Legislature(2007 - 2008)BUTROVICH 205
02/11/2008 03:30 PM Senate RESOURCES
| Audio | Topic |
|---|---|
| Start | |
| Presentation: Agia Applicant Alaska Gasline Port Authority | |
| Adjourn |
* first hearing in first committee of referral
+ teleconferenced
= bill was previously heard/scheduled
+ teleconferenced
= bill was previously heard/scheduled
| + | TELECONFERENCED | ||
| + | TELECONFERENCED |
ALASKA STATE LEGISLATURE
SENATE RESOURCES STANDING COMMITTEE
February 11, 2008
3:38 p.m.
MEMBERS PRESENT
Senator Charlie Huggins, Chair
Senator Bert Stedman, Vice Chair
Senator Lyda Green
Senator Lesil McGuire
Senator Gary Stevens
Senator Bill Wielechowski
Senator Thomas Wagoner
MEMBERS ABSENT
All members present
OTHER LEGISLATORS PRESENT
Senator Joe Thomas
COMMITTEE CALENDAR
Presentation: AGIA Applicant Alaska Gasline Port Authority
PREVIOUS COMMITTEE ACTION
No previous action to consider
WITNESS REGISTER
BILL WALKER, General Counsel and Project Manager
Alaska Gasline Port Authority
POSITION STATEMENT: Gave PowerPoint presentation and answered
questions.
CRAIG RICHARDS, of Counsel
Walker and Leveque LLC
Anchorage, AK
POSITION STATEMENT: Assisted with PowerPoint presentation and
answered questions.
ACTION NARRATIVE
CHAIR CHARLIE HUGGINS called the Senate Resources Standing
Committee meeting to order at 3:38:05 PM. Present at the call
to order were Senators Wagoner, Green, McGuire, Stedman,
Wielechowski, and Chair Huggins; Senator Stevens arrived shortly
thereafter. Also in attendance was Senator Joe Thomas.
^Presentation: AGIA Applicant Alaska Gasline Port Authority
3:38:42 PM
CHAIR HUGGINS announced the presentation by the Alaska Gasline
Port Authority ("Port Authority") relating to its application
under the Alaska Gasline Inducement Act (AGIA).
3:39:00 PM
BILL WALKER, General Counsel and Project Manager, Alaska Gasline
Port Authority, told members much has happened in the last
couple of months relating to the Port Authority's efforts to
build a gas pipeline. The Port Authority existed in 1999,
before the Stranded Gas Act and AGIA, and will continue until
there is a pipeline. Mr. Walker said the Port Authority has a
lot of passion for this issue, with a voluntary board of
directors stretching from the North Slope Borough to the
Fairbanks North Star Borough and the City of Valdez.
MR. WALKER reported that over the years the municipalities have
put about $1.5 million into this effort, with about $20 million
from the private sector. The Port Authority hasn't had to ask
the legislature for funding. He surmised since companies have
been willing to step up and contribute millions, they are
serious about working with the Port Authority. He noted Craig
Richards would present some topics today. Radoslav Shipkoff of
Greengate LLC, on teleconference today from Washington, D.C.,
has been the Port Authority's financial advisor since 1999; his
company has performed all the financial modeling.
3:41:38 PM
SENATOR STEVENS joined the meeting.
MR. WALKER began the PowerPoint presentation, duplicated in a
28-page handout. He showed a slide that said the mission of the
Port Authority has always been to build - or cause to be built -
a gas pipeline from the North Slope to Valdez for the maximum
benefit of all Alaskans. Noting this mission has been tested
recently, he said it doesn't have to be under the Port
Authority's name. He expressed confidence in the AGIA process,
saying it has caused mountains of information to come forth that
Alaskans didn't have before.
MR. WALKER told members the Port Authority always wanted a
complete cost estimate on a turnkey basis, together with a
financial market analysis. Now that data is available. He said
the results are exciting. Although some companies have
withdrawn, they'd specified it wasn't because of the economics,
which are strong.
MR. WALKER explained that slide 3, labeled "All Alaska/LNG
Project Returns the Highest Wellhead Value," tells the whole
story of why the Port Authority continues to push for an all-
Alaska project. A netback on a project of 2.7 billion cubic
feet a day (Bcfd) has a higher wellhead value than a project of
4.5 Bcfd; it is a market function. While the Port Authority
prefers that the gas be consumed within Alaska, realistically it
must be exported to Canada, Asia, or another location first.
MR. WALKER said the economic model assumes that shippers will
take it to the best market and that gas can be put into six
different markets. The Port Authority believes "market
optionality" - which other slides will address - is important.
Of the projects looked at worldwide, none began with the largest
piece; most started with the smallest piece and then added to
it, as done for Qatargas 1, 2, 3, and ultimately 4.
MR. WALKER opined that it is highly unusual that Alaska has the
opportunity to begin with a smaller project with a higher
wellhead price. He attributed this to liquefied natural gas
(LNG), which allows taking advantage of world markets, not just
a single market where a pipeline hub might be.
3:45:43 PM
MR. WALKER turned to slide 4, "Bechtel," which showed a
breakdown of the cost estimate and had the following two points:
- Bechtel provided approximately $10 million in
engineering work for the Project/Application.
- Bechtel cost estimate: $23.65 billion.
He noted since 1999 Bechtel spent about $10 million toward this
effort, updating the project model and cost estimate. For the
final 2007 cost estimate for the application, the vast majority
of work was performed by that company, using approximately 50
engineers in Houston, Texas, where Mr. Walker spent most of the
summer. He lauded Bechtel, which he noted has made several
presentations to the Alaska State Legislature.
CHAIR HUGGINS referenced Bechtel's total cost estimate. He
asked what the effective date was for that.
MR. WALKER answered November 30, 2007, the date of the AGIA bid
submittal. Prior work was done in 2000, it was updated in 2005,
and there was a complete update in 2007. He'd deleted slides
showing every pipe yard and storage location, the number of
miles of pipe, construction camps on the route, and the number
of bids per camp; he'd felt such detail wasn't necessary for the
committee, he said, although a total of 15,000 pages was turned
in November 30. The estimate is approximately $12 billion for
the pipeline and $7 billion for the LNG facilities. A third
party is assumed for the gas conditioning plant (GCP), with a
toll built into the tariff for gas conditioning.
3:48:24 PM
MR. WALKER showed slide 5, "The All Alaska Project," surmising
members had seen it before, but without the 18 offtake locations
depicted on the map. It had the following points:
Gas Conditioning Plant in Prudhoe Bay
- removes impurities
- compresses and chills the gas to pipeline
specifications
- Pipeline from Prudhoe Bay to Valdez
- parallel to TAPS
- pre-build to Delta Junction for later tie-in for the
Alaska/Canada Highway Project
- tie-in at Glennallen for a spur line to Alaska South
Central natural gas grid
LNG Facility in Valdez
- integrated LNG liquefaction and LPG extraction
facilities
- includes storage and vessel loading facilities
MR. WALKER provided details. He said this project consists of
an 806-mile pipeline from Prudhoe Bay to Valdez, parallel to the
Trans-Alaska Pipeline System (TAPS) for oil. It is a 2.7 Bcfd
pipeline, with gas chilled to 28 degrees Fahrenheit. The GCP,
the first piece on the North Slope, is oversized because the
Port Authority realizes 2.7 Bcfd in a 48-inch line is
significantly under capacity. Liquefaction in Valdez is at the
terminal site approved by the Federal Energy Regulatory
Commission (FERC) at Anderson Bay, as obtained by Yukon Pacific
Corporation (YPC); a slide addresses that.
MR. WALKER discussed anticipated offtake locations. Although
the minimum number for the application was five, he reported
that the Port Authority had asked entities between Prudhoe Bay
and Valdez - every military base, as well as villages and
industrial entities - if they'd be interested in gas coming off
this line; without exception, the answer was yes.
MR. WALKER noted the original 22 locations were narrowed to 18.
He indicated other applicants have proposed offtake points in
Canada at Burwash Landing. The goal is as many offtake points
as possible, he told members, to distribute gas through Alaska.
Also, gas can be put into the pipe to get it to market.
MR. WALKER suggested one obvious point is at Glennallen, for a
spur line into Southcentral Alaska, and provisions are made for
a spur line to Canada at a later date. The pipe is oversized to
Delta Junction, 48 inches, then becoming 42 inches. It starts
at 2.7 Bcfd, but he said there is ample room for additional
expansion through compressors. It will start with three
compressors. The first is the gas conditioning plant at Prudhoe
Bay; it comes out with pressure there. The two additional
compressor stations are approximately 100 miles north of
Fairbanks and 100 miles north of Glennallen.
3:52:07 PM
SENATOR WAGONER asked at what pressure the line will operate.
MR. WALKER answered 2200 pounds per square inch (psi).
SENATOR WAGONER asked who'd pay the cost of all these small
amounts of gas for the offtake sites listed.
MR. WALKER answered it would be paid for by those taking the gas
off. Envisioned is some sort of local distribution system, a
necessary piece.
SENATOR WAGONER asked if the people who were contacted by the
Port Authority had been told how much it would cost to reduce
the pressure of that gas, odorize it, and distribute it.
MR. WALKER replied no. They'd inquired about interest and had
found strong interest. He noted the application refers to nine
centralized distribution centers because many could use one
center. It may be more economical to have fewer offtake points
and more of a distribution system. But that calculation hasn't
been completed yet.
SENATOR WIELECHOWSKI asked how much it would cost to offtake the
gas and the expected charge for in-state use. For example, does
this anticipate using distance-sensitive rates? He also asked,
with 18 offtake points, how much gas is expected to be available
at Valdez.
3:53:48 PM
MR. WALKER replied the maximum anticipated for in-state use is
0.5 Bcf, the rule of thumb they've used.
SENATOR WIELECHOWSKI asked how they set the rates.
MR. WALKER explained that the application uses a true distance-
sensitive rate. The fewer miles of distance in the pipeline,
the lower it is. If it goes past a compressor station, the cost
of that is included in the rate. In further response, he said
the Port Authority wouldn't control the price of the gas, but
would provide the facility and infrastructure to move it. All
the Port Authority could propose is the rate for the
transportation charge, which is a distance-sensitive rate.
CHAIR HUGGINS welcomed Senator Joe Thomas.
3:55:49 PM
MR. WALKER turned to slide 6, "Gas Conditioning Plant (GCP),"
which had the following points:
(a) 3rd Party Ownership
(b) Alaska Regional Native Corporation or Consortium
He explained that they'd broken the $24 billion project into
four different pieces, for manageability. First is the GCP at
Prudhoe Bay. The Port Authority has looked at the GCP with
private entities and believes it can be done in-state, with
Alaskan companies. The regional corporations seem to be a
natural, and the Port Authority has met with them; he said there
seems to be a strong interest.
MR. WALKER highlighted tax benefits for whoever owns and
operates the GCP, benefits he believes should remain in Alaska
if possible. In response to Senator Wagoner, he recalled that
this is through accelerated depreciation in the 2004 federal
energy Act. He opined that it is an easy and appropriate piece
to do separately.
MR. WALKER said the Port Authority had given thought to having
the producers be the owner-operator. While it is a possibility,
some suggest it might be better to have someone independent,
because of access issues. He said the board feels it should be
a local, Alaskan company. He pointed out that much has happened
since TAPS was built, with a lot of growth. He emphasized that
his entity believes this can truly be all-Alaskan.
3:58:29 PM
MR. WALKER showed slide 7, "Marine Transportation," noting there
has been previous discussion about the transportation of LNG,
including Jones Act issues. He said the Port Authority's
project allows shippers that put gas into the pipeline at
Prudhoe Bay to take it anywhere in the world they wish. As
shown on the slide, the Port Authority has a teaming agreement
with Mitsui OSK Lines and BGT Ltd., which have eight U.S.-built
LNG tankers.
MR. WALKER told members time was spent in Washington, D.C., to
determine the process and difficulty of reflagging those ships
out of the U.S.; the owners of the vessels have retained a D.C.
law firm to look at it. He indicated staff to the congressional
delegation advised that it isn't a lot to ask to reflag a U.S.-
built vessel, because it puts U.S. workers to work on the ship.
Those vessels would be available to ship LNG from Valdez to
other Pacific Coast points.
MR. WALKER noted for those who want to ship LNG to Asia, Mitsui
OSK Lines is the largest in the world, with about 645 ships, 80
of which are LNG tankers. It is the largest owner of LNG
tankers in the world, and the Port Authority is comfortable with
its technology. He indicated Mitsui OSK Lines has been to
Alaska, is familiar with shipping requirements, and has looked
at the Port Authority's information on the terminal site
including water depth. Thus the Port Authority has no issues on
the shipping.
CHAIR HUGGINS asked whether this assumes an export permit.
MR. WALKER replied the assumption is that the export permit
obtained by YPC would remain in existence. Saying he'd spoken
with the attorney in Washington, D.C., who obtained the permit
for YPC, Mr. Walker recalled that it expires 25 years after the
first shipment of LNG. Every year the fee is paid for the state
right-of-way, and the federal right-of-way was renewed this
year. With FERC, the LNG license at Anderson Bay at Valdez must
be renewed every three years, so that was renewed in May. He
said the export license seems as good as the day the ink dried.
4:02:46 PM
SENATOR WAGONER inquired whether anyone has asked the federal
Department of Energy (DOE) about the validity of the export
license today, especially based upon a project that uses the
$18 billion federal loan guarantee. He also asked if a response
has been put in writing.
MR. WALKER relayed the assumption that someone couldn't do both,
based on meetings they've had with the DOE about the loan
guarantee. Thus the assumption for the AGIA application and
model is that there'll be no federal loan guarantee.
CHAIR HUGGINS asked whether the Port Authority has a declared
affiliation with a pipeline company to do the pipeline piece.
MR. WALKER replied no, not at this time.
4:04:23 PM
MR. WALKER showed slide 8 and began a lengthy discussion of the
Port Authority's experience under AGIA, noting they'd testified
last year in favor of the Act. He opined that a good job was
done by the media in explaining the circumstances relating to
the Port Authority. However, he wanted to restate it directly
and answer any questions.
MR. WALKER recalled after AGIA passed, the Port Authority
immediately went to the Lower 48 to put together a consortium.
The process began in June. The Port Authority was pleased with
the response, particularly from one pipeline company that came
to Alaska several times and wanted to do it all, working closely
with the Port Authority on a pipeline to Valdez and worrying
about the LNG later. The Port Authority said no, wanting LNG
along with the pipeline, and ultimately put together a
significant pipeline company and a significant LNG company.
MR. WALKER said that company very much liked the data and work
from Bechtel and had wanted to update it itself. That's when
the Port Authority's board made that tough decision of "build or
cause to be built." There was one condition: If the company
didn't bid, it would give the updated data back so the Port
Authority could submit a bid.
MR. WALKER recalled about that time, August 12, 2007, a
Petroleum News article quoted David Sokol, talking about Mid-
America's bid, as saying he couldn't believe the kind of
pressure he was under to not submit a bid; Mr. Sokol didn't
divulge the partners, saying he didn't want them to be under the
same kind of pressure. Mr. Walker told members he hadn't fully
appreciated what Mr. Sokol was saying at the time and had to
read between the lines.
4:08:14 PM
MR. WALKER said the Port Authority continued with this
consortium, providing data and making everything it had
available. The others came up with the YPC permits, he
indicated, and all was fine until mid-October, when he was
informed that the pipeline entity was withdrawing. He said that
was the company's choice, but it declined to give back the Port
Authority's data, which was needed to put a bid together.
MR. WALKER explained that, at first, the LNG company said it was
unsure about bidding, but then said it would bid. Thus the Port
Authority put in a bid November 30 referencing that bid.
However, the LNG company didn't actually submit a bid, which was
discovered the next day. Then the Port Authority became more
aggressive and finally received the data.
MR. WALKER said when the Port Authority received the state's
letter requesting additional information, areas of deficiency
were pointed out that they were well aware of, since they'd only
been able to provide the little data available at the time. In
responding, they could have 1) submitted the minimum information
that complied with its original bid or 2) submitted the best
information they had. Since the goal was to build or have built
a gas pipeline - and wasn't necessarily to be successful under
AGIA - he said the Port Authority chose the latter.
MR. WALKER told members he takes responsibility for that
decision. It was the first time in ten years the Port Authority
had all the cost estimates and market data, put together by
leading companies around the world. Access to the data was
gained Friday night, December 15, in Houston; it was due
December 18 at 2 o'clock. Noting they'd worked around the
clock, he expressed pride in the application submitted
December 18, before it became public. Mr. Walker said the Port
Authority had no advantage by submitting it with a supplemental
request from the administration.
MR. WALKER explained that the Port Authority had believed it was
best for the State of Alaska to have those companies use the
Port Authority's data to submit a bid. When he'd asked the
pipeline company why it was withdrawing, the answer was that the
economics were fine and it was just a business decision. Also,
the LNG company had indicated the economics were getting better
and better. While he didn't know what was meant at the time,
Mr. Walker said now that the data is available and put together,
he sees that a smaller project can have about a $1 advantage
with respect to the wellhead, compared with a larger project.
4:13:09 PM
SENATOR WIELECHOWSKI asked if the Port Authority has a
confidentiality agreement with the LNG and pipeline companies
that prohibits disclosing their names.
MR. WALKER replied yes. While not convinced the agreement is as
strong as previously, he hasn't publicly shared the names. The
goal is to advance a pipeline project. He added that the Port
Authority benefited from the relationship to the tune of about
$2 million of work to have the data updated, and there is a
complete project, down to the nuts and bolts. In further
response about the withdrawal, Mr. Walker declined to speculate
and said he'd rather focus on the path forward.
CHAIR HUGGINS noted the Port Authority's AGIA application was
deemed noncompliant, which the Port Authority then contested.
He asked about specific points of disagreement.
4:15:23 PM
MR. WALKER opined that the Port Authority's application
submitted December 18 was fully compliant, answering every
question raised and having every piece necessary. Provisions
under AGIA disallow filing an appeal, he said, which the Port
Authority agreed to in testimony last year. However, the Port
Authority believes the Alaska Statutes and Alaska Administrative
Code allow the commissioner to choose to reconsider.
MR. WALKER added that the administration didn't misread the Port
Authority's first application. But he believes there had been
efforts to prevent its bidding; thus the Port Authority had
provided the administration with copies of correspondence with
the withdrawn partners and a copy of the draft complaint he'd
prepared and had ready to file in order to obtain that data.
MR. WALKER told members the Port Authority had shown what it
could under a confidential arrangement. While knowing the first
application had significant problems, the Port Authority
complied before anything became public and thus believes no
advantage was gained by its submittal December 18; nor was there
was any disadvantage to another bidder, since the Port Authority
hadn't seen anyone else's bid. However, the Port Authority was
told the second filing couldn't be considered because the
questions couldn't be answered from within the original
application.
CHAIR HUGGINS recalled the Port Authority received notification
January 3 that the reconsideration request was disallowed.
MR. WALKER affirmed that.
CHAIR HUGGINS recalled a briefing related to a commitment to
look at an LNG course of action. He asked what sort of
commitment was made to the Port Authority then.
MR. WALKER replied there wasn't one at that point, though it was
communicated that there would be an independent look at LNG.
Clarifying it isn't an aspersion against this administration, he
said the Port Authority has lived and breathed the all-Alaska
LNG project for ten years. An in-house analysis doesn't provide
comfort that the analysis will be aggressive. It is likely that
the administration will interpret some things differently; for
example, the specific market makes a lot of difference. He also
recalled a $200,000 analysis by the former administration with a
somewhat negative slant, done by an East Coast consultant that
never even contacted the Port Authority.
4:19:19 PM
CHAIR HUGGINS asked whether an analysis is being done of a
Canadian route and also LNG, for a baseline.
MR. WALKER replied he believes so. Now that the Port Authority
is outside of AGIA, it can do things it couldn't under AGIA,
although its offer to work with the administration, making
consultants such as Mr. Shipkoff available, was declined. He
said it's confusing. The Port Authority isn't allowed to remain
in the process, having been told reconsideration isn't allowed
under AGIA. But the side-by-side analysis being done isn't
allowed either. He noted later he would discuss solutions.
4:21:58 PM
MR. WALKER turned to slide 9, "Alaska's Successful Fight to Keep
TAPS in Alaska," with the following point:
In the early 1970's Alaska successfully fought to keep
the Trans-Alaska Oil Pipeline from going through
Canada for the very same reasons the gasline should
remain in Alaska.
He gave personal recollections and mentioned jobs, value added,
and refineries, pointing out that if TAPS had turned at Delta
Junction and headed through Canada, much of the infrastructure
in Alaska wouldn't exist, or the jobs. Mr. Walker said this is
one of the forces that keep the Port Authority going.
4:23:26 PM
MR. WALKER showed slide 10, "Significant Advantages of All
Alaska Line," with the following points:
- Substantial permitting already in place (YPC)
results in the earliest gas to Alaska.
- Lower energy cost and clean burning fuel to Alaskan
communities.
- All jobs remain in Alaska -
- Construction
- Operations
- Maintenance
MR. WALKER gave details. He said companies are impressed with
the amount of permitting done by YPC; Wayne Lewis and Jeff
Lowenfels have a 16-year history with YPC. Noting he spent time
at YPC's Anchorage warehouse, where he marveled at the
$100 million of effort in gathering permits, environmental data,
and so on, he indicated there have been five "due diligence"
reviews on that data and not one company has said there is no
value. He highlighted the importance of clean-burning fuel in
Fairbanks and elsewhere. Turning to jobs, he said this provides
not only a higher wellhead price, but also the jobs.
4:25:40 PM
CHAIR HUGGINS recalled that Dr. Pedro van Meurs, talking to the
legislature last October, opined that it wasn't economically
viable to go through Canada at the time and that if there was a
viable project, he'd recommend LNG.
MR. WALKER agreed. Recalling that David Keane said the LNG
project would enable a "highway" project, starting with the
smallest and then adding on, Mr. Walker opined that an LNG
project would later cause a highway project to become economic.
4:26:44 PM
MR. WALKER showed slide 11, "Reasons Why All Alaska Project is
Superior," with the following points:
- Value added industry/jobs in Alaska.
- Alaska controls its own destiny.
- Earliest construction date.
- Smaller project requires only STATE plus ONE
Producer to commit gas, reducing risk of failed open
season.
- Market optionality.
- Superior economics - higher wellhead value.
MR. WALKER elaborated. He lauded Alberta's access to liquids;
surmised that what happened on the Kenai Peninsula is the tip of
the iceberg for Alaskan value-added opportunities; and said it's
important for Alaska to control its own destiny. Noting there
has been much analysis of how many years the YPC permits will
cut from the process, Mr. Walker said he's heard one to five.
The Port Authority application was put in as if those permits
didn't exist, he added, a worst-case scenario of the last
quarter of 2017. He emphasized there are existing rights-of-
way, with the all-Alaska line pre-staked 55 percent of the way.
MR. WALKER told members the smaller project only requires one of
the three producers. With a 2.7 Bcfd project, viable at 2 Bcfd,
it could be the state and one producer. He recalled Dr. van
Meurs saying if a project can be "bite size," it can go. The
previous processes have required concurrence of all three
producers, he noted.
MR. WALKER turned to market optionality. He opined that it is
imperative to have the most markets possible. The Port
Authority project has six available within the confines of the
export license. The market that the Port Authority is looking
at is whatever gets gas to Alaskans first. He said Alaska's gas
shouldn't be restricted except by the laws in place. Alaska
should be able to take its product to the market that pays the
highest price. Once this resource is gone, it's gone. He noted
that the final bullet, superior economics and higher wellhead
value, was discussed already.
4:32:32 PM
MR. WALKER showed slide 12, "Value Added," with the following
points:
- Alaska should have full access to liquids for value
added industry.
- Agrium
- ANGDA study.
He cited the Kenai Peninsula's Agrium plant as the state's
biggest success story, though not operating now because of lack
of gas in Cook Inlet. Mr. Walker expressed concern that if
additional incentives are given to the three producers, with the
hope that eventually all three will agree to something, more
facilities will close, weakening an incredible position of
strength now.
MR. WALKER thanked Scott Heyworth of the Alaska Natural Gas
Development Authority (ANGDA), who'd told him ANGDA is doing a
value-added study. Mr. Walker predicted the ANGDA study would
show significant benefits to the state as a result of being able
to utilize the liquids in Alaska.
CHAIR HUGGINS inquired about the advantage of an in-state gas
provision with respect to holding down the price of gas, which
he indicated was in the 2007 legislation known as Alaska's Clear
and Equitable Share (ACES).
MR. WALKER recalled legislative testimony about constituents who
are paying double this year for gas; he opined that this is
causing the whole economy to grind to a halt, since people who
spend a lot to heat their homes won't do other things. He said
in Fairbanks gas is $25 per thousand cubic feet (Mcf), heading
to $28. Henry Hub is perhaps $8, and in Alberta it around $7;
that would be a huge help. Much of Alaska is tied to diesel,
even No. 1 diesel when it's cold enough. Expressing hope that
the ANGDA study would show that value, he said it's actually
value added if a household's expenses are so much lower.
4:35:59 PM
MR. WALKER showed slide 13, "Alaskan Autonomy," a map of Alaska
with the following wording: "Decisions regarding
permits/negotiations for the All Alaska line would be made in
Alaska." Reiterating that much was learned from TAPS, he said
the more that can be kept under Alaskan control, the better.
MR. WALKER turned to slide 14, "YPC Permits Available to an All
Alaska Project," with the following points:
- Anderson Bay LNG/MT facility Air Quality (PSD)
permit (8 years)
- FERC authorization for siting LNG/MT facility
(7 years, 3 months)
- Anderson Bay (LNG terminal) Final EIS (7 years,
3 months
- Federal Pipeline Right-of-way Grants (4 years,
5 months)
- TAGS Project-wide Final EIS (4 years, 5 months)
- Presidential finding approving export of Alaska
natural gas (3 years, 8 months)
- DOE/OFE Authorization for export of natural gas
(Order 350) (23 months)
- State of Alaska Conditional ROW Lease (21 months)
- Coastal Zone Consistency Determination (10 months)
- DOE/OFE Confirmation of Order 350 (March 8, 1990)
- Ahtna Corp. Right-of-way Agreement
MR. WALKER emphasized the time it took to obtain some of these,
noting that the longest was 8 years; that the siting permit was
renewed last year; and that another right-of-way doesn't need to
be obtained from the federal or state government, although what
exists might need to be updated. He likened it to a lease or
rental, paid for.
MR. WALKER, surmising this pipeline goes down the right-of-way
of the most studied piece of earth, said there have been three
environmental impact statements for this route - one by Alyeska,
one renewal, and one by YPC - and there are few surprises at
this point, which is desirable when doing such a project.
4:38:06 PM
CRAIG RICHARDS, of Counsel, Walker and Leveque LLC, presented
slide 15, "All Alaska LNG is viable with Gas Committed by State
and One Producer," which consisted of three tables. He began
with a table showing required gas reserves to a pipeline,
depicting projects at 2.0, 2.7, and 4.5 Bcfd and showing totals
over 30 years.
MR. RICHARDS noted a 4.5 Bcfd project requires about 50 trillion
cubic feet (Tcf) of gas; a 2.7 Bcfd project, the Port
Authority's base case in its AGIA application, requires about
30 Tcf; and the smaller yet still economically project - shown
as 2.0 Bcfd - requires a little over 20 Tcf. He recalled that
TransCanada's application said it could go as low as 3.5 Bcfd
and still have a viable project - about 40 Tcf of gas.
MR. RICHARDS explained that the table on proven gas reserves by
shipper demonstrates that Alaska has about 33.5 Tcf of proven
reserves at Prudhoe Bay and Point Thomson; Kuparuk adds maybe
1.0, so it totals about 35 Tcf. Noting financial advisors have
said about 30 years of proven reserves are needed to finance a
pipeline, he said for TransCanada it's still short about 5 Tcf,
even at the lowest viable flow-through rate; even if that can be
proven up in time for the project, there needs to be full
participation by the State of Alaska and all three producers.
MR. RICHARDS told members the 2.0 Bcfd project, however, is
viable at 20 Tcf. Highlighting what has happened at Point
Thomson in the last year, he noted this table shows the major
gas holders in Alaska. That 9 Tcf reverted back to the state
from ExxonMobil, BP, Chevron, and ConocoPhillips to a small
extent, he said; the title will be clear in 2009. Hence the
state has gone from being the smallest gas controller in Alaska
to the largest.
MR. RICHARDS said the State of Alaska now owns outright
36 percent of the gas produced at the wellhead, a third of the
gas to commit to a pipeline to bring to market. This is 12 Tcf,
or 60 percent of a viable project. Thus it only requires adding
one producer to get to 20 Tcf. It could be ExxonMobil, shown
with 7.8 Tcf for 23.3 percent; or ConocoPhillips, shown with
7.7 Tcf for 23.1 percent; or perhaps BP, shown with 5.7 Tcf for
16.9 percent, plus a little extra from somewhere else.
4:40:41 PM
MR. WALKER showed slide 16, "Market Optionality," with the
following points:
- Alaska consumers
- Lower 48
- Other premium worldwide markets
He said the Port Authority believes the first market is Alaskan
consumers. Gas can go the Lower 48 three ways: 1) by having an
enabling pipeline for a later "highway" project, assuming that
gas goes into the Lower 48; 2) as LNG to the West Coast; and
3) since both LNG and oil are swapped regularly and because of
Alaska's location in relation to the world market, swaps could
be done that send LNG to both U.S. coasts. It depends on who
ships gas.
MR. WALKER emphasized having the greatest number of market
options. He said all this comes down to a successful open
season, which means a smaller project that doesn't require all
three producers and that has market optionality - the ability to
go anywhere in the world someone wants to take the product.
4:42:42 PM
MR. WALKER turned to slide 17, "All Alaska Project returns the
Highest Wellhead Value"; identical to slide 3, it had a table of
projected 20-year average netback prices for the All-Alaska
Gasline and Alcan Highway Projects. He said the higher wellhead
value relates to the market looked at, the one the Port
Authority believes will get gas to Alaskans first. The average
price is Henry Hub plus $3; it ranges from $2 to $4. The
Alberta market is Henry Hub minus 75 cents. This runs out to 20
years past construction.
MR. WALKER reported this figure was obtained from a number of
sources, including entities the Port Authority is working with
in that market, some Japanese public energy companies that are
forecasting 20 years past the construction completion date, and
various trade journals. He said there are four ways the Port
Authority has vetted that number.
MR. WALKER showed slide 18, with the following points:
All Alaska/LNG Project DOES NOT Require:
- Federal government as "bridge shipper".
- Federal loan guarantees.
- All 3 Producers. No single producer, such as Exxon,
can cause open season to fail.
- Additional North Slope gas discoveries prior to open
season.
- Resolution of Canadian aboriginal land issues.
- Additional Federal or State ROW's (already obtained
by YPC).
- A Federal export license (already obtained by YPC).
MR. WALKER explained that no bridge shipper is required at the
open season. And the Port Authority doesn't believe there will
be a failed open season because the volume is 2.7, within the
current offtake at Prudhoe Bay under Rule 9 of the Alaska Oil
and Gas Conservation Commission (AOGCC); it doesn't require an
oil mitigation plan.
4:44:45 PM
SENATOR McGUIRE noted it wouldn't total 2.7 without one of the
producers. She asked: Thinking about an open season, have you
looked at the unit agreements and do you feel confident that the
way those are structured, one producer could break out of the
pack and bid to be part of that 2.7 Bcfd?
MR. RICHARDS replied he'd looked at that a year ago and might
not recall all the details. The Prudhoe Bay operating agreement
is typically where one would find the gas-balancing provision
among operators, allowing one operator to remove its gas while
the others maintain their gas in the reservoir. He opined,
however, that Prudhoe Bay doesn't have a viable gas-balancing
provision, which he said is unacceptable; it should have one,
and the state should require that.
MR. RICHARDS added that federal law is clear: It is an
antitrust violation for one producer to keep another producer
from getting its gas to market by not agreeing to a gas-
balancing provision. Additionally, in a number of cases in
Louisiana and Texas, those have been held to be a breach of
lease terms with respect to the implied duty to get gas to
market. The State of Alaska, in his opinion, has the legal
right - through AOGCC or the Department of Natural Resources
(DNR), with the adoption of regulations - to create a default
gas-balancing provision, which he believes it should do. He
surmised doing so would motivate the producers to come up with
their own provision.
4:46:28 PM
MR. WALKER continued with slide 18, saying the Port Authority
hasn't put in for the federal loan guarantee because it's an
uphill battle that would cause delay. Mentioning that no
single producer can veto it, he cited interplay seen over the
years with regard to routes.
MR. WALKER stressed not needing additional gas discoveries prior
to an open season; he cited advice that the financial market
wants to ensure reserves are proven. He recalled that
Commissioner Irwin said there is plenty of gas for all the
projects; while agreeing with that, Mr. Walker indicated the
term proven reserves means something different when financing a
$20 billion project. He highlighted sufficient proven reserves
for a 2.0 or 2.7 Bcfd project, surmising there'll be additional
gas someday, but not necessarily enough for a 4.5 Bcfd open
season within 18 months.
MR. WALKER said land issues for this project have been resolved,
but not for a line through Canada; he recalled telling companies
that are considering going through Canada that perhaps an all-
Alaska line would be best for them, too, since it would give
more options and a reason to resolve issues. As for state and
federal rights-of-way (ROWs), he said those were obtained
through the YPC permits and don't need to be applied for again;
nor does an export license need to be requested.
4:49:44 PM
MR. WALKER showed slide 19, "History of Gasline Incentives,"
which stated, "20+ years of incentives have not resulted in the
building of a gas line in Alaska." Noting he'd made a study of
this back to 1985, Mr. Walker expressed frustration about the
incentive process. He highlighted the cycle: talking about
building a gas pipeline, forming teams, doing studies, making
concessions, putting together legislative incentive packages,
having nothing happen, having a change of administrations, and
then starting over.
MR. WALKER suggested because Alaska now is in the number-one
position with respect to controlling gas, the state should say
enough is enough. The incentive process hasn't worked. Even
the Stranded Gas Act and the $13.25 billion offered didn't
result in a commitment to actually build a pipeline; rather,
there was a commitment to work towards it.
MR. WALKER also mentioned the federal energy bill. He recalled
that Lower 48 natural gas trade associations had said they
wouldn't have their tax dollars used to subsidize a gas line
from Alaska and wouldn't accept the price floor, and so that was
taken out. As for issues associated with so-called bridge
shipping, Mr. Walker said he hasn't received indications that
will happen either.
MR. WALKER told members the Port Authority project doesn't need
such incentives. When it applied under the Stranded Gas Act, it
didn't ask for incentives, and it isn't applying under AGIA
because of wanting the incentives and $0.5 billion in funds.
The Port Authority is in this for the long haul - it's just a
little longer haul than originally believed. He opined that
this project is the closest project to being built and has the
fewest hurdles. Highlighting the skyrocketing cost of
utilities, he said something must be done. The Port Authority
believes it has figured out a solution.
4:54:37 PM
MR. WALKER showed slide 20, "Benefits of State Participation in
Gas Pipeline Ownership," with the following points:
1. Pipeline will finally be built.
2. Earliest gas to Alaskans.
3. Complies with voter mandate for an All Alaska
gasline.
4. Lowest pipeline tariff.
5. Tax exempt financing through the Alaska Railroad
Transfer Act (up to $17 billion).
6. Significantly reduces risk of failed Open Season.
MR. WALKER recalled meetings in Houston last summer with large
companies in the LNG or exploration business on the North Slope.
The pipeline partner had slipped away for some reason, and he'd
asked what people would think if the State of Alaska
participated in just the pipeline piece. The response had been
that it would be a big step forward, the most significant
statement that a project would happen.
MR. WALKER opined that there'd be a true alignment of interests
in that case. Both the state and the shippers would want a
lower tariff, for instance, since the state would make more
money on a lower tariff and higher wellhead price.
MR. WALKER reported being told that when a host government says
it will be involved and have an open season, companies show up.
When others hold an open season, by contrast, companies may or
may not show up; there is concern about potential gaming with
respect to the pipeline piece, for example, when a company
doesn't own part of the pipeline. He also recalled being asked
in Calgary whether Alaska has learned nothing in 30 years about
how the pipeline piece should work; he indicated he was told the
state should have at least 51 percent ownership in the pipeline
in order to have a lower tariff.
MR. WALKER indicated pipeline companies have said they don't
want to be involved in just the pipeline piece, which has a
regulated return. Thus it's a tough piece. If there were a
goldmine and a market, he said, a road would be built. He
likened this pipeline to a third lane of the Richardson and
Dalton Highways.
MR. WALKER proposed that the state take a significant role in
the pipeline piece. He recalled being advised there'd be high
interest in a liquefaction piece in that case. He emphasized
that it doesn't have to be done through the Port Authority. He
opined that the legislature is the best entity to jumpstart it,
to say the "incentive parade" is over and there will be an all-
Alaska pipeline, starting now.
SENATOR McGUIRE voiced concern that the state doesn't have the
expertise; because of its procurement code and being in the
U.S., it can't get things done as international sovereigns do.
She said no disrespect is meant to the state or its employees,
but she sees it as a terribly inefficient business model.
5:00:20 PM
MR. WALKER replied he understands the concern but doesn't
envision a state employee's involvement. Experts would be
retained. Other states have been involved in projects; he cited
California's involvement in building an aqueduct in the 1960s to
take water from north to south, noting Alaska's gas is also in
the north, away from its more southern population and markets.
And many things in Alaska are sophisticated, he pointed out,
including the successful permanent fund and the railroad.
MR. WALKER agreed with Senator McGuire that Alaska doesn't have
the expertise today, but said it is there. He has been told
it's a piece of pipe with two compressor stations. Yes, there
is detail, and obviously there has to be the right pipeline
company as the builder and operator. Everything wouldn't be
done in-house. He turned the presentation back to Mr. Richards.
5:03:18 PM
MR. RICHARDS showed slides 21 and 22, "State Participation in
the All Alaska Gasline," which had the following points:
1. The State should form a consortium of investors to
own, finance and construct the pipeline to Valdez,
with the State holding a controlling interest
(e.g., 51%).
2. Private development and financing of the
liquefaction, GCP, and shipping would follow
easily.
3. Typical pipeline project finance could be limited
recourse whereby equity holders would provide
credit support to the debt lenders during
construction. After completion, the recourse to
the equity participants would fall away.
4. With a controlling interest in the $12 billion
pipeline, assuming 25% equity and 75% debt, the
State would contribute approximately $1.5 billion
in equity and would have a risk exposure of up to
$6 billion during the construction period.
5. Customary mitigants that reduce lender pre-
completion risk would lessen the State's $6 billion
risk exposure (e.g., lump sum turnkey price
provisions, liquidated damages in the event of
performance shortfalls, cost overrun standby debt
facilities from financial investors, credit
enhancement from outside parties).
6. With the State as lead consortium member, it will
be able to control the development phase process
and timeline which, when combined with the State's
12+ tcf of gas, creates the best chance for a
timely and successful open season.
MR. RICHARDS highlighted the effort to find the weak points that
prevent a gas pipeline and strengthen those. He said the
pipeline portion is where help is needed, where there's the most
difficulty in getting investors interested. The desire is for
the state to have a 51 percent equity interest in a $12 billion
pipeline. After 75 percent is paid for by debt, the state would
have about a $1.5 billion investment in the pipeline, giving it
majority control.
MR. RICHARDS noted risk exposure comes with that, up to about
$6 billion because of being on the hook for debt payments during
construction. Typically during pipeline construction, equity
investors cover debt payments if they're not made. The exposure
in this case is up to half of the debt costs of the pipeline.
After construction, when gas flows, equity holders are no longer
on the hook for that debt.
MR. RICHARDS emphasized for $1.5 billion the State of Alaska
could move a pipeline forward; be a majority owner; and, during
construction only, have risk exposure of about $6 billion. As
shown in point 5, there is an excellent chance that the risk
exposure could be mitigated significantly through various
financing mitigation provisions.
5:04:52 PM
MR. RICHARDS turned to slide 23, "Examples of State
Participation in Economic Development/Infrastructure," which
listed various Alaska public corporations, with columns for
total assets, assets less liabilities, and unrestricted net
assets. He said it shows that the $1.5 billion which the state
needs to move the pipeline forward isn't significant in light of
other public corporations in operation.
MR. RICHARDS recalled when the permanent fund was created, it
was debated whether it should be a development bank or run as an
independent endowment like a pension fund; the latter won out.
However, the Alaska Industrial Development & Export Authority
(AIDEA), the Alaska Municipal Bond Bank Authority, and the
Alaska Housing Finance Corporation (AHFC) were created to
fulfill that development role; AHFC was capitalized at almost
$1 billion in the 1980s, about the amount needed to move a
pipeline forward. He opined that it isn't out of keeping with
state history or reasonable risk exposure for the state to put
up $1.5 billion to get this pipeline going.
5:05:58 PM
MR. WALKER concluded the presentation with three slides labeled
"The Way Forward." The first, slide 24, had the following
points:
Option 1
- Continue current process with applicant (TCPL) with
Administration internally constructing a strawman
LNG project for comparison.
- Legislature approves recommendation of AGIA license
to the Canadian project without the independent
analysis to provide proper checks and balances.
MR. WALKER explained that under Option 1, things could be left
as is, with the legislature given the opportunity to vote the
Canadian project up or down. If the contract were voted down,
it would lead to Option 2, shown on slide 25 as follows:
Option 2 - AGIA II
- Legislature does not approve AGIA license for
Canadian line.
- Administration undertakes AGIA II this summer
Cost = 1 year delay
MR. WALKER told members in this instance the administration
would reassess, come back with additional requests for proposal
(RFPs), and start the process again. Recommending against it,
he surmised it could cost a year's time or more and might result
in fewer bidders the second time around.
5:07:52 PM
MR. WALKER recommended Option 3, a parallel process shown on
slide 26 as follows:
Option 3 - Parallel Process:
- Legislature retains its own experts now to evaluate
ALL Alaska LNG Project.
- Allows Legislature to be fully informed regarding
the All Alaska gas line option at time of
Administrative recommendation of an AGIA license
award.
- In Special Session Legislature either:
1. Awards TransCanada AGIA license, or
2. Adopts legislation to enable construction of All
Alaska LNG project.
MR. WALKER told members this isn't unprecedented. In the past,
the legislature retained its own experts to analyze the Stranded
Gas Act and other things. The recommendation is to retain
experts now, to evaluate what isn't in AGIA. Mr. Walker also
said the legislature's hands aren't tied because of AGIA; this
wouldn't affect AGIA. He expressed hope that legislators would
want to be as independently informed as possible about all
options, rather than just vote up or down on one application.
MR. WALKER clarified that he wasn't being critical of the
administration or the process, but was saying that the purpose
of AGIA was to do what's best for Alaska. He opined that this
can be accomplished, even with the limitations of AGIA.
MR. WALKER said assuming a special session, the legislature
could award it to a Canadian project or adopt legislation for an
all-Alaska project. The Port Authority isn't asking for
legislative action or amendment of AGIA at this point. Rather,
the request is to retain independent experts to do a full and
robust analysis of the all-Alaska line. He opined that Alaskans
are anxious for that to be done. While wanting the state, as
the majority controlling interest on the North Slope, to step
forward and say it is doing a project, he also encouraged a full
analysis by experts to verify what was presented.
5:09:58 PM
CHAIR HUGGINS asked whether the Port Authority would allow the
legislature to have the benefit of its research.
MR. WALKER affirmed that, saying everything the Port Authority
had would be available.
CHAIR HUGGINS thanked the presenters, indicating the committee
had held off hearing from them until the reconsideration request
was taken up by the administration.
There being no further business to come before the committee,
Chair Huggins adjourned the Senate Resources Standing Committee
meeting at 5:10:37 PM.
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