Legislature(2003 - 2004)
03/31/2004 03:35 PM Senate RES
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* first hearing in first committee of referral
+ teleconferenced
= bill was previously heard/scheduled
+ teleconferenced
= bill was previously heard/scheduled
ALASKA STATE LEGISLATURE
SENATE RESOURCES STANDING COMMITTEE
March 31, 2004
3:35 p.m.
TAPE(S) 04-33, 34
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 Gretchen Guess
Senator Con Bunde
Representative Beth Kerttula
Representative Eric Croft
Representative Ethan Berkowitz
COMMITTEE CALENDAR
CS FOR HOUSE JOINT RESOLUTION NO. 34(FSH)
Requesting the United States Department of Agriculture and the
United States Department of Labor to extend Trade Adjustment
Assistance benefits to Alaska salmon fishermen; requesting the
United States Congress and the United States Department of
Agriculture to extend additional disaster and price support
benefits to Alaska salmon fishermen; and requesting the United
States Department of Commerce to establish a Trade Adjustment
Assistance program specific to commercial fishermen.
BILL POSTPONED TO 4/2/04
Alaska Stranded Gas Applications
Mr. Kirk Morgan, Vice President and Project Manager, Alaska
Gas Transmission Company (AGTC), MidAmerican Energy Holding
Co.
Mr. Joseph P. Marushack, Vice President, ANS Gas
Development, ConocoPhillips Alaska, Inc. - representing the
producers
Ken Konrad, Senior Vice President, Business Unit Leader,
BP Exploration (Alaska), Inc.
Mr. Mark Hanley, Manager for Public Affairs, Anadarko
Petroleum
ACTION NARRATIVE
TAPE 04-33, SIDE A
CHAIR SCOTT OGAN called the Senate Resources Standing Committee
meeting to order at 3:35 p.m. Present were Senators Ralph
Seekins, Thomas Wagoner, Fred Dyson, Kim Elton, Georgianna
Lincoln and Chair Scott Ogan. Senator Ben Stevens arrived at
3:40 p.m. Chair Ogan announced that Mr. Morgan, AGTC, Mr.
Marushack representing the producers, and Mr. Hanley, Anadarko,
would speak before the committee and stated:
^ALASKA STRANDED GAS ACT APPLICATIONS
The purpose is not to Monday-morning-quarter-back the
events of last week, but to be more forward looking on
where we're going, not where we've been and to try - I
think it's imperative upon the Legislature to consider
whether or not we should make a policy call on what's
in the best interests of the state - whether it's to
have a producer owned and operated pipeline or an
independently owned and operated pipeline and what do
both groups bring to the table - the pluses and
minuses and advantages and disadvantages....
MR. KIRK MORGAN, Vice President and Project Manager, Alaska Gas
Transmission Company, thanked the chair and committee for
inviting him to share his views on the proposed Alaska gas
pipeline project and AGTC's Stranded Gas Development Act
application. He stated that he is a former employee of Northwest
Alaskan Pipeline and, in the early 1980s, coordinated all the
field programs and acquired the estimated 4,000 permits to
execute the project. After it was suspended in late '82, he
continued to work with Northwest Energy Company, which was
acquired by the Williams Companies. Since then, attempts have
been made to restart the project and reconstitute the old Alaska
Northwest Natural Gas Transportation Partnership. Most recently,
an attempt was made in 2001, but the attempt was not successful.
Today, he is back as a result of some of Williams' assets being
acquired by MidAmerican Energy Company. MidAmerican believes
that there is a growing supply/demand imbalance in the Lower 48
states from new power generation, general economic growth and
conversions to natural gas (relating to the Clean Air Act). New
development, like the Alberta Oil Sands, requires an immense
amount of gas to produce, for instance. At the same time, the
Lower 48 supply basins, except the Rocky Mountain basin, have
been declining.
Even the western Canadian sedimentary basin, which
really fueled the growth of the Lower 48 for the last
one or two decades is now in decline. The initial
discoveries are smaller; the drilling costs are higher
and the decline rates have increased, as well. So,
although you have record amounts of drilling that
occur in western Canada, they're just barely able, in
fact, they are not able to keep up with production and
certainly not able to keep up with the export volumes
to the Lower 48.
Predictably then, you see higher gas prices,
substantially higher gas prices. They've doubled in a
couple of years and that's contributing to at least a
level of demand destruction in the chemical areas - in
the aluminum manufacturing, in fertilizer businesses
and that's certainly not healthy for the U.S. economy.
So, the market has recognized that and there are now,
since the famous Greenspan proclamation, there are now
more than 40 proposed liquefied natural gas import
terminals in the U.S. and Mexico that together
represent more than 30 BCF of potential new supply
that would come to the U.S. That is really what drives
our belief that the timing for the Alaska natural gas
pipeline is critical - it's important and it is now.
Most of those LNG terminals do not propose to be in
service until, perhaps, 2008 or 2009. Those are
probably optimistic schedules, but it's important that
if Alaska gas is to be commercialized, it be
competitive with the LNG resources that are being
proposed to come to the United States. Alaska gas is
widely viewed by most people that forecast gas to be
over the horizon, to be something in the 2016 or 2018
time period. Our view at Alaska Gas and MidAmerican is
that that schedule needs to be accelerated and that
Alaska gas should compete head on head with the
proposed LNG import terminals.
The project, however, has started and stopped a number
of times and it really suffers from a lack of
credibility. We have believed since we came up to
Alaska that Alaska really needs a development partner
that will be fully aligned with the interests of the
State of Alaska and will actively push this project
forward to an early in-service date, which we proposed
to be December 2010. So, that alignment is very
important and in terms of what are the state's
interests, we feel like independent ownership of the
gas pipeline is in the state's interests.
We think that market structure matters and it matters
a lot. We have extensive experience in California -
and what you saw there contributing to an energy
crisis was a broken market structure. Hopefully, we've
learned some lessons from California about market
concentration and market power and transparent markets
and we think that an independently owned pipeline will
enable functional gas markets to occur.
Our proposal is to utilize existing down stream
pipelines so that we can access diverse markets across
Canada and the United States. It's a fundamental
difference between our proposal and a bullet line to
the Chicago area. We think that having greater market
access does a couple of things. It allows there to be
more shippers on the pipeline whether they're LDC
shippers, whether they're electric generators - large
industrials, whether they're marketers. If you have a
broader market reach, you can have more market
players, more shippers on the pipeline. That, in turn,
enables us to spread the risk of holding pipeline
capacity.
It occurs to us that if the producer group owns the
gas, they own the pipelines. Just Monday, natural gas
intelligence released the top North American gas
marketers and between the three North Slope producers,
they market 40 percent of the gas in North America. To
us, that seems like an invitation for excess market
concentration and market power and we think an
independent pipeline is in the interest of the state.
The other significant interest is to accelerate the
development of the project. We've proposed an in-
service date that is fully five years before you might
expect a gas pipeline to be developed by the producer
group. That's for a number of reasons. We believe that
the producer group has other interests around the
globe - both in LNG imports and McKenzie gas and that
they have to work out where to deploy the capital
necessary and in what order to bring Alaska gas to
market. From an independent pipeline perspective, we
have no interest other than to bring the gas to market
as quickly as possible at the most competitive rate to
commercialize the project. The meeting we had last
Monday with the governor, I think the producers
outlined a number of prerequisites to development and
they included getting a federal energy bill, getting a
Stranded Gas Development Act contract, getting a
favorable Canadian regulatory regime, which would
enable somebody to build a pipeline outside of the
Northern Pipeline Act, which conveys exclusive rights
to TransCanada and they indicated they needed to
pursue lower costs. The proposal is a one step at a
time proposal that would result in the project being
in service some time in the 2015, 2016, 2017 time
frame. We feel, as I've mentioned, that we could do
substantially better than that in accelerating the
timing of the project.
Alaska ownership in the pipeline is another desire
that's been expressed to us and when we came to
Alaska, we took that advice and we went out and
developed a partnership that does have a 19.9 percent
Alaska Native corporation ownership. So, we think
that's also an important distinction.
We feel like we are very well aligned with the
interests of the State of Alaska and that this is a
very large, complex project. It has many development
components; it will require a lot of money and time to
develop the project. But, the marketplace needs to
receive this project as serious and we've asked the
State of Alaska to make a serious commitment. We've
asked to be their sole development partner. That may
mean different things to different people, but we've
looked at potentially investing $100 million over the
next two years to advance this project and what we
don't want to have happen is for the state to turn
around and start providing incentives to other
parties, whether they be SDA contracts, whether they
be shipping commitments or other commercial ways to
support a competing project. If we have put that money
at risk and successfully developed a project, we feel
like we should be the ones who are allowed to build
and operate that project.
Having said that, there has been a tendency for
everybody to jump to the final answer. What is it
going to take to commercialize the project? And quite
simply, that is not knowable at this time. We didn't
come to Alaska with a fully baked project ready to go.
It will take three years worth of development work to
develop a commercial proposal. Our concept is to
develop the lowest cost tariff to market by number
one, avoiding construction of a new bullet line to
Chicago, for starters. That will drop about $5 billion
off the capital expenditure for the project, but also,
by utilizing these existing downstream pipelines, you
create more efficiency. You drive 4.5 BCF of gas on
the pipelines that have existing available capacity.
By increasing the throughput on those pipelines, the
unit cost or the cost per decatherm can be reduced and
we think that's an important component to saving
costs.
The integrated system approach is also more expedient,
because you don't have to build another 1,500 to 1,600
miles of pipe; you don't have to get into a legal
challenge with the Canadians over exclusivity on the
Canadian part of the line. The integrated approach,
again, as I mentioned earlier, will access more
diverse markets. Rather than just dropping gas off in
Chicago, it will serve the West Coast, the mid-
Continent, the East Coast, the Canadian markets
throughout the Pacific Northwest. That's important,
because when you bring in 4.5 BCF of new supply, there
is going to be a market response. If you deliver that
all to one market, that price response will be more
dramatic - it will lower the prices dramatically. By
making that gas and delivering it throughout the U.S.,
we feel like the price response will be less dramatic
and that's important to maintaining the highest
possible netback at the wellhead.
We have proposed a project plan for the next two years
and that involves validating the construction costs.
There's been a lot of work done on this project, but
we are aligned primarily on work done by TransCanada
over the last couple of decades. The most recent cost
estimates that we have are 2002. There's a lot of
things that have changed since then - the dollar has
declined significantly. A lot of the pipe and steel
plate compressors could be purchased overseas for this
type of project equipment and we need to assess the
impact of that. We need to assess what's happened in
just the last quarter with steel prices. We need to
know that the capital costs that we've proposed are
valid and that is something that we plan to undertake
this year.
There is also a wide range of environmental and
engineering studies that have to be performed so that
we have confidence in the number and that when we go
to commercialization, the market is not just signing
up on, you know, maybe it's close to $6.3 billion - we
have to know that. We intend to put in tariff
provisions that include capital discipline so that
there are rewards or penalties for missing that
number. So, it's a very important number to us.
There's also a lot of environmental work that is done
that is necessary to support the FERC filing. In our
case, that was proposed after two field seasons or
some time after had we gotten started on time. Some
time after the 2005 field season we'd be filing with
FERC. They require about 18 months to process that and
that would allow us to get a financial close and a
final certificate for the project in the first quarter
of 2007.
There are a lot of other elements as far as
negotiating agreements in Canada to make sure this is
a seamless project all the way from Prudhoe Bay to
market and we have to lock down a lot of variables. We
need to lock down what the tax regime will be; we need
to lock down what the financing costs would be. We
have been discussing the possibility of getting tax
exempt financing either through the Alaska Railroad
Corporation [ARRC] or other entities to combine with
the loan guarantees that we hope will be included as
either part of the energy bill or a separate rider.
The cost of capital is something that is very
important. Interest rates are very important to the
ultimate tariff and when you hear us being criticized
for not offering a proposal, it's because there are a
lot of variables that we want to lock down and make
sure that we have base case models with assumptions in
them, but we need to validate all of that.
We also need to validate the downstream tariffs. When
you talk about an approach that utilizes the existing
infrastructure that's there, that's many pipes and
there should be incentives offered by those pipes to
drive this kind of new volume on to the project. There
are things like identifying operating costs and
project labor agreements, in negotiating shipping
contracts and helping to facilitate the gas supply
requirements. It's a lot of work; there's a lot of
risk; there's a lot of variables and that's what we
were proposing to do in our project plan.
There's also the market side, knowing that the cost of
gas plus the tariff, the cost to move the gas, will
clear the market. Predicting gas prices is certainly
something that doesn't have a consensus and the
project needs to be economic in a wide range of
assumptions. Some of the things that are critical to
assessing the predictive modeling that we've been
doing are a variety of demand growth scenarios,
various levels of market penetration by the LNGs.
Certainly, not all 40 are going to be built; some
amount will.
But, what happens if 5 BCF or 10 BCF is built? What
does that do to market pricing overall? What does the
decline in domestic production do to price? The 13,000
wells that are drilled in Canada every year have a
decline rate of between 22 and 25 percent. When the
Alaska gas line becomes a certainty, what will that do
to those drillers' allocation of capital? Will they
quit drilling? Once the pipeline is built, that gas
will flow and if producers stop drilling or reduce
drilling when we begin construction, there will be a
large decline in the volumes available for western
Canada. So, we have to assess that and generally
assess the impact on prices that this large volume of
gas will have. So, that is part of the development
effort, as well. It's a long-term development process
and it involves significant expenditures. So, where we
came to in all of that is really there are two
principles that are important - the policy issues that
have to be dealt with by the state and the first one
is an independently owned pipeline in the state's best
interest. We feel very strongly, for the reasons I
have stated, that it is. We can accelerate the
construction schedule. We will limit the amount of
market concentration or market power that is held by a
new party and the number of shippers that we envision
getting in our marketing plan will allow the risk to
be spread of holding that capacity and allow for gas
markets to function more properly.
The second question is the period of exclusivity that
we have asked the state for. We've called it by
different names; we've probably made a mistake using
that word, but we want to be the state's sole
development partner. We don't want them to be
assisting in any meaningful manner competing projects
and that's because the costs to do this development
are so high and the risks are so high, as well.
Exclusivity is not new. The ANGDA [Alaska Natural Gas
Development Authority] partnership granted exclusivity
to the ANGTS [Alaska Natural Gas Transportation
System] partnership; TransCanada has exclusivity on
the Canadian part. That exclusivity has given those
partners the comfort that was required to spend the
$400 million in Alaska that was spent in the early
80s. So, it is not a new concept and we think that if
you want the project to be accelerated, it's essential
to us to have some level of protection for our
investment.
Unfortunately, that's where our negotiations have
broken down. As you know, we've withdrawn our Stranded
Gas Act [SGA] application. We made it clear that that
investment protection and exclusivity was crucial to
us moving forward. We are now on the sidelines, but we
do continue to believe that the project is essential,
both for the Lower 48 and for Alaska. We believe that
the timing is critical, that it needs to be initiated
now, that it needs to be taken seriously in the
marketplace. And, if there is a path forward that
involves Alaska Gas Transmission and MidAmerican
Energy, we'd be willing to listen to what that path
forward is. Unfortunately, we're unable to get there
with the state at this time. That concludes my opening
remarks. I'd be happy to invite your questions now or
after the other presenters.
CHAIR OGAN noted that all committee members were in attendance,
as well as Representative Eric Croft and Senator Gretchen Guess.
He stated that commercializing the state's gas is one of the
Legislature's biggest priorities. As chair of the Energy
Council, he has found one of its dominant discussions confirms
that both market and price are there.
So, the timing is very good. I think we, as a state,
need to make a statement and maybe it's the
Legislature that makes the statement, that I believe
we appear dysfunctional to the market and to
investors.... And it's time that we have some
leadership and give some clear direction....
SENATOR KIM ELTON asked what is a reasonable timeline for
establishing an appropriate tariff level.
MR. MORGAN replied:
There are representative tariffs today. I think
there's been a proposal submitted to the state that
shows a tariff from Prudhoe Bay to Alberta Hub of
$1.10. That's what we need to validate. We certainly
have replicated that rate model. We don't have any
reason to believe that rate model is inappropriate,
but there are a lot of assumptions in a rate model.
Billing determinants are one and that's one difference
between our proposals. We're proposing initially a 4.5
BCF per day project compared to a 4 BCF project.
Generally speaking, you get economies of scale out of
increasing the size of the project in that you would
expect to have lower unit costs - all things being
equal.
The financing, as I've mentioned, is extraordinarily
important. On the project that we just completed at
Kern River we lowered rates by 11.4 percent on the
first day of operation because of successful
financing. We were able to close financing on almost
$1 billion of debt at 4.89 percent - compared to the 7
percent we had projected in our tariff. All those
benefits are straight pass through; there's no benefit
to the company other than it makes a much more
competitive pipeline and that's always to the benefit
of the company.
What interest rates are going to be when we get the
financing? We won't know until we have daylight on the
two issues - the loan guarantees and the possibility
of tax exempt financing. But, what is in the model is
7 percent interest rates and there's an ability to do
better than that.
On other things like taxes, we were engaged in the
Stranded Gas Act negotiation - that's another large
component, operating costs are a large component,
capital structure and return on equity. When we get to
a point of sitting down to negotiate with shippers to
see what the tariff will take to clear the market and
how the risks of holding capacity should be allocated,
it's not just necessarily a low tariff, it may be a
friendly tariff. It might be occasionally there are
excess volumes that could be transported and who gets
the revenue off of that. We've got revenue-crediting
mechanisms on other pipes. There are a number of
issues. It would probably be when we file with the
FERC [Federal Energy Regulatory Commission] - we'll
have a proposed tariff there. That was planned to be
in the beginning of the fourth quarter 2005, but we
need to have two full field seasons before we can be
in a position to make the environmental and
engineering representations in the FERC filing. What
is occurring here is we are standing a very high
chance of losing the 2004 field season and all of the
dates would progressively move back.
SENATOR FRED DYSON said the McKenzie Delta pipeline is estimated
to bring 1 BCF to market and some think that "will get soaked up
in the tar sands." British Columbia thinks it is going to be a
major gas producer and he enjoyed Mr. Morgan's comments on how
the Canadian producers will affect the market.
MR. MORGAN responded that the oil sands in eastern Alberta is a
big market and maybe McKenzie gas would get "soaked up there."
Maybe the project will need more gas.
It probably depends on the price of oil and how
aggressively the tar sands are developed there. The
other Canadian market is really power generation.
Except for a small amount of renewables, most of the
base power generation is gas fired these days. But, as
a practical matter, most of the gas we anticipate,
Canadians will supply themselves, and most of the gas
will be marketed in the Lower 48. But, we do see a
decline in the amount of export capacity that will be
available from Canada to the Lower 48.
SENATOR THOMAS WAGONER noted that MidAmerican had asked for a
five-year exclusive contract and asked how a spur line off the
main line going into the Cook Inlet Basin played into that
request.
MR. MORGAN replied:
As I mentioned, we probably made a mistake using the
exclusive word and not defining what that meant, but
we have been clear with the administration all along
that the exclusivity provisions that we sought were
with regard to a Prudhoe Bay to the Yukon border
pipeline. We have no interest in seeing the efforts of
the Port Authority or ANGDA get derailed. Frankly,
there's nothing that we're doing with the Alaska
pipeline that would in any way disturb the plans of
those two projects. Exclusivity did not apply to in-
state uses at all. It was for the line from Prudhoe
Bay to the Yukon border.
SENATOR WAGONER asked how knowing the state has first call on
the 12.5 percent of their royalty tied into demand for gas in
the pipeline.
MR. MORGAN replied:
We met with the Port Authority and understand their
plans. It's that the Alaska Highway Gas Pipeline was
big enough by itself to take on without trying to make
it bigger; and so we've solely focused on that. But,
we've also assured the Port Authority that there's
nothing we were doing that would in any way conflict
with their ability to tie into the pipeline at Delta
and bring gas to Valdez, to Anchorage, to Kenai,
wherever it needed to go to. It is an open-access
pipeline. It is FERC regulated. We provide both
receipts and deliveries to anybody who wants it on a
non-discriminatory basis. So, we don't actually know
until we hold what's called an open season where the
market will be. But, if the Port Authority were to
take a B or a B and a half of gas, that would
fundamentally change the design of the pipeline. You
want to keep the economies of scale the same on the
Canadian end. So, it might be that we're looking at an
immediate expansion case to expand the Alaska end of
the pipeline to accommodate the Port Authority.
CHAIR OGAN said an independent only makes money on the tariff
and asked him what would stop him from trying to build as much
profit as possible into the tariff.
MR. MORGAN replied:
Well, the project has to be competitive. We make zero
if we can't commercialize the project and so our
interest is in getting the lowest-cost commercially
viable tariff so that it will aide in getting shippers
to take capacity on the pipeline. The tariff will be
set by FERC who is charged with insuring that there
are just and reasonable rates. But, you know, if we
fully develop the project and somebody came in and
says we'll do it for 1 percent less on return on
equity, that would be unfair to the developer, in our
view. We would set out from the beginning what our
rate assumptions are and the state or the shippers -
anybody is free to intervene at FERC - and say you
guys are making too much money. But, I don't think we
are or we're not proposing to. We're looking for a
very low-cost commercially viable project.
CHAIR OGAN asked if FERC adjudicates the tariff of this
pipeline, would it be set by agreement or by FERC.
MR. MORGAN replied:
There [are] generally two types of rates. One is a
recourse rate, which is set by FERC and approved and
it has rate design principles in it and it's available
to any customer on a non-discriminatory basis. There
could also be negotiated rates, so that we sit down,
whether it's with the State of Alaska or with an LDC
[local distribution company], with a large electric
generator or industrial customers or the producers.
The FERC allows for parties to sit down and negotiate
a rate. Those rates are then, at least the recourse
rates, are subject to periodic review by the FERC to
insure that they are just and reasonable.
SENATOR GEORGIANNA LINCOLN asked what in his negotiations with
the state led him to believe that a little more time for review
of his proposal by his company and the state wasn't needed to go
forward. "Also, when you speak about being on the sidelines,
does that mean that you would be willing to come back into the
project, if the two negotiators can come back together again?"
MR. MORGAN replied:
The process that we started with was not the Stranded
Gas Act application. We filed a development proposal
with the state - a joint development proposal - back
in December - asking us to actually be partners - to
share development costs - for the state to be an
equity owner in the pipeline. That was not possible
because the state didn't have funds appropriated
through the Legislature and felt like maybe it didn't
need to be in the developer role. So, we amended our
proposal to say, well, we will bear the risk of all
the development, if at the end of the day, if we're
successful, we get to build it. That proposal has been
on the table for four months and it's a pretty basic
policy decision to make. And, when we sat down and
initially went through a work plan, at the governor's
request, to complete a Stranded Gas Contract, both
sides agreed to a work plan and to dates. I think you
can see in the series of press releases that it was
the intention of all parties to get a contract in
front of the Legislature this legislative session. And
that's the schedule we all committed to and we've been
working on.
As regards to your last question about being on the
sidelines - it's simply because we've withdrawn our
application. But, if it can be shown that there is a
structure on the deal that will achieve the protection
of our investment dollars, we'd be willing to listen
to that. We haven't been able to get there at this
time.
CHAIR OGAN noted that Senator Con Bunde and Representative Bruce
Weyhrauch had joined the committee.
SENATOR RALPH SEEKINS asked Mr. Morgan how a small independent
might benefit from independent ownership versus producer
ownership of the pipeline.
MR. MORGAN replied:
As I said, we are an open-access pipeline or would be
an open-access pipeline, which means we would accept
gas from any party who is willing to sign a shipping
contract on a non-discriminatory basis. I think being
independent is really - that's our primary business -
just moving gas. Our view is, if you had a producer-
controlled pipeline, there may be inherent conflicts.
Do they move their gas? Do they move somebody else's
gas? Maybe there's competitive issues there. I don't
know. But, by getting a large number of shippers, I
think David Sokol has used the number 30, shippers on
there - a mix of shippers, of producers, perhaps the
state, LDCs, power generation companies, industrial
users, you have a much more functional market, an
active market, a transparent market - rather than
having a few shippers that control all of the
capacity. You know, perhaps regulations should make it
work, even if it is a producer pipeline, but I think
we've all learned that regulation is imperfect and
there are instances where abuses and conflicts can
arise.
SENATOR ELTON said that MidAmerican's original proposal
envisioned the state as an equity partner in the pipeline and
TransCanada had suggested the state share some risk by being a
gas owner.
We can easily define exclusivity - your ability for
five years to not have competitors - we can define
that as the state sharing some of the risk. I mean, do
you envision that the state needs to assume some risk
beyond giving a company five years exclusive right to
construct a pipeline, such as taking equity in the
project or buying gas?
MR. MORGAN replied:
The TransCanada proposal was that the state take the
full shipping risk, 4.5 BCF a day. If that happened,
the project is commercialized overnight and there
would be no need for exclusivity. We'd simply sign a
shipping contract and the project would move forward.
That would be the best of all worlds from a pipeline
standpoint. However, we did not sense that the state
was up to making that large of a commitment and our
concept was to bring in more shippers from the
marketplace, from the producers. We would very much
welcome and encourage the state to take a capacity
position. And as David Sokol has said, we'd consider
at the appropriate time taking a capacity position
ourselves, not as Alaska Gas Transmission, but as an
affiliate of Berkshire Hathaway.
And so, our original view was that if TransCanada and
Alaska Gas Transmission and the state were all in
perfect alignment and willing to share some risks and
make some commitments, we could send a very strong
message to the marketplace that the project was
serious, credible and being advanced very deliberately
on a very deliberate schedule and that would jump-
start the project and help others - whether they be
LDCs or marketers or whatever - to join in that
process and bring the project to an early
commercialization. So, I do think the state should
take some risk - whether it's just in the amount of
their royalty position, which has been discussed, or
in some larger amount, which would enable it to offer
immediate capacity to an explorer, for instance. If an
explorer came on and the pipeline were full, the state
could simply release part of its capacity to that new
person or that new explorer would have to wait until
we could expand the pipeline. But, having capacity
would give them that ability to make it available on
an immediate basis.
CHAIR OGAN jested, "How do you break Ogan's golden gas rule -
that if the guys with the gas make the rule, how do you get them
to come to the table?"
MR. MORGAN countered, "Those are questions for another speaker,
I'm afraid. For us it's getting an economic gas tariff. That's
what the pipeline can do." [END OF SIDE A]
TAPE 04-33, SIDE B
4:22 p.m.
MR. MORGAN continued saying that over the years, the producers
have said they didn't want the entire risk of the pipeline to be
on their back and needed a value proposition for someone else to
build it besides themselves:
That's what we're trying to offer here. Certainly,
they have access to capital at low cost. We think we
can duplicate that cost of capital through loan
guarantees, through the strength of Berkshire and
MidAmerican Energy and through tax-exempt financing.
So, that wouldn't be an issue. We think we have the
expertise, as do they, to bring additional market
participants to the table to take and share some of
the shipper risk by holding capacity. We think the
state has a role in that and, as we've said, Berkshire
would also consider that. Those are the elements. We
expect to have to earn the business and provide a low
cost tariff so that they will ship and get a
reasonable netback for their gas. That's what we've
set out to do.
CHAIR OGAN thanked Mr. Morgan very much for being at the meeting
today and extended his thanks to Mr. Sokol for his cooperation.
He announced that Representatives Ethan Berkowitz, Beth Kerttula
and Mike Chenault had joined the committee. He introduced the
next speaker, Joe Marushack, Vice President, ANS Gas
Development, ConocoPhillips Alaska, Inc., who would represent
the producers, saying, "We've been sitting across the table on
this issue for many years. Joe, it's time we get past the
talking part."
MR. JOE MARUSHACK, Vice President, ANS Gas Development,
ConocoPhillips Alaska, Inc., vowed, "Well, we're trying to,
Senator." He thanked the committee for allowing him to address
this issue and noted that Ken Conrad, Vice President, BP, was on
teleconference. He began:
I think the response to this question really has four
important components. First, the only successful
project will be one that has the lowest cost of
service to market. Whether a pipeline company is
affiliated or unaffiliated with the gas shippers,
producers, or others, is really not as critical as
getting the project developed. And in this regard,
what matters most is how much it costs to transport
gas to market. The lowest cost solution advances the
state's best interest, because it will provide the
greatest royalty value. It provides the greatest tax
base; it provides the greatest incentive for
exploration.
From a producer's standpoint, the lowest cost of
service project will maximize the value of the
resource and, as the major explorer investor in the
state, we need a cost of service that's low enough to
encourage exploration - exploration for us,
exploration for other companies.
One needs to consider the question - who is most
interested in developing the lowest cost
transportation system and who wants to see the lowest
cost tolled. The answer - the producers and the state
want the lowest toll, because it means higher netbacks
and higher revenues. A pipeline company does not
necessarily share that incentive, because its profits
come solely from the toll and the greater the
investment, the larger the return. But, the impact to
the producers and the state is a smaller netback.
Second, it's much too early for any one pipeline
project or project sponsor to be committed on an
exclusive basis. The state needs to know which project
will maximize the value of the state's resources. This
needs to be an informed choice. We can't imagine that
after so much interest in developing the state's gas
resources, that the state would wish to sideline any
party from developing a project.
One of the key factors we continue to pursue in
Washington is the enabling legislation. That
legislation would provide a clear regulatory process
for the pipeline and care has been taken to craft this
legislation so that any project sponsor, not just
producers, could use it as a framework for a pipeline
project. Additionally, we specifically request the
state, that any pipeline specific terms negotiated
under the Stranded Gas Act be fully assignable to any
party, including independent pipeline companies to
allow for the widest participation possible.
The third issue is the extent to which ownership
affects access to and management of the pipeline.
Again, whether the pipeline company is affiliated or
unaffiliated with the gas owners is not the critical
issue. The pipeline will be regulated by FERC
regardless of who owns it. FERC will insure that
access is fair and that terms and conditions are
consistent, regardless of the sponsor, and the rates
of return to pipeline owners are reasonable. FERC
insures that the pipeline owners do not discriminate
in providing access or administering expansions. This
is an important point.
The producer pipeline proposal envisions transporting
50 TCF of gas over the project life. Currently, only
about 35 TCF of gas has been discovered on the Slope.
Thus, our proposal is dependent on additional gas
being discovered and access to the line being made.
There [would be] no procedural differences between
producer-owned pipeline and an independent owned
pipeline. Under any case, the pipeline would be open
access regulated by the NEB, the National Energy Board
of Canada, and FERC. Open access means any party can
purchase pipeline capacity without discrimination.
This may include, but not be limited to producers,
local distribution companies, utilities, gas
marketers, explorers, the state or even speculators.
All that's needed is credit worthiness and a promise
to pay for the capacity. FERC and NEB processes for
securing capacity have been in place for several
years. In addition, FERC in November 2003 issued a new
regulation, which establishes a code of conduct
governing activities between FERC regulated pipelines
and all other energy affiliates. This [indisc.]
regulation requires that firewalls be established
between pipeline personnel and their energy
affiliates, including producing affiliates and
marketing affiliates. These rules recognize that
pipeline operators may have affiliates that operate in
segments of the energy industry and are designed to
insure pipelines operate impartially.
Any mandate of ownership requirements at this stage
does not make the project more likely, rather it
threatens project viability. Indeed, FERC encourages
competing pipeline proposals. FERC views this as
helpful in developing a project that meets the
obligations to protect the nation's interests. FERC
recognizes that limiting project sponsors from
competing may result in a poor project or even no
project at all. A recent example is competing projects
pipeline projects have been proposed to transport
[gasified] LNG from the Bahamas to Florida. FERC has
approved both projects relying on market forces to
determine which project proceeds.
Fourth, and by no means last, is the question of
allocation of risk. As explained, the producers are
aligned with the state in ensuring the most efficient
and lowest cost of service. Independent pipeline
owners who do not have a stake in other parts of the
value chain earn profits solely from the toll.
Mortgage investors assume cost risk or simply pass on
risk to the state and producers. There's the potential
for a lack of alignment that can further jeopardize
the project. This is because neither the state nor the
shippers would be in a position to manage or limit
cost overruns, yet we would remain liable for the
overruns through the pipeline rates. While there might
be an opportunity to challenge the prudence of the
pipeline's actions, the burden of proof is on the
challenger. This issue must be considered in the
overall context of developing a viable pipeline
project. So, in short, we believe that the best
interests of the state, the producers and the natural
gas consumers, is that the process for developing a
pipeline project be allowed to run its course under
the terms of the Stranded Gas Act without any grant of
exclusivity. As legislators looking out for the
state's interests, we suggest the key considerations
are which project has the lowest cost to market,
insures open access, and includes risk-sharing, which
supports project viability.
Just a couple other comments on some areas I'd like to
get clarified a bit. There is a question about when
this project can be done and I've heard 2016/18 is the
producers' number. I'd ask you to go to the 2003 NPC,
National Petroleum Council, study that was done for
Secretary Abram that addressed supply and demand
issues. In that, you'll see that Alaska gas is assumed
to come on in 2014. The people who worked that process
under the NPC were ExxonMobil, BP, ConocoPhillips, as
well as others. So, I would point out to you that I
think the producers' view, the mid-2013, 14, 15 is
when we hope that this project can come on line, not
2016/18.
Furthermore, the question about can people invest
before without exclusivity. I'd like you to recall
something. ConocoPhillips, at the time Phillips, BP
and ExxonMobil spent $125 million about two years ago
developing the feasibility study that resulted in this
project assumption of roughly $20 billion-to-market,
2.3 BCF-a-day pipeline. We did not have exclusivity;
we did not have any way of recouping that; we invested
that just as we looked at developing other projects.
And we think putting that at risk and pulling that
away from us isn't really in your best interest. In
addition to that, ConocoPhillips has spent tens of
millions more trying to develop the project from that
time.
Finally, I'd like to give you a personal view of what
exclusivity does. To me, exclusivity means costs are
going to be higher and you're going to have delays.
And if that isn't the case, one could look at what's
happened with ANGTA [Alaska Natural Gas Transportation
Act of 1976], which really isn't exclusive, or the NPA
[Northern Pipeline Act] in Canada, which also really
isn't exclusive, but [are] classified as franchises.
Those projects, those legislations, have not resulted
in a pipeline to date. So, in the best interests of
time, I'll stop, but I look forward to any questions
and any clarifications I may offer.
CHAIR OGAN said if the pipeline is filled to capacity from
companies that have gas available to ship at the time of the
open season, that limits the ability of other explorers to come
on line and might limit the investment by independent gas
explorers on the North Slope. The producers already have
capacity. He asked about companies that aren't yet exploring in
Alaska and that might not come at all because there is no
pipeline capacity.
You're not going to prorate it like a true common
carrier pipeline, are you? ...I'm worried about that
discouraging independent investment, especially in the
Foothills.
MR. MARUSHACK stated that the pipeline project has been
discussed in earnest for about three years.
Companies had the ability to explore for gas to be
ready for an open season whenever it is.
ConocoPhillips has explored for gas and we continue to
explore for gas on the Slope. So, first of all,
companies can explore for gas so they're ready to
participate in the initial open season.
The second way is there's the possibility for some
multiple open season process that allows a firm
shipping commitment so that the pipeline can go
forward followed up, then, with some time after that
with a second open season that would allow for the
final design so that exploration gas could be
included.
Third, companies can take capacity on-the-come, what I
call on-the-come, which is - I think I'm going to have
success - this is what happens in the Gulf of Mexico,
this is what happens in the Rockies - so, I'll make a
shipping commitment.
Fourth, this pipeline that we've talked about - the
48-inch, the 52-inch, 4.3 BCF a day pipeline - is too
big for the base volume that we have. What it does is
it allows incremental expansion that is very
efficient. So, companies can go out there after the
initial volumes have been committed and they can make
their exploration successes. We could have an
expansion open season; they can get access to it then.
I think ConocoPhillips is probably one of those
companies that will be in the position [where] we hope
we have exploration success. We will ask for an
expansion. Hopefully, we will have enough gas to do
so. There's a number of ways.
The fifth possible way is the 35 TCF that we know
about right now, assuming the underpinning by Pt.
Thompson and Prudhoe Bay puts us on a decline around
year 12, year 13 - somewhere around that - maybe year
14, but there is a big wedge in the base 20 years that
we need new gas. The way companies can get access to
that is they can either buy that from companies who
have made the firm shipping commitments already or it
can be sold and it could be under duress, it could be
at a premium. We don't know, but we do know for sure
that in the 20-year period, we do not have enough base
gas. So, hopefully there's a number of ways companies
could get access to that, sir.
CHAIR OGAN said there is also the issue of whose gas is going to
get used first and he was legitimately concerned about the
effect on the pressure reservoir and, ultimately, production.
So, if you guys have gas for sale, which you can
nominate for the pipeline and the guys up in the
Foothills don't have it, the state has an economic
interest in making sure that we get the best return on
the well, as you do, too. I think we share that
interest in a way.
MR. MARUSHACK agreed, "Absolutely."
CHAIR OGAN contended:
But, I think our interests aren't totally aligned,
because you have that X amount of gas that you want to
sell and you're probably going to sell your gas first,
before these other people, these ancillary fields get
on line, and that affects production, which affects
the state's bottom line. When you lose the pressure
reservoir, the performance goes down. AOGCC [Alaska
Oil and Gas Conservation Commission] has done a study
on that...
MR. MARUSHACK took that point and ran:
Your point is excellent. So, let me give you some
examples and then I'm going to go through what has to
happen in the future. But, the example I want to give
you is if you go back to the decade of 1990 to 1999
and you look at what gas prices were. Gas price, NYMEX
basis, was $2.07 [MCF]. The base tariff we've talked
about is $2.40. Had the pipeline been built and up and
running in 1999, the state and producers would have
lost a half billion dollars a year. When that
happened, had we done that also, your point is even
more in effect, because we would not have, at that
point, almost three billion barrels of oil that's been
traded by Prudhoe Bay through the pressure maintenance
that you're talking about. So, that's a valid point;
we're more fortunate the way we have managed together,
managed this process.
Now, looking forward on your issue, by the time first
gas arrives, we think it's going to be 9 to 10 years
for first gas sales from today. That means that not
only will we be able to continue the pressure
maintenance and the incremental oil production, but
we're going to get to the point where you are getting
to diminishing returns. Now there is still the
possibility for some minor amount of loss on the oil,
but I don't think it'll be very significant by the
time first gas is out there. I think we'll be at the
point where it makes a lot of sense.
MR. MARUSHACK said the project is so complicated that knowing
Prudhoe Bay and Pt. Thompson have 30 to 35 TCF of resource is a
blessing that other places don't have. It is the base
underpinning volume that would make this project happen. "The
other thing we know, though, is we don't have enough [gas] to
make this a long-term viable project without exploration
success."
SENATOR RALPH SEEKINS asked how many of the 40 proposed
liquifaction plants that were to go into service in 2008 and
2009 are owned or planned by the producers as part of their plan
to meet their 40 percent marketshare.
MR. MARUSHACK replied that he didn't know how many of the
proposed plants were legitimate. He explained:
[ConocoPhillips] has an asset in Nigeria that is an
LNG possibility and we were working on a re-gas
facility in Harpswell, Maine. We're actually a partner
on that deal with TransCanada. We were not able to
secure the necessary permitting in Harpswell, Maine,
on an existing industrial site to make that happen.
So, the point I'm trying to make here is - and we had
the financing to do it, we had strong partners, we had
the gas, we still have the gas - my point is it's not
very easy to get the re-gases. Let me point out some
others to you. In Alabama, ExxonMobil is having
trouble getting their permit for that process. They
have the gas; they have the wherewithal to do it. In
California, we're seeing a new environmentalist wave
is starting to limit to see whose got rights to put
the permitting process in place - be it the state or
be it the federal government through FERC - and that's
going to take some delays. In Baja, we've seen
companies come out of that.
I'm not sure how many there will be, but I'll tell you
this. We all need LNG to be successful and the reason
we do is - because we need McKenzie gas, Alaska gas,
Rockies gas, Gulf of Mexico, LNG gas - if we get gas
prices completely out of the range of reasonableness,
we're going to see demand destruction. That's a bigger
threat to you and I than LNG terminals into the
country.
Demand destruction - once you turn and go from gas
fired to coal fired to oil fired, it's very difficult
to go back in the other direction. So, I'm not worried
about LNG; I hope LNG happens, but our focus is still
Alaska gas. We need Alaska gas to happen.... The
bottom line is I don't believe that anywhere near 40
of those re-gases are going to happen and I don't
think too many other people do, either.
MR. KEN KONRAD, Senior Vice President, Business Unit Leader, BP,
interrupted to say that BP currently imports gas to two existing
terminals on the U.S. East Coast and is looking at one
additional BP-owned terminal in New Jersey. BP also has
capacity, but not ownership in a proposed project on the Baja.
CHAIR OGAN said all assumptions he has heard at the Energy
Council indicate that even with 4 BCF per day of Alaska gas, the
U.S. would have to import 11 to 20 percent of LNG from foreign
sources by 2020.
SENATOR WAGONER said he is having a hard time determining the
difference between a pipeline that would be built by the major
producers on the Slope now and one built by MidAmerican, because
on the TAPS [TransAlaska Pipeline System] he has seen the
producers set up a separate company to build and operate the
line. They're both going to be controlled by FERC, because the
tariff would be controlled by FERC. He wanted to know what the
difference in ownership really meant.
MR. MARUSHACK replied:
The FERC process for access and expansion are exactly
the same. The idea that the producers can set
something up so that they have preferential rights is
- I don't believe that's right. I could tell you
that's not our mindset. So, one of the differences,
and I'd like to say that the first thing is if
companies can provide incremental value, we need to
talk to them. We need to have a seat at the table.
This is why I don't think exclusivity is in your best
interests at all. So, if that's a pipeline company, if
it's a commercial company, whatever it is - a Native
corporation or Alaskan individuals - there's a seat at
the table to make that discussion happen.
I think what you're going to find is the big
difference between the two, possibly, is the focus on
having the lowest-cost pipeline and the ability to
manage project costs.
MR. MARUSHACK said the producers believe overruns can be
minimized by doing the upfront work - getting the engineering
the logistics and steel procurement done right and within the
first three to five years.
So, it's project management and project execution that
I suspect is going to be the big difference. I'll
point out something else to you. Alaska isn't like
Wyoming.... Permafrost issues, technical issues,
working in the wintertime - it's very, very different.
BP and ConocoPhillips are operators on the Slope and
that's it. So, I think we have something to bring to
the table. So, the answer to your question here is
from the state's perspective, I think again, the
difference you need to think about is who can do the
lowest-cost project and how can that be done - and
then you just make it happen. In terms of is there an
inherent advantage one versus the other, at this point
in time, I don't think you can say there is. Hence,
everybody should be playing.
CHAIR OGAN said the FERC doesn't entirely control the tariffs.
They review it after negotiations and production.
Then if somebody complains about it, they will weigh
in and adjudicate it, but they're not really in a
position of setting the tariff per se. You guys
present your costs and the reasonable costs and they
kind of overview it and as long as no one is
complaining, there's probably not going to be any
action on the part of FERC. Is that correct?
MR. MARUSHACK agreed and said that was a good clarification.
But, I will say this. What's really, really important
about this process in my mind is that the State of
Alaska and the project sponsor together go to FERC and
agree on what those terms are so that there isn't a
train wreck in front of FERC and FERC gets put in a
position of seeking winners and losers. So, I think
that a proposal from whatever the pipeline actually is
in terms of the rate and the recovery and those sorts
of things will be important to go forward with the
state. But, in terms of access and discriminatory
practices, FERC is the governing body on those, not
the pipeline owner.
SENATOR ELTON stated that Mr. Morgan testified that the majors
on the North Slope are now producing about 40 percent of the
U.S. domestic gas.
When I hear that, it suggests to me that when it comes
to timing issues, when we will be able to move our
stranded gas to the market, it suggests to me that the
imperative to get the gas quickly to market is maybe
less for you than it would be for an independent
pipeline owner. You obviously have gas that isn't
stranded. You're obviously dominant in the domestic
marketplace. So, why should we assume that your
imperative is the same as the state's imperative to
get Alaska's gas to market?
MR. MARUSHACK replied that the reason the producers have 40
percent marketshare is three years ago many gas traders, like
Enron and Dynergy, went out of business.
So, in particular, the reason that number looks big is
because of what's happened historically and
fortunately your partners are still here marketing
that gas.
In regard to your question about who is really
motivated to sell the gas, we are motivated to sell
that gas. The reason is our share price is driven by
the profitability of our company. We make money
primarily by finding, development and selling oil and
gas. We have many priorities. One of a number of our
priorities is commercialize Alaska gas. That means
sell Alaska gas in what we see as the best market in
the world, which is the Lower 48. We are highly
motivated to sell that. It drives our share price.
SENATOR ELTON followed up saying that earlier Mr. Marushack
suggested the price of a producer-built pipeline would be in the
neighborhood of $20 million and he understood the profit motive,
but the cost of infrastructure eats into a company's profits.
"It seems to me that you could easily make a decision that a $20
billion cost may eat into your profits a little bit more than
LNG from some other non-stranded gas regime."
MR. MARUSHACK supposed he could be right, but said the $20
billion is assuming a pipeline is built all the way to Chicago.
There seems to be some question about that number and
why you say that. The fact is you have to build all
the way to Alberta, to start out. From that point in
Alberta, you might be able to use existing
infrastructure, but the reason we've designed a system
all the way to Chicago is because that provides us
with a toll that we can compare to using existing
infrastructure. So, if existing infrastructure is
cheaper, we will do that. If it's not, you build all
the way to Chicago. The whole point is to get the
lowest cost to market.
Now, your question about our project versus LNG - the
reason. We want to bring in as much ConocoPhillips LNG
as we can and we want to bring in as much Alaska gas
as we can. This is a fiercely competitive business and
we want to sell as much oil and gas as we possibly
can. Again, we don't make money by holding assets; we
make money by commercializing those and selling those
and, frankly, we want to out-compete everybody. We
want to sell everything we possibly can, sir.
CHAIR OGAN said that the TAPS is an affiliated North Slope
project and recently the RCA [Regulatory Commission of Alaska]
found that its tariff exceeded just and reasonable rates and
legislation was introduced to try to deal with it. He asked why
a producer-owned pipeline in Alaska would be different and what
assurances would the state have that that wouldn't happen in
this case.
MR. MARUSHACK said that was a difficult question, but attempted
to explain:
TAPS is a common carrier and this project is an open
access contract carriage. The regulatory process is
significantly different and I am not an expert on
TAPS, but I can tell you that on this pipeline, we
will have commitments made, we will have agreements
made with FERC that provide the kind of access, the
kind of tariff structure, that we think we're talking
about here. Furthermore, one of the things that we've
long held is that this particular project needs to
probably have something that's unique, which is more
or less a flat tariff - not an escalating tariff, not
a declining tariff - because a flat tariff allows us
to capture some value right now and have that remain
stable over time. If we were to decline this issue
with a normal pipeline, the cost of the tariff up
front would be too high.... So, this is a flat type of
tariff that we're assuming, which allows us, then, to
make this, hopefully, an economic project.
This isn't a trust me one, but the FERC process
provides the mechanism that I think we all need to
make you comfortable and it's an education process,
sir. It's a long process.
SENATOR GEORGIANNA LINCOLN prefaced her concern saying she was
bothered that Mr. Marushack now says the pipeline could be in
operation between 2013 and 2015 when she remembers talking with
her former colleague, Ramona Barnes, about how to motivate the
producers to sell their gas over six years ago.
We have been talking for years and years about getting
the producers motivated.... What motivation do you
have to get that to market at this point that I can
feel assured that we are not going to be here 10 years
from now with you at the end of the table telling me
you are going to be motivated?
MR. MARUSHACK responded:
When you're talking about six years ago, seven years
ago, whatever it was, the frustration in Alaska that
gas that's been stranded hasn't sold, I would like
again to go back to the '90s. The '90s would have been
a very bad time to be commercializing gas. You would
have had negative royalty, negative severance, we
wouldn't be investing in satellites right now.
What's different now? Well, what's different now is
though the volatility has got a lot more extreme on
gas, the prices are higher right now. They've been
higher, on average, for about the last three years.
Whether that's sustainable or not, we don't know for
sure. What we do know is that our base tariff...is
about $2.40 off this project. Prices are higher than
that now and there is a supply demand imbalance, which
we hope allows us to move forward. But, the key issue
on moving forward is to make sure that we have the
lowest cost project, that we've got fiscal certainty
with the state - so we know how we're going to be
taxed - so those things don't change. We've got a
process in the federal government that allows us to
get the permitting through and then we can look and
see does this make sense. Have we got our toll low
enough? Have we got enough certainty on this project?
If you're looking for certainty - anybody to give you
certainty on this pipeline project, I would ask you to
think about this. The next step in this project is
probably $1 billion in permitting and design
engineering and...that's going to take about three
years. If this project isn't economic after we've
spent another billion dollars, it still won't get
done, but we hope it will be.
SENATOR ELTON was incredulous about Mr. Marushack's comparison
of pipeline building prospects now to the ones in the last
decade.
If six years ago, if you had made a decision to build
a pipeline, we would be close to completing a
pipeline, we would be selling very expensive gas in
the marketplace and the pipeline would have cost less.
So, I don't understand why we keep comparing what
could have happened in the '90s.
CHAIR OGAN mused that hindsight is always 20-20 and about the
current high price of gas contended, "A lot of people who are
more educated than me were analyzing [gas pipeline feasibility
issues] and didn't see that coming."
MR. MARUSHACK vouched that the supply demand forecast back then
didn't support this project.
REPRESENTATIVE ERIC CROFT compared an independent pipeline
company with the producers saying that it would have every
interest in pushing as much gas, regardless of who owns it, as
quickly as possible.
And yet, a producer on-line would be interested in,
you said, out-competing everybody with Conoco's gas
and Conoco's LNG. At some point, you could have an
interest in limiting or delaying production to bring
on other assets worldwide. And if that made more
money, that would not only be in your interest, it
would be your statutory duty to your shareholders to
do. Isn't that a major difference between a producer-
owned line and an independent line?
MR. MARUSHACK replied:
That would be illegal. What the process under the
pipeline is, if people have gas and they ask for that
capacity and you can expand, then you have to do that.
The other point is the more gas you get down that
pipeline, the lower the tariff should be - the more
economic it should be. So, the more gas you put down
there, the lower that tariff could be for everybody,
including ConocoPhillips.
REPRESENTATIVE CROFT asked if producers owned the line, they
might have a big interest in negotiating upstream collateral
issues to the line (severance or benefits in royalty), but an
independent company would have no interest in those issues.
We could end up in a situation where we had a very low
tariff, but had given away so much in the upstream
that the input to the state was much less.
MR. MARUSHACK responded that this project needs to be looked at
as a ringed fence around the entire gas development, which
includes the resource and the pipeline.
To the extent that the resource becomes less burdened,
if there's enhancement on the resource, then that
makes the wellhead higher, that means it's more likely
that we can nominate and we can move this project
forward. So, there's two components. It's a total
economic issue. The one thing we may be able to
control is the cost of the pipeline. That needs to be
as low as possible. You are right, at the same time,
we need to look at how we can enhance and make the
project more competitive and that does include some of
the resource issues. That's important for anybody that
owns the pipeline, though. They need to have the
lowest cost pipeline and the resource has to make
sense. You want it that way so people explore.
REPRESENTATIVE CROFT surmised that another difference is that an
independent pipeline company would be interested in having
multiple shippers whereas the producers' best interests would be
served by owning the shipping rights on their pipeline to give
them more control.
MR. MARUSHACK parried:
Shipping during the open season, anybody can sign up
for shipping commitments - a local distribution
company can do it, a producer company can do it....
Well, let's assume that you get enough capacity so
people say they want 6 BCF a day. When the pipeline
gets built, it's a 6 BCF a day pipeline. The issue
you've got, however, though, is somebody is taking a
heck of a risk because there isn't enough resource to
justify a 6 BCF a day pipeline. But, anybody can take
shipping commitments on that pipeline; it does not
have to be a producer.
SENATOR SEEKINS said he had not been around the Legislature that
long, but he didn't see any way a sitting Legislature can tell a
future body what they can or can't do with regards to the tax
stability issue. "So, it appears to me that you'll never get
that. What are you going to do?"
MR. MARUSHACK professed that was one of the issues to be
discussed under the Stranded Gas Act.
I think it's important that we understand the base
objective here. Then, we try to figure how we can make
that happen. What we're really saying here is, if we
invest in this long-term shipping commitment.... [We
need to know] that the tax rate doesn't go up directly
after that and take back any profit that we thought we
were going to make on that - given that you've got
market uncertainty anyway.
He felt that the administration understands this issue and
everyone is trying to find a way of doing that so the project
can move forward.
SENATOR SEEKINS reiterated his concern that he didn't know how
that was going to be accomplished.
CHAIR OGAN informed him that the state enters into contracts all
the time.
SENATOR SEEKINS said he didn't know how a future legislature
could be restricted.
CHAIR OGAN repeated that that is done by contract and a future
legislature could undo the contract, but "that would be a lawyer
employer act."
5:08 p.m. - 5:10 p.m. - at ease
MR. MARK HANLEY, Public Affairs Manager, Anadarko Petroleum,
gave the final presentation. He said that Anadarko shares its
enthusiasm for the pipeline project with the previous two
speakers.
As an explorer, our interests are also similar to
those of the state. We want the lowest cost
transportation system. Number one, we want a gasline
built; nobody gets its gas to market if a gasline
isn't built.... It's one of the better incentives you
can do to improve oil exploration, as well, because
you find as you explore for oil, you often find gas.
If that gas can be commercialized, you can recover
some of your investment.
He agreed that getting the lowest rates possible for
transporting gas to the Lower 48 is important. [END OF TAPE]
TAPE 04-34, SIDE A
5:13 p.m.
MR. HANLEY said if the Legislature wants to insure access, it
needs to understand the FERC process. He explained that the
person who builds the pipeline designs the open season process.
FERC doesn't really regulate it. You can appeal
afterwards for problems that have occurred, but they
don't regulate it. The terms and conditions of that
open season are set by the people holding it. If the
state were going out for request for proposals (RFP)
for pens and you want 100,000 pens for the state, and
I was a pen dealer, would you think there might be a
conflict if I got to write the rules for the RFP?
That's the concern that we see with a producer-owned
pipeline. We see some concerns where there are
competitive advantages.
MR. HANLEY explained that the FERC allows for "undue
discrimination," which he interpreted to mean that some
discrimination is allowed. Also, he revealed that terms and
conditions of the tariff give the right of first refusal for
expansion to the people who nominate the initial capacity.
It's been done; FERC has allowed it.... I will just
tell you there are circumstances where things that
would discriminate against an explorer who might not
be in the initial [open season], who wants to go
explore for gas and be able to expand, wouldn't be
able to - because the terms and conditions set by the
owners of the pipe make it difficult.
How long the open season is open is another issue that could be
appealed to the FERC. Some open seasons have lasted a day, but
if a company wants to nominate .5 BCF per day on a pipeline and
therefore needs to make a $300 million commitment over a 20-
year period, time is needed to look at all the terms and
conditions before signing on the dotted line.
Even the timing of the open season can be, if other
people have worked a lot of the details out ahead of
time and set the terms and conditions of that and they
already know what they are, of course, they've got an
advantage. If you don't have adequate time, it makes
it difficult.
MR. HANLEY said there are discussions about setting a tariff for
this pipeline on a volumetric (MCF) basis versus a thermal basis
(MMBTU). Normally, FERC uses MMBTUs.
Some gas, particularly on the North Slope, as it comes
out is pretty liquid - has a lot of liquid content,
has a high heat content and in many cases, tends to be
more valuable. If you [set the tariff] on a volume
basis, other gas that's drier - actually there's a
competitive disadvantage there. So, if you set the
terms one way or the other, you can create a
competitive disadvantage for a company that may be
exploring in a different basin. Those are just a
couple of examples.
I just want to raise that as a concern for you folks
to look at as people say that open access means that
everybody can get in. Sometimes you can write the
rules and FERC will allow them such that it would be,
in our view, discriminatory and we would be at a
significant disadvantage to other people.... As a
producing company, I can tell you we have that
perception, that Mr. Marushack said, of sometimes
pipeline companies get a return on their investment,
so they don't necessarily have the biggest desire to
have the lowest cost. They can't exceed the cost so
much that it creates a problem and it makes the
project uneconomic. I don't know whether that's
reality or not, because in most places we deal with,
it is pipeline companies that build these things, but
I'll just tell you that's a perception within the
industry if you want to talk about a concern the
people have on the tariff side. On the other hand,
pipeline companies build pipelines all the time. To
give you an example, we're an exploration company. We
don't drill wells. You might think we drill wells. We
manage the wells. We go to Doyon neighbors or
something like that.
MR. HANLEY said he didn't know if the producers have their own
company that would build the pipeline or if they would contract
with someone else to do it. "Our view is that there is an
advantage to a pipeline company building the pipeline, because
they have that expertise."
He said there might be an issue with the tariff if a pipeline
company builds the pipeline, but he didn't believe it would be a
very strong one. Anadarko's view is that the pipeline company
doesn't care whose gas it carries as long as the money is good.
So, they would be interested in having companies that explore
for and put more gas down the pipeline.
On the other hand, I guess, we are less comfortable
with a producer-owned pipeline, because we see what's
in their best interest and their shareholders' best
interest.
There's a tremendous value of gas out there to be
discovered in Alaska. The discovered resources are in
the range of 35 TCF; estimates are there are another
100 TCF of gas yet to be discovered. We would like to
go out and explore for some of that. We are in a
catch-22; we're not going to go drill wells and have
stranded investment - number one - until the gasline
looks like it's going to be built. That's a tough one
and number two, until we can see what the rates are
and number three, until we feel like we can get access
to that, because we're not going to go drill a well
and have to go to somebody else who's our competitor
and ask them if we can get capacity on their line.
That won't happen. That's the concern that we have.
MR. HANLEY said he is concerned about a producer owner pipeline,
but it really doesn't matter so much who owns the pipeline as
long as it has the lowest rate for transportation and as long as
the terms and conditions for access are fair.
We might think that an independent pipeline would be
more willing to do that, but I would also warn you
that, in this case in Alaska, the producers have all
the gas. They control it. As we have heard earlier,
there will be a commercial negotiation over that. We
are also not so naïve as to think that if an
independent pipeline company starts negotiating with
the producers for the terms and conditions of this
tariff that the producers might ask for right of first
refusal on expansion capacity, which would not
necessarily be a good thing for us. And, with the
leverage that people have, they might get it.
So, our view as an explorer is that you should look at
fundamentals that you think are important. I'll tell
you ours are, as some other people have said, that
you've got to get the lowest rate, absolutely. There
is no question about that.
Then on the access provisions, you need to make sure
that those are included in the Stranded Gas Act
negotiations whether it's a producer-owned pipe or an
independent owned pipeline. I can tell you that's kind
of what went on as we went through the federal energy
bill on the federal level. We have language that was
negotiated with a whole bunch of parties. Not
everybody is exactly happy with exactly what is in
there. Right now FERC does not have a regulatory set
to tell you what happens in an open season. To address
some of the concerns I raised with you about timing of
open seasons, the ability to get the information you
need, to have time to do it, to have access, I'll just
read you a quick thing. It says:
The commission [FERC] shall promulgate
regulations governing conduct of open
seasons for the Alaska Natural Gas
Transportation project including procedures
for allocation of capacity. If the bill
passes, that will be in. The regulation
shall include the criteria for and timing of
any open seasons, promote competition in the
exploration, development and production of
Alaska natural gas and for any open season
for capacity exceeding the initial capacity,
provide the opportunity for the
transportation of natural gas from other
than the Pt. Thompson and Prudhoe Bay units.
MR. HANLEY said that it's important for FERC to adopt
regulations to implement those principles.
If we can get, as an explorer, a low rate, which I
think is in most people's interest, and fair access
provisions, we're willing to pay our fair share. We
just don't want to be opted out or have things that
are not fair to us. I think you will find companies
like ours, and others out there, willing to explore
for gas.
CHAIR OGAN summarized that FERC currently doesn't have
regulations on the books to regulate the open season for the
Alaska gas pipeline and asked if any protocols at all exist now.
MR. HANLEY replied:
There is a general requirement that an open season
occur and there are precedents based on issues that
have happened. It's an appeals process. If you feel
like you were aggrieved in an open season, you can
appeal that process to the FERC. There's no question
about it. People generally understand what the
guidelines are - what FERC would and wouldn't accept,
but I just gave examples of things that FERC has
accepted that we would feel would create a competitive
advantage for one side against us - that would not
necessarily be in our interest and we don't think it
would be in the state's best interest to have those,
as well.
SENATOR SEEKINS asked:
Because of the leverage the producers may have, you
don't see any real clear advantage to either
independently-owner or producer-owned in terms of
being able to get access at this time?
MR. HANLEY replied:
Not necessarily.... We don't know that the producers
are necessarily going to ask for these things that
we're concerned about, but they could.... If they do,
they've got a lot of leverage.
SENATOR DYSON said he heard earlier that the FERC process is
inadequate protection for companies like Anadarko and asked him
to comment on that. He also didn't see why the producers
couldn't make the same argument - that they should have priority
access because they have risked billions of dollars to build the
pipeline and Anadarko that hadn't risked anything, but could get
in on the same per unit volume rate. "It only makes sense for
those who have risk to get a leg up on being able to ship and
recover."
MR. HANLEY deftly replied the current FERC process is a lot more
flexible than might be thought.
I think it came out that people file rates and if
nobody challenges them, FERC doesn't necessarily go
through a rate case of determining a just and
reasonable rate.... It's usually done on an appeals
basis.... It doesn't necessarily guarantee us access
or the rates we think [are fair]....
As far as the risk and reward thing, I would say it's
interesting as a producer, and we would agree somewhat
with the producers, that a large risk is actually in
the production. You take the price risk. The pipeline
has risk in overrun and other things, but in the end,
somebody has signed a contract to guarantee that
capacity. So, the people taking the biggest risk are
the people getting that capacity and having to meet
those terms whether or not you have gas to put down
[the pipe] and whether or not that gas covers the
agreed-upon tariff or not. So, I would agree that they
are taking a significant risk. If they can justify the
initial pipe, they should have the right to that
initial pipe.
On the expansion capacity, on the other hand... if we
come to the table and we want to nominate capacity, we
are going to take that risk. We'll pay for the
expansion costs and we will take that same risk. I'm
not sure that it's fair necessarily.... That's a
policy call that people can make.... Do you want them
to have the right to have all the capacity, because
they took the initial risk? I will tell you this, it
doesn't take a genius to figure out that compared to
our risk - we'll have actually in some respects larger
risks, because we're going to go out and explore for
gas - we don't know for sure if it's going to be
there. We take that risk.... We go out and do raw
exploration. They're going to want to produce cheaper
gas; it's already discovered; there's investments
already made. They will have a significant economic
advantage over our raw exploration gas. If we go drill
new wells down in the foothills, we're going to have
more costs than they will overall, probably. So, I
think their interests are going to be to produce that
gas first and, you heard them, there's a wedge coming.
Their interests may be waiting to explore for new gas.
I mean, why would they want to find new gas that's
more expensive than producing the gas they have?
They're going to wait 'til that wedge and decide when
it's in their interest to build that.
Our [best interest] is if we can get a reasonable rate
and we think we can make it economic, we'll go out and
explore right now and we might expand that pipeline
sooner than they would or fill in that pipe sooner. I
think that's probably in the state's interest. As you
said, you have to balance that against the policy
call, but they will decide when it's in their interest
to either explore for more gas or fill in that wedge.
Whereas, if we have fair terms, I think we'll be out
there, if we think there's a reasonable chance of
success finding gas as soon as we can getting it into
the market - either expanding that pipe sooner [than
the producers would]. So, I think there's a value in
letting, at least, everyone have fair access to that
expansion capacity on an equal basis....
SENATOR WAGONER asked how many other companies he thought would
be willing to explore for gas or currently have leases on the
Slope that are thinking about exploration.
MR. HANLEY replied:
Remember, it's not just exploring for gas. A lot of
guys are exploring for oil, because it is more
profitable and they're going to find gas. If they can
make some money on it, put it in the pipe, it's going
to benefit everybody. There's a lot of companies.
He named Encana, Pioneer, Kerr-McGee, Burlington Resources,
PetroCanada, Windstar, ABCG, Total and more.
There are some companies that bought significant
positions in the gas areas of the foothills that
haven't really done an awful lot, but I think they're
doing what we are. We don't drive the process of the
gasline, but we're kind of waiting to see what goes
forward.
CHAIR OGAN added that a true common carrier pipeline has the
access prorated based on whether there's more supply than
capacity. "I haven't heard anybody say that's going to happen
here."
MR. HANLEY responded that he didn't know of any gaslines that
are common carriers.
They're all contract carriers, as far as I know.
People talk about the open contract carriage system.
It is a little bit different. You go through this open
season. Once you get that capacity, it's yours. As you
said, on a common carrier, if you're at a million
barrels a day and that's the capacity of the line and
somebody else finds 100,000 barrels, they get to put
it in. Everybody is going to get prorated 10 percent.
So, they'll only get 90,000 in and that's how common
carriage works.
On the contract carrier side, ownership of the
pipeline doesn't guarantee you - if you own pipe on a
common carrier, there is a little bit of a difference.
You get to nominate on your own capacity. On a
contract carrier, you can own 100 percent of the
pipeline and it doesn't give you any capacity on that
pipe. You get the capacity by bidding at these open
seasons where the terms and conditions are set,
typically, by the pipeline company, but as you heard
here, some of those things are said in negotiations.
They'll sit down with the larger shippers that are
expected to nominate and negotiate some of those terms
and conditions. So, what those terms and conditions
are are critical under a contract carrier for people
that are explorers.
CHAIR OGAN said he hoped Anadarko could work with the
administration to make sure adequate access terms are negotiated
in any kind of an agreement and let the Legislature know if they
don't. "I think that's probably key to the future of development
on the North Slope, jobs, access..."
MR. HANLEY said the governor has made numerous public statements
about needing access for explorers and is committed to that
idea. Since Anadarko isn't in the negotiations, it doesn't see
the specific terms and conditions. He told them that the FERC
terms in the energy bill he just read to the committee were put
in by U.S. Senator Lisa Murkowski and the administration
supported it at the time. The state understands Anadarko's
concerns and he hoped it would continue with what it has said is
important.
SENATOR ELTON asked if he thought the timing right now was
better for a producer-owned company that may be marketing 40
percent of the gas than for an independently owned company.
MR. HANLEY replied:
I don't know. I can tell you in the end the
independent company is going to have to go to these
companies and get the gas. Either get them to sell it
to a shipper or get their own capacity. They have the
gas and I've heard them say when it's economic,
they're going to do it. Now, are their economic terms
different? The pipeline company will do it when they
think they can get the contracts. In the end it comes
down to a pretty limited number of sellers deciding
when they want to sell their gas and I think it's
going to be difficult.... I don't know who has the
best timing. In the end it comes down to if somebody
comes to them with a better mousetrap, the producers
might sell then. It's really their decision, it seems,
at this point, when that gas gets developed, because
they control the gas.
CHAIR OGAN said that maybe someday soon they would actually
build it instead of talking about it. "Let's get the talking
part over with. With that, we're adjourned."
5:30 p.m.
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