Legislature(2001 - 2002)

01/16/2002 12:07 PM NGP

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

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