Legislature(2001 - 2002)
01/31/2001 03:37 PM Senate RES
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* first hearing in first committee of referral
+ teleconferenced
= bill was previously heard/scheduled
+ teleconferenced
= bill was previously heard/scheduled
ALASKA STATE LEGISLATURE
SENATE RESOURCES COMMITTEE
January 31, 2001
3:37 p.m.
MEMBERS PRESENT
Senator John Torgerson
Senator Drue Pearce
Senator Robin Taylor
Senator Pete Kelly
Senator Rick Halford
Senator Georgianna Lincoln
Senator Kim Elton
MEMEBERS ABSENT
All members present
COMMITTEE CALENDAR
Alaska Soil and Water Conservation Briefing by:
Mr. Art Weiner, Executive Director
Natural Resource Conservation and Development Board
Department of Natural Resources
550 West 7th Ave., Ste 1400
Anchorage AK 99501
Mr. Van Oss, Member
Alaska Natural Resources Conservation Development Board
Homer AK
Ms. Rachel Morse, District Coordinator
Alaska Soil and Water Conservation District
Homer AK
Overview of Natural Gas Pipeline by:
Commissioner Pat Pourchot
Department of Natural Resources
400 Willoughby Ave.
Juneau, AK 99801-1724
Commissioner Wilson Condon
Department of Revenue
PO Box 110400
Juneau, AK 99811-0400
Mr. Kevin Banks
Petroleum Analyst
Division of Oil and Gas
550 W 7th Ave, Ste. 800
Anchorage AK 99501
ACTION NARRATIVE
TAPE 01-5, SIDE A
Number 001
CHAIRMAN TORGERSON called the Senate Resources Committee meeting to
order at 3:37 p.m. and announced that the committee would now hear
a short overview by the Alaska Soil and Water Conservation Service.
MR. ART WEINER, Alaska Soil and Water Conservation Districts, said
he also represented the Alaska Natural Resources Conservation
Development Board (ANRCDB)and that the State of Alaska has 12
conservation districts that are directed in part by an appointed
board. He explained that the board and districts are funded in
part by the state and part by the federal government. Most
recently, the districts have received $2 million from the federal
government which has allowed the districts to hire staff people.
This has allowed districts to grow their capacity so they have
brought in approximately $10 million worth of project money from
the federal government. Projects that have been accomplished by
the Soil and Water Conservation Districts have included very large
flood control projects in the Salcha Delta area, a shoreline
erosion protection project in Unalakleet, a stored water protection
program in McCarthy, a number of water quality monitoring projects
throughout the state (funded by 319 funds from the Department of
Environmental Conservation), smaller education programs, and small
farm based programs.
MR. JIM VAN OSS, Homer District Board member, gave the committee a
power point presentation from the local Soil and Water Conservation
District. He explained that the Natural Resources Conservation
Service got started after the Soil Conservation Act of 1935 during
the dust bowl days of the Roosevelt Administration. The first
conservation district was started in 1938 in the state of North
Carolina. Alaska came on with AK 41.10 in 1947. Since that time,
12 conservation districts have been established in Alaska.
MS. RACHEL MORSE, Alaska Soil and Water Conservation District, said
this district is the largest in the nation, 331 million acres, and
encompasses everything that has yet to be incorporated into a local
conservation district so that every resident of Alaska has a
district. She used a power point presentation to illustrate her
points.
Her Board of Directors serves a dual function; they are also the
Natural Resource Conservation and Development Board which works
with the commissioner of Department of Natural Resources. For her,
this means that rather than having a locally elected board of
directors, she has one appointed by the governor. They come from
all regions of the state and their qualifications are that they are
a land user and cooperator in the local districts. They bring a
lot of experience as far as agriculture and natural resource use.
The focal point of her district that spans such a great area is
outreach to the communities to let them know of available services
and to provide a pipeline to NRCS. The Board also contributes to
professional conservation activities that are going on around the
state and tries to function as a local conservation district
wherever they can. They have standard outreach between conferences
and fairs, but those really don't get out to the people they
represent. So, they do the site visits which were in the
presentation. They work with non-timber forest products and there
is a conference in November 2001 in Anchorage to bring together all
the users and producers to talk about wise use development, market
niches, making sure they have all the cultural and traditional
uses. She related how one woman sells all of her product, a birch
syrup, overseas before she ever touches a tree. They work with the
Alaska delegation for conservation and reinvestment legislation so
the conservation districts can be supported in that manner. They
are working with conservation districts nation-wide on this. They
also work with other groups that promote the wise use of natural
resources in Alaska and lend their expertise wherever they can.
MS. MORSE said they function as a traditional district and work
with the inter-tribal watershed council, a group of villages along
the Kobuk that is interested in collecting base-line water quality
data. The data is very useful as the watershed resources are
developed, Cooperative agreements with NRCS are maintained so that
the projects not mentioned here take place.
CHAIRMAN TORGERSON announced an at ease from 3:50 to 3:52.
COMMISSIONER PAT POURCHOT, Department of Natural Resources, said he
wasn't prepared to break down line-by-line budget items, but he
could walk through some areas where work could be started now and
proceed through permitting and actual construction of a gas
pipeline. He explained:
In the 1970's the oil line hadn't been completed when the
prospect of gas development on the North Slope was being
discussed in earnest. In 1976 Congress passed the Alaska
Natural Gas Transportation Act (ANGTA), which set the
process in motion for a presidential finding and decision
on what route and actually what company would be granted
a right-of-way for bringing to market of a gas line. In
1977, President Carter issued presidential findings and
found the proposal by - at that time - Northwest Pipeline
Co. and the ANGTA route, which followed the existing TAPS
route and then the Alcan Highway down through Canada to
lower 48 markets, was the preferred route and should be
the subject for a right-of-way and the necessary EIS
work.
In 1978 Congress ratified that decision, essentially
declaring that company and that route should be granted a
right-of-way. In 1980 BLM followed through and issued
federal permits through federal lands and some state
lands that had not been transferred to the state. They
issued the right-of-way to the Northwest Pipeline Company
for a gas line following that route. Almost concurrently,
the United States entered into an agreement with Canada
to cooperate on that right-of-way. Canada, during that
same period, issued similar permits and rights-of-way and
fully permitted and granted a right-of-way through
Canadian lands for that same project - matching up with
both ends in the United States.
The project never got financing and events changed in the
national oil and gas world. By 1984 the project was
dormant - dormant in terms of the state was relevant in
that they had filed for a right-of-way for that same
permit across state lands from the state and that
application was never acted on by the state nor was it
requested to be finished by the company at the time.
By 1988 there was a lot of interest in the liquefied
natural gas route. Yukon Pacific pursued permits and
rights-of-way with both the state and the federal
government. In 1988 they received a federal right-of-way
following, basically, the TAPS route to the Valdez area
and they received a conditional right-of-way from the
state. The conditional right-of-way needed and still
needs lots of work to make it 'unconditional.' There's a
whole series of permits we could supply you, but it's a
ways from a final right-of-way. It was also not an
exclusive right-of-way nor did it convey any title or
rights to land per se.
COMMISSIONER POURCHOT displayed some large DNR maps with the
proposed routes on them. One of the tasks that is needed, he said,
for any kind of detailed work that could involve variances from the
original rights-of-way because of advance geologic determinations,
is that the state needs to bring its land status completely up-to-
date in a corridor fashion, a couple of townships wide, down the
whole length of the pipeline. This would not only fully identify
land status within that, but it would develop a system where that
information is readily available to any companies and applicants by
the web, so that people who are working on very small areas can
have instant land status.
COMMISSIONER POURCHOT said the state renewed the conditional right-
of-way and BLM renewed the TAGS line permit in 1998 for another 10-
year period. There is no state ANGTA right-of-way, but the federal
right-of-way still exists. He added that all the companies and
attorneys are now rereading and evaluating the status of all the
events that took place in the late 70's and they don't yet know the
answers to the following questions:
· Is the EIS still good?
· Can the right-of-way be moved?
· Can pump stations be relocated?
· Is it only Northwest or their successors, which is
now Foothills owned by TransCanada and West Coast
Transmission, Canadian Companies.
· Are they the only ones?
· What is their ownership right?
· What are their pay back responsibilities for the
work that they did?
CHAIRMAN TORGERSON asked if he thought Congress would take up the
issue.
COMMISSIONER POURCHOT said he read in the paper that an energy bill
might address some aspects of the gas line or clarifications. He
said that through the early gas process, the Federal Inspector's
Office was designated as the central point of contact for the feds.
That was merged with the Department of Energy and over the years
when nothing happened on the pipeline, it gradually faded away, but
it still exists as a statutory designation within the Department of
Energy. He said it needs to be revisited and that the Department
of Interior and the Federal Energy Regulatory Commission (FERC) are
involved already.
The State Pipeline Coordinator's Office parallels the federal
counterpart agencies in the Joint Pipeline Office (JPO). Their
mission under state law is to "permit any and all pipelines in
Alaska and to monitor on-going operations of those pipelines."
Oversight of the TAPS is the bulk of their work. The federal side
of the JPO reports through the Department of Interior now. The
governor issued an administrative order several weeks ago
designating the State Pipeline Coordinator's Office, under DNR, as
the lead state agency under which we would coordinate the state
right-of-way and permitting functions for a gas line (like the
TAPS). This has been working well and hopefully the permitting
function would move into construction and there would be teams of
people working in unison to every extent possible so that each
agency isn't independently going to each contractor or project
sponsor.
He touched on some of the Governor's budget items for advancing the
gas line commercialization. In addition to the creation and
staffing of the State Pipeline Coordinator's Office, the state is
coordinating with its federal agency and Canadian counterparts.
The department has found that identifying requirements and
explaining the process up-front to their applicants and people
wanting permits makes the whole process move faster.
There are some resource needs and research work that are going to
be required in any permitting scenario, COMMISSIONER POURCHOT said,
like hydrology work, identifying and updating geologic hazards,
fishery information and land status. He wants to get a jump start
on this required work. He explained that there is a reimbursable
fee for some work done by the applicants.
He is recommending some studies of Alaskan gas supplies and demand
and an analysis of the national gas market that are absolutely
necessary. One study is to determine the possibility of instate
uses and instate needs. Another would be to assess the outside
market and its economic and financial impacts on the actual
feasibility of a gas line construction. They also have a component
that references some of his earlier questions dealing with study of
some legal and legislative or congressional legislation issues that
may surround gas line development. He is recommending studies of
some fiscal regimes like what the state can expect for a return on
state resources and various aspects of that. Skilled labor needs
to be identified and how it might be provided when and if
construction starts. One of the objectives is to put as many
Alaskans to work as possible.
CHAIRMAN TORGERSON asked how many of these studies are currently
under way.
COMMISSIONER POURCHOT answered that Commissioner Condon has let one
contract for some of the national market information. Outside of
some of the broadest land work, DNR hasn't initiated any of the
studies for resource information as DNR did not have the funding
before legislative appropriation. They have started on one of the
tasks by sharing what permitting information they have with
applicants. The JPO, which is getting hit with a lot of the work,
is largely funded by RSAs.
SENATOR TAYLOR said he had read the original pipeline bills and
Congress actually said one couldn't sue to enjoin the work, that
all of the provisions of federal labor law were suspended as
concerned the ability of a labor union to strike during
construction of that project. Many other federal laws were
suspended concerning that project. He asked if such legislation
wouldn't be necessary in the construction of a gas pipeline, too.
He asked how they intend to get around the litigation obstacles, no
matter where the pipeline is built.
COMMISSIONER POURCHOT replied that the most significant exemption
in the TAPS law was the declaration that it had indeed complied
with the National Energy Policy Act (NEPA) and that the
Environmental Impact Statement (EIS) was valid. He recommended
reading the Alaska Natural Gas Transportation Act (ANGTA) of 1976
and the presidential findings in 1977. He was surprised to find it
contained the EIS, the right-of-way, and other things that were
fairly straight-forward, he said. Some, all, or most of that may
still apply today.
SENATOR LINCOLN said she heard a presentation by Yukon Pacific that
emphasized that is the only project that doesn't need permits and
that is to go; and if the state goes with the Alcan project, 860
permits are still needed. She asked him to respond to that. Also,
she said, it was reported that if there was an Alcan route going to
Calgary, the prebuilt pipeline it would connect with is already
full. She asked him to respond to that, too.
COMMISSIONER POURCHOT distinguished between state and federal
rights-of-way and permits. Many, if not most, of the federal
permits and the federal right-of-way for the TAGS route has been
granted. On the state side, there are a number of studies and
further information, as well as many non-right-of-way permits that
are needed for the TAGS line. A conditional right-of-way exists
which is a piece of the total state permitting picture. Many times
getting information from applicants is what takes a lot of time, so
an efficient process would speed it up. He estimated it would take
at least 18 months for the necessary state rights-of-way and
permits.
Regarding capacity, he explained, gas pipelines aren't as rigid as
oil pipelines. Pressure and compression can be increased, so more
gas can be put through the recently completed pipeline from Calgary
to Chicago.
SENATOR ELTON asked if the Administration had considered how
information would be collected and how they would work with other
decision makers, including the Legislature so everyone is asking
the same questions and getting all the answers at the same time.
COMMISSIONER POURCHOT replied that is a already a challenge within
the state agencies and DNR is in the process of submitting a
supplemental budget to the Legislature for those very concerns.
TAPE 01-5, SIDE B
Number 2230
COMMISSIONER POURCHOT said the Governor signed an Executive Order
last week that called for an advisory council and one of the core
functions of that council is to have a citizen group act as a
sounding board.
SENATOR ELTON said he wasn't sure it was entirely the
Administration's responsibility to make sure there is a loop that
includes the Legislature. However, he thought it is important to
be in that loop early so legislators can ask appropriate questions
throughout the process and review what the Administration is doing.
CHAIRMAN TORGERSON asked if there are any provisions for in-state
processing or any benefits from it.
COMMISSIONER POURCHOT replied that they didn't identify a separate
study for that, but they expected to hear of those possibilities as
applicants come to the department.
Another charge of the natural gas policy council is to solicit,
analyze, and make recommendations on in-state industrial
development through the use of limited royalty gas.
CHAIRMAN TORGERSON asked if he thought the state could commit
royalty gas to any project it felt like.
COMMISSIONER POURCHOT replied the same statute applies to royalty
gas that applies to royalty oil, which requires best interest
findings. He thought the state needs to receive the same value or
better, as if we would take the oil in value.
MR. KEVIN BANKS, Division of Oil and Gas, testified that was
correct and is in statute.
CHAIRMAN TORGERSON asked if the state still gets 12.5 percent
royalty.
COMMISSIONER POURCHOT replied yes.
CHAIRMAN TORGERSON asked how we got a royalty share from gas or gas
liquids.
COMMISSIONER CONDON answered that he was involved in litigation on
behalf of the state addressing gas issues. Some of the liquids that
are recovered on the North Slope today and sent through the
pipeline and off to market are classified as gas, principally the
butane. It is recovered at the central gas facility and blended
with crude oil and sent down the pipeline. Under the state's oil
and gas lease and the applicable state tax statutes, both for
royalty and production tax, that substance is classified as gas.
"Miscible injectant in the Prudhoe Bay field - and that same
substance that is sent over to the Kuparak field - all of those
substances are technically gas. What finally gets produced and
sent to wherever, the state will own one eighth of that."
CHAIRMAN TORGERSON said he hoped we would have the opportunity of
taking our eighth for something in state, not something that goes
to Chicago.
COMMISSIONER CONDON replied that we obviously have that option.
"It doesn't have to go to Chicago and it doesn't have to go to
Asia, if we want to take it and do something else with it."
SENATOR PEARCE asked if the governor's council is charged to look
at just a natural gas pipeline and just one route.
COMMISSIONER POURCHOT answered that they are not charged with
looking at routings. They're charged with soliciting views of
Alaskans on a variety of issues concerning the use of gas, needs
and desires of Alaskans in terms of labor, returns to the state,
and best uses of in-state gas, particularly royalty gas.
SENATOR PEARCE said she would like to see an Alaskan Highway route
natural gas pipeline built. It seemed to her that this group is
going to go out and raise expectations and have conversations on
just one route and the Legislature doesn't really know what
proposal they are going to get from the owners. She said our one -
eighth is not enough to build any of these projects and she is
trying to understand why the state is so far out front.
COMMISSIONER POURCHOT explained that it was always envisioned that
a gas line following the Alcan Highway through Canada doesn't mean
you wouldn't have other options also, like spurs to Valdez or Cook
Inlet. The charge also addresses use of NGL, LNG, and other uses
that are not viewed as alternates to an Alaskan Highway route. They
could be adjuncts which also serve valuable purposes for Alaska.
COMMISSIONER POURCHOT said:
The Council shall deliberate and make recommendations on
topics related to natural gas commercialization,
including benefits of gas development to Alaskan
communities, best uses of state's royalty share of gas,
promotion or attraction of investment for in-state or
value-added processing, the costs and benefits of the
state taking delivery of its royalty share of gas in
Alaska versus allowing a project developer to include the
gas in delivery to lower 48 states, options for projects
utilizing gas to liquids, liquefied natural gas, and
natural gas liquids, demand for in-state natural gas
consumption and its effect on a gas project,
environmental impacts, necessary protection measures,
training and readiness for Alaskans for jobs on a gas
project, use of Alaska labor pool by contractors and
subcontractors and use of Alaskan businesses, and state
promotion and facilitation of project financing including
potential ownership by the state of some or all of the
project.
SENATOR ELTON said he sees two reasons for a public process. One
would be to decide, after talking to Alaskans, what questions need
to be asked as DNR proceeds with the studies, and the other would
be to go back to Alaskans and say, "This is what we found out.
Help us make a good decision on what some of these options would
be."
COMMISSIONER POURCHOT said the administrative order calls for a
report to the gas cabinet and to the Governor and the Legislature
on November 30, 2001. The idea was to have a long enough time to
solicit the views of Alaskans knowing that we're probably not going
to make decisions during that time frame. He would not call the
work items he laid out policy decisions; he would consider them as
the foundation for making decisions, doing some nitty gritty
permitting and right-of-way work, and for preparing legislation for
the next session.
Number 1690
SENATOR PEARCE said they are running the risk of doing work that,
if not useless, would be put on the shelf for a few years, like
hydrology work, fisheries, or fiscal regimes, until they know what
projects are on the table.
COMMISSIONER POURCHOT said he is optimistic. He reviewed the
contents of the meeting for Senator Halford, who arrived late.
SENATOR HALFORD asked if the federal legislation is still on the
books.
COMMISSIONER POURCHOT answered yes.
SENATOR HALFORD asked if it is exclusive in both cases.
COMMISSIONER POURCHOT said it named a specific company and granted
a specific right-of-way, but lawyers are trying to answer that.
SENATOR LINCOLN said she understood that the report from the
governor was just on that Alcan route and not the alternatives.
COMMISSIONER POURCHOT answered that it could very well speak to
branches from the route and some other kinds of use of gas.
SENATOR LINCOLN wanted clarification if they were just looking at
that one route.
COMMISSIONER POURCHOT answered that to their knowledge, the only
other alternative to the major marketing of gas would be the so-
called over-the-top route off-shore of ANWR and down through the
Mackenzie River delta.
SENATOR LINCOLN asked about following the existing line to Valdez
and shipping out of there (TAGS).
COMMISSIONER POURCHOT explained that there is an application for
that route and some rights-of-way had been granted, but he thought
it was more a function of the market rather than public policy
decisions.
SENATOR LINCOLN said it was also a fact that spurs are a
responsibility of the community. They can tap in, but they have to
pay for that spur from that point to the community.
COMMISSIONER POURCHOT said there could be a private project like
Enstar in the Cook Inlet area.
CHAIRMAN TORGERSON asked if he had an opportunity to figure out how
not reinjecting gas and repressurizing the fields would impact the
production of oil.
COMMISSIONER POURCHOT said that the last item on his list was study
of the impacts of gas commercialization on North Slope oil
resources. He said there were two separate studies, done by the
AOGCC and by the Division of Oil and Gas.
SENATOR TAYLOR said throughout Administrative Order 188, the Alaska
Highway Gas Pipeline cabinet will work with the Governor and with
the council. He asked who the Gas Pipeline cabinet is.
COMMISSIONER POURCHOT replied that it is a subgroup of the
governor's cabinet, chaired by DNR. It includes all the
departments that have a permitting function or an interest in gas
line development. It includes DNR, ADF&G, DEC, DOTPF, DOL, DOR, and
DGC. He said it's a large group, but it's indicative of why there
needs to be a forum in which to discuss the gas line.
SENATOR TAYLOR asked why right-of-way would be a problem in the
state since it has the right of eminent domain.
Number 1147
COMMISSIONER POURCHOT answered that pipelines, highways, and
utilities do have eminent domain. In Alaska there traditionally
has been little private land ownership and, unlike other states,
when we exercise eminent domain, we do it very cautiously.
CHAIRMAN TORGERSON asked if the state had been paid royalty on gas
that has been used on the North Slope.
COMMISSIONER POURCHOT replied yes.
SENATOR PEARCE asked if the group could discuss the possibility of
Alaskan ownership of an equity interest in whatever projects come
to the table eventually. She thought that is the place right now
for public discussion. She also noted that there was no discussion
of possible financing schemes in terms of using alternative methods
such as a port authority. She asked if the council was charged
with looking at some of the opportunities that might be available
to some of our communities.
CHAIRMAN TORGERSON said he just received an e-mail saying that the
department had suspended all the applications on shallow gas and
frontier leasing and he wanted to know if that is true and why.
COMMISSIONER POURCHOT answered that it is true and explained that
the department issued one shallow gas lease to Cominco in the Nome
area to develop some alternative energy sources. DNR has 250
pending applications. To grant the leases, the same DNR staff has
to search all the titles. Meanwhile, on the North Slope, to issue
the leases the department granted last fall, the same people have
to do the same process. The shallow gas leases are worth thousands
of dollars, but the North Slope leases are worth millions in state
revenue. He said DNR is not suspending the program; it is shifting
resources temporarily until it gets caught up on the North Slope
leases. DNR is committed to the program, but the reality is has to
slow down on the actual granting of the shallow gas leases. The
applications are still valid and the program is still on-going.
Number 730
COMMISSIONER CONDON said he would run through his notes and talk
about the dollars:
They are important with respect to the economic viability
of a gas commercialization project. They're important
for public revenue from a gas commercialization project
and they're important to financing, which links back to
the economic viability. In terms of thinking about the
dollars for any one of the proposed projects, whether
it's the project that we've been more or less focused on
here today, which is to take the gas pipeline down the
Alcan or whether it's over the top which we're not
talking too much about, but I want to talk a little bit
about the variables [which] are: what's the gas worth in
the market you take it to, whether it's central North
America or North America in the largest sense or whether
it's Asia.
The second variable is project cost - how much does it
cost to build a project to get it there. The third
variable is the volume you're shipping through the
facilities you build to the market you're accessing.
Thinking about those three variables, you can think about
it in a simplified term. You don't need to think a lot
about operating costs, but you do need to think about
what is the market going to be like when you get there,
what kind of capital investment do you have to make to
get there and how much do you send - because you're going
to spread the capital costs over the volume that you
send.
As folks have focused on pipelining gas to mid-North
America, they've really talked about a lot of different
combinations of projects. To keep the discussion here
simple, I want to just focus on three. Two of them are
variations on sending gas down the highway. One is a 2.5
billion cubic foot per day (bcfd) project that would send
gas to Alberta. Another version of the same idea is a 4
bcfd project following the same route. A third project,
just to talk about these variable, I want to
hypothetically put out before you, is over the top where
folks have talked about taking 2.5 bcfd from Prudhoe Bay
moving it under the Beaufort Sea over to the Mackenzie
Delta and there picking up 1.5 bcfd and thus moving 4
bcfd into the North American market.
As you think about those projects, if you're moving 2.5
bcfd of Alaska gas, either down the Alcan or over the top
into the North American market a $1 change in the
destination market is going to make a difference in state
revenue of about $180 - $200 million. That's the
sensitivity for Alaskan public revenue to a dollar change
in the market price in the lower 48.
With the 4 bcfd project taking Alaska gas into the market
place, a $1 change results in a $360 - $400 million in
state revenue. If you look at the sensitivity of state
revenue, just sort of a proxy of what happens to the
economics of the project of changes in the project costs
and if you're looking at a project that takes 2.5 bcfd of
Alaska gas to market and you have a $1 billion change in
the project costs, that results in either an increase or
decrease of Alaska's wellhead value by about 20 cents per
mcf. For a project that takes 4 bcfd, a $1 billion
change in project costs results in about a 12 cent change
in revenue for the state.
As people think about what the over the top route might
be worth to Alaska as opposed to the Alaska Highway, if
you believed that the over the top project would cost $2
billion less than the Highway route - and we don't know
how much less it cost or whether it would cost more - but
if you thought how much less it would cost, and each of
those projects would deliver 4 bcfd to the market, we
have another set of comparative revenue numbers that we
ought to look at. The wellhead value per unit, if you
assume the over the top project costs less, would result
in a wellhead value for Alaska gas that would be 15 cents
[per mcf] higher than it would if you went down the
Alcan. But the total revenue to the state would be about
$160 million per year greater - if you went down the
Alcan with a 4 bcfd project than if you went over to the
Mackenzie with 2.5 bcfd and then went to market with 4
bcfd there. It's obvious why. You are taking more Alaska
gas to market earlier [with the Alcan project].
In terms of thinking about public revenue, while what the
state would receive per unit would be 15 cents/mcf less,
lots more Alaskan gas would be moving into the
marketplace and, Alaska's revenue, as a consequence,
would be considerably greater. There are lots and lots
and lots of variations that you can then continue with in
terms of volumes - making assumptions about whether or
not and when Alaska gas gets to market. You can add on
LNG plants, spurs, and possible GTL plants. I'll close
out this discussion by saying that all of these variables
are modelable. Our staff has put together models that
can look at any of them.
COMMISSIONER CONDON said there are other variables that complicate
it. There is the question of gas liquids and it may be important
to a project's economics in terms of an industrial base here in
Alaska. Models aren't available for those at this point in his
department. They have talked with Cambridge Energy Research
Associates (CERA) about helping to lay out a path for doing this
kind of analysis.
TAPE 6, SIDE A
Number 001
COMMISSIONER CONDON said:
There are issues related to royalty in-kind gas and to
the extent you are talking about using royalty in-kind
gas not just as fuel in communities, but as possible
industrial feed stock, the same kind of analysis really
ought to be done.
In terms of looking at the variables we talked about -
markets, costs, and volumes, we commend to you the
analysis that we'll make available to you from CERA on
the North American gas market. They're certainly prepared
to share with us their analysis of the Asian Pacific Rim
LNG market, as well.
With respect to construction costs and that variable,
that is not something which we've undertaken to look at
ourselves. We're rather not qualified to do that in
terms of the staff at the Department of Revenue. There
are folks who've done some quick and not so expensive
studies and there are people who claim to have devoted
thousands of hours to studying alternative costs. Some
of that is available in the public domain and some of it
has been held proprietary by the companies that have done
it. We have not had access, yet, to that information -
the Purvin and Gertz study which some of you have seen
was a quickly done study. They certainly have qualified
people, but it was not an expensive or extremely thorough
cost study. They certainly have qualified people. The
mayor's group had an extensive study which was in effect
- donated may not be quite the right verb, but it
certainly hasn't been paid for yet - that was done for
them. Bechtel, one of the major pipeline companies had
done a study that has not been shared with us nor
discussed in a public forum. Yukon Pacific had redone its
own cost studies and again that's information they might
choose to share with you.
Of course, we can't know for sure what kind of projects
people are finally going to propose in terms of the
volume of gas that's likely to move. All we can do is
model the economics of as many different kinds of
projects as seem plausible and that's what we have done
and what we are prepared to continue to do to the extent
that you or anyone else wants our assistance or wants to
look at our analyses.
I should say something about the fiscal system. Senator
Pearce is correct that until we know what someone
proposes to do quite specifically, it's not going to be
possible to make a judgment about whether or not the
state's fiscal system needs to be modified or tailored in
some way to accommodate the project. In tailoring the
fiscal system, it seems to me there are two questions
that we would ask ourselves. The first one is, do we
need to change it to get a project? We need to make a
judgment about whether that's the case. If we are going
to change it, obviously the way we would want to change
it is how do we maximize the public interest in the
development. That may mean modifying the way we tax, but
certainly I hate to see us talk about it as I read
stories in the various publications - tax concessions.
That's really not the lens we should be looking through.
We're not trying to do the taxpayers a favor. We're
trying to figure out what it's going to take for us to
have a project and what fiscal system makes the most
sense for the project in terms of our analysis of what
the public interest is.
Let me return to CERA for just a moment. There's been a
lot of discussion about markets and what we can expect in
the market. As the person who has the responsibility for
coordinating the contract that we've entered into to deal
with the gas issues, I would commend their market
analysis to you and will certainly work to try to make
them available at a time that would be useful to you to
hear what they have to say about the North American gas
market - where is it today, where do they think it's
going to go and you can form your own conclusions about
what that means for commercializing this resource for
Alaskans.
Those are my notes, Mr. Chair.
Number 413
CHAIRMAN TORGERSON asked if he discussed the possible state
investment.
COMMISSIONER CONDON replied he hadn't, but added that was certainly
a possibility. He didn't know what more he should say about it
now. "If you're going to make an equity investment, you've got to
have some equity to invest." There may be things the state could
do even if it were not an equity investor to facilitate the
financing of the pipeline, he said and those are obviously things
the state should explore and we intend to do so. "That's an area
where our department has responsibility. We will study the options
and give you our judgment about what might be available."
CHAIRMAN TORGERSON asked for any help he could give him in
understanding the difference in West Texas Intermediate (WTI) and
West Coast (WCI) oil prices.
COMMISSIONER CONDON passed copies of a graph to the committee and
referred to it with his explanation. He said this is how his chief
petroleum economist likes to present information.
When OPEC announced its October 1 increase, the increase
it put into the market at that point was largely sour
crude. As a result, we saw a worldwide decline in value
of sour crudes relative to West Texas Intermediate which
we all know is a very sweet crude. ANS values held up
relatively better than other sour crudes. ANS fell after
the first few days of September. Dated Brent did not,
but it is not a sour crude.
You can pretty much explain what we've seen with respect
to the differential between ANS and WCI by looking at the
price behavior of sour crudes worldwide. There are also
some specific issues with respect to the west coast in
terms of refinery shutdowns, other crudes being imported
into the west coast by some refiners which may put
further pressure on ANS relative to WCI. We've actually
seen a little bit of a recovery on all ANS since this
chart was prepared, but I think there is still some
possibility that what we see in the market place will
again widen the differential with respect to WCI. What
has happened now, of course, is that OPEC has announced
that it is taking crude off the market. I believe we
will see a price response for sour crude and the question
is whether ANS will track that. It is something we are
watching on a daily basis.
CHAIRMAN TORGERSON said he heard something about other states
(Washington, Oregon, and California) investigating something like
price fixing and asked if the Commissioner was in contact with
these states.
COMMISSIONER CONDON answered yes. One of the things he foresaw was
Senator Widen, who got access to some of the documents that were
produced in connection with the merger, focused specifically on
BP's pricing behavior, and sought to reposition the export ban. If
BP was behaving as Senator Widen alleges it was, of course, we were
the beneficiaries of that, and it is not in our interest for there
to be a reimposed export ban.
CHAIRMAN TORGERSON asked how much we are exporting now.
Number 1000
COMMISSIONER CONDON answered that we are not exporting any right
now.
SENATOR HALFORD said they just agreed to reduce the quota out of
Saudi Arabia and asked, "If they have reduced the component of
their export oil from which they are getting the lowest price, we
would assume the glut of low grade oil on the West Coast declines
and the differential would decline, too. Is that wishful
thinking?"
COMMISSIONER CONDON said he didn't think it was wishful thinking
and he could find out the answer, but he didn't know it right now.
One has to assume they would take the sour crude off the market
first.
SENATOR HALFORD asked if he knew what portion of the OPEC decline
the Saudis agreed to take.
COMMISSIONER CONDON answered that he would find out.
CHAIRMAN TORGERSON thanked everyone for joining the committee and
adjourned the meeting at 5:30 p.m.
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