Legislature(2009 - 2010)BUTROVICH 205

03/25/2009 03:30 PM Senate RESOURCES

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03:38:55 PM Start
03:40:07 PM SJR16
03:47:35 PM Overview: Status of North Slope Pipelines and Other Facilities
04:32:23 PM Overview: Effect of Shale Gas Development on Prospects for an Alaska Natural Gas Pipeline.
05:30:33 PM Adjourn
* first hearing in first committee of referral
+ teleconferenced
= bill was previously heard/scheduled
Heard & Held
+ Overview: Status of North Slope Pipelines TELECONFERENCED
& Other Facilities
Presenters: Dennis Hinnah, Alaska Coord.,
U.S. Pipeline & Hazardous Materials
Safety Administration
Allison Iversen, Coordinator, Petroleum
Systems Integrity Office
Larry Dietrick, Dir., Division of Spill
Prevention & Response, DEC
+ Overview: Effect of Shale Gas Development TELECONFERENCED
on Prospects for an Alaska Natural Gas
Presenter: Mark Meyers, State AGIA Coord.
+ Bills Previously Heard/Scheduled TELECONFERENCED
<Meeting Will Run to 5:30>
                    ALASKA STATE LEGISLATURE                                                                                  
              SENATE RESOURCES STANDING COMMITTEE                                                                             
                         March 25, 2009                                                                                         
                           3:38 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                                                                                                            
Senator Thomas Wagoner                                                                                                          
MEMBERS ABSENT                                                                                                                
All members present                                                                                                             
COMMITTEE CALENDAR                                                                                                            
SENATE JOINT RESOLUTION NO. 16                                                                                                  
Expressing  support  for  environmentally  sound  and  culturally                                                               
sensitive development  of the  oil and  gas resources  in federal                                                               
waters offshore  of Alaska's  coast as a  means to  ensure energy                                                               
independence,  security for  the nation,  and jobs  for Alaskans;                                                               
and  urging the  United States  Congress to  provide a  means for                                                               
consistently  sharing with  all coastal  energy-producing states,                                                               
on  an  ongoing  basis,  revenue   generated  from  oil  and  gas                                                               
development on the outer continental  shelf, to ensure that those                                                               
states  develop, support,  and maintain  necessary infrastructure                                                               
and preserve environmental integrity.                                                                                           
     HEARD AND HELD                                                                                                             
Overview: Status of North Slope Pipelines and Other Facilities                                                                  
Overview: Effect  of Shale  Gas Development  on Prospects  for an                                                               
Alaska Natural Gas Pipeline                                                                                                     
PREVIOUS COMMITTEE ACTION                                                                                                     
BILL: SJR 16                                                                                                                  
SHORT TITLE: OFFSHORE OIL & GAS REVENUE                                                                                         
SPONSOR(S): SENATOR(S) WIELECHOWSKI                                                                                             
03/20/09       (S)       READ THE FIRST TIME - REFERRALS                                                                        
03/20/09       (S)       RES                                                                                                    
03/25/09       (S)       RES AT 3:30 PM BUTROVICH 205                                                                           
WITNESS REGISTER                                                                                                              
MICHELLE SIDEMAN, Staff                                                                                                         
  to Senator Wielechowski                                                                                                       
Alaska Capitol Building                                                                                                         
Juneau, AK                                                                                                                      
POSITION STATEMENT:  Provided information on SJR 16.                                                                          
DENNIS HINNAH, Deputy Director                                                                                                  
Alaska Office                                                                                                                   
Pipeline and Hazardous Materials Safety Administration (PHMSA)                                                                  
U.S. Department of Transportation                                                                                               
POSITION STATEMENT:  Delivered a presentation.                                                                                
ALLISON IVERSEN, Coordinator                                                                                                    
Petroleum Systems Integrity Office (PSIO)                                                                                       
Division of Oil and Gas                                                                                                         
Department of Natural Resources (DNR)                                                                                           
POSITION STATEMENT:  Delivered a presentation.                                                                                
LARRY DIETRICK, Director                                                                                                        
Division of Spill Prevention and Response                                                                                       
Department of Environmental Conservation (DEC)                                                                                  
POSITION STATEMENT:  Delivered a presentation.                                                                                
IRA ROSEN, Project Manager                                                                                                      
Alaska Risk Assessment of Oil and Gas Infrastructure                                                                            
Department of Environmental Conservation (DEC)                                                                                  
POSITION STATEMENT:  Delivered a presentation.                                                                                
MARK MYERS, AGIA Coordinator                                                                                                    
Gas Pipeline Office                                                                                                             
Department of Natural Resources                                                                                                 
POSITION STATEMENT:  Delivered a presentation.                                                                                
ACTION NARRATIVE                                                                                                              
3:38:55 PM                                                                                                                    
CO-CHAIR  LESIL  MCGUIRE  called the  Senate  Resources  Standing                                                             
Committee  meeting  to  order  at   3:38  p.m.  Senators  French,                                                               
Stedman,  Stevens, Huggins,  Wagoner,  Wielechowski, and  McGuire                                                               
were present at the call to order.                                                                                              
               SJR 16-OFFSHORE OIL & GAS REVENUE                                                                            
3:40:07 PM                                                                                                                    
CO-CHAIR MCGUIRE announced the consideration of SJR 16.                                                                         
SENATOR WIELECHOWSKI,  Alaska State  Legislature, sponsor  of SJR
16,  said  that on  April  14  the  U.S. Department  of  Interior                                                               
Secretary  Ken  Salazar is  coming  to  Alaska seeking  input  on                                                               
exploration in  the Outer  Continental Shelf (OCS).  SJR 16  is a                                                               
timely  resolution   that  supports   responsible  oil   and  gas                                                               
development in the OCS and asks  for revenue sharing from oil and                                                               
gas leasing and  development in those federal  waters. A similar,                                                               
but more limited, resolution passed unanimously last year.                                                                      
SENATOR STEDMAN  referenced page 2, line  30, and said he  is not                                                               
sure  how   to  define   environmentally  sound   and  culturally                                                               
SENATOR  WIELECHOWSKI said  he is  open to  suggestion as  to how                                                               
that  is defined.  He wants  to  take into  account the  cultural                                                               
issues  that  are  in  play  on  the  North  Slope,  particularly                                                               
whaling.  Environmentally  sound  development would  protect  the                                                               
environment  in  all  of  Alaska. He  added  that  the  committee                                                               
certainly  could hold  the resolution  to  flesh it  out; he  was                                                               
pushing for  the April 14 deadline  and tried to use  broad terms                                                               
to appease the interests that people have.                                                                                      
3:41:57 PM                                                                                                                    
SENATOR   HUGGINS   suggested   that  the   phrase   "responsible                                                               
development" would work in both instances.                                                                                      
SENATOR  WIELECHOWSKI  said he  would  accept  that change  as  a                                                               
friendly amendment.                                                                                                             
SENATOR WAGONER referenced the next  to last "Whereas" on page 2,                                                               
line  26,  and said  he  doesn't  know of  any  OCS  oil and  gas                                                               
production  off the  Alaska coast  since  it became  a state.  He                                                               
suggested the committee strike that "Whereas."                                                                                  
3:43:14 PM                                                                                                                    
MICHELLE  SIDEMAN,  Staff  to   Senator  Wielechowski,  said  the                                                               
reference is  to the money  that has been collected  through high                                                               
bids in the lease sale; it's not money from actual production.                                                                  
SENATOR WAGONER said that is his  point. He agrees that the sales                                                               
of leases  have generated millions  of dollars, but  there hasn't                                                               
been any oil and gas development that produced anything.                                                                        
SENATOR   FRENCH  suggested   the  committee   strike  the   word                                                               
"production" on page  2, line 26, and insert "lease  sales" so it                                                               
would refer to oil and gas  lease sales. Also, on line 27, strike                                                               
the word "has" and insert the word "have."                                                                                      
CHAIR MCGUIRE recapped the suggested changes and asked for a                                                                    
motion to adopt the first amendment.                                                                                            
SENATOR HUGGINS moved Amendment 1.                                                                                              
                          AMENDMENT 1                                                                                       
     Page 1, line 1:                                                                                                            
          Delete "environmentally sound and culturally                                                                          
          Insert "responsible development                                                                                       
     Page 1, line 14:                                                                                                           
         Delete   "environmentally   responsible   and                                                                          
          culturally sensitive"                                                                                                 
          Insert "responsible development"                                                                                      
     Page 2, lines 30-31:                                                                                                       
          Delete "environmentally sound and culturally                                                                          
          Insert "responsible development"                                                                                      
3:45:20 PM                                                                                                                    
CHAIR MCGUIRE announced that without objection Amendment 1 is                                                                   
SENATOR FRENCH moved Amendment 2.                                                                                               
                          AMENDMENT 2                                                                                       
     Page 2, lines 26:                                                                                                          
          Delete "production"                                                                                                   
          Insert "lease sales"                                                                                                  
     Page 2, lines 27:                                                                                                          
          Delete "has"                                                                                                          
          Insert "have"                                                                                                         
CO-CHAIR MCGUIRE announced that without objection Amendment 2 is                                                                
SENATOR  STEDMAN  suggested  the committee  hold  the  resolution                                                               
until the next meeting since this is the first hearing.                                                                         
3:46:59 PM                                                                                                                    
CHAIR MCGUIRE announced she would hold SJR 16 in committee.                                                                     
^Overview: Status of North Slope Pipelines and Other Facilities                                                             
3:47:35 PM                                                                                                                    
CHAIR MCGUIRE announced  the next order of business  is an update                                                               
on  the status  of North  Slope pipelines  and other  facilities.                                                               
It's been suggested  that an update is a good  idea given the age                                                               
of the pipeline and associated facilities.                                                                                      
3:48:38 PM                                                                                                                    
DENNIS  HINNAH,  Deputy  Director, Alaska  Office,  Pipeline  and                                                               
Hazardous   Materials   Safety   Administration   (PHMSA),   U.S.                                                               
Department  of  Transportation, said  he  is  pleased to  discuss                                                               
PHMSA  actions  in overseeing  safe  operations  of pipelines  in                                                               
Alaska.  This federal  agency is  responsible nationwide  for the                                                               
development  and enforcement  of safety  regulations for  natural                                                               
gas  pipelines, hazardous  liquid  transmission and  distribution                                                               
pipelines,  and  liquefied  natural  gas  (LNG)  facilities.  The                                                               
agency does  not currently have  the authority to  regulate North                                                               
Slope  production facilities.  However,  PHMSA  does inspect  and                                                               
regulate  interstate and  intrastate gas  transmission pipelines,                                                               
hazardous  liquid pipelines,  gas distribution  systems, and  LNG                                                               
facilities  in Alaska.  Hazardous liquids  subject to  regulation                                                               
include crude oil and refined petroleum products.                                                                               
Ensuring the safety  of over two million miles of  pipeline is an                                                               
enormous  task. Most  states  partner with  PHMSA  to oversee  90                                                               
percent  of pipeline  mileage that  requires operator  compliance                                                               
with  pipeline   safety  regulations.   Alaska  and   Hawaii  are                                                               
exceptions  and do  not participate  in the  state/federal safety                                                               
program.  Still,  PHMSA  takes  pipeline safety  in  Alaska  very                                                               
seriously and has,  since 2006, increased its staff  in Alaska to                                                               
prepare for oversight of the proposed natural gas pipelines.                                                                    
3:50:33 PM                                                                                                                    
MR. HINNAH said  Alaska is part of the PHMSA  Western Region with                                                               
headquarters in  Denver. The Anchorage office  currently has four                                                               
fulltime  engineer/inspectors in  addition  to  an assistant  and                                                               
himself. PHMSA works closely with  pipeline owners and operators,                                                               
the  Joint  Pipeline  Office,  the  Petroleum  Systems  Integrity                                                               
Office, the  Office of the  Federal Coordinator, and  other state                                                               
and federal regulators.                                                                                                         
PHMSA uses a  risk-based approach to determine which  of the more                                                               
than 40 pipelines  and LNG facilities it will  inspect each year.                                                               
TAPS is  inspected annually  and all  pipelines are  inspected at                                                               
least  ever three  years. PHMSA  also investigates  accidents and                                                               
safety  issues. As  the lead  federal agency  to investigate  the                                                               
2006 BP  Alaska spills  on two North  Slope transit  lines, PHMSA                                                               
subsequently issued a  corrective action order, which  led to the                                                               
replacement of  the eastern and  western area oil  transit lines.                                                               
PHMSA  conducts  inspections  of  pipeline  design,  construction                                                               
standards,  integrity  management, operator  qualifications,  and                                                               
drug   and  alcohol   requirements.  These   inspections  include                                                               
document   reviews,    sealed   inspections,    and   interviews.                                                               
Additionally,   PHMSA  takes   a   role   in  ensuring   operator                                                               
preparedness and response to oil spills.                                                                                        
3:53:05 PM                                                                                                                    
PHMSA  regulations  require  pipeline  owners  and  operators  to                                                               
report  certain types  of incidents.  State and  federal agencies                                                             
are subsequently informed  of the findings. In the  case of TAPS,                                                               
much of  the coordination is  handled through the  Joint Pipeline                                                               
Office. That  is a  consortium of 11  federal and  state agencies                                                               
that provides oversight  of TAPS and shares  information on other                                                               
Alaska  pipelines.   In  some  instances  PHMSA   follows  up  an                                                               
investigation with enforcement action.                                                                                          
Examples of  recent PHMSA investigations  include: the  2007 TAPS                                                               
pump station 9 fire; the  January 15, 2009 incident where natural                                                               
gas was  pushed into  TAPS pump  station 1;  the January  15 2009                                                               
sinking of the  M/V Monarch near the Granite  Point platform; and                                                               
the March 12, 2009 residential gas explosion in Anchorage.                                                                      
3:54:53 PM                                                                                                                    
MR.  HINNAH said  that  in  the last  three  years PHMSA  actions                                                               
include corrective action orders issued  to BP Alaska and notices                                                               
of  probable   violation  issued  to  Aleyska   and  Enstar.  The                                                               
corrective order requiring BP Alaska  to replace the failed North                                                               
Slope oil transit lines has been closely monitored.                                                                             
The   PHMSA  integrity   management   (IM)  regulations   require                                                               
operators to  assess and mitigate  the risk that  their pipelines                                                               
pose to high  consequence areas. TAPS, Alpine,  and Endicott have                                                               
completed  this  process  and PHMSA  periodically  reviews  their                                                               
required  IM program  updates. Under  the  2008 low-stress  rule,                                                               
more pipeline operators are required to develop IM programs.                                                                    
CHAIR MCGUIRE asked what the low-stress rule is.                                                                                
MR. HINNAH explained  that prior to 2006  pipelines that operated                                                               
at low pressure  were exempt from PHMSA regulations.  In 2004 and                                                               
2005 PHMSA  was trying  to bring them  under regulation,  and the                                                               
2006 spills  on the North  Slope pushed it forward.  Low pressure                                                               
pipelines are no longer exempt from PHMSA regulation.                                                                           
3:56:36 PM                                                                                                                    
SENATOR HUGGINS asked at what point pressure becomes high.                                                                      
MR.  HINNAH replied  the cut  off is  usually 20  percent of  the                                                               
maximum pressure that a line can carry.                                                                                         
MR. HINNAH continued the presentation  saying that PHMSA is aware                                                               
of the risk assessments the  state is performing and is committed                                                               
to sharing certain risk information  on pipelines over which they                                                               
have safety  jurisdiction. Currently  PHMSA is providing  data to                                                               
the Department of Environmental Conservation (DEC).                                                                             
MR. HINNAH  said that  responsibility for  safety rests  with the                                                               
pipeline owners  and operators. The  PHMSA mission is  to achieve                                                               
and maintain  safe and environmentally  sound operations  for the                                                               
nation's  pipeline   system.  This  requires   understanding  the                                                               
condition  of  the pipelines  and  ensuring  that operators  take                                                               
appropriate action  to address unsafe  conditions. PHMSA  takes a                                                               
risk-based systems approach to setting  priorities and makes full                                                               
use  of the  2002 Pipeline  Safety Improvement  Act and  the 2006                                                               
Pipeline Inspection, Protection Enforcement,  and Safety Act. The                                                               
IM program made it possible to  take effective action when the BP                                                               
Alaska Prudhoe Bay  low-stress oil transit lines  failed in March                                                               
and August 2006.                                                                                                                
3:58:12 PM                                                                                                                    
MR.  HINNAH  said  that  over  the past  eight  years  PHMSA  has                                                               
undertaken  prioritized  rulemaking   projects  acting  first  on                                                               
infrastructure that  posed the  greatest risk  to people  and the                                                               
environment.   Initially,   PHMSA   defined   and   mapped   high                                                               
consequence areas  in the National Pipeline  Mapping System. This                                                               
included  areas that  are  unusually  sensitive to  environmental                                                               
damage. PHMSA is in the  process of implementing regulations that                                                               
provide protection for  people and the environment  that could be                                                               
affected by  failures in high  and low pressure  hazardous liquid                                                               
pipelines and high pressure gas transmission pipelines.                                                                         
Given the  impact the 2006  incidents, PHMSA has deployed  a team                                                               
to assess the  risk of the other feeder  line shutdowns including                                                               
those at Kuparuk, Alpine, Budami,  North Star, Oliktok, and Milne                                                               
3:59:53 PM                                                                                                                    
MR. HINNAH  said PHMSA has  recently amended its  pipeline safety                                                               
regulations  to  bring  previously unregulated  hazardous  liquid                                                               
gathering  and  low-stress  pipelines  in rural  areas  into  its                                                               
oversight  program.  The  low-stress   rule  will  add  to  PHMSA                                                               
oversight of pipelines in Prudhoe  Bay, Cook Inlet, and the Kenai                                                               
Peninsula. This is  a risk-based approach to  protect lines that,                                                               
in the  event of  failure, could  spill into  unusually sensitive                                                               
areas. The assessment of which lines  to regulate is based on how                                                               
they could  impact a  sensitive area, the  pressure of  the line,                                                               
and the volume of the product that could be spilled.                                                                            
These   phased-in   safety   regulations  will   provide   robust                                                               
protection  to areas  where oil  pipelines in  rural areas  could                                                               
affect drinking  water, endangered  species and  other ecological                                                               
resource  concerns.  These  regulations  will  enhance  corrosion                                                               
protection   by   requiring  continuous   monitoring,   integrity                                                               
assessments, and  leak detection.  Operators will be  required to                                                               
follow  safety  rules  for  design,  construction,  testing,  and                                                               
maximum  operating  pressure.  In  addition,  operators  will  be                                                               
required to  protect lines from corrosion  and excavation damage;                                                               
install   and   maintain   line   markers;   establish   operator                                                               
qualification  and  damage  prevention programs;  provide  public                                                               
education; and report accidents and safety conditions.                                                                          
MR.  HINNAH  assured  the  committee  of  PHMSA's  dedication  to                                                               
improving safety,  reliability and public confidence  in pipeline                                                               
4:02:28 PM                                                                                                                    
CHAIR  MCGUIRE asked  if the  regulations  he's referencing  have                                                               
been promulgated.                                                                                                               
MR. HINNAH  replied the low-stress  regulations are  being phased                                                               
in  right  now. PHMSA  is  currently  working with  operators  to                                                               
identify which ones apply in  Alaska. The North Slope oil transit                                                               
lines now  fall under  the low-stress rule  and pipelines  in the                                                               
Cook Inlet area will fall under it as well.                                                                                     
CHAIR  MCGUIRE asked  if regulations  related to  drinking water,                                                               
endangered species, design and construction  and other things are                                                               
extensions of the low-stress rule.                                                                                              
4:03:39 PM                                                                                                                    
MR.  HINNAH  replied  these  are  part  of  the  PHMSA  Integrity                                                               
Management  Program,   which  looks   at  sensitive   areas  like                                                               
wetlands, endangered  species, and  drinking water.  That program                                                               
has  been  fully implemented  and  in  Alaska everyone  has  gone                                                               
through the first improvement cycle. It is a continuous process.                                                                
4:04:35 PM                                                                                                                    
ALLISON IVERSEN, Coordinator,  Petroleum Systems Integrity Office                                                               
(PSIO), Division of Oil and  Gas, Department of Natural Resources                                                               
(DNR) cited a speech by a  Petrobras executive on an oil platform                                                               
off the  coast of Brazil  to show  why quality management  in oil                                                               
and  gas  is  so  important.   The  executive  talked  about  the                                                               
elimination of unnecessary safe jackets  and the win-win bonus of                                                               
enhanced  profitability.  Just  18 months  later  that  Petrobras                                                               
platform had two  explosions that killed 11 of the  175 people on                                                               
board.  Petrobras  was  fined  $50.8  million  for  environmental                                                               
damages. Inadequate safety inspections  and no quality management                                                               
were blamed.                                                                                                                    
4:07:14 PM                                                                                                                    
MS.  IVERSEN said  the  PSIO  was established  in  April 2007  by                                                               
administrative  order.   It  has   four  primary  tasks:   1)  to                                                               
coordinate state,  federal and local agencies;  2) to investigate                                                               
incidents  or employee  concerns that  do not  fall within  other                                                               
agency jurisdiction; 3) the gap/overlap  analysis; and 4) quality                                                               
management. PSIO  has multiple  designated liaison  agencies that                                                               
it works  with closely. Among  others, this includes  DEC, ADF&G,                                                               
DPS,  DOR, DOT&PF,  DOLWD, DOL,  DNR, AOGCC,  and the  governor's                                                               
office in Washington, D.C.                                                                                                      
Coordinating efforts  among agencies that  deal with oil  and gas                                                               
is   one  of   PSIO's  largest   tasks.  This   includes  regular                                                               
notification  of incidents  and  coordination of  investigations;                                                               
circulation of employee and public  concerns to impacted agencies                                                               
in  an  effort  to  have  a  unified  response;  regular  liaison                                                               
interaction; and  regular contact  with local, state  and federal                                                               
agencies. PSIO works closely with the local PHMSA offices.                                                                      
4:08:44 PM                                                                                                                    
MS. IVERSEN said that recent  incident investigations include the                                                               
September  2008 artificial  lift gasline  rupture at  the Prudhoe                                                               
Bay Y-Pad facilities and the  January 2009 Pump Station 1 pigging                                                               
incident.  PSIO   has  been  working   with  other   agencies  to                                                               
investigate those incidents.                                                                                                    
The gap analysis  was called for in the  administrative order and                                                               
is  currently PSIO's  largest  task.  The goal  is  to provide  a                                                               
comprehensive and  cost-effective approach to state  oversight of                                                               
oil and  natural gas  facilities, equipment,  infrastructure, and                                                               
activities  on  state oil  and  gas  leases. To  accomplish  this                                                               
analysis PSIO is coordinating with  liaison officers to indentify                                                               
statutory  and   regulatory  authorities;   look  at   how  these                                                               
authorities are  implemented; identifying not only  gaps but also                                                               
overlaps; assessing risks associated  with the gaps and overlaps;                                                               
coordinating  the  review  of  gaps,  overlaps,  and  risks;  and                                                               
providing  recommendations   to  the  appropriate   entities  for                                                               
further action.                                                                                                                 
4:09:56 PM                                                                                                                    
MS. IVERSEN said  that ARCADIS was hired to analyze  the gaps and                                                               
overlaps  in the  statutes and  regulations. Data  compilation is                                                               
underway  and   PSIO  will  soon   look  at  how   agencies  have                                                               
implemented  their authorities.  Results are  expected in  August                                                               
2009  with the  caveat that  PSIO is  relying on  other agencies'                                                               
timelines and availability to work on the project.                                                                              
The  Department  of  Environmental Conservation  is  the  project                                                               
manager for the risk assessment.  The risk assessment and the gap                                                               
analysis are interrelated  in that they will serve  as tools that                                                               
the  state can  use to  determine how  best to  coordinate agency                                                               
efforts  and provide  comprehensive and  cost-effective oversight                                                               
of oil and gas activities  and facilities. Where high risks exist                                                               
in areas  of little of no  oversight, the gap should  probably be                                                               
filled. Where low risks exist  in areas of duplicative oversight,                                                               
those overlaps  should probably  be removed  so the  agencies are                                                               
more cost-effective.                                                                                                            
4:11:31 PM                                                                                                                    
MS.  IVERSEN said  the administrative  order also  calls for  the                                                               
review of quality  management in the state.  It requires industry                                                               
businesses  to provide  a  comprehensive  description of  current                                                               
practices  of  quality  management  that  they  utilize.  Quality                                                               
assurance focuses  on the  product to determine  if it  meets the                                                               
agreed upon  characteristics for performance. It  establishes the                                                               
rules  and  procedures  to  achieve   the  expected  results  and                                                               
conformity to  the requirements of  the plan. Quality  control is                                                               
the  process, procedures,  and activities  that  are employed  to                                                               
test  or  check  the  physical  characteristics  and  performance                                                               
requirements against the predetermined criteria.                                                                                
MS. IVERSEN  displayed a  characterization of  the plan-do-check-                                                               
adjust (PDCA)  cycle and  said it's a  common process  in quality                                                               
management. She  recapped the fundamentals of  quality management                                                               
systems   which   are   quality   control,   quality   assurance,                                                               
monitoring,  inspection,  and  other   practices  to  ensure  the                                                               
integrity and reliability of the infrastructure.                                                                                
4:13:10 PM                                                                                                                    
MS.  IVERSEN said  PSIO is  helping  agencies understand  quality                                                               
management  systems in  order that  they  can more  knowledgeably                                                               
maintain the  integrity and  reliability of  oil and  natural gas                                                               
facilities, equipment,  and infrastructure. For  example, instead                                                               
of asking  whether a  company inspected  a certain  facility this                                                               
year, a  more appropriate question may  be to ask if  they have a                                                               
procedure  or policy  that requires  a  facility inspection  this                                                               
year. Ask about follow-up procedures  and if they are reviewed on                                                               
a regular basis to ensure that they are appropriate.                                                                            
PSIO  expectations of  agencies and  itself includes:  documented                                                               
evaluations    of   oil    and    gas   facilities,    equipment,                                                               
infrastructure, and  work activities; effective  communication of                                                               
results to  industry; and to  review evaluations,  identify gaps,                                                               
and  seek  remedial  action.  PSIO   is  implementing  a  quality                                                               
management system  for itself asking  if policies  and procedures                                                               
are written, if they are effective, and if they can be improved.                                                                
The PSIO  expectations of the  petroleum industry are  to provide                                                               
evidence that  their management systems or  processes for quality                                                               
control,  quality  assurance,   monitoring  and  inspections  are                                                               
implemented,  effective,  and   periodically  reviewed  by  upper                                                               
4:14:54 PM                                                                                                                    
SENATOR HUGGINS asked for a timeline for the gap analysis.                                                                      
MS.  IVERSEN  said the  results  are  expected August  2009.  The                                                               
caveat  is  that   they  are  at  the  whim   of  other  agencies                                                               
availability to provide  the data. ARCADIS is  the contractor and                                                               
Black and Beach is their main engineering subcontractor.                                                                        
4:16:16 PM                                                                                                                    
LARRY  DIETRICK,  Director,  Division  of  Spill  Prevention  and                                                               
Response,   Department   of  Environmental   Conservation   (DEC)                                                               
introduced himself.                                                                                                             
IRA ROSEN,  Project Manager,  Alaska Risk  Assessment of  Oil and                                                               
Gas  Infrastructure,  Department  of  Environmental  Conservation                                                               
(DEC) said he  will give a snapshot of today  and what remains to                                                               
be done in the project.                                                                                                         
MR. DIETRICK said the initiative  to take a comprehensive look at                                                               
the state's  oil infrastructure was  twofold. It was  in response                                                               
to the  spills in 2006 and  to the business decision  to continue                                                               
production  on the  North Slope  for another  50 years.  It is  a                                                               
novel project that hasn't been done on this scale before.                                                                       
MR. ROSEN  said the  risk assessment project  is a  three-year $5                                                               
million  initiative   to  evaluate  the  operational   safety  of                                                               
Alaska's  oil  and  gas  infrastructure. It  is  the  outcome  of                                                               
spills, leaks,  and corrosion  that was  discovered on  the North                                                               
Slope  in   recent  years.   When  complete   this  will   be  an                                                               
engineering-oriented  assessment that  identifies  and ranks  the                                                               
risks involved  in operating the  system for  another generation.                                                               
The  risks will  be evaluated  in  terms of  the consequences  to                                                               
state  revenue, safety,  and the  environment.  The final  report                                                               
will be published in June 2010.                                                                                                 
A  slide of  the  organizational structure  shows  that DEC  will                                                               
provide management and contract  administration over the project.                                                               
Overall  direction comes  from the  state agency  oversight team.                                                               
The  state  in  June  2008  awarded the  contract  for  the  risk                                                               
assessment to Doyon Emerald,  an Anchorage-based engineering firm                                                               
that  is familiar  with  the  Alaska oil  and  gas industry.  ABS                                                               
Consulting is the  main subcontractor and has  expertise in large                                                               
infrastructure risk assessments.                                                                                                
MR. ROSEN  displayed a slide  that lists the state  agencies that                                                               
have an  oversight or regulatory  role in  regard to the  oil and                                                               
gas  industry.   The  state   agency  oversight   team  includes:                                                               
Department  of Environmental  Conservation  (DEC), Department  of                                                               
Labor  and  Workforce  Development  (DOLWD),  Department  of  Law                                                               
(DOL),  Department of  Natural  Resources  (DNR), State  Pipeline                                                               
Office (SPO),  Petroleum Systems Integrity, Department  of Public                                                               
Safety (DPS),  State Fire Marshall  (SFM), Department  of Revenue                                                               
(DOR), and Alaska Oil &  Gas Conservation Commission (AOGCC). The                                                               
Joint Pipeline  Office and the  University of Alaska are  also on                                                               
the oversight team.                                                                                                             
4:19:17 PM                                                                                                                    
MR.  ROSEN  explained  the  format  for  a  risk  assessment  for                                                               
pipelines  and  facilities  is  to  first  break  out  individual                                                               
facilities  or  pieces  of pipeline.  The  team  then  postulates                                                               
different  types  of things  that  could  go  wrong in  terms  of                                                               
natural   or  operational   hazards.  Next   they  estimate   the                                                               
likelihood of  the event occurring  followed by  the consequences                                                               
should it occur. The probability  of the event occurring combined                                                               
with the significance of the consequence equals the risk.                                                                       
4:21:08 PM                                                                                                                    
MR. ROSEN said  the project was established in  three phases. The                                                               
purpose is to  develop a method that will be  used to conduct the                                                               
risk assessment  that responds to  the public's  concerns. Public                                                               
meetings were  held in Anchorage,  Fairbanks, Valdez,  Kenai, and                                                               
Barrow to  explain the project  to the key stakeholders  and find                                                               
areas  of concern.  Stakeholders  include oil  and gas  industry,                                                               
local   governments,  nongovernmental   organizations,  and   the                                                               
He showed a map of the  general project scope, which includes the                                                               
North Slope,  TAPS, the Valdez  oil corridor, and Cook  Inlet. He                                                               
noted  that tanker  traffic was  not included  in the  project. A                                                               
Venn diagram shows the three  areas of concern, which are safety,                                                               
environment, and  reliability. The  highest level of  concern was                                                               
water quality  and subsistence impacts.  Safety concerns  for the                                                               
public and industry employees were next highest.                                                                                
4:23:12 PM                                                                                                                    
MR. ROSEN recapped  that phase 1 focused on  outreach and efforts                                                               
to  develop a  method to  conduct the  risk assessment.  He noted                                                               
that  included  crafting  a  description  of  what  would  be  an                                                               
unacceptable  consequence  or  significant event.  Phase  2  will                                                               
consist  of  data  collection  including  information  about  the                                                               
infrastructure, previous studies and  risk assessments, spill and                                                               
corrosion reports, operating  procedures, and business practices.                                                               
That information will  be applied to the model  and will estimate                                                               
the  likelihood of  an event  occurring and  the consequences  of                                                               
natural  and  operational  hazardous   events.  In  phase  3  the                                                               
information  will be  analyzed, summarized  and presented  in the                                                               
final  report.  The  first  report  in  phase  1  summarized  the                                                               
stakeholder process and  all the work through  December 2008. The                                                               
design and methodology  report also is complete  and was formally                                                               
released in a press release  earlier this week. It's available on                                                               
their website.                                                                                                                  
MR. ROSEN  described this  as the kickoff  for the  public review                                                               
period. The  team will  return to the  same locations  to present                                                               
the   proposed  methodology   and  confirm   that  it   addresses                                                               
stakeholder concerns. The state  has contracted with the National                                                               
Academy  of  Science  to examine  the  assumptions  and  industry                                                               
standards that  are proposed  as the  basis for  the methodology.                                                               
The  final  report will  be  a  summary  of the  event  scenarios                                                               
categorized  for  reliability,  safe, and  environmental  impact.                                                               
Identified high  risks will be  listed for  potential mitigation.                                                               
Recommendations  may include  repair or  replacement if  the risk                                                               
relates   to   physical   infrastructure.   Or   there   may   be                                                               
modifications to  policies or regulations  or perhaps  changes in                                                               
management or oversight of the facilities.                                                                                      
4:27:29 PM                                                                                                                    
CHAIR MCGUIRE asked if there is an economic component.                                                                          
MR. ROSEN  replied the  report will only  indentify and  rank the                                                               
risks; it  will not  estimate the cost  of addressing  the risks.                                                               
The companies  will make business  decisions based on  the risks.                                                               
For example, they may consider  replacement or repair, additional                                                               
monitoring,  more  frequent  inspections, or  different  business                                                               
SENATOR  HUGGINS asked  if the  commercial operators  will inform                                                               
DEC  about  how  they  intend  to  address  the  risks  that  are                                                               
MR. ROSEN said the final implementation  is yet to be refined. He                                                               
expects it will  be an interactive process.  Industry will likely                                                               
step forward  with a plan  to mitigate the identified  risks, and                                                               
if that is satisfactory they can go ahead.                                                                                      
SENATOR HUGGINS asked about penalties.                                                                                          
MR.  ROSEN said  the  project is  an  engineering-based study  to                                                               
identify  risks; it  is  not intended  to  include regulatory  or                                                               
enforcement actions.  However, if the agencies  are not satisfied                                                               
with  the  industry  response,   then  additional  regulation  or                                                               
oversight would be a state option.                                                                                              
4:30:14 PM                                                                                                                    
SENATOR  HUGGINS asked  if whoever  prepares  the report  assumes                                                               
some  responsibility  if  an  event  occurs  that  had  not  been                                                               
identified as a risk.                                                                                                           
MR. ROSEN  said hundreds of  risks may be identified  and they'll                                                               
be considered  to be high  risk, moderate,  or low risk.  At some                                                               
point a determination  will be made as to where  to draw the line                                                               
for high risks, which will require action by the asset owner.                                                                   
 ^Overview: Effect of Shale Gas Development on Prospects for an                                                             
                  Alaska Natural Gas Pipeline.                                                                              
CO-CHAIR MCGUIRE announced the next  order of business is to hear                                                               
about the  effect of  shale gas development  on prospects  for an                                                               
Alaska natural gas pipeline.                                                                                                    
4:32:23 PM                                                                                                                    
MARK MYERS, AGIA Coordinator, Gas  Pipeline Office, Department of                                                               
Natural   Resources,   said   he  wants   to   provide   baseline                                                               
information.  The   first  slide  shows  increasing   energy  use                                                               
worldwide coupled with a growing  population. With current growth                                                               
rates,  the population  by mid  century  will be  9 billion.  The                                                               
competition  for  resources  is  huge, with  a  lot  coming  from                                                               
developing areas like China and  India. Increased urbanization is                                                               
requiring  point-source energy  supplies.  Worldwide  there is  a                                                               
strategic shift in  how energy is used, and there  is an increase                                                               
in energy demand.                                                                                                               
4:34:03 PM                                                                                                                    
SENATOR FRENCH asked for an  explanation of a point-source energy                                                               
MR. MYERS  said it's a  supply that is highly  distributable that                                                               
can be delivered to a city.                                                                                                     
SENATOR FRENCH  asked if it is  any source of energy  that can be                                                               
delivered or transported.                                                                                                       
MR.  MYERS said  the  old  philosophy was  that  any energy  that                                                               
worked  was  good  enough, but  with  development  and  increased                                                               
population  all  resources  are under  more  and  more  pressure.                                                               
Water, for example, is becoming  a critical and limiting resource                                                               
in the  production of energy  because it's in  increasingly short                                                               
supply. That  competition for  resources limits  the availability                                                               
of supplies that  previously were abundant and  it's changing the                                                               
way energy will be used  in the future. Environmental constraints                                                               
result in  more limitations  as to which  energy supplies  can be                                                               
used.  It's  important  to  see  how  Alaska,  natural  gas,  and                                                               
nonconventional  sources of  natural gas  fit in  the marketplace                                                               
globally and specifically in North America, he said.                                                                            
4:36:06 PM                                                                                                                    
MR. MYERS said  what hasn't been fully discussed  is what happens                                                               
if CO  and carbon emissions are regulated. What sources of energy                                                               
will  become  preferred  and  how will  that  shift  pricing  and                                                               
availability of  resources? In  the next  few years  Congress and                                                               
the  Obama administration  will address  that substantial  policy                                                               
MR. MYERS  said that the U.S.  is now about 70  percent dependent                                                               
on imported  oil and in  some scenarios  it will be  dependent on                                                               
much higher quantities  of imported natural gas. Will  the gas be                                                               
available  and secure  in terms  of  national security,  national                                                               
policy,  and the  environment? Tracking  energy  growth over  the                                                               
long-term shows  increasing demand on a  predictably large scale.                                                               
Worldwide,   certain  sources   of  fuel   will  be   limited  by                                                               
environmental  constraints,  policy  direction, and  scarcity  of                                                               
other resources affected by energy development.                                                                                 
4:38:12 PM                                                                                                                    
CHAIR MCGUIRE  asked if he  agrees that, as  a result of  a 1970s                                                               
policy decision, the  U.S. now relies on crude oil  for less than                                                               
2  percent of  its electrical  generation. She  further asked  if                                                               
developing countries  like India and China  have similar policies                                                               
and how that might impact natural gas.                                                                                          
MR.  MYERS said  we'll be  with existing  fuels for  a long  time                                                               
because  growth  outstrips capacity  to  grow.  He displayed  pie                                                               
charts of  percentage of electric  power generation by  fuel type                                                               
in  1975 and  2004. All  fuel  sources have  grown except  hydro.                                                               
Capacity for  hydro projects is  decreasing, particularly  in the                                                               
west, due in large part  to systematic climate change. It dropped                                                               
from 15.6 percent  to just 7 percent. Natural gas  has grown very                                                               
slightly due to  limits in supply. Coal and  nuclear supplies for                                                               
electrical generation  have increased  the most  in that  30 year                                                               
time period. Petroleum  shrank to 3 percent in 2004  and it keeps                                                               
shrinking.  It's not  cost effective  to use  oil when  there are                                                               
alternative supplies.  He summarized  that the dynamic  market is                                                               
shifting from an oil-based supply  to a larger dependence on coal                                                               
and nuclear.                                                                                                                    
4:42:36 PM                                                                                                                    
CHAIR MCGUIRE asked  what carrots and sticks  the government used                                                               
to reduce dependence on crude oil for electrical generation.                                                                    
MR. MYERS  said not a lot;  policies have really been  market and                                                               
supply-reliability  driven.  Electrical  generation  has  shifted                                                               
dynamically to  coal. Nuclear  isn't growing  now and  demand for                                                               
natural  gas  has  stayed  flat.  Demands  for  electricity  keep                                                               
4:44:10 PM                                                                                                                    
MR.  MYERS  said   energy  sources  for  the   future  have  real                                                               
constraints. Bio-fuels have seen huge  growth, but water is a big                                                               
challenge. Water usage and availability  will play a huge role in                                                               
future  development  of  resources.   Current  policies  will  be                                                               
challenged. No free  lunch is true with any  energy, renewable or                                                               
MR. MYERS highlighted some changes  that have occurred since AGIA                                                               
was  passed  to answer  whether  the  fundamental economics  have                                                               
   · The global economic downturn has caused a decrease in                                                                      
     energy  use,  which resulted  in  oversupply  and a  dynamic                                                               
     short term  fall in prices.  Gas prices have fallen  to less                                                               
     than $4/mmbtu on the major markets.                                                                                        
   · There's been a rapid expansion of unconventional shale gas                                                                 
     supplies to  the U.S. He  noted that  in the U.S.  the first                                                               
     shale gas  well was  drilled in 1820.  Commercial production                                                               
     began  in 1926.  The first  Barnett shale  well was  drilled                                                               
   · Policies on federal land really matter because much of the                                                                 
     available  resources  for  fossil   and  renewables  are  on                                                               
     federal land. In Alaska that's  a major point. What will the                                                               
     policies be? Will  the Atlantic margin or the  West Coast be                                                               
     open    for   gas    development?    The   development    of                                                               
     nonconventional gas  is dependent on  continued availability                                                               
     of these  areas. There's a  great deal of conflict  over the                                                               
     use of  these lands  with water, grazing  rights, ecological                                                               
     change,  endangered   species,  and  human   habitation.  He                                                               
     believes that with the current  administration there will be                                                               
     new restrictions  in certain areas.  How the  development of                                                               
     gas  resources and  nonconventional  gas  resources will  be                                                               
     affected  in the  next few  decades is  the question  that's                                                               
     relevant to the Alaska gas pipeline.                                                                                       
   · The first authoritative Arctic oil and gas assessment was                                                                  
     completed by the USGS in  2008. The results are favorable to                                                               
     Alaska resources.                                                                                                          
   · There's an increased likelihood of carbon regulation.                                                                      
4:50:48 PM                                                                                                                    
SENATOR  STEVENS said  one thing  you'd hope  would have  changed                                                               
since  the   AGIA  license  was   awarded  is   an  international                                                               
recognition  that this  is a  global  issue. He  thinks the  U.S.                                                               
economy would have  been impacted enormously if  the Kyoto treaty                                                               
had  been  ratified. Hopefully  the  current  downturn will  stop                                                               
folks from  thinking that the  U.S. should do something  that the                                                               
rest to the world isn't willing to do.                                                                                          
MR. MYERS said  his perspective is that Alaska gas  is a positive                                                               
mechanism for  the new administration to  honor restricted carbon                                                               
loads and still have a  vibrant economy. If President Obama signs                                                               
a post Kyoto treaty he has to dramatically decrease CO  emissions                                                               
in this country and  the way to get there is  to increased use of                                                               
natural gas. The  countries that didn't support  the Kyoto treaty                                                               
are now  becoming the largest  carbon emitters. He  believes that                                                               
the  U.S. will  be inclusive  and try  to put  something together                                                               
that will work for the  developed and the developing world. There                                                               
is intent in Congress and the administration to do that.                                                                        
4:54:32 PM                                                                                                                    
MR. MYERS  said there's  need for  growth line  base of  gas from                                                               
nonconventional as well as conventional  sources. Alaska gas will                                                               
be very  cost competitive  with nonconventional  gas and  LNG. He                                                               
noted that  ConocoPhillips CEO,  Jim Mulva,  is still  bullish on                                                               
Alaska gas being  a key market-driven product.  Also, natural gas                                                               
helps extend  oil production on  North Slope oil; it  allows more                                                               
barrels of oil to be recovered  and it allows for better economic                                                               
development of major  fields like Prudhoe Bay  and Point Thomson.                                                               
A gasline  becomes essential for  not just gas recovery,  but for                                                               
the integrated  economics of oil  and gas fields  and lengthening                                                               
the useful service of TAPS                                                                                                      
4:55:54 PM                                                                                                                    
MR.  MYERS said  that  natural  gas was  found  in the  discovery                                                               
process of conventional  high quality oil. Initially  the gas was                                                               
flared  off, but  over time  it became  a valuable  commodity and                                                               
there  was  deliberate  exploration  for  natural  gas.  In  that                                                               
process, the  U.S. became a  leader in the production  of natural                                                               
gas. Over  time the quality  and size of the  conventional fields                                                               
declined  and  more  challenged reservoirs  were  developed.  Now                                                               
nonconventional  reservoirs are  becoming  the  dominant form  of                                                               
production  in the  U.S.  Shale  gas is  among  those sources  of                                                               
nonconventional  gas, but  it's  not the  dominant source  that's                                                               
produced  today. Nonconventional  gas requires  higher technology                                                               
and  is generally  more expensive  to  produce than  conventional                                                               
gas. It's  the same  with oil;  the light  hot sweet  crudes were                                                               
produced  first,   then  heavier  oils  were   produced  and  now                                                               
production is from tar sands and potentially oil shales.                                                                        
4:58:20 PM                                                                                                                    
MR. MYERS  said that  shale gas  is now  being produced  in large                                                               
amounts because  of improved technology  and increased  price. He                                                               
displayed a  map showing shale  gas plays  in the U.S.  and noted                                                               
that not all  of it is economic. Production will  be in the sweet                                                               
spots, and as  prices rise and technology gets better  it will be                                                               
expanded to different areas.                                                                                                    
CO-CHAIR  WIELECHOWSKI asked  if  [competition  for] water  might                                                               
limit shale gas production in the Lower-48.                                                                                     
MR.  MYERS said  yes, in  some areas  water will  be the  leading                                                               
environmental  concern.  Dry  wells  require  chemically  treated                                                               
water  to be  injected  for fracturing,  and then  it  has to  be                                                               
pumped out and  disposed. There is natural flow  back of hydrogen                                                               
sulfate  and salts  associated  with the  shale  from the  wells.                                                               
Sometimes oil shale is found  close to fresh water reservoirs and                                                               
that is  a big issue.  And regulatory structures don't  yet exist                                                               
in areas  where shale  gas occurs in  nontraditional oil  and gas                                                               
areas.  Those  may or  may  not  be  favorable. The  resource  is                                                               
needed, but it  isn't logical to assume that the  growth from the                                                               
sweet spots will be linear.                                                                                                     
5:01:38 PM                                                                                                                    
MR.  MYERS  said  nonconventional  gas  is  filling  the  gap  as                                                               
offshore  and onshore  conventional gas  declines. At  this point                                                               
shale gas  accounts for about  five percent of  total production;                                                               
tight sands is dominant, followed  by coalbed methane. The bottom                                                               
line is that  shale gas is only one  component of nonconventional                                                               
gas. The AGIA probability models  considered the long term growth                                                               
of nonconventional  gas and recognized  that over time  LNG would                                                               
be put into the market place.                                                                                                   
The history  of gas  production in Wyoming  shows that  over time                                                               
[1977-2006]   nonconventional  gas   is   becoming  dominant   as                                                               
conventional  production declines.  The largest  source is  tight                                                               
gas sands. Much of the production  in western states is on public                                                               
5:04:00 PM                                                                                                                    
MR. MYERS  said the  Arctic Basin  is one  of the  last remaining                                                               
large  areas for  undiscovered oil  and gas  development; Siberia                                                               
and Arctic  Alaska are  the best of  the best.  Alaska represents                                                               
about  36  percent of  the  national  potential for  undiscovered                                                               
conventional  gas. If  the current  administration does  not open                                                               
the Atlantic  or Pacific OCS  for oil and gas  production, Alaska                                                               
becomes more dominant.                                                                                                          
Nonconventional continuous gas,  including coalbed methane, shows                                                               
that Alaska  has 18.06 TCFG of  the mean national total  of 364.2                                                               
tcfg.  Excluding coalbed  methane, the  national total  is [274.9                                                               
tcfg.] The  Alaska gas  endowment is much  bigger than  the shale                                                               
gas  endowment, based  on USGS  December 2008  data. Undiscovered                                                               
conventional gas  potential shows that,  for Alaska, much  of the                                                               
resource is onshore.                                                                                                            
5:07:07 PM                                                                                                                    
The  real question,  however,  is  how much  of  the resource  is                                                               
economic to recover and at  what cost. USGS data for conventional                                                               
pure gas  play on the central  North Slope shows the  mean number                                                               
is 33.32  tcf. A probability model  of the mean case  shows that,                                                               
over a large portion, the gas is  economic in the $4 to $6 range.                                                               
The  Bank of  America numbers  for economic  shale gas  breakeven                                                               
prices vary a lot, but the  resources vary as well. The mid range                                                               
was about  $6.64 and the high  range was $11.50. Alaska  gas fits                                                               
into  the   lower  end  of   the  cost  of  production   of  this                                                               
nonconventional gas.                                                                                                            
CHAIR MCGUIRE  said the committee  heard that some  estimates are                                                               
as low as $3.                                                                                                                   
MR. MYERS said  it depends on whether capital  costs are included                                                               
or  just the  operating costs  to keep  the wells  on line.  Once                                                               
production  starts   there's  a  cash  flow   issue.  Many  small                                                               
companies  developing shale  gas are  heavily leveraged  by banks                                                               
and they're worried about their  credit. So they will continue to                                                               
flow gas to  make their operating costs or  their pipeline tariff                                                               
commitments. The  best cost estimate  he could find  was $800,000                                                               
for a vertical fractured well.  Estimates for a horizontal multi-                                                               
phased  fractured  well,  which  is  predominant,  was  about  $4                                                               
million. The other  thing is that if it was  just $3 they'd still                                                               
be drilling  a lot of wells.  The Baker rig count  between August                                                               
2008 and today  is 43 percent of  the oil and gas  rigs have been                                                               
laid down. Most  of those are gas rigs so  there's a huge decline                                                               
in  drilling,  which  over  time   will  lead  to  a  decline  in                                                               
production. There may  be shale gas that could be  economic at $3                                                               
but not the kinds of figures you're seeing out there.                                                                           
5:10:40 PM                                                                                                                    
SENATOR WAGONER  asked, at the  current rate of use  and assuming                                                               
they stack 50 percent  of the rigs, how long will  it take to see                                                               
an effect on the price of gas?                                                                                                  
MR. MYERS said it's a supply  and demand and storage issue and it                                                               
depends  on how  much gas  is in  storage. Right  now storage  is                                                               
peaked  out.  Within  about  a year  you  could  see  significant                                                               
declines in  production and if  demand doesn't grow in  that time                                                               
then  prices will  stay  down.  Also, we  are  not an  attractive                                                               
market  for LNG.  European and  Asian  markets pay  significantly                                                               
5:12:29 PM                                                                                                                    
MR. MYERS  said the Department of  Energy view is that  over half                                                               
of  the   conventional  gas  on   North  Slope   is  economically                                                               
recoverable.   There  aren't   good  numbers   for  recovery   of                                                               
unconventional  resources in  shale locations.  Another plug  for                                                               
Alaska is  that it has about  1/80 the well density  that Wyoming                                                               
has.  Clearly,  Alaska  has  a  lot of  growth  room  and  upside                                                               
potential. Nonconventional  gas in Alaska includes  gas hydrates,                                                               
over  pressured basin-centered  gas, and  coalbed gas.  The first                                                               
assessment of  technically recoverable hydrates came  out with 85                                                               
tcf.  The number  is conservative;  it's just  for depressurizing                                                               
the  gas and  does not  include heating,  changing the  stability                                                               
zones of hydrates by thermally inducing heat or  injecting COand                                                                
removing methane.  What's positive about  hydrates is that  a lot                                                               
sits within the existing infrastructure.                                                                                        
MR. MEYERS said the last point is  what happens to our plans in a                                                               
carbon constrained  world. Traditional  use relied on  a dramatic                                                               
increase  in coal  production to  meet future  demands. It  shows                                                               
modest  growth in  nuclear;  hydro is  flat;  non renewables  are                                                               
increasing;  oil  production,  largely   from  corn  sources,  is                                                               
increasing;  a dynamic  increase  in coal;  and  a flattening  of                                                               
natural gas.  If coal is taken  out of the equation,  you have to                                                               
fill the gap.  Different climate scenarios say that  based on the                                                               
models  the  agreement of  the  scientists  in the  international                                                               
panel is that without significant  reduction of current levels of                                                               
COwe   will  see significant climate  change and  global warming.                                                               
This is  modeled, not actual,  but if  the U.S. believes  this it                                                               
will  react and  try to  decrease CO.   Natural gas  is the  only                                                               
readily available  source to do that  in the short term.  To have                                                               
an  effect, it  needs to  be done  in the  next few  years not  a                                                               
decade from  now. The residual lag time  of COin   the atmosphere                                                               
and  the growth  of  COtakes   you  over lip  in  almost all  the                                                               
climate scenarios.                                                                                                              
5:15:28 PM                                                                                                                    
SENATOR  WAGONER said  the graph  shows  that coal  is taking  an                                                               
uptick,  but  if  the  administration   and  Congress  decide  to                                                               
sequester CO  a lot of  coal plants will need to  shut down. That                                                               
will have a tremendous effect on  the price of natural gas in the                                                               
next three years or so.                                                                                                         
MR.  MYERS said  that's the  general consensus,  and the  way the                                                               
policy is  implemented has a  huge effect. Whether it's  a simple                                                               
cap and trade, whether there's a  value change and premium put on                                                               
natural gas, whether  it's a regulatory structure  that says thou                                                               
shalt not emit  CO  unless you can sequester it,  or whether it's                                                               
another mechanism  is crucial  to whether  those plants  are shut                                                               
down or  new plants  aren't built. Right  now coal  plants aren't                                                               
being built  because of the  uncertainty of the  markets. Capital                                                               
markets  aren't  willing to  fund  the  coal  plants nor  do  the                                                               
regulators appear  to be  willing to  regulate and  approve these                                                               
plants.  At the  same time  natural gas  plants have  been slowed                                                               
because  of high  volatility and  availability of  the commodity.                                                               
That's why shale gas is our friend,  he said. You have to build a                                                               
base capacity now if you're going  to treat this problem. New gas                                                               
coming  in -  the  fact that  there  was a  7  percent growth  in                                                               
natural  gas capacity  in the  country  - and  the moderation  of                                                               
prices lead  you to  believe that policy  will lead  to gas-fired                                                               
power plants  as the dominant  new source  of power for  the next                                                               
decade  or so  while  we increase  solar,  wind, and  potentially                                                               
nuclear  as  rapidly as  we  can  but  not  fast enough  to  meet                                                               
reasonably expected CO  goals. Natural gas is the fuel you've got                                                               
to bridge and the way the policy is done will become crucial.                                                                   
SENATOR  FRENCH said  it  sounds  like the  movement  to a  green                                                               
economy  is very  promising for  Alaska. He  wonders whether  the                                                               
downside might  not be  some environmental  regulations regarding                                                               
Arctic areas that impact development here.                                                                                      
MR. MYERS  said there's  a lot of  speculation about  what future                                                               
Arctic  policy will  look  like. Decisions  by  the Secretary  of                                                               
Interior in  the next  year become a  critical element.  He needs                                                               
some  source  of  energy  that's  environmentally  preferred  and                                                               
available. That gives  an opportunity for Alaskans  to make their                                                               
case.  Also, there  is the  President's  support for  it. If  you                                                               
believe that cap  and trade will occur, it  will incentivize more                                                               
gas demand.  With Arctic  policy, Alaskans have  to be  able make                                                               
the  case of  how  important  it is  and  show the  environmental                                                               
balancing act  that needs to  occur. Recognizing that  every type                                                               
of energy has  full cycle costs and benefit, we  need to quantify                                                               
those benefits better. He tried to  show that with ethanol it was                                                               
a  choice  that   has  a  poor  tradeoff  with   respect  to  the                                                               
environment. Now we are making  tough choices and the future will                                                               
require us to make them rationally.                                                                                             
5:20:42 PM                                                                                                                    
SENATOR STEVENS asked if he's saying  that cap and trade could be                                                               
advantageous to Alaska.                                                                                                         
MR. MYERS  directed attention to a  slide of Black &  Veatch AGIA                                                               
data  showing the  impact  of carbon  regulation  on natural  gas                                                               
demand.  It  shows   that  demand  for  natural   gas  for  power                                                               
generation  under the  AGIA base  case increases  about 14  bcf/d                                                               
under  carbon   managed  growth.  Alaska  gas   isn't  the  total                                                               
solution,  but it's  important  and  at the  right  time. If  you                                                               
believe the figures that were  generated under the many different                                                               
scenarios for what  it will cost to get Alaska  gas to market, it                                                               
is  very competitive  with nonconventional  gas in  the Lower-48.                                                               
From  a strategic  and economic  perspective, the  Alaska project                                                               
makes sense, even with a  significant increase in LNG imports and                                                               
an increase in shale gas.                                                                                                       
5:23:38 PM                                                                                                                    
MR. MYERS  said that in  the carbon managed growth  case multiple                                                               
different sources of natural gas  will be needed to meet Lower-48                                                               
demand growth. The Black &  Veatch analysis shows that demand for                                                               
LNG  will  increase,  nonconventional   gas  will  increase,  and                                                               
conventional gas will increase if  it's available through Alaska.                                                               
A Black  & Veatch chart shows  that in the carbon  managed growth                                                               
case, gas prices  will have a higher price path  than in the AGIA                                                               
base  case. "Basically,  the managed  carbon case  actually beats                                                               
all the  cases we  based the  economics of  the pipeline  on," he                                                               
MR. MYERS  summarized that he tried  to walk through a  couple of                                                               
logical scenarios  to provide perspective on  world energy demand                                                               
and  where that  energy  could  come from,  that  energy use  has                                                               
evolved and  that shale gas  is a player.  He does not  see shale                                                               
gas in  any way negatively affecting  the AGIA project. It  is an                                                               
opportunity to  build a  greater base  of natural  gas production                                                               
for   the   generation   of  electricity.   He   didn't   discuss                                                               
transportation, but  the fact  that natural  gas is  projected to                                                               
sell at a discount to oil enhances it as a transportation fuel.                                                                 
SENATOR FRENCH commented that he  is dismayed that there are only                                                               
30 people  in the room  listening because this  thorough analysis                                                               
should be  broadcast statewide.  He committed to  file a  bill to                                                               
have a web  camera in every committee room  to stream information                                                               
live. It's long overdue.                                                                                                        
5:26:09 PM                                                                                                                    
SENATOR HUGGINS said  he wants to know the  modifiers because one                                                               
perfect answer  usually isn't as  pure and brief as  it's thought                                                               
to be.                                                                                                                          
MR. MYERS agreed  that it's not a  good idea to rely  on a single                                                               
deterministic viewpoint. One  of the powers of  the AGIA analysis                                                               
is that it didn't rely on one  answer; it relied on a Monte Carlo                                                               
probabilistic  effect  with all  the  outcomes  modeled time  and                                                               
again  under different  circumstances. That  data set  captures a                                                               
broad range of a very uncertain world in the best available                                                                     
statistical method to deal with the uncertainty.                                                                                
5:30:33 PM                                                                                                                    
There being nothing further to come before the committee, Co-                                                                   
Chair McGuire adjourned the Senate Resources Standing Committee                                                                 
meeting at 5:30 p.m.                                                                                                            

Document Name Date/Time Subjects
DOT - PHMSA - 03-25-09.pdf SRES 3/25/2009 3:30:00 PM
Mark Meyers presentation 03-25-09.pdf SRES 3/25/2009 3:30:00 PM
PSIO Update - 03-25-09.pdf SRES 3/25/2009 3:30:00 PM
Risk Assessment - DEC - 03-25-09.pdf SRES 3/25/2009 3:30:00 PM