Legislature(2001 - 2002)
03/14/2001 03:58 PM Senate RES
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ALASKA STATE LEGISLATURE
SENATE RESOURCES COMMITTEE
March 14, 2001
3:58 pm
MEMBERS PRESENT
Senator John Torgerson, Chair
Senator Drue Pearce, Vice Chair
Senator Rick Halford
Senator Pete Kelly
Senator Kim Elton
MEMBERS ABSENT
Senator Robin Taylor
Senator Georgianna Lincoln
COMMITTEE CALENDAR
Presentation on Alcan Highway Gas Pipeline route by Mr. Ken
Thompson, President, Pacific Rim Leadership Development
ACTION NARRATIVE
TAPE 01-20, SIDE A
Number 001
CHAIRMAN JOHN TORGERSON called the Senate Resources Committee
meeting to order at 3:58 pm. and announced a presentation on the
Alcan Highway Gas Pipeline route.
MR. KEN THOMPSON, President, Pacific Rim Leadership Development,
explained that Pacific Rim is a consulting firm he started when he
moved back to Anchorage to provide Alaskan businesses, nonprofits,
and churches with leadership advice on setting direction and
strategy for the future and how to build good executive teams. He
is working with 10 companies in Alaska. He does not do consulting
with any of the major producers.
"I do have a passion for commercializing North Slope gas," Mr.
Thompson said. He believes that gas prices will level at some point
above $3 and that would make it commercial to the Lower 48. In his
last two years at ARCO he was executive vice president of their
Asia Pacific region in charge of their companies in Alaska, China,
Malaysia, Thailand and Indonesia. He was also head of global gas
marketing for ARCO. He was also appointed by, then, Secretary of
Energy Richardson as one of two Americans to assist Asian nations
in forging and formulating natural gas policies and power
generation policies, as well as in South America. He wanted, as a
citizen, to step forward and assist Alaska offering his consulting,
experience and advice to the House and Senate. He would waive his
fee over the next few years, because he thought it was, "important
to get off on the right foot as Alaskans."
MR. THOMPSON introduced his concept of a "Gas Business Vision" for
Alaska. He thought the state should have a broader vision than just
the individual projects and do things right in the first few years
to make sure they create broader opportunities and multiple markets
in the future.
It's important to realize the producers are completing
their studies to create a vision from their perspective.
I think the state should also proactively complete its
separate studies and create a vision that's best long-
term for Alaskans. I advise the state would make mistakes
while waiting for the producers to finish. While we may
have a lot of details we do have to wait to do, based on
what their final conclusion is, there are many things the
state could do proactively regardless of their
recommendations.
He said it's important to realize that the state and producers will
differ in their perspectives. The producers must look at what's
best from a discounted present value or rates of return. They ought
to focus on that or their boards should run them off. On the other
hand, the state needs to focus on 50 years of socio-economic
benefit to the state. He thought with planning the state and
industry could come together in the next few years with a win-win.
MR. THOMPSON recommended:
· Gas pipeline traversing Alaska - LNG might not be viable now,
but it could be in the future. If you accept the gas business
route, the northern route is a non-starter. That would not be
best for Alaskans. He said we want multiple markets for our
gas. The northern route would hold Alaskans hostage to one
market. Access or the potential for access in the future to
multiple markets, when you go to negotiate terms and price,
you get better deals if that buyer thinks you can go
elsewhere. If the state takes the northern route, the buyers
will be in the Lower 48 only.
· "Natural gas hub" near Fairbanks or Delta Junction. The gas
hub is physical, but more importantly, there is a contractual
principle element of gas trading that is not currently
existing in Alaska that needs to be finalized in the next few
years.
o On the physical facilities, "Imagine a hub, a system of
manifolds and valves near Fairbanks or Delta Junction and
from that pipelines could converge." He could envision a
small natural gas liquids plant near Fairbanks that could
manufacture propane and butane off gas and ship those
products to interior villages very much like what is done
with diesel today. The propane butane would be much
cleaner fuel for those villages. He also envisioned from
that hub another trunk line into Anchorage that could be
power generation for Anchorage and residential home use.
This will be even more critical in 10 years if the
industry is not successful in its exploration effort for
more natural gas in Cook Inlet. He envisioned a
fertilizer plant that could ship urea to China, which is
closer to Alaska than Indonesia, which does that now. He
envisioned a gas-to-liquids plant in Anchorage or
Fairbanks sending clean diesel to the west coast. He
noted that cleaner technology for gas-to-liquids fuels is
progressing.
o He strongly suggested before gas flows, the state should
get the contractual system down, which is clear rules and
regulation for the rights of gas access and netback
pricing. Those rules are not clear in Alaska, yet. He
thought Alaskans should be able to buy gas at a hub for
$1 if that's what it's selling for in Chicago, adjusted a
little bit for volumes. Right now there are no
regulations and rules in place to govern that. A supplier
right now would be in a position to offer diesel to a
community for only a few cents less than it would take to
ship it up, but that would still be a lot more than a hub
price. He reiterated that Alaskans should have access to
gas at the netback pricing.
o Another thing that's not clear is the rights of other
people and other pipelines to tap into whether it be a
hub or a spur line. He used an example in 1994 when ARCO
discovered a satellite field near Prudhoe Bay. They
wanted access into the Prudhoe Bay processing facilities,
because the field was too small to construct its own
facilities. It took them five years to gain access to
those facilities, because some of the owners differed.
Only during the merger were clear rules set for facility
access on the North Slope.
· The state should retain its 12.5 percent royalty share of gas
"in kind". Leases allow for the state to allow the producers
to sell the gas and send the state a royalty check, but he
favored keeping the gas and marketing it ourselves. Initially,
that market would be the Lower 48, but the state can hire and
contract with companies such as Enron Trading or Williams
Energy Trading. "We need to iron out gas price valuation
methodology up front and when we market our gas, we will know
what true market value is in the market. He explained:
If a producer is selling gas in Chicago at a
certain price and the state is able to have our gas
marketing company get a higher price, the producers
must pay, under the leases at Prudhoe Bay, that
higher market valuation. The leases stipulate
"actual proceeds or market valuation" whichever is
higher. In the past on oil, Alaska has never had a
clear way to determine that market valuation. On
gas, because of its liquidity and the large amount
of gas trading, we do have a way on gas, but we
need to clarify that up front and we can help do
that by selling our share of gas. Also, when the
state retains its share of gas, I think that will
better facilitate instate gas use. For example, the
state currently uses about 115 million cubic feet
of gas per day (MCFD). The state's share at 12.5
percent at 2 BCFD would be roughly 250 MCFD and if
the gas pipeline ramps up to 4 BCFD, it would be
double that. The state's share would be much larger
than current use and we can expand gas industry in
our state.
· The State of Alaskan companies invest at least 12.5 percent
share in the gas pipeline from the Slope to the hub and hub
facilities. He feels the role of government is to provide a
positive business climate and wouldn't normally recommend a
state or government investing in a business venture such as
this. But in this case, the state has had 20 years of
discrepancies and lawsuits with TAPS owners over cost and
tariffs. "I think Alaska on the gas pipeline needs a seat at
the table." He recommended investment just from the hub to the
North Slope and he has heard some estimates of $2 - $3 billion
gross making the state's share about $250 - $400 million. He
thought that was doable, if the state wanted to use that
alternative. If the government decided not to invest, at least
it could stipulate that Alaskan companies and corporations
with boards in Alaska be able to purchase and invest in that
12.5 percent that would move the state's share of gas. "That
way we have people at the table that are Alaskans and the
decisions in boardrooms would be here and not just boardrooms
in Bartlesville, Houston, or London.
· The final recommendation is that the state formulates policies
and regulations for clear and transparent valuation and
pricing to resolve up front and prevent lawsuits that have
happened on oil.
Page four of his presentation illustrates what could happen in
Alaska with the trading hub concept, particularly with principles
for trading. In the future, investors could choose to have spur
lines instead of the physical hub, but we need to have the trading
principles and regulations for trading to make sure there's clear
access rules and clear valuation rules. It illustrates that there
could be multiple markets over the next 50-years.
Number 1200
MR. THOMPSON said that the state does not need to do all of the
suggestions on page five in one year, but they all happen daily in
gas basins around the world. They are:
· 2001: Make a resolution supporting principles of a natural gas
business in Alaska in conjunction with a Lower 48 gas line -
in regards to access and trading to give Alaskans a broad view
of where the state would like to go.
· 2002 - 03:
o Regulations for clear, transparent netback pricing
o Rules for clear, transparent access for in-state use
o Rules for clear, transparent access for overseas markets
o State finalize decision of investment in line, gas "in
kind"
· 2004 - 06: State attract investors for hub and/or spur lines,
in-state distribution, city infrastructure, value added
processing
He concluded:
· Lower 48 market appears best currently, but cyclical
· Northern route holds Alaska gas hostage to one cyclical market
long-term
· Southern route along TAPS route and Alaska highway provides
access to future multiple markets
o Alaska internal markets
o Asia, West Coast U.S. - Recently, Phillips announced they
would team up the El Paso Natural Gas to provide LNG to
Mexico or California. Peru is also looking at LNG to
Mexico and California. He said with a hub, a company like
Yukon Pacific doesn't have to look at the economics of
building the lines all the way from the Slope. They could
perhaps build a smaller line from the hub down to Valdez,
start off with the smaller less expensive project, fit in
to some of the smaller markets that might be more
commercial for them.
· State and Producers will see different calculations for
northern vs. southern routes
o Producers must focus on discounted present value, rates-
of-return
o State must focus on 50 years of socio-economic benefit to
the state
· Find win-win solution for route traversing Alaska
MR. THOMPSON reiterated the need for establishing a trading hub in
Alaska. He said that some of the same companies that are in Alaska
work with the European Union (EU) to formulate the European Union
Gas Directive that has clear rules and regulations for trading in
transport of gas and power generation. Some of the same companies
have trading hubs in the U.K. and he couldn't see why Alaska
couldn't have that. "I think it's important."
MR. THOMPSON said that exhibit 10 reiterates some of the points
made on the state retaining 12.5 percent share. Exhibit 11
highlights key points to consider on the state investing. He
pointed out:
If the state did not see fit to invest, selecting Alaskan
companies through a bidding process - quality native
corporations, quality Alaskan corporations, for at least
12.5 percent could be very helpful to move the state's
share of gas. It also means there are more profits kept
in state. A plus of the state owning the pipeline, you
get advance fees and tariffs that are fairly constant and
not cyclical like the gas prices are.
MR. THOMPSON said exhibit 12 reiterates that the discussion of
valuation and pricing policies has to take place with producers. He
truly thought that would be a win-win situation for both the state
and producers. The lawsuits generated angry feelings and a lot of
dollars paid. This would resolve that upfront.
Exhibit 13 illustrates that before final rules and regulations were
passed in the EU governing the natural gas business, they
established a set of principles that are very easy to understand
and straight forward. Those EU principles are:
· Gas transmission, distribution interconnected, no barriers
· State regulates gas business: nondiscriminatory, clear
· Fair and open access to the natural gas system
· Access to pipelines allowed under set of transparent rules. He
noted that the are forms that protect buyers and sellers and
the EU has that for trading of natural gas.
· Participants in the market will not abuse their dominant
position nor engage in predatory behavior
· Participants have open, nondiscriminatory storage access
· Gas suppliers will compete freely for "eligible customers"
MR. THOMPSON summarized that the state doesn't have to do all the
things at once, but he recommended some steps over the next few
years:
· 2001: Resolution supporting principles of natural gas business
in Alaska in conjunction with Lower 48 gas line
· 2002-03:
o Regulations for clear, transparent netback pricing
o Rules for clear, transparent access for in-state use
o Rules for clear, transparent access for overseas markets
o State finalize decision of investment in line, gas "in
kind"
· 2004 - 06+: State attract investors for hub and/or spur lines,
in-state distribution, city infrastructure, value added
processing
· 2007: "GAS TO CASH" for Alaska, Alaskan companies, Alaskans!!
Number 1600
SENATOR ELTON commented that the producers' timeline is the end of
this year for trying to decide on a project. "With these issues
hanging out front, they could make an argument that it's difficult
for them to make a decision when we don't know what the rules will
be two years hence."
MR. THOMPSON responded that getting final regulations could require
complex negotiations. He suggested having the principles of fair
netback pricing in the resolution and principles for 2001. Knowing
netback pricing at a hub or wellhead will be based on actual
proceeds minus auditable transportation costs and would give
producers a good feel for their economics as to what to use in
their calculations. There are a lot more details behind that that
could be in the regulations made in 2002 and 03.
SENATOR ELTON asked if the state has an equity investment in the
line from the Slope to the hub, would we be less subject to less
cyclical changes in gas prices because we would always be
collecting a certain amount of revenue from the transportation of
gas. He also asked why had Mr. Thompson strongly suggest "at least
12.5 percent" for a state stake.
MR. THOMPSON responded that 12.5 percent would give the state
ownership that is capable of moving all of their share of gas. That
could be important in the future. "If the market swings down in the
Lower 48, the producers may (and this could be a valid case, if the
prices cycle low) reduce their flow." But if Alaska has established
with this royalty share of gas contracts in Alaska to move its full
share, having that capacity to move the gas without having to
purchase capacity from others would be wise. The state could
incrementally move the volumes it sees fit and sometimes our
perspective may differ from the producers.
He explained that they way TAPS ownership was originally split,
each company could move about its equivalent. They wanted a straw
big enough to move their share of oil and not have to pay others.
He would use the same reasoning for the state.
SENATOR ELTON asked if our position at the table diminished if we
only own a percent of a segment and how do the regulatory
authorities handle that?
MR. THOMPSON answered, "I think the regulations should be on the
whole system and it be in a department that's separate from one
that may manage the ownership of the line, as well as managing the
royalty shares."
SENATOR ELTON asked if we only own a percent of a section, would we
still be treated as an owner in the system for the purposes of rate
setting and the other regulatory functions.
MR. THOMPSON replied that was correct. It's hard to say where the
producers' studies will lead, but they may size the line for what
they see is the market in the Lower 48 and not be as interested in
the Alaskan or Asian markets. If Alaskan's wanted to have capacity
on the 50 year horizon, Alaskan companies and others have to
recommend sizing that pipeline in a larger size from the Slope to
the hub to allow for those future possibilities. If producers don't
want to do that, they could fall back on other investors, maybe
foreign investors who were interested in LNG. It is important for
Alaska to own a part of that segment to size the future pipe.
CHAIRMAN TORGERSON said under that scenario, the state would be
paying for the excess capacity.
MR. THOMPSON replied that was correct, but we might find pipeline
companies that could also invest in that. It could be that the
reason we're using that extra size, is for LNG in the future.
"Yukon Pacific or even Japanese buyers might be interested in that
incremental capacity."
CHAIRMAN TORGERSON asked if he foresaw problems with the
realignment with smaller operators in getting access to the Prudhoe
Bay facilities, the way the law is currently written.
MR. THOMPSON said the merger agreement on the existing production
facilities had that as a key element that resolved much of the
access issues.
While there is still some negotiation on value, there is
a clear formula as to what rate of return producers are
allowed. If you pay that fee that gets them that rate of
return and there is capacity, then a small producer is
allowed into the facility. It's very important. Take the
reverse of that. What are the rules to allow a small
entrepreneur in Fairbanks to build a spur line and create
their small business near Fairbanks? The rules are not
clear. A producer could say no, I've got better markets
south. Whereas, if there are rules that they did a
competitive price and can be shown they have the
financial capability and the capacity is there, they
ought to have right to access the gas and do their
project.
CHAIRMAN TORGERSON asked if hubs were the creature of legislation
or negotiation between companies.
MR. THOMPSON explained that some elements are negotiations. Yet
there are clear operating rules around in the UK, the EU and in the
Lower 48. The mechanisms for trading in hubs in the UK is called
the Natural Gas Trading Arrangement, a very clear set of
principles. In the EU it's principles he enumerated on page 13, a
European Natural Gas Directive. In the Lower 48 hubs, the rules and
legal arrangements are known.
SENATOR PEARCE asked if the rules at Henry Hub, for instance, are
state or federal.
MR. THOMPSON answered that at the Henry Hub they are federal (FERC)
on some of the pipelines because of their crossing interstate
lines, but most of the rules and regulations are state. It's clear
rules when you know how to balance. So, if one producer can't make
a contract and someone else is making up that volume, the gas is
balanced later. This would be an issue at Prudhoe Bay for the
state, if others cut back on production, because we still have our
instate market. There are formulas for that; trading hubs do all
those transactions for companies in the Lower 48.
SENATOR PEARCE asked once those rules are in effect, who regulates
them.
MR. THOMPSON answered that to his knowledge in Texas, it's the
Texas Railroad Commission. Some aspects of the netback valuation
are regulated by the Texas Royalty Board. He was contacting them to
see if there were lessons that would be valuable to Alaska.
SENATOR ELTON asked what he meant by clear access to gas. Was he
talking about just the 12.5 percent royalty gas or any of the gas.
MR. THOMPSON replied that it could be any of the gas. If a producer
for some reason makes a bid, it could be for the state gas or the
producer gas, as well. He thought it would be more clear cut if the
state could make decisions on gas in Alaska. "The state's not going
to pay federal taxes on its proceeds. They may have an advantage
for more sales in state that could be helpful."
CHAIRMAN TORGERSON said he didn't see how a hub would help unless
the state built in additional capacity of line.
MR. THOMPSON responded that even if there's not any additional
capacity and the line is sized for just 4 BCFD, the state's share
is 500 MCFD. That could generate additional new businesses in
Alaska making a hub. "Regardless of the physical hub being built,
this issue of the contractual and the principles for trading are
going to be important to be clarified before gas starts."
CHAIRMAN TORGERSON asked what he was using for a reserve number up
North.
MR. THOMPSON answered that he had heard estimates that proven
reserves were in the 35 TCF range. He knows that's there, but he
has heard talk of 100 TCF. Some of the gas areas on the Slope are
yet to be explored. "Just 35 TCF could be a 50-year kind of
business."
SENATOR PEARCE asked how the state would manage to pay for 12.5
percent or part of a pipeline. Why would somebody want you to do
that, just from the Slope to the hub.
MR. THOMPSON answered that that happens in the Lower 48. Different
companies will have different ownership from a field line to a
junction point. If the line splits, they can do different
interests. It can be structured any way. He reiterated that the
segment of at least 12.5 percent from the Prudhoe to the hub was
important for the state to own for instate business. At this early
stage, the state could work with producers to structure it if the
state wants to invest.
SENATOR PEARCE asked historically how the hubs came to be.
MR. THOMPSON explained that most of his experience is in the Lower
48, but he has had nine years in Alaska.
Back in the 70s almost all gas was traded by medium to
long-term contracts and we didn't have the natural gas
trading that's happening now. There were just pipelines
that were owned by pipeline companies and sometimes
producers owned interest and sometimes they didn't. The
pipeline companies would take gas from a field to the
market in cities and power plants, etc. As businesses
grew, more fields were discovered and more natural gas
was used and more pipelines were built. Hubs came about
because major lines found themselves crisscrossing and at
one point, it was realized there would be a lot more
flexibility if these lines could be interconnected in a
way that people could supply into that hub. They could
have access to not just the three markets off their one
line, but maybe to nine or 10 if the lines were
interconnected. That was the physical reason for hubs.
That is a factor here, but the other purpose of hubs was
the contractual arrangements and setting rules of the
trading price. Then you know the netback prices for
taxation and royalties, as well. Also, at the hub you
have control of gas balancing.
TAPE 01-20, SIDE B
CHAIRMAN TORGERSON thanked Mr. Thompson for his presentation and
adjourned the meeting at 4:45 pm.
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