Legislature(2003 - 2004)
09/10/2003 01:00 PM Senate RES
| Audio | Topic |
|---|
* first hearing in first committee of referral
+ teleconferenced
= bill was previously heard/scheduled
+ teleconferenced
= bill was previously heard/scheduled
ALASKA STATE LEGISLATURE
SENATE RESOURCES STANDING COMMITTEE
Anchorage, Alaska
September 10, 2003
1:00 p.m.
MEMBERS PRESENTG
Senator Scott Ogan, Chair
Senator Thomas Wagoner, Vice Chair
Senator Ben Stevens
Senator Fred Dyson
Senator Georgiana Lincoln
Senator Kim Elton
MEMBERS ABSENT
None
OTHER LEGISLATORS PRESENT
Representative Beth Kerttula
Representative Beverly Masek
Representative Hugh Fate
Representative David Guttenberg
Representative Cheryl Heinze
Representative Ethan Berkowitz
Representative Les Gara
COMMITTEE CALENDAR
GAS PIPELINE ISSUES
PRESENTATIONS BY:
Mr. Steve Porter, Deputy Commissioner
Department of Revenue
PO Box 110400
Juneau, AK 99811-0400
Ms. Colleen Mukavitz
Commercial Manager, ANS Group
ConocoPhillips Alaska
ANS Gas Development
PO Box 100360
Anchorage, AK 99510
Mr. Mark Hanley, Public Affairs Manager
Anadarko Petroleum Corporation
1201 Lake Robbins Dr.
The Woodlands TX 77380-1045 USA
Mr. Ken Boyd
Encana Gas Marketing
1800 855 2nd Street SW
PO Box 2850
Calgary AB T2P 2S5
Mr. Ward Whitmore
Yukon Pacific Corporation
1400 West Benson Blvd., Suite 525
Anchorage, AK 99503
Mr. Harold Heinze
Alaska Natural Gas Development Authority (ANGDA)
411 W 4th Ave.
Anchorage, AK 99501
Mr. Ken Thompson
Pacific Star Energy
3601 C Street, Suite 1400
Anchorage, AK 99503
Mr. Greg Bartholomew
Director of Strategic Planning and Analysis
Sempra Energy
101 Ash Street
San Diego, CA 92101-3017
Mr. Mark Myers, Director
Division of Oil and Gas
Department of Natural Resources
550 W. 7th Ave. Ste 800
Anchorage AK 99501-3560
ACTION NARRATIVE
TAPE 03-50, SIDE A
CHAIR SCOTT OGAN called the Senate Resources Standing Committee
meeting to order at 1:00 p.m. Senators Stevens, Elton, Wagoner
and Dyson were present, as well as Representatives Kerttula,
Masek and Fate. Chair Ogan said the committee would hear an
update from a number of people in the industry and the
Administration on the implementation of the Stranded Gas Act
negotiations. He asked Deputy Commissioner Porter whether a
negotiating team has been created, who is on that team, what the
team has done, and when committee members can anticipate final
results.
MR. STEVE PORTER, Deputy Commissioner of the Department of
Revenue, said he would provide members with the state's position
on North Slope gas and would first cover the Stranded Gas
Development Act and the department's negotiations with the major
oil companies. He told members:
As you know, the Stranded Gas Development Act
legislation was passed this last year and we do expect
an application from the major oil companies. The
Stranded Gas Development Act was passed last session.
It provides for an applicant to be able to propose a
project to the state and the opportunity for the state
to negotiate a contract with that applicant. That
contract could possibly provide certainty to the
applicant, could provide a revenue structure that
could be beneficial to both the applicant and the
state. We are currently in discussions with a major
oil company.
We have been preparing internally for negotiating the
contract under the Act, as contemplated by the
Legislature, in anticipation of an application from
the major oil companies. We have not received an
application to date. Right now, the focus of the
Administration and the oil companies is on the federal
enabling legislation in Washington, D.C.
The U.S. Congress has the energy bill in conference
committee and it includes important provisions, which
the state and the industry have been active in trying
to support. If the energy bill is passed, as we would
like to see it, it could pave the way for development
of a natural gas pipeline that would take basically
4.5 bcf [billion cubic feet] per day of Alaska's
stranded gas to market.
This Administration is committed to passage of that
bill and putting Alaska in a position to develop not
only existing gas reserves, but also new discoveries
as they become available.
We do support the Alaska Highway route project as our
current priority and the focus of our efforts in the
near term. The reason for that is this project
maximizes the value of Alaska's gas because it is a
4.5 bcf project, with potential of expanding to 5.5
bcf, with additional potential beyond that for other
alternatives, depending on how much gas is discovered
on the North Slope. The LNG project is for
approximately less than half that volume at the
current time as the Development Authority sees that
project. An Alaska Highway route maximizes the timely
use of all of the known reserves and provides a
pathway for use of all future discoveries.
Currently the producers control the gas. This is their
preferred project, and the state is committed to
working with the producers. So long as they're
actively pursuing the project, the LNG project will
not be able to contract the purchase of gas as well so
they do not have a source until such time as the oil
companies are no longer actively pursuing the project.
Given the current gas reserves, recognizing the
reserve requirements to underpin the Alaska Highway
route project, another project would be a secondary
focus until future reserves are identified. Basically,
there aren't enough known reserves to allow both
projects to move forward concurrently.
A spur line to tidewater would complement the gas
pipeline project in the future as additional gas
reserves are identified.
DEPUTY COMMISSIONER PORTER asked members to ask questions as
they arise and then said he would now speak to the Alaska
Natural Gas Development Authority's funding request.
We do consider the funding request premature at this
point in time; prior to defining exactly what project
the state and the Legislature deem is appropriate to
move forward. If, in fact, the Alaska Highway gas
route moves forward, then the Alaska Natural Gas
Development Authority would be focused on entirely
different things than if it does not move forward. I
think that's important to remember.
The Legislature and the public also have not had the
opportunity to assess the risks associated with the
project and we think that's important. The
Administration feels that a thorough exploration and
subsequent discussion of the benefits and risks of a
state funded project need to occur before a major
commitment is made. This conversation must involve the
entire Legislature, the executive branch, the public,
and the Alaska Natural Gas Development Authority and
should also precede a large budget request.
We are currently in the process of developing the
Administration's budget and until the appropriate role
of the gas authority is defined, we are uncertain what
the appropriate request should be, where the funds
should be originated, and what specific functions are
appropriate for the Alaska Natural Gas Development
Authority to pursue.
We do feel - and I think this is important - we do
feel there are appropriate things the Development
Authority could be doing at this time and a small or
more focused funding request may be appropriate,
although such a request should be submitted as part of
the normal budget process.
So, if we go to what the Authority should be doing
now, what are those types of things that we'd like to
see the Authority do and what are the things that
benefit the state and the Authority as we move both
projects forward? First off, the Alaska Natural Gas
Development Authority does have the statutory
obligation to study and bring natural gas to market as
LNG and we believe it's appropriate for them to
continue to review that and to complete that project
according to the statutory obligation. Those options
should include a spur line to Valdez and a possible
spur line to Southcentral Alaska that could provide
natural gas to those residents as well.
They also serve another important role in terms of
just asking a lot of questions that are out there and
I think that they should be pursuing those answers as
we're trying to determine which project is the most
important project to move forward - not to say which
project, but the stages at which each project may come
into play. They should be addressing the role of the
Alaska Railroad bonding issue and whether or not you
can finance a project with exempt bonds and to what
level that could take - is 100 percent bonding even
possible and it may be but those questions need to be
asked. Can the market handle that level of bonding and
what does it cost for those bonds? There are a number
of other tax - you know the IRS, there's a tax exempt
status request that they'd probably need to move
forward with at some point in time.
There has been a substantial amount of discussion
regarding the Jones Act and tankers. We would
encourage them to spend time understanding that issue,
developing the options so that the state can make good
decisions and the Authority can make good decisions in
the future.
And I think another very important thing is to
identify the benefits that arise out of in-state gas
use. If either project moves forward, or both of them
at certain stages, the benefit to the state is
extremely important, both from a contracts and local
hire standpoint - but use of gas for people in the
state, whether Southcentral, the Interior or other
parts of the state. And, actually, the Development
Authority has a substantial number of ideas, many of
them are very creative, very interesting, and we would
encourage them to pursue those ideas to provide them
to both the Executive Branch and to the Legislature.
We believe that many of the above activities and
studies can be done by using existing state and
private resources. There is a substantial amount of
research that could be done to compile and analyze
existing data without requesting additional funds at
this time from the Legislature or the Executive Branch
and we would encourage them to do so over the next
four months in preparation for the legislative
session. That is exactly what we would recommend they
do.
CHAIR OGAN noted that Representatives Guttenberg, Berkowitz and
Heinze had joined the committee. He opened the meeting to
questions of Deputy Commissioner Porter from members.
REPRESENTATIVE BERKOWITZ asked if the Administration has entered
into any discussions with the Federal Energy Regulatory
Commission (FERC).
DEPUTY COMMISSIONER PORTER said the Administration has had no
formal discussions with FERC because it is awaiting a contract
to see what the project will look like prior to entering formal
discussions with any other parties.
REPRESENTATIVE BERKOWITZ asked if any informal discussions have
taken place.
DEPUTY COMMISSIONER PORTER said not to his knowledge.
SENATOR DYSON asked Deputy Commissioner Porter if he was
inferring that the LNG project to tidewater and to Southcentral
would preclude the highway pipeline when he said there was not
enough gas for both.
DEPUTY COMMISSIONER PORTER said he struggles with the word
"preclude." He believes the focus must be on optimizing the gas
on the North Slope. All existing and known reserves will be
necessary to support a 4.5 bcf line. If additional reserves were
discovered, that would open up other alternatives down the road.
He stated:
Sending an LNG spur line may actually be very viable
and may be the appropriate opportunity, and at that
point, what we've done is continue to maximize the
value of the state as we move forward. As we define
additional reserves, additional elements of expansion
can then take place. That is what this is really
about. It's not necessarily an either-or opportunity.
SENATOR DYSON asked Deputy Commissioner Porter if he was
speaking strictly to the economics when he spoke about
maximizing the value to the state or whether he was also
considering the value of in-state use of the gas.
DEPUTY COMMISSIONER PORTER said the value to the state includes
everything. The department is very serious about in-state gas
use and believes the Development Authority can help the state by
looking at those opportunities.
CHAIR OGAN noted that Representative Gara joined the committee.
REPRESENTATIVE BERKOWITZ asked Deputy Commissioner Porter for
the Administration's position on the over-the-top route.
DEPUTY COMMISSIONER PORTER asked to first answer a previous
question, and said he was just informed that the Joint Pipeline
Office and the Division of Oil and Gas have held informal
discussions with FERC. He then told Representative Berkowitz
that the Administration has been consistent in its opposition to
an over-the-top route and reaffirmed that it supports the
highway route.
CHAIR OGAN asked who is on the negotiating team.
DEPUTY COMMISSIONER PORTER said the team is composed of staff
from three agencies: the Department of Revenue; the Department
of Natural Resources; and the Department of Law. Depending on
what particular topic is being discussed, particular individuals
participate at each stage.
CHAIR OGAN asked if any outside consultants have been hired.
DEPUTY COMMISSIONER PORTER said that Pedro VanMeers is a member
of the negotiating team.
CHAIR OGAN asked for the names of the participants from the
Department of Revenue.
DEPUTY COMMISSIONER PORTER said he and Roger Marks, Chief
Economist of the Division of Oil and Gas, are the two primary
contacts in the Department of Revenue.
MR. MARTIN SCHULTZ of the Department of Law told members he is
on the team, as well as Assistant Attorney General David Marcus.
AN UNIDENTIFIED SPEAKER said the team members from the
Department of Natural Resources are Marty Rutherford, who is
acting in a consulting role, and Anthony Scott. He noted that
Bonnie Robson was involved until her retirement.
DEPUTY COMMISSIONER PORTER said the team will consist of six
individuals from each organization.
CHAIR OGAN asked if the participants are "big enough guns" to
negotiate a good deal for Alaska.
DEPUTY COMMISSIONER PORTER said they are.
CHAIR OGAN said he does not underestimate the quality of help
the applicants are getting.
DEPUTY COMMISSIONER PORTER noted that he named the individuals
at the table but the team consists of a broad base of
consultants and support staff from the Departments of Revenue,
Law and Natural Resources.
CHAIR OGAN asked Deputy Commissioner Porter when he expects to
have a final product.
DEPUTY COMMISSIONER PORTER said the Stranded Gas Development Act
is specific on the elements of the application. Once submitted,
the application will be a public document and provided to the
Legislature and the public. He hopes the team will be able to
provide some type of product to the Legislature during the
upcoming session.
CHAIR OGAN said he wants to see the Legislature presented with a
product for approval at the beginning of the session, not during
the last two weeks.
DEPUTY COMMISSIONER PORTER said the Administration has the same
goal and wants to provide a reasonable amount of time for the
Legislature to evaluate the contract because of the importance
of this decision to the state.
REPRESENTATIVE HEINZE said the vice president of an [oil]
producing company recently asked her about her husband's role in
California and she told him he was in California promoting
Alaska gas. The man's response was that Alaska has no natural
gas to sell. She stated:
That troubled me. This type of thinking - I think the
Alaska people are very thin on patience. I think over
the years we feel like this caveat has been dangled in
front of us and they seem to hold all the shots and
then tell us we don't have gas to sell.
She repeated she finds the prevalence of that type of thinking
troublesome, as well as the fact that no one from the
Legislature is at the bargaining table. She asked members to
contemplate putting a legislator on that team. She also
suggested that it would be wise for the members of the Resources
Committees to meet Mr. VanMeers.
DEPUTY COMMISSIONER PORTER noted that Mr. VanMeers has made a
number of presentations to the Legislature over the years and
the department would be happy to arrange for him to speak to the
committees again.
CHAIR OGAN pointed out that Mr. VanMeers was the genesis of the
Stranded Gas Act, when the state was trying and develop Alaska's
LNG project. He is an economic consultant who is noted
worldwide. He asked Deputy Commissioner Porter if any trial
lawyers are on the negotiating team.
DEPUTY COMMISSIONER PORTER said the team has every kind of
lawyer it could need available to it. He then said, regarding
Representative Heinze's comment about the response that Alaska
does not have the gas to sell, the debate about who can do what
has been ongoing for a long time. He said the goal is to bring
Alaska gas to market; there's a plan and methodology for getting
it there and it doesn't matter whose gas it is. As long as the
producers are actively pursuing and actively involved in
marketing gas, they have the right to do so, and the state
should support them 100 percent for their benefit and the
state's benefit. If, at some point in the future, they elect not
to, the state will need to make other decisions but each stage
and process needs to follow its full course. If they elect not
to, that decision will not come into play for a long time. He
believes it will never come into play.
REPRESENTATIVE HEINZE said she is a strong proponent of the
owner state concept.
DEPUTY COMMISSIONER PORTER said everything the State of Alaska
is doing is very consistent with the owner-state [concept]. The
state's job is to market the gas and maximize its value. The
Administration believes the Alaska Highway route provides the
best opportunity to do that. He said the Administration is doing
everything in its power to make that occur. If, for some reason,
it does not occur, that is the time to make other decisions but
the Administration would still sit down with the producers and
talk through the process.
CHAIR OGAN pointed out that he is about to assume the
chairmanship of the Alaska Energy Council. At the last Council
meeting, all eyes were on Alaska to see what is happening. He
explained "Ogan's Golden Gas Rule" to mean the guys with the gas
make the rules. He said many people have many plans on how to
transport the gas but the bottom line is that the companies with
the rights to own the gas must ultimately make the decision to
sell it. Those companies also have obligations to their
stockholders and conflicting interests. He said that is what
Representative Heinze was referring to. The Legislature has held
oil and gas hearings ad nauseum; he hopes the state is
successful this time.
DEPUTY COMMISSIONER PORTER said the Administration cannot
guarantee success but it can guarantee that a plan is in place.
He noted the timing of decisions is very important and right now
the focus is on the Alaska Highway route. If additional reserves
are found, a spur line to Southcentral Alaska could be
concurrent. In the future, the market could expand to the West
Coast and Asia. He repeated that a very definitive plan is in
place; the process is staged, timed and logical.
SENATOR LINCOLN asked Deputy Commissioner Porter if he is in
agreement with the material provided by Mr. Heinze for his
presentation in committee members' packets.
DEPUTY COMMISSIONER PORTER said the Administration believes the
focus of the Authority should be on the benefits that could
accrue if one or both of the projects proceed forward. He said
the Administration supports the discussion and evaluation of
those proposals that are consistent with an Alaska Highway route
project and an Alaskan LNG project. He noted the discussion
should primarily focus on benefits to the state. He said he
referred to some of the items in the Development Authority's
handout that discuss a spur line to Southcentral and to Valdez,
and railroad bonds. He repeated that the Authority has some very
creative ideas on how to bring additional value to the state and
he encourages the Authority to pursue those ideas.
SENATOR ELTON said he is aware that Mr. Heinze has been talking
to other people. He said he is not sure he wants to let Deputy
Commissioner Porter off the hook with his response that the
Administration will agree with the Authority on those areas that
it agrees upon. He said that kind of an answer leads to a
bifurcated process that will cause a lot of confusion when the
Administration returns to the Legislature with a plan. He asked
how the Department of Revenue is working with other departments
and how they are working with Mr. Heinze.
DEPUTY COMMISSIONER PORTER said that is a very good question. He
and Mr. Heinze speak on a regular basis and have had several
discussions about the plan and the state's position. Mr. Heinze
understands that the Department of Revenue's responsibility is
to see that both projects are successful. The department's focus
with the Authority is to encourage it to do those things that
support the primary project and will complement it with
additional information, for example, in-state gas use and
benefits to Alaska.
SENATOR ELTON asked if anyone is assessing whether the economics
exist for both projects.
DEPUTY COMMISSIONER PORTER asked if Senator Elton is referring
to the economics of going forward with both projects
simultaneously.
SENATOR ELTON asked if the markets will support both projects
and whether the state has the resources to do both at the same
time. He said it seems that one might trump the other.
DEPUTY COMMISSIONER PORTER said if both projects move forward
simultaneously, one would trump the other because there is not
enough gas.
CHAIR OGAN said that statement is contrary to everything the
committee has heard in years past.
DEPUTY COMMISSIONER PORTER said to move both projects forward
simultaneously would require 6.5 bcf per day, which is why
timing is very important and that a plan be developed that
allows for additional exploration on the North Slope. The
Administration encourages that to maximize the opportunity of
those explorers who find gas so that they have an alternative
and method for producing that gas. That is why the
Administration has recommended the main gas line first and then
expansion.
SENATOR DYSON said he inferred from Deputy Commissioner Porter's
earlier comments that an LNG project should not precede the
highway route. He asked what would happen if Congress does not
provide the incentives and guarantees, for example tax relief
and a price floor, and gas is provided via the MacKenzie
corridor pipeline to the Great Lakes area. He asked if the
Administration would then be enthusiastic about letting the LNG
project go forward if the economics are feasible.
DEPUTY COMMISSIONER PORTER said that Senator Dyson is asking
whether there is a circumstance under which the Governor's
Office would support an LNG project moving forward independent
of any other project. He said it would take a number of
contingencies to get there.
SENATOR DYSON said one of the contingencies would be the Alaska
Highway route "going in a ditch."
DEPUTY COMMISSIONER PORTER agreed and said even at that point,
the team will still sit down and talk to the major producers.
They have gas in the North Slope they will want to "monetize."
REPRESENTATIVE FATE noted there are no receiving stations on the
Pacific Coast yet although seven have been contemplated. Out of
that seven, three are fairly firm. He asked how much of the
marketability and availability of receiving stations went into
the Administration's position on the route to Valdez.
DEPUTY COMMISSIONER PORTER told members the Administration does
not believe that market price and the availability of a West
Coast market are drivers. Even assuming a contract on the West
Coast could be had, the Administration still believes the best
opportunity and the best plan is to market at 4.5 bcf to the
East Coast and then expand to other markets.
CHAIR OGAN asked Deputy Commissioner Porter to keep on his
"radar screen" an economic analysis of the effect from the draw
down of gas on the production of oil. He noted that a reduction
in the pressure reservoir will have to be offset with water or
other technology. He asked Deputy Commissioner Porter if an
analysis has been done to date.
DEPUTY COMMISSIONER PORTER said the state and industry have done
some research.
CHAIR OGAN said he will need an economic analysis from the
Department of Revenue when the Legislature gets to the decision
making point. He then asked Ms. Mukavitz to testify.
MS. COLLEEN MUKAVITZ, Commercial Manager for ANS [Alaska North
Slope] Gas Development for ConocoPhillips, gave the following
testimony.
At ConocoPhillips Alaska, we continue to work hard to
pursue a strategy to develop ANS gas through a
southern route pipeline, that is, a pipeline through
Alaska and Canada and to the Lower 48.
We continue to pursue a very clear strategy to
commercialize this gas by obtaining passage of federal
and state legislation. On the federal side of the
equation, this strategy consists of obtaining federal
enabling - which is the regulatory streamlining -
legislation, and fiscal legislation. On the state side
of the equation, this strategy includes filing an
application with the Administration under the Stranded
Gas Development Act, drafting a fiscal agreement with
the state, and securing the Legislature's approval of
this agreement.
As far as the status on the federal legislation, as
you know, in April the U.S. House of Representatives
passed their energy bill and it included the
regulatory streamlining, or what we call the enabling
legislation. That was followed in July by the Senate
passing its energy bill, which included both the
regulatory streamlining legislation and the federal
fiscal incentives or mechanisms that we have proposed.
Congress is now in joint conference currently working
to reconcile these two bills. We will likely know
whether Congress will pass an energy bill in the next
month or couple of months this fall. If you're
interested, I'm happy to expand on the federal
legislation and do a 'Q & A' afterwards. In terms of
the status of the state fiscal certainty, as Deputy
Commissioner Porter stated, the Stranded Gas
Development Act was reauthorized last session and it
provides sponsors in the state with a mechanism to
work toward a clear and durable fiscal contract.
ConocoPhillips has initiated dialog with the state on
the application so that we have a clear understanding
of the application under the Act. We're focused on
obtaining development of this application as the first
step in the process of obtaining a predictable and
durable contract, which will be necessary for the
project to move forward. We remain hopeful an
application acceptable to the state can be filed soon.
In conclusion, ConocoPhillips is working very hard to
commercialize ANS gas. We remain committed to bringing
a gas pipeline through Alaska via a southern route
through Alaska and Canada but significant challenges
do exist for this project. Obtaining federal enabling
fiscal legislation represents one more building block
into making this project a reality. I'm happy to
answer any questions.
SENATOR ELTON asked Ms. Mukavitz to describe the other
significant challenges to this project.
MS. MUKAVITZ said many stakeholders are involved so it takes a
long time to work through the processes of such a project. She
said after ConocoPhillips obtains a contract with the state, it
will figure out how to form an entity and how to build the
pipeline. It will then move through the regulatory process,
which involves many steps. In addition, the project will require
a huge capital investment. She noted that when the TransAlaska
Pipeline was built, it impacted the whole country and a gas line
will do the same.
REPRESENTATIVE HEINZE asked Ms. Mukavitz what she sees as the
timeline for the start of construction in a perfect world.
MS. MUKAVITZ said she believes the process would take four to
five years before construction could begin. The first gas would
flow in 9 to 10 years. She noted that includes the permitting
process, which takes about three years.
REPRESENTATIVE HEINZE asked Ms. Mukavitz for a realistic
timeline, knowing the world is not perfect.
TAPE 03-50, SIDE B
MS. MUKAVITZ's response was inaudible.
SENATOR LINCOLN asked Ms. Mukavitz if anything in Deputy
Commissioner Porter's testimony "raised her eyebrows."
MS. MUKAVITZ said that ConocoPhillips is generally in agreement
with Deputy Commissioner Porter's testimony. She said the best
option to obtain the highest value of Alaska gas is a pipeline
to the Lower 48 and it is important to remain focused on that.
SENATOR WAGONER commented that this pipeline will be
international, not an Alaska pipeline. He said the current
administration on the East Coast of Canada is experiencing some
of the same problems that Alaska is experiencing dealing with
the East Coast of the United States. He questioned what makes
everyone think the Canadian administration is amenable to having
an Alaska pipeline go through Canada. He asked what timelines
she sees for approval from Canada and said he believes that will
be the bigger problem.
MS. MUKAVITZ said she believes a lot of the pieces could create
a critical path as the project starts to move forward.
ConocoPhillips has heard a lot of support for the project from
the Canadians. Canada is clearly focused on the MacKenzie
project at this time but the Alaska gas line project has the
potential for great impact too and Canada stands to benefit.
SENATOR WAGONER said he would feel more comfortable if he saw
more positive communications with the government in Ottawa.
MS. MUKAVITZ said to her knowledge, ConocoPhillips has not had
any negative conversations with the administration in Canada.
She said in discussions with Canada's regulatory agencies,
they've appeared willing to work with ConocoPhillips but there
is some uncertainty with that process too.
CHAIR OGAN said he has heard the Canadian government objects to
the federal legislation and to the price floor. He noted that he
and Senator Dyson are planning a Northwest Energy Summit in
Victoria next year and have been working on relations with
provincial governments in Canada. He said they should consider
taking a delegation to Ottawa. He asked if ConocoPhillips is
going to sell any gas to another company to make a profit on it.
MS. MUKAVITZ said ConocoPhillips has spent a lot of money to
commercialize the gas and has concluded time and again that the
pipeline delivers the highest value to it and the state.
CHAIR OGAN asked Ms. Mukavitz to describe her job position at
ConocoPhillips.
MS. MUKAVITZ said that she [manages] a small group currently
focused solely on passage of the federal legislation but she
gets involved in all aspects. She said she believes the federal
legislation has a lot of momentum and she is cautiously
optimistic that it will be enacted.
CHAIR OGAN said he has upgraded his skepticism of
commercializing North Slope gas from a cynical optimism to
guarded optimism. He noted that one of the presenters said it
needs all of Alaska's gas and as much LNG as it can import.
MS. MUKAVITZ said ConocoPhillips is seeing a growing awareness
of the supply-demand fundamentals in the market and that the
supply will not meet the demand.
CHAIR OGAN said gas wells are being shut in in Alberta because
oil production has been lost from the amount of gas that was
pumped off. Alberta cannot keep up with demand either.
REPRESENTATIVE KERTTULA asked what other projects ConocoPhillips
is involved in that are potential competitors to the gas line.
MS. MUKAVITZ said ConocoPhillips does not view projects as
competing. Right now, ConocoPhillips is committed to the United
States market.
REPRESENTATIVE KERTTULA asked which projects ConocoPhillips has
brought on line recently that would provide gas to the United
States.
MS. MUKAVITZ said she does not believe ConocoPhillips has
brought any on line. She said ConocoPhillips is a Lower 48
producer; it produces 1.5 bcf per day so all of its ongoing
projects are within the U.S. She added that ConocoPhillips
continues to produce LNG projects that have their own set of
hard challenges. She pointed out that Alaska gas is by far one
of ConocoPhillips' biggest and most important projects.
REPRESENTATIVE FATE commented that he had a conversation with
U.S. Senate staff who said that once the Midwest commodity
market and ANWR issues are settled, the conference committee
would pass the package as it stands. He said the Midwest
commodity issue has already been taken care of and ANWR probably
will not be.
CHAIR OGAN offered that the United States has no offshore
program other than in Alaska and the Gulf of Mexico. The
Northeast is now supplied from Nova Scotia. He said everything
he has heard indicates the demand is huge.
REPRESENTATIVE HEINZE asked where else ConocoPhillips sells its
gas around the world.
MS. MUKAVITZ said ConocoPhillips sells gas where it has
operations. The largest areas are the United Kingdom and Norway.
It also has business development operations in Indonesia, China,
West Africa, Australia and Venezuela.
CHAIR OGAN asked if ConocoPhillips plans to sell any LNG from
Indonesia to the West Coast and whether it had a project in East
Timor that fell through.
MS. MUKAVITZ said she thought the [East Timor] gas ended up
being sold to Japan or is contracted to be sold.
CHAIR OGAN thanked Ms. Mukavitz and asked Mr. Hanley to testify.
MR. MARK HANLEY, Public Affairs Manager for Anadarko Petroleum,
gave the following testimony.
You had asked us to come give you our update. We're a
bit on the periphery I guess, on some of these issues,
although they are very important to us. As a company
with a large acreage position, particularly in the
foothills, that is gas-prone, we think there is a
tremendous potential for gas in Alaska - new gas and,
in fact, the numbers suggest there may be more gas to
be discovered than has already been discovered. So we
do think there's a lot of potential.
We've done a fair amount of work in the foothills on
seismic work, reanalyzing both old and new, looking at
old well data. So, we are one of the companies - and I
think there are multiple ones as you've seen in the
foothills lease sale area. We've got a lot of new
companies expressing interest in that area from
independents to majors. Anadarko is partnered with
Encana in a lot of the areas but there [are] people
like Burlington Resources, PetroCanada, which are
independents, you've got Unocal, even ConocoPhillips
and others have bid on some leases down there - and
Chevron, in the foothills. So I think there's a lot of
potential.
The big issue for us, and you've probably heard me say
it before, is access. The way we envision the gas
pipeline being built...it's largely going to be a
contract carrier. The difference between that and a
common carrier is that in a common carrier, if the
pipeline is full and you want to put your oil in,
everybody gets prorated. On a contract carrier, that's
not the case. You contract essentially upfront for
your capacity and, once you have it, you control it.
And so, there's a bit of a catch-22 for people that
want to explore for gas in Alaska, which is if you
don't contract up front, it's very difficult
potentially to get that capacity. And those are the
issues we've been working on.
We worked on the federal energy bill and had
amendments included, which are in the portions that
are likely to be adopted, that help with that access.
We have also worked with the Administration. Anadarko
and Encana did a bid and were successful in a
competitive bid for the state's royalty gas. That was
one way we felt could help us get access to that
pipeline initially and encourage us to drill wells.
The problem we have is, without reasonable access at a
fair price, we won't drill any wells. I mean we've
gone about as far as we can in the foothills. Nobody's
going to drill any gas wells looking for gas, number
one.
We do support some way to commercialize gas. I mean
nobody benefits if some way doesn't help and you're
not going to find any expiration but if a gas pipeline
gets built, and it's controlled by three companies -
all of the capacity, it makes it very difficult when
there are competitors in these areas. We're not going
to go spend a lot of money to find gas and ask if we
can have capacity in that pipe from the people that
control it. So, our issue has been access all along.
We've worked on the federal side.
Just to give you a heads up, as I said, RIK [royalty
in kind] was one of our issues with the state
administration. Under the Stranded Gas Act, the thing
we're kind of following - and we've communicated this
- is we hope the state doesn't negotiate away access.
You can either provide it or take it away as part of
that process and so we are concerned about those
issues. We're not saying they've gone in any
particular direction but you've asked what the issues
are. If you want companies other than what are likely
- the three that will initially build this pipe to
explore for gas in this state - you're going to have
to make sure there's reasonable access under the
system.
CHAIR OGAN said he has some concerns about the effect of the
draw-own of gas on oil production. He said the Alaska Oil and
Gas Conservation Commission (AOGCC) ultimately has the
responsibility of conserving the resource. He believes it would
be advantageous to use foothills or Point Thomson gas as the
first gas that goes into the line because drawing down Prudhoe
Bay gas later will allow for more oil production and the oil is
worth more than the gas.
MR. HANLEY said he does not know how a gas drawdown would impact
the field. Anadarko is not an owner in Prudhoe Bay and he does
not have that technical expertise, so it is difficult for him to
comment, but he believes Chair Ogan is generally correct. In
many cases, drawing down gas will have some impact. He noted in
defense of the producers, they need an underlying base of gas to
justify building any project.
CHAIR OGAN said that hopefully the economics will drive it with
the producers.
MR. HANLEY informed members that Anadarko is drilling the first
U.S. hydrates well, hydrates being a frozen gas on the North
Slope. The well will not come on-line in the near future; this
project is a long-range research project and its status is
similar to that of coalbed methane 20 years ago. He said finding
a way to commercially produce hydrates has tremendous potential
for Alaska long term. This project is being conducted under a
joint arrangement with the U.S. Department of Energy [DOE]. At
this point, Anadarko is trying to find the frozen gas, core it,
determine its properties, and test to see how it comes out
naturally with pressure reduction.
MR. HANLEY said, in regard to the next legislative session,
royalty-in-kind gas, the Stranded Gas Act negotiations, the
provisions related to access, and HB 277 are of concern to
Anadarko.
CHAIR OGAN thanked Mr. Hanley and asked Mr. Whitmore to testify.
MR. WARD WHITMORE, Director of Project Development for Yukon
Pacific Resources, read the following testimony.
Yukon Pacific has been working on its Trans-Alaska Gas
System LNG project to Valdez for 20 years. Until three
years ago, we've been focusing exclusively on delivery
of LNG to Asian markets. The economic hurdles that
Alaskan gas faced were that we had to place a large
quantity of LNG into the Asian market in a timely
manner to achieve project economies of scale and we
were competing with other LNG supplies, some of which
were closer to the Asian market than Alaska.
Also, at a rate of less than 2 billion cubic feet
[bcf] per day, the project was criticized as being too
large, thereby resulting in an unacceptably high loss
of oil production at Prudhoe Bay.
Recently, two significant events have occurred. Most
importantly, a strong LNG market has emerged along the
West Coast of North America. Second, the project has
been delayed for so long that the Prudhoe Bay field
has aged to the point where oil loss appears to no
longer be an issue, and we may now be able to
transport large quantities of propane from Prudhoe Bay
that were unavailable earlier.
YPC is focusing on Prudhoe Bay simply because data is
available for this field, but we certainly don't
preclude use of gas from Point Thomson.
An LNG facility at Valdez will be much closer to the
emerging markets along the West Coast of North America
than all other potential Pacific Rim LNG suppliers.
Such suppliers will have to buy more tankers than an
Alaskan project to provide the same amount of LNG to
the West Coast simply because they are located farther
away. Depending on the project, the incremental
capital costs of LNG tankers required by other Pacific
Rim projects negate most, if not all, of the cost
burden of an 800-mile Alaskan gas pipeline.
As I speak, West Coast markets are indicating they
need to secure contracts for large quantities of LNG.
Although YPC does not discount the possibility of
delivering LNG to Asia, it is this large West Coast
LNG demand that will allow the Alaskan project to
achieve the necessary economies of scale.
Currently, a large quantity of propane is being
produced at Prudhoe Bay and reinjected as miscible
injectant for enhanced oil recovery. YPC understands
that the need for miscible injectant at Prudhoe Bay is
expected to diminish or cease altogether by 2010 or
shortly thereafter. Large amounts of propane and other
non-methane hydrocarbons can be transported by a high-
pressure pipeline to Valdez, where they can be removed
from the gas prior to liquefaction. Transport of non-
methane hydrocarbons enriches the gas, reduces the
unit cost for all gas moving through the pipeline, and
diversifies project revenues through the sale of
products other than LNG.
Propane is of particular interest for sale as
liquefied petroleum gas, or LPG, to Asian markets. LPG
commands a price significantly higher than the price
of LNG in Asia and represents a potentially lucrative
market.
Ethane and butane removed from the gas can be used as
feedstock to a world-class petrochemical facility
located in Valdez.
Utility grade natural gas can be made at any point
along the pipeline for use within Alaska. Also, LNG
and LPG will be available at tidewater for potential
distribution to coastal communities throughout Alaska.
Yukon Pacific has completely reconfigured its TAGS
project to address the LNG market along the West Coast
of North America, the sale of LPG to Asia, and the
sale of ethane and/or butane to a petrochemical
facility in Valdez. YPC modified its capital and
operating costs to reflect the new configuration and
has run the economics. The approach was to use low to
moderate product prices and calculate a wellhead price
that would yield a 12 percent return on equity such as
typically allowed by the Federal Energy Regulatory
Commission for common carrier pipelines. George K.
Baum and Company graciously offered to run its
economic models using YPC input as a bench test of
YPC's calculations.
The models show that an LNG project with a pipeline
flow of about 2 billion standard cubic feet per day
produces a wellhead price that appears strong enough
to warrant further work on either a privately or
publicly owned project. I'm sure that most everyone in
this room knows that YPC possesses permits for an LNG
project through Valdez. YPC has also developed
geotechnical databases and analytical software to
rigorously address the thermal design of a natural gas
pipeline traversing alternating permafrost and thawed
soils.
The concept for the reconfigured TAGS project has
remained essentially unchanged for the last 16 months.
YPC has been waiting to see if other parties, private
or public, believe that an LNG project through Valdez
is worth pursuing. The Alaska Natural Gas Development
Authority has stated it will look at an LNG project to
Valdez and YPC is willing to assist them at their
request. And that concludes my comments. Thanks.
CHAIR OGAN asked how long Yukon Pacific has been working on this
project.
MR. WHITMORE said former Governors Hickel and Egan founded the
company in 1983 or 1984. Yukon Pacific worked hard to get an
environmental impact statement for the project in 1988. That was
used to get rights-of-way and then Yukon Pacific began working
with FERC for export authorization at the Anderson Bay site. An
environmental impact statement was prepared in 1995 for that
site and used for place of export authorization with FERC. Yukon
Pacific also negotiated at that time with the EPA and FERC and
had to put in a 40 meter [indisc.]. It recorded data for 1.5
years and did a PSAR air quality permit site as well. Since
then, Yukon Pacific has been looking for ways to make the
project more economical. This new configuration significantly
raises the return on the project.
CHAIR OGAN said the producers have said for years that they are
the ones taking the risks because the gas transporter will get a
tariff regardless. He again referred to his Golden Gas Rule and
asked, "How do you get the guys with the gas to sell the gas to
you?"
MR. WHITMORE said that has been an issue for many years. Yukon
Pacific views itself as a resource. If people wish to tap into
that resource, Yukon Pacific thinks it can help people pursue a
project but it is not going to attempt to get the gas from the
producers. Yukon Pacific feels it is ANGDA's role to deal with
the producers.
CHAIR OGAN asked if the marketers will have to go to the
producers and say they want to buy the gas and what will drive
Yukon Pacific to decide to build the project.
MR. WHITMORE said Yukon Pacific's view right now is that it is
looking for other people to do the project. For years, it tried
to be the facilitator but, as of about two years ago, it decided
that role was inappropriate. Yukon Pacific decided if it could
find other people to try to get the project going, it would
pursue it, otherwise it won't. He said if Yukon Pacific remains
the only entity that believes the project will go, it will not
happen. It is now in a purely reactive mode to see if other
people want to do the project. Yukon Pacific has permits; CSX
would like to monetize those permits.
REPRESENTATIVE HEINZE asked if a representative from Exxon was
invited to present at today's meeting.
CHAIR OGAN said yes, but Exxon declined the invitation. He then
asked Mr. Heinze to present.
MR. HAROLD HEINZE, Chief Executive Officer of the Alaska Natural
Gas Development Authority, said he posted charts to show the
benefits of ANGDA to Alaskans and said ANGDA is all about trying
to capture the benefit of North Slope gas for Alaska. He stated
ANGDA is not a facilitator; it is a "doer." He said he would
explain ANGDA's funding request and ANGDA's business concept and
approach in his presentation, which follows.
We were created by a ballot measure in the last
November election. That ballot passed 2 to 1 and
frankly received support from every district in the
State of Alaska - very strong. We did not really come
into being until after the session was over. Our board
members were appointed in May and the first meeting of
the Authority was held in June of this year so we're
only a few months old.
In terms of our board, they are the ones who are
responsible for the organization. There are seven of
them. I know Andy Warwick, our chairman, is up in
Fairbanks. We have a number of the members here - if
you could stand? Scott Heyworth, John Kelsey, Bob
Favretto of Kenai. Let's see, who am I missing? Dan
Sullivan and Warren Christian....
The Authority under the law that created it has
several unusual ingredients. It is a public
corporation of the state, similar in many ways to the
Alaska Railroad, the Alaska Permanent Fund, other
creations of the state. Additionally it has a lot of
characteristics that are unique to government in that,
for instance, we have the right of eminent domain, we
have the right to administer state land as a state
agency, we have the right to issue revenue bonds and
so on. So, the idea was to combine the best business
approach and, frankly, governmental approach.
We've focused on building an operating facility here
in Alaska. We intend to both buy and sell gas, so we
are looking at North Slope gas from a bigger picture
[than] from just the state's royalty share. We are
looking at buying and selling gas in a business-like
way. We expect that we would at some point invest that
risk and, again, I'll later on explain to you some of
those risks. But, again, if you're going to be a
'doer,' you have to invest that risk and the good news
is that you get to receive the rewards of that risk.
We're benefit driven. Again, that's important because
we are more than just a commercial entity driven by
return on investment. We have a responsibility to look
at broader issues than that and see our impact on
individual Alaskans and the economy and the total
revenue picture of the state.
And then finally, I think it's realistic to tell you
up front, we would expect to deal with people who have
much more expertise and involvement in terms of both
shipping and marketing type functions. We would intend
to restrict our activities generally to the boundaries
of Alaska and contract for whatever we needed beyond
that - again, with a very business-like approach.
The idea of benefit focus here interplays with the LNG
project and I'd like to explain that to you. While the
Authority is focused clearly on North Slope gas
benefits, it appears that the export scheme is
absolutely integral to achieving those benefits. Very
frankly, I can't find any way to make the benefit side
of this work in any economy of scale without doing
some sort of export project so the two are just
linked. Every time I look at an export project, I find
lots of benefits from it. When I try to achieve the
benefits without an LNG export type scheme, I can't
make it work. So, we then have proceeded to look at
the LNG side of it. Fortunately, that's been looked
at, as you heard from Yukon Pacific for several
decades. It actually was looked at for a decade before
then under the name of El Paso, so it actually has
been around.
Additionally, besides Yukon Pacific, an entity called
the Alaska Gas Line Port Authority, which was formed
by a number of our major communities along the
pipeline route, also looked at a number of the
concepts related to LNG export. They also, besides
Yukon Pacific, have made their work available and so
even though we are a few months old, I feel like we
have decades of knowledge to start from. We've come a
fast way.
Right now, it is very clear that the West Coast market
opportunity is emerging very dynamic and it actually
favors Alaska because of the short nautical distance
sailing. We are only half as far as the next closest
competitor and only a third as far as most of the
competitors. That's a significant advantage in the LNG
scheme.
CHAIR OGAN interjected to ask how far the gas will have to be
transported to tidewater.
MR. HEINZE replied that different projects in the world have
different characteristics. Some projects in Indonesia are not as
far from the coast but the terrain that must be traversed makes
those projects more costly. In the case of Sakhalin, a 540-mile
pipeline will be required. ANGDA does not feel it is at that
much of a disadvantage and has every reason to believe it is
very competitive on a world scale. He explained the problem is
the market is going fast - people are out there gobbling it up
everyday. ANGDA is doing the best it can to compete against
those projects and find a home for Alaskan gas. It is a
difficult situation because once markets become saturated, or
they secure supplies, one has to wait a long time for another
chance. He continued his presentation.
Looking at the funding request here, our board at its
last meeting respectfully requests from you a funding
of up to $3 million to finish conceptual design and
make a cost estimate, schedule, benefits analysis and
marketing plan by January '04. I should point out to
you that is the statutory requirement put on the
Authority by the law. We must finish that by June of
'04 - all of those things so we are simply here
accelerating that request.
CHAIR OGAN noted that some of the work has already been done.
MR. HEINZE said he would address that in the remainder of his
presentation.
SENATOR LINCOLN noted the request says January of '04.
MR. HEINZE said he is accelerating the request; the legal
requirement is June of '04. ANGDA has accelerated the progress
so that it will have a majority of the engineering work done by
January of '04. He continued his presentation.
Again, what I'm here today - again, so we understand
each other, I realize you cannot appropriate money to
me today. I understand that. I'm here asking for $2.5
million. I am asking for the Legislature to
demonstrate its support for moving this project
forward by being positive and in essence saying you
would appropriate that grubstake of money out in the
future here when you come back into session. All I
want is a $2.5 million grubstake and if I had 21 and
11 signatures, I believe I can borrow that money right
here in Alaska.
As far as the accelerated funding request, in general
it satisfies the statutory requirement in January
instead of June. It is design funding and it is
focused on new concepts and increased Alaska benefits.
We sit here right now, Senator, with probably 95
percent of the project done. We've had a chance to
look through what Yukon Pacific has done and others
and I'm very satisfied that we are - there's a lot of
good work. Now we haven't had a chance to pour through
the details but we've looked at it enough that it's
there. What we lack is that last bit of closure on
these design concepts and, as I'll explain to you, the
concepts we've developed here are very important
because they are concepts that have not been examined
so far and, number two, they are concepts that
increase the Alaska benefit content of the project
significantly. So I'll talk about that.
The other part is, very frankly, we've talked a little
bit about the producer-led highway project effort and
you are all aware that they, not that long ago,
finished $125 million worth of engineering on that.
And frankly, I'm behind. I'm behind in having a
meaningful conversation with them. I don't know how to
go talk to them given I haven't got a finished
conceptual design and they've just finished $125
million worth of work. So what I'm asking for is $2.5
million to let me catch up so I can at least go have
that conversation on somewhat of an equal footing.
The other reason it's only $2.5 million frankly is
we're getting a lot of things contributed free. I'll
show you a list of things we're getting for free. It's
a lot of money but there's some things you do have to
pay for if you expect to achieve them. And then
finally, the $2.5 million - I will look you in the eye
and I will tell you that 90 percent of that funding is
right here in Alaska with Alaska companies.
To give you some specific benefits again, referring to
the chart and some of the other things there, for
instance, the spur line to Cook Inlet is indicated
there. The spur line has never been looked at in these
studies. There is no estimate of cost to do it. That
is absolutely essential. You're talking about 85
percent of the residential, commercial, and industrial
base of Alaska is sitting right here and we're running
out of gas, we're down to our last 2 bcf in Cook
Inlet. It wasn't that way 25 years ago but it is that
way today. I don't know if we can wait a decade to
figure out what we're going to do about that.
We're going to study a barge mounted LNG concept.
Everybody's looked at LNG plants before but nobody's
looked at a barge mounted one. The advantage of barge
mounting the plant is that it could be built at the
fabrication sites down in Nikiski, here at the Port of
Anchorage, and elsewhere. That means we could hire
people and they would not be living in a camp. They
could go home and sleep in their own bed at night. It
would be a local resident workforce. In this area, we
have at least a couple thousand craft people that
would be able to work on that project. We could pay
them more money. They could bring their lunch in a
brown bag. We wouldn't feed them or house them so that
saves us cost and we could pay them more money and it
all comes right here into the economy because again,
it's very hard to control Alaska hire in a remote camp
but it's very easy to control it in a local hiring
situation.
We want to look at a concept called the LNG thermos
bottle barge. If you have an LNG plant, you can fill
up smaller container barges and you can take them to
every coastal community in Alaska. Now Barrow already
has energy but we could probably go as far north as
Kotzebue and we could probably go as far south as
Ketchikan if we wanted, and I think that's a pretty
significant potential.
We have at least one major portion of our industrial
sector in this state, both the Kenai LNG plant and the
Kenai urea plant and both of those, because of lack of
gas reserves, face difficult futures. We can directly
influence that. And then finally, by way of example,
nobody's worried about the propane content in this gas
and it turns out when we, in a preliminary sense,
looked at how do you supply energy in the Yukon River
area, one of the keys might be to have plentiful
propane available because [it] is very easy to handle
and transport hydrocarbon.
We've gone through in the last ten days and we sat
down and developed a work schedule for this project. I
submitted to the committee, for the record, a full
copy of that. We involved a number of contractors:
ASRC, VECO, PND, Wood MacKenzie and Northern
Economics. They went through and they helped us scope
the work. They provided very significant efforts in
terms of estimating the cost to do the work that we
need to do to finish off the conceptual design. I
would intend to sole source the contracts with the
approval of my board, of course, and the majority
would frankly be fixed price. That's how we'd get it
done for the price.
I did include a table of how we would spend the money,
spending $2.5 million. The majority of it, almost $1.8
million of the money, is to finish off the design and
execution plan. If we can bring those to closure by
January and have a total concept, I'll show you some
of the advantages of that later. Additionally we've
included money in here for the benefits analysis,
which has never been done. We've included in here a
marketing and competitor analysis, which is again
vital to our continued competition in the LNG markets
of the West Coast in the world. I allowed $150,000 for
specialized legal opinions. That may be a little too
much money for the lawyers but, basically, the idea
would be to research the tax, the bond, and the
shipping related issues with that money. Then finally
we have a small staff and we will remain at a small
staff, and I've included money for that.
The next page shows the contributed studies and
besides, again, acknowledging Yukon Pacific and the
Gas Line Port Authority, we need tanker design and
cost information and we have talked to the West
Coast's largest ship builder and we have talked about
potentially cooperating with them in ways that they
would help us understand the design and cost issues
there.
Training and Alaska hire - I think the labor movement
in Alaska is entitled to a lot of input as to what
kinds of things we need to do to develop workers to
maximize Alaska hire.
Then finally gas compositions and conservation - there
are a number of conservation related issues that I
believe the state agencies involved in conservation
have more than enough authority to cause hearings to
be held and public information to be developed so that
we can all see what's going on. There also, frankly,
is a lot of state in-house expert consulting
available. In areas of revenue and economics and those
things, we don't need to go outside. In terms of
social and environmental impacts, we don't need to go
outside and certainly, in permitting and land use, the
state itself knows more about that than almost
anybody. [END OF TAPE]
TAPE 03-51, SIDE A
MR. HEINZE continued.
...that potentially is billions of dollars in the
Alaskan economy. The difference between having enough
gas in this broad Cook Inlet area and not is billions
of dollars so, it seems to me, a few hundred thousand
dollars for the only study of it seems like a wise
investment at this point. The barge-mounted LNG plant
- again it might sprinkle an extra billion dollars in
this economy. Again, it seems like it's worth studying
- nobody else has.
We have a brand new concept for looking at the LNG
birthing and plant location in Valdez. People have
traditionally talked about Anderson Bay. There are
issues related to it. We're looking at a whole new
concept which would utilize the old town site in
Valdez with a dredging and a sheet piling type
operation and the plant barge mounted in the area.
That alone would probably add hundreds of millions of
dollars to the business opportunities in
petrochemicals and other things in the Valdez area -
just that change of location.
And then, finally, the idea of the barge mounted
cryogenic storage units and supplying Alaskan
communities with clean and abundant energy, I don't
know - $100 million, $200 million, whatever number you
want to write down. It's pretty big stakes as far as
I'm concerned.
One of the questions I was asked was why proceed now
to finish the project concept design. Why not just
wait? And I tried to pick off four reasons here. One
frankly is the market pull. The market I have no
control over. It moves and if we're going to play in
the market you have to go with it. You have to market
yourself and you have to put your best foot forward
every time you go out there. Right now I'm doing - at
least one person I'm talking to in the room so I hope
they don't listen, right now I'm doing the best I can
with a 90-95 percent product, at a concept level. I
need a 100 percent product at a concept level to sell
it. I mean, you can only use the mirror so many times
and then they catch on.
Secondly, producer decisions. Very frankly, I'm very
supportive of the producers' efforts to bring our gas
to market through a pipeline following the highway on
down. I would encourage you to realize if somebody
wants to spend $20 billion to do something good for
Alaska, I think we should help them do it. I'd be
happy to go back to Washington and testify in their
favor. I hope they get every break possible from the
federal government. On the other hand, I know that
historically their statements, and I know in
everything they've studied so far, they are not
looking at the benefits to Alaska, how to deliver the
things that are on that chart. The only way I know to
have the conversation with them is for me to have
something to work from in a technical sense that at
least says here's how we will do this. Here's how we
would approach this and we want to make this work with
you and then have that very business-like discussion.
Right now, I don't know how to do those things. I
don't know how to have that conversation with them
until we do.
From a project management point of view, very frankly
I have to tell you closing out the engineering design
by January or February would allow us to use the next
four or five months to do the business plan, the
marketing plan, and all of the other things it really
takes to make a good business judgment on the next
decision, which will be a big decision by the state to
spend hundreds of millions of dollars, frankly.
Then finally, energy in Alaska. I'm sorry, I read the
paper every day faithfully and every day there's
decisions being made somewhere here in Alaska about
energy in our communities and whatever. We need to
understand what's on that chart and what could happen,
what the alternatives are so that it is available for
those communities as a framework when we make those
decisions. So I don't think we can wait.
Some people have asked why are you getting into the
business - the gas business and the Authority is
definitely a different approach. This is not to
facilitate, this is not to sit back, this is get in
the business. We intend to buy and sell. We intend to
build and operate and, as such, we are very directly
involved. Basically, we believe, and I'll show you the
numbers here, that while an Alaskan LNG project is
very marginal for a commercial entity like the
producers, as they've told you - I believe they're
telling you the absolute truth, it is very marginal
for them. But for a non-taxable state entity, just
like the Alaska Railroad and everybody else, we're not
taxable. We're serving a public purpose. If we are
non-taxable, that savings takes us from being marginal
to highly competitive. It makes all the difference in
the world.
Frankly, we also have a very limited portfolio of
other choices. We don't have a lot of things that we
can do or work on or approach us to our gas. And then
finally, we don't have multiple shots at the Pacific
Rim market. I mean things out there are happening and
either you play or you don't play. We may lose some
things on merit but, frankly, I don't want to lose
things because we didn't try.
I went through and I've delineated to you how to spend
$12 billion to build an Alaska LNG project. I'm not
going to tell you this is our cost estimate. It's some
numbers. It's some very reasonable numbers. I believe
they're towards the high end. We have not had a chance
to go through and verify the estimates that these are
taken from. We have not had a chance to go through and
see if we can improve on these numbers. We think we
can. If you take $12 billion - spent like that, and
then you go through and you calculate what's
traditionally called the cost of service, this number
represents a number that when you add the wellhead
price to it, it tells you what you basically can fit
up against in terms of a market price. For instance,
in this case, I calculated that if you were a highly
rate-of-return oriented commercial investor type
entity, you would need $2.90 for every unit
transported through the system to make money, to come
out where you wanted to be as an investor. Now if you
take $2.90 and add to it some reasonable amounts for
wellhead price, that's not where we want to be in
terms of the price world out there today. On the other
hand, if we are non-taxable, that same number
calculates to be $2.20 and $2.20 for a cost of service
is lower than any other cost of service we've seen.
Now I'm not telling you that's what we would do. I'm
not telling you that we would necessarily build
everything but that starts to illustrate to you how
powerful this concept of the Authority [is] and its
ability to adjust the cost structure here.
And then finally, if we looked at the pipeline and the
facilities involved, like we do a highway in Alaska -
when we go to build a road we don't ask the rate of
return. You look at - it connects A and B and you look
at the fact that its infrastructure stimulates
activity at A and B and that's what you care about.
Well, basically what that means is you just pay your
bond debt. If I did that calculation, I get $1.65 and,
again, I hope it's not lost on you that in the
arithmetic of the world, if you take $1.65 and you
take $1.35, which is the high at-risk price mentioned
by the producers in Washington, D.C., that's $3.00 and
$3.00 will fit into any market I know of right now,
anywhere. So that starts to get pretty powerful.
There is risk, and again, I put together a table of
risk for you. All of those elements of risk are risk
elements that anybody who builds a pipeline has to
endure. They are very real. Fortunately, the Authority
hopefully doesn't have to undergo fiscal changes. That
risk isn't there for us, but all the others are. We
believe there are ways, in a business-like way, to
understand, to minimize and move forward on those
risks. For instance, if we are taking the risk, we
would expect to be able to offer people on the North
Slope a fixed price for their gas. Again, you can
speculate with me. What would be the effect if the
Authority offered a firm $1 mcf price right now on the
North Slope - no risk, you don't have to make any
investments, we just buy your gas for $1 an mcf. Now
I'm not negotiating in public here but I - wouldn't
that stimulate development? Would we find more
reserves? Would things happen? Would somebody maybe
want to see to us even? I tend to think we'd have a
chance, at least.
There were several other questions that came up
earlier that I probably ought to just touch on. One is
your gas rule, Senator. I would say we would offer a
fair, no risk price and if people wanted to take it, I
think we would be very happy to be in the gas business
under those circumstances, realizing there's both risk
and there's reward at that point. I think that's one
of the important things we could do.
We've heard people evaluate choices in this case and,
again, I probably can calculate the same numbers they
can. All I can tell you is that what people see as the
best value as a commercial entity may not be the same
as what we see as the best value as the Authority
because of our entirely different business structure -
as to the fact that the two projects may or may not
interact with each other and how that interaction
occurs. Some of you know I'm a reservoir engineer by
background. The only statements I've seen on this
issue are by a former colleague who is also a
reservoir engineer and I respect. But, you know, very
frankly if there's anything on the record at all right
now on that issue, it's pretty skinny so I'd just love
to see somebody come forward and let's have a good
public discussion on what should or shouldn't happen
on those volumes.
The second thing is, I believe once there is a real
belief that gas can be sold on the North Slope for a
fair and reasonable price, you're going to see so much
exploration happen so quickly, that instead of
worrying about whether there's 35 trillion or
whatever, it's going to be a bigger number. I think
also you have to keep in mind that a lot of the people
that comment on this issue are folks that have gas in
a lot of other settings and, you know, at times you
[have] to compare what they're saying here and there.
For instance, in terms of LNG, very frankly every one
of the producers on the North Slope is in one form or
another trying to sell LNG into the West Coast.
They've all seen that there's a market there. They're
all smart people. They've all pursued it to varying
degrees and in varying ways. But that's the reality.
For instance, the MacKenzie Delta, again a similar
list of companies is involved there. You know the
MacKenzie Delta pipeline is moving forward rapidly. I
don't know if you've thought what it's all about. It's
based on 6 trillion cubic feet [tcf] of gas and they
plan on a production rate of 1.2 bcf per day. Now if I
just take those numbers and scale them up, our known
gas reserves right now would support 7 billion
standard cubic feet per day and that seems like enough
to me for the moment. And so, again, I don't know
where the consistency is in the story, but I don't
have a problem with seeing all of the projects being
compatible. I don't see any problem in working the
projects through.
My approach is not to compete on this one. I would
like the opportunity to work with the producers. I'm
concerned that they are making decisions on the
pipeline right now that could influence how we get our
benefits. I'd like to be sitting down and having a
very business-like discussion with them to come to
grips with commercial terms. I don't mind paying money
to share in the cost of whatever needs to be done but
we need to be part of the discussion. I think clearly
the markets will support both projects.
And then finally, the other question was, I believe,
again, if there [are] legitimate offers for gas, that
everybody involved - the producers certainly, have
committed to consider any serious offer. I would like
to be in a position to make them a serious offer. I
can't right now. I don't have enough and that's part
of the grubstake, part of trying to move this forward
so I can make that legitimate offer. Certainly the
state's royalty gas, and I hope it's not lost on us,
that the state's royalty gas as I recollect being a
former commissioner, I believe it has to be available
for what's on that chart. Again, my recollection of
our resource ownership in common is that if there is
an in-state use, that that royalty gas will be made
available and I don't believe anybody can trade that
one away.
That's my view. We're coming at this from a very
benefit-driven approach. We're trying to be very
positive and yes, we are pushing a little bit and at
times I find myself a little bit outside the plan and
I assure you I am on board with the Administration in
terms of being a very pro-development, move forward
Administration. At this moment, I have a
responsibility under the law, a law that was created
by the people and I'm going to pursue it. I'm going to
do the very best job I can and what I'm asking for is
your support of that. That's all.
REPRESENTATIVE FATE said he has repeatedly heard that there is a
West Coast market but it is going to take five to seven years
before Alaska LNG could be shipped, if the project started
today. He said that target must be timed with if and when a
receiving station on the West Coast, of which there are now
none, would be on line to receive the LNG. He asked Mr. Heinze
how he would negotiate a contract and wedge Alaska LNG into that
market when nothing will be produced for seven years.
MR. HEINZE said several parts of that question are important.
First, timing is everything. The project concept the Authority
is working under does not take the extent of time quoted by
others. He noted if the state moves forward in a punctual
manner, gas could be on stream in 2007. Alaska has several
advantages. First, it would use a pipeline route that already
has pipe on it. He does not know the producers' timeline but if
they intend to lay that pipe early and quickly in the process,
the Authority can meet that kind of a timeline. He said the
permitting issues will not be problematic if the TAPS line is
followed. The TAPS right-of-way was recently renewed; the
environmental studies have all been done and there are no
residual issues to his knowledge. He said he thinks this project
can be executed faster than most people believe.
MR. HEINZE said second, the market situation on the West Coast
is one that has emerged. People who were very alert six months
or a year ago sensed that it was going to happen. He
acknowledged that there are a whole series of proposals on the
table; one is very high quality [Sempra]. He would like Alaska
gas to supply the Sempra project. He has also talked with
Mitsubishi who has a very good project. The Mitsubishi project
is not as advanced as Sempra's, but the Mitsubishi project may
fit Alaska's timeline more easily. He said to close the gap,
Alaska must move forward. A lot of LNG is moving around the
world so Alaska could meet its contractual requirements of
supplying LNG. Prior to Alaska's project coming on stream, the
Authority would buy LNG produced by others.
REPRESENTATIVE FATE asked what the contract price would be based
on.
MR. HEINZE said the pricing arrangements are part of the risk.
The Authority visualizes a pricing structure that, at the market
end, is driven by a basket of prices. At the going price,
different economic results will occur. In general, one can buy
cargoes that reflect the current price in the market. The
Authority would not be speculating; it would be buying at the
time to fill a demand at the time. That represents a risk, but a
very low one. He maintained there are ways to structure the
timing compatibility with other projects, although the Authority
has not thought them through completely.
REPRESENTATIVE FATE said he spoke with FERC representatives not
long ago and learned, on the issue of separation of the
pipelines, certain questions remain unanswered regarding a gas
pipeline versus an oil pipeline. He said he is not convinced
that Alaska could use the permitting process for one type of
pipeline and transfer it to a different type. He wishes someone
could assure him that the permit renewal for the oil pipeline
will cut the timeframe.
MR. HEINZE said the Authority has taken a hard look at that
question. An expedited EIS process can be completed in 18
months. This project would be eligible for an expedited EIS
process because the information is on file. Second, Yukon
Pacific has a federal grant of right-of-way, which is
transferable. Yukon Pacific does not have a full grant of the
state right-of way, but the Authority can administer the land
for the state government as any other department might. The
Authority has looked at the fundamentals. He acknowledged that
technical issues do exist, but they are very solvable. He said
there is no reason the two pipes cannot be placed close
together.
SENATOR ELTON said his reaction to Mr. Heinze's testimony is
that he wants to invest. However, statements made in other
testimony about one project trumping another give him pause. In
addition, the Authority will need cooperation from the producers
and the markets. He expressed concern that with the
Administration and producers' attention focused on another
route, everyone may be walking all over each other. He said he
needs to be convinced that it is appropriate to have a
bifurcated process.
MR. HEINZE acknowledged that he is selling but he is trying to
be honest about the risks. He said he was trying to convey to
members that the Authority has a couple of competitive
advantages. First, in the LNG market, Alaska's distance to the
West Coast is an advantage. Second, as a business entity, the
Authority does not have to pay income tax. That is a big
advantage. Those two advantages have convinced him that the
state needs to make a business decision. He wants to use those
competitive advantages to provide benefits for Alaska. He said
the state has choices. He is asking the Legislature to bet $2.5
million and believes it will feel better at the end of the day.
SENATOR ELTON asked, given the previous testimony, whether Mr.
Heinze feels that part of his job is to sell this to the
markets, producers and to the Administration.
MR. HEINZE said he believes the Administration has a very well
conceived approach and knows what it wants to do. He supports
the Administration's efforts and believes the Authority's
activities enhance the Administration's efforts. He said
different people have different interpretations of why the
initiative passed the way it did. He believes the two reasons
were a timing frustration and the perception of a lack of
credibility regarding benefits to Alaskans. He is trying to
address those issues by being timing and benefit proactive.
SENATOR LINCOLN referred to Deputy Commissioner Porter's
handout, particularly to the Authority's funding request, about
which Deputy Commissioner Porter said that funding request, is
premature prior to knowing the outcome of the energy bill
[before Congress]. He also said it would be appropriate for the
Authority to study the market in a way that complements the
Alaska Highway route project. She said he laid out the state's
position toward the Authority in a clear manner. She said her
impression, from Mr. Heinze's presentation, is that the
Authority has a board and executive director that are "gun-ho"
and have a directive from the people of Alaska. She asked what
mission the voters understood the Authority to have. Her second
question was in relation to the Authority's ability to take
lands using eminent domain and asked if any Native lands will be
affected on either of the routes.
MR. HEINZE referred to a map of the routes and said the route
from Prudhoe Bay to Valdez would follow the TransAlaska
pipeline. That right-of-way is already controlled. He noted that
part of that right-of-way passes through Ahtna land and he has
called that corporation to talk about it. He pointed out the
real grant of right-of-way is controlled by the federal and
state governments and the gas line would be in such close
proximity to the oil line, he does not believe there would be a
lot of issues. He expects he will have to deal with two or three
Native entities but, since the right-of-way has already been
designated for transportation, the Authority could easily work
out terms.
MR. HEINZE then said, in terms of the Authority's relationship
with the Administration, he apologizes if he sounds
confrontational. However, he believes what he has shown the
committee is responsive to the direction that he was given as
part of the team. He works for state government and for the
Governor. He made sure that the monies he asked for are benefit
driven. To the extent he differs over the point of what may
happen on the energy bill in Washington, D.C., he said he is
just a stubborn Alaskan who refuses to have timing dictated by
what happens there. He said if this is a good time to move
forward, he believes the Authority should. The Authority is
doing nothing to threaten efforts in Washington, D.C.
SENATOR LINCOLN said Mr. Heinze is asking the Legislature for
$2.5 million, which is not a lot in the big scheme of things,
but given the fiscal crisis, that amount matters. She said it
seems strange that a deputy commissioner would come before the
committee and say that the funding request is premature. She
cautioned Mr. Heinze that he is going to have a hard sell.
MR. HEINZE agreed that he may have a hard sell and clarified
that the Authority is asking to borrow $2.5 million and to pay
interest. He said it will always be difficult for public
corporations to find their own way but the Authority has nothing
to start with. He said he has to be entrepreneurial.
REPRESENTATIVE HEINZE said as past president of ARCO,
commissioner of the Department of Natural Resources, and state
gas "czar" under Governor Hickel, the Legislature has put a lot
of store in what Mr. Heinze is saying. However, legislators have
to answer to the people down the road. She said many people are
very serious about wanting to work with Alaska. She asked Mr.
Heinze what the possible return to the state will be on the $2.5
million.
MR. HEINZE said he tried to illustrate that several issues run
in the billions of dollars. He said he has no way of knowing the
status of the producers' issue. He said they may be making
decisions right now that might impact the composition of gas
carried down the pipeline. He said one of those decisions might
mean that propane cannot be provided to the Yukon River. He said
he knows that the Legislature and the Administration represent
the will of the people, but he is also a creature of a law that
was created by the will of the people and he is trying to pursue
that mission. He is trying to do the work of the people without
challenging anyone else who is doing similar work. He asked
committee members to look at the Authority's motives, and the
positives and negatives of it. He said $2.5 million is a lot of
money in a tight budget but the Authority is requesting a loan.
CHAIR OGAN said as bankers, the Legislature has to answer to its
stockholders.
SENATOR WAGONER said he understands Mr. Heinze's desire to take
advantage of the window of opportunity that is open right now,
but members have been told that the Administration is
negotiating to sell the rights to Alaska's 12.5 percent royalty
gas. He asked how that sale will affect the Authority's ability
to do the projects it has outlined.
MR. HEINZE said the Authority represents an alternative
approach. It may be appropriate for the state to dedicate its
royalty, but the state must reserve enough gas for instate use.
He said he was planning to offer Anadarko money for every
million cubic feet it found and thought he could probably get a
few wells drilled for the state. He said the alternative the
Authority is struggling with is the extent to which the state
wants to use a business-like approach. He said the intent of
ballot measure 3 was clear in that the Authority is not to study
or facilitate, it is to take action. He said there is a lot of
gas on the North Slope and he thinks the Authority can buy gas
at a reasonable wellhead price because the owners will not have
to take the risk.
SENATOR WAGONER commented that when Phillips was built in Kenai
to supply LNG to Japan, that amount was 100 percent of Japan's
import amount. Now it amounts to less than 1 percent. He asked
if the same scenario is projected for the West Coast and the
rest of the United States.
MR. HEINZE said the highway gas line is definitely going into
the Midwest and that is the best and biggest market in the
world. On the other hand, the LNG market to the West Coast is a
very strong market. LNG is a wonderful solution to the problems
associated with moving gas into that market, and someone will
bring LNG in.
CHAIR OGAN thanked Mr. Heinze and asked Mr. Bartholomew to
testify.
TAPE 03-51, SIDE B
MR. GREG BARTHOLOMEW, Director of Strategic Planning and
Analysis, Sempra Energy, gave a slide show, which he described
as follows.
The first slide illustrates historical consumption and
production in the Lower 48 states. In the early 1970s, a gas
shortage was primarily driven by price regulation. Consumption
and production of natural gas declined. Price deregulation
occurred in the mid-1980s, and production and consumption
increased. From then until now, a gap between production and
consumption has opened up. The gap has been filled primarily
with Canadian imports, which currently represent 16 percent of
U.S. natural gas consumption. The U.S. Government has projected
very aggressive growth for consumption. Most energy consultants
take a less aggressive stance toward consumption but all suggest
a growth, driven primarily by electricity growth and a belief
that the U.S. economy will continue to grow. Sempra believes
that Lower 48 gas production has peaked and will decline. The
primary question at this time is how fast that production will
decline. Sempra has plotted two different [indisc.] - a high and
a low, both based on U.S. Potential Gas Committee probable and
possible resource estimates. Also plotted is Sempra's most
likely scenario. Sempra believes that natural gas supply is a
grave concern for the U.S. economy. Unless LNG liquefaction
capacity is built, the United States will have a very difficult
time over the next 20 years. Sempra also believes that Canadian
natural gas production may have peaked, in which case LNG
imports will be even more critical.
MR. BARTHOLOMEW said he has spoken to representatives from many
of the countries around the world with stranded natural gas. He
recently learned from one of the leading energy consultants that
only been one significant natural gas discovery has been found
in the Lower 4 this year, which is shocking the entire industry.
Even though rig counts are increasing, the drilling is
concentrated in fewer and fewer plays. For example, two-thirds
of the drilling in Wyoming is currently in two fields. Despite
the good news on the surface, the outlook is increasingly bleak
as one looks at the details.
CHAIR OGAN asked Mr. Bartholomew to give the committee an
overview of what Sempra Energy does.
MR. BARTHOLOMEW said Sempra Energy's primary business is
ownership of a Southern California gas company and the San Diego
Gas and Electric Company, both natural gas distributors. Sempra
Energy also generates electricity and has built five power
plants, generating a total of 1.5 gigawatts of power. In
addition, it owns a power plant in Texas.
CHAIR OGAN asked if Sempra Energy is a transporter and consumer
of natural gas and creates electricity to wholesale to
utilities.
MR. BARTHOLOMEW said there is a large barrier between the
regulated and unregulated side of the business so they are
essentially independent businesses. Sempra also owns a solutions
business that works with commercial/industrial customers. He
continued his presentation.
The next plot shows what has happened with respect to U.S. oil
production consumption. Lower 48 production peaked in 1970 and
has since declined over 50 percent. That decline has been
mitigated somewhat by new frontiers that have been brought on
from the shallow Gulf of Mexico, Alaska, and the deepwater Gulf
of Mexico. He noted there are not many frontiers left in North
America yet consumption continues to increase. Imports represent
60 percent of consumption and that may increase to 75 percent
over the next decade. During the 1990s, prices escalated
steadily about 5 percent per year. In the year 2000 and 2002,
price spikes occurred, signaling a much tighter market than
expected. The current outlook in prices is that LNG will be on
the margin in North America in the indefinite future and natural
gas prices will likely trade above $4. Currently, the markets
are trading in the $4.50 to $4.75 range.
MR. BARTHOLOMEW showed a plot of gas demand for western and
southwestern states. Those states comprise an 8 bcf/day market.
Demand has recently grown but, in general, growth in the western
states is expected to be modest. The western states are a
relatively small market that is not well integrated into the
rest of the nation. He said all of the major producers are
interested in building an LNG terminal on the West Coast because
all West Coast supplies are declining rapidly. Sempra predicts
that California's local gas production is going to decline
quickly, driven primarily by the fact that 40 percent of
California's gas comes from a single field. Coalbed methane in
the San Juan basin is declining at a 10 percent rate, and the
non-associated gas is expected to begin to decline in a few
years. The Permian (ph) Basin in West Texas and Eastern New
Mexico has been holding flat for the last 15 years and is also
declining.
MR. BARTHOLOMEW said drilling will not solve the problem.
Drilling in many of those areas has become "price inelastic,"
meaning rig count does not increase no matter how high the price
is. In many of these areas, rig count is actually decreasing
despite the high prices in more and more regions of the United
States. He said many people have stated that the Rocky Mountains
are America's last hope for natural gas production. He said most
of the growth in Wyoming production after 1998 has come from the
Jonah field and Powder River coalbed methane. Without those,
Wyoming natural gas has been relatively flat. Rig counts for
Wyoming have actually been declining over the last six years,
excluding the previously mentioned projects.
CHAIR OGAN said he just spoke with Senator Coe (ph) of Wyoming
who said Wyoming has a $500 million budget surplus this year,
primarily from coalbed methane.
MR. BARTHOLOMEW said the concern is that there are fewer and
fewer plays. Everyone focuses on coalbed methane and the Jonah
and Pinedale fields because there is not much left to drill on.
He said fortunately, there is a lot of gas left in the world.
North America uses about one-quarter of the world's consumption.
The global reserves-to-production ratio shows a 70-year supply
and, except for the Arctic, the Lower 48 and Canada do not have
a lot of resources left.
MR. BARTHOLOMEW showed a map of the major plays in the Pacific
Basin. Sempra is talking to all of the parties interested in
delivering gas to the West Coast. Alaska is on the bottom of the
list because the other countries have made getting gas to the
West Coast their highest priority. Sempra has been meeting with
many of the heads of state in these locations. In the meantime,
Alaska is still wrestling with the decision of whether it wants
the big pipe or whether it wants to build an LNG terminal. Until
Alaska can make up its mind, it will not be considered as a
serious player. Most of the VMPs have invested between one half
and one billion dollars in each one of these projects. The
stakes for the countries where these projects are located are
exceptionally high. In some cases, the democracy of the country
rests on what it can do with its LNG. Sempra has been working
with some of these parties for a very long time. Sempra would
like Alaska to be a player because the money would be kept in
the country; however, the question is whether Alaska can move
fast enough. Sempra is ready to start construction and it has to
have contracts very soon.
SENATOR LINCOLN asked if Alaska's location, being 2300 nautical
miles away from the West Coast market, makes it more feasible
than the other locations.
MR. BARTHOLOMEW said the competition is not about what location
is the most economic, it is about who is willing to take the
price risk and make the commitment for the capacity first. It
comes down to who has the greatest desire to do their project.
He said he is not here to pressure Alaska; he is trying to be
honest about the situation. Everything depends on who wants
their project the most.
MR. BARTHOLOMEW then went on to say the Lower 48 is fairly well
connected with pipes so the West Coast is competing against the
Atlantic Basin also. The primary competition is from Trinidad,
Venezuela, West Africa and Qatar. Qatar has 900 trillion cubic
feet and very much wants a large amount of the North American
market. Even though the shipping distance is very far, Qatar has
a lot of gas. Sempra has received all of the necessary
significant permits from the Mexican government. It plans to
begin building in January and will have contracts prior to
building. It is in the final stages of commitments with many
players but those commitments are non-binding and non-exclusive.
CHAIR OGAN asked about Marathon.
MR. BARTHOLOMEW said that Sempra is the only company that has
all of its permits. Shell does not own its land [in Mexico] and,
as a consequence, cannot get a land use permit until it owns the
land. Marathon does not own its land either and has not filed
for an environmental permit or a land use permit. Sempra Energy
owns 400 acres and plans to build on 72 acres. Sempra's
advantage is that its location is isolated. It is invisible from
the highway and has no close neighbors.
CHAIR OGAN asked how much gas Sempra will be able to handle.
MR. BARTHOLOMEW said its initial capacity will be 1 bcf per day.
Sempra will have room to build two more tanks to allow it to
potentially double its capacity. Sempra received its FERC permit
today for its Cameron facility in Louisiana. Construction of
that facility will begin in the first quarter of 2004.
CHAIR OGAN asked the source of the gas for that facility.
MR. BARTHOLOMEW said Sempra is still talking to suppliers.
CHAIR OGAN asked if Trinidad is a likely location.
MR. BARTHOLOMEW said he cannot comment on that.
CHAIR OGAN asked if Mr. Bartholomew is in a position to make a
deal with producers to buy gas if the state could get someone to
step up to the plate and build a transport system.
MR. BARTHOLOMEW said Sempra is having discussions with all of
the producers but he is not in a position to talk about supply
arrangements. He said once Alaska is prepared to be earnest in
its negotiations, Sempra will be very much prepared to talk
about a contract.
REPRESENTATIVE HEINZE said Mr. Bartholomew mentioned that its
current contracts are not exclusive. She asked if that is open
to negotiation if the state can show something to convince
Sempra at a later date that it is serious.
MR. BARTHOLOMEW said if Alaska really wants to do LNG, it will
need to get very earnest in the next couple of weeks with the
intention of finalizing a contract by the end of the year. He
said all is not yet lost but the window is closing very rapidly.
CHAIR OGAN asked if Sempra would be interested in 1 bcf from
Alaska.
MR. BARTHOLOMEW noted the West Coast is a relatively small
market. He stated:
If 2 [bcf] a day were landed on the West Coast, if
Sempra were to expand to accommodate that, it would
make building a second terminal rather difficult.
Okay, so, if Alaska thinks well, they can miss this
opportunity and we'll catch the next one, it may be
very difficult to do that.
CHAIR OGAN asked Mr. Bartholomew if he would be presenting to
the Finance Committee tomorrow.
MR. BARTHOLOMEW said he will be.
CHAIR OGAN thanked Mr. Bartholomew and asked Mr. Thompson to
testify.
MR. KEN THOMPSON, President of Pacific Star Energy, told members
he was the past president of ARCO-Alaska and also headed up
global gas marketing for ARCO and LNG marketing in the Asian
Pacific region for ARCO. He told members he agrees with the
charts shown by Mr. Bartholomew and he believes North Slope gas
will be needed in the Lower 48 in the next 10 years. Pacific
Star Energy believes Alaska's gas should never be tied up in one
market; it should go to multiple markets. He stated:
We really foster what I would call a plan that would
ship gas to the Lower 48 that would allow gas to be
tied into the Chicago area, New York, as well as
Pacific Northwest and we also endorse at some point
LNG shipments from Alaska to the West Coast. We are a
consortium of various Alaska companies across the
state that [is] interested in having an equity
investment in any project that happens. As oil has
evolved in Alaska, no Alaska company today owns an
interest in the TAPS oil line. No Alaska company today
owns equity interest in the oil. We want to change
that and when the natural gas industry evolves, it
will be Alaska companies and Alaska individuals that
hopefully can own up to 10 percent equity in any gas
pipeline project and eventually even natural gas
production.
Producers maintain legal title and legal marketing
rights under the leases to 87.5 percent of the gas. On
the other hand, the state does maintain - if it elects
to take gas in-kind - maintains legal rights, legal
title and full marketing rights to its 12.5 percent
share of the gas. We think the state, while it cannot
mandate that any project include Alaska investors, it
certainly can suggest it and have strong input because
of our ownership in natural gas.
If investors such as those mentioned by Mr. Heinze
were to approve capital investment for construction of
an LNG terminal for shipment of LNG to either the West
Coast or even Asia, Pacific Star Energy would be
interested in assessing equity ownership in that
project as well. Very importantly, we submitted our
plan a year ago last month to our investors and
basically our plan is in two pieces. One, we'd own a
ten percent interest in any gas project. Number two,
we would use that cash flow within Alaska to play a
vital role to building natural gas infrastructure
within the state.
We are interested in constructing with private equity
a hub distribution center in Alaska, a natural gas
processing facility for natural gas liquids such as
propane and butane to Interior communities, and we
have already submitted and talked about concepts to
our board of constructing spur pipelines to Fairbanks,
Anchorage and even potentially to Valdez. We also will
assess in the future regional electricity generation
stations.
PSE, or Pacific Star Energy, also will carry on the
work that has already been done to look at commercial
viability of a natural gas petrochemical business on
the Kenai Peninsula as spur lines come into the
Anchorage area.
I'm extremely excited to tell you today that 12
companies have finalized investment and signed joint
venture agreements with Pacific Star Energy so we are
fully grubstaked, as [indisc.] would be. We're fully
funded for the next two years to mid-2005. Our owner
companies, we have 12 at this point - Arctic Slope
Regional Corporation, Aleut Corporation, Bering
Straits Native Corporation, Bristol Bay Native
Corporation, Chugach Alaska, Cook Inlet Region, Doyon
Limited, Koniag Incorporated, NANA Development
Corporation, Sealaska Corporation, the 13th Regional
Corporation, and Pacific Rim Leadership Development
are our current investors. We are currently talking
with several village corporations that have expressed
interest in investing and we have approached and will
be approaching several non-Native Alaska companies. We
have already talked to securities attorneys on even an
Alaska IPO at the start of construction of the
pipeline in 2007 so that every individual Alaskan can
invest in this project.
We plan to work cooperatively with the major
producers. Major producers do, we feel, control the
gas project decisions in the near term and we are
working with them cooperatively. We will cooperate, as
I've already told Mr. Heinze and the Gas Authority, we
just want a project - plan A being the producers'
projects and let's call Plan B the Gas Authority
project. We will invest in either Plan A or Plan B but
there needs to be a Plan A or Plan B and we have
funding through mid 2005 because we believe that
producers should decide a project by the end of next
year or mid-2005 or the Gas Authority make decisions
by then and the state facilitate one of those two into
happening.
We think that Pacific Star Energy and having Alaska
companies can add new value to any project; for
example, more profits would stay within the state to
help the Alaska economy. We can foster investments. In
fact, it's part of our base plan to have investments
in in-state gas use and value-added processing. We
will enhance Alaska hire. We can provide assistance
obtaining pipeline permitting across Native and other
lands and we want to assist in transportation of the
state's share of royalty gas and, as Mark Hanley
talked about, for smaller producers we think we can
assist smaller producers in helping transport their
gas. We certainly can assist in government
relationships and we will deliver on our share of
capital. To date we're fully funded through midyear
2005 and then at that point, phase 2.
Let me get to the bottom line of what we think is the
optimal business plan. One, Alaska should foster both
these projects and the work continuing for the next
two years. Alaska should not choose one over the
other. It would be a big mistake and I say that from
having marketed gas and having marketed LNG throughout
Asia. As an old marketer, the worst situation you can
get into is to market to one market. They, then,
dictate the terms. Alaska should get its gas to
multiple markets. I envision someday that there will
be a project that's the Lower 48 pipeline. It will go
into Alberta and from Alberta will be expansion of
lines to the Pacific Northwest, Chicago, and New
England. I envision that someday there will be a spur
pipeline built down to Valdez, or perhaps even extend
the pipeline to the Nikiski area and extend that LNG
plant's life for shipments to the West Coast. We would
make a mistake to ship only to the West Coast. I
worked that market. I've made a lot of money and I've
been burnt in that market. I've made a lot of money in
the Midwest and I've been burnt there too. You want
four or five regional markets that you're into that
you can play one off the other based on the regional
economic conditions - one percent growth on the West
Coast now and the gas demand - 1.5 percent is being
forecast in the upper Midwest and the New York area.
We hope that we can play a role. We hope this time
when the natural gas industry evolves, that Alaskans
will own at least ten percent. I will tell you this -
I do think to keep an eye, very clearly, on the
national policy - on the energy policy act - if that
passes, I think there is a high chance and then also
if the majors are able to negotiate a satisfactory
agreement with the Administration and the Legislature,
I do think you'll see chances higher than ever - and
I've been in this business 30 years - I think the
chances are highest ever that a decision will be made
to go ahead by the end of next year.
If the national energy policy act does not pass, I
think you'll find the major producers, and I cannot
speak for them, if I were them I would not go ahead
with the project without that passing. At that point,
I'd give Mr. Heinze as much money as he needs. On the
other hand, if it passes, I think the timing for the
Gas Authority is not 2004. I think we have to play it
out with the major producers to the end of 2004,
cooperate, make that large project into multiple
markets happen. If the producers aren't moving ahead
by the end of 2004, I'd give the Gas Authority the
money they need in 2005. And that sort of wraps up my
personal perspective.
REPRESENTATIVE HEINZE said she heard two messages from Mr.
Thompson: one that the state should go down this road and get
behind both projects; and second, wait another year and then
give the Gas Authority the money it needs.
MR. THOMPSON explained that he was talking about money beyond $3
million for the Gas Authority. He repeated that he believes both
efforts should continue. He believes the Gas Authority will need
far more because if the major producers cannot announce a
project after a successful energy policy act, the producers
should not be criticized because for them, the project is not
competitive with other projects in the world. However, it will
be time for Alaskans to build this project. He thought the major
producers would be willing to sell their gas at that point.
REPRESENTATIVE HEINZE asked, "So, in that case, would you
grubstake it?"
MR. THOMPSON said he has not looked at the full budget to know
what the grubstake is. He said his grubstake is about $1 million
for the next two years. He added as a manager in any one of
these companies, it is foolish to only come in with one project.
These companies always compare two or three projects so
certainly the major producers would understand that the state
needs to look at multiple projects. He stated he opposes funding
LNG in 2004. He said it is important to play out what the major
producers are going to do. He said if the national energy policy
act fails for the Alaska gas pipeline, the state needs to be
prepared to fund a lot more than $3 million for the Gas
Authority.
REPRESENTATIVE FATE said the timeline Mr. Thompson has proposed
is longer than many legislators want to see. Given that, and
having acknowledged that the major producers are in contracting
discussions with the Administration, he asked if Plan A could be
forged on the premise that the national energy policy act will
be enacted, since everything indicates it will. Back-up plans
could also be devised in case the national energy policy act is
not enacted, which would prolong the timeline. He asked why some
presumptions can't be made that would shorten the timeline.
MR. THOMPSON said Pacific Star Energy's Plan A would go into
effect if the energy policy act does pass because there are
positive signs. Negotiations will continue and agreements with
the major producers would be wrapped up by year's end. Early in
the legislative session, the producers and Administration would
propose the agreements for legislative approval. During the last
half of next year, the boards of the directors of the three
major companies would approve moving to the next step.
Permitting would occur in 2005 and 2006 and pipe would be laid
in the ground in 2007 through 2010. Gas sales would begin in
2011. LNG spur lines could be built soon after that, as new gas
reserves are discovered. He advised that he would not sell more
than 3 to 4 bcf per day from Prudhoe Bay due to oil loss but new
gas discoveries could happen once the line is built. Companies
will be exploring and there will be plenty of gas for an LNG
project as well.
MR. THOMPSON said Plan B would kick in if the energy policy act
does not pass. Alaska's view must be more like that of
Indonesia, Qatar, and Malaysia. Those governments get involved
and do what the Alaska Gas Authority is talking about. He said a
New York Times article from the previous day reported that
Sempra Energy and BP came to an agreement on the Tangguh project
in Indonesia. That project is at tidewater so no pipeline is
necessary. Labor costs are one-one hundredth of the costs in
Alaska. He said other governments often help fund the LNG plant
at a zero or very small return. He said when ARCO was in
discussions, governments would help sponsor the LNG plants,
which is why Indonesia is one of the most competitive suppliers.
He said Alaska will have to play more of that kind of role if
the energy policy act does not pass or if the major producers do
not move forward by 2004 or 2005.
REPRESENTATIVE HEINZE asked Mr. Thompson to provide his comments
in written form. He agreed to do so.
CHAIR OGAN asked Mr. Myers to testify.
TAPE 03-52, SIDE A
MR. MARK MYERS, Director of the Division of Oil and Gas,
Department of Natural Resources (DNR), said he would first
address some questions that came up earlier. The first question
was what might happen, regarding in-state use, with the RIK gas
contract. He said that contract has been negotiated but has not
been approved by the royalty board or by the Legislature. That
contract requires a preference for in-state use so it would not
be in conflict with the general state policy of providing in-
state use for gas, provided the state gets at least the end-
value revenue from that gas.
The second question was about oil loss in Prudhoe Bay. If no
additional mitigation was done in terms of additional gas cap
water flood or COreinjection into the reservoir, the off-take
2
would be about a 2.5 bcf per day or up to 500 million barrels
per day in a worst case scenario. If mitigation involves
additional incremental water flood into the gas cap, a CO
2
reinjection into the reservoir,the number is probably closer to
200 million. That presumes the beginning off-take of gas in 2010
or 2011.
CHAIR OGAN noted that depends on where the gas is taken from.
MR. MYERS said that assumes about 2.5 bcf per day coming out of
Prudhoe Bay for the first 18 to 20 years of the gas line. Some
incremental oil would be picked up in the later years, past
2030, from Prudhoe Bay because the economics of operating the
field are better in the off years when production is low. He
said there is a wedge of increased production for time, but
there is a net loss of oil due to the lowering pressure.
The third question was related to the state's rights to produce
gas. MR. MYERS said the state does own its gas. The state can
control gas off-take through its plan of development or plan of
exploration through unitization because it has the lease
contract rights. There is also an implied covenant to market
with the leases. That said, the state cannot just say it wants
its share of the gas out of the field right now - that would
have to be part of a negotiated deal. If there is a market and
the gas is not being produced, the state does have some rights
under its leases under the unitization rules.
MR. MYERS said his presentation would include a review of
Alaska's gas resource reserves, where additional gas might be
found, and what the division knows. He then gave the following
testimony based on a slide presentation.
If you look at this first slide, we have about 19
percent of the U.S. total gas reserves, and that's the
Prudhoe Bay and Point Thomson reserves and some
associated gas in the other fields on the North Slope.
If you look also in those areas in green, there are
other areas that are very under explored or virtually
no exploration has occurred for gas in these
sedimentary basins. Indications are most of these
areas in green are very gas prone and would contain
gas that could be potentially commercialized. You can
see TAPS is on there for scale but you can imagine a
southern gas line route that will go past multiple
lease basins.
So I'm going to walk through the situation in some of
these basins but first I'm going to talk a little bit
about what is there, again, our 35 or 36 tcf,
depending on if you count associated gas in the
fields. Then you have the upside potential, the amount
of gas people estimate might be there and might be
technically recoverable of that amount of gas in place
- a pretty substantial large number - about 160 tcf is
the current estimate. That number, of course, is just
an estimate. It's from a multiple series of estimates
from each basin that's broken out in this slide.
The other unconventional resources are huge in Alaska.
As mentioned, gas hydrates, as Mr. Hanley mentioned
with Anadarko's testimony - a very incredibly large
quantity of gas hydrates exist and some of that
directly underneath Prudhoe Bay and the Kuparuk River
oil fields.
And then the last big category, the unknown, is
coalbed methane and I'll talk a little bit about those
numbers. You can see those numbers are just incredible
in size - you know, 33,000 tcf or so in the hydrates
and 800,000 tcf in coalbed methane. Those are sort of
in place numbers, no economic filtering. The economic
numbers, obviously, would be way less than that but
still, a huge potential gas resource.
If you look at activity in Alaska, very little
activity on the North Slope in fact, basically no
drilling activity has been done specifically for gas.
It's all been related to oil. Gas discoveries have
been incidental to the oil discoveries. We know
there's a significant quantity of gas in NPRA, we know
in the Prudhoe and Point Thomson units, but basically
if you look at the rest of the North Slope, very
little gas has been explored for.
If you look geologically though, in incidental
encountering, almost - this is the geological column
of the North Slope, all the little - on the right are
the red dots listing fields and formations, but it
just shows you that all the way through the geologic
column, there are major gas shales. If you look at the
potential gas in the future, it will come from some of
those units like the Blue Lisburne unit in the
foothills. It's very akin to similar basins that occur
in the Rocky Mountain areas and in British Columbia,
but are virtually untested. Some wells have been
drilled in the foothills that do have gas shales at
these intervals but no modern wells have really been
drilled to test the potential. But certainly the
geology suggests it's there. There's a general
concurrence between the companies doing exploration in
the foothills that the gas, in fact, is there and that
their problems aren't so much exploration risk but
they're commercial risk.
To show you the North Slope situation again, I said no
wells really drilled - I will caveat that with the
exception of Anadarko's gas hydrate exploration test
just south of the Kuparuk and Prudhoe area. But if you
look on this map, this kind of shows you multiple
things. It shows you in green the outline of the
sedimentary basin. The pink and brown colors are
current state leases and federal leases and then the
hatched areas are the coal methane that occur and the
area in the green line is the gas hydrate stability
field where we might expect to find the unconventional
gas hydrates. So on the North Slope you overlay
multiple different types of potential gas. Again, the
primary source here that you would look for is
conventional gas.
As you move further south in the area where you see
that large lease block in the bottom of the green
area, that's in the North Slope foothills. That is an
area that we believe is dominated by gas, it's
dominated by very large geologic structures. It's very
akin to the Rocky Mountains or the British Columbia
over-thrust belt. It is an area where companies have
leased a substantial amount of acreage. Those
companies include PetroCanada, Anadarko, Encana,
UnoCal, Burlington Resources, and some others in
lesser amounts. But they are banking on geologic
concepts primarily for gas. At this point, they have
not drilled any wells on those leases. They have shot
some seismic data. They've re-valued it and done a
series of field works like, as Mr. Hanley said, have
looked at the wells but they have not yet drilled.
They have no plans that we know of for drilling in the
area.
Gas hydrates - I'll just say basically gas hydrates
are methane that's frozen in a crystalline matrix. The
important thing about hydrates is the volumetrics in
hydrates are huge for the given area - about 180
times. A conventional gas volume and a block of
hydrate are the same size.
This just shows you under the existing infrastructure
where the known hydrate accumulations are. The neat
thing about the North Slope is these hydrates exist
underneath the existing infrastructure. The pads and
wells are there. A tremendous amount of data exists on
their location but not a whole lot of data exists on
how we commercially produce those. Anadarko's project
is one of those. BP has a project where they're
looking at it as well, both of these partially funded
by DOE.
CHAIR OGAN asked if they either have to figure out a way to
change the chemical composition of the hydrate to release the
gas or heat it up.
MR. MYERS explained it is the same problem with ice water where
the phase is changed with temperature or the pressure regime.
Changing either one changes the stability field and the hydrates
will come out of solution. Right now most of the data is known
because when the wells are drilled through the hydrate zones,
the wells are drilled quickly to try to case them off so that
the hydrate field is not accidentally destabilized. The bottom
line is that a great deal of data is available and the potential
reserve is equivalent to or larger than the known gas reserves.
He said that looking at any place in the world that will have
large scale hydrate production, it will come from the North
Slope first. Also associated with the 36 tcf number is some free
gas in the shallower zones.
MR. MYERS said he would discuss the area south of the foothills.
The North Slope and foothills have tremendous potential and
contain enough gas to supply multiple projects. Without drilling
to quantify those resources, no proposals can be taken to the
bank. The state clearly needs to stimulate exploration drilling
in the foothills to get a better understanding of the numbers.
Moving south, Alaska has nearly half of the nation's coal. It
underlies about nine percent of Alaska's surface mass. Much of
that coal is of the right rank and properties to produce coalbed
methane. Coalbed methane numbers range to 1,000 tcf or more.
Unless the coalbed methane can be produced economically, that
number does not have a lot of meaning.
MR. MYERS reviewed a map of the Interior basins and the pipeline
corridor and the resources that could be reached along that
corridor. Both coalbed methane and potential gas are in the
Yukon flats, Nenana basin, and the middle Tanana basin. The
state has done an exploration licensing program in several of
these basins. Exploration work permits are required under a
license proposal. Exploration licenses have already been issued
or will soon be issued for over 2 million acres. The licenses
are about to be issued in the Susitna basin, the Nenana basin
and the Copper River basin. He said the few wells that have been
drilled had gas shales in them but the value of those reserves
have not been fully quantified. Without a distribution system,
the economics will always be problematic with the exception of
Fairbanks, where there is a local market for a sufficient amount
of gas.
CHAIR OGAN asked who has the exploration licenses.
MR. MYERS said Andex Petroleum has the license in Nenana; Forest
Oil has two license proposals in the Susitna Basin; Peer Flame
(ph) has one south of Susitna, and Andex and Forest Oil have one
in Copper River. In addition, three parties have shown interest
in a license proposal for Bristol Bay. He noted the Copper River
Basin is dominantly gas prone and the Susitna Basin is an
extension of the Cook Inlet Basin.
MR. MYERS said he would next discuss some of the issues in Cook
Inlet. Of about 11 tcf of total gas reserves in Cook Inlet at
one time, 9 have been produced, so about 2 tcf remain. Most of
the gas in Cook Inlet was discovered in a search for oil. Of the
largest 10 fields, only one was specifically found while
exploring for gas. Cook Inlet has historically had more gas than
market and the gas was stranded, which is why the LNG plant and
a large-scale fertilizer operation were built. That is changing
now. Current usage is about 220 bcf per year. The chart shows
the distribution of that gas use.
REPRESENTATIVE HEINZE asked if all of the Beluga Point electric
generation is based on gas reserves.
MR. MYERS said that is correct; it is all gas generation based
on the Beluga River field. He said that Southcentral's entire
infrastructure is dependent on gas, from energy to its economy.
The whole economic picture will change if there is not enough
gas. He noted the utility market uses much more gas during
certain periods of the winter than the chart demonstrates. He
said historically, there has always been extra gas but now gas
has to be put in storage to meet peak demands. The utility
market pays more for gas than the LNG export or fertilizer
market because the utilities must have it. The demand for
utility gas has spurred more exploration.
REPRESENTATIVE HEINZE said she does not believe people realize
how vulnerable they are.
MR. MYERS said a ten-year supply is in bounds but we need to
find more reserves. As gas supply has dwindled, there has been
more exploration. Most of that exploration is deliberately
focused at market. For example, Northstar's goal is to provide
gas to the Homer market. Ninilchik's goal is to provide gas to
the utility market. He said the question is how long is it
sustainable and what is the reserve base. He said the good news
is that exploration is occurring due to the gas price.
MR. MYERS said one of the key drivers in the long-term supply of
gas for Alaska will be coalbed methane, particularly for
Southcentral Alaska. To that end, the state has shallow gas
leasing and a large conventional pioneer unit in the Wasilla
area. He said it is important that the state find out just how
commercial coalbed methane is. To date, Evergreen Resources has
drilled eight wells and is now testing them. There is a lot of
tension in Alaska because these projects are being challenged
environmentally. The resource sits in an area with a fairly high
population density, by rural Alaska standards. He said it is
important to understand the resource because it could be the
supply to fill the gap for Southcentral Alaska.
MR. MYERS said another potential area for exploration licensing
and leasing are the onshore portions and state water portion of
the Bristol Bay-Alaska Peninsula area. The local communities
approached the state looking for a cheaper supply of energy. The
Administration proposed several activities. He explained the
Alaska Peninsula area was explored up to 1985. That area has
multiple gas and oil shoals but the resource base in that area
has not been quantified. He said if commercial quantities of gas
were found in that area, it is pretty well suited for an LNG
project. The deeper part of the basin is in the federal acreage,
which is under a federal moratorium. The state is not suggesting
that the federal moratorium be lifted but it is planning a lease
sale in the southern part of the basin in 2005. To that end, the
division will be coming to the Legislature and asking for a
small change to its leasing program to allow the division to do
the lease sale in 2005. Under the normal process, the division
would have to wait until 2006 because it would have to introduce
the sale at the first session of the legislative session rather
than the second session.
MR. MYERS said the division will play a role in helping to get
wells drilled by providing incentives. The current EIC incentive
allows the state to pay for part of the cost of data gathering.
A new state program enacted last year allows up to 40 percent of
the cost of the well to be credited to severance taxes. In
addition, the Governor is looking at strategically placed roads
to access certain areas, particularly on the North Slope. In
those areas, it might be better environmentally to create
baseline roads rather than temporary roads or rely on partial
ice roads. He offered to answer questions.
There being no further questions, CHAIR OGAN thanked all
participants and adjourned the meeting.
| Document Name | Date/Time | Subjects |
|---|