 
     Marathon in Cook Inlet allows  us to do so. However, we do                                                                 
     not see  that an export license  extension is necessarily                                                                  
     contingent  on ANS gas being  available in the Cook  Inlet                                                                 
     5)   What  is your assessment of the Japanese  LNG market?                                                                 
     The  East Asian  LNG market  is fiercely  competitive  and                                                                 
     likely  to continue to be so  throughout the remainder  of                                                                 
     the  decade.  In round  numbers,  we see  about  60 to  75                                                                 
     million metric  tons per year of potential new  LNG supply                                                                 
     chasing  after 20 to  40 million metric  tons per year  of                                                                 
     new  LNG demand  through 2010.  As a result,  recently  we                                                                 
     have seen  prices for new contracts trending downward  and                                                                 
     pressure for shorter contract periods.                                                                                     
     This  reinforces  the  difficulties  that an  Alaskan  LNG                                                                 
     project  faces  in the  East Asian  market over  the  next                                                                 
     decade. While the market  for new LNG is expected to grow,                                                                 
     there  is an over abundance  of lower  cost supply and  in                                                                 
     smaller  increments  compared  to new  LNG that  would  be                                                                 
     delivered from Alaska.                                                                                                     
     That said, Phillips will  continue to monitor and evaluate                                                                 
     this  situation  for possible  opportunities  for Alaskan                                                                  
     6)   What  is your current assessment of proven  developed                                                                 
     gas  reserves,   proven  undeveloped   gas  and  unproven                                                                  
     probable  gas reserves  in the  Cook Inlet?  What is  your                                                                 
     current  assessment of undiscovered  gas resources in  the                                                                 
     Cook Inlet?                                                                                                                
     For competitive  reasons, Phillips  does not increase  its                                                                 
     internal  assessment  of reserves  for fields  or basins.                                                                  
     However,  we  can  cite  several  published  reports  that                                                                 
     provide  estimates of Cook Inlet  reserves. Schlumberger-                                                                  
     Geoquest  performed   a study  for  Phillips/Marathon   in                                                                 
     support  of the  LNG export  license renewal  effort.  The                                                                 
     Schlumberger-Geoquest   report   estimated  that,  as   of                                                                 
     1/1/98,  total remaining  proven  reserves  in Cook  Inlet                                                                 
     stood  at  3.3 TCF  (cited  in the  application  to  Amend                                                                 
     Authorization to Export  Liquefied Natural Gas, Department                                                                 
     of  Energy,  Office  of  Fossil  Energy).  Adjusting   for                                                                 
     estimated  production volumes since then, 1/1/2001  proven                                                                 
     reserves  stood  at around  2.7  TCF.  The USGS  has  also                                                                 
     estimated   probable  reserves  at  1  TCF  and  possible                                                                  
     reserves  at 1.4  TCF (as reported  in "A  Review of  Cook                                                                 
     Inlet Natural Gas Supply  and Demand", Northern Economics,                                                                 
     2001, p.8).                                                                                                                
     With regard  to Phillips' assessment  of undiscovered  gas                                                                 
     resources in Cook Inlet,  one has to first step back a bit                                                                 
     from the  numbers. While the  estimate of proven reserves                                                                  
     is  fairly   precise,  the  assessment  of  possible   new                                                                 
     potential   reserves  is  less  precise.  The  only   real                                                                 
     significance of the USGS  estimate is that it indicates we                                                                 
     probably  have not found everything  there is to be  found                                                                 
     in Cook  Inlet. The only way  to know for sure is through                                                                  
     drilling. Because of the  historic overabundance of gas in                                                                 
     Cook  Inlet, drilling  activity  targeted at  gas has  not                                                                 
     been as high as it might  have been. The supply and demand                                                                 
     relationship  is starting  to turn now,  with the extreme                                                                  
     supply  overabundance  relative  to demand  dropping to  a                                                                 
     level  more çomparable  to the  Lower 48.  While some  see                                                                 
     this  as a matter  of concern,  it is  premature to  think                                                                 
     that  the market  will not react  and fill  in the supply                                                                  
     opportunities  as  they  arise. From  an  exploration  and                                                                 
     production  point  of  view, this  is  really a  time  for                                                                 
     optimism, not pessimism. Let me explain.                                                                                   
     By  1970, gas  reserves  in Cook Inlet  stood  at about  8                                                                 
     trillion  cubic feet  (TCF) and production  was about  145                                                                 
     billion  cubic  feet  per  year:  thus   the Reserves   to                                                                 
     Production  ratio (R to  P ratio) was  about 55 years.  As                                                                 
     would  be  expected with  such  a high  ratio,  there  was                                                                 
     little  incentive  to  explore  for gas,  since  it  would                                                                 
     either  be a long time before  revenues would be realized                                                                  
     for the additional,  discovered gas or the gas  would have                                                                 
     to be sold at inordinately low prices.                                                                                     
     Over time, the known Cook  Inlet reserves have been slowly                                                                 
     consumed. As indicated above,  reserves are about 2.7 TCP.                                                                 
     Consumption  is about 215 bet/yr  and the R to P ratio  is                                                                 
     just  under 13 years.  Theoretically,  this would suggest                                                                  
     that developed  reserves will be exhausted in  about 2014.                                                                 
     However,  in reality, this is  a very normal situation  in                                                                 
     the  natural resource  industry. For example,  the R to  P                                                                 
     ratio of the Lower 48 is  about 7 years and it has roughly                                                                 
     been at  7-10 years, with a slight  decline, for the  last                                                                 
     20 years. New resources  have been added at about the same                                                                 
     level  as  consumption.   The  market  for  gas   and  the                                                                 
     increased demand spurs exploration and development.                                                                        
     In  the past,  the overabundance  of  gas supply  in  Cook                                                                 
     Inlet  has  served  as  a disincentive  for  exploration.                                                                  
     However, for  the first time in about 30 years,  a company                                                                 
     that finds new gas can actually  sell at least some of its                                                                 
     potential production at  a price that may yield acceptable                                                                 
     rates of return.                                                                                                           
     In fact,  Phillips believes  we are  beginning to see  the                                                                 
     early signs  of a new phase of exploration and  discovery.                                                                 
     We  have  seen  public  announcements   showing  that  gas                                                                 
     activity has  begun to pick up. Phillips and Anadarko  had                                                                 
     success  in finding gas  in the Moquawkie  Field. We  also                                                                 
     note the public announcement  that Nikolai Creek No. 3 has                                                                 
     been successfully  recompleted  and that Northstar Energy                                                                  
     Group  proposes a well  to tap the North  Fork gas field.                                                                  
     Marathon and Unocal are  actively exploring throughout the                                                                 
     Kenai  Peninsula. There is clearly  a renewal of interest                                                                  
     in gas exploration  and production in the Cook  Inlet area                                                                 
     and the results  of that effort are beginning  to be seen.                                                                 
     Exploration  for oil is also  on an 'upswing'. Forest  Oil                                                                 
     has made  an oil discovery at  Redoubt Shoal and Phillips                                                                  
     is  drilling an oil  exploration well  near Anchor Point.                                                                  
     While  these  oil  fields  may  not  add significant   gas                                                                 
     reserves, they do provide  infrastructure that could lower                                                                 
     the  economic  hurdles  for  additional  exploration   and                                                                 
     On the  price side,  Enstar has shown  willingness in  its                                                                 
     more  recent  contracts   to  tie gas  prices   to widely                                                                  
     accepted gas  indices such as Henry Hub. While  Cook Inlet                                                                 
     is  not connected  to  the Lower  48, receiving  Lower  48                                                                 
     prices  or better for  Cook Inlet gas  makes it easier  to                                                                 
     evaluate  gas  plays  in  Cook  Inlet  relative  to  other                                                                 
     options available to potential investors.                                                                                  
     Beyond these  basic observations, there are other  reasons                                                                 
     for  prudent  optimism.  First,  seismic  technology   has                                                                 
     progressed  and should significantly  improve exploration                                                                  
     chance factors. Second,  there are more players, some new,                                                                 
     in  the picture. Besides  the historical  players such  as                                                                 
     Unocal, Marathon, Chevron  and Phillips, companies such as                                                                 
     Northstar   Energy,   Forest   Oil,   Anadarko,   Aurora,                                                                  
     Crosstimbers,  Pelican Hill and Escopeta are investing  in                                                                 
     the  Inlet.  Clearly, there  are  players making  it  more                                                                 
     likely  that wells will be drilled  and discoveries  made.                                                                 
     In  looking  at  Cook  Inlet  as  typical  of  any large,                                                                  
     prolific   resource   basin,  there   are   a  couple   of                                                                 
     characteristics  that are common to all of these  types of                                                                 
     basins.  First,  there  is invariably  a  distribution  of                                                                 
     field  sizes  in basins  that  have  been  well explored.                                                                  
     Second,  there are  normally cycles  of discoveries  based                                                                 
     upon technology or play concepts.                                                                                          
     I   want  to   first  take   the  topic   of  field   size                                                                 
     distribution.   We   know   that,  typically,   naturally                                                                  
     occurring  phenomena  like hydrocarbon  accumulations  are                                                                 
     distributed  in  what  is technically  defined  as  a  log                                                                 
     normal  distribution.  Simplistically, there  should be  a                                                                 
     few giant fields and an  ever-increasing number of smaller                                                                 
     fields. In  Cook Inlet, almost all of the currently  known                                                                 
     reserves  are contained  in what industry  would consider                                                                  
     large  or giant  gas fields.  These are  fields with  more                                                                 
     than  1 TCF of initial  reserves. These  fields have  long                                                                 
     been  regarded  as  'accidental  discoveries'  made  while                                                                 
     exploring  for oil. There  has also  been a sprinkling  of                                                                 
     relatively small discoveries  in the 50 BCF or less range,                                                                 
     which  are an inevitable result  of the exploration  wells                                                                 
     that  have been  drilled. What  are undiscovered  are  the                                                                 
     expected  field  sizes in  between.  As the  incentive  to                                                                 
     explore for  gas in Cook Inlet increases, there  is a high                                                                 
     likelihood  that  explorers   will  start  to  find  these                                                                 
     middle-sized  fields.  With higher  prices  and increased                                                                  
     infrastructure,  many  of these fields  could be economic                                                                  
     and in  aggregate could contain  relatively large amounts                                                                  
     of gas.                                                                                                                    
     Discovery  cycles  are  also a  common  characteristic  of                                                                 
     basins   like  Cook   Inlet.   Typically,   a  number   of                                                                 
     discoveries  are initially  made in a  basin based upon  a                                                                 
     particular  geologic concept,  often followed by a period                                                                  
     of  few discoveries.  Almost  invariably, there  is a  new                                                                 
     with  the peak gas  demand of consumers.  While such  peak                                                                 
     facilities    are   common   elsewhere,   due    to   high                                                                 
     deliverability,  there has been little incentive  for them                                                                 
     in Cook Inlet.                                                                                                             
     In public forums, we often  hear the concern that the Cook                                                                 
     Inlet  is running  out of  gas. It  strikes  us that  this                                                                 
     assertion  basically ignores the role that exploration  is                                                                 
     very  likely  to  play  in Cook  Inlet.  As  long  as  the                                                                 
     industry has incentive to  drill, we believe the next five                                                                 
     to ten  years will yield much  about the potential of  the                                                                 
     7)  What are  your current  exploration  plans within  and                                                                 
     outside known producing  fields in the Cook Inlet? What is                                                                 
     your  proposed Cook  Inlet drilling  budget  for the  next                                                                 
     five years?                                                                                                                
     As  I mentioned  in  my  response to  the  last question,                                                                  
     Phillips is  drilling an oil exploration well  near Anchor                                                                 
     Point. For proprietary reasons,  Phillips does not release                                                                 
     its specific exploration  plans or strategies. In general,                                                                 
     however,   we  will  look  at  any  Cook  Inlet  drilling                                                                  
     opportunity  on a case by case  basis and determine  if it                                                                 
     competes   with    Phillips'   worldwide   opportunities,                                                                  
     including those on the North Slope.                                                                                        
     8)  What  is  your current  assessment  of  South-central                                                                  
     demand for  gas over the next ten to twenty years.  If you                                                                 
     have  pessimistic,  optimistic   and  base cases,  please                                                                  
     generally describe each case.                                                                                              
     The  area  utilities  and  the  University  of  Alaska  at                                                                 
     Anchorage  generally  provide  demand  forecasts  for  the                                                                 
     South central area on an  ongoing basis. In general, we do                                                                 
     not see any  significant variances around their  forecasts                                                                 
     at   this  time   that  would   influence   our  business                                                                  
     9) We have heard that deliverability,  the ability to meet                                                                 
     peak winter demand, may  be a problem soon. Please discuss                                                                 
     whether  you see deliverability  constraints  in the  next                                                                 
     ten years.  Please discus what  can be done to reduce  any                                                                 
     deliverability problem.                                                                                                    
     Gas  demand in  the Cook  Inlet is  very seasonal.  For  a                                                                 
     period  of a  few days  to perhaps  several  weeks in  the                                                                 
     winter, consumption  peaks perhaps 30 - 40 percent  higher                                                                 
     than  for the  rest of the  year. However,  meeting  those                                                                 
     demands  is  not so  much  a  function of  reserves  as  a                                                                 
     function   of  the   capacity   of  wells   and  delivery                                                                  
     facilities.  To meet the peak  winter demand, investments                                                                  
     must be made that are underutilized  at other times of the                                                                 
     year.  For example, in  the Lower 48,  Canada and Europe,                                                                  
     investments  have been made for  peak shaving, facilities                                                                  
     specifically  designed to supply gas during seasonal  high                                                                 
     demand.  Common  types  of peak  shaving  are underground                                                                  
     storage in converted reservoirs,  LNG storage and facility                                                                 
     capacity  expansions   such  as  additional  compression.                                                                  
     Typically,  these investments  are made by the utilities,                                                                  
     which  have the ultimate responsibility  to meet the  peak                                                                 
     gas  demand   of  consumers.   While  such  peak  shaving                                                                  
     facilities    are   common   elsewhere,   due    to   high                                                                 
     deliverability,  there has been little incentive  for them                                                                 
     in Cook Inlet.                                                                                                             
     Phillips believes that the  tension of not over-investing,                                                                 
     yet  still meeting  peak  demands  is something  that  the                                                                 
     marketplace  can  and  will  ultimately  solve  through  a                                                                 
     variety of strategies. As  a practical matter, as has been                                                                 
     illustrated   in  numerous  markets   around  the  world,                                                                  
     investments    by  the   producers    to  increase    peak                                                                 
     deliverability  must be balanced with development  of true                                                                 
     peaking  facilities.  Further,  we understand  Enstar  has                                                                 
     agreements  in place  with Unocal and  Marathon to divert                                                                  
     gas supplies  to meet local peak requirements,  should the                                                                 
     need arise. In addition,  Phillips is committed to working                                                                 
     in support  of Enstar's efforts  to ensure that the  needs                                                                 
     of the community during critical periods are met.                                                                          
     10)   Finally,   do  you   have  any   recommended   state                                                                 
     legislation  the  committee  should  consider  to advance                                                                  
     development  of natural  gas related  industry within  the                                                                 
     Clearly,   more  frequent  and   wider  lease  sales   and                                                                 
     expedited permitting is  an excellent policy. In addition,                                                                 
     State  support of  increased  federal lease  sales in  the                                                                 
     potentia1ly  gas prospective  lower Cook Inlet would  also                                                                 
     be appropriate.                                                                                                            
     Mr. Chairman  this concludes  my testimony. Thank you  for                                                                 
     the opportunity  to present Phillips' views on  Cook Inlet                                                                 
     gas.  I would be  happy to  answer any  questions you  may                                                                 
CHAIRMAN  TORGERSON thanked  him for  his testimony  and said  there                                                            
were  no  questions  at  the  time.  He  announced  that  Mr.  Scott                                                            
Heyworth, Chairman  for the Citizens  Initiative For the  All-Alaska                                                            
Pipeline, would  give the committee  an update on how the  signature                                                            
gathering is going  and answer the question of what  he expects this                                                            
committee or the legislature to do.                                                                                             
11:28 a.m.                                                                                                                      
MR. SCOTT HEYWORTH said:                                                                                                        
     Good Morning Mr. Chairman  and members of the Committee. I                                                                 
     was  pleased to  accept your  invitation  to attend  these                                                                 
     hearings and testify before you today.                                                                                     
     1 am happy to report that  the Citizens Initiative for the                                                                 
     All-Alaska Gasline has just  gone over the 50% mark of its                                                                 
     goal of 37,500 registered  Alaskan voter signatures. While                                                                 
     it  is  a  bit  chilly  outside  these  days,  it  is  not                                                                 
     discouraging Alaskan voters  from signing it. As you know,                                                                 
     we  must obtain  28,700 valid  signatures  by January  14,                                                                 
     2002  to be on  the November  5, 2002  general ballot.  We                                                                 
     have almost  60 petitioners currently  working across  the                                                                 
     State,  mostly   volunteers,  who  just  believe   in  the                                                                 
     Initiative  and what  it will  do for Alaska.  He said  he                                                                 
     needs  to get  about 265  signatures  a day  to reach  his                                                                 
     Also,  in  your  packet  you will  find  an  article  from                                                                 
     Pacific  Maritime Magazine, dated  October 2001. You  will                                                                 
     notice  strong  demand   for  both  new  LNG tankers   and                                                                 
     receiving  facilities  being built  in both  Asia and  U.S                                                                 
     West Coast LNG markets, OUR NATURAL GAS MARKETS!!!                                                                 
     As the  article points  out, demand  for LNG is obviously                                                                  
     increasing, not declining anytime soon.                                                                                    
     In  the  front   of  your  packets,  you  will  find   the                                                                 
     certification  letter and ballot language agreed  on by my                                                                 
     group,  the Attorney  General's office  and Lt. Gov.  Fran                                                                 
     Ulmer.  Following it, please  find a copy of my Anchorage                                                                  
     only  poll  results.  I  agree  with  your  comments,  Mr.                                                                 
     Chairman,  in the Juneau  Empire last  week that you  feel                                                                 
     this  Initiative  will pass  by  70 percent  approval,  as                                                                 
     validated by many state-wide polls.                                                                                        
     Mr. Chairman,  I would like to  share with your Committee                                                                  
     some of the structure of  this Initiative. This Initiative                                                                 
     creates  a State of Alaska Gas  Authority that ensures  an                                                                 
     All-Alaska   Gasline  will  at  least  be  an  option   in                                                                 
     developing North Slope Natural Gas.                                                                                        
     Mr. Chairman,  turning to your packet again you  will find                                                                 
     the complete Initiative  language. I now wish to bring the                                                                 
     Committee's  attention  to  page  12, section  41.41.400,                                                                  
     which reads:                                                                                                               
     Credit of state not pledged:                                                                                               
     a)  Obligations  issued  under   the provisions   of  this                                                                 
     chapter   do  not   constitute  a   debt,  liability,   or                                                                 
     obligation  of the state or of a political subdivision  of                                                                 
     the  state or  a pledge  of the  faith and  credit of  the                                                                 
     state or of  a political subdivision of the state  but are                                                                 
     payable   solely  from  the  revenue  or  assets   of  the                                                                 
     authority. Each obligation  issued under this chapter must                                                                 
     contain on its face a statement  that the authority is not                                                                 
     obligated to pay it or the  interest on it except from the                                                                 
     revenue  or assets of the authority  and that neither  the                                                                 
     faith and  credit nor the taxing power of the  state or of                                                                 
     a political  subdivision  of the state  is pledged to  the                                                                 
     payment  of  the  principal  of or  the  interest  on  the                                                                 
     (b) Expenses  incurred by title authority in carrying  out                                                                 
     the  provision  of this  chapter  are payable  from  funds                                                                 
     provided  under this  chapter,  and liability  may not  be                                                                 
     incurred by the authority in excess of these funds.                                                                        
MR. HEYWORTH continued:                                                                                                         
     This  wording  is  the  key  to understanding   that  this                                                                 
     Authority  will not be encumbered by past deficiencies  in                                                                 
     past state ventures, such  as the Delta barley project. He                                                                 
     said,  "I  wanted  to  read  you  this  section,  which  I                                                                 
      consider to be the integrity of the Initiative itself.                                                                    
     The  importance  of  this  is that  it  is  a stand-alone                                                                  
     project. Creditors  cannot access the Alaska General  Fund                                                                 
     or the  Permanent Fund.  To obtain the  financing of  this                                                                 
     project, it will have to  be economically sound on its own                                                                 
     merits.  In addition, the Committee  should be aware  that                                                                 
     the  model we used  for the Initiative  language is  quite                                                                 
     similar  to SB  221 introduced  and sponsored  by Senator                                                                  
     Robin  Taylor last  session. The legislative  drafters  of                                                                 
     that  bill included  language  on bonding  and financing.                                                                  
     While   I  do  not  profess   to  be  an  expert  on   all                                                                 
     technicalities  concerning bonds and finance,  I think the                                                                 
     drafters  made it fairly clear  as to how bonds and  notes                                                                 
     of the  authority are  issued for financing.  See page  6,                                                                 
     Section 41.41.300.                                                                                                         
     The Initiative  also states on  page 4, Section 41.41.100                                                                  
     that the  Authority's operating  budget is subject to  the                                                                 
     Executive   Budget  Act,  which  allows  for  Legislative                                                                  
     oversight.  Succeeding sections  allow for more oversight                                                                  
     and public inclusion. Our  concept of the structure of the                                                                 
     Authority  is that the  Board of Directors,  appointed  by                                                                 
     the  Governor  with  approval  of  the Legislature,   will                                                                 
     oversee  development   of  the project,   similar  to  the                                                                 
     Permanent  Fund  Board, but  that  we expect  all project                                                                  
     construction,  maintenance, and operations to  be provided                                                                 
     by the private sector.                                                                                                     
     The  Initiative also calls  for a spur  line to bring  our                                                                 
     gas to South-central  as an integral part of the  project.                                                                 
     I also believe  an LNG project could provide shipments  of                                                                 
     Alaska natural  gas to the Alaskan Interior, coastal,  and                                                                 
     river  communities  with  LNG  barges or  spur  lines.  By                                                                 
     moving  gas to  South-central,  this project  will ensure                                                                  
     that  gas  will  continue  to  arrive  in  [indisc.]   and                                                                 
     Mr.  Chairman,  you  also  asked  me  to  comment  on  the                                                                 
     Legislature's  involvement  with this  Initiative. As  you                                                                 
     may know, Alaska law provides  that any initiative for the                                                                 
     general  ballot  must  allow for  a  full session  of  the                                                                 
     Legislature    to   assess,    review   and   even    pass                                                                 
     "substantially  similar" legislation. Senator  Taylor's SB
     221for   instance,  is "substantially  similar".  I  would                                                                 
     encourage  the  legislature  in the  upcoming  session  to                                                                 
     closely  look at  this legislation  in order  to expedite                                                                  
     this  project and save  Alaska approximately  one year  in                                                                 
     order  to get our  gas to market  as soon  as possible.  I                                                                 
     would   hope  the  legislature   would  move  quickly   to                                                                 
     appropriate  the funds  necessary for  development of  the                                                                 
     project   plan  as  called  for   in  Section  41.41.900,                                                                  
     DEVELOPMENT  OF PROJECT PLAN, page 13. Completion  of this                                                                 
     project  development   plan  would  put  Alaska  into  the                                                                 
     position  to seek long-term sales  contracts for our  gas.                                                                 
     In  closing, Mr. Chairman  and Committee  members, I  know                                                                 
     from  personally  gathering over  500  signatures myself,                                                                  
     statewide polls…[END OF TAPE]                                                                                              
TAPE 01-27, SIDE B                                                                                                            
MR. HEYWORTH continued:                                                                                                         
     …and from  the reports of my  petitioners all over Alaska                                                                  
     that the  response of Alaskan  voters to this petition  in                                                                 
     the last  7 weeks allows me to  state with assurance  that                                                                 
     this  is the gas line  project that  Alaskans wish to  see                                                                 
     developed.  Finally, for the  record, I am not opposed  to                                                                 
     any  gas  project  that  brings  Alaska   gas  to market.                                                                  
     However,  we do  not want to  wait on  a Canadian highway                                                                  
     project   that  may   never  happen   before  we  explore                                                                  
     developing  the  very gas  pipeline project  that Alaskan                                                                  
     voters  clearly want. I look  forward to working with  all                                                                 
     of you in this exciting endeavor.                                                                                          
CHAIRMAN TORGERSON asked  Mr. Heyworth to tell them what interaction                                                            
he had with Yukon Pacific (YPC) or the Port Authority.                                                                          
MR. HEYWORTH  said Jeff Lowenfels  of YPC helped him understand  the                                                            
route issues.                                                                                                                   
CHAIRMAN  TORGERSON said rumor  on the street  is that YPC  might be                                                            
for sale and  he wanted to know if  part of his discussion  was that                                                            
the Authority might purchase assets.                                                                                            
MR.  HEYWORTH said  that  was right  and they  pledged  to sell  the                                                            
permits.  It's  in   the  suggested  legislation  under   the  word,                                                            
CHAIRMAN  TORGERSON asked  what other  discussions  he has had  with                                                            
Senator Taylor.                                                                                                                 
MR. HEYWORTH said  Senator Taylor introduced SB 221  on the last day                                                            
of session  and he used a  lot of his language,  "because it's  good                                                            
stuff." It's quite similar to the initiative. He stated:                                                                        
     All the initiative is showing,  in my personal opinion, is                                                                 
     the  shining   will  of  the   people  to  their  elected                                                                  
     legislators  that this  is the way they'd  like to go  and                                                                 
     Senator Taylor's  bill covers so much stuff that's  in our                                                                 
     initiative.   In fact,  the  legislature   could  make  it                                                                 
     tighter,  because as you know  I couldn't get through  the                                                                 
     Attorney  General's  office  if I  had  appropriations  in                                                                 
     there, for instance...                                                                                                     
CHAIRMAN  TORGERSON asked what  he thought  would be needed  to jump                                                            
start this.                                                                                                                     
MR. HEYWORTH  replied that  the project plan  was on page 13  and he                                                            
thought it would cost $1 - $2 million.                                                                                          
REPRESENTATIVE   DAVIES  asked  if  he  agreed  with   Roger  Marks'                                                            
MR. HEYWORTH responded  that he would be satisfied if the initiative                                                            
suggested doing  a best interest finding to look at  LNG, because he                                                            
didn't agree with Roger Marks.                                                                                                  
CHAIRMAN TORGERSON  said they were in the process  of going out with                                                            
an RFP now  for the committee's own  staff economists. He  said that                                                            
not many people agreed  with Mr. Marks' inputs, although they agreed                                                            
that the final product is correct.                                                                                              
CHAIRMAN TORGERSON announced a short break.                                                                                     
TAPE 01-28, SIDE A                                                                                                            
12:30 p.m.                                                                                                                      
MR. JOHN ELLWOOD,  Executive Vice  President, Foothills Pipe  Lines,                                                            
Ltd., offered the following testimony:                                                                                          
     Mr.  Chairman,  thank you  for  the invitation  to appear                                                                  
     before  your committee  and to report  on the progress  of                                                                 
     the  ANNGTC/Foothills  (ANGTS)  Alaska  Highway  Pipeline                                                                  
     Foothills  appeared  before  your committee  on  July  18,                                                                 
     August  15 and  September  19,  2001. During  the earlier                                                                  
     appearances,  we spoke to issues of the ANGTS  advantages,                                                                 
     Alaska benefits,  pipeline access, status of the  pipeline                                                                 
     and the various  permits. The later appearance  focused on                                                                 
     our position regarding he  federal legislation proposed by                                                                 
     the Alaska producer group.                                                                                                 
     Since  that, U.S. Senate  hearings on  Alaska natural  gas                                                                 
     were  held in Washington  and the  Alaska Highway Natural                                                                  
     Gas Policy  Council forwarded  its recommendations to  the                                                                 
     Governor.  Foothills  appreciates  the efforts  of policy                                                                  
     makers involved in both of these proceedings.                                                                              
     Mr.  Chairman, I would  like at this  time to express  our                                                                 
     appreciation  to you and to the  committee for your  words                                                                 
     and  contribution  to  the U.S.  Senate  Energy Committee                                                                  
     Today I would  propose to report progress by Foothills  on                                                                 
     three fronts:                                                                                                              
   · The Alaska Northwest Natural Gas Transportation Company                                                                    
     (ANNGTC) partnership.                                                                                                      
   · Foothills commercial proposal.                                                                                             
   · Work on the pipeline right-of-way.                                                                                         
     We  are aware  of a lingering  concern  regarding the  so-                                                                 
     called  withdrawn partners issue  and alleged liabilities                                                                  
     associated  with that issue.  When I appeared before  your                                                                 
     committee   in  July  of  this  year,  I  indicated   that                                                                 
     Foothills  had  undertaken  discussions  to  reenlist  the                                                                 
     Withdrawn Partners of the  ANNGTC. In our testimony before                                                                 
     the  U.S. Senate  Energy  Committee  on October  2,  2001,                                                                 
     Foothills said:                                                                                                            
     "In  the initial  stages of  the Alaska  Highway Project,                                                                  
     numerous  U.S.  energy  companies  were  partners  in  the                                                                 
     Alaska  Partnership.  However, during  the  decade of  the                                                                 
     1980s and  the 1990s when the producers of Alaska  natural                                                                 
     gas were unwilling to commit  that gas to Lower 48 markets                                                                 
     because  of low energy  prices, all  of the U.S. partners                                                                  
     withdrew  from  the  Alaska  Partnership.  Foothills   and                                                                 
     TransCanada as the two remaining  partners have offered to                                                                 
     the current holders of the  withdrawn partner interests an                                                                 
     opportunity   to  rejoin  the   Alaska  Partnership.   The                                                                 
     negotiations  with these  companies have  been productive                                                                  
     and are ongoing."                                                                                                          
     Last  month we  followed-up our  testimony  with a letter                                                                  
     expanding on the reenlistment  process. Earlier this month                                                                 
     we testified  before the Committee  on Energy and Natural                                                                  
     Resources  regarding   our efforts  to  reconstitute   the                                                                 
     Alaska  Northwest   Natural  Gas  Transportation  Company                                                                  
     (Alaska   Partnership)   by  reenlisting   the  withdrawn                                                                  
     partners.  We are writing today  on behalf of TransCanada                                                                  
     and Foothills and with the  authorization of the withdrawn                                                                 
     partners - Duke, El Paso,  Enron, PG&E Corporation, Sempra                                                                 
     and   Williams   specifically    with   respect   to   the                                                                 
     reenlistment  process.  We  are  pleased  to  report  that                                                                 
     continued  progress has been made on the critical  issues,                                                                 
     including  the  key principles  for  reenlistment  by  any                                                                 
     withdrawn partner who so  elects in the Alaska Partnership                                                                 
     for  the purpose of  constructing the  Alaska Natural  Gas                                                                 
     Transportation System (ANGTS).                                                                                             
     We  have already  scheduled further  meetings  so that  we                                                                 
     continue  to work on  the details  for reconstituting  the                                                                 
     Alaska  Partnership. It  is anticipated  that all parties                                                                  
     will have signed a Memorandum  of Understanding within the                                                                 
     next  month.  TransCanada,  Foothills  and  the withdrawn                                                                  
     partners are committed to  eliminating commercial barriers                                                                 
     to  construction of  the ANGTS  and in so  doing would  be                                                                 
     prepared to  release contingent claims against  the Alaska                                                                 
     Partnership  related to previous investments in  the ANGTS                                                                 
     as part  of a commercial  arrangement  to ensure a market                                                                  
     viable project.                                                                                                            
     Our   negotiations  with   the  withdrawn   partners   are                                                                 
     approaching  the  final stages  and  we are  confident  of                                                                 
     meeting our  timeline for the successful conclusion  of an                                                                 
     Commercial Proposal                                                                                                      
     A commercial  agreement  with the Alaska  producers is  an                                                                 
     important prerequisite to  any pipeline project. Achieving                                                                 
     such an agreement has been  delayed in part because of the                                                                 
     withdrawn  partnership issue  overhanging the project  and                                                                 
     because  the Alaska North Slope  producers are focused  on                                                                 
     completing  their project  feasibility  study. In October                                                                  
     evidence before the U.S.  Senate Energy Committee we said:                                                                 
     'An important  first step towards commercial viability  of                                                                 
     an Alaska  gas pipeline is a commercial agreement  between                                                                 
     the producers  and potential shippers who, in  turn, enter                                                                 
     into   transportation  contracts   with  the  owners   and                                                                 
     operators  of the transportation  system. In this regard,                                                                  
     the Alaska  Partnership has pursued  discussions with  the                                                                 
     producers  for  the last  several  months.  After several                                                                  
     discussions with the producers  over the last year, it has                                                                 
     been agreed that we will  develop a commercial proposal to                                                                 
     present to the producers before the end of the year.'                                                                      
     The above referenced October testimony also stated:                                                                        
     'The next  step on our critical  path will be to prepare,                                                                  
     present  to and  negotiate with  the producers  of Alaska                                                                  
     North  Slope   natural  gas  a  comprehensive  commercial                                                                  
     proposal for a pipeline  project. Based on the progress we                                                                 
     have  made since  the Energy  Committee  hearings, we  are                                                                 
     confident  that such a proposal  will be presented to  the                                                                 
     producers  before the end of  the year. As companies  with                                                                 
     longstanding  interest  in building and  owning an Alaska                                                                  
     natural gas  pipeline, we have every incentive  to reach a                                                                 
     commercial  arrangement  with the producers  to develop  a                                                                 
     viable project.  We believe that such an arrangement  will                                                                 
     be achieved on a timely  basis, consistent with the energy                                                                 
     needs of the nation.'                                                                                                      
     With  regards to  the negotiations  with  the North  Slope                                                                 
     Producers,  we  remain  confident  that  we will  reach  a                                                                 
     commercial arrangement to develop a viable project.                                                                        
     Pipeline Right-of-Way                                                                                                    
     The Alaska Natural Gas Transportation  System from Prudhoe                                                                 
     to Alberta  is approximately  1,750 miles long. Access  to                                                                 
     land  is becoming  a  difficult  challenge for  all  North                                                                 
     American  pipeline projects.  Public lands constitute  the                                                                 
     majority of  the property through which the pipeline  will                                                                 
     pass.  Foothills  is  well  advanced  along  the  road  of                                                                 
     securing  the pipeline right-of-way.  More than 400  miles                                                                 
     of  right-of-way  on  federal  lands  has  been acquired.                                                                  
     Currently,  we are  making progress  on  securing the  200                                                                 
     miles  of  right-of-way   on  state  lands  with  the  Gas                                                                 
     Pipeline   Office.  Work  is  under  way  to  assess   the                                                                 
     information  that was previously  submitted in an earlier                                                                  
     application  and  a  process  to  move  forward  has  been                                                                 
     identified. With the state  right-of-way lease expected to                                                                 
     be in hand  by 2003, over 90% of the right-of-way  for the                                                                 
     project will have been acquired or reserved.                                                                               
     Let's  summarize  the  progress   of the  Alaska  Highway                                                                  
     Pipeline project.                                                                                                          
     1. The United  States and Canada have determined  that the                                                                 
     ANNGTC/Foothills  (ANGTS) Alaska Highway Pipeline  project                                                                 
     is:  (a) necessary, (b)  in the public  interest, and  (c)                                                                 
     should be granted a unique fast track status.                                                                              
     2. Foothills  and TransCanada have offered to  the current                                                                 
     holders of the withdrawn  partner interests an opportunity                                                                 
     to rejoin  the Alaska Partnership. Negotiations  have been                                                                 
     productive and we are well  on our way to reassembling the                                                                 
     Alaska Partnership.                                                                                                        
     3. A commercial  arrangement between a coalition  of North                                                                 
     American  pipeline  companies  and  [Alaska]  natural  gas                                                                 
     producer group  is the next key milestone. We  are working                                                                 
     towards that end. A commercial  arrangement will allow the                                                                 
     project  to move to  the next phase of  the project -  the                                                                 
     countdown  to construction phase. A substantial  amount of                                                                 
     this  work   has  already  been  completed  and   more  is                                                                 
     currently  being done  on spec  to further  expedite  this                                                                 
     stage of the project.                                                                                                      
     4. As  I indicated, we have made  substantial progress  in                                                                 
     the area of pipeline right-of-way.                                                                                         
     5. In  moving forward, we will  comply with the technical                                                                  
     and  environmental  conditions  established  by President                                                                  
     Carter  when he  approved  our project.  In  doing so,  we                                                                 
     intend  to work  with interested  stakeholders.  Over  the                                                                 
     coming   months  we  will  take   steps  to  establish   a                                                                 
     consultation process that  will enable interested Alaskans                                                                 
     to become involved in the project.                                                                                         
     6.  We  are  committed   to  maximizing  Alaska  benefits                                                                  
     consistent   with  prudent  economic   efficiencies.   The                                                                 
     Governor's    Policy   Council    has   made   reasonable                                                                  
     recommendations in this regard.                                                                                            
     Ultimately  the  final decision  to construct  a pipeline                                                                  
     will  rest with  the gas  producers. We  remain confident                                                                  
     that  the long-term demand  for and  the price of natural                                                                  
     gas  in  the  North  American  markets  will  support  his                                                                 
12:45 p.m.                                                                                                                      
CHAIRMAN  TORGERSON said  some of  Foothills' partners  sell gas  in                                                            
their  own markets  and  asked if  they are  approaching  this as  a                                                            
pipeline company or as  a potential partner in the marketing of gas.                                                            
MR. ELLWOOD answered that the companies that are pure pipeliners,                                                               
such as Foothills, and those who have a marketing arm are treated                                                               
as two  different businesses.  "The pipeline  part of this  wouldn't                                                            
necessarily be buying the gas."                                                                                                 
CHAIRMAN  TORGERSON  asked  if  he  wanted  to  comment  on  Senator                                                            
Murkowski's proposed legislation.                                                                                               
MR. ELLWOOD  replied, "Our  position is that  no new legislation  is                                                            
needed. The  existing legislation,  ANGTA, provides everything  that                                                            
is needed here…"                                                                                                                
CHAIRMAN TORGERSON asked  if the partners are owners in the Canadian                                                            
portion of the pipeline or just the Alaskan part.                                                                               
MR. ELLWOOD  answered that  they are working  on restructuring  just                                                            
the Alaska partnership.                                                                                                         
CHAIRMAN TORGERSON  asked if the Canadian  side would be  Foothills.                                                            
MR. ELLWOOD  replied that  was correct and  Foothills would  soon be                                                            
half owned by Duke.                                                                                                             
CHAIRMAN TORGERSON asked an indiscernible question.                                                                             
MR. ELLWOOD  answer is that three  to five entities will  step up to                                                            
do  that.  There  is some  inexpensive   expandability  of  existing                                                            
pipeline network  in Canada, particularly on the Alliance  Pipeline.                                                            
There  is presently  some unused  capacity on  the Nova TransCanada                                                             
     There  is the capability of expanding  the Foothills  PG&E                                                                 
     systems and the capability  to move southwest gas down the                                                                 
     west  coast system.  There's also the  possibility that  a                                                                 
     smaller, but  new bullet line or greenfield project  could                                                                 
     be built.  It wouldn't  have to carry  all the gas coming                                                                  
     from Alaska.  Again, depending  on the timing of when  the                                                                 
     volumes from here build  up, it may be economic; it may be                                                                 
     preferable  to build another new, but smaller  pipe to one                                                                 
     or more markets.                                                                                                           
CHAIRMAN  TORGERSON asked if  they were thinking  about twin  30s or                                                            
one large pipe.                                                                                                                 
MR. ELLWOOD  replied that  they hadn't given  much consideration  to                                                            
twin pipes. They think this line will be a 42 or 48 inch pipe.                                                                  
REPRESENTATIVE  DAVIES said he raised the issue of  risk sharing and                                                            
asked  if they  are contemplating  the  possibility  of sharing  the                                                            
market risk with the producers.                                                                                                 
MR. ELLWOOD  replied that  he didn't  think that  would be a  useful                                                            
thing for the  pipeline company to  do. He saw a marketing  function                                                            
where that risk might be taken up.                                                                                              
CHAIRMAN TORGERSON  asked if they had a timeline for  the resolution                                                            
of the withdrawn partner issue.                                                                                                 
MR. ELLWOOD replied that  there is no drop-dead date but, "We're all                                                            
working very diligently to get this thing done."                                                                                
He was confident  that it  would be done in  the month of  November.                                                            
All the companies are supportive of the project.                                                                                
CHAIRMAN  TORGERSON  asked  if  any of  the  agreements  needed  the                                                            
approval of a board of directors.                                                                                               
MR. ELLWOOD  replied that  in most of the  cases it is a  management                                                            
decision, which helps their timeline somewhat.                                                                                  
REPRESENTATIVE  DAVIES  asked  him  to  comment  on  Mr.  Heyworth's                                                            
MR. ELLWOOD  replied that  he didn't know  much about it. He  wished                                                            
them well. There  is a lot of LNG capacity world wide  chasing about                                                            
a third or half as much market.                                                                                                 
REPRESENTATIVE  FATE asked  if he  felt there  was some exclusivity                                                             
with ANGTA  or if there would be more  competition for constructing                                                             
the line allowed under it.                                                                                                      
MR. ELLWOOD  replied that  they are confident  that it will  come to                                                            
fruition next year.                                                                                                             
     It  seems  to  us that  things  are  coalescing  around  a                                                                 
     highway route. There's less  and less debate about what is                                                                 
     the most  viable route. The question  now comes how  do we                                                                 
     pull together a consortium,  a group of companies that can                                                                 
     make  this deal happen.  Part of that  is to bring in  the                                                                 
     U.S.  pipeline marketing  entities and  we're doing  that.                                                                 
     And the  other half of that is  to bring the producers  on                                                                 
     and  strike   some  suitable   arrangement  with  them   -                                                                 
     something  that's  satisfactory  for  both sides  of  this                                                                 
     equation.  That is  just beginning,  but  I am encouraged                                                                  
     that we are under way now.                                                                                                 
REPRESENTATIVE  DAVIES  asked  him  about the  probability  of  this                                                            
project coming together.                                                                                                        
MR. ELLWOOD replied:                                                                                                            
     If  we  put this  commercial  proposal  in  front  of  the                                                                 
     producers  towards the end of this year, my understanding                                                                  
     is that their  studies are going to be completed  at about                                                                 
     the  same time…I would  hope we could  get around a  table                                                                 
     and  into some serious  negotiation in  the early part  of                                                                 
     next   year.   My  expectation   would   be   that   those                                                                 
     negotiations are going to  be challenging and that we will                                                                 
     probably  be at  that for  some months  before we whittle                                                                  
     down  to what an agreement  might be.  By the end of  next                                                                 
     year  we should  be in  a position  to drop  the flag  and                                                                 
     that's  when things  really  start to  happen  - when  the                                                                 
     major money starts to be spent to get something done.                                                                      
REPRESENTATIVE OGAN asked if the position of the assets by Duke was                                                             
motivated by bullishness on this project or whether it just                                                                     
happened because it came along with the package.                                                                                
MR. ELLWOOD said he couldn't answer that; only Duke could. They                                                                 
hadn't announced any spin offs, so he thought they wanted to keep                                                               
all of them.                                                                                                                    
REPRESENTATIVE OGAN asked what percentage of West Coast assets that                                                             
are now Duke's were involved in this gas pipeline project.                                                                      
MR. ELLWOOD said he thought the percentage was very small.                                                                      
CHAIRMAN TORGERSON thanked him for his presentation and announced                                                               
they would hear from Mr. Peterson next.                                                                                         
MR. RICHARD PETERSON, President and CEO, Alaska Natural Gas-to-                                                                 
Liquids (ANGTL) Co., said:                                                                                                      
     I have long  been a proponent of GTLs as one solution  for                                                                 
     Alaska's  stranded  natural gas.  Coal based  GTLs is  one                                                                 
     answer  for  reducing  U.S. dependence  on  foreign  crude                                                                 
     imports. I want to say that  there's a lot of other people                                                                 
     over the last  five or six years that I have run  into who                                                                 
     are interested in the GTL  program around the country, but                                                                 
     they want to see some interest  from the federal and state                                                                 
     governments.  Typically, all you hear about is  the LNG or                                                                 
     a gas pipeline.                                                                                                            
     I want  to talk about the national  energy policy. If  the                                                                 
     U.S.  really wants  a policy  that reduces  dependence  on                                                                 
     foreign  crude, we think they  can look at the example  of                                                                 
     South Africa.  South Africa pioneered GTLs in  the 50s and                                                                 
     expanded  the program in the  70s when OPEC fortified  the                                                                 
     U.S.  in order  to reduce  its imports  of foreign crude.                                                                  
     Today with advances in GTL  technology, the U.S. can build                                                                 
     more efficient  gasification  and GTL plants for far  less                                                                 
     than what it costs in South  Africa. I would like to point                                                                 
     out that  the U.S. has enough  coal reserves in 38 states                                                                  
     across  the nation to make over  10 million barrels  a day                                                                 
     of synthetic motor fuels for over 200 years.                                                                               
     I think most people don't  know, but the United States has                                                                 
     about 25 percent  of the world's proven reserves  of coal.                                                                 
     It's  a significant  amount of  energy.  Also, the Alaska                                                                  
     North  Slope contains enough  natural gas to make upwards                                                                  
     of 1 million barrels a day  of synthetic fuels that can be                                                                 
     transported  down  the  existing pipeline  to  Valdez  for                                                                 
     shipment  to the  Lower  48. What  else is  of importance                                                                  
     about  that point is that GTLs  as a batching program  can                                                                 
     also improve the economics  of a gas line with more assets                                                                 
     built in Alaska and more jobs for Americans.                                                                               
     GTLs  from Alaska can  start the process  today educating                                                                  
     Americans  with the possibility  of GTLs. Coal based  GTLs                                                                 
     can produce  not only the cleanest  motor fuels, but  they                                                                 
     can also  produce some of the  cleanest electricity  known                                                                 
     to  man - a reliable,  affordable,  environmentally  sound                                                                 
     energy  for  America's  future  and  if you  have  gas  to                                                                 
     liquids, I  think you have a solution that President  Bush                                                                 
     would  be  looking for.  If  this Bush  thing  can happen                                                                  
     today, we truly believe  that Alaska can start the process                                                                 
     and  show  the rest  of  the  nation how  GTLs  can  work,                                                                 
     whether it's on the North Slope or in Cook Inlet.                                                                          
He said  for  a year  and a half  ANGTL  has been  looking at  other                                                            
potential gas  to liquid options in Alaska and they  focused on Cook                                                            
Inlet.  Various producers  told them  that there  was no demand  and                                                            
that's  the  reason they're  not  exploring.  Based  on preliminary                                                             
engineering  studies, he  thought they  could build  a plant  in the                                                            
$250 million range. Gas  availability limited the size of the plant.                                                            
They proposed to sell gas  on an impact basis determined by revenues                                                            
received  from the sale of  the products in  the U.S. market.  A GTL                                                            
plant produces  excess hydrogen and  nitrogen, the two primary  feed                                                            
stocks  for  the fertilizer   plant. GTL  plants  can  export  these                                                            
products  to the  fertilizer plant  for incremental  fertilizer  and                                                            
urea  production  exponentially  lowering the  overall  cost to  the                                                            
fertilizer plant  and its ability to pay higher than  current market                                                            
values  for  natural  gas while  still  competing  in  their  export                                                            
market. He explained:                                                                                                           
     In the scenario  of a gas shortage in the Cook  Inlet area                                                                 
     with  gas  prices  well  above  $2 -  we  believe  if  you                                                                 
     subscribe  to that  position,  then the  most ideal  thing                                                                 
     that we've  seen on the market is to do what is  called an                                                                 
     integrated  coal  gasification  combined  cycle  electric                                                                  
     generation  gas to liquid plant. It's a mouthful,  but the                                                                 
     DOE has  sponsored several programs  in the mid-1990s  and                                                                 
     these  programs  are very  successful  in the  Lower 48  -                                                                 
     taking  coal gas and  refining it and  running the gas  to                                                                 
     produce  electricity.  When you  add on a  GTL complex  or                                                                 
     module  to that use, it increases  the overall efficiency                                                                  
     of the process and creates  a well-balanced program. It is                                                                 
     a  fact that  DOE is  actually looking  at  some of  these                                                                 
     programs now.  We'd like to point out that these  programs                                                                 
     have  basically been  in existence for  50 years in  South                                                                 
     Africa, so it's not an issue  of do they work. It's what's                                                                 
     the total economics.                                                                                                       
     In our proposal we look  at upgrading the existing City of                                                                 
     Anchorage  MLP  and  Chugach  generation   plants  in  one                                                                 
     location  so that  we get  a higher  base load  amount  of                                                                 
     electricity  being  generated and  using the  latest  fuel                                                                 
     efficient combined cycle  generators fueled by coal from a                                                                 
     gasification facility and  a small portion of natural gas.                                                                 
     This  gasification facility  would now  sell the same  gas                                                                 
     that  would  be  needed  for the  FT  [Fischer  Tropsch  -                                                                 
     synthetic  fuel]  technology   to produce  healthy   clean                                                                 
     fuels. The combination of  these technologies improves the                                                                 
     process,   extends  the  life  of  existing  natural   gas                                                                 
     reserves in the Cook Inlet  area, benefiting the people in                                                                 
     the area giving  them another choice of using  natural gas                                                                 
     such as Enstar.                                                                                                            
MR. PETERSON said they  proposed to target about 200 - 300 megawatts                                                            
of combined  cycle power  and that's the base  load of both  Chugach                                                            
and MLP.  They could pick  up some additional  loads since  they are                                                            
connected to the Railbelt. He said:                                                                                             
     As  you  can  well imagine,  this  creates  some  sort  of                                                                 
     consternation  with the  existing electric  generators  in                                                                 
     that  they would wonder  where the  generation would  come                                                                 
     into play.  Our proposal is to work with them,  but we can                                                                 
     also produce what they call  power for electricity. Again,                                                                 
     this  process  would  produce  between  8,000  and 12,000                                                                  
     barrels a day of ultra clean  fuels and share the proposed                                                                 
     background coal export facilities  or utilize the existing                                                                 
     [indisc.]  to Anchorage facilities if a crude  oil line is                                                                 
     built  across the Inlet. As some  of you know, Forest  Oil                                                                 
     has  discovered additional  amounts  of oil  and now  it's                                                                 
     looking  like they are  going to build  a pipeline across                                                                  
     the Inlet and eliminate  the tankering from Drift River to                                                                 
     the  [indisc.]  facilities.  If that  happens,  then  this                                                                 
     might  be an  advantage for  use of these  facilities  for                                                                 
     export down  the west side of the Inlet - if we  get a GTL                                                                 
     plant that's built on that side.                                                                                           
     We're working  closely with Polar Star both in  Alaska and                                                                 
     South Africa  on GTL programs and hope to move  forward on                                                                 
     a  GTL program  in Cook Inlet  shortly. But,  I would  say                                                                 
     that a gas based GTL program  and a coal based GTL program                                                                 
     are  mutually exclusive.  There  isn't enough  demand  for                                                                 
     these  products in the Alaska  area and things that  would                                                                 
     justify going ahead with  both projects. The thing that we                                                                 
     find most frustrating over  the last year in conversations                                                                 
     with  people  who produce  this  gas is  how much  gas  is                                                                 
     available?  What industries are going to be there?  Can we                                                                 
     do  a  viable  project?  If  we  do a  coal  gasification                                                                  
     project,  it will have a tremendous  benefit for existing                                                                  
     gas  users. It should  reduce gas  prices, reduce demand,                                                                  
     reduce load. But if we're  wrong and another 3 - 20 bcf of                                                                 
     gas is found,  the gas price in Cook Inlet is  going to be                                                                 
     so  low  that it  would  make  no sense  to  be producing                                                                  
     electricity  from a syn-gas base. So, we're at  this point                                                                 
     of - okay guys, try to tell us what's going on.                                                                            
     From  the producers'  point  of  view we  understand  they                                                                 
     would like to get higher  prices, but at $3 we see the LNG                                                                 
     plant out  of business, we see the fertilizer  plant being                                                                 
     out  of business. So,  we're wondering  just where is  the                                                                 
     industrial  load in the Kenai going to be and  what can we                                                                 
     do to  work around that.  I guess one  of the things  I've                                                                 
     found talking to various  producers, the issues come up of                                                                 
     what is royalty going to  be. If we start selling to a GTL                                                                 
     plant  and  we're also  selling  electric  generation  and                                                                 
     we're  also selling to Enstar,  what is our royalty  going                                                                 
     to be?  I think these  are big issues  for the commercial                                                                  
     side of this  equation. These questions are going  to have                                                                 
     to  be addressed  because  there's too  much  risk on  the                                                                 
     producer's side to want  to deal with a commercial project                                                                 
     such  as ours not knowing  what they're  going to have  to                                                                 
     pay on a royalty.                                                                                                          
     I'd say the  other thing that we've been told  is that the                                                                 
     state needs to do something  about the time lag date to go                                                                 
     from buying  a lease to physically  getting production  on                                                                 
     line.  Without  being  specific,  that's  just  a general                                                                  
     comment that we've heard.                                                                                                  
     From our  point as a potential  developer of a project  in                                                                 
     the Cook Inlet area that  needs natural gas, we would like                                                                 
     to have natural gas to do  that. We'd like to see anything                                                                 
     the legislature can do to  encourage exploration, to speed                                                                 
     up the  exploration drilling  production process, to  look                                                                 
     at  ways  that  from an  industrial  point  of  view,  the                                                                 
     producer  is not penalized  for selling  to us or promote                                                                  
     buying  gas at a flat level base  that's year in and  year                                                                 
     out,  day in  and  day out  when there's  other  peak  day                                                                 
     markets  and so on. That's basically  all I wanted to  say                                                                 
     today…It's  my  strong  feeling  that if  the  nation  and                                                                 
     Alaska  truly want a national  energy program, it's  going                                                                 
     to  reduce its  dependence  on  foreign crude.  I realize                                                                  
     that's a double  edged sword for Alaska, because  reducing                                                                 
     dependence  on foreign  crude can also  mean reducing  the                                                                 
     price of crude  in general and sales of crude  oil is what                                                                 
     this state  lives on. We truly  believe if we're going  to                                                                 
     have an  impact, gas to liquids  is going to play a  major                                                                 
     role and a  gas based GTL plant is going to set  the stage                                                                 
     for  a coal base. And  when we talk  about coal based,  we                                                                 
     talk  about the  huge potential  of the  country. We  also                                                                 
     would  like to point  out that half  the coal reserves  in                                                                 
     the United States are in Alaska.                                                                                           
CHAIRMAN  TORGERSON  asked   if he  had  discussions   with  Chugach                                                            
Electric on his proposal and what were their comments.                                                                          
MR. PETERSON  replied  that he had  and they're  betting that  there                                                            
will be a lot  of natural gas found  in Cook Inlet and that  the gas                                                            
price is going  to come dramatically down from what  they are paying                                                            
CHAIRMAN TORGERSON asked  if it was Forrest Oil who announced a year                                                            
ago that the committee was interested in a GTL plant here.                                                                      
MR. PETERSON replied yes.                                                                                                       
CHAIRMAN TORGERSON  asked if they  had been talking with  ANGTL then                                                            
or did that happen later.                                                                                                       
MR. PETERSON replied that  the announcement that Forest Oil made was                                                            
at a  Senate hearing  last  September and  the GTL  plant they  were                                                            
talking  about was  on  the North  Slope.  Forest Oil  is  extremely                                                            
bullish  on gas to  be found in  the Cook Inlet  area. They  believe                                                            
that a  large amount  of natural gas  will be  found and that  there                                                            
really isn't  a market to take these  large quantities. GTL  is just                                                            
one option  for that  and because  of the success  of GTLs in  South                                                            
Africa, they thought  this would be a good place to  get involved in                                                            
the U.S.                                                                                                                        
CHAIRMAN  TORGERSON thanked  him for his  testimony and announced  a                                                            
short break so  that Tony Izzo could give Enstar's  overview on Cook                                                            
Inlet reserves.                                                                                                                 
1:29 p.m.                                                                                                                       
MR. TONY IZZO, President,  Enstar Natural Gas Company, said he would                                                            
give  Enstar's  perspective  on  projected  gas  usage  as  well  as                                                            
Southcentral   demand  and   deliverability.   Enstar  is  a   local                                                            
distribution company  based in Anchorage serving the  Mat-Su Valley,                                                            
Soldotna  and Kenai. They  started operation  over 40 years  ago and                                                            
serve over  106,000 customers with  some of the lowest gas  rates in                                                            
the country  and the highest  residential usage  in the country.  He                                                            
provided  members  with a  snapshot  of rates  around  the  country:                                                            
Anchorage is  the lowest at.40 per  cubic foot; San Diego  is at the                                                            
other end at $1.91.                                                                                                             
MR. IZZO said Enstar's  future plans include expansion of its system                                                            
to  Ninilchik, Anchor  Point  and Homer  in  the next  year or  two.                                                            
Enstar   owns  and  operates   2,700  miles   of  distribution   and                                                            
transmission pipeline operating  at pressures of 1,000/psi with line                                                            
diameters up to 20 inches.  On projected gas usage, he said a little                                                            
perspective  helps. Enstar represents  about 13 percent of  the Cook                                                            
Inlet consumption  in any given year.  They transport a good  amount                                                            
of the  power generation  and  he showed  the committee  a chart  of                                                            
their projections.                                                                                                              
Gas is purchased  under long-term contracts with Marathon,  Chevron,                                                            
ML&P and Phillips  and is indexed  to changes in the price  of crude                                                            
oil. They don't make money  on the commodity itself; they make money                                                            
on the  delivery. Their supply  contracts are  negotiated and  go to                                                            
the RCA for  approval and move up  over time based on the  prices of                                                            
oil and supply  costs are passed through to customers.  They have no                                                            
take or  pay liability,  which means  that if  they don't take  what                                                            
they project  to take from a producer,  they're not required  to pay                                                            
anything, which might occur during a warmer than normal winter.                                                                 
Enstar  has two  new supply  contracts  with Moquawkie  (Anadarko  &                                                            
Phillips)  deliveries  starting  in 1/1/02  and Unocal  starting  in                                                            
1/1/04.  They are  currently  talking  with producers  about  future                                                            
supply. In the  near term (2001 - 2008), it may become  difficult to                                                            
meet winter peak  demands without new discoveries  or development of                                                            
peaking facilities,  like LNG vaporization and underground  storage.                                                            
Industrial  usage  reduction  may  be needed  to  meet  winter  peak                                                            
demand. Enstar,  like others in the  area, are very concerned  about                                                            
the economy  of the community  they serve  and are pro-active.  They                                                            
have  entered into  new  supply contracts  at  higher  prices in  an                                                            
effort  to  spur  exploration  and  increase   reserves.  Their  new                                                            
contract  with  Unocal   contemplates  that  gas  storage   will  be                                                            
In the  medium  term (2009  - 2019)  peak and  daily deliverability                                                             
become more difficult if  approximately 2 tcf of additional reserves                                                            
are not  added  and industrial  use continues  at  the present  rate                                                            
after 2009.  Along with that,  the federal  LNG license could  be at                                                            
risk.  He   showed  the   committee  a   chart  called,   "Estimated                                                            
Deliverability  Timeline Assuming that Industrial  Use is Reduced by                                                            
Half in 2010."                                                                                                                  
Average demand intersects known reserves around 2006.                                                                           
TAPE 01-28, SIDE B                                                                                                            
1:39 p.m.                                                                                                                       
MR. IZZO pointed  out that the chart, prepared in  March 2001, shows                                                            
there could  be problems with  peak demand  in the year 2003.  He is                                                            
more optimistic  than these numbers  since he has seen Marathon  and                                                            
UNOCAL's drilling  programs and didn't  think there would  be issues                                                            
with average or  peak demand until closer to the end  of the decade.                                                            
Long-term deliverability  (after 2019)  will most likely  not be met                                                            
in Cook Inlet unless 2  tcf of reserves are added and industrial use                                                            
is discontinued  after 2009. He noted, "After 2020,  significant new                                                            
reserves of North Slope gas is necessary."                                                                                      
He summarized  that Enstar believes  that the reserves of  the Inlet                                                            
are sufficient to meet  residential and commercial needs in the near                                                            
term and  he is  optimistic that  new reserves  and/or storage  will                                                            
improve  near-term  deliverability  during  peak  demand.  They  are                                                            
optimistic  about future  growth  that is  under  way in  Ninilchik,                                                            
Anchor  Point and  Homer.  "Enstar supports  an in-state  route  for                                                            
North Slope  gas to ensure  access to reliable  low cost energy  for                                                            
future generations of Alaskans."                                                                                                
He said  their primary  concern is  to keep homes  warm and  if they                                                            
were pushed  to the point of choosing,  they would favor  curtailing                                                            
industrial  use. He  urged them  to do  anything  possible to  avoid                                                            
REPRESENTATIVE  OGAN  asked if  there was  a 20-inch  gas line  from                                                            
Beluga into Anchorage.                                                                                                          
MR. IZZO replied there is.                                                                                                      
REPRESENTATIVE  OGAN asked  how big the line  was from Anchorage  to                                                            
MR.  IZZO  replied  that  they have  twin  12-inch  lines  that  run                                                            
parallel to each other across the Turnagain Arm.                                                                                
REPRESENTATIVE  OGAN asked  how much capacity  was in the lines,  as                                                            
Beluga was getting to be  a real mature field. He asked, if coal bed                                                            
methane  comes on  line  in the  Matanuska  Valley,  will they  have                                                            
enough capacity to supply industrial users in Kenai.                                                                            
MR. IZZO replied:                                                                                                               
     Yes, we believe we do. If  you were to average out through                                                                 
     the  year what our  delivery is through  our system,  it's                                                                 
     128  mcf/d. We  have endured  some extreme  periods,  have                                                                 
     tested that  system up higher than 250 mcf/d and  have had                                                                 
     no problems.  We know for instance  that we could survive                                                                  
     without  one or the  other of those lines.  So, if we  had                                                                 
     maintenance  to perform on the lines across the  Turnagain                                                                 
     from the Kenai,  most days of the year, 99 percent  of the                                                                 
     year, we could  survive with the Beluga line and  the same                                                                 
     would exist  in reverse. If the Beluga line were  down, we                                                                 
     have enough capacity on  the Kenai twin 12 inch lines that                                                                 
     we could support  our system throughout the Mat-Su  Valley                                                                 
     as well as Anchorage.                                                                                                      
CHAIRMAN TORGERSON  asked if the UNOCAL  contract was capped  at 450                                                            
MR. IZZO replied:                                                                                                               
     The  contract  provides  them  with the  first  option  to                                                                 
     provide additional  supply. So, it is possible  they could                                                                 
     fill up the  undesignated requirement in 2006  and provide                                                                 
     much more  in '07, as well as  a layer going forward.  The                                                                 
     result  of  their drilling  program  would  determine  the                                                                 
     actual  specifics.  What  we see  here  is just  what  the                                                                 
     contractual  commitments are. The 450 bcf cap  anticipates                                                                 
     potential.  So, if additional reserves are discovered,  we                                                                 
     certainly  have an opening in the market and we'd  be very                                                                 
     pleased to fill it.                                                                                                        
CHAIRMAN TORGERSON  asked why go to the RCA if they  have a contract                                                            
to supply 20 years of gas.                                                                                                      
MR. IZZO replied that applies in the undesignated areas.                                                                        
CHAIRMAN TORGERSON said they don't show anything after '07.                                                                     
MR. IZZO replied if the  drilling results were to provide additional                                                            
reserves, there's  a provision in  the contract where they  can fill                                                            
up on designated needs.                                                                                                         
CHAIRMAN  TORGERSON asked if  Enstar would  go for the lowest  price                                                            
gas if they aren't bound to a contract with UNOCAL.                                                                             
MR.  IZZO  replied  that  additional  contracts  would  have  to  be                                                            
approved through  the RCA. Their goal has always been  to obtain the                                                            
lowest price  they can, but it was  determined that it was  going to                                                            
take  a  higher  price  to  spur some  exploration   for  additional                                                            
CHAIRMAN TORGERSON  said the Henry  Hub had the potential  of taking                                                            
the state in  some drastic price swings.  He appreciated  Mr. Izzo's                                                            
willingness to help them figure things out.                                                                                     
CHAIRMAN TORGERSON announced a short break.                                                                                     
2:09 p.m.                                                                                                                       
MR. MARK SEXTON, President  and CEO, Evergreen Resources, Inc., said                                                            
Dennis Carlton,  Senior Vice President, Exploration  and Operations,                                                            
and  John Catigala,  Alaska  Project  Manager,  were with  him.  Mr.                                                            
Sexton  gave  an  overview  of their  company,  which  is  a  public                                                            
independent  oil  and gas  company  traded  on  the New  York  Stock                                                            
Exchange with the symbol of EVG. He said:                                                                                       
     Our  operations  involve extraction  of natural  gas  from                                                                 
     coal seams  in coal beds primarily from our leases  in the                                                                 
     Raton  Basin in  Southern  Colorado. There  are certainly                                                                  
     other  coal bed methane operations  in the Lower 48,  some                                                                 
     larger than  ours and some not as extensive as  Evergreen.                                                                 
     But  none  have  been executed  with  more  care  for  the                                                                 
     environment, we believe,  nor for the communities in which                                                                 
     we  operate.  On that  point,  the Colorado  Oil  and  Gas                                                                 
     Conservation  Commission recognized  us for excellence  in                                                                 
     three  of  the  last  five  years  - in  96  and  2000  as                                                                 
     outstanding  operator  specifically  cited  for community                                                                  
     relations   and   in  97   as  an   outstanding  operator                                                                  
     specifically  citing  production  enhancement.  Closer  to                                                                 
     home  in May  of this  year,  Governor Tony  Knowles  gave                                                                 
     Evergreen  the  Environmental  Stewardship  Award  at  the                                                                 
     annual  Interstate Oil  and Gas Compact  meeting that  was                                                                 
     held  in  Anchorage.  We've  added  quite a  few  jobs  to                                                                 
     express  regions bringing  prosperity  and vitality  where                                                                 
     previously  the southern Colorado  economy was stagnating                                                                  
     and notoriously so.                                                                                                        
     In the following discussion  you'll hear the term coal bed                                                                 
     methane.  Please keep  in mind  that coal  bed methane  is                                                                 
     just really  another word for natural gas. They're  almost                                                                 
     chemically  identical   except  in  this  case  it's  just                                                                 
     natural gas that comes from  coal seams directly. A lot of                                                                 
     natural gas that you think  of as natural gas was actually                                                                 
     sourced   from  coal   seams  that   migrated  into   more                                                                 
     conventional sandstone type reservoirs.                                                                                    
MR. SEXTON showed  the committee graphs of the coal  content in coal                                                            
methane and their prospects in Alaska.                                                                                          
Evergreen plans  to drill 6 - 10 wells next year in  the Unit and to                                                            
complete a  disposal well. He said  it's important to differentiate                                                             
between resources  and reserves. Resources  are simply estimates  of                                                            
the amount  of  the physical  gas in  place without  regard to  what                                                            
would be  economically extracted.  Reserves  are resources  in place                                                            
that are proven  to be economic through  existing wells at  existing                                                            
prices  with existing  technology. So,  there is  a huge  difference                                                            
between reserves,  which are tied to economics and  resources, which                                                            
are simply estimates of in place supply.                                                                                        
He said that  it is well documented  that groups of wells  do better                                                            
than single  wells  producing in  isolation. Once  they get  results                                                            
from exploratory  wells,  they would  know how  fast development  of                                                            
this resource  would go  forward. Coal bed  methane would  alleviate                                                            
the need for  a natural gas pipeline  from the North Slope  and that                                                            
gas could be rerouted to other markets. He said:                                                                                
     Natural  gas in the Cook Inlet  will provide a steady  and                                                                 
     long-lived source for jobs  and provide the most efficient                                                                 
     use  of capital  in  that  area. It's  probably  the  most                                                                 
     secure  and reliable  way of providing  Cook Inlet with  a                                                                 
     long-term  supply of natural  gas, which is the nature  of                                                                 
     coal bed  methane. It is very  long-lived, typically  20 -                                                                 
     30 years of reserves. As  far as our current assessment of                                                                 
     what's  going   on,  we're  going  to  have  to   rely  on                                                                 
     statistics  published by  the Alaska  Division of Oil  and                                                                 
     Gas and the  Conservation Commission. In the case  of coal                                                                 
     bed  methane,  our  own  studies  suggest  that  coal  bed                                                                 
     methane does have the potential  to replace the decline in                                                                 
     gas production  of reserves in the Inlet if economic.  Our                                                                 
     estimates  are  that we  can  get probably  1 tcf  in  the                                                                 
     Pioneer Unit area alone.  More gas on the order of several                                                                 
     tens  of trillion  cubic  feet  are possible.  Again,  the                                                                 
     long-lived natural gas suggests  it could be a long steady                                                                 
     course.  I do know, however,  that the six prior attempts                                                                  
     to produce  coal bed  methane gas in  the Cook Inlet  were                                                                 
     not successful and after  reviewing those histories, we're                                                                 
     not surprised  that those wells did not produce  gas. As I                                                                 
     indicated  earlier, through  our own  experience, we  know                                                                 
     that  very  slight  variations  in [indisc.],  completion                                                                  
     techniques, production practices  have a huge and profound                                                                 
     impact  on the success  or failure of  a coal bed methane                                                                  
MR. SEXTON  said they use their own  companies and aggressively  use                                                            
local  people   and  contractors   to  get  their  work   done.  For                                                            
exploration  plans, they  also have shallow  gas lease applications                                                             
pending with the state  that were applied for in February 2000. Once                                                            
those leases  are granted  by the end of  this year, Evergreen  will                                                            
negotiate with  the successful lessees  and unitize the acreage.  If                                                            
unitization  could   be  accomplished  next  year,  permitting   and                                                            
exploration  activity could also begin  that year and they  would be                                                            
drilling  wells in  2003 and  beyond. Their  next  year's budget  is                                                            
roughly $5  million. If successful,  they hope  to accelerate  as in                                                            
the Raton Basin  - slowly and prudently to make sure  they are doing                                                            
it right.  They are  spending over  $75 million  in the Raton  Basin                                                            
this year, but  their investment actually exceeds  a quarter billion                                                            
in drilling and almost a quarter billion in acquisition.                                                                        
Evergreen's  demand has grown  by 2 bcf per  year and believes  that                                                            
trend  will continue.  As  delivering peak  volumes  on the  coldest                                                            
winter day  becomes more  difficult, they  use short-term  solutions                                                            
like additional  compression, recompletion of existing  and drilling                                                            
new wells  in established  fields to increase  peak recoveries.  The                                                            
real long-term  solution is to develop  new gas supplies  with long-                                                            
term life, such as coal bed methane.                                                                                            
MR.  SEXTON  said  there  is  legislation  that  could  advance  the                                                            
development  of coal bed natural gas.  He couldn't stress  the word,                                                            
"if" enough.                                                                                                                    
     I am  confident that  if coal gas is  produced in Alaska,                                                                  
     then  Evergreen  is the  company  to do  it. We  have  the                                                                 
     technical  expertise  to do it  and the state  of the  art                                                                 
     equipment  required to make coal  bed methane a technical                                                                  
     success. We  have a very integrated group that  works well                                                                 
     together to do all this  with the highest level of quality                                                                 
     assurance   and  quality  control…Coal   bed  methane   is                                                                 
     different  from  other  types of  gas  development that's                                                                  
     occurred  in the state. We can  get it; we can get in  and                                                                 
     out  very quickly,  drill wells,  be in and  out within  a                                                                 
     couple of days and fracture simulate in a day.                                                                             
     Doing   this   development   requires   streamlining   the                                                                 
     permitting  and  regulatory  processes.  I'm sure  in  the                                                                 
     upcoming  session bills  may be proposed  that attempt  to                                                                 
     fill in the  regulatory gas gap. We ask that you  consider                                                                 
     this and to hear Evergreen's  opinions on them, because it                                                                 
     will profoundly affect our ability to go forward.                                                                          
Probably  Evergreen's  greatest  challenge  to developing  coal  bed                                                            
methane in  Alaska, MR. SEXTON  said, is dealing  with the  issue of                                                            
gaining surface access  for subsurface mineral development. For this                                                            
reason they believe  legislation must be passed that  encourages the                                                            
surface owner  to cooperate with gas companies that  want to develop                                                            
natural gas on their land  rather than allowing the surface owner to                                                            
discourage  this   development.  He  said  that  coal   bed  methane                                                            
development  is an environmentally  friendly process inherently  and                                                            
they are proud of their track record in this area.                                                                              
MR. SEXTON'S concluding remarks were:                                                                                           
     First  and foremost  our  goal is  to secure  a long-term                                                                  
     supply  of secure natural gas  for Alaska just as we  have                                                                 
     for  the  citizens of  Colorado.  We specifically  target                                                                  
     Alaska  because  of its favorable  business  climate,  its                                                                 
     experience and sophistication  with oil and gas matters in                                                                 
     development  and, of course,  we believe coal bed methane                                                                  
     resource is highly prospective  there, particularly around                                                                 
     Second,   coal  bed  methane  is  a  long-lived  resource                                                                  
     naturally and provides us  the opportunity to make a long-                                                                 
     term investment  in Alaska. That's not just a  lot of gas;                                                                 
     that's a lot of jobs. We've  grown from just a few jobs in                                                                 
     southern   Colorado  to  directly  or  indirectly  employ                                                                  
     several  hundred people  in the Raton  Basin. Just as  our                                                                 
     activities  there  have  resulted in  long-term  jobs  and                                                                 
     growth  and prosperity, so too  could our investment  with                                                                 
     you in Alaska…                                                                                                             
     Thirdly,  we support Alaska's  efforts to build a natural                                                                  
     gas pipeline to the Lower  48 and hope that Cook Inlet has                                                                 
     sufficient  gas to allow us to  transport some of our  own                                                                 
     gas  into that  market.  Above  all else,  we want  to  be                                                                 
     contributing citizens in  Alaska. We want to provide jobs;                                                                 
     we think we  can; we think we can provide environmentally                                                                  
     responsible  development that result in a long-term  clean                                                                 
     energy  source, which  this state needs  and particularly                                                                  
     the Anchorage  area requires.  We've done exactly that  in                                                                 
     the Raton Basin; we're proud  of our track record and look                                                                 
     forward  with  great  anticipation  to  replicating   that                                                                 
     success here with you.                                                                                                     
CHAIRMAN TORGERSON thanked  him and said this was his first exposure                                                            
to Evergreen.                                                                                                                   
2:39 p.m.                                                                                                                       
REPRESENTATIVE  OGAN  said  he was  concerned  about  the  conflicts                                                            
between  the surface  owners and  the subsurface  owner (state).  He                                                            
asked him to describe ways  that he had worked through that issue in                                                            
MR. SEXTON said the first thing they do is talk to people:                                                                      
     We don't  tell people the way  it is; we tell people  this                                                                 
     is  what our program  is; this  is what we'd  like to  do.                                                                 
     This is  how it might benefit  you. What do you want?  And                                                                 
     we find out  that people generally have very strong  ideas                                                                 
     about what they want…                                                                                                      
TAPE 01-29, SIDE A                                                                                                            
MR. SEXTON  said their wells are small  with very small footprints.                                                             
Their well  pads are  200 x 125  ft. They also  do visual and  sound                                                            
mitigation; but mostly  they talk to people in the local communities                                                            
and let them see it's not really a big deal.                                                                                    
SENATOR OLSON asked how successful he thought a coal bed methane                                                                
source of energy would be for people in western Alaska where energy                                                             
prices are expensive.                                                                                                           
MR. SEXTON replied:                                                                                                             
     Probably  one of the  better examples  of that is the  Red                                                                 
     Dog  mine area,  an area  where they're  importing diesel                                                                  
     fuel about three months  out of the year and have to stock                                                                 
     pile it.  We're examining the  potential of a shallow  gas                                                                 
     play  up in that  area, which  probably  wouldn't be  coal                                                                 
     methane,  but shale-type sand  development. As an example                                                                  
     there,  even with  the economies  of scale  they have,  it                                                                 
     still  costs  them  with  the diesel  fuel  they  have  to                                                                 
     import,  the equivalent of paying  $10 - $12 per mcf.  The                                                                 
     residents  of  Fairbanks  are  having  to  take liquefied                                                                  
     natural  gas costing  on  the order  of $7  mcf. Coal  bed                                                                 
     methane  is fairly economic  at $3 - $4.  If we can get  a                                                                 
     large  enough area,  get the  process going  and keep  the                                                                 
     economy in scale going,  the reality is a coal bed methane                                                                 
     play is the potentially  perfect solution for these people                                                                 
     that can't otherwise get energy.                                                                                           
     They could in fact with  a little bit of help and effort -                                                                 
     a few  pilot projects  to show that  it's economic -  this                                                                 
     has the potential to supply  natural gas to a lot of areas                                                                 
     which  simply  would not  be available,  where  it's  hard                                                                 
     enough to get the diesel  and fuel oil brought in. We'd be                                                                 
     very interested  in working with the state outside  of the                                                                 
     easy to access areas and  to look at areas where there's a                                                                 
     critical need in the outer  communities for energy and see                                                                 
     if  we could work  with the  state to  establish a viable                                                                  
     coal bed  methane project. If  it works, you've got  a 30-                                                                 
     year supply of gas to help these people out.                                                                               
SENATOR  OLSON asked  if they were  looking  at extensive  pipelines                                                            
reaching  across the  tundra for long  distances  or at a  different                                                            
well site for each community.                                                                                                   
MR. SEXTON  replied  that each community  could  be serviced  with a                                                            
very few wells. He explained:                                                                                                   
     A typical coal bed methane  well produces 100 - 500 mcf/d.                                                                 
     This  is  about  the  amount  of gas  that  a  1 megawatt                                                                  
     generator  requires. Even if you could not get  a pipeline                                                                 
     system through there, if  you got a few wells in a cluster                                                                 
     and brought  them to a central  point, you could generate                                                                  
     power  and supply to power people,  but could also supply                                                                  
     the  gas to people.  You don't need a  whole lot of  wells                                                                 
     drilled to supply a community…                                                                                             
SENATOR OLSON asked a question about reserves.                                                                                  
MR. SEXTON replied  that there is some potential on  the Yukon Flats                                                            
east of Fairbanks. There are huge deposits of bituminous coal.                                                                  
     The  great thing about  coal bed methane  is if you do  it                                                                 
     right,   it's    very   environmentally   friendly….    No                                                                 
     petrochemical  burns cleaner than pure methane.  It is the                                                                 
     simplest  form of hydrocarbon  and it's the environmental                                                                  
     solution. Water disposal  is the issue and where the water                                                                 
     doesn't  meet  the  surface  use  requirement,  we simply                                                                  
     reinject  it  into  deeper  formations   where  the  water                                                                 
     quality obviously isn't very good.                                                                                         
SENATOR OLSON said the Yukon Kuskokwim Flats are quite far away.                                                                
MR. SEXTON said he didn't  know about that area, coal bed methane as                                                            
a process can be done just  about anywhere as long as you can get it                                                            
out economically.  The only way to know that for sure  is to drill a                                                            
few wells.                                                                                                                      
MR. SEXTON thanked  the committee for the opportunity  to speak with                                                            
CHAIRMAN  TORGERSON thanked  him and  announced  that concluded  the                                                            
public testimony portion of the meeting.                                                                                        
2:50 - 2:58 p.m. BREAK                                                                                                          
CHAIRMAN  TORGERSON announced  that they would  begin the  committee                                                            
meeting portion  of the  schedule. He said  that Williams  Petroleum                                                            
offered to meet  with this committee in Tulsa in early  December and                                                            
show  members  how  gas  is traded  on  the  open  market.  He  also                                                            
announced that  the Premier of Alberta  appointed Mark Glady  to the                                                            
International Committee,  which now includes Alaska and Alberta, and                                                            
they are trying  to get B.C. to join.  The first meeting  is set for                                                            
December 6 in the Yukon and will be very informal.                                                                              
He informed  the  committee that  the Legislative  Council  approved                                                            
$300,000 to  hire an in-house economist,  either an individual  or a                                                            
firm. He  is in the process  of getting an  RFP ready to go  and the                                                            
goal is to complete the hiring by mid-December.                                                                                 
CHAIRMAN TORGERSON  said that he didn't  think there would  be a lot                                                            
of  new  information  to  go  over  in  regards  to  the  producers'                                                            
application, but there  are on-going studies that should be released                                                            
close  to  mid-December,   primarily  one  that  compares   pipeline                                                            
ownership  around the  world, including  ones that  are financed  by                                                            
government. He left the  date of the next meeting open and adjourned                                                            
this meeting at 3:13 p.m.                                                                                                       

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