Legislature(2001 - 2002)
02/15/2001 12:10 PM Senate RES
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* first hearing in first committee of referral
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+ teleconferenced
= bill was previously heard/scheduled
ALASKA STATE LEGISLATURE
JOINT MEETING
SENATE RESOURCES COMMITTEE
HOUSE RESOURCES STANDING COMMITTEE
HOUSE SPECIAL COMMITTEE ON OIL AND GAS
February 15, 2001
12:10 p.m.
SENATE MEMBERS PRESENT
Senator John Torgerson, Chair
Senator Rick Halford
Senator Pete Kelly
Senator Robin Taylor
Senator Kim Elton
Senator Georgianna Lincoln
SENATE MEMBERS ABSENT
Senator Drue Pearce, Vice Chair
OTHER SENATE MEMBERS PRESENT
Senator Gary Wilken
Senator Loren Leman
Senator Donald Olson
HOUSE RESOURCES MEMBERS PRESENT
Representative Drew Scalzi, Co-Chair
Representative Hugh Fate, Vice Chair
Representative Joe Green
Representative Mike Chenault
Representative Gary Stevens
Representative Beth Kerttula
HOUSE RESOURCES MEMBERS ABSENT
Representative Beverly Masek, Co-Chair
Representative Mary Kapsner
Representative Lesil McGuire
HOUSE OIL AND GAS MEMBERS PRESENT
Representative Scott Ogan, Chair
Representative Hugh Fate, Vice Chair
Representative Fred Dyson
Representative Mike Chenault
Representative Vic Kohring
Representative Gretchen Guess
HOUSE OIL AND GAS MEMBERS ABSENT
Representative Reggie Joule
OTHER HOUSE MEMBERS PRESENT
Representative Jeannette James
Representative Carl Morgan
Representative John Davies
COMMITTEE CALENDAR
Presentation on LNG Market in Japan and Asia and Alaska's Position
In That Market by Mr. Shigeru Muraki, General Manager, Gas
Resources Dept., Tokyo Gas Co. Ltd. assisted by Mr. Jeff Lowenfels,
President, Yukon Pacific Corporation (who arranged his visit)
ACTION NARRATIVE
TAPE 01-13, SIDE A
Number 001
CHAIRMAN JOHN TORGERSON called the Senate Resources Committee
meeting to order at 12:10 p.m. and introduced Mr. Shigeru Muraki,
General Manager of the Gas Resources Department of Tokyo Gas, the
largest gas company in Japan and the second largest importer of LNG
in the world. "Japan has been a customer of Alaska since 1969. For
over 31-years, Alaska has been shipping LNG's to the Tokyo Gas and
Tokyo Electric Power Company from the Phillips Marathon Plant that
is located in Representative Chenault's district in Nikiski."
MR. SHIGERU MURAKI said Alaska's LNG supply is the second LNG
project in the world and first LNG project in the Asia Pacific.
Algeria started in 1964 and stopped 10 years ago. Alaska has the
longest LNG trade history in the world with Japan, which started
importing LNG in 1969. Korea started importing in 1986 and Taiwan
in 1990. The growth rate was 12.8 percent per year. Due to the
economic slow downs in this region, the growth rate slowed to 4.6
percent for the last three years.
In 1999, three countries imported 69 million tons of LNG - Japan 52
million tons, Korea 13 million tons, Taiwan 4 million tons - from
seven countries: Alaska, Brunei, Indonesia, Malaysia, Australia,
and Abu Dhabi and Qatar. In 2000, Omar started to supply gas and
now eight countries have 77 million tons of contracts with three
importing countries.
MR. MURAKI said that most countries are trying to liberalize the
market, which is creating competition in the Asian energy market.
Due to increased concerns for the environment, particularly global
warming, and the efficient use of energy, the role of natural gas
is increasing and he thought it would become the primary fuel of
the 21st Century.
MR. MURAKI said that Japan uses 13.2 percent and Asia uses 10.7
percent and are very low compared to the U.S. He said that oil and
coal are still dominant in the Asian markets. The main reason is
that the discoveries in Asia are a long distance from Asian
markets. He said that there was a lot of room for expansion of the
LNG market in Asia.
The amount of gas reported by the International Gas Union (IGU) in
2000 was 3.4 percent growth per year in Asia and 3.5 percent in
East Asia. The energy demand growth for the next 10 years is
expected to be 2.2 percent per year in the world and as much as
five percent in Asia. LNG will increase from 10 percent to more
than 60 percent in 2030.
MR. MURAKI followed with this review of the energy markets in
Japan, Korea, Taiwan, Indian and China:
JAPAN
He said that pipeline access to pipeline network full major
introduced in 1999. Japan is a small country with 238 gas
utilities, most of them very small. Discussions of further
liberalization of the gas market just started in January 2001. The
major issues will be the expanded liberalization of the market and
open access to LNG terminals and pipeline networks for all the gas
companies in Japan.
In the electricity industry, wholesale bidding was introduced in
1996. Nine power utilities regionally dominate the market in Japan.
Forty-one independent power producers (IPP) total 6,725 MW with
four gas-fired projects producing 733MW. This is because gas cannot
compete with coal and oil. All new entrants are required to go
through the bidding system.
Most consumers are eligible to purchase electricity from
independent power suppliers. This liberalized market represents
about 30 percent of the total power demand in Japan. Several
companies have already announced to participate in this new market.
One of them is Tokyo Gas Company who created a joint venture
company with Osaka Gas and Nippon Telephone and Telegram (NTT), one
of the largest electricity consumers. E Power, a joint venture by
Orix and Enron of the U.S., are planning to participate, also.
Discussions for the next step of the liberalization of the power
market will start soon. Major issues will be the expansion of the
liberalized market and the possibility of introducing the power -
pool system. The slowdown in the Japanese economy could have some
impact on these discussions and countries that are totally
separated geographically may have certain impacts on the next step
of the liberalization of gas.
MR. MURAKI showed the committee a graph of the LNG demand in Japan
issued by the Ministry of International Trade and Industry (MITI).
He noted that this agency is now called METI. It showed that in
1998 energy demand in 2010 was predicted to be 61 Mt under moderate
energy demand growth of 1.1 percent per year. However, considering
the slow development of nuclear power and increased concern of
greenhouse gas emissions, he thought that LNG demand could reach 70
Mt in 2010, an 18 Mt increase from 1999, requiring more than 15 Mt
of additional supply to Japan by 2010. They already have contracts
for 55 Mt. Japan is still struggling with recovery from the
recession and energy demand growth can be lower than 1.1 percent
per year. However, Mr. Muraki thought 70 million tons of LNG demand
could still be an achievable level.
Number 200
KOREA
MR. MURAKI said that liberalization of the electrical industry is
moving ahead in Korea. Unbundling of the Korea Electric Power
Company and liberalization of the power market was approved by
Parliament in December 2000. The power generation sector will be
unbundled, privatized and separated into five companies by 2002.
They will liberalize the wholesale market during 2003 and then
finally after 2009, they will liberalize the retail market. Nuclear
power and hydropower will be owned by the government in different
companies as private companies will own the natural gas, coal and
oil power generation plants.
Plans for liberalization of the gas power industry were announced
in November 1999 - same time as the power industry. However, they
are still under discussion. Liberalizing LNG imports will occur
this year. Korean Gas Corporation (KOGAS), the sole importer of LNG
in Korea, owns LNG terminals and trunk pipelines to distribute gas
to the power stations and local gas utilities. Korean Gas
Corporation in the current plan will be separated into one company
that will own LNG terminals and pipelines and three LNG importers.
"So anyone can import LNG to the market through the LNG terminals
and pipelines owned by one company." When that plan will be
implemented is not clear, yet.
MR. MURAKI showed the committee a graph of demand in Korea. He said
that energy demand was to be 22 Mt in 2010. He said this was shown
by MOCIE, which is the government agency to regulate energy
markets. The previous estimate was 29 Mt. In September 2000, Korean
Energy Economics Institute (KEEI) issued a median energy demand
forecast that indicated higher demand growth than the government
predicted. This is because of the recovery of the economy. In this
forecast LNG demand is expected to increase to 24.6 Mt in the base
case, 28.3 Mt in high case and 19.5 Mt in low case, which is still
higher than the government forecast (18.5 Mt). He thought the high
case and the base case were unlikely to happen because no one can
commit to a new supply source right now. He predicted about 30 Mt
of LNG demand in 2010 in Korea.
MR. MURAKI said that Korea may need an additional supply of LNG
before 2005 because they have 17 Mt of LNG contracts currently. If
the KEEI case becomes a reality, much more LNG will be needed by
2005. He summarized that Korea needs it before 2005 and Japan needs
it after.
Number 300
TAIWAN:
MR. MURAKI explained that Taiwan is a relatively smaller market
compared to Japan and Korea. Liberalization of the market is
advancing very slowly there. The IPP bidding system was introduced
in 1995 and six natural gas-fired IPPs were approved last July.
Natural gas is becoming the primary energy for new power capacity
in Taiwan.
Privatization of the Chinese Petroleum Corporation (CPC), the sole
importer of LNG in Taiwan, and Tai Power Company (TPC) is planned
for this year, but it's unlikely to happen until next year.
Together they consume about 1.8 Mt of LNG and new LNG importers
using new LNG terminals will be suppliers of gas. Taiwan has only
one terminal now with the second terminal being built by Tatan
Power Station giving Taiwan more space for imported LNG.
MR. MURAKI said that CPC predicted LNG demand to be about 10 Mt in
2010 - the maximum capacity that could be brought to the existing
terminal. He said Tokyo Gas predicts an LNG demand of 13 Mt. in
2010 partly because of concern with the green house effect. Nuclear
development was a commercial issue, but the government decided not
to deal with a nuclear power plant. They changed their minds and
will probably build the power station. This has had an impact on
the LNG demand. The 13 Mt estimate was before the government
decided not to build the plant.
Number 340
INDIA
MR. MURAKI said the market in India will be really big, but Alaska
is too far away to supply it. He said that Dabhol Power is planning
to start importing LNG this year and they already have contracts
with Middle East suppliers, Oman and Abu Dhabi for a total of 2.1
Mt of LNG. A company owned by Dabhol and Indian Enterprises is
planning to build a pipeline to distribute gas to the Indian market
and are negotiating a contract for 2.2 Mt with Malaysia. This will
be the first LNG project in India.
In addition to the Dabhol project, MR. MURAKI said there are
several projects being planned in the states of Gujarat,
Maharashtra and Tamil Nadu. He said that some of these projects
already have contracts or letters of agreement with suppliers -
mostly from the Middle East because of its location. Mr. Muraki
said, "I see between 10 to 15 Mt of LNG demand could be created in
2010. Some say 25 Mt, but because of the economy, they cannot
import that much LNG in ten years time."
CHINA
MR. MURAKI said, "China could be the potential market for Alaskan
gas." The first project is planned for Guangdon Province near Hong
Kong. It will start by importing 3 Mt of LNG from 2005 and increase
its imports up to 5 to 6 Mt by 2010. China is now in the process of
selecting a foreign partner. Their short list of companies are: BP,
ExxonMobil, Shell and an Australian company. One of them will be
selected. The other potential LNG markets are in the Yantsu Delta
area, where Shanghai is located (the largest natural gas market in
China), and Fujan Province, located between Guangdong and Shanghai.
The Chinese government is planning to build a pipeline over 2200
kilometers to Shanghai. "At this time the Chinese government gives
priority to the pipeline project."
MR. MURAKI said he didn't know when the second LNG project will be
started in China, but one terminal can receive up to 6 Mt. If the
second project is realized before 2010, Tokyo Gas predicts that
demand could reach 9 to 10 Mt in China.
In 2005, the five countries combined will demand between 83 to 96
Mt and in 2010, between 108 and 137 Mt. He said that existing LNG
projects will continue to fill 80 Mt of demand through 2010. "In
2005, in the high case, around 50 Mt of additional supplies will be
required in mainly Korea, India and China," Mr. Muraki said.
Japan's additional demand for 2005 and 2006 has already been
secured through negotiations with new projects, mainly Malaysian
and Australian expansion. Japan needs additional supply after 2006,
MR. MURAKI thought. He reiterated that demand in 2010 will require
a large volume of natural gas to supply the growing Asian market in
addition to the 80 Mt under existing contract.
MR. MURAKI said that Southeast Asia and Australia will remain the
major suppliers to East Asian markets. The Middle East will
continue to supply East Asia, because they have 20 to 25 years of
contracts. Because of its geographical location, they can supply
India and possibly Europe (LNG or pipeline). Southeast Asia may
have gas, MR. MURAKI said, but they plan to build a regional
pipeline network to get gas to their counties to facilitate
industrialization. Gas exports would be limited for this reason.
MR. MURAKI said, "Alaskan North Slope and Sakhalin gas are
important potential supplies to the East Asian market, which can
improve the stability of LNG by diversification of the supply
sources. This is very important for Japan and Korea, who are net
importers of energy. Those countries have too much dependence on
Middle East supply."
He said further that, "Sakhalin and East Siberia have the potential
to supply gas to China, Japan and Korea by pipeline, as well.
Currently, feasibility studies of pipelines from Sakhalin to Japan
and pipelines from Yakutsk in Siberia to China are under way.
Considering this potential supply, I believe there will be the
addition of natural gas supply, including Alaskan North Slope gas
to support this growing demand in Asia."
CHALLENGES LNG IS FACING:
MR. MURAKI said, "Liberalization of the market is creating
sharpening competition in an energy market in fuel competition and
gas-to-gas competition, particularly in the growing industrial
commercial market and power generation markets. Power generation
markets are very important. It is the same as the United States and
Europe. It is becoming more and more important for LNG and natural
gas to achieve the competitive pricing and higher productivity to
increase its share in the LNG price. LNG in the Asian market is
indexed to the crude oil price which has been well accommodated in
the market, because LNG has been an alternative energy to crude oil
and oil products in the Asian market. However, natural gas is
becoming one of the major energy sources and it is probably the
timing to consider the new market oriented pricing mechanism."
Stable income can create a secure financial return for the project.
Achieving cost reduction in transportation is also important,
because LNG carriers are very expensive. They carry about 60,000
tons of LNG and cost $160 million. He said that Tokyo Gas will be
building two new LNG carriers and they will design them to be
versatile in different marine conditions. "These ships are designed
for ice resistance, which can make the ships come into Alaskan
waters, like Cook Inlet."
MR. MURAKI said, "Long-term contracts will continue to be the base
of the LNG trade." Also, he explained that LNG cannot become a
commodity like oil and that a combination of short-term and spot
cargoes, accounting for 10 to 20 percent of the market, and long-
term contracts, accounting for 80 to 90 percent of the market, can
create the flexibility to meet market conditions. All participants
have achieved cost reductions, but a continuous effort is needed to
create benefits to all the industries in the LNG market.
MR. MURAKI concluded: "We are facing a challenging time, but I
believe those challenges will make natural gas the primary energy
to fuel the 21st century in Asian and LNG will continue to play a
key role."
Number 520
REPRESENTATIVE DYSON asked if Japan was concerned about Chinese
expansion into the Spratly Islands and the Straits of Malacca.
MR. MURAKI answered that was a concern. "Cheap transportation is
very important, but not only to energy." This raises a concern
about energy supplies from the Middle East and that is why the
Alaskan and Sakhalin projects, which come through open water, are
move favorable.
REPRESENTATIVE OGAN said it appears from Mr. Muraki's charts that
contracted Asian supply through 2010 is about 80 Mt and the demand
is between 108 and 140 Mt. Rough math says it's between 28 and 55
Mt of additional demand. He asked which projects were competing
with Alaska to meet that demand.
MR. MURAKI responded that he didn't want to create conflict among
the suppliers, but for the northeastern Asian market, Sakhalin will
compete. Australia has gas and another competitor was Malaysian
Irian Jaya (Tangguh) project. The existing Northwest Shelf project
in Australia has a plan to expand and there is a lot of gas in the
northern territory of Australia between East Timor and Australia is
the future supply to the East Asian markets.
REPRESENTATIVE OGAN asked if Tokyo Gas planned to diversify its
supplies. He said that Alaska offers a stable political situation;
we have the supply; we have some hurdles getting it to tidewater
that make it difficult to be competitive currently. He asked if
they were going to diversify for political reasons.
MR. MURAKI answered that they have political reasons, but basically
they want to secure a long-term supply. An accident could happen in
one supply project, for instance, and stop the project. The
political issues have to be considered.
REPRESENTATIVE JAMES asked Mr. Muraki to explain the scope of his
company and if they were just a supplier of gas or do they market
gas to other markets.
MR. MURAKI replied that their major business is to supply gas to
their markets and utilities. They have 8.7 million customers. In
the future, the LNG business can grow and they will look at that.
They operate jointly with the local gas company. "We want to be an
energy company, not just a gas company."
REPRESENTATIVE JAMES asked what percentage of Shell's Sakhalin gas
would Japan be interested in.
MR. MURAKI answered that he wasn't sure how much gas Japan would
get and added that Sakhalin has two projects. Shell is a major
player in one and ExxonMobil is in the other. Shell is planning to
create 9 Mt of LNG project and Exxon is planning to supply gas by
pipeline to Japan with a capacity of about 6 Mt. Shell is looking
at Japan and Korea as major markets, but wants to send majority of
its supply to Japan. He added that project would start in 2006;
ExxonMobil is planning to start in 2008.
REPRESENTATIVE CROFT asked when a project becomes competitive. He
has heard that a project is feasible if it costs $1 billion and
produce 1 Mt per year.
MR. MURAKI answered that the cost of the projects are different.
The cheapest LNG project so far is Tangguh for $1 billion, but he
didn't know what costs were included. Usually the lead production
terminal for two train projects of 6 Mt to 7 Mt costs $3 to $4
billion. "That is what I know," MR. MURAKI said.
REPRESENTATIVE DAVIES asked what price Tokyo Gas paid for contracts
through 2006 and what would they be into 2010. He asked if they had
negotiated with Alaskan producers, yet.
MR. MURAKI replied that the contract price changes with the oil
price, which is $20 per barrel. To take LNG to Japan and Korea is
about $3.80 Mbtu. A $1 change for oil up or down makes a change of
15 cents for gas. He explained that a lower limit was required by
LNG producers to secure long-term return of investments. Probably
the price will be a little bit lower in their negotiations for new
supplies. Another option they have is "decoupling for oil." They
don't have anything like a New York Mercantile market and that
would be very difficult.
MR. MURAKI said, "We haven't had any deep discussions with Alaska.
I think the reason is that there are several organizations bringing
Alaskan gas coming into the market. That is creating a little bit
of confusion. At this moment, I cannot identify who is the real
organization we can discuss LNG from Alaska."
REPRESENTATIVE OGAN asked how can Alaskan legislators overcome the
"dysfunctional" view of Alaska that overseas markets have.
MR. MURAKI replied, "Alaska needs to create new ties to
organizations to market LNG to the Asian market and contact with
the potential buyers." He said the market place is becoming more
complex. They used to have a large consortium for different buyers,
but now there is more competition. He thought the projects needed
to contact each buyer to discuss specific proposals.
Number 500
SENATOR TAYLOR said that it appears that there is no sure knowledge
of gas nor a secure way to get gas to Japan and asked if that was a
fair statement.
MR. MURAKI answered that they know there is gas in Alaska. The gas
reserve is not the problem. They have contact with the gas
producers and suppliers, but buyers cannot seriously consider
buying gas with the confusion of who to deal with who owns it.
SENATOR TAYLOR said, "We are also well-aware and have been for
years, of the known reserves of the gas that we have. And yet we,
too, find ourselves here as a body very frustrated that there is
not a direct linkage going on or a marketing effort going on… It is
hard to pin down who is talking to whom about what." He thanked Mr.
Muraki for being here and for his candor.
REPRESENTATIVE FATE said his pricing mechanism included long-term
contracts, short-term and spot contracts. He asked if he saw a
balanced combination of those or that most of them would be short-
term or spot, moving away from long-term.
MR. MURAKI answered that long-term contracts would be the base.
Short-term and spot contracts would be relatively small. Spot price
is influenced by specific markets. Long-term contracts have a
different pricing mechanism with different countries and different
markets. "We want to have different portfolios for different
markets."
CHAIRMAN TORGERSON thanked Mr. Muraki and adjourned the meeting at
1:20 pm.
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