Legislature(2003 - 2004)
02/25/2004 03:37 PM Senate RES
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ALASKA STATE LEGISLATURE
SENATE RESOURCES STANDING COMMITTEE
February 25, 2004
3:37 p.m.
TAPE(S) 04-16
MEMBERS PRESENT
Senator Scott Ogan, Chair
Senator Thomas Wagoner, Vice Chair
Senator Fred Dyson
Senator Ralph Seekins
Senator Ben Stevens
Senator Kim Elton
Senator Georgianna Lincoln
MEMBERS ABSENT
All members present
OTHER LEGISLATORS PRESENT
Senator Hollis French
Senator Bert Stedman
Senator Donny Olson
Representative Nancy Dahlstrom
Representative Jack Coghill
Representative Hugh Fate
COMMITTEE CALENDAR
^OVERVIEW:
^MIDAMERICAN ENERGY HOLDING CO.
Presentation by David Sokol and Bob Sluder
CHAIR SCOTT OGAN convened the meeting of the Senate Resources
Standing Committee at 3:37 p.m. All members were present. In
addition, Senators Olson, French and Stedman and Representatives
Coghill, Fate, and Dahlstrom attended.
SUMMARY OF INFORMATION
OVERVIEW PRESENTATION: MIDAMERICAN ENERGY HOLDING CO.
MR. DAVID SOKOL, Chairman and Chief Executive Officer of
MidAmerican Energy Holdings Company, provided members with a
description of MidAmerican. It is the second largest pipeline
company in the United States with $19 to $20 billion in natural
gas assets. It owns 18,000 miles of interstate pipeline assets.
Berkshire Hathaway, a New York Stock Exchange Company, owns 80
percent of MidAmerican. Berkshire Hathaway owns about $200
billion in assets, has a large amount of cash on hand, and has
virtually no debt. Warren Buffett sits on the board of
MidAmerican; he is supportive of this project.
In regard to what MidAmerican will bring to the table, MR. SOKOL
told members the Alaska gas line will be an open-access common
carrier pipeline that will handle any shipper that wants to
purchase or ship natural gas to the Lower 48 in a non-
discriminatory manner. MidAmerican is prepared to commit all of
the equity necessary, along with its two partners, to construct,
own, and operate the facility. MidAmerican has the most
experience in North America with a large bore pipeline. It
recently expanded its Kern River pipeline by 1 bcf/day. Due to
the recognized need for the project, that 720-mile project was
permitted in nine months, received full FERC certification in 11
months and was constructed in 8.5 months. It was built on time
and 10 percent under budget. If MidAmerican cannot provide the
lowest cost tariff to the shippers, it will not construct or own
the pipeline.
MidAmerican understands the importance of local involvement and
content. It has committed to using local businesses and people
on all of its projects to the greatest extent possible and will
do so in Alaska.
MidAmerican will be a FERC regulated owner/operator of a
pipeline that must provide equal access to all participants. The
project will move forward more quickly because several
transactions can be worked on simultaneously. He noted the
producers want a number of issues resolved, and that must occur
before the project moves forward. However, the time for the
pipeline is now because of the best financial climate in the
Lower 48, reasonable pricing, the need for the gas, and a
supportive Bush Administration.
MR. SOKOL said that he, Mr. Sluder, Mr. Dunn and Mr. Kroloff
were present to introduce themselves and were not asking for
anything of the Legislature.
MR. SOKOL and MR. SLUDER provided the following information in
response to members' questions.
MidAmerican will have two roles: ownership, operation and
construction of the asset and as the commercial party putting
the entire transaction together. MidAmerican will identify the
pipeline itself - from Prudhoe Bay to the Yukon border, which
will connect to a new pipeline that connects with the Boundary
Lakes Foothills' assets of TransCanada. The TransCanada pipeline
will be expanded with looping and compression for gas delivery
in the Lower 48. That structure provides the lowest cost of
delivering that gas to develop the lowest cost tariff for
shippers. Using that infrastructure will also allow markets of
gas throughout the Lower 48 to directly participate. Purchasers
will be able to directly buy gas and get it delivered to their
market, rather than buy it in Chicago and transport it from
there.
MidAmerican's job is to own and operate the pipeline at the
lowest possible cost so that customers can buy gas at the lowest
possible price and producers can netback the greatest to
themselves. It will not compete with its customers by buying gas
in Alaska or shipping capacity.
MidAmerican is already educating gas purchasers in the Lower 48
about the benefits this pipeline will bring in moderating gas
prices there. It will also create a market for local
distribution companies, high volume purchasers and states to buy
capacity on the pipeline. Genuine open access will make this
pipeline the greatest value for the state and will enhance its
economy. By creating a market in the Lower 48 that recognizes
the value of holding capacity on this system, MidAmerican hopes
to have 30 to 50 shippers on this pipeline. That is important
because the potential users of this pipeline do not know the
advantage of signing up and buying capacity now. If all of the
capacity is owned by a small number of companies, when an
exploration and production company finds gas in Alaska, it could
only buy access to the pipeline from a small number of
companies. However, 50 shippers would create a natural market
where capacity would trade between those parties. Shippers could
subcontract for more or less capacity than they need at that
time. That is important to credit stability and to expand the
economic opportunities in Alaska. MidAmerican will participate
in the process of getting customers to sign up and pairing them
with producers who buy and sell gas. MidAmerican would only
participate, contingent upon approval from the state and FERC.
if a party is necessary to close the gap.
The Alaska gas line will be a contract common carrier so that
when the pipeline is envisioned, an open season will occur
during which companies will bid on capacity rights. MidAmerican
is envisioning 4.5 bcf/d. If the companies bid upfront for 5
bcf/d, MidAmerican will engage in a process to get that group to
sign firm contracts on 4.5 bcf/d. Those shippers will own the
capacity right for 25 years. That right can be sold or sublet.
If additional shippers want access to the pipeline, it will be
designed with up to 1.5 bcf/d expansion capacity through
compression, which can be done incrementally.
The contracts will have two components. The majority and most
important part of the contract is a demand component, or the
ship or pay provision, in which the shippers pay for the
capacity whether they use it or not. The second component is a
commodity component that is not paid unless the commodity is
shipped. The ratio is about 95 to 5.
MidAmerican's rate of return would be regulated by FERC, which
ultimately sets the tariff. The components of calculating the
tariff are the cost of construction, the cost of financing,
operations, fuel used for compression, insurances, fees, and
taxes. Any benefit the state negotiates, such as a structured
payment in lieu of taxes, goes to the tariff, not to
MidAmerican. MidAmerican's rate of return is regulated so that
if something occurs to allow MidAmerican to make more money, it
benefits the shippers. The rate of return ranges, depending on
the leverage and the risk profile of the project. The Alaska gas
line will clearly be viewed as a high-risk project. MidAmerican
is encouraging greater leverage, which will affect that, but the
debt benefits make it the right thing to do. That rate of return
will be in the 12 to 14 percent range, assuming MidAmerican
performs.
MidAmerican has an extremely good track record of using local
hire; its most recent projects were in Utah and Nevada, where
local hire ran about 60 to 70 percent. Alaska probably does not
have enough union contractors to do all of the work on the gas
pipeline. Local hire goes beyond the job issue; Alaska has some
of the most qualified consultants who have been looking at this
project for 25 years. MidAmerican plans to take full advantage
of that Alaska expertise. In addition, MidAmerican plans to buy
needed materials locally when possible to keep transportation
costs down.
Regarding state ownership as a partner in the gas line,
MidAmerican believes the risk level for the state is probably
too high. However, the state should seriously consider ownership
of shipping rights for royalty gas. The state might consider
buying 1 bcf/day to provide enhanced access to new participants,
which would be the greatest return on investment the state could
provide.
MidAmerican is not in conflict with ANGDA and views ANGDA as a
customer. To the extent an LNG plant and the pipeline to Valdez
are economic, MidAmerican would make them more so because ANGDA
could buy capacity for the first several hundred miles for less
than building a line itself. MidAmerican assumes there will be
customers to take gas off for Fairbanks and Cook Inlet.
MidAmerican would not participate in those actions unless asked
to do so by the state.
MidAmerican anticipates completing stranded gas negotiations in
mid-March and delivering gas to the Lower 48 by 2010.
Construction would begin in 2007. That should give any Cook
Inlet or ANGDA project plenty of time to know that MidAmerican's
project is financed and moving forward. MidAmerican has looked
at some of the estimates for a spur line that run several
hundred million dollars. The size of the pipeline will be a
function of the market the gas is going to; MidAmerican sees
Anchorage and an LNG facility as making economic sense.
TransCanada and the Canadian government are anxious to go
forward with this project but nothing will happen unless
everything goes forward together with back-to-back agreements so
that the shippers know their costs and exactly when the pipeline
will be finished. In addition, the project could not be financed
unless the agreements are in place. The producers want to sell
their gas but at their time and price. Once consumers in the
Lower 48 are prepared to sign up for shipping capacity, the
producers will have to start negotiating to sell the gas or buy
their own shipping capacity. The producers will do what is in
their best interest but, once an outlet for the gas is
contractually obvious, they will sell.
MidAmerican has heard an estimate for a bullet line of $19 to
$20 billion from the producers but it does not believe that is
the most economical approach. The first component is a gas
conditioning facility on the North Slope; that would cost $2 to
$2.5 billion. MidAmerican is prepared to build and operate that
facility but did not include it in its proposal. It makes sense
that the producers control that facility because they will also
be able to use capacity on the TAPS line to move those liquids.
The pipeline to the Yukon border will cost $6.3 billion to
construct. Another 1,000 miles of pipeline will need to be built
from the Yukon border to the Boundary Lakes region of Alberta.
The entire project should cost $5 to $6 billion less than going
into Chicago, which translates to 50 cents per mcf of delivered
gas, which must be saved to make this pipeline viable. In terms
of tariffs, MidAmerican believes this pipeline can deliver gas
in the range of $3.25 to $3.50 per mcf, an extremely competitive
price in today's market.
The pipeline will be 48 inches in diameter. It's possible the
pipe length will be 80 feet on the northern areas but 60-foot
lengths are more likely. MidAmerican will try to do more than
the single random 40 foot to save on welding.
MidAmerican and TransCanada have a very good relationship.
TransCanada has spent in the vicinity of $400 million on this
project for right-of-way work in Canada and other work in
Alaska. Whichever way the state chooses to go, TransCanada wants
to be a player. The Canadian interconnection will happen whether
the project is a bullet line to Chicago or not because the rules
are different at that border. That pipeline will have to go
through the Canadian environmental and regulatory processes so a
contractual relationship will be necessary regardless of whether
MidAmerican or the producers own it. MidAmerican believes
TransCanada is the most competent party to own and operate that
pipeline. If MidAmerican had to build a bullet line through
Canada, that permitting process would take several years. If
MidAmerican chose not to use TransCanada, it would be permitting
an entirely new right-of-way, which would be prohibitive time
wise.
The shippers will pay three tariffs. The first is on the portion
from Prudhoe Bay to the Yukon border. The second tariff will be
on the new Canadian piece of pipe and the existing Foothills
pipeline. That rate will be similar to Alaska's and will be put
into a firm foundation. There will also be smaller, commercial
tariffs for a buyer that wants to move gas to Nebraska, New
York, or elsewhere. Those tariffs are already established.
The 25-year contracts with the shippers will work much like an
office building lease. Parts of the contract, to be determined
by FERC, will not be fixed for the entire period. Although the
price will not remain constant for 25 years, the shipper will
have a 25-year right to the capacity and a known pricing
formula.
MidAmerican does not believe a bullet line makes sense and would
argue that mixing producers with pipeline owner/operators is
problematic because of potential conflicts. Those conflicts can
be sorted out but that arrangement often gives the wrong
impression to other exploration and production companies.
TAPE 04-16, SIDE B
MidAmerican normally does not have partners in its pipelines but
it believes having business partners that know Alaska is of
value. Berkshire Hathaway has had a long relationship with CIRI.
Pacific Star Energy encompasses CIRI and the other Native
corporations; CIRI felt it was a logical additional partner. The
19.9 percent was established based upon U.S. tax law: a company
must have 80 percent ownership to take advantage of more rapid
depreciation. 20 percent of equity in this project could equal
$800 million.
MidAmerican has agreed to complete negotiations with the
Stranded Gas Committee by March 12. The contract will then be
available for public comment and legislative consideration. That
process must be completed in that timeframe so that MidAmerican
can complete about $14 million of environmental work this
summer, otherwise its overall schedule will be delayed one year.
The issue to be discussed under MidAmerican's proposal is the
state's tax regime. Most of the negotiations will be about
timelines and dealing with rights-of way and permit
applications. The producers' negotiations will be more complex.
Regarding LNG that will be shipped to the United States over the
next 10 to 20 years, most of it will come from areas where an
above ground pipeline was built near to an LNG facility so the
pipeline is an almost inconsequential cost of the LNG process.
The uniqueness of the Valdez project is the expense of that
interconnection. However, MidAmerican has no concern with 1 bcf
per day going to Valdez to be processed into LNG. MidAmerican
will be able to get 6 bcf per day off of its 48 inch line with
compression - the first 1 bcf will come off after a few hundred
miles. There will be additional stations north of Fairbanks to
accommodate the additional 1 bcf.
Producers around the world typically want to control the
conditioning facility because they are best suited to deal with
the products they want to bring off that gas. There are two
places to put a conditioning facility - in Alberta or the North
Slope. MidAmerican believes the better place is the North Slope
because of the existing infrastructure. Use of the Mackenzie gas
in the tar sands may have changed Canada's interests in this
arena.
Regarding the need for a dehydrating plant on the North Slope,
an existing conditioning plant removes CO, nitrogen and water
2
but it would need to be expanded to treat basic contaminants. A
liquids processing treatment plant would remove butanes,
hexanes, and heavy gases, and liquefy them for injection into
the oil pipeline. To transport those heavy liquids in the gas
line would require a wet-phased pipeline. MidAmerican plans to
run a dry gas pipeline. The gas will be a little hotter than
normal but within normal specifications and will be suitable for
heating fuels for homes.
MidAmerican has an AAA credit rating and built a pipeline
closest to this size within the last 10 years. Its relationships
with FERC, the Department of Energy and the EPA is very good.
The pipeline's time has come - the economics and market
conditions came clear a year ago. The energy markets do not
stand still. There is clearly a supply and demand balance issue
in the Lower 48 that will get resolved with or without Alaskan
gas. MidAmerican believes this project is the best resolution as
the economic benefits will remain within the U.S. and it will be
more secure. However, if gas prices continue to rise, demand
will diminish and move offshore. The window of opportunity to
commercialize Alaska's gas is 18 to 36 months and it will take
every minute to do it. Purchasers would prefer to buy from
Alaska rather than foreign sources. The time to sign long-term
agreements is now.
MR. MARK KROLOFF, Chief Operating Officer of Cook Inlet Region,
Incorporated (CIRI), endorsed the comments made by Mr. Sokol and
Mr. Sluder.
ADJOURNMENT
NOTE: The meeting was recorded and handwritten log notes were
taken. A copy of the tape(s) and log notes may be obtained by
contacting the Senate Records Office at State Capitol, Room 3,
Juneau, Alaska 99801 (mailing address), (907) 465-2870, and
after adjournment of the second session of the Twenty-Third
Alaska State Legislature this information may be obtained by
contacting the Legislative Reference Library at (907) 465-3808.
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