Legislature(2007 - 2008)BUTROVICH 205
02/26/2007 03:30 PM Senate RESOURCES
| Audio | Topic |
|---|---|
| Start | |
| Overview: Agrium; Gasification of Coal | |
| Adjourn |
* first hearing in first committee of referral
+ teleconferenced
= bill was previously heard/scheduled
+ teleconferenced
= bill was previously heard/scheduled
| + | TELECONFERENCED | ||
ALASKA STATE LEGISLATURE
SENATE RESOURCES STANDING COMMITTEE
February 26, 2007
3:34 p.m.
MEMBERS PRESENT
Senator Charlie Huggins, Chair
Senator Bert Stedman, Vice Chair
Senator Lyda Green
Senator Gary Stevens
Senator Lesil McGuire
Senator Bill Wielechowski
Senator Thomas Wagoner
MEMBERS ABSENT
All members present
COMMITTEE CALENDAR
Presentation: Agrium Gasification Project
PREVIOUS COMMITTEE ACTION
No Action to report.
WITNESS REGISTER
TIM JOHNSON, Project Manager
Agrium Blue Sky Gasification Project
Kenai, Alaska
POSITION STATEMENT: Presented a coal gasification plan.
PAT GAMBLE, President
Alaska Railroad Corporation
Anchorage, Alaska
POSITION STATEMENT: Discussed the Alaska Railroad's role in the
gasification project.
DONNA BOLTZ, Deputy Director
Port of Anchorage
Anchorage, Alaska
POSITION STATEMENT: Stated that the port is responding to
Agrium's needs.
DAN GRAHAM, Consultant
Usibelli Coal Mine
Anchorage, Alaska
POSITION STATEMENT: Presented information on the coal source for
Agrium.
BILL O'LEARY, Chief Financial Officer
Alaska Railroad Corporation
Anchorage, Alaska
POSITION STATEMENT: Presented information on financing the
Agrium project.
BILL POPP
Kenai Peninsula Borough
Kenai, Alaska
POSITION STATEMENT: Spoke in favor of the Agrium project.
ACTION NARRATIVE
CHAIR CHARLIE HUGGINS called the Senate Resources Standing
Committee meeting to order at 3:34:22 PM. Senators Green,
Stevens, Wielechowski, Wagoner, Stedman, and Huggins were
present at the call to order.
^Overview: Agrium; gasification of coal
3:35:10 PM
TIM JOHNSON, Project Manager, Agrium Blue Sky Gasification, said
his goal today is to explain Agrium's operation in Kenai and the
situation that started Agrium looking at coal gasification. The
plant in Kenai is a fertilizer production facility that has been
operating almost 40 years. It is the second largest nitrogen
fertilizer facility in North America and produces ammonia and
urea fertilizer that is exported around the world. It was built
on stranded gas, he said. It is now facing a crisis in gas
supply--from an industrial-user standpoint. There is a declining
supply of large reserves, and the pricing structure is tied to a
"NYMEX-type" structure, and the overall supply of gas is forcing
industry out of business, he stated. There is increasing demand
for residential users and a large amount of export of liquefied
gas to Japan.
MR. JOHNSON said Agrium purchased the facility from Unocal in
2000, believing there was a long-term supply of gas in place.
Then gas supplies began to decline. "We were in discussions with
Unocal and eventually settled…and that settlement resulted in
our supplies under that Unocal contract being depleted in 2005."
He thanked the State of Alaska for its support of Agrium,
including HB 57 and support for this Kenai Blue Sky project.
3:38:46 PM
MR. JOHNSON said the standard picture for Alaska's Kenai
nitrogen operations is consuming about 53 billion cubic feet of
gas-year in and year out-and producing over 1.2 million tons of
fertilizer for export. The business started to suffer in 2001
when gas supplies started to decline. In 2004 Agrium announced
there would only be gas through 2005, and it shut down the first
urea production facility in October, 2004. In 2005 it shut down
another ammonia plant. A total of 80 jobs have been cut since
then. In 2006 only two plants were operating, and those were
shut down in October. The company hopes to start up by the end
of the first quarter of 2007 and has gas contracts through the
end of 2007, he said. There are no other contracts, but getting
one is a key part of Agrium's long-term operations.
3:40:04 PM
MR. JOHNSON said the operation is built on having a long-term
supply of low-cost gas, and it will pursue gasification because
of the severe decline in Cook Inlet gas. The facility is large,
and without a gas supply past October, 2007, it will no longer
be able to operate. If it shuts down, over 400 jobs will be lost
and there will be a loss of a substantial tax base for the Kenai
Peninsula Borough.
3:41:02 PM
CHAIR HUGGINS asked the export volume in dollars.
MR. JOHNSON said it is $163 million. The gasification project
seeks to capitalize on the long-term supply of abundant coal.
There is demand for low-cost power in Southcentral Alaska, and
there are 13 oil fields that are declining in Cook Inlet. He
said that studies by the Department of Energy indicate that up
to 300 million barrels of additional oil could be recovered by
supplying CO2 for enhanced oil recovery, which will be made
available through the gasification project. There are additional
opportunities for other byproducts. He showed a photo of the
plant, including the Kenai nitrogen operations, the Tesoro
refinery, the ConocoPhillips liquid natural gas production
facility, and an open field where the new gasification and power
production complex would be.
3:42:48 PM
MR. JOHNSON said the plan is to bring coal by rail from Healy or
elsewhere to Anchorage, and then a barge will ship it from
there. There will be a new dock to receive the coal. The CO2
would be shipped to the oil fields in the area, excess power
would be sold to the grid, and the fertilizer would be exported
and supplied to Alaska. The new gasifier would convert coal and
air into the building blocks that are needed for fertilizer
production. The gasifier will supply hydrogen, nitrogen, and CO2
to the fertilizer plant. A large power plant will be built and
supply at least 100 megawatts of power to the process and excess
power would go to the power grid.
3:45:24 PM
MR. JOHNSON said the gasification process works by combining
coal or any carbon source with pure oxygen. That reaction
provides the building blocks needed for fertilizer. It expects
to need 3 million metric tons of coal for gasification and power
production. It will produce almost 1.5 million tons of urea and
100,000 tons of ammonia, and it will provide 70 megawatts of
power to the grid. The process is highly integrated, he said, so
the facilities must be located near each other. He said a phase-
one feasibility study is done. The company is working toward
design and permitting.
3:47:13 PM
CHAIR HUGGINS asked about the timeframe.
MR. JOHNSON said phase-two will be completed in the summer of
2008, construction will begin in the summer of 2009, and startup
should occur in late 2011. Phase one was a joint effort with
Usibelli Coal, and Agrium has invested about $3 million, looking
at many sites, feedstock, and locations. It looked at design
variations trying to maximize the existing plants and taking
advantage of economies of scale. It determined it was feasible,
with the best design trying to maximize the urea production,
which makes more tons of fertilizer per ton of coal. At the same
time the Department of Energy conducted a gasification study
with similar results that gasification could be economical.
3:49:07 PM
MR. JOHNSON said Agrium is now in partnership with Homer
Electric, which has the lead role in the power block
development, so they will go out and seek partners for a power
production facility. Agrium is doing due diligence on the
feedstock supply and is looking for a partner to finance the
gasification island. It needs to continue to find and secure
natural gas for the existing plant to maintain its personnel and
presence in Alaska.
3:50:49 PM
MR. JOHNSON said it is a viable project with many benefits to
Alaska and no environmental obstacles. The company is finalizing
its design and verifying the availability of feedstock. Agrium
will be screening the gasification partners who will come in and
invest in the gasifier block itself.
3:51:48 PM
SENATOR WIELECHOWSKI spoke of the limitation on mercury release
by coal plants under the Clean Air Act, and Alaska has been
allocated about 10 pounds per year.
MR. JOHNSON said the mercury rule is new, and there is a minor
allocation for Alaska. There is litigation pending to challenge
that allocation, and there is also a provision in the rule for a
trading program. Agrium will try to minimized mercury emissions
by engineering and is currently assessing the best mercury
scrubbing technologies. It is part of the evaluations, he said,
and the worst case would be the trade program.
SENATOR WIELECHOWSKI asked if current transmission lines are
sufficient for shipping Agrium's excess power.
3:53:44 PM
MR. JOHNSON said transmission on the Kenai is limited to about
70 megawatts of export power, and so that is the amount that
Agrium is considering. It will see if it can be commercialized
and will be working with Homer Electric.
SENATOR WAGONER asked about the size of the power plant and how
much power will be used on site.
3:55:01 PM
MR. JOHNSON said the power plant is sized to be about 200
megawatts of electrical power, and roughly 120 megawatts would
be used to supply the air-separation unit, the gasifier, and the
existing fertilizer plant. There is also 85 megawatts of thermal
energy as steam, so a total of about 300 megawatts is produced
and consumed by the process, and 70 megawatts would be exported.
SENATOR WAGONER asked how much gas is produced and put in
storage and not made available for Agrium.
3:56:10 PM
MR. JOHNSON said there is gas going into storage, but he doesn't
know how much.
SENATOR WAGONER asked about other byproducts besides CO2.
MR. JOHNSON said the gasifier will produce slag or molten ash,
which is inert and can be used for road base or cinder block.
3:57:12 PM
CHAIR HUGGINS asked about using Beluga coal.
MR. JOHNSON said Agrium looked at Beluga coal but found that the
Healy mine was a good fit. Healy is an existing mine in
operation with a rail link. Beluga is a large resource, but not
in production. Both are options, but Healy is being used for the
feasibility studies.
CHAIR HUGGINS asked if it may be more economical to move coal
from the Beluga mine in the distant future.
3:58:49 PM
MR. JOHNSON said Beluga coal is closer, but it has to overcome
the capital of starting up a new mine. It could become the most
economical, but that is difficult to project.
CHAIR HUGGINS said his impression is that the cost of natural
gas is the biggest challenge for Agrium, instead of supply.
MR. JOHNSON said the biggest challenge is supply. "We lost
supply early in October." There will eventually be a price
concern; the supply is the problem now.
CHAIR HUGGINS said, "So at present market value in Cook Inlet,
if there was supply available, it would it work you?"
MR. JOHNSON said yes.
SENATOR WIELECHOWSKI said if the Federal Energy Regulatory
Commission (FERC) denied the LNG permit that is up in the coming
year, he asked what the impact would be on Agrium's natural gas
supply. He asked him to compare the costs of natural gas with
shipping the coal.
4:00:38 PM
MR. JOHNSON said Agrium is still in negotiations with all of the
producers and trying to obtain gas. The supply of gas from the
North Slope will be out of sync with the company's timeline,
because it wants to be operating by 2011, and the gas line is
projected for 2015 at the earliest. The economies could be
compared then.
SENATOR WAGONER asked which has the least price volatility.
4:02:07 PM
MR. JOHNSON said coal is much more stable, so if the capital
hurtle can be overcome for the gasification unit, there will be
a stable cost of feedstock. Natural gas is more volatile because
it is indexed to NYMEX, he stated.
CHAIR HUGGINS asked about clean coal and environmental
considerations.
MR. JOHNSON said gasification is a very high energy process and
captures a lot of the impurities, like sulphur and mercury.
Gasifying produces a clean feedstock for the fertilizer plant.
Agrium is trying to determine the ultimate source of firing for
the coal-fired power plant. The current coal-fired boiler would
be updated to be environmentally friendly. Alaska coal has low
sulphur so both gasification and power would be clean.
4:04:10 PM
SENATOR WIELECHOWSKI noted a report of mercury in some of
Alaska's fish, and he asked for assurance that the use of the
coal will not increase mercury in fish or wildlife.
MR. JOHNSON said, "Our initial evaluation was a detailed
environmental screening on the air quality emissions from the
project. The air quality emissions will be very high standard of
controls. In addition to the air quality, the bigger concern for
fish would be on the water side. And on the water side from the
gasification plant, anywhere coal is touching the process, we'll
use a zero liquid discharge process to collect any wastewater
and treat it, so that there will not be a liquid discharge from
the coal gasification process and facilities. And that will
greatly eliminate any chance or risk of mercury contamination in
the water."
SENATOR WIELECHOWSKI asked if mercury is released in the air and
brought down by rain.
MR. JOHNSON said that is possible and that is why the company
will minimize air emissions. One of the proposals for financing
the project includes the Alaska railroad's bonding ability.
4:06:12 PM
PAT GAMBLE, President, Alaska Railroad Corporation, said Agrium
contacted the railroad regarding coal transportation and
financing. The Alaska Railroad has access to tax-free bonding.
He has asked Agrium to provide technical information regarding
transportation. The Alaska Railroad issued the first segment of
up to $165 million worth of bond already, he stated. It has a
financial team to run the models of a project of this size. "We
are busy in direct response to Agrium's questions," he said.
Agrium has asked the Alaska Railroad to look at options like
Port McKenzie, Port of Anchorage, Seward, or building a railroad
track down to the site. "We are very much a part of this
discussion with [Agrium] at the present time."
4:08:27 PM
SENATOR STEVENS asked about the option of extending the
railroad.
MR. GAMBLE said the analysis is not complete, but the extension
to Kenai is not practical. The rail is already to the Port of
Anchorage and one can analyze the efficiencies--as the port
grows--of designing in the coal off-load capability. Another
option is extending the line near Willow with a spur to the Port
of McKenzie. An off-load area could be designed into the port.
He noted that pile management is important. It is a significant
investment, but the railroad is also working with the borough.
The railroad has "a good teaming effort," he stated.
4:10:21 PM
SENATOR STEVENS stated that an efficient operation could be
added to the Seward facility, but a ship would then have to go
around the peninsula.
MR. GAMBLE said it is not difficult, but it is a time and
distance expense issue.
4:10:50 PM
CHAIR HUGGINS said the corridor to Pt. McKenzie is attractive
"to some of us…, but from a state's prospective it appears that-
-assuming some growth potential of the port-that places like
Anchorage will probably, in the future, welcome this, maybe…But
when you come to gas pipeline-sort of things, there's at least
some potential to be able to haul from a port like that versus
through the Port of Anchorage…Would that be feasible, assuming
some rail hooking to the port at Pt. McKenzie?"
MR. GAMBLE said Port McKenzie is expensive, but if that can be
overcome, there is a real opportunity to move goods to tide
water that would be hard to move all the way around to the Port
of Anchorage. He said there are a lot of resource products in
the interior that could go to an industrial McKenzie port. The
container business would grow and continue to come into the Port
of Anchorage. He said, "I think it's well within the bounds to
de-conflict those and to optimize those so that you get the
advantage of both." The Alaska Railroad has always felt that
combining transportation, power, and data transmission the
entrepreneurs come out of the woodwork. He mentioned limestone
and other resource opportunities that are not feasible now
because of transportation issues, and said that this would be a
great move for the State of Alaska.
4:13:59 PM
CHAIR HUGGINS said he thinks the Port of Anchorage sees this as
an interim "to make it work for Agrium-being a good neighbor,"
but it would prefer an alternative location.
MR. GAMBLE said the idea needs a lot of coordination, and almost
begs for some sort of an authority so the entities are not in
competition for federal state dollars. If "the bridge" is in
there, it will be a big player, he said.
4:15:34 PM
DONNA BOLTZ, Deputy Director, Port of Anchorage, said the port
is in the third year of an intermodal extension program, and it
has extended the rail line onto port property. The expansion
project supports Agrium's construction timeline, she said. Last
year the port filled in an additional 21 acres and will continue
to work on the north end. It will be completed in 2008. She said
it has worked closely with Agrium in fitting its needs into the
port's master plan. The facility and timing is very well
postured to support Agrium, she added.
CHAIR HUGGINS asked about any concerns from the port.
MS. BOLTZ said it will take very close coordination, but with
everything that Agrium has laid out, "we can support this."
4:17:27 PM
SENATOR GREEN asked about coal dust produced from the exchange
from train to barge, and any impact to the local subdivisions.
4:18:24 PM
DAN GRAHAM, Consultant, Usibelli Coal Mine, said there will be
100 percent coverage and containment for all steps from train
off-loading to the ship.
MR. GRAHAM said he works for Technical Field Services. The
project looked at Beluga and Healy sources of coal, and they are
both very competitive, but Healy has ample reserves, it is
already permitted, it is capitalized, and it is only a Monday
through Friday operation, "and over half this additional
capacity can be picked up just by adding staff and running the
equipment longer." He is working with the railroad to get the
transportation costs under control, and the delivery from Healy
can be relied on for the 2011 time period. Another big advantage
is that in 2003 the Alaska Energy Authority did a power study
for the rail belt, and one key conclusion was that the rail belt
was too dependent on gas-fired power and needed to diversify.
"This project, along with the project the [Matanuska Electric
Association is] bringing forward, gets about halfway to their
recommendation of trying to diversify the power into the rail
belt using coal." The lowest cost coal states in the country
have rates that are substantially lower than other states, he
noted.
4:22:17 PM
SENATOR WIELECHOWSKI asked what percentage the 70 megawatts of
power would be for the total Railbelt energy.
MR. GRAHAM said the total capacity in the rail belt is between
1000 and 1200 megawatts. A small percentage of that is coal.
SENATOR WIELECHOWSKI asked what the cost per megawatt will be by
using coal instead of natural gas.
MR. GRAHAM said Matanuska Electric just released a study, and it
is about 30-40 percent lower for coal than natural gas.
4:23:39 PM
SENATOR STEDMAN asked about a break-even price of natural gas
where coal becomes more efficient for electrical generation.
MR. GRAHAM said the break-even point was around $2 or $2.50 per
million BTU, and now Cook Inlet gas is approaching $6 per
million BTU, so the breakeven point has been surpassed.
4:24:44 PM
SENATOR WAGONER asked how many megawatts the Beluga generation
plant puts out.
MR. GRAHAM said about 358 megawatts, and that is one third of
the rail belt.
CHAIR HUGGINS asked about coal activity in the lower 48.
MR. GRAHAM said he won't claim any expertise on the lower 48
coal markets.
CHAIR HUGGINS asked if the state should be in hot pursuit of
gasification or if it is just a last resort.
MR. GRAHAM said Alaska has a tremendous amount of coal, and if
gasification is solely for power generation, it may not be the
best option. In this case, where power is generated and the
products of gasification are used, it makes sense, he stated.
CHAIR HUGGINS asked about the feasibility of the Agrium Blue Sky
project, and if it is feasible only under optimum circumstances.
4:26:18 PM
MR. GRAHAM said the initial costing of the project attempted to
avoid killing the project by having too many safety nets, and
"we didn't want to undercut ourselves and build optimization in
early in the process. We tried to put it right down the middle
of the best estimate that we could come up with…"
MR. JOHNSON said every project will have its challenges and
opportunities, but this project has so many positives. There is
an existing facility without a feedstock source, and "that is a
great anchor." There is a demand for low cost energy that is
using a declining source of natural gas. The project provides
ability for more oil recovery, and it will be done in an
environmentally sensitive way. There are still challenges, "but
for a gasification project, this has certainly got to be one of
the top projects around because so many things come together
that are positive."
CHAIR HUGGINS asked how many jobs the project will create.
4:28:17 PM
MR. JOHNSON said the plus side is that the 250 current jobs will
be retained, and it will create more jobs at the mine, the
railroad, and transportation infrastructure. There will also be
1,000 to 1,400 construction jobs.
CHAIR HUGGINS asked about Homer Electric.
MR. JOHNSON said Homer Electric has signed on to be a partner
and is eager to find a way to make the project work for its
cooperative. They are responsible for commercializing the power
that is sold under the grid. They are active and enthusiastic.
4:29:36 PM
SENATOR STEVENS asked about bonding the project and the impacts
to the Alaska Railroad.
BILL O'LEARY, Chief Financial Officer, Alaska Railroad
Corporation, said the railroad has been working with Agrium for
a number of months and trying to examine if there is an
opportunity for the Alaska Railroad to assist. When the Alaska
Railroad was transferred from federal ownership to state
ownership there was "a provision that we believe allows the
railroad to issue tax-exempt bonds." This is a powerful tool for
financing, he said. The financial team believes that it would be
allowed, but it has not been tested, so Agrium and the Alaska
Railroad could gain clarity on this. He thinks the impacts to
the railroad would be positive. Using tax-exempt debt would help
the economics if the Agrium project and provide the Alaska
Railroad with the transportation piece.
4:32:34 PM
MR. GAMBLE added that the IRS determination gets more solid as
the link between the railroad and the customer increases, so he
is working with Agrium to define that link, "and make it a no-
brainer" before taking it to the IRS. He said he is very
confident there will be no problem with the IRS. There are two
components for bonding, and one is partnering with Agrium on the
larger project. Secondly, the Mat-Su Borough is interested in
getting the rail extended to Port McKenzie. One option on who
pays for what, is the railroad uses its tax-free bonding
capability for that as well, he explained.
4:34:02 PM
SENATOR WIELECHOWSKI asked the bond amount; if it would require
legislative approval; and if the state will be liable for a
default.
MR. O'LEARY said the amount would be about $2.5 billion, and the
enabling statute requires legislative authorization. The basic
tenet of the financing is that it would be non recourse to the
Alaska Railroad and all debt issued by the Alaska Railroad is
not an obligation of the state. The obligation in a default
would be "the project." Agrium or whatever structure it has set
up would be on the hook for payment of the bonds.
4:35:56 PM
CHAIR HUGGINS said he went through the same process last year,
and the statute made it clear that the state was not on the hook
for the money.
SENATOR STEDMAN said he heard them say that it was a "riskless
bond." But if it turns upside down, clearly it will impact the
Alaska Railroad and any future expansion obligations.
MR. O'LEARY said it would not reflect well on the Railroad, but
the actual obligation would not be to the Alaska Railroad.
4:37:12 PM
SENATOR STEDMAN said he understands the technical aspect of who
ends up holding the bag, but there is impact when looking at
over $2 billion in bonds. The railroad will have other expansion
issues to deal with, including a gas line. "So I wouldn't
characterize it as riskless to the railroad," he said.
MR. GAMBLE said there is a responsibility and the railroad would
be on board to the end of the term. If there is a problem, the
Alaska Railroad will be in court with everybody else. He said he
is confident that the Alaska Railroad would not be financially
liable. The railroad board will carefully examine the risks. The
board is waiting for that next step.
4:39:16 PM
SENATOR STEVENS asked about the IRS and how long it will take.
MR. O'LEARY said it starts with a private-letter ruling request
to the IRS to make the bonds marketable. The IRS would issue a
determination within six months of a complete application, but
the IRS determines the completeness, so it can be a lengthy
process. The project must look very real to the IRS because it
doesn't rule on hypotheticals, he noted.
4:40:37 PM
BILL POPP, Kenai Peninsula Borough, said this project is
important to the Kenai Peninsula and the state for major new
value-added opportunities. There could be tremendous
opportunities rippling through the economy, including collateral
development like raising the level of expertise in the area. It
carries over into other industries. It is a very large project
and Agrium has taken up quite a task, but this technology is
gaining traction elsewhere, he stated. China has $70 billion
worth of coal gasification facilities. Alaska has the
opportunity to be at the forefront of the technology and spin
off other economic opportunities for the southcentral region and
the state.
CHAIR HUGGINS asked about port facilities on the Kenai.
MR. POPP said he doesn't know Agrium's final plans, but some
opportunities may be improved dock and port facilities in the
Nikiski area. Port McKenzie is an addition to the infrastructure
base in Cook Inlet, he said. The dock facilities will be multi-
purpose and will lead to spin-offs that benefit the economy.
4:44:17 PM
CHAIR HUGGINS said it is important for the state to leverage
additional coal marketing, which has tremendous potential. "We
don't use it, and we don't sell much of it," he stated. Coal is
the third leg in the energy stool in Alaska. The state can't
turn its back on the potential for leveraging new infrastructure
to the future. "We don't blindly issue bonds…but if we can tie
those three things together and some of the other players, then
we're all a winner."
4:46:18 PM
SENATOR WAGONER asked about the difference in the qualities of
Beluga coal and Healy coal.
MR. GRAHAM said they are identical and interchangeable.
The Senate Resources committee adjourned at 4:47:16 PM.
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