JOINT HOUSE STANDING COMMITTEE ON RESOURCES AND HOUSE SPECIAL COMMITTEE ON OIL AND GAS February 1, 1996 10:10 a.m. HOUSE RESOURCE COMMITTEE MEMBERS PRESENT Representative Joe Green, Co-Chairman Representative William K. (Bill) Williams, Co-Chairman Representative Scott Ogan, Vice-Chairman Representative Alan Austerman Representative John Davies Representative Pete Kott Representative Don Long Representative Irene Nicholia HOUSE RESOURCE COMMITTEE MEMBERS ABSENT Representative Ramona Barnes HOUSE OIL AND GAS MEMBERS PRESENT Representative Norman Rokeberg, Chairman Representative Scott Ogan, Vice-Chairman Representative Gary Davis Representative William K. (Bill) Williams Representative Tom Brice Representative Bettye Davis Representative David Finkelstein HOUSE OIL AND GAS MEMBERS ABSENT All members present OTHER HOUSE MEMBERS PRESENT Representative Terry Martin Representative Gene Kubina COMMITTEE CALENDAR Presentation by Yukon Pacific Corporation: Proposed Natural Gas Pipeline from the North Slope to Tidewater in Prince William Sound WITNESS REGISTER JEFF LOWENFELS, President Yukon Pacific Corporation CSX Corporation 1049 West 5th Avenue Anchorage, Alaska 99501 Telephone: (907) 265-3100 POSITION STATEMENT: Presented information on the proposed natural gas pipeline from the North Slope to tidewater in Prince William Sound. ACTION NARRATIVE TAPE 96-4, SIDE A Number 000 The Joint House Standing Committee on Resources and House Special Committee on Oil and Gas was called to order by CHAIRMAN NORMAN ROKEBERG at 10:10 a.m. House Oil and Gas members present at the call to order were Representatives Rokeberg, Ogan, G. Davis, B. Davis, and Finkelstein. CO-CHAIRMAN JOE GREEN announced that House Resource Committee members present at the call to order were Representatives Ogan, Nicholia, Davies, Austerman, Long and Green. This meeting was teleconferenced to Anchorage, Barrow, Cordova, and Valdez on a listen only basis. CHAIRMAN ROKEBERG announced the agenda for the meeting was a presentation of the TransAlaska gas pipeline project by Yukon Pacific Corporation. Number 115 JEFF LOWENFELS, President, Yukon Pacific Corporation, explained that his company was sponsoring a project known as the TransAlaska Gas System. He announced he would present a slide presentation which sets out the fundamentals of the project and addresses Yukon Pacific Corporation concerns over project timing, and then discuss the Blue Book titled, "Briefing on Alaska Natural Gas Project," which contains answers to questions put forth by the Alaska Senate Resources Committee, and finally to answer questions by the joint committees. Number 203 MR. LOWENFELS began his slide presentation. He said Yukon Pacific Corporation is the sponsor of the TransAlaska gas system. Yukon Pacific Corporation was incorporated in 1982 and is a single purpose corporation working on the TransAlaska gas system project. Yukon Pacific Corporation is a business unit of the CSX Corporation. CSX is an international company which contains SeaLand Service which is a shipping company serving 120 different ports of call including ports in Alaska. CSX also owns a large intermodal system which transfers freight throughout the United States and the American Commercial Barge Line serving the MidWest on the Mississippi and Ohio Rivers. CSX owns a large railroad on the East Coast of the United States. To explain its size, he said this railroad system incorporates two of the railroads listed in the Monopoly board game. He said CSX is a large transportation corporation and operates business throughout the world. He said CSX received $9.5 billion in revenues and employs 50,000 people worldwide. Number 355 MR. LOWENFELS pointed to a map projection which depicted the TransAlaska Gas System (TAGS) project Yukon Pacific Corporation has been working on for 14 years. He said TAGS is designed to take Prudhoe Bay Unit (PBU) natural gas and possible Point Thomson Unit natural gas down through the existing corridor, following the existing TransAlaska Pipeline, in a buried, chilled pipeline. At the terminal in Valdez where it will be converted into liquified natural gas and then placed on tankers which will take it to Japan, Korea, and Taiwan. He said the natural gas will not only go to Asian ports, but also to communities located along the pipeline corridor such as Tok, Fort Yukon, Fairbanks, Glennallen, and Valdez. He said the 90,000 people living along the corridor pay the highest utilities rate of anyone in the United States with Valdez being the ranked the highest. He said the economics of TAGS works because of Japan, Korea and Taiwan but this project is also designed to get natural gas into the communities along the pipeline corridor. MR. LOWENFELS said the project costs, as depicted on the next slide, were $10 billion for Alaskan facilities and $3.4 billion for ships. He pointed to the figures mentioned that were listed up at the top of the slide and said these were 1991 figures. He said in most circumstances you would escalate those figures which would result in a higher cost and then explained why those figures are not higher. In 1983, the Alaskan Facility Design Work derived a $10 billion cost which included the conditioning facility, the marine terminal, the pipeline and compressor stations. In the 1991 figures, a 20 to 25 percent contingency factor was built into the costs depending on the facility. He said the ships have certain fixed prices. He added that the shipping numbers have dropped as economy of scales are reached in the worldwide ship construction market. The Alaskan facility figure is still $10 billion, despite inflation, because of technological advances which have lead to some cost saving economies. He cited the improved pipe material which has been proven to be effective and is less expensive. MR. LOWENFELS said other cost savings have been achieved and he remained confident that the cost of the natural gas pipeline would be $13 billion instead of the $15 billion which is the cost generally associated with the 1991 figure plus inflation. He said the producers, at the Monday meeting in the Senate, had estimated costs in the $12 billion to $13 billion range. Number 639 MR. LOWENFELS said differences between Yukon Pacific Corporation, BP and ARCO are usually stressed. He said there are differences, but he said the similarities should be stressed. He said Yukon Pacific Corporation is usually seen as a competitor with the North Slope producers in the same way the North Slope producers are usually seen as competitors with the state of Alaska. He said Yukon Pacific Corporation wishes to be partners as the producers wish to be partners with the state. He said there are differences that these need to be discussed. Representative Kott from the House Resources Committee and Representative Finkelstein from the House Oil and Gas Committee joined the committee meeting as witnessed by Co-Chairman Green. Number 708 MR. LOWENFELS said the North Slope contains 26 trillion cubic feet of natural gas at the PBU and five trillion CF at Point Thomson. He said these sources are believed to be the natural gas sources which would be used for TAGS. He said other sources might be added once TAGS becomes a reality. He added, because there is no current transportation system for natural gas, there is a joke that if you discover natural gas in the North Slope you are fired. He said that marginal oil and gas fields could be developed if there was a gas market. Point Thomson has the potential to be a gigantic natural gas field and it would be considered to be one if it were not located next to a 26 trillion CF accumulation of gas at the PBU. Number 890 MR. LOWENFELS said Yukon Pacific Corporation talks about shipping liquid natural gas (LNG). LNG is a colorless, odorless, non-toxic and sulfur-free liquid. LNG is made by taking natural gas, the same type of gas that is used in the Anchorage ENSTAR system, and chilling it to minus 259 degrees Fahrenheit. At this temperature the gas turns into a liquid and stays in this liquid for ten days. LNG is a safe and efficiently handled material and it is the cleanest burning of all the fossil fuels. Because of these reasons, it is sought by markets within the United States and throughout the world. He said the advantage to LNG is that 600 CF of natural gas condenses down to 1 CF of LNG which makes the transportation economics possible. Number 890 MR. LOWENFELS said Yukon Pacific Corporation has been around for 14 years and although he could go into the project in detail, he would prefer to cover the fundamentals of what would allow TAGS to succeed this includes; marketability, economic feasibility, technical feasible, and whether permits are available. MR. LOWENFELS asked a rhetorical question about whether or not markets in Asia needed natural gas from Yukon Pacific Corporation and the North Slope producers. He repeated that the similarities between North Slope producers and Yukon Pacific Corporation need to be emphasized. He pointed to a slide of the supply and demand projections in Asia. The diagram contained a bar graph of existing projects. These project figures listed were producing at maximum capacity and with the full expansion of their supplies of gas. The graph showed that these projects are unable to keep up with the demand in Japan, Korea, and Taiwan. He said starting in 2000 there is a shortfall of about 1.5 million tons of natural gas per year. He said in the year 2005 there is a shortfall of 23.5 million tons of natural gas per year and in the year 2010 there is a shortfall of 36.5 million tons of natural gas per year. He said to make TAGS economically successful 14 million tons of natural gas need to be placed into the marketplace. MR. LOWENFELS said this amount of natural gas needed to be sold because of the costs associated with the development of the natural gas pipeline. The pipeline would be 800 miles long, from PBU to tidewater, costing $5 billion. He discussed the start up procedure of a pipeline. He said that a pipeline does not start up at maximum capacity, but slowly builds up until you reach the capacity that you are trying to achieve. This period of fill up is referred to as ramp-up. He said the entire pipeline must be finished before one drop of LNG can be produced. He reiterated, saying the whole pipeline, plus the interest on that money, must be paid before any of the benefits of the pipeline can be realized. MR. LOWENFELS said 14 million tons of natural gas cannot be accepted into the Asian market in the year 2000, but it can be accepted into the market starting in the year 2005. Number 1122 MR. LOWENFELS discussed natural gas projects around the world seeking to get that Asian market. He listed Sakhalin as well as projects in Indonesia, Papua New Guinea, Australia, Yemen, Oman, Qatar and other potential projects including two cited last week by ARCO. He said competition exists for the Asian market and added that the demand numbers are similar to those derived by the oil and gas producers. The fact that there are projects being developed show this demand exists. He said difference in the competition comes from the fact that Alaska has only one project to place into the market and other producers have more than one project than can go into the market. He said this makes for a different affinity for serving for the market. Number 1213 MR. LOWENFELS said the competitive projects are seeking to get into the marketplace before Alaska. He pointed to the slide projection and said none of the announced start up dates occur after 2005. He said some of these projects, especially those in Natuna and Qatar, contain deposits far larger than the Alaskan natural gas deposits. He said that once a project is built, it can be expanded at a lower cost than building a new project. Once a project enters the market it can hold on to that and meet market demand through expansion of it's facilities. He reiterated that the project start up dates all begin between 2005 and 2010, which is the projected start-up date of the Alaskan project. Number 1304 MR. LOWENFELS said there is consensus, between Yukon Pacific Corporation, the producers and the state of Alaska, that the Asian markets will obtain LNG whether or not Alaska enters the market. He said the Asian market is dependent, in an ever increasing way, on LNG. He said the situation, in which a demand is perceived, is commonly referred to as a market window. The LNG market has to make long range plans such as permitting the receiving facilities. They have to build energy plants and pipeline systems knowing that there will be LNG in place when the shortfall occurs in 2001 and 2002. He said he talked with an Asian contact who listed the projects his company is currently working on and stated that the Alaskan project is not on his list because Alaska is not competing effectively. MR. LOWENFELS said the pipeline that Yukon Pacific Corporation is proposing is not designed to produce 14 million tons of LNG, but 28 million tons of LNG. He said this amount is by far the best economics of any of the competing projects or their expansion potential. He said the disadvantage lies in whether or not Alaska can get into the market. If other projects get into the market before, then Alaska will not have the market to ramp up to the 14 million tons of LNG let alone the 28 million ton figure. Number 1450 MR. LOWENFELS said between 2001 and 2003 the market window expands. He said Alaska cannot get the full 14 million tons into the market, but it is at that time that the ramp-up needs to begin. He said this is the first time in the history of the LNG market where 14 million tons can be inserted. He said this market window may never happen again and the risk Alaska faces is that they might not get the LNG into the market during this time period. MR. LOWENFELS said the first LNG introduced into Asia was LNG from the Kenai Peninsula. Alaska now has 1.5 percent of the LNG market in Asia and has the potential to go up to 14 percent. He said a difference in the presentation between Yukon Pacific Corporation and the producers is that although both sides agree that it is difficult placing 14 million tons of LNG into the market, the producers expressed concern that 14 million tons is 25 percent of today's market. He said Yukon Pacific Corporation feels that Alaska should not be daunted by putting a large amount of LNG into the market and cited examples where Indonesia is currently supplying 50 percent of the market. He added that Alaska supplies 20 to 25 percent of the nation's oil and we should take a large share of this Asian market. MR. LOWENFELS said the risk to Alaska is that it is a serious horse race. He referred to a slide showing the existing supply sources of natural gas which can no longer expand to meet the growing demand. The next slide showed the decreased potential demand when Exxon's Natuna project entered the LNG market. He then showed a slide showing the decreased potential demand when BP's proposed projects entered the market. He said he did not have a slide projecting the demand when ARCO's projects entered the market, but suggested that there would be no potential demand. MR. LOWENFELS mentioned the competition between the Alaskan producers and their international counterparts. He suggested that the Alaskan producers want to see an Alaskan project enter the market place first. He said the competing projects are a serious problem for the Alaskan producers and everything should be done to encourage them to look at TAGS in the best light possible. He said it is not that Alaska gas is not competitive, but rather that it is not competing. He said until the producers and Yukon Pacific Corporation can form a united team, in cooperation with the state of Alaska, they will not be able to fully compete. Number 1820 MR. LOWENFELS discussed aspects of the Natuna project being developed by Exxon. The time line for the project is between 2004 to 2005 in order for it to compete in the Asian market window. The Natuna project is being built at a cost of $20 billion dollars, 50 percent more expensive than the cost of the Alaskan project. He said Exxon International is promoting this project because it believes that the market place will pay the cost of the gas they can produce. He mentioned examples of how Exxon International is promoting this project to the twelve buyers of LNG in the Asian market. He then compared the Alaska project with the Natuna project and said Alaska already has the production facilities, is producing 7.5 billion CF per day, and contains 12.5 percent carbon dioxide. Whereas the Natuna project does not have existing production facilities, has not produced any LNG and has LNG consisting of 70 percent carbon dioxide. MR. LOWENFELS said the Alaska project is still in the horse race because of the work done by Yukon Pacific Corporation, the state and the federal government. The state has set up a joint pipeline office and the federal government has participated in that office. Even though Alaska is in the horse race, we won't be competitive until the gas supply is linked to the transportation system. Number 1901 MR. LOWENFELS discussed marketability by saying that Yukon Pacific Corporation has been working solely on this project for 14 years. They have made 56 trips, the equivalent of 21 months, within the Asian market during the past six years. He said the Asian buyers recognize Yukon Pacific Corporation, know the project in terms of economics and engineering and the buyers know Alaska. Alaska started the LNG business in the Asian market and have been stable and secure for 27 years. He said the buyers like Alaska because the gas is already being produced by ARCO, Exxon, BP, and the other members of the PBU. He complimented the ability by the producers to bring up the gas from the ground and said currently Yukon Pacific Corporation is using the fact, that Alaska is producing 7.5 CF per day, to impress upon the buyers the strength of Alaska. Number 2090 MR. LOWENFELS said existing projects are being paid $3.55 per million BTU's into the marketplace. These existing projects include Alaska, Indonesia, Malaysia, Brunei, Abu Dhabi and Australia. These projects cannot expand without at least one new grassroots, also known as greenfield, project. Those new projects are going to require a higher price than $3.55 and it is those projects with which Alaska is competing. He mentioned the concept of the oil patch which describes how small the oil market is and then mentioned that the LNG market is comparatively smaller and suggested that it could be referred to as the LNG weed. He said the publications produced and conferences for this market are expensive because of the small size of interested parties. MR. LOWENFELS said that using the $13 billion project cost as suggested by Yukon Pacific Corporation and the oil producers or if you took the commissioner's project cost of $15 billion dollars, even with that higher cost it still beats the projects costs of Qatargas, Natuna, and Sakhalin, the three projects that have had real numbers published. He said there is no dispute about these numbers, and if Alaska competes, Alaska can get that market place. Number 2203 MR. LOWENFELS said the project is economically feasible. The expected price of getting LNG into the marketplace is somewhere around $4.00 million metric BTU and pays a substantial wellhead price for the gas. The state of Alaska uses a $5.00 in the commissioner's report, do not include a wellhead price, is a pessimistic view. Number 2235 MR. LOWENFELS said project costs and price reductions can be achieved in two ways. The first is seller side opportunities which are the things that Alaska can do to reduce the construction costs of the pipeline. Oil companies as well as Yukon Pacific Corporation have attempted to reduce the costs of building the project such as adjusting the pipe size, looking at different types of compressors, looking at a different size of the manufacturing facility at the terminal of TAGS. MR. LOWENFELS said the second set of opportunities come from discussing the project with the buyers. Suggested savings come from using larger ships which attain increased economies of scale, accelerating the ramp up time from five years to three years, discussing the potential of more than 14 million tons which reduces the per unit cost and finally receiving low interest financing from the markets. He said that not only is the LNG market small, but that companies who purchase LNG also finance it at a subsidized rate because they want the product. Korea, Japan, and Taiwan have little indigenous supplies of LNG and have assisted chosen projects. MR. LOWENFELS said the project in Qatar received 4.9 percent financing from Japan. He said the project is 88 miles in length and in the Straits of Hormuz, a SCUDs throw away from Kuwait, Iraq and Iran. The Japanese gave this project 4.9 percent financing a year and a half ago. He said there is no stronger and more stable producer of natural gas than Alaska the project will be able to get less than 4.9 percent financing. MR. LOWENFELS said he believed that prices can be reduced 40 cents from the $5.00 worse case scenario just by working on costs in Alaska. He said when the project was designed, Yukon Pacific Corporation was told by the Alyeska folks and the oil companies said they must stay 200 feet away from all oil facilities on the pipeline. However, if the oil companies and Yukon Pacific Corporation can work together the savings represent 40 cents. He said by working with the buyers there is the potential to save $1.50 to $2.00 off that hypothetical $5.00 price. He said these savings can only be achieved by negotiating with the buyers. He added that you can not begin negotiations if you do have the permits for transportation and you do not own the gas. He said maximum savings can reduce the cost of the LNG to $3.57 which not only beats Natuna and Qatar but leaves a high wellhead price for the producers. TAPE 96-4, SIDE B Number 000 MR. LOWENFELS reiterated points about the numbers. He said showing the numbers was a sensitive issue, but he wanted to give an indication of what Yukon Pacific Corporation thought was happening in the market, in order to compare it with the commissioner's report. He reiterated points about Yukon Pacific Corporation. He said the president and chairman of the board of CSX and the chief financial officer of CSX are both on the board of Yukon Pacific Corporation. The combined economic weight of the advisory group, that advises CSX, scrutinizes Yukon Pacific Corporation. He said if these numbers did not work, CSX would not have invested 14 years in Yukon Pacific Corporation. MR. LOWENFELS said the commissioner's report says it is hard to get the TAGS project to work from their perspective. He added that the commissioner's report should be regarded as a first, because it marks an optimistic outlook from the state officials, state administration and the state legislature. It appears that all involved parties want to make this project work. MR. LOWENFELS discussed the technical feasibility of TAGS. He said the LNG design is large, but within the manufacturer's capabilities. He said in some cases parts of the design have been priced and even contracted. LNG tankers are already in service and larger tankers are on the drawing board. The pipe size has changed from X-80 to X-90 or X-100. This pipe is better and clearly works for TAGS. "This is now the standard and clearly works with our project and the X-90 and X-100 will also clearly work." Number 130 MR. LOWENFELS said TAGS has no new technical problems. Gas is already being produced at the rate of 7.5 billion cf to 8 billion cubic feet per day. He said only 2 billion cf are needed to reach 14 million tons. He pointed to the Natuna project and said new technology will need to be developed to remove the carbon dioxide content from the gas. Number 158 MR. LOWENFELS discussed permit issues, he said Yukon Pacific Corporation has spent ten years obtaining these permits. Yukon Pacific Corporation now has these permits, many of which were obtained prior to the Exxon Valdez oil spill. He said he did not believe that these permits could be duplicated. He pointed to the time in which it took Yukon Pacific Corporation to obtain the permits and said that even if the oil and gas companies could obtain these permits, he didn't think they could get those permits in less time than ten years. MR. LOWENFELS said Yukon Pacific Corporation obtained the permits in a tiered permit process. He said worse case scenarios were built into Yukon Pacific Corporation's two environmental impact statements. Based on those statements, there are no deal killers from now on, in regards to permitting issues. He said the environmental community was brought into to work on the project from the very beginning. With their concerns, Yukon Pacific Corporation built around those issues. Chosen routes avoid wetlands and incorporates suggestions made by the environmental community. MR. LOWENFELS again complimented the state and federal governments on the joint pipeline office. He said to obtain permits you go to one place at one time and which avoids staff duplication. Number 268 MR. LOWENFELS summed up by saying there is a market window and LNG will be supplied by anyone who can deliver it to that market. He said he hoped it would be Alaskan LNG as it will be the lowest cost producing LNG of the new grassroots projects. He said the Alaskan project is economically and technically feasible, and that the permits have already been obtained. Number 294 MR. LOWENFELS said the problem with the Alaskan project comes from issues concerning the North Slope producers. He again emphasized the need for cooperation between all interested parties. He said the producers face problems that are real and need to be addressed. He said there is no consensus about gas issues and long term operations between the owners at PBU or Point Thomson because there is a difference in ownership between oil and gas at PBU. He said it is the only place, he knew of in the United States, where you have two participating areas and your ownership of oil does not equal your ownership of gas. He said this situation has made disincentives for producing one product versus the other product. He added that the state of Alaska approved the unit agreement. He said no one should blame the producers for this problem. MR. LOWENFELS said the state has now stepped forward, through the Oil and Gas Conservation Commission, in issuing Order 360 which asked the oil companies to voluntarily resolve this problem. The oil companies are currently working on resolving this problem. He said this issue needs to be resolved soon because of the other LNG projects currently being developed. He said to understand this issue you should read the Oil and Gas Conservation Commission Order, the 1991 Issues Resolutions Agreement, the hearing record in front of the Oil and Gas Conservation Commission and the Department of Natural Resources, and the footnote on page 21 of the commissioner's report. He said all parties need to resolve the problem in a non-confrontational way and when that happens consensus will be achieved and the gas project can go forward. Number 419 MR. LOWENFELS said the second issue surrounding the gas issue is the discussion of oil loss. Confusion surrounds this issue, because at times it is said that there is no oil loss by taking gas out of the unit around 2005 and another oil producer stated that a potential 400 million barrels of oil would be lost from PBU if gas sales began in 2005. Both of these statements were made in 1995. He said BP and ARCO said that oil loss is a diminutive problem, at the worst, when you start taking gas out at 2005. He said he believed BP and ARCO, yet confusion about oil loss continues to be a problem because it is an uncertain equation. MR. LOWENFELS said oil is lost when an oil field shuts down. It is the oil that is left in the field when the field shuts down. He asked a series of questions based around this oil loss such as when does oil loss occur, does the ramp up timing affect oil loss, when will the TransAlaskan pipeline system (TAPS) shut down because there is not enough oil to put into the system. He continued by asking whether the shut down of TAPS causes the oil loss or if it is due to taking gas out of the ground. He asked what is the feasibility of operating PBU through 2030 with or without gas sales. He concluded by asking if Point Thomson gas can be used to alleviate or eliminate the possible oil loss at PBU. He said there is a great deal of confusion about predictions surrounding the future of oil. Number 597 MR. LOWENFELS said gas sales insure certain revenues for 25 years. Probable revenues can also be attained from the Point Thomson Unit which has 5 to 7 trillion cf of natural gas. It has 300 million barrels of condensate, the richest of the hydrocarbon column. Gas sales insure revenues and employment. Gas sales stimulate the state economy. He made a reference to how the budget gap affects all people from branches of the government who are trying to resolve this issue to the man interested in earning an income. Number 700 MR. LOWENFELS said Asia is making the natural gas pipeline a possibility, but communities along the corridor will also benefit. He referenced Anchorage as also benefiting because it is predicted that the Cook Inlet will run out of natural gas in 2010. If gas is not developed on the North Slope, PBU and Point Thomson revenues are lost, gas for our communities is lost, and the single largest opportunity Alaska will see for years. Number 739 MR. LOWENFELS said the second issue revolves around competition and marketing. The risk to Alaska is that the window will close to a project needing to sell 14 million tons of LNG to be economically sound. Representative Brice joins the committee meeting at 11:23 a.m. MR. LOWENFELS said Alaska needs to get into the market before the other projects. He added that the real risk is not competing. He suggested other uses for gas and said they are not as productive and stimulating to the economy in the way that a gas project is. He said Yukon Pacific Corporation has been perceived as a smug, little company, but he said at this time the oil and gas producers as well as the state are realizing that a gas transportation system is a question of when rather than if it is going to happen. MR. LOWENFELS said Ken Thompson, President, ARCO Alaska, on Monday, reported that $800 million was spent trying to build a natural gas pipeline down to the continental United States. Mr. Thompson said it was a lot of money to not build a project. Mr. Lowenfels said the project did not work then, will not work now, and will not work next week. MR. LOWENFELS mentioned the western routes for the pipeline. He said this is an area of disagreement between Yukon Pacific Corporation and the gas companies. Studies examining western routes are admirable in attempts to avoid the restraints of Alyeska and the Alyeska right- of- way, but these routes do not work. He said you need to use icebreaking LNG tankers and the Japanese have said they will not buy LNG using these tankers. He said an act of Congress would be needed to get through the National Petroleum Reserve in Alaska (NPRA). He said the other disadvantage, is the loss of natural gas for the communities along the southern route corridor. He concluded, that for the proposed western routes no environmental impact statements or leases have been done for those areas. He said that until those have been obtained, no one should be pinning their hopes on this project. Number 1122 MR. LOWENFELS discussed cost reductions as a result of shared facilities. He said these areas include the facility at PBU and the pipeline right-of-way. He added that in most cases you do not want to be next to a hot oil pipeline when you are a chilled gas pipeline. There are instances when you can use the work pads which are in place, pump stations, and camp sites. Yukon Pacific Corporation have established right-of-way which allows for the sharing of facilities right up against the pipeline. Yukon Pacific Corporation has established that they are first in this right-of- way permit. MR. LOWENFELS said that shared facilities do not work at the Alyeska terminal property for the LNG facility. Yukon Pacific Corporation has studied this in great detail and have established that it can not be permitted. He pointed to a slide and referred to the location of Valdez as compared to the oil facility which produces 25 percent of the nations oil. He said oil is a very flammable product. The proposed shared facility concept is to remove four tanks and insert a facility which uses a water cooling process. He said an exclusion zone is needed around the LNG facility and anything in that exclusion zone must be LNG related and owned by the LNG facility. He said this would not be the case by putting the facility next to the Alyeska property and another issue is that this exclusion zone incorporates some of the city of Valdez. MR. LOWENFELS said the Department of Transportation/Public Facilities requires that no flammable liquid is used in the production of LNG within this exclusion zone. He said the new site chosen by Yukon Pacific Corporation was based on their environmental impact studies, it is the site where they have received permits and added that you do not want to build a new state of the art facility next to a facility which is 30 years old. He said it does not make economic, political, or regulatory sense. Number 1141 MR. LOWENFELS once again made the point of stressing the competitive advantages of Alaska. It has a significant source diversification, a secure and stable supply and the flexibility of our cold climate which allows for continued production when Asia needs the LNG supply. The international balance of trade can be affected to the tune of $4 billion a year, every year for 25 years at 14 million tons of LNG. MR. LOWENFELS said the risk is not competing and losing 10,000 Alaskan jobs. He said Yukon Pacific Corporation calculates $40,000 to the state and local communities for 25 years and the loss of natural gas supply to the communities along the southern corridor if this project does not happen. He also said it is the risk that electrical energy from waste heat as well as the spin-off opportunities would be lost. Number 1223 MR. LOWENFELS said a teamwork approach is needed. He said Yukon Pacific Corporation is willing to throw their permits into the pot, to subdue their ego, if that is what is needed to make this project happen. Yukon Pacific Corporation will give up control of the project in order to work in any possible way with the producers in the state of Alaska to move this project forward as a team. He said without the gas project, the future of Alaska does not look as bright. MR. LOWENFELS said that if it takes until 2005 to begin ramp up, so be it, but urged making that decision now. He said let's guarantee Alaska's place in the LNG market. He presented a slide with a bumper sticker asking for another boom and said the LNG market, within this time period, is that opportunity. Number 1363 CHAIRMAN ROKEBERG recognized Representatives Brice, Kubina, and Kott. Number 1375 CO-CHAIRMAN GREEN expressed his appreciation for the presentation and then apologized for needing to leave the meeting early. MR. LOWENFELS complimented Co-Chair Green on his public and private time which he has invested in this issue. CO-CHAIRMAN GREEN said the Friday meeting with the gas producers would be held in the House Finance Committee room at 8:00 a.m. Number 1452 CHAIRMAN ROKEBERG said he was impressed by the amount of money Yukon Pacific Corporation had invested in research. He said it increases the credibility of the private sector when they are willing to do this. Number 1520 MR. LOWENFELS said that Yukon Pacific Corporation has invested tens of millions of dollars into this project with no guarantee of return. He said this project does not require investment by the state of Alaska, although they would be encouraged if they wanted to do so. This project does ask the state to pay attention to the monetary situation. He said the oil companies are quite sincere when they express concern over the states ability to balance their budget. He said that if the state is not able to balance the budget, somehow the state needs to allow this project to be off bounds when it comes to balancing the budget. He said this assurance would go a long way in encouraging investment and research in this project. Number 1707 REPRESENTATIVE JOHN DAVIES wanted clarification that the market will not be able to be supplied by existing sources. Number 1750 MR. LOWENFELS said that statement is correct. He said there are one or two projects that will be expanding between now and 2001. He added that there is a small expansion project which will combine with a new discovery. He said that, in essence, 14 million tons has to come from a grassroots project between 2001 and 2005. Number 1790 REPRESENTATIVE DAVIES wanted clarification on the projected cost which at first was said to be higher than $3.55, but that later other numbers were used. Number 1836 MR. LOWENFELS said all new grassroots projects, based on their costs and the numbers they have published, will result in a higher price than $3.55. He said the last published number of the Natuna project was $7.00 to get into the market place. He said in Alaska, the projected cost must take into consideration the requirements of the state and the requirements of the producers for their wellhead price. He the Yukon Pacific Corporation modeling indicates, on a scenario based on a variety of factors deemed acceptable, that $5.00 is the worst case scenario. He said cost savings within the state can result in savings of 40 cents, lowing the figure to $4.60. He said Yukon Pacific Corporation has identified $1.88 worth of savings by working with the market. He said Yukon Pacific Corporation will not get the full benefit of those negotiations and so the best guess figure is a $4.00 price range which includes the wellhead net back. He said these numbers might seem soft, but discussing numbers is a very sensitive subject and must be done carefully. Number 2028 REPRESENTATIVE DAVIES asked where the other half of the negotiation benefit goes. Number 2035 MR. LOWENFELS said the benefit goes to the buyers, to their trading companies or the utilities. He said Yukon Pacific Corporation will attempt to get the full $1.88 benefit, but it is not likely that all of it will be gotten. Number 2074 REPRESENTATIVE GENE KUBINA expressed support for this project. He said he hoped that during this legislative session a resolution could be passed supporting this project and asking the Governor to do what he can and also what the President can do. He said then the producers and Yukon Pacific Corporation need to come together to decide what you need to make this project viable in the future. He said that next year, when the legislature meets, he hoped that everyone would have a better understanding of where we were going with this project. Number 2271 MR. LOWENFELS agreed with Representative Kubina and said no one can be harmed by trying to get this project started. He said some things that the state of Alaska can do are listed before the tabs, of the Blue Book, titled "Briefing on Alaska Natural Gas Project." He said his only area of disagreement is in timing differences. He hoped for continuing discussions. He added that this project does not have the luxury of waiting another year. TAPE 96-5, SIDE A Number 000 CHAIRMAN ROKEBERG said it appeared that with all the competitive projects, and the advantages they have received such as the 4.9 percent financing, have already shoved Alaska out of the market place. Number 102 Co-Chair Williams enters the committee meeting at 11:45 a.m. MR. LOWENFELS said that the project in Qatar can expand to obtain their 300 trillion plus natural gas reserve and take over the whole market. He said this probably will not happen because of three reasons. The first reason is its location. Trading companies from Asia have told Yukon Pacific Corporation that they will never invest in projects in the Middle East again because of losses they have suffered. He said another reason why this won't happen is because of the expansion potential of those projects is not as good as the Alaskan potential. Qatar is twice the distance to Japan than the distance between Japan and Alaska. In addition, Qatar cannot expand one project, but it consists of a series of independent, grassroots projects. His third and final reason is that Japanese do not like to put all of their eggs into one basket. Number 385 CHAIRMAN ROKEBERG asked what the current investment is on this project. Number 427 MR. LOWENFELS said it is not the policy of Yukon Pacific Corporation to reveal this amount. He said it is well over $50 million. He said 10 percent of Yukon Pacific Corporation is owned by a charitable foundation in the state of Alaska. Number 488 CHAIRMAN ROKEBERG asked for comment on whether CSX wants to sell asset of Yukon Pacific Corporation to the producers. Number 504 MR. LOWENFELS said that CSX intends to keep 15 to 25 percent of this project. The balance sheet of CSX does not allow them to have a larger amount, nor does CSX feel that they should have a greater share than the North Slope producers. He said the North Slope producers should control this project, but CSX is not seeking to sell out this project. He added that compared with CSX's other holdings, the gas project is a very steady and stable investment as well as providing opportunities to increase business for their shipping company. Number 600 CHAIRMAN ROKEBERG asked, conceptually, if the state of Alaska or the permanent fund would invest in the project. Number 613 MR. LOWENFELS said he liked the idea of the state investing in this project. He added concern for the need to have private closed negotiations with the buyers and how that would balance out with the freedom of information act which would require the state to divulge information about its investments. He said despite this he likes the idea of state investment because this will be a profitable project and will be good for the people of Alaska. He said the benefit of state investment is that when the state invests it tends to tenderize the state view of the project and will cause the state to think two and three times before increasing the taxes on a project. He said conceptually, it makes sense but it is not required. He added that current statutes limit investment to a couple million dollars on any one in-state project. Number 723 REPRESENTATIVE DON LONG asked for explanation on the 12.5 percent figure. Number 750 MR. LOWENFELS said the state of Alaska owns 12.5 percent royalty on the gas on the North Slope. Alaska can take that gas in kind or to have the gas project sold. If this gas project needs to be jump- started, it is felt that some of that gas royalty should be used to jump start the project. If there is a problem between the three companies taking their gas out of PBU in a timely manner, maybe the state can commit its 12.5 percent early. He said this is one of the economic tools the state has to manipulate the economics of this project as it starts. He said this tool was used in the 1960s and resulted in a couple of in-state refineries. Number 845 REPRESENTATIVE LONG asked if the 12.5 percent was large enough to jump start the project. Number 850 MR. LOWENFELS said the gas project requires a commitment of 16.5 to 20 trillion cf of natural gas before you can start. He said you can then start the project with 12.5 percent if you know that there is the rest of the gas coming on line at a specific time. He said you need to have this 12.5 percent asset because it can be used in your investment negotiations. He added that the state could also use this gas in a "power equalization situation," as is done in some instances with electrical power, and get gas into communities which do not have access to natural gas. Number 953 REPRESENTATIVE OGAN said he would not be able to attend the presentation tomorrow, but would follow the issue from Anchorage. ADJOURNMENT There being no further business to come before the Joint House Resources and the House Oil and Gas Committee, Chairman Rokeberg adjourned the meeting at 11:57 a.m.