Legislature(2015 - 2016)FAHRENKAMP 203
04/14/2015 03:30 PM Senate RESOURCES
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| SB50 | |
| Adjourn |
* first hearing in first committee of referral
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| += | SB 50 | TELECONFERENCED | |
ALASKA STATE LEGISLATURE
SENATE RESOURCES STANDING COMMITTEE
April 14, 2015
3:30 p.m.
MEMBERS PRESENT
Senator Cathy Giessel, Chair
Senator Mia Costello, Vice Chair
Senator John Coghill
Senator Peter Micciche
Senator Bill Stoltze
Senator Bill Wielechowski
MEMBERS ABSENT
Senator Bert Stedman
COMMITTEE CALENDAR
SENATE BILL NO. 50
"An Act relating to the programs and bonds of the Alaska
Industrial Development and Export Authority; related to the
financing authorization through the Alaska Industrial
Development and Export Authority of a liquefied natural gas
production plant and natural gas energy projects and
distribution systems in the state; amending and repealing bond
authorizations granted to the Alaska Industrial Development and
Export Authority; and providing for an effective date."
- HEARD & HELD
PREVIOUS COMMITTEE ACTION
BILL: SB 50
SHORT TITLE: AIDEA: BONDS;PROGRAMS;LOANS;LNG PROJECT
SPONSOR(s): RULES BY REQUEST OF THE GOVERNOR
02/11/15 (S) READ THE FIRST TIME - REFERRALS
02/11/15 (S) NRG, RES, FIN
03/10/15 (S) NRG AT 3:30 PM BELTZ 105 (TSBldg)
03/10/15 (S) Heard & Held
03/10/15 (S) MINUTE(NRG)
03/26/15 (S) NRG AT 3:30 PM BELTZ 105 (TSBldg)
03/26/15 (S) Moved CSSB 50(NRG) Out of Committee
03/26/15 (S) MINUTE(NRG)
03/27/15 (S) NRG RPT CS 3DP 1NR SAME TITLE
03/27/15 (S) DP: EGAN, BISHOP, HOFFMAN
03/27/15 (S) NR: MICCICHE
03/30/15 (S) RES AT 3:30 PM BUTROVICH 205
03/30/15 (S) Heard & Held
03/30/15 (S) MINUTE(RES)
04/03/15 (S) RES AT 3:30 PM BUTROVICH 205
04/03/15 (S) -- MEETING CANCELED --
04/09/15 (S) FIN AT 1:30 PM SENATE FINANCE 532
04/09/15 (S) <Pending Referral>
04/10/15 (S) RES AT 3:30 PM BUTROVICH 205
04/10/15 (S) Heard & Held
04/10/15 (S) MINUTE(RES)
04/14/15 (S) RES AT 3:30 PM FAHRENKAMP 203
WITNESS REGISTER
WILLIAM BARRON, representing himself
Eagle River, Alaska
POSITION STATEMENT: Commented on delivering energy to the
Interior relative to SB 50.
GENE THERRIAULT, Deputy Director
Energy Policy
Alaska Energy Authority (AEA)
Fairbanks, Alaska
POSITION STATEMENT: Supported SB 50.
MARK MYERS, Commissioner
Department of Natural Resources (DNR)
Anchorage, Alaska
POSITION STATEMENT: Commented on Interior energy issues
relative to SB 50.
PAUL DECKER, Acting Director
Division of Oil and Gas
Department of Natural Resources (DNR)
Anchorage, Alaska
POSITION STATEMENT: Commented on Interior energy issues relative
to SB 50.
NICK SZYMONIAK, Deputy Commissioner
Alaska Industrial, Development Export Authority (AIDEA)
Anchorage, Alaska
POSITION STATEMENT: Supported SB 50.
FRED PARADY, Deputy Commissioner
Department of Commerce, Community and Economic Development
Anchorage, Alaska
POSITION STATEMENT: Supported SB 50.
JOHN COLLETTE
Alaska Works Engineering
Fairbanks, Alaska
POSITION STATEMENT: Supported SB 50.
MERRICK PIERCE, representing himself
Fairbanks, Alaska
POSITION STATEMENT: Supported SB 50.
JOMO STEWART, Energy Project Manager
Fairbanks Economic Development Corporation
Fairbanks, Alaska
POSITION STATEMENT: Supported SB 50 and Senator Coghill's
proposed amendment.
GARY NEWMAN, representing himself
Fairbanks, Alaska
POSITION STATEMENT: Supported SB 50 and Senator Coghill's
amendment.
DAN SPILLANE, representing himself
Fairbanks, Alaska
POSITION STATEMENT: Related how bad the air quality is in
Fairbanks relative to SB 50.
PAMELA THROOP, representing herself
Fairbanks, Alaska
POSITION STATEMENT: Supported SB 50.
TED LEONARD, Director Emeritus
Alaska Industrial Development and Export Authority (AIDEA)
Anchorage, Alaska
POSITION STATEMENT: Supported SB 50.
ACTION NARRATIVE
3:30:22 PM
CHAIR CATHY GIESSEL called the Senate Resources Standing
Committee meeting to order at 3:30 p.m. Present at the call to
order were Senators Coghill, Costello, Micciche and Chair
Giessel.
3:30:50 PM
SENATOR STOLTZE joined the committee.
SB 50-AIDEA: BONDS;PROGRAMS;LOANS;LNG PROJECT
3:31:50 PM
CHAIR GIESSEL announced the consideration of SB 50 [CSSB 50(NRG)
was before the committee]. She invited Mr. Barron to discuss how
this legislation could potentially affect the Cook Inlet Basin.
3:33:03 PM
SENATOR WIELECHOWSKI joined the committee.
3:33:31 PM
WILLIAM BARRON [former director for the Division of Oil and
Gas], representing himself, Eagle River, Alaska, said delivering
energy to the Interior is important but complicated. He said the
general market is relatively small and natural gas
infrastructure is immature or non-existent. These two factors
combine an exasperatingly difficult business model by combining
elevated up front capital costs and unknown operating costs, all
to be covered by a small yet undetermined customer base and
still allowing a reasonable rate of return for a utility. These
market entry barriers must be thoroughly understood and
addressed before any project will be successful.
He said his comments would cover three primary areas:
1. AIDEA's role
2. Unintended consequences associated with broad AIDEA roles
3. The complicated Cook Inlet market
3:34:49 PM
What is the role of AIDEA in the quest to deliver lower cost
energy? Is it a financial institution which can supply low
interest loans and creative repayment schedules to enhance
project economics or is it a facilitator of commercial
agreements between producers and utilities? Can it be used as an
owner in part or all of the supply chain or is it some entangled
blend of all three?
This leads to the second issue: Has there been an assessment of
cause and effect or unintended consequences associated with
AIDEA involvement beyond the role of a funding source? For
example, how will the producers and utilities react? Will
government entities be advocating for a city utility the same
product needed by others? How will the consumers be protected if
the "government utility" isn't a regulated utility? How will the
gas industry respond if AIDEA is a working interest owner
competing to sell into the same closed market? If AIDEA is an
owner, is the state prepared to assume ongoing capital and
operating costs and obligations, including abandonment
liabilities? Fundamentally, is the state by coincidence or by
design becoming an oil and gas transmission and distribution
company to be in competition with the private sector? If a
private company is a producer and owner in the manufacturing
plant, the transmission system and/or the distribution system,
what action would the Department of Law take, and if AIDEA is in
the same position, couldn't the action be the same?
3:36:38 PM
Third, the Cook Inlet supply and demand model is complicated.
The recent balance is a result of capital infusion and
negotiation between producers and utilities with RCA oversight.
The supply is not just about reserves; it is also about
sustained deliverability. As current supply contracts sunset,
people should expect another perceived shortfall.
The Hilcorp consent agreement expires in a few years as do
several of the tax credits targeting the Cook Inlet and it's
difficult to predict the combined impact of those events. New
markets for gas can spur new exploration and development, but
those developments will be challenged. They will probably be
smaller and more costly and will press any predetermined market
threshold.
3:38:09 PM
MR. BARRON said they know the goal, but what is the project? A
thorough assessment of all potential options - their schedule,
their scope, budgets and the cost to consumers - should be
completed before making any determination of final project
selection. The state has already spent over [$12] million on an
aborted North Slope project; it can't afford to repeat that.
SENATOR COSTELLO said she also was concerned about inserting
government into a private solution and asked what it would look
like with more private sector participation.
3:39:32 PM
MR. BARRON explained that he was trying to articulate that there
are a lot of options, but his main thrust is what the role of
AIDEA is in any of these ventures. AIDEA is a state financially
backed institution that can create loan opportunities, creative
financing and payback of those loans to private sector companies
that will enhance the net present value of those projects simply
because they have ways of creating new financial returns. To him
that is a very positive role for a state-funded organization to
maintain.
Once AIDEA steps out of that role as a financial institution,
the role becomes very complicated and has significant "knock-on
effects" to the private sector, which would be noted if and when
a state-funded agency becomes more involved beyond just a
financial institution. His question is: Is the state prepared to
become an owner of physical assets rather than a financial
organization supporting the acquisition and development of those
activities?
3:41:19 PM
SENATOR COGHILL asked him to expound on the difficulties of
getting a gas contract for the Interior.
3:41:48 PM
MR. BARRON responded that there are a couple of differences
between the North Slope activities that were originally
sponsored by SB 23 and going into the Cook Inlet. The difference
is commercially that there was no fore-thought of bringing
natural gas from the North Slope to Fairbanks area and the Cook
Inlet producers were willing to try to get gas into Fairbanks
and have sent supplies to FNG. The problem is that the market of
Fairbanks is so small that there wasn't enough critical mass to
be signed up to really drive the commercial business into
Fairbanks.
When the Kenai gas field was brought on in the 1960s right off
the heels of the Swanson River discovery in 1957, that created a
huge supply with a very small demand, and as the reserves of
Kenai, Beaver Creek, Beluga River, North Cook and utilities in
Anchorage have been supplied over time, those major big fields
are beginning to wain and the smaller fields now require
increased capital, and are much more technically complicated to
advance.
3:44:43 PM
The Cook Inlet Basin consists of disconnected sands that are
hard to trace and identify their overall capacity. Even if a
well is drilled, its capacity is not known until a long-term
production test is conducted. On the market side, utilities need
to have something that is robust and deliverability of high
volumes over a short period of time as well as having longevity.
The problem on the reservoir side is that one won't know how big
some of these are or how much they can deliver when they need to
be delivered until a contract is secured that is price sensitive
to those developments. As the bigger fields wane, smaller fields
will have to be brought to bear. This is what is happening with
the Hilcorp investments in the Cook Inlet. This is not usual as
every major sunset of major contracts in Southcentral has had a
surge of activity to bring new reserves and new deliverability
to the market to satisfy those contracts. Part of the problem is
being able to satisfy both the near term and the long term
requirements of Southcentral Alaska; the needs of the utilities
and Fairbanks and future markets are going to be more
technically complicated and higher priced. The development of
these smaller gas fields is going to be greater than the
historic costs of the major gas fields. If the cost of those
developments are elevated over what has been the historical
basis, it is almost a business conundrum of how to bring gas
into a new market that has immature distribution systems without
creating a subsidized environment for that market, and
therefore, possibly a subsidized industry in the Cook Inlet. So,
the independents and the new producers are trying to figure out
how to deal with the state-subsidized organization.
SENATOR COGHILL agreed that the market is complex and would have
to be subsidized and stated that is why Fairbanks needs this
project. Fairbanks would have been the first to get gas off the
North Slope and probably the last one to get out of a contract
like that, but for gas from Southcentral, Fairbanks would be the
last ones into a contract and the first ones to be left out of
one.
Along the way, he hears that a subsidized market is something
that is going to have to happen; AIDEA's role, for example -
whether it's the Red Dog mine or a jack-up rig in the Kenai - is
to help industry with ways to get a head start. The Kenai area's
storage facilities allowed for ways to get the industry revved
back up again, which worked pretty well. So, they are looking
for ways to make sure that this little project, even if it has
some subsidy level to it, is equitable to what has been done
before in Alaska and still does not have unintended consequences
of leaving people high and dry. He sees this as a bridge project
before North Slope gas arrives.
SENATOR COGHILL said he understood that a lot of contracts are
coming up in the basin in 2018 and asked if that is a barrier or
a positive.
MR. BARRON answered that he wasn't aware of how many contracts
are coming up, but the contracts Hilcorp signed were through
2018, primarily with Enstar. A lot of contracts will sunset in
and around that timeframe. Furie, BlueCrest Energy and a few
other new players have some potential reserves that they would
like to bring to market and they have yet to be fully proven and
developed, but those will be at an elevated cost. He supports
getting lower cost energy to Fairbanks, but he wanted to
encourage AIDEA to look at all the possibilities, recognizing
that if there are going to be subsidies, they need to make sure
that those don't create an unfair business model that will
preclude the private sector from engaging in exploration and
development and building or owning the assets to supply the
customers.
SENATOR COGHILL said his point is well taken and he will try to
make sure that language stays open to industry - even in
Fairbanks.
3:52:05 PM
GENE THERRIAULT, Deputy Director, Energy Policy, Alaska Energy
Authority (AEA), Fairbanks, Alaska, said it would be best for
Commissioner Myers to start by responding to the issue of the
ability of the Cook Inlet Basin to eventually produce the
molecules in a volume that could satisfy not only the demand in
Cook Inlet but also the small quantity it would take to serve
the Interior. He said the existing utility demand in the
Interior is less than 1 bcf/yr. As the distribution system is
built out and three utilities - Fairbanks Natural Gas (FNG)
Distribution, Interior Gas Utilities (IGU) Distribution for
space heat and Golden Valley Electric Association (GVEA) - are
brought on, it is anticipated that demand would increase to 10
bcf/yr. in 10 years. Cook Inlet demand now is 90-100 bcf/yr., a
relatively small amount.
3:53:52 PM
MARK MYERS, Commissioner, Department of Natural Resources (DNR),
Anchorage, Alaska, thanked Mr. Barron for his past service as
director of the Division of Oil and Gas. "He is a real expert on
Cook Inlet," Commissioner Myers said. He stated that they really
want to get gas to Fairbanks at affordable prices, but also make
sure that Anchorage is adequately supplied. He said he had
provided advice to various legislators on various Cook Inlet
Senate bills.
He related that Cook Inlet's undiscovered resource, based on a
2011 assessment, showed 19 tcf of gas, 14 tcf of which are
conventional, non-coal, non-other sources of gas. That is a very
large volume of natural gas, but it's not behind a pipe. In the
28 fields that produce oil and gas in the Cook Inlet only 1 tcf
of proven reserves is economic and available for production.
About 355 bcf of additional gas is a resource in later and lower
reserve categories.
COMMISSIONER MYERS stated that as Mr. Barron said, people do not
produce reserves until there is a known market, and exploration
isn't typically done until there is a market, either. Cook
Inlet has a small market, the major uses being for utility gas
and LNG export. Traditionally, the state has viewed that supply
as: more demand is better for the basin given the resource base
that is there and the companies that are exploring. For
instance, the LNG export license was renewed for 40 bcf for a
two-year period; last year about 17 bcf were exported out of the
basin. That is a good thing, because it will lead to more
market, more exploration and more development.
He explained that pricing for LNG is very different than the
pricing that is regulated by the Regulator Commission of Alaska
(RCA) for utilities. So, there is already a significant amount
of non-regulated gas that is leaving the basin. Generally,
support for export has come from the Department of Energy in
approving that export license, the state in supporting that
license and from the producers generally in the Cook Inlet.
The Fairbanks market is about 1 percent of the current instate
demand. To the question of: Is the supply adequate and is
additional demand a good thing in the basin or a bad thing?
Generally and historically, the state has viewed it as a good
thing, because they believe the resource assessments show the
gas is there. How much it will cost to develop and produce
economically will depend on the market. Therefore, AIDEA's going
with an RFI request for competitive solicitation to gauge the
market price that would take gas to Fairbanks is a very prudent
approach. The drilling is only to keep up with the contractual
obligations of the companies with the exception of exporting
gas.
3:59:56 PM
COMMISSIONER MYERS said the other body is considering supporting
more fertilizer production from the Agrium plant under the same
theory that more demand equals a better commercial market for
folks. This has been the historical viewpoint, and again, this
amount of gas to Fairbanks would probably be a good thing for
the market provided that the market is able to deliver it at a
reasonable price.
He thought a lot of questions in Mr. Barron's testimony were
about AIDEA's structure being commercial or a state-subsidized
structure and then the question of making a gas to Fairbanks
project affordable. The Fairbanks Natural Gas program has been
going on for 20 years and it has not seen a significant amount
of market expansion in that time from the 1 bcf/yr. level. So,
Commissioner Myers said, commercial markets really have not
responded to increased supply to Fairbanks. The reasons are that
it's a very low density market and the infrastructure is not
there to build out. It hasn't been built because of the cost and
low density of market, the supply and the distances.
Realistically, aggregation of demand is necessary to get a
request for enough gas to get explorers interested in exploring
or developers interested in developing additional reserves.
He noted that gas to Fairbanks serves a lot of purposes. In
addition to lowering the cost of energy, it provides a cleaner
source of fuel than much of the wood that is being burned and it
will address the urgency behind air quality and health issues in
Fairbanks. It comes down to answering the question of what the
commercial market can deliver to a 1 bcf proposal that scales up
to 10 bcf over a decade.
4:02:34 PM
PAUL DECKER, Acting Director, Division of Oil and Gas,
Department of Natural Resources (DNR), Anchorage, Alaska, agreed
that about 1 tcf/gas is remaining in the proven and probable
categories of reserves in the basin. It is a best estimate
gleaned from making a series of incremental estimates from 2009
onward and he is more comfortable with .8 tcf to 1.3 tcf/gas.
Currently, all engineering data is being reviewed to get a
better estimate and that will be available in mid-to-late
August.
He said that recent exploration successes in the basin
demonstrate that additional fields remain to be discovered and
brought on line. Some are fairly small like the Kenai Loop and
others appear to be larger like the jack-up rig at Kitchen
Lights and Cosmopolitan. It would be a little premature to
assume that all of those fields are going to be equally
challenged economically as sources of affordable gas for the
IEP. The IEP leadership's goal of putting out a competitive
solicitation or request for information (RFI) to find out what
the market will bear is the right approach. Those numbers will
speak for themselves.
4:05:52 PM
CHAIR GIESSEL said she wanted it on the record that this
committee understands the imperative nature of getting gas to
Fairbanks and they want to facilitate in getting it there, but
it's a question of where it can be economically obtained and the
role of AIDEA in it.
4:07:20 PM
MR. THERRIAULT said when he first expected 10 years for build
out and ramping up to a total of about 9.5 bcf/year for the
distribution and demand in Fairbanks, he expected using 80
bcf/gas, which is equivalent to one year of Cook Inlet's current
demand, and AIDEA's role in putting those pieces together is
critical. Removing the restriction on gas molecules coming from
just the North Slope doesn't mean that the North Slope is not
still potentially the source that would supply Interior Alaska.
Going out with a new RFP could provide another opportunity for
producers to sharpen their pencils and still create potential
competition for delivery off of the North Slope. This
legislation is just asking to not be restricted to just the
North Slope as they utilize the tools that the legislature
proved two years ago.
4:09:43 PM
SENATOR MICCICHE said his 10-year build out was very aggressive
and asked how he arrived at that number considering what it
would take to even begin going from 1 bcf to as much as 5 mcf in
the first three years.
MR. THERRIAULT replied that they used conservative numbers, but
he would let Mr. Szymoniak, who produced the graph, answer that
question.
4:10:28 PM
NICK SZYMONIAK, Deputy Commissioner, Alaska Industrial,
Development Export Authority (AIDEA), answered that it is a
fairly aggressive build out that is based on analysis performed
by Cardno ENTRIX, Corporation, in 2013 for AIDEA. He said that
they are constantly refining and working with the utilities and
the local community to better understand what the demand profile
looks like. While it is an aggressive timeline, they believe it
to be reasonable. He noted that in the early years they expect
2-3 bcf to go instantaneously to Golden Valley Electric
Association (GVEA), which helps get that quick ramp up and they
believe that AIDEA has an important role to play to help soften
that risk on the private investors.
SENATOR MICCICHE asked him to share that analysis saying
overestimating is not in their favor in thinking about supply
challenges from Cook Inlet.
MR. SZYMONIAK replied that they are fully aware and sensitive to
the demand projections and can share the demand projection by
utility for the 10 years that constitute the 80 bcf as well as
the Cardno ENTRIX report.
CHAIR GIESSEL commented that as of about 10 days ago, the auto-
fill pricing for home heating oil in Fairbanks was $3.04 a
gallon and asked if he was concerned about the number of people
who may not want to convert to natural gas at this time of low
oil prices.
MR. SZYMONIAK replied that AIDEA is concerned, but oil prices
won't necessarily stay low and this project is a bit of a hedge
to protect Fairbanks against higher oil prices in the future.
They don't want to let off the gas pedal just because of a
temporary energy relief concept for Fairbanks. Because of the
analysis produced by Cardno, there was a follow-up analysis,
which they will also supply to the committee that looked at the
sensitivity of conversion rates to different prices of natural
gas. That analysis held the price of fuel oil static while
changing the prices of natural gas to determine what conversion
rates to expect at different natural gas prices and found
significant conversions to natural gas even at softer oil
prices.
CHAIR GIESSEL said it seems like a rational consumer would
consider the cost of swapping from oil to gas and asked if he
had taken into account the closing of Flint Hills.
MR. SZYMONIAK answered yes and that Flint Hills is not in any of
the base scenarios.
4:15:31 PM
FRED PARADY, Deputy Commissioner, Department of Commerce,
Community and Economic Development (DCCED), remarked that two
prongs drive conversion. One is the particulate matter (PM)
concern which may involve local government decision-making in
support of that conversion and the other is what Mr. Therriault
described.
CHAIR GIESSEL asked if he was saying that local government might
require residences to convert.
MR. PARADY replied that he would leave that to local government,
but it is within the possible tool kit if one considers the fact
that Fairbanks is a non-attainment area that will impede
permitting abilities of different projects going forward. It is
a health issue that will have to be addressed in some fashion.
SENATOR MICCICHE asked if he was willing to share his conversion
model.
MR. THERRIALUT responded that the Cardno report is on their
website; he could also supply hard copies.
4:17:23 PM
SENATOR MICCICHE said prices can change dramatically in the Cook
Inlet but the conversion rate in the model happens at a certain
price point and has an age sensitivity and asked if the model
scaled the price oil per mmbtu with potential changes in the gas
prices as supply either tightens or demand increases.
4:17:37 PM
MR. THERRIAULT replied that the model, put together from surveys
and consumer focus groups, was constructed to show a scale of
consumer actions as the price of oil or gas goes up or down. The
expectation was that 75 percent of consumers would actually
convert as the pipe goes down the street in the subdivision
where they live. Consumers can make different decisions based on
the age of their existing boilers and the cost of conversion,
which is estimated to be about $2500 compared to $10,000 or
$11,000 for a complete swap out for domestic heat and hot water.
When the Interior Gas Utilities (IGU) went out with a model they
actually asked for 50 homes to volunteer to have an audit done
on their actual infrastructure. Of those 50 volunteers, the
conversion could be achieved rather than a complete swap out. A
lot of housing was built 30 or 40 years ago, so a number of
those original boilers had been swapped out in the last 10 years
leading to the possibility for them to be converted more
economically.
SENATOR MICCICHE said he ran some numbers on the 9.5 bcf/yr. and
the residential potential is about 1 bcf. It looks like the big
conversions will be on the industrial side and asked if there
was any offset in potential federal financing on the industrial
side.
MR. THERRIAULT said he wasn't aware of any federal benefit that
can come into play, but another separate piece of legislation
targets business conversions. He explained that the majority of
the light industrial and business use in the Fairbanks North
Star Borough is in Fairbanks and as quickly as those potential
users could convert the better. The legislation is a mechanism
by which the local government can assist businesses by offering
a low cost source of financing and allowing the payback of that
loan to be stretched out over time. It has a zero fiscal note
and is asking the legislature to just allow the local government
to have the mechanism. It applies to any energy efficiency a
local business wants to implement but it has a particular use in
Fairbanks and they believe the cities in the borough will be the
local governments that fully develop the mechanism and try it
out.
4:22:46 PM
SENATOR COGHILL said the Fairbanks North Star Borough talks
about various ways to make sure the houses convert.
MR. THERRIAULT added the bill mentions using PACE financing for
local government to tap into possible federal funds.
4:24:40 PM
JOHN COLLETTE, Alaska Works Engineering, Fairbanks, Alaska,
supported SB 50. He was asked by the state to look at moving
natural gas away from the Railbelt area, a very complicated
task, and he didn't want to see the legislature at this time tie
the hands of AIDEA. Fairbanks is in a crisis situation and AIDEA
is the agency the state relies on for making deals with private
enterprise and they are good organization.
4:25:53 PM
MERRICK PIERCE, representing himself, Fairbanks, Alaska,
supported SB 50. He said the air quality in Fairbanks and North
Pole is so badly degraded due to lack of clean energy that
morbidity and mortality has increased among the 100,000
residents of the area. The legislature has a constitutional as
well as a moral imperative to act consistent with Article VII,
Section 4, in addition to the very large body of scientific
evidence that documents harm to human health from particulate
matter. A comprehensive study was just published by the British
Medical Journal in March 2015 and is conclusion was that
particulate air pollutants have a marked and close correlation
with emissions which lead to stroke. He appreciated being able
to look at all ideas that could be used to get affordable energy
to Fairbanks.
4:28:05 PM
JOMO STEWART, Energy Project Manager, Fairbanks Economic
Development Corporation, Fairbanks, Alaska, supported SB 50 as
currently drafted and Senator Coghill's proposed amendment.
GARY NEWMAN, representing himself, Fairbanks, Alaska, supported
SB 50 and Senator Coghill's amendment. He said he serves on the
University of Alaska Fairbanks (UAF) Master Plan Committee and
is familiar with the power plant project that people are working
on to bring costs down. He has also been an active member and a
candidate for the board of GVEA. He said he didn't support HB
105, as amended.
MR. NEWMAN also said AIDEA actually exhibited a bit of due
diligence in pulling out of the North Slope project because it
didn't meet the criteria of supplying $15/mcf delivered to the
home. GVEA said it wouldn't take all the risk. The goal has been
to provide relief to Fairbanks and AIDEA is trying to make sure
it is affordable. There has been a slight reprieve with oil
prices, but $3/gallon is still kind of high and he is hoping to
get an equivalent of about $2/gallon with natural gas or
propane. Finally, he said the argument that Fairbanks will
constrain LNG for Anchorage and Kenai is a "paper tiger."
CHAIR GIESSEL said he brought up the $15/mcf price point that
seems to be the threshold and asked what if the new idea can't
meet that? Is that a deal breaker, again?
MR. NEWMAN replied that won't be known until the experts go
through the effort. The bar of getting affordable energy seems
to be moving and he said, "Let's continue to move the bar."
4:31:58 PM
DAN SPILLANE, representing himself, Fairbanks, Alaska, related
how bad the air quality is in Fairbanks. He urged them to not
pigeon-hole AIDEA. He and his wife are both business owners in
Fairbanks and a gasline would be a welcome relief for them as
well as the economic benefit of all of Fairbanks. He related
that his daughter was born with congenital heart defects and
part of her continued health and welfare is proper exercise. The
family goes cross country skiing at least four times a week, but
sometimes the air quality gets so bad their eyes will get red
and their lungs will hurt.
4:33:24 PM
PAMELA THROOP, representing herself, Fairbanks, Alaska,
supported SB 50. She has been a commercial real estate broker
and developer for 20 years. She said that many businesses would
love to locate in Fairbanks, but they often walk away saying
that the cost of doing business is way too high. In the last
three or four months seven or eight businesses are closing and
leaving town or moving to Anchorage. Fairbanks is also
experiencing increasing foreclosures and the health problem. She
wanted AIDEA to have a broad enough scope to be able to look at
anything good for them, whether it's the pipeline from Cook
Inlet or propane.
4:36:10 PM
CHAIR GIESSEL said the legislature talks a lot about
diversifying the economy and everyone sitting at the Resources
table understands that resources, especially energy resources,
are what is going to facilitate that. She remarked that Iceland
found a very low cost energy source and now it has an aluminum
refining company with raw materials being shipped from South
America. So, she knows the difference that affordable energy can
make.
4:36:59 PM
MR. PARADY said AIDEA's role in this quest is to deliver low
cost energy. Yes, it is a financial institution and as such, its
role is to provide a combination of financing tools in a manner
that benefits Interior consumers and third party participants.
In addition to low interest rates and flexible repayment
schedules, AIDEA's IEP financing tools are able to assume market
risks that the private sector might not otherwise take.
Is it a facilitator of commercial agreements between producers
and utilities? The answer is yes. The IEP project team is
working to facilitate commercial agreements. The heart of this
bill is to change four words which say that that supply was from
the North Slope and to open it to other alternatives such as
Cook Inlet, flex steel pipe and propane, to initiate the
commercial process through a formal solicitation for natural gas
and liquefaction, and to facilitate preliminary negotiations
with Cook Inlet producers and liquefaction providers on behalf
of the Interior utilities.
Through these three roles AIDEA is working to rationalize the
process and support development on commercial terms, but it will
not directly enter into the commercial agreements beyond its
financial role.
4:39:52 PM
CHAIR GIESSEL said the fundamental question is that a private
sector buyer wanted to move forward with an LNG facility
(purchase of Pentex Exploration, Inc.) and was stopped by the
Attorney General (AG). Then AIDEA stepped in and she asked how
that fits the role of AIDEA.
MR. PARADY answered that the AG stepped in stems from the
original Hilcorp consent decree to which those parties agreed
(in the RCA review) and that original letter was written by the
prior AG rather than the present one. From AIDEA's perspective,
they are not interfering in buying the parent, Pentex and it may
still go forward. If it does go forward on its own merits, then
AIDEA will work with that entity to rationalize the distribution
system in Fairbanks. It is an accomplishment of AIDEA that in
moving to purchase Pentex, it has afforded the community of
Fairbanks the opportunity to have a single utility. He commented
that nothing makes less sense to him than to have a postage
stamp small market that is fragmented in two pieces. By
combining it, Fairbanks will have one warehouse, one
administrative staff, one metering system, and it just makes
sense. It does not preclude Hilcorp's proposed acquisition of
FNG.
4:41:38 PM
CHAIR GIESSEL said it sounds like he is describing a utility
company: the purchasing and metering.
MR. PARADY responded that AIDEA does not intend to operate a
utility and will divest those assets at the appropriate time.
CHAIR GIESSEL asked if AIDEA will hold gas reserves in Cook
Inlet.
MR. PARADY answered no. The role of AIDEA is having capital to
solve any number of problems, but that role is in support of the
market.
SENATOR MICCICHE said AIDEA didn't intend to own any gas
reserves, but then he said it intends if necessary to own equity
in gas reserves, and that seems to be the same thing.
MR. PARADY replied that the answer is no; AIDEA does not intend
to own gas reserves in the ground. He suggested there may be a
role for AIDEA to play with its patient capital in the supply
chain, but not in the ownership of natural gas reserves.
4:44:04 PM
CHAIR GIESSEL said AIDEA is conducting a $400,000 study with REI
relating to a potential LNG facility in Cook Inlet and that,
again, seems like a complex relationship.
MR. PARADY answered that was outside his area of expertise, but
Ted Leonard could answer that.
4:44:56 PM
TED LEONARD, Director Emeritus, Alaska Industrial Development
and Export Authority (AIDEA), answered that the chair is
correct; AIDEA has a reimbursement agreement with REI to look at
the financing of an LNG export facility. AIDEA would have the
ability as part of this financing to take a preferred ownership
position in it to provide the long-term patient capital, but
that's only one of the options they are looking at - if that
project goes forward. It is in the very early stages.
CHAIR GIESSEL said that AIDEA is involved with many complex
projects: an LNG facility when there is already one in Cook
Inlet and a gas field resource basin that has complex
structures. She wondered about their great involvement in Cook
Inlet.
MR. LEONARD responded that AIDEA is trying to ensure and assist
in the development of Cook Inlet through investments they have
made before taking into account all the complexities that are
being discussed.
4:47:56 PM
MR. PARADY said Mr. Barron's last questions was if AIDEA is some
entangled blend of all three. He would simply say that AIDEA is
a reasonable combination of those tools. It has been responsive
and nimble; it is up to the challenges of the project which are
complicated. That is why they are before the legislature now
seeking a geographic diversification option.
SENATOR MICCICHE said he was worried, because two years ago he
tried to make an amendment that removed the North Slope
language, because he believed that project was $100 million
under-capitalized. A non-public fight killed that amendment,
but it took AIDEA "more money than it took me on a napkin to
figure it out how under-capitalized it was. Now here we are two
years later. He believes AIDEA has an appropriate role in
projects such as these, but he felt that political motivation
does not normally arrive at the same answer that a private
entity would, because of the push for a political solution.
4:50:44 PM
MR. PARADY responded that the answer isn't self-evident; the
process needs to be worked through before the answer will become
clear. It's possible they will still end up back on the North
Slope. A particular set of circumstances led to a set of numbers
that didn't work for delivery. It's possible that could be
revisited with a different team of partners that could come up
with a lower number. It's possible Cook Inlet works; it's
possible that propane works; and the pipeline needs to be
evaluated. AIDEA has found itself tied to the North Slope in
that due diligence process. That is why they are seeking
flexibility. He simply didn't believe that politics can trump
numbers when it comes to operation of an energy system. Politics
has a role in any aspect of society, but not in the mechanics of
solving this particular problem.
CHAIR GIESSEL remarked that the North Slope didn't pencil out
and asked how he could justify the buildout happening without a
gas contract.
MR. THERRIAULT answered that the proposal is to go out with an
RFI to private sector players that have molecules to bring to
the infrastructure as well as an RFP for private sector players
that want to propose the infrastructure liquefaction, but it
would be an open and competitive process for private sector
players. That process will happen between now and the middle of
summer.
CHAIR GIESSEL asked if he had a timeframe for the stage-gates he
will be going through.
MR. THERRIAULT replied that the RFI and RFP need to have
responses back in 1.5 to 2 months and then the proposals would
be narrowed down to a smaller number that could work for
evaluation. It could be from the north or the south or a
combination that an entity that has gas molecules partnering
with another entity that wants to build infrastructure - and
both are looking for access to the patient capital or an entity
that has access to the gas molecules and infrastructure. They
are also open to a propane proposal or someone that wants to
deliver via pipe. The language in the bill would allow them to
look at all of the above. He said the number of $15 gets thrown
out, but the end isn't quite that rigid; it is a range.
4:56:01 PM
CHAIR GIESSEL said burner tip price was mentioned to be $15 and
that's a pretty aggressive price goal.
MR. THERRIAULT responded that's comparable to about $2 fuel oil
at the time and now the price of competing fuel has come down.
SENATOR STOLTZE said two Interior folks suggested they are
violating health and welfare provisions of the constitution:
Article 7, Section 4. He asked if this is an official position
and a litigation concern.
MR. THERRIAULT replied there is no suggestion of litigation. The
Environmental Protection Agency (EPA) is watching the Interior
very closely and allowing Fairbanks slack in coming into
compliance. If the project is further delayed by the
legislature, the EPA may feel more compelled to force the
community into a compliance effort.
4:58:46 PM
SENATOR MICCICHE remarked that he couldn't believe that a small
bore pipeline was not one of the solutions in the last 20 years
and while he supported Interior senators, he saw a couple of
problems in looking at the North Slope LNG business model. They
talk about combining into one utility, yet they have an LNG
production business model, a transportation trucking business
model and a re-gas, storage and distribution model. The LNG
production model in Cook Inlet in his view eliminates the
potential for the best price for a competitive bid option to
pipe, because someone will control the supply and that worries
him. His main concern with the North Slope and down the Dalton
Highway option was not under capitalization, but with what just
happened when the Dalton Highway was shut down. The long term
value of this project is cents on the dollar. A Richardson
Highway route small bore pipeline and Parks Highway route with
AKLNG would solve the problem out into the next generation. He
asked them to look at that approach instead of a piecemeal
approach. He would rather subsidize a real solution.
SENATOR COGHILL agreed with Senator Stoltze that they are
looking for an economic solution not a constitutional mandate.
5:03:00 PM
SENATOR WIELECHOWSKI commented that he had been here for nine
sessions and they had talked about getting low cost energy for
Fairbanks every single year. He thought they needed to pass
something that gives AIDEA authority instead of micromanaging
for another nine years and leaving Fairbanks to die on the vine.
SENATOR GIESSEL closed public testimony and held SB 50 in
committee.
ADJOURNMENT
5:04:44 PM
CHAIR GIESSEL adjourned the Senate Resources Committee meeting
at 5:04 p.m.
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