Legislature(2009 - 2010)BUTROVICH 205
01/21/2009 03:30 PM Senate RESOURCES
| Audio | Topic |
|---|---|
| Start | |
| Overview: Natural Gas for Instate Use | |
| 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
January 21, 2009
3:33 p.m.
MEMBERS PRESENT
Senator Lesil McGuire, Co-Chair
Senator Bill Wielechowski, Co-Chair
Senator Charlie Huggins, Vice Chair
Senator Hollis French
Senator Bert Stedman
Senator Gary Stevens
MEMBERS ABSENT
Senator Thomas Wagoner
COMMITTEE CALENDAR
Overview: Natural Gas for Instate Use
Alaska Gasline Port Authority
Alaska Natural Gas Development Authority
Enstar
PREVIOUS COMMITTEE ACTION
No Action to Report
WITNESS REGISTER
WILLIAM WALKER, Attorney
Walker and Levesque, LLC
Alaska Gasline Port Authority (AGPA)
Anchorage, AK
POSITION STATEMENT: Gave an update on AGPA.
HAROLD HEINZE, Chief Executive Officer
Alaska Natural Gas Development Authority (ANGDA)
Anchorage, AK
POSITION STATEMENT: Gave an update on ANGDA.
COLLEEN STARRING, President
Enstar Natural Gas
Anchorage, AK
POSITION STATEMENT: Answered questions regarding Enstar.
GEORGE SCHREIBER, President and CEO
Continental Energy Systems -- the holding company of Enstar
Rochester Hills, MI
POSITION STATEMENT: Gave an update on Enstar.
ACTION NARRATIVE
3:33:50 PM
CO-CHAIR LESIL MCGUIRE called the Senate Resources Standing
Committee meeting to order at 3:33 p.m. Senators Stevens,
McGuire, Wielechowski, French, and Huggins were present at the
call to order. Senator Stedman arrived shortly thereafter.
Senators Thomas and Paskvan and Representative Ramras were also
present.
CO-CHAIR MCGUIRE announced the excused absence of Senator
Wagoner. She said in-state gas is now the most important issue
for the committee.
^Overview: Natural Gas for Instate Use
3:33:57 PM
WILLIAM WALKER, Attorney, Walker and Levesque LLC, Alaska
Gasline Port Authority (AGPA), Anchorage, AK said he will give a
brief overview. He provided the names of the members of AGPA'S
nine-member volunteer board. It is chaired by Bert Cottle, the
Mayor of Valdez.
3:36:51 PM
MR. WALKER thanked the legislature for its intent language
passed last year in a vote of 58 to 1, which allowed AGPA to go
to its partners and to the market and show that the exclusive
license to TransCanada didn't negate LNG; "what you did with the
passage of the legislative intent proved … that the legislature
has every bit of interest in the LNG project being considered
and evaluated - so thank you very much for that." Following the
intent language, AGPA received Administrative Order 242 from
Governor Palin, which was also helpful, he said. It kept AGPA's
partners interested, and AGPA would not be present today if the
legislature had not done that. Mr. Walker went to Hawaii last
year to meet with the Office of Hawaiian Affairs, which is
analogous to the Alaska Federation of Natives (AFN). Hawaii is
evaluating the importation of LNG. It is now using coal and
diesel and wants cleaner and cheaper fuel, and they have
expressed an interest in Alaska gas.
3:39:08 PM
MR. WALKER said the AFN passed a resolution to support an LNG
project that gets energy to Hawaii and rural Alaska. The Office
of Hawaiian Affairs may be coming to Juneau to speak with the
legislature. He expressed an interest in continuing to develop
that relationship.
3:39:43 PM
MR. WALKER said AGPA continues to work with Mitsubishi and
Sempra, and it is entering its next level of agreements. They
both want to come to Juneau to speak with the committee on what
is happening on the world market and why they want to be
involved in the Alaska LNG project. He noted that Mitsubishi
brings in about 50 percent of the LNG to the Asian market.
Sempra is one of the largest marketers of natural gas in the
Lower 48, "so we feel we … cover both spectrums - both the world
market as well as the U.S. market by having both of those
entities."
MR. WALKER said AGPA's focus since the passage of AGIA [Alaska
Gas Inducement Act] is preparing for the open season in July,
2010. It has met with TransCanada. TransCanada has committed to
build a stand-alone line to Valdez, which will be independent of
a Canadian line if there are sufficient customers on that line.
He thanked the legislature for its involvement in "that
process." It is a significant piece because TransCanada is a
very good pipeline company. AGPA has spent many days in Calgary
with TransCanada long before AGIA began. Mr. Walker said he is
pleased with TransCanada's track record, and AGPA plans to
continue to work with it in preparation for the open season, and
"it's just nice to have that piece taken care of." AGPA's role
is the liquid fractionation facility in Valdez, he stated.
3:42:22 PM
MR. WALKER said AGPA is working on cost estimates for that
facility. It needs to "have the same level of cost estimate that
TransCanada has. They have proposed a Class 4 cost estimate. We
need … to make sure that our cost estimate for the liquefaction
and the fractionation units are of comparable class so that it
flanges up … because no one will be wanting to ship just to the
end of the pipe. They'll need to know all the way through,
including the shipping piece of it." So, AGPA will cover the
liquifaction and the shipping. Some will take care of their own
shipping, he noted. AGPA's goal is to attract customers to the
open season, so it is important to make it attractive to the
shippers - those that own the gas, whether it is the producers
or someone who buys it from the North Slope producers. That's
where AGPA's focus is now.
3:43:46 PM
MR. WALKER said AGPA believes that LNG maximizes the wellhead
value of the gas. "We are all about in-state use of gas," he
stated. AGPA's AGIA application initially had 22 off-take
points, and it is now narrowed down to 18. "That's the kind of
focus we have on in-state gas. We contacted every military base
in the state … any industrial user." The goal is to get as much
gas used in Alaska as possible. AGPA has a long relationship
with ANGDA [Alaska Natural Gas Development Authority]. The two
groups have a memorandum of understanding together regarding
gas. Recently Scott Heyworth attended one of AGPA's meetings.
The two groups are going to work closer. "We applaud what
they're doing - I think 'boots in the field' is the term that
Harold [Heinze] has used." He said "that brings value to getting
gas to Alaskans. We hope that their line only has to go to
Glennallen instead of all the way to Delta. That's what we're
working towards, and … we applaud what they're doing, and we
will continue to work with them."
3:45:37 PM
MR. WALKER said the biggest change in the past year has been in
the market. Shale gas development is astounding, he said. He
provided some articles on shale gas. With horizontal drilling
"they fracture the gas hydraulically with water and the gas
comes out." "The estimates are absolutely huge." The Marcella
play in West Virginia to New York is estimated at 1,300 trillion
cubic feet. There are estimates of two to three thousand
trillion cubic feet of gas available in the shale gas
development. This developed quickly because "when the price at
Henry Hub went to $13, suddenly there was plenty of money for
technology to go in and do things that they couldn't do at $2
and $3, and some of the articles that I've read … refer to
technology as the absolute unsung hero in this process because
that's really what has cause it to happen." The prices have now
dropped, and recent articles said money can still be made on the
shale gas at $5. Today's price is $4.79. In the last 12 months
there has been a 10 percent increase in gas production because
of shale gas. It is a "game changer," he said. Ottawa just
decided to put "a couple million dollars" into the McKenzie
project to get ahead of the shale gas. This is significant.
3:48:23 PM
MR. WALKER said Alaska has multiple options, and LNG makes an
abundance of sense. One of the largest shale gas plays is in the
Horn River Valley of British Columbia and is speculated to be as
big as the Barnett play in Texas. He said the municipal
ordinance of Fort Worth allows drilling a gas well within 600
feet of someone's home without a variance. With a variance, a
well can be drilled within 200 feet of a home, and then
"everybody shares in the royalty." The Fort Worth area is
producing about 3 BCF of gas, and some believe it can go up to 6
BCF. He noted that plays are spread out across the continent. It
is great news for North America and the security of supply.
"Some have speculated that there is enough for the next 100
years in the shale gas development."
3:50:10 PM
MR. WALKER said AGPA has watched its competition take advantage
of that. AGPA received a letter from the Kitimat [British
Columbia] receiving terminal 13 months ago indicating a desire
for Alaska LNG. About a week ago it was announced that Kitimat
is now an LNG export terminal with Mitsubishi as a partner. "We
certainly don't fault them in any way. It just is another
indication to us that people are putting a lot of credence in
the shale gas development." Kitimat is looking at the premium
Asian market for its LNG, and because of the change of pricing
in the Lower 48 it made more sense to be exporting into the
Asian market. That gives the first real competition on the West
Coast, and now AGPA needs to work a little faster and harder.
3:51:59 PM
MR. WALKER said AGPA is an in-state project and an export
project. The in-state part is the heart of the purpose of AGPA.
In the North Slope, 8.4 BCF of gas is injected every day, and
2.7 of that could be taken off today, according to AOGCC [Alaska
Oil and Gas Conservation Commission] Rule 9. "So we come from an
existing source of proved reserves on gas - is where our project
would begin." He believes that LNG provides the highest netback
to the North Slope producers and to the state. It is important
that AGPA can provide the highest netback to a holder of a
lease. "We think it's helpful that for a later line through
Canada that they could tie in at Delta Junction, and there'd be
550 miles of shared line." That helps the economics. AGPA is not
interested in waiting for that to happen before a line through
the rest of Alaska takes place, and that is why AGPA is pleased
with the independent, stand-alone line to Valdez if there are
sufficient customers. AGPA does not have a volume restriction of
500 MCF. AGPA is within AGIA and would be utilizing TransCanada
and its license. The volume will be what the market will bear.
It depends upon the train sizes and the consumption within
Alaska. It is good not to be limited to the 500 MCF. There are
some parts of Alaska that have never had access to natural gas,
and it is hard to put out a number. There may be development in
the future, so he wants to be able to exceed 500 MCF.
3:54:45 PM
SENATOR HUGGINS asked if TransCanada agrees with no restriction.
MR. WALKER said yes, as long as it comes through its line. AGPA
has committed to working with them.
CO-CHAIR MCGUIRE asked if that is in writing.
MR. WALKER said AGPA is getting that and will provide it to the
committee. TransCanada is already working on the open season.
"They've done the over-flight to Valdez." AGPA is working on the
volume estimate to provide to TransCanada this week. TransCanada
needs to know the size of the pipe so it can come up with a cost
estimate for the Valdez portion. AGPA, Sempra, Mitsubishi, and
TransCanada are "working toward their open season." The pipeline
route will be parallel to TAPS [Trans Alaskan Pipeline]. There
have been three environmental impact statements; two were done
by Alyeska and one was done by the Yukon Pacific Corporation, so
there are few surprises in that route. TransCanada will be doing
the pipeline portion. AGPA will enjoy all the benefits of AGIA,
including expedited considerations. The largest in-state line
provides the anchor for more economical gas development in
Alaska. Offtake locations will benefit from that larger volume.
"Our anchor tenant is the world market." Tokyo is very
interested in gas from Alaska, and they have been receiving gas
from Nikiski since 1969. Alaska has the highest rating in the
world on on-time deliveries, and it is the longest contract, by
far, that's ever been honored. That means a lot to companies
that require that to generate the product.
3:58:18 PM
MR. WALKER said, "We have the anchor tenant … and how that would
be distributed on the world market between the West Coast of the
U.S., Hawaii and Asian market, the market will really be the
test for that." He likes the fact that it is all within Alaska.
CO-CHAIR WIELECHOWSKI said during the open season next year, in
May or June, the Asian corporations and countries will have the
opportunity to make deals with the oil companies to put the gas
in the line for a line down to Valdez.
MR. WALKER said that is correct, "They would either be able to
buy it at the wellhead prior to the open season or purchase it
with the shipper, the current lessee, retaining control of it to
their site."
CO-CHAIR WIELECHOWSKI asked if there are states, countries, or
organizations that are planning on doing that.
MR. WALKER said AGPA would probably not have Mitsubishi and
Sempra if that was not going to happen. He believes they have a
high level of confidence that it will be a successful open
season.
4:00:06 PM
CO-CHAIR WIELECHOWSKI said the most important thing for Alaskans
is getting the quickest and cheapest natural gas. He asked if
AGPA's route provides that. What is the best for Alaskans?
MR. WALKER said AGPA is the quickest because of the sheer
economics. There are proved reserves and a market that will take
the volume that Alaskans cannot use. "We believe that the line
parallel to TAPS through an existing corridor is the quickest
and surest." The goal is to get it to Alaskans at an economical
price, and that is what the LNG project provides. It provides
the anchor tenant that allows there to be economies of scale for
the transportation of the gas. The goal is to get the tariff as
low as possible. That same benefit equates to $10 billion to the
consumers in Canada with the TransCanada line. The same concept
would apply in Alaska.
4:01:56 PM
CO-CHAIR WIELECHOWSKI asked what that cost might be.
MR. WALKER said it depends on the volume at the open season. It
needs to be enough to offset the costs. The tariff will be
significantly lower than it would be with a much smaller line.
CO-CHAIR WIELECHOWSKI asked about the recent rejection of the
renewal of the permits for Yukon Pacific.
4:02:48 PM
MR. WALKER said he knows that company has spent a lot of time
and money on its efforts. There may be reconsideration for it,
but he doesn't know if that will affect AGPA. "We will either
work with them with their permits or we will apply our own
permits." He doesn't think it is a problem at all.
SENATOR FRENCH said one hang up with the LNG project was getting
an export license to send the gas overseas. He suggested the
recent discoveries of volumes of natural gas in the Lower 48 may
be an impediment to the big pipeline, but it may provide an
opportunity to overcome the difficulties of shipping overseas.
He asked if the Obama administration would look more favorably
on an export license for Alaska's gas given these new
discoveries.
4:04:16 PM
MR. WALKER said AGPA follows that closely. There is a
presumption of export. America wants to export products, he
stated. To not grant it has to overcome the proof that there
will not be enough gas for the United States. The shale gas has
resoundingly shown that there is plenty of gas in the U.S. The
export license can "interruptible" in case there was a shortage
in the Lower 48. The balance of payments is important, and AGPA
would be happy with any one of the reports that have come out.
"ICF has come out with some significant reports in Washington
D.C. on the amount of shale gas -- when the energy consultants
are referring to the lower 48 as awash in gas … that's good news
for us as Alaskans when we go for the export license." There is
a desire for gas for Americans, and he noted that Alaskans are
Americans too, so if Alaska has to export to provide gas to
Alaskans, "that should be taken into consideration and we
shouldn't be prevented from using our resource" for fear of a
future shortage in the Lower 48.
4:06:20 PM
SENATOR HUGGINS said there are two countries that buy [U.S.]
bonds: Japan and China. This economic relationship and China's
great thirst for the resource, "may become overwhelmingly
important for us as we build up this growing debt of trillions,
which probably is even more important than an export permit
because it may be fundamentally spring-loaded until we have to
do the export permit when we look at the economic analysis of
who buys our bonds."
CO-CHAIR MCGUIRE asked if Enstar's proposal is competing or not.
4:07:30 PM
MR. WALKER said AGPA is pleased with anyone wanting to move gas
in Alaska, "so we don't really look it as a competitor; we look
at it as a different concept. They have a totally different
concept than we have." The goal is for the best one to proceed.
AGPA is working with TransCanada because of the AGIA process and
because of the volume restrictions and the opportunity to have
the world market as the anchor tenant. He applauds anyone
spending time, money, and effort to get gas throughout Alaska.
4:08:22 PM
The committee took a brief at-ease.
4:10:09 PM
HAROLD HEINZE, Chief Executive Officer, Alaska Natural Gas
Development Authority (ANGDA), Anchorage, said he will give an
update since his last hearing in July. He noted the recent
changes in oil prices, the meltdown in financing, and potential
employment issues. It is not all bad in that "we have created
some momentum on the big gas pipeline." Today there are two
active sponsor groups moving forward. The decline in oil prices
"bought us some time." There are still people in bush Alaska
suffering from the high fuel prices, but there is some relief.
MR. HEINZE said ANGDA's current project is the Beluga-to-
Fairbanks linkage. It links Beluga to Palmer through Glennallen
and on to Delta Junction in a high-pressure gas pipeline. It
then provides for either a high-density plastic pipe or small-
diameter steel pipe (awaiting the big pipe) linking Delta
Junction on up to Fairbanks. That project is an outgrowth of a
challenge given to ANGDA because of the extreme energy costs
experienced by Fairbanks.
4:13:26 PM
MR. HEINZE said, "That is the B2F project." ANGDA has a
conditional right-of-way "between the Palmer Glennallen area"
from the state. It parallels the Trans Alaskan pipeline from
Glennallen up to Delta Junction and up to Fairbanks. ANGDA can
make economic sense of this project, "feeding a relatively small
volume of Cook Inlet gas all the way up to Fairbanks." The
economics are not the greatest, but if it had existed in July
when the cost of gas was high it would have provided substantial
relief to the people in Fairbanks. There may be less interest
with the current price of oil near $40. It will not remain at
that price forever, "so we see this project as one that is
worthy of moving forward and at least have it as an option."
ANGDA wants to preserve options, he said. None of these
[projects] require huge commitments at this point, and they have
been advanced with very modest efforts and expenditures compared
to the scale of the potential savings. ANGDA completed the
wetlands work for the entire route.
4:16:03 PM
MR. HEINZE said the wetlands work is a major permitting step.
ANGDA has also initiated the federal Environmental Impact
Statement on the entire Beluga to Fairbanks project, which is
the necessary step for the state and federal right-of-ways and
all other federal permits. That process takes about 18 months so
there should be a draft result in less than a year from now. He
doesn't expect many difficult issues to arise from it. In about
18 months the final permits should be complete. The Army Corps
of Engineers is the lead agency. "There is no way to do an EIS
in less than about 18 months." It is his expectation that all
permissions will be in order by the first half of 2010 and in
the position "to start building something."
4:18:10 PM
MR. HEINZE said ANGDA has used some of the support it has
received to help form the core of a value-added manufacturing
conference in April of this year. It is jointly sponsored by the
Tri-Borough mayors in the Cook Inlet area and is a world-class
conference to attract the major international petrochemical
companies to "light up Alaska and the availability of a huge
quantity of ethane that may be coming off the North Slope for
their potential consideration." It is a crucial first step and
the best way to advance this. ANGDA hired a number of people
through the Anchorage Economic Development Council to actually
put on the conference. ANGDA has opened mutual-interest
discussions with TransCanada and its willingness to look at
going to Valdez. TransCanada has been true to its word on that.
It placed as much priority on Delta Junction to Valdez as it did
on Delta Junction to the border. ANGDA was already working on
acquiring additional information in the Delta Junction to
Glennallen area. In that area of overlap, he expects to find
working with TransCanada very productive. Under AGIA,
TransCanada is spending a percentage of public money and it
makes sense to work closely.
4:20:03 PM
MR. HEINZE said ANGDA is seriously negotiating purchasing
propane molecules on the North Slope with the intent that when
that agreement is reached it will become the basis for private-
sector construction of a propane extraction plant, and trucking,
barging, and all activities associated with distributing propane
from the North Slope. He believes that will offer a fuel
alternative to many rural communities along rivers or tide
water, including Cook Inlet. The terms of that agreement have
not been finalized, but he has every reason to expect that it
will offer a competitive fuel price for many parts of Alaska.
Last week ANGDA announced its intention to form a gas-supply co-
op for the utilities. ANGDA's major concern is the role it can
play as an aggregator. Many utilities are fractured in their
needs and don't have the financial ability to take long-term
positions that are necessary for shipping commitments and "other
things like that." ANGDA looked at the alternatives and found
that existing state statutes are good for the formation of a co-
op. It takes a limited amount of people to prepare papers of
incorporation. He envisions a traditional, menu-driven, Kansas
farmer-type co-op. The members of the co-op will set the menu
and drive the priorities, and they can choose what to use. In
this case the focus is on seven or eight of the electrical co-
ops. He said he believes there is reasonable interest in order
to take it to the step of forming [the co-op]. Feedback so far
has included gas storage and immediate contracting for gas in
this aggregated and cooperative format.
4:23:11 PM
CO-CHAIR MCGUIRE asked the impetus for that.
MR. HEINZE said ANGDA conducted open-season workshops, and it
included someone from a co-op of utilities that buys gas in the
ground. The members are about 200 different utilities. It is
made up of utilities from about six different states and is part
of their gas portfolio. Since Alaska's electric utilities are
small and fractured, a co-op will get a volume discount and will
allow them to "work against each other in terms when they need
things" and help each other out, including time trades. It would
be member driven, and ANGDA's job would be to launch,
facilitate, and help with bonding for long-term purchase of
pipeline space or purchase of gas. He will have more details in
a few weeks after the board meets.
4:25:29 PM
MR. HEINZE said ANGDA has been working with the concept of a
public/private partnership. The in-state system will benefit by
not being purely public or private. That is a classic approach
used for many different things. Here the setting is different,
so ANGDA is working on realistic goals and structure. ANGDA's
major issues for the next six months include working "with the
utilities to prepare for a fully and very active open season
process with either TransCanada Alaska or Denali in 2010." Both
of those groups have indicated their intention to move to the
open season sometime in 2010. They may do it sooner than they
say in order to have a competitive advantage in seeking a FERC
[Federal Energy Regulatory Commission] certification. ANGDA
wants to do everything it can to prepare utilities - maybe
through a co-op - for that open season. "We've done a lot of
work to get here; it has taken a lot of time and energy … it's
going to take a lot more work to get there, but this is the
single most important thing we see." There will be a tremendous
benefit to Alaskans "in terms of in-state gas being on the table
from day-1 in the big pipeline's open season. Missing the
opportunity to fully participate may bring on severe penalties.
4:29:02 PM
MR. HEINZE said there still exists the opportunity for some
significant level of field construction activities as early as
2010. It is a window that might not stay open for very long. The
economy of Alaska might want this activity in 2010. Meeting the
earlier timeline might have significant benefits. ANGDA found
that there is a sense of momentum that something is going to
happen since the inclusion of the two sponsor groups. If the
open season occurs in 2010, even if the gas doesn't move for
many years after, most major pipelines know that they need to
catch that opportunity. That is good. One concern is that the
basic process here in Alaska not be restricted. The competition
on the in-state part is great. He said he welcomed AGIA at the
time because it created competition between Denali and
TransCanada Alaska. In-state competition will be healthy too,
and ANGDA will do everything "to help that happen."
4:32:14 PM
CO-CHAIR MCGUIRE said she had wondered if an Enstar-type line
would be "mutually exclusive to the plans that you've laid out,
because your project and the Port Authority's are heavily
dependent on the open season in 2010 and the AGIA process, but
different and distinct from the proposed bullet line, and so I'm
glad to hear those comments."
MR. HEINZE said he sees Enstar as an example of competitive
concepts, and "I think that's good. I would be worried if we
thought we could pick the right answer right now." One should
expect "the reversal of the world in six months," and realize it
isn't easy to divine the right solution. He would suggest
expanding the players, concepts, and opportunities. Let the
market speak through the commitment of gas, financing, and
funding. That is crucial for getting the best deal for Alaska.
4:33:53 PM
CO-CHAIR WIELECHOWSKI asked how a public/private partnership
would work if it is market driven.
MR. HEINZE said he wished he had all the answers. It needs to be
worked on. Indications are that it is easy to evaluate a
private-investor approach or a fully public approach - it's all
debt. There are many examples of public/private partnerships "in
achieving some of the good from both sides, and it does require
give. An investor doesn't make as much in a public partnership.
He said he would not support the public taking all the risks,
and he doesn't think the public has the expertise. The middle
ground is good, but he doesn't know where that middle ground is.
One needs to hire consultants and ask the right questions. There
is a risk/reward ratio that needs to be understood. That can be
part of the process over the next year - "not of making a
decision, but of understanding at least form and structure and
those kinds of questions, because that's ultimately what affects
the utility bills all of us pay."
CO-CHAIR WIELECHOWSKI said he thought Alaska had that. The
governor had a press conference and said that ANGDA would be
working with Enstar. "Where are we with that situation?"
MR. HEINZE said there have been conversations and some attempts
"to do some things." Enstar's main conversations have been with
the administration. But to his knowledge "we have not progressed
in this area." ANGDA has conversed with other companies, and he
believes there is some opportunity to progress with them.
4:36:37 PM
SENATOR STEVENS asked about moving propane by barge to residents
that are off the grid.
MR. HEINZE said Alaska's small communities look like the farm
communities in the Midwest. The big propane companies operate
where there are long distances between users. Alaska has a
certain amount of propane tank users, but it comes from Canada
and Bellingham, so there would be an opportunity for a different
source. Another idea is having a tank that is the same size as
an ISO-container - "the common 20-foot, 40-foot you find all
over Alaska; we manage to get them everywhere ... without roads,
and you imagine a tank inside that steal frame," which could be
used to fill with propane. Making those containers in Alaska,
and other things like that, by using low-interest loans will
solve some of the storage and transportation issues. ANGDA is
trying to "get it to the point where it tips to the [Alaskan]
entrepreneurs."
4:39:11 PM
SENATOR HUGGINS asked why not tailor in-state gas to an AGIA
process. "Why wouldn't we take in-state gas and just boiler
plate it down to an AGIA process?"
MR. HEINZE said the virtue of the AGIA process is to create
competition, but competition can be created without going
through that process. The flaw of AGIA was to try and pick a
winner, but the market picks winners. "And I think we're going
to ultimately end up with that in the big line too."
SENATOR HUGGINS asked about a gas-supply co-op and guidance from
the administration.
MR. HEINZE said the ANGDA board is empowered, under statute, to
do whatever it takes to help get North Slope gas to market in a
way that benefits Alaskans. There is a liaison with the
administration in the Department of Revenue. Mr. Heinze,
himself, is a state employee, as are the people who do ANGDA's
contracting. ANGDA is obligated to follow all of the state
procurement rules and all the public notice provisions. There is
a pretty good public turnout at times at ANGDA's meetings. ANGDA
gets public feedback, and it has outreached all along the route.
"In terms of guidance I thought I received some of that in July
… the governor issued a press conference; we were there … she
told us to take care of Fairbanks if we could; develop whatever
ideas."
SENATOR HUGGINS asked about administrative guidance subsequent
to July.
4:42:03 PM
MR. HEINZE said it is important that "both the propane timeline
and B2F … is a result of the stimulus given to us in that
guidance." Since then, ANGDA has moved forward. "If you follow
us closely you'll see that our meetings and our direction and
decisions are pretty well publicized in the Petroleum News,
occasionally the other media chooses to cover us whether it be
talk radio or the Anchorage Daily News."
4:43:05 PM
The committee took a brief at-ease.
4:43:45 PM
COLLEEN STARRING, President, Enstar Natural Gas, Anchorage,
thanked the committee.
GEORGE SCHREIBER, President and Chief Executive Officer,
Continental Energy Systems -- the holding company of Enstar,
Rochester Hills, MI, said he will propose a way to solve the
in-state gas issue. He showed a chart on the availability of gas
in Cook Inlet. In the middle of the next decade, if there is no
in-state gas flowing to Enstar's customers by 2014, Enstar won't
be able to supply new customers, and old customers will be cut
off. He showed the Enstar gas supply contract comparison. "We
have taken the contract we negotiated about two and a half years
ago - APL-5 - and extrapolated out to where we are, which is the
last two contracts on the right side of the page." He said the
APL-5 agreement went out to 2016, which marries nicely with
Enstar's proposal for a line that will be delivering gas in
2015. That was an all-requirements contract, so as Enstar needed
gas and the market grew, "they" were contracting to supply all
of that gas. The RCA [Regulatory Commission of Alaska] rejected
APL-5, and "look what happens to the volumes." Volumes in the
APL-5 contract were 60 BCF, and it is 10 BCF under the current
contract. The new contracts are not all-requirements contracts.
Enstar spent three years and over $2 million with consultants
and lawyers negotiating these contracts, and the prices are
virtually the same. "I would submit to you that the RCA did our
customers a huge disservice by turning down the APL-5 contract."
4:47:32 PM
MR. SCHREIBER showed the state of gas in Cook Inlet. "We can't
wait for the big line to come on." The customers need it. For
each dollar the customer pays to Enstar, 96 cents goes to the
cost of delivering gas. There is only 4 cents in every dollar
that goes to Enstar. Higher gas prices hurt his business,
because Enstar's profitability is tied to rate and volume. With
low prices, customers use more gas and Enstar makes more money.
At high prices, customers conserve and less gas flows through
the line, and Enstar makes less money. Some people have trouble
understanding that. Enstar will try and insulate itself from
those volumetric fluctuations so it can promote conservation.
4:49:19 PM
MR. SCHREIBER said Alaska still enjoys the lowest cost of gas in
the nation. If there is not gas in 2014 or 2015, the impact on
customers will be dramatic and there will be a huge impact on
the state's economy. He presented a chart showing that natural
gas is cheaper than oil, propane, and electricity. In 2015,
Enstar will not be hooking up new customers and will drop
existing customers. His cost estimates do not include the cost
of the new furnace and water heater, which will be borne by the
customers. Customers who are now paying $150 a month for gas
will pay $218 a month for oil or over $500 a month for
electricity.
MR. SCHREIBER said what he is proposing "changes the market for
natural gas in Alaska." He proposes to move newly discovered gas
to the Interior and Southcentral Alaska. It is the right thing
for his customers and his business. He will require a
governmental framework that promotes private-sector investment
with predictable and fair market prices for natural gas. Enstar
will start by taking gas from the foothills near Gubik and
bringing it to Southcentral, with a 33-mile spur line to serve
Fairbanks. It will be 690 miles long and 20 inches in diameter.
It will flow 500 MCF per day and cost about $4 billion. Enstar
will invest $5 million in engineering, environment, right-of-
way, and other studies by the first part of March. Field work
will begin in 2009, and the other items listed on his handout
will require another $14 million. In 2010, Enstar will spend
another $53 million - "this is all on the permitting, the
engineering, the site and that kind of thing." The big bucks
will start to be spent in 2011, he said.
4:52:53 PM
MR. SCHREIBER said Enstar has retained a world-class team of
consultants for the engineering and siting to get this pipeline
flowing by 2015. For this project there must be gas supply on
the north end. There is no gas in Cook Inlet that will be able
to be taken anywhere. Enstar also needs customers. There are
several areas along the pipeline where it hopes to pick up
additional gas, "under the theory that if you build it, they
will come." He believes Enstar can start out with gas from
Anadarko, which had one rig in the Gubik area last year and now
has two rigs. He expects a report from Anadarko this spring on
what is there, but the increase in number of rigs indicates
supply in sufficient amounts. Finding customers to take the gas
is what he worries about. The Agrium plant and an LNG export
facility need to be fully operating. Fairbanks will have to be
"built out." If Fairbanks is completely gasified, it will have
about the same demand as Anchorage because of its weather. Other
opportunities may be available, like a petro-chemical plant, a
limestone operation that needs a heat source, and others. The
driving force is to get a significant customer base, because
that will decrease the costs to all.
4:56:20 PM
MR. SCHREIBER said the need for additional gas is getting to a
critical point. "It's going to have a significant impact on the
market if we're not successful getting our line in place. We
have contracted all of our requirements only through 2010, not
through 2016." Natural gas consumption and fair market prices
are important to continued economic growth and in securing
future gas supplies. The cost of switching from gas will be
detrimental. Government-mandated discounts won't remedy supply
and deliverability. Government needs to set sound public policy
that allows private-sector investments to develop this business
and develop storage. Time is critical; the gas needs to start
flowing by 2014.
4:58:20 PM
SENATOR STEDMAN said he is confused. A few months ago Enstar
said in a press conference that it was planning on going north
out of Cook Inlet. He asked what changed.
MS. STARRING said there hasn't been a change. There was a
discussion about getting relief to Fairbanks quickly, but Enstar
had gas contracts pending before the RCA at that time that gave
Enstar an additional five-year supply. "We also had one of our
current suppliers who we have options to purchase additional
gas." Since that time, the RCA didn't approve those contracts as
submitted. The RCA required amendments, and Enstar was not able
to negotiate those amendments with the producers. So Enstar
realized that it went from 60 BCF of gas to 10 BCF. One current
supplier declined an option for gas that Enstar had under
contract out in 2013. It has become clear that if there is gas
in the inlet, no one is offering it to Enstar under contract;
nobody is exploring. "We know that there's been exploration in
the inlet; however, those efforts have not been successful."
It's geology, she said, and she thinks the producers are
drilling and exploring but not having success like they did in
the 1960s and 1970s. The big finds have not proved up.
4:59:55 PM
MR. SCHREIBER said, "These are commercial guys, and they want to
monetize their assets. We are finding it more and more difficult
to get them to contract for gas, and so our thinking has changed
dramatically. We are going to have to get gas from the north and
bring it south because the gas in the inlet is just not there."
SENATOR STEDMAN said, "On page 16 under 2009, it talks about the
field work in a legislative package." He asked what that was.
MR. SCHREIBER said Enstar is in a conceptual stage of trying to
figure out if it needs some legislation to help expedite
permitting and right-of-way review and to make sure that fair
market prices can be determined in a timely fashion. "We're
considering whether that might make some sense to propose some
legislation for you all to consider to help in the process so we
can make our timeline of 2015."
MS. STARRING said Enstar has looked at issues such as contract
versus common carrier. It has been cognizant of the AGIA process
and trying to connect to it. "At this point we're just looking
at a lot of things that could come into play."
5:01:20 PM
MR. SCHREIBER said, "Not withstanding today's capital markets,
we have the financing for this project basically in place." The
people who own Enstar and Continental just raised $5 billion,
and they have $1 billion to invest in this. This is the kind of
investment they have been looking for, and they are excited
about it.
SENATOR STEDMAN asked if Enstar will come to the legislature for
money or for a partnership.
MR. SCHREIBER said no.
5:02:09 PM
CO-CHAIR WIELECHOWSKI said he has a lot of concerns. He really
disagrees with Mr. Schreiber's assessment of the RCA decision.
It was the right decision for the Southcentral consumers who
have seen their [gas] prices triple in the past few years. Many
conversations with people that deal with production in Cook
Inlet have noted that capitalization costs for the wells are 50
cents to the dollar. There are more costs for the newer wells,
but many of the existing wells are still working. "I know there
is still continued production, but I know it hasn't increased
that dramatically, and so I think the consumers in Southcentral
would greatly disagree with your assessment that the RCA did a
disservice."
MR. SCHREIBER said the historical costs of the wells go back 40
years. One of Enstar's suppliers has spent $100 million trying
to find new reserves in Cook Inlet and has been unsuccessful.
The price that Enstar is asking customers to pay supports
continued exploration and development, which has been
unsuccessful to date. "The other problem with the RCA rejecting
that order [is that] they put a tremendous amount of risk on our
customers to be able to make sure we have supplies of gas for
them in a market of declining reserves, because that contract
was an all-requirements contract. Our supplier was on the hook
to supply whatever gas we needed, and now we don't have that."
5:04:22 PM
CO-CHAIR WIELECHOWSKI said Conoco-Philips testified here a
couple of months ago that it had a 20-year supply in Cook Inlet.
It had 1.7 TCF in proven reserves. DOE [U.S. Department of
Energy] would not have approved an export license if there
wasn't enough gas for Southcentral. Conoco-Philips verified that
when it submitted its application to DOE. The producers are
saying there is plenty of gas in Cook Inlet. The average basin
reserve is about eight years, "and we've got more than double
that in Cook Inlet."
MR. SCHREIBER said, "I'm sure what they also told you [is] that
if the LNG plant doesn't operate, the gas will not be there."
Wells fill up with water and the gas becomes undeliverable, "so
you can't have one without the other." Mr. Schreiber said he did
not know what Conoco-Philips said, but he thinks it is fair that
the consumers pay the market price for gas that will incentivize
the producers to find more gas, like Anadarko is doing up north,
and the consumer will benefit. Otherwise the consumer will have
to use oil or electricity.
CO-CHAIR WIELECHOWSKI asked what Enstar's projected cost per MCF
once this line is running.
5:06:00 PM
MR. SCHREIBER said, "If we used what we have used in the past,
whether it's with Unocal or whether it's with Marathon or
Conoco, if you used a Henry Hub price, OK, that is a proxy for
the market price. The reason Henry Hub is used because the guys
that do that for a living are then able to hedge the cost of
gas, and they can do things in their business off of a price
which the market recognizes as a proxy for the market price." So
he doesn't know what it will be in terms of dollars, but by
following Henry Hub, that will be approximately what Enstar's
customers will pay for gas - including transportation costs.
CO-CHAIR WIELECHOWSKI said, "So Henry Hub's at $4.83?"
MR. SCHREIBER said if there was a rolling average of Henry Hub
of $4.80, customers would be paying that "instead of the $8.97."
5:07:10 PM
CO-CHAIR WIELECHOWSKI asked if that would be an acceptable index
for Enstar in Cook Inlet.
MS. STARRING said, "Most certainly." The contract with
Unocal/Chevron was tied to Henry Hub. When Enstar negotiated the
subsequent contract, it was the negotiated index that was turned
down. The markets work. At some point during the hearings the
price was between $9 and $10, and now it is down to $4 or $5.
"We believe we'll have a very good story to tell customers next
January first, but again, you can't predict the market."
5:07:56 PM
CO-CHAIR MCGUIRE said that was the contract that was rejected
because of a viewpoint that Henry Hub prices may not be
indicative of the market in Alaska. The Japanese LNG contract
was used as an example.
CO-CHAIR WIELECHOWSKI said his point is if money is made at
$4.80, and Alaska consumers are paying $10.57, it is a big gap.
MR. SCHREIBER said, "We're not making money on the commodity …
It is a straight price pass-through." When Enstar signs up to
buy gas, it makes no money on it. It is all pass-through to the
consumer.
SENATOR HUGGINS asked what Enstar did during the recent cold
weather.
5:09:07 PM
MS. STARRING said the cold snap was a challenge. If management
was left out of the equation and the field operators worked
together, everything would have been fine. Enstar's three
suppliers were back filling each other as they had problems with
deliverability and their wells. The LNG plant was fully
diverted. "They had 10,000, I believe, left at the plant. The
plant was full diverted into the system to keep everybody up and
running." The 11-day cold snap had an average of -12 degrees. If
it had been a few degrees lower, "we would lose considerable
parts of our system."
SENATOR STEDMAN referred to potential anchor tenants to
guarantee success. He asked how critical the export facility is,
and what those facilities are.
5:10:37 PM
MS. STARRING said, during economic analyses, Enstar has
considered the current LNG plant in Kenai fully operating and
exporting at capacity, as well as Agrium. One or the other would
suffice, as would a new export facility. The in-state gas
requirement is about 250 million cubic feet, and LNG or Agrium
would take up the other 250, which would make a very affordable
tariff for customers.
5:11:29 PM
The committee adjourned at 5:11 p.m.
| Document Name | Date/Time | Subjects |
|---|