Legislature(2001 - 2002)
04/27/2001 03:55 PM Senate RES
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ALASKA STATE LEGISLATURE
SENATE RESOURCES COMMITTEE
April 27, 2001
3:55 p.m.
MEMBERS PRESENT
Senator John Torgerson, Chair
Senator Drue Pearce, Vice Chair
Senator Pete Kelly
Senator Kim Elton
Senator Georgianna Lincoln
MEMBERS ABSENT
Senator Rick Halford
Senator Robin Taylor
COMMITTEE CALENDAR
SENATE CONCURRENT RESOLUTION NO. 10
Expressing the legislature's support for sale of a portion of
Alaska's North Slope natural gas for electrical generation to power
data centers within the North Slope Borough.
HEARD AND HELD
PREVIOUS SENATE COMMITTEE ACTION
SCR 10 - No previous action to consider.
WITNESS REGISTER
Mr. Kris Knauss
Staff to Senator Kelly
Alaska State Capitol
Juneau, AK 99801-1182
POSITION STATEMENT: Presented SCR 10 for the sponsor.
Mr. Mike Caskey
MDU Resources Group
Denver CO
POSITION STATEMENT: Supported SCR 10.
Mr. Mark Myers, Director
Division of Oil and Gas
Department of Natural Resources
550 W 7th Ave., Ste 800
Anchorage AK 99501
POSITION STATEMENT: Commented on SCR 10.
Mr. Kevin Banks
Division of Oil and Gas
Department of Natural Resources
550 W 7th Ave., Ste 800
Anchorage AK 99501
POSITION STATEMENT: Commented on SCR 10.
ACTION NARRATIVE
TAPE 01-34, SIDE A
Number 001
SCR 10-SALE OF NATURAL GAS TO POWER DATA CENTERS
CHAIRMAN JOHN TORGERSON called the Senate Resources Committee
meeting to order at 3:55 p.m. and announced SCR 10 to be up for
consideration.
SENATOR PEARCE moved to adopt the proposed committee substitute
(CS), labeled 4/26/01 Chenoweth - Version F, to SCR 10. There were
no objections and it was so ordered.
MR. KRIS KNAUSS, staff to Senator Kelly, explained that SCR 10 is
intended to send a message stating the Legislature's support for
the sale of state royalty gas for the purposes of an Internet data
center and to promote business in Alaska, realizing that North
Slope gas has been stranded for at least the past 30 years. He said
Senator Kelly supports the committee substitute.
SENATOR LINCOLN asked if someone would go through the differences
in the versions.
CHAIRMAN TORGERSON explained that the Version F basically lays out
the steps you have to go through to purchase state royalty gas by
referencing the process to actual statutes and regulations that
govern and control its sale. Language on page 3 asks the
commissioner to bring a contract to the legislature for approval or
a report of why the state can't sell the royalty gas. This assures
action and that third parties will have knowledge of the processes.
MR. MIKE CASKEY, MDU Resources Group, thanked the committee for
inviting him to speak about one of MDU's favorite projects named
Netricity. He said the idea came from looking for a way to utilize
trapped gas on the North Slope. The Netricity proposal would use
enough gas on the North Slope to produce approximately 500,000
megawatts of power to drive a data center that would supply non-
grid data electricity for the transmission of international data.
He said, "There are several things in the Lower 48 that really make
data centers not seem the best use of grid power at this point in
time because the grid is so loaded."
MR. CASKEY said that MDU is proposing that a fairly large portion
of the Internet have a dedicated power grid in Alaska for
continuous, high-level dependability for the international
Internet. It would employ Alaskans and develop resources instate to
the degree that very few other projects would do.
CHAIRMAN TORGERSON said he had a thousand questions generated
around MDU's lack of a business plan, but he liked to hear about
local hire and development of Alaska's resources. He said this
proposal would have to be a good deal for the State of Alaska also.
He said the committee needs more detail than the one page offer to
buy 25 percent of Alaska royalty gas for 25 years. He said the
proposal has raised the question of whether or not the State of
Alaska could take its royalty in-kind share prior to the
construction or sale of the product by the producers.
MR. MARK MYERS, Director, Division of Oil and Gas, Department of
Natural Resources (DNR), said he thought it was very appropriate to
describe the state's process. He told members, "Pricing the value
of the gas at this time is very difficult considering the
uncertainty in terms of the quantity of gas on the North Slope and
the netback we would receive from sales and the long-term price of
gas."
MR. MYERS said the state is getting about $1.10 - $1.11 per million
cubic feet (MCF) of gas right now. Netricity's proposal was about
36 cents minus [indisc.], which brings that down to about 15 cents.
Applying that difference to a 1 trillion cubic foot (TCF) sale
amounts to over $1 billion. He explained, "So, we're looking at
very significant variations in terms of interpreting what the value
of royalty gas is."
He said DNR is just beginning to get to the valuation issue and
this is the first proposal. He said that long term contracts of 20
to 25 years are not the way gas is sold anymore. Options for long-
term are available, but premiums are associated with them. As to
whether the state could require purchase of all of it is purely
uncharted territory at this point prior to a major gas sale. He
thought Alaska could legally sell its royalty share, but DNR is
working with the Department of Law to resolve that issue and to
determine how to do the payback.
MR. KEVIN BANKS, Division of Oil and Gas, DNR, said he would answer
questions, but that Mr. Myers had outlined the issue they are
trying to get their arms around.
CHAIRMAN TORGERSON asked Mr. Myers when they expect a legal opinion
from the Department of Law.
MR. MYERS replied he does not have a date, but the Department of
Law is working at it diligently.
CHAIRMAN TORGERSON asked if the current royalty agreements are
confidential.
MR. MYERS said they are not confidential.
CHAIRMAN TORGERSON asked if he received copies of the letters from
Phillips and BP commenting on this issue.
MR. MYERS said he received the Phillips' response, but not the BP
one.
CHAIRMAN TORGERSON said that both basically said the same thing.
MR. MYERS said he understood the Phillips' letter to say that
Phillips was willing to work with the state on it.
SENATOR PEARCE said she understood the Phillips' letter to talk
about the governing leases and settlement agreements. She thought
settlement agreements were different from the unitization
agreement. She asked if the Department of Law would provide them
with something that would explain the different tiers of governance
and determine whether the Department could sell state gas or not.
MR. MYERS said he didn't have an answer for her in terms of the
settlement agreements; portions of those are confidential. He said
those are good questions the Department of Law would have to
answer.
SENATOR ELTON asked what the normal term of a gas contract is.
MR. MYERS said he thought it is about five years. He said one of
the challenges would be to figure out what the market value is.
CHAIRMAN TORGERSON asked if he is assuming there would be a fixed
price for gas for five years.
MR. MYERS responded that prior to having a major gas sale, DNR
would have to find a mechanism to value that time. If the pipeline
isn't in place until 2006, DNR would need some mechanism to value
North Slope gas for multiple years.
CHAIRMAN TORGERSON asked if that would be part of the normal
process of selling gas.
MR. MYERS answered it would, because the volume of gas is so large,
a small difference would mean millions of dollars. He commented,
"On 1 TCF, one cent per million square feet is about $10 million."
That is one of the challenges with this proposal.
CHAIRMAN TORGERSON said that the committee was talking about
options of six or seven years, "to give the folks a chance to go
around and sell their idea."
He asked if DNR would look at an option.
MR. MYERS answered they would look at options, but something like
this would have a significant premium. He didn't think 36 cents was
a very reasonable value based on the current sale price of $1.30
that the state gets.
CHAIRMAN TORGERSON asked if there would be a yearly premium payment
for an option.
MR. MYERS answered yes, that's the standard way of doing business.
CHAIRMAN TORGERSON asked if a premium for options should be
mentioned in the resolution.
MR. MYERS said it is part of their duty to protect the public
interest and get a fair value for the gas and he didn't think it
was a bad idea to put it in.
CHAIRMAN TORGERSON asked him to find out the Department of Law's
projected time line for its answer. Mr. Myers acknowledged that he
would do that.
CHAIRMAN TORGERSON noted that there were no further questions at
this time and said he would hold SCR 10 for further work. He
adjourned the meeting at 4:27 p.m.
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