HOUSE SPECIAL COMMITTEE ON ECONOMIC DEVELOPMENT February 28, 1995 9:15 a.m. MEMBERS PRESENT Representative Jerry Sanders, Chairman Representative Norman Rokeberg Representative Vic Kohring Representative Ed Willis Representative Eileen MacLean MEMBERS ABSENT Representative Pete Kelly Representative Carl E. Moses, Vice Chairman COMMITTEE CALENDAR Overview of the Coal Industry WITNESS REGISTER JOHN SHIVELY, Commissioner Department of Natural Resources 400 Willoughby Avenue Juneau, Alaska 99801-1796 Telephone: 465-2400 POSITION STATEMENT: Commented on the coal industry in Alaska GABRIELLE LAROCHE, Section Chief Resource Development Department of Commerce & Economic Development P.O. Box 110804 Juneau, Alaska 99801-0804 Telephone: 465-5467 POSITION STATEMENT: Gave an overview of the coal industry and the department's involvement ROBERT B. STILES, President Alaska Coal Association DRven Corporation 711 H Street, Suite 600 Anchorage, Alaska 99501 Telephone: 276-6868 POSITION STATEMENT: Gave an overview on coal reserves in Alaska CHARLIE GREEN, Assistant to the Vice President for Marketing Usibelli Coal Mine P.O. Box 71805 Fairbanks, Alaska 99707 Telephone: 452-2625 POSITION STATEMENT: Gave an overview of the Healy Clean Coal Project WARRICK WILSON Alaska Coal Water Fuel, Inc. 12212 Old Glenn Highway, Suite 8 Eagle River, Alaska 99577 Telephone: 696-4775 POSITION STATEMENT: Gave an overview on the Alaskan Low-Rank Coal-Water Fuel Project KATE LAMAL, Environmental Offices Golden Valley Electric Association Box 71249 Fairbanks, Alaska 99707-1249 Telephone: 452-1151 Fax: 451-5638 POSITION STATEMENT: Commented on the user group issues involved in the industry TERESA IMM, Project Manager Arctic Slope Regional Association 6700 Arctic Spur Road Anchorage, Alaska 99518-1550 Telephone: 349-5148 Fax: 349-4213 POSITION STATEMENT: Commented on Western Arctic Coal JOHN SIMMS, Vice President, Marketing Usibelli Coal Marketing 122 lst Avenue, Suite 302 Fairbanks, Alaska 99701 Telephone: 452-2625 Fax: 451-6543 POSITION STATEMENT: Commented on constraints with regard to domestic U.S. use of Alaskan coal CHARLIE BODDY Usibelli Coal Marketing 122 lst Avenue, Suite 302 Fairbanks, Alaska 99701 Telephone: 452-2625 Fax: 451-6543 POSITION STATEMENT: Commented on the Alaska coal policy ACTION NARRATIVE TAPE 95-2, SIDE A Number 000 CHAIRMAN JERRY SANDERS called the House Special Committee on Economic Development to order at 9:15 a.m. Representatives Sanders, Kohring, and Rokeberg were present. Representatives Moses, Kelly, MacLean and Willis were attending other committee meetings and would be available as soon as possible. CHAIRMAN SANDERS gave a brief overview of the coal industry in Alaska. He commented that Alaska contains some 300 years of coal reserves based on present U.S. consumption rates. This is more than the rest of the U.S. combined. He said our reserve has substantial added value due to its low sulfur content and the growing global trend toward clean air standards. He also stated that getting this vast resource to market in a safe, environmentally sound, productive, and profitable manner involves many complicated factors: Currency exchange rates, cultural practices of our overseas customers, lack of the necessary transportation infrastructure, etc. CHAIRMAN SANDERS introduced Commissioner John Shively of Natural Resources as the first witness. Number 040 JOHN SHIVELY, Commissioner, Department of Natural Resources, stated that coal has been Alaska's undeveloped resource largely constrained by price, location and government regulations. He stated the Usibelli coal mine is our main mine and that the state takes in approximately $1.4 million a year in royalties. COMMISSIONER SHIVELY said the next project would be the Jarvis Creek lease sale which is in the Tok Delta area. He stated that through the public comment period on the best interest finding, the project is in the process of being finalized and hopes to go to a lease sale sometime this spring. The main purpose of this coal lease will be to supply a project in Tok which will replace a diesel plant with a plant that will burn a combination of coal and wood, and waste. CHAIRMAN SANDERS asked if the Administration has any plans or clues as to what changes might be expected within the next four years. Number 090 COMMISSIONER SHIVELY replied that we need to get some common sense out of what government does, and to confine the time frames so that they are more reasonable. It takes so long for the government to determine what responsible development is that very few businesses can afford to get involved. Number 108 REPRESENTATIVE NORMAN ROKEBERG asked Commissioner Shively to comment on the Administration's action in reopening the Clean Water Act and any ideas in that regard on why that was reopened. COMMISSIONER SHIVELY responded that he should talk to Commissioner Burden on that subject. REPRESENTATIVE VIC KOHRING asked if Commissioner Shively was aware of anything that is planned for potential coal methane activity in the Mat-Su Valley. COMMISSIONER SHIVELY responded that activity in the Mat-Su area is being watched with interest. He explained that there is a drilling technology being used and that's the coil tubing technology, which would make drilling coal bed methane much cheaper. That provides us a real opportunity to provide alternative energy in the rural areas. He stated there is a real problem in the rural areas with fuel tanks; getting them into compliance with state and federal laws. REPRESENTATIVE ROKEBERG said in relating to the rural cost equalization situation where there is an endowment that has been established, the sinking fund aspect of that endowment appears to be a four to five year life. At that time there is going to be other difficult decisions made by the state of Alaska on a policy basis to what to do about that. He stated that we have a very short time frame to look at alternate technologies and other methods of providing electrical power in the rural areas, and asked if there were any ideas or if he was interested in pursuing any pilot projects along this line. Number 164 COMMISSIONER SHIVELY responded that he has asked his people to look at that. Right now there is a dispute in who is supposed to oversee some of these projects. The Alaska Oil and Gas Commission said they have some jurisdiction. He explained that their jurisdiction makes drilling for this kind of gas relatively expensive because of their bonding requirements. Commissioner Shively said he is very interested in looking at both technologies and what could happen if the Tok plant is built and how that might be used in the rural areas. He is also interested in where we could use the coal methane method. Number 177 REPRESENTATIVE KOHRING commented on lowering the bonding requirements. COMMISSIONER SHIVELY responded that in his opinion the Alaska oil and gas bonding requirement of a million dollars is wrong. He explained that this is the kind of bonding you would have for oil drilling. REPRESENTATIVE KOHRING mentioned that it was recently dropped from $5 million to $1 million and he was considering introducing legislation to further reduce the bonding requirement. COMMISSIONER SHIVELY responded it could be a different bonding requirement. CHAIRMAN SANDERS congratulated Commissioner Shively and said he looked forward to working with him the next four years. COMMISSIONER SHIVELY thanked Chairman Sanders and said he is also looking forward to working with him. He said we are faced with some great opportunities, and working together we should make some of these things into being. CHAIRMAN SANDERS noted for the record that Representative Willis arrived at 9:25 a.m. Number 215 REPRESENTATIVE ROKEBERG asked to be excused to attend another important committee meeting. Number 222 GABRIELLE LAROCHE, Section Chief, Resource Development, Division of Economic Development, testified that Alaska's coal resource is virtually untapped with the remaining reserves estimated to be 5 to 5.5 trillion tons. This is an energy equivalent in BTUs, of more than 1,000 Prudhoe Bays, much of this being high-rank bituminous coal. This coal is valuable due to its low sulfur content. However, high production and transportation costs, along with price competition from other countries, is inhibiting further development of Alaska's coal. MS. LAROCHE further testified that the Usibelli mine at Healy is the only large scale coal mine operating in Alaska with export going to South Korea. Another coal investor in Alaska, Idemitsu Alaska, has temporarily canceled plans to mine the Premier Coal Seam in the Wishbone Hill area. This was due to continued low prices in the Pacific Rim steam coal market. MS. LAROCHE stated the largest reasonably markets for Alaska's steam coal are China, India, Japan and Korea which currently consume l.6 billion tons per year with future forecasts of 2.1 billion by the year 2000. This projected increase offers opportunities for Alaska to expand its exports. Other major producers in competition for this expanding market are Australia, Indonesia, China, and the former Soviet Union. Although market forecasts are positive, Alaska's current penetration remains small. If the market price were to make the projected gains, projects such as Wishbone Hill and western Arctic coal may see a window of opportunity to develop and gain significant market share. The development of Arctic coal reserves could provide a competitive alternative for village and individual power in comparison to diesel fuel. MS. LAROCHE said the January l995 Report of the Alaska Minerals Commission finds the exclusion of coal mining operations from the state's reclamation bonding pool to be an issue for the coal industry. The department mineral specialist provides assistance to many coal developments in the state such as the Healy clean coal project, Northwest Arctic Coal, Wishbone Hill, the Beluga projects and the low rank coal water fuel demonstration. MS. LAROCHE talked briefly about the Alaska Industrial Development and Export Authority's (AIDEA) involvement in development of many coal projects throughout the state. She also discussed the department's support of the Arctic Slope Regional Corporation in its efforts to demonstrate the viability of the development and export of northwest Arctic coal deposits. MS. LAROCHE stated the department (OIT & AIDEA) continues to work with Usibelli, the Alaska Railroad, and KEPCO to assure the long term viability of the Usibelli export contract. Number 308 REPRESENTATIVE KOHRING commented she had mentioned that the Wishbone Hill project is temporarily on hold. Is there hope that it might come back on line. MS. LAROCHE replied there is always hope. There are significant reserves and it's in a good location. REPRESENTATIVE KOHRING asked if the Healy clean coal project is under construction. MS. LAROCHE responded that she wasn't sure, but will check on it. REPRESENTATIVE KOHRING said he was also interested in the funding aspect as well. MS. LAROCHE stated she will get back to Representative Kohring's office on funding. Number 335 BOB STILES, President of Alaska Coal Association, and President of Drven Corporation, which is involved with the coal developments in the Beluga field. Mr. Stiles noted a few people from the private sector will speak and cover some details. Charlie Green will cover the Healy clean coal project, Warrick Wilson will speak on the low rank water fuel developments, Kate Lamal will speak on the user group issues involved in the industry, Teresa Imm on western Arctic coal, John Simms on constraints with regard to domestic U.S. use of Alaskan coal, and Charlie Boddy will cover cleanup in terms of the Alaska coal policy that was passed by the legislature a few years ago. MR. STILES gave an overview on some of the coal reserves in Alaska: North of the Arctic Slope, Interior Yukon, Susitna Basin, NANA Basin, the Cook Inlet area which includes the Wishbone area, the Beluga reserves and the Jarvis Creek area. MR. STILES noted the primary market in the Cook Inlet would be to export to Japan, Taiwan, Korea, the coast of China and an outside possibility, the coast of Russia, Mexico, western portion of the Pacific Northwest and possibly Hawaii. Mr. Stiles said the Interior reserves are competitive in international markets. The reserves that are in pockets in the Interior would likely be development for local use. The western Arctic coal, that has a high heating value, has potential in both international in the long term and local market for the near term. MR. STILES explained what really controls our business in international markets, we have faced a five year slide in international prices. He believes strongly this year the worm has turned. All indications are, the current negotiations on what's called a bench mark price we will see an uptick anywhere from $2 to $6 per ton on the bench mark coal which is a bituminous coal. A $6.00 uptick on bituminous coal translates to a $4.00 uptick on the subtuminous coal. He noted while we are always enthusiastic about seeing an uptick in price, we hope it is not too big. The reason is, if it is too large there will be other production developed in response to that uptick in price which makes the competitive playing field more difficult than it is now. MR. STILES explained the reason Alaska coal has been under developed in the last five years is not the price but the Mental Health Land litigation. He stated that had a very chilling effect in the market place. If you cannot market, and have no credibility in the market, you cannot sell; if you cannot sell, you cannot develop new mines. MR. STILES stated the important thing about the contradictory factor that they have seen in the market place during the time of this price slide is they have seen it continuing to increase in demand, so they do not operate like the classic economic model. Mr. Stiles explained that the most important factor on the price of Alaska coal is the global currency exchange rates. Number 474 REPRESENTATIVE ED WILLIS asked what the status is with slurry transportation, where you pulverized the coal and mix with water. MR. STILES responded that slurring coal does not offer a lot of potential for Alaska, and it's to a large extent, market constrained. Customers buy their coal and they multi-source their fuel supply at the plant level. Number 490 REPRESENTATIVE KOHRING asked if the reserves were economically feasible. MR. STILES responded that you have to be close to existing transportation or you have to be close to the coast to break into the international markets. If you look at some of the fields in the Yukon area, they will likely not see any export. REPRESENTATIVE WILLIS asked if Wyoming has a large export market to the Pacific Rim countries. MR. STILES replied no, Wyoming probably exports less coal to the Pacific Rim than Usibelli does to Korea. The predominant United States steam coals that go to the Pacific Rim come out of Utah. CHAIRMAN SANDERS asked that if and when the Beluga market develops, where will it be brought to tide water. Number 496 MR. STILES stated there are three potential sites. One at Granite Point, North Forland which is the old BLM dock facility, and one at Ladd. The preferred choice would probably be North Forland. Number 560 CHARLIE GREEN, Assistant to the Vice President for Marketing for Usibelli coal mine, gave an overview of the Healy clean coal project. He explained that this was started six years ago. Alaska Industrial Development and Export Authority, Usibelli coal mine and Golden Valley made an application to the United States Department of Energy to propose this project. Congress has been interested in making grant moneys available to accelerate commercialization of coal burning technologies. It's been a long process since the project was awarded by the Department of Energy, but all of that was resolved this past November. TAPE 95-2, SIDE B Number 000 MR. GREEN said on February 1, l995, H.C. Price company which was the low bidder received the final notice to proceed with construction. He explained that to bridge the $25 million gap, there was a number of contributions by the Golden Valley Electric Association and the Usibelli coal mine, and the most significant contribution in that gap is expected to come from the Department of Energy. MR. GREEN noted that the scheduled foundation work will start in April or May. The construction work will take place in l995 through l997. In l998, because of the matching funds from the Department of Energy, the project will undergo a one year demonstration period on the new technology. In l999, it would become full commercial production operated by Golden Valley Electric Association. MR. GREEN stated the project has many benefits to it. He said Golden Valley has a needed new power facility. They are looking at the turn of the century of having a lot of their generating capacity, including their oil fired turbines at North Pole, as being the end of their useful life. He said they had to make a decision as to what their next generating facility was going to be and this project fit in nicely. MR. GREEN said of the new 50 mega watts of power that will come out of that facility there will probably be 35 mega watts that will be utilized by the Fort Knox gold mine which will start construction this March in Fairbanks. MR. GREEN explained that this is a clean coal technology project. He said a number of interesting aspects to the combustion technology will be used. There are three things that power plant operators and environmental engineers are interested in and what comes out of a power plant, rocks, knox, and socks. Mr. Green explained the rocks are the ash that you want to keep from coming out the flue. Knox is nitrogen oxides and socks is sulfur dioxide. This technology has a combuster that you bolt on to the side of a boiler that controls the chemistry in the initial combustion stage, so you do not create nitrogen oxides. It will include lime stone cleanup technology in the boiler and capturing sulfur dioxide as calcium sulfate in the fuel gas stream. MR. GREEN also explained the cleaning of ash, which is a concern of boiler operators everywhere. Coal ash abrades the inside of the boiler, corrodes tubes; it builds up and interferes with the heat transfer. Mr. Green said this is a slagging combuster and it will take out the ash before it ever goes into the boiler as molten slack. He said that about 90 percent of the ash will be removed before the combustion gas gets into the boiler. CHAIRMAN SANDERS noted for the record that Representative MacLean arrived at l0:05 a.m. REPRESENTATIVE KOHRING asked if there was a shortfall in the project. MR. GREEN responded that it is still going through the process where the Department of Energy will forward funds to the project. If that comes through to the full extent, the $25 million gap has been bridged. If that does not happen, Alaska Industrial Development and Export Authority, within its organization, has enough contingency to make up that gap. If there is any question on this matter, he will contact Riley Snell and have him get back to the committee. REPRESENTATIVE EILEEN MACLEAN asked what is the amount of the gap. MR. GREEN responded that it was $25 million. He noted that $12 million has been made up by Golden Valley Electric, Usibelli, and equipment manufacturers. CHAIRMAN SANDERS asked if the rise in the global market price will have any affect on the profitability of this project, or is this a domestic situation. MR. GREEN replied that it is completely domestic. WARRICK WILSON with the Alaska Coal Water Fuels, Inc., and the Energy and Environmental Research Center, stated they developed a technology at the Energy and Environmental Research Center. He said they were one of five Department of Energy technology centers until they were de-federalized under the Reagan Administration. Mr. Wilson stated a part of their mission was to look at ways to develop and utilize low rank coal nationwide. The technology that they think has the most potential is to beneficiate the coal by causing a permanent moisture reduction by temperature and pressure. MR. WILSON explained the funding sources and potential markets for a low rank coal water fuel. He discussed the viability of coal water fuel as substitute for diesel and heavy oil fuels. REPRESENTATIVE WILLIS stated that Mr. Wilson mentioned coal water fuel being a possibility for diesel generation, and asked would gas turbines be a possibility. MR. WILSON responded that coal water fuel will work for gas turbines. He explained that the most successful test there is to date in an advanced engine, is the Energy and Environmental Research Center produced 20,000 gallons of low rank coal water fuel that was used in General Motors' Allison turbine simulator. REPRESENTATIVE MACLEAN mentioned that the Alaska Science & Technology Foundation awarded $l80,000 for the first phase. She would like to know when the next phase is due. MR. WILSON replied that phase one is being completed. Part of the contingency for the award of the remaining funds is the successful completion of phase one, and to find and develop a binding agreement with the end user. The other was to find a site which will be the University of Alaska, Fairbanks. The key for the Board of Directors of Alaska Science & Technology Foundation's final approval will be the business plan. REPRESENTATIVE MACLEAN asked how many phases will it take to get to the $3.9 million. MR. WILSON said hopefully, the proposal will be completed and into Alaska Science & Technology Foundation by the April 13 meeting. He said that during this time they will be asking for the balance of the funding. CHAIRMAN SANDERS asked how practical is this for some of the smaller villages that are located where the coal is as a fuel source. MR. WILSON responded that in competing in the rural market, there would be somewhere between one-half million and one million tons a year. That is larger than you would use in the whole Interior and everywhere else. KATE LAMAL, Environmental Officer, Golden Valley Electric Association, also representing the users of coal, noted there is a 25 mega watt existing generation plant near the Healy mine right at Usibelli. She stated there are seven power plants that use coal for generation. She explained that the plants are having to watch the development of the new air quality regulations very closely to make sure that they are able to operate within operating compliance. She noted there exists about 100 air quality permits and with the new regulations out, that will probably go up to 300 permits. There is only seven coal fired permits in the state, but that represents about 75,000 people. REPRESENTATIVE MACLEAN asked if the state goes over and beyond the Clean Air Act of l990 within the state. MS. LAMAL explained that the regulations were signed in December and they are now at the Environmental Protection Agency for approval. There was a public comment period open for simultaneous review. There are certain aspects of the state regulations that appear to be more stringent than the federal regulations at this time. MS. LAMAL stated the other issue that is being watched is the coal ash. The power plants produce tons and tons of ash on a daily basis. The ash is classified under the federal regulations as being an inert substance. TERESA IMM, Project Manager, Arctic Slope Regional Corporation, stated they are strictly in the feasible phase of developing coal lands owned by the Arctic Slope Regional Corporation. The mine site that she identified for development is approximately ten miles off the Chukchi Sea. The area is called Deadfall Syncline. She explained that it's a bituminous coal, it's a low moisture, low ash, low sulfur coal with an energy range of an excess of 3,000 BTUs per pound. She said they are looking at the feasibility of developing an underground coal mine. MS. IMM stated they are also looking at the technology of transporting the coal for export to the Pacific Rim. She noted they have determined that they can underground mine the coal economically, and it would be cost competitive with underground mines in the Lower 48. MS. IMM said they are in the process of trying to finalize the transportation. They have two alternatives. One is to go south to the Red Dog system and tie into the Red Dog port. The second alternative that is being evaluated, is developing a port offshore of the mine site, in which they would try to extend the shipping season using ice breaking vessels. CHAIRMAN SANDERS asked if they are cost competitive, does that mean at the surface, not including transportation. MS. IMM replied that it does not include transportation, the mine costs are competitive with the Lower 48 at the surface. CHAIRMAN SANDERS asked if ice breaking vessels are currently operating that are capable of handling coal or does it have to be developed. MS. IMM explained that it is an evolving technology, but the technology is there. She noted that the Russians and Canadians move bulk material through ice regularly. CHAIRMAN SANDERS said it was mentioned earlier that the price in the global market may go up $2 to $6 per ton. He asked that the coal being of better quality, it is possible that it will go up even more. MS. IMM responded that the coal has been classified by some of the Japanese as premium coal. They are looking at it as a blending coal. CHAIRMAN SANDERS introduced Governor Sheffield, with the Arctic Slope consulting group. He apologized for not introducing him earlier. Chairman Sanders thanked him for coming. REPRESENTATIVE MACLEAN noted for the record that the other members should be present. CHAIRMAN SANDERS explained that members have been present at one time or another. He noted they have other committee meetings to attend and that some of them have bills up. REPRESENTATIVE MACLEAN stated that a memo to the members should be written to that effect. TAPE 95-3, SIDE A Number 000 JOHN SIMMS, Vice President, Marketing for the Usibelli Coal Mine, informed the committee of two federal issues. The first issue he discuss was the Jones Act, which requires that the transport of coal between states be carried out on American-made ships with American crews. Mr. Simms discussed the negative impact this had on the price of Alaska coal. MR. SIMMS discussed the second issue which was a proposed treaty by International Maritime Organization that proposes to reclassify coal as a hazardous and noxious material. This would require producers of coal to contribute to a fund that would be used to cover compensation claims arising from environmental catastrophe. This would raise the cost of coal $3 to $4 each time it is handled either at the loading or unloading ends of transportation. Mr. Simms testified that this would have a devastating effect on the production of Alaska Coal. REPRESENTATIVE MACLEAN asked for clarification of the two issues that he believed the state could take action on. A resolution seeking exemption from the Jones Act, and a resolution opposing the current language of the proposed International Maritime Organization. MR. SIMMS responded that it would be very appropriate and he would like to work with her on drafting a resolution. CHAIRMAN SANDERS asked in the question of Hawaii, is it possible to get an exemption to the Jones Act from port to port. On the West Coast, without the Jones Act, would it be possible to compete with Wyoming and Utah. MR. SIMMS believes that with an exemption to the Jones Act, there is no reason why Alaska could not become the chief supplier of West Coast and Hawaii coal. CHARLIE BODDY, Usibelli coal mine, gave a brief overview on the tremendous advances we have made within the industry and only have scratched the infancy by having only one operational mine. Mr. Boddy stated that mining is important to the state because it provides long term stable jobs for the people of Alaska. CHAIRMAN SANDERS thanked everyone for coming and assured the body that the Economic Development Committee is interested in the coal industry, both as a committee and individually. He stated that the committee is looking forward to working with them the next two years. ADJOURNMENT There being no further business to come before the committee, Chairman Sanders adjourned the meeting at 11:06 a.m.