JOINT HOUSE STANDING COMMITTEE ON RESOURCES AND HOUSE SPECIAL COMMITTEE ON OIL AND GAS February 2, 1996 8:08 a.m. HOUSE RESOURCE COMMITTEE MEMBERS PRESENT Representative Joe Green, Co-Chairman Representative William K. (Bill) Williams, Co-Chairman Representative Scott Ogan, Vice-Chairman, via teleconference Representative Alan Austerman Representative Pete Kott Representative Don Long Representative Irene Nicholia HOUSE RESOURCE COMMITTEE MEMBERS ABSENT Representative Ramona Barnes Representative John Davies HOUSE OIL AND GAS MEMBERS PRESENT Representative Norman Rokeberg, Chairman Representative Scott Ogan, Vice-Chairman, via teleconference Representative Gary Davis Representative William K. (Bill) Williams Representative Tom Brice Representative Bettye Davis HOUSE OIL AND GAS MEMBERS ABSENT Representative David Finkelstein OTHER HOUSE MEMBERS PRESENT Representative Gene Kubina, via teleconference Representative Con Bunde Representative Mike Navarre COMMITTEE CALENDAR Presentation by Representatives of the Natural Gas Producers. WITNESS REGISTER JUDD MILLER, JR., Vice-President Exxon Company, USA P.O. Box 2180 Houston, Texas 77024 Telephone: (713) 656-2508 POSITION STATEMENT: Presented information on the proposed natural gas pipeline. JOHN MORGAN, President BP Exploration (Alaska) Incorporated P.O. Box 196612 Anchorage, Alaska 99519 Telephone: (907) 564-5429 POSITION STATEMENT: Presented information on the proposed natural gas pipeline. KEN THOMPSON, President ARCO Alaska, Incorporated P.O. Box 100360 Anchorage, Alaska 99516 Telephone: (907) 265-6511 POSITION STATEMENT: Presented information on the proposed natural gas pipeline. WILSON L. CONDON, Commissioner Department of Revenue P.O. Box 110420 Juneau, Alaska 99801-0400 Telephone: (907) 465-2300 POSITION STATEMENT: Presented information on the proposed natural gas pipeline. ACTION NARRATIVE TAPE 96-6, SIDE A Number 000 The Joint House Standing Committee on Resources and House Special Committee on Oil and Gas was called to order by Co-Chair Joe Green at 8:08 a.m. Members from the House Resources Committee were Representatives Green, Williams, Kott, and Austerman. House Oil and Gas members present at the call to order were Representatives Rokeberg, G. Davis, Williams, Brice, and B. Davis. This meeting was teleconferenced to Anchorage, Fairbanks, Cordova and Valdez. CO-CHAIRMAN JOE GREEN introduced the gas producers and invited them to come forward and make their presentation. Number 034 JUDD MILLER, JR., Vice-President, Exxon Company, USA, said he was here with Ken Thompson of ARCO and John Morgan of BP to share results of studies produced by the three companies. He said these studies concerning the commercialization of the North Slope gas and have been developed over a number of years. He said there have been three pipeline proposals, one is a pipeline down to the continental United States, the other is liquification of natural gas (LNG) for export to Far East markets, and the final proposal is converting the natural gas to a hydrocarbon liquid on the North Slope which could then be pumped through the attached oil pipeline. He said none of these proposals are commercially viable. MR. MILLER said studies regarding the LNG export began in detail in 1992. He said last year they terminated their Phase 3 part of the study and that is what they will comment on today. CO-CHAIRMAN GREEN clarified that questions could be asked during the presentation. Number 100 KEN THOMPSON, President, ARCO Alaska, Incorporated, began a slide presentation. A hand-out was given whose first page read "ANS Gas Commercialization." This hand-out follows along with the slide presentation. Mr. Thompson said he would cover three key points, these include activities of the past ten years, recent accomplishments and the next steps to success. He said these next steps include what needs to be done in order for Alaskan LNG to compete in the market. He added these steps include further cost reduction, market certainty for large volumes of LNG and government tax and regulatory certainty. Number 129 MR. THOMPSON said the largest natural gas reserves are at the Prudhoe Bay Unit (PBU) and contain 26 trillion cubic feet of gas, representing a little over 85 percent of the North Slope gas reserves. PBU is thought to be the anchor of the Alaskan LNG product, but PBU is not a gigantic field. He said north field in Qatar in the Middle East is 250 trillion cubic feet making PBU a tenth of that size. He said PBU has small economies of scale compared to Indonesia and the Middle East. MR. THOMPSON pointed out that both the gas cap and the oil rim have substantial gas reserves. He said 70 percent of the 26 trillion cubic feet are the gas cap and 30 percent of that volume is in the oil rim. He then pointed out the ownership of the PBU gas. He said ARCO and Exxon both own 32 percent, BP owns 21 percent, and the state of Alaska owns 12.5 percent (this is the state's royalty share.) He added that there are eight other minor owners who share 2 percent of the gas. MR. THOMPSON said the three gas producers often get asked whether "the two participating areas in the agreements cover those hinder the sale of North Slope gas." He said the three gas producers do not believe that it hinders gas sales. Producers do have disagreements on whether natural gas liquids, such as propane and butane, should be injected into the oil reservoir or should be shipped down the TransAlaska Pipeline System (TAPS.) He said those two possibilities are currently be negotiated with the Oil and Gas Conservation Commission. He said despite this one area, the three gas producers see no differences of opinion in gas sales and agreements covering major gas sales. Number 243 MR. THOMPSON said the three gas producers have invested more money, devoted more personnel towards commercialization of North Slope gas than anyone else. He discussed these various systems. The first one he discussed was the Alaska Natural Gas Transportation System (ANGTS.) Research on ANGTS was conducted in 1980 to 1982 and involved a proposed overland gas pipeline along the haul road and then travel down the Alaska Highway to the Lower 48. He said money was spent on engineering details as well as construction of plants and facilities to the sum of $800 million. No gas sales were ever derived from this effort. He said during the time of this project the natural gas prices were high, but then collapsed due to increased gas supplies from both the Gulf of Mexico and Canada. MR. THOMPSON then discussed the Alaska-Canadian Energy Transportation System (ACETS.) He said this project began in 1984 and ran through May 1987 and was funded by ARCO, Exxon and Sohio at a cost of $3 million. This project was an attempt to locate an alternative route to bring natural gas supplies to the Lower 48. He said prices could not be reduced down to a competitive level and this project was abandoned. MR. THOMPSON said in 1984 to 1987, one of the most interesting projects was done. This project was called the Alaska Asia Gas System and this work was funded primarily by ARCO and the Japanese Institute of Energy Economics with additional funding from Yukon Pacific Corporation. The state of Alaska was given this report and it's conclusions. He said this study is very similar to the proposal made by the Yukon Pacific Corporation today. MR. THOMPSON said joint work was done by BP, Exxon and ARCO for Alaska North Slope (ANS) gas commercialization. This work began in 1992 and continues up to today with expenditures of $10 million dollars. Most of the discussion today will focus on this last effort. He said the three companies have concluded that a project approach occurring every two years does not work and gas commercialization needs an on-going continuous effort. The three producers have full time personnel, including marketing personnel, in the Far East. MR. THOMPSON said the three producers addressed the concept of selling gas to communities located on the proposed southern route pipeline. He said they have also studied the use of a technology, called gas conversion, which would convert the gas under high pressures and temperatures to liquids on the slope which would allow it to be sent down the TAPS pipeline. Number 260 MR. THOMPSON said the most immediate option is the Alaskan LNG export system which involves liquefying it and then shipping it to market. He pointed to a slide listing the major components of the export system. He said most LNG projects have certain components. In the North Slope this includes the gas reservoir, the gas conditioning plant which removes the 12 percent carbon dioxide from the gas before it is shipped, the pipeline, an LNG plant marine terminal. He added that the gas producers feel this facility should be located next to the oil facility with higher technological automation and process safety methodology which has been advanced in the last few years. He said he felt this facility would both the most economical and safest operation. The other component of this export system include LNG ships which would take it to the Pacific Rim markets. MR. THOMPSON said the Alaskan LNG project differs from other projects in that it has oil associated with the project. He said the three producers have come up with a reservoir simulator and derived figures regarding oil loss. He said that if LNG sales began in 2005, oil loss from PBU would be 400 million barrels. If gas sales began in 2010, oil loss would be around 100 million barrels. He said the three producers see this as a secondary issue because oil loss at that kind of volume is minor compared to the billions of barrels produced at PBU. MR. THOMPSON said the things needed to make Alaskan LNG competitive are cost reduction, market certainty and close cooperation with the state and federal government for tax and fiscal certainty. He said the three producers will continue to inject gas back into the gas cap as well as injecting it back into the oil rim so that reservoir pressure is maintained and assists oil recovery. This injection into the oil wells contributes 200,000 barrels of oil per day of the 1 million barrels per day from PBU. He said PBU will have one of the most efficient oil recoveries in the world though this missable oil recovery. MR. THOMPSON showed a slide listing the differences between LNG and crude oil projects. He said crude oil has a large commodity market. Today, a little over 60 million barrels a day in oil is produced. A discovery of 100,000 barrels a day can be easily placed in the domestic and international market. He said oil is absorbed quickly with little price change unless you have large volumes of oil. He then referred to the LNG market and said that it has few dedicated buyers. He said it is an international market with only one minor exception. This LNG market absorbs new supply slowly. Currently the Far East LNG market is 55 million tons per year. The proposed figure of 14 million tons per year of Alaskan LNG is 25 percent of the world market. He compared that figure with PBU oil which is only one-sixtieth of the market. Placing too much LNG into the market can easily cause price fluctuations and price decreases. MR. THOMPSON compared the short term contracts of oil and the long term, 20 to 30 year, contracts of LNG. He said oil does not require relationships with the buyers, but that it is essential in the LNG market. Project costs for oil varies greatly, whereas in LNG projects the cost is always large compared to the energy size. Oil projects always see some recovery over shorter time period, in LNG it is often a long payout. Fiscal terms for oil are broad. The oil regulations in Alaska apply, for the most part, to all oil. In LNG, the project must be negotiated with the host government. Number 393 MR. THOMPSON said success is defined as having a project having competitive prices in the world market. He pointed to a slide discussing the issues versus the competition and remarked that Taiwan, Korea, and Japan listed positive of the Alaskan project when the three producers visited them. He said the buyers mentioned the fact that a field development is in place at PBU, as compared to new projects whose wells are still speculative. The amount of gas at PBU is firmly established. MR. THOMPSON said another positive for LNG commercialization is the potential for integrating the gas and oil facilities along the pipeline, as well as in Valdez, for cost savings. Other positive include helping the Japanese/United States trade imbalance and the geographical closeness. Alaska is closer to Japan lowering shipping costs. MR. THOMPSON said a negative of an Alaskan LNG project is the fiscal uncertainty regarding the lack of a balanced state budget and the incremental $5 billion pipeline investment. Other LNG projects do not face this cost as there are usually located near the water. The ramp up factor is also a negative aspect. Ramp up is when you go from the start of sales to maximum output, this is 0 to 14 million tons of North Slope gas sales. He said if it takes 10 years or 15 years versus 5 years there is a big difference in economics. It is more difficult to ramp up in a shorter time span, but it is important to work with the buyers to determine the time span. He again mentioned the carbon dioxide content and that no incremental liquids, such as methane, butane and propane would be sold during the gas project. This is because PBU is currently selling those incremental liquids at a rate of 90,000 plus barrels a day down the TAPS pipeline. Number 448 MR. THOMPSON said the steps that need to happen in order to make a gas project successful were located on the next slide, titled, "Alaskan Gas: Steps to Success." He said this gas project would be largest private investment project ever in the history of the United States. He said the three gas producers have come close to finishing an aggressive technical approach yielding cost reductions and establishing a common understanding among gas owners. He said the three producers must adhere to these steps in a timely fashion. He said during 1996 and 1997 the producers must meet fiscal, environmental and regulatory challenges and make agreements with the state of Alaska about tax and regulatory certainty. During that time frame they must also establish further cost reductions and a conceptual response from the gas market. If these steps are accomplished during this time, the producers feel they have emerging competitiveness. MR. THOMPSON said Yukon Pacific Corporation has done an admirable job in the area of permitting. He said in 1996 and 1997, the producers want to address the regulatory challenges and have informal discussions with Yukon Pacific Corporation to better understand their permits and determine if those permits are of value to the project or whether they would be cost prohibitive. He said if the permits Yukon Pacific Corporation obtained were not thought to be useful, the producers would begin the permit process on their own. MR. THOMPSON said that when the producers achieve further reductions in cost, market certainty and government certainty in tax and regulations, then, only at that point will project structure be looked at. He stressed the complexity of the gas project structure which includes manufacturers, engineering firms, trading houses, buyers, producers and the state of Alaska's possible investment. He said at that time, the producers would not rule out involvement by the CSX corporation or any other potential investor to invest in this project, if they so desire, and the terms were correct. Number 502 CO-CHAIR GREEN recognized that Representative Kubina was listening on teleconference from Valdez. Representatives Nicholia, Bunde, Brice and Navarre also joined the joint committee meeting. Number 510 JOHN MORGAN, President, BP Exploration (Alaska) Incorporated said he would discuss cost reduction efforts in the area of project definition, the supply issues which will drive the market for Alaskan gas and finally the observations on the role of governments in the world and their role in major LNG projects. He began with addressing project costs and reiterated Mr. Thompson's estimate of a $15 billion gas project cost, one of the largest civil projects. He said within the $5 billion pipeline cost distinguishes this project from other greenfield, or grassroots, LNG projects. He said, when the pipeline was looked at, two approaches were analyzed. The first was to look at ways to integrate the proposed gas pipeline more closely with the existing TAPS pipeline. The second was to look at ways to reduce the length of the pipeline and as a result two proposed western routes were suggested. Number 520 MR. MORGAN said the first proposed western routes would emerge east of Wainwright at a distance of 300 miles, the other proposed route would emerge north of Kivalina at a distance of 500 miles. The shorter pipeline and the fact that there is not mountainous terrain to cross are advantages to these routes. The disadvantage is that you emerge in northern ports which have ice conditions a substantial part of the year. Number 546 CHAIRMAN ROKEBERG referred to the map showing the proposed southern route and asked if the circles on the map referred to the TAPS pump stations. He then asked if integrating a gas pipeline with the existing TAPS pipeline would result in some cost reductions. Number 550 MR. MORGAN differed the question to later in his presentation. He said, when studying the technical feasibility of the western routes, experts, including shipping experts with knowledge of similar ice conditions, were brought in to study the project. Number 552 MR. MORGAN referred to a slide with two diagrams of the terminal at Wainwright. The left diagram showed the landfast ice located next to the shore, a shear zone of ice rubble next to it and then a stretch of open sea before the ice pack zone. He said an underground, 2.7 mile, 18 foot diameter tunnel would be built out to loading platforms. The loading platform would consist of two single point mooring facilities. He said lower costs could be achieved from the shorter pipeline length, but higher shipping costs would be involved including icebreaking LNG tankers and icebreaking vessels to keep the routes clear. He said some of the technical feasibility of the route is understood, but more work needs to be done. Number 580 MR. THOMPSON said it had been understood that the Japanese did not want the icebreaking tankers because of their size and draft, but he said at meetings, between the Japanese and the producers, the Japanese said they were open to this concept. A suggestion was made at those meetings to use current icebreaking vessels which would tow modified hull, LNG tankers to reduce the costs of new LNG tankers. Number 589 MR. MORGAN then discussed the southern route and the proposed sharing of facilities between the gas pipeline and the TAPS pipeline. He referred to a slide, titled, "Infrastructure Sharing," with a diagram of some typical pipeline alignments. He said the ability to use the Dalton highway during construction would potentially be important. MR. MORGAN then cited the benefits of a shared infrastructure at the terminal point in Valdez. He said these benefits include the ability to use the loading berth, existing access roads, existing power generation facilities, existing control systems, maintenance facilities and basically the site itself. He said studies have been made on a shared facility and appear to be promising, but work would need to be done with the regulatory agencies. He said this terminal sharing is important because half of all the cost savings, approximately $1.4 billion, would be a result of using those shared facilities. He said that on the North Slope the ability to use the PBU compression, camps and power generation would also be important. MR. MORGAN referred to Chairman Rokeberg's question and said that pump stations along TAPS could certainly be used for cost reduction. Number 617 CO-CHAIRMAN GREEN asked if the pump stations would be a re-cooling station or would just be used to push the gas along the pipeline. Number 620 MR. THOMPSON said they are mainly compressor stations, but provide some additional dehydration. He referred to the 1984 study under the AAGS project and said Anderson Bay had been examined as a possible terminal site, but it is currently felt that the more viable option is the integration of facilities. He said increased automation technology and process safety management have allowed the possibility of oil and gas facilities to be located in close proximity to each other. He said, at major refineries in the United States, there is a shared oil and gas infrastructure. Number 631 MR. MORGAN discussed the use of state of the art technology in terms of pipeline construction and shipping. He said in pipeline construction there has been an increased lay rate of piping and the use of X-90 pipe which is a type of steel having great strength. In the areas of shipping, simulation models have been built utilizing weather, wave conditions as well as ice conditions in order to build larger LNG tankers from 135,000 cubic liters up to 150,000 cubic liters. Number 644 MR. MORGAN said the overall project cost is $15 billion. He said the three producers have determined $3 billion in cost savings which come from infrastructure sharing, pipeline and shipping construction. This figure is derived from the proposed southern pipeline route. He said it is important to maintain western route option. He said further cost reductions will need to be made to make this project viable. Number 658 MR. MORGAN presented a slide titled, "Far East LNG Demand & Possible Need for Grass Roots Projects." This slide included a diagram of the complex Japanese market. He said 25 percent of the gas goes directly into the Japanese gas distribution system, the other 75 percent goes for use in power generation. He said a competitive interfuel situation occurs, with LNG accounting for 23 percent of the fuel used to generate power. He mentioned the recent advances in coal technology allowing coal to be burned less expensively in an environmentally acceptable manner. He said there are deregulation processes within the fuel market and the Japanese have not decided how they will meet their future fuel needs. TAPE 96-6, SIDE B Number 000 MR. MORGAN then referred to the same slide and explained the projected supply. The diagram included existing LNG supplies, current projects under construction amounting to 14 million tons a year of LNG. He said the producers have examined potential expansions which amount to 15 million tons a year of LNG. He said it is felt that these expansion projects will enter the market before any new grass roots projects can, this includes the Alaskan project. He then mentioned the potential grass roots projects, including the Alaskan project, would amount to 84 million tons of LNG. MR. MORGAN discussed the demand curve on the slide diagram. He said the producers made their projection of demand from a number of sources, including the Asian countries, and averaged those figures to form two demand curves. One of those curves is the average low demand the other being the average high demand. On the low average curve, LNG space in the market would amount to 4 million tons a year from new grass roots activity. He said on the high end, a demand of 26 million tons per year could be placed into the market. MR. MORGAN referred to a slide titled, "Far East LNG Supply," and discussed existing supply schemes, including the Cook Inlet project. He then referred to projects under construction which include an expansion project and a grass roots project in Qatar which amounts to some 14 million tons of LNG. Lastly he looked at potential projects, including three expansion projects, which amounts to 15 million tons of LNG, and then listed 11 grassroots schemes. Of those grass roots schemes the largest, Alaska and Natuna, will face different problems because of their size. He then listed the different sizes of the different projects. MR. MORGAN said Alaska needs to sell LNG to a number of countries including Korea, Taiwan and Japan. He said all of these countries are undergoing a period of deregulation, increasing the uncertainty for their market. He said that during the 1980s only two new grass roots projects came on line, and during the 1990s only the Qatar project will come into the market. Number 075 MR. THOMPSON mentioned that Cook Inlet was the first natural gas producer in the Asian market. He said it has been a profitable venture, but added that it is located on the water and a few miles from an LNG plant. Number 085 REPRESENTATIVE MIKE NAVARRE mentioned that incentives by the state were given to assist that project when it was first under construction. Number 089 MR. MORGAN said he would like to discuss how government can assist the Alaskan LNG project, specifically regarding modifying the fiscal terms and providing stability. He discussed the Arthur D. Little study, done at the request of the Government of Papua New Guinea, one of the competing grass roots project sites. The report concludes that LNG projects are typically not as profitable as oil projects. As a result government percentages will be less and governments will need to give LNG projects special fiscal terms. He mentioned a number of countries that have are in the process of modifying their fiscal terms, including Indonesia, Malaysia, Oman, Papua New Guinea and Qatar. MR. MORGAN then mentioned the need to provide stability in fiscal terms. In this aspect the A. D. Little study concluded that stability was very important to encourage investors and financing. The report also felt that if fiscal terms were changed they needed to be offset by some type of compensation. A novel approach, suggested by this study, was to use international arbitration if fiscal disputes occur. MR. MORGAN said, in the Indonesia's Badak project, the government's participating company has accepted the responsibility to pay all taxes outside of income taxes. In Australia's Northwest Shelf project, the government has exempted the project for the resource rent tax. He mentioned that the governments of Abu Dhabi, Brunei, Indonesia, Malaysia and Qatar have opted to participate directly in LNG projects through investment. MR. MORGAN said the other approach to fiscal stability is through permitting and regulatory arrangements which assist in reducing cost of the program. Number 163 REPRESENTATIVE CON BUNDE asked if the gas producers could expand on Alaska's possible investment in the LNG project. Number 170 MR. MORGAN said, the three companies are not in the position to respond to that issue, they are focusing their efforts on the commercial aspects an LNG project. The three producers are now determining what fiscal terms and regulatory permitting the state will need to provide in order for the project to succeed. He said when the structure of the project is determined, it is at that stage that investment by the state will be considered. Number 193 CO-CHAIRMAN GREEN said on teleconference from Anchorage, Loren Landsbury and Kristen Nelson were on line. Cordova was also on the teleconference line. Number 200 MR. MORGAN said the producers have made good progress on project definition and costs, yet the project is not economic. He said a project of this size, cost and complexity will require the involvement of many parties, most notably the state and federal governments. He added that there were significant uncertainties around the areas of fiscal structure and certainty, the regulatory environment, market timing, product pricing and project costs. MR. MORGAN said further improvements are needed to ensure a competitive ability including improvement in the fiscal area, timely and consistent permitting and finally maintaining market contacts to understand market timing issues and to get a rapid build up of LNG volumes. MR. MORGAN said progress must be seen in those three areas before money is invested for project cost definition. He said the next steps require close cooperation between the three gas producers, the state of Alaska and the federal government. He said it is important to determine what the state's role should be in helping this project become competitive. He reiterated what the producers feel the next phase to a successful project was. Number 274 MR. THOMPSON presented a slide, titled, "ANS Gas Commercialization Operator's Market Visit, October 1995," and said these are the largest LNG buyers in the world. The Tokyo Electric Power Company (TEPCO) is the largest buyer of LNG in the world at 14 million tons, the same size of the proposed Alaskan LNG project. The producers visited buyers and other trading companies as well as the Agency of Natural Resources and Energy. This agency determines the future fuel consumption in terms of how much will be in coal, oil, LNG or nuclear fuel. At that meeting, it was learned that there is growing sentiment against nuclear power plants in Japan and a decreased use of coal, unless clean burning technology is developed. These agency insights were included in the demand estimates. Number 306 MR. THOMPSON said they also visited the Chinese Petroleum Company, who sell to the Taiwan Power Company. The Taiwanese market is relatively small at two million tons of LNG per year, but is growing. He said they also visited Korea, which buys about 5.8 million tons of LNG per year. He added that the end result of this trip was the determination that the LNG market is growing at 5 to 10 percent per year and most of these companies prefer a mix of nuclear, oil, coal and LNG for security reasons. He said that if one of the fuels price goes up or down, then they are not relying too heavily on one type of fuel. MR. THOMPSON repeated that the buyers comment that Alaskan LNG must be priced competitively in order to compete against alternative projects and fuels. In the past LNG contracts were tied to the fluctuations in the oil price. The buyers are becoming more sophisticated, and now the LNG price will also be tied to coal prices as well as competing LNG prices. The big challenge in the next few years is to make Alaskan LNG competitively priced. He concluded that 14 million tons will be difficult to place in the market and that there needs to be five, six or more buyers of LNG. MR. THOMPSON listed the positive of the Alaskan project including the stability and security of the Alaskan market and its affect on the trade imbalance. The buyers also thought BP, ARCO and Exxon were capable sponsors of such a large project. Alaska also increases the diversity of the buyers LNG supply portfolio. MR. THOMPSON said there was concern that environmental and permitting opposition is viewed as a country wide risk in the United States. He explained that the buyers saw that, even when permits were obtained, environmental groups and opposition would develop lawsuits which effectively shut down operations for years. The gas producers said when they reassured the buyers, one of the buyers turned around and reviewed the whole history of the TAPS pipeline. He stressed the need for the state to work together with the gas producers to avoid these situations in the future. MR. THOMPSON said emerging deregulations, in the Asian countries, for the independent power producers are competitive threats to the power companies. He said this might create some business for Alaskan LNG and added that if this occurred it would be the first time in the history of Korea and Taiwan that deregulation occurred. This potential deregulation would happen in 1998 or 1999. MR. THOMPSON said the operators were pleased to meet with the gas producers. He said business relations were found to be important and visiting every quarter term was not enough. Personnel have been established in Asia by all three producers. The Asian buyers' feedback was that it was essential to work with the state and federal governments for fiscal environment and permitting. The buyers commented repeatedly about the need for market relationships. The project timing of 2005 to 2010 was well received. Most companies have established a gas supply though 2002 to 2003, with TEPCO securing their supply through 2004. He said the market for large volumes of LNG falls within this 2005 to 2010 period. The gas producers do not feel that the market potential will end after this period of 2005 to 2010. MR. THOMPSON said some buyers expressed interest in investing in this project. MR. MORGAN remarked that these are sophisticated investors and if they are interested, it shows that they feel the Alaskan LNG project can deliver a project at a competitive price. He said the buyers are interested in seeing the gas producers as they achieve the steps listed earlier in their presentation. Number 426 REPRESENTATIVE BUNDE asked about the Chinese LNG market potential. Number 430 MR. THOMPSON said there are emerging markets in China and India that could become significant, but most likely this will not occur until after 2005 to 2010. Discussions between ARCO and China have occurred and the market will not be ruled out, but it is at too early a stage. He emphasized that the large buyers of LNG must be secured because it sends a signal to the smaller companies that this is a worthwhile project. Number 445 REPRESENTATIVE BETTYE DAVIS asked for differences as well as areas where the gas producers and Yukon Pacific Corporation can work together, specifically in the permit issues and the timing issues. Number 461 MR. THOMPSON said the gas producers differ from Yukon Pacific Corporation in that they do not respond to the limited market window theory. He said, if there was such a limited market window it would increase the risk of price collapse and oversupply which would mean this is not a good investment. The gas producers believe that the demand will grow in the base countries of Japan, Korea, and Taiwan. The demand will also increase as a result of emerging independent power producers as well as emerging markets in other countries. MR. THOMPSON said there is agreement between the producers and Yukon Pacific Corporation in the need to make Alaskan LNG competitive to fit into the market and again outlined those needs. In regards to permits, the gas producers plan on working with agencies in 1996 and 1997 to determine permit needs. Informal discussions have been held with Yukon Pacific Corporation to better understand those permits and see if they are applicable to the gas producers project. He said the Yukon Pacific Corporation project is a little different and the differences in the Yukon Pacific Corporation project might not make the LNG project economically feasible. If similarities can be found, permits might be shared, but if they are not then the gas producers will start the permitting process from scratch. MR. THOMPSON said investment by CSX or other parties will not be ruled out. Number 491 CO-CHAIRMAN GREEN said Representative Ogan was listening via teleconference from Anchorage and Fairbanks was also on the teleconference line. Number 497 CHAIRMAN ROKEBERG asked the length of time it would take to obtain permits, from scratch, for both the northern and southern routes. He then asked whether or not it would take an act of Congress have the route cross the National Petroleum Reserve in Alaska (NPRA). Number 506 MR. THOMPSON said that if the route was chosen, he hoped that the federal government would realize the importance of this project to the state of Alaska and the possibilities for an international balance of trade. He said the gas producers are currently in the process of determining how long it would take to obtain these permits and compare that with possible cost and time savings from working with existing Yukon Pacific Corporation permits obtained. Number 510 MR. MORGAN said starting the permit process from scratch might take a long time and stressed the importance of working with the states to scale these regulatory issues in as fast a time frame as possible. He added that this process should begin in the next few months. Number 520 CHAIRMAN ROKEBERG asked how long the pipeline would take to build. MR. THOMPSON said once the detailed engineering and the construction taking eight years and permitting would be done concurrently. Number 531 CHAIRMAN ROKEBERG asked if it would take 13 years for pipeline construction. Number 534 MR. MILLER said there is three years of detailed engineering which would involve obtaining permits, some of which could be obtained earlier, and then five years of construction. He said with the projected start up date of 2005, it would mean a ten year project span. Number 542 REPRESENTATIVE GARY DAVIS asked how the Yukon Pacific Corporation project differs from the proposed project by the gas producers. Number 545 MR. THOMPSON said the most significant difference is in the timing issue. He said the gas producers do not believe the earlier time frame proposed by Yukon Pacific Corporation is commercial for Alaska. He said the gas producers have also tried to integrate the gas pipeline more closely with the oil pipeline whereas the Yukon Pacific Corporation project is more similar to the AAGS study which proposed an Anderson Bay LNG facility. Number 559 REPRESENTATIVE G. DAVIS asked if the proposed projects in Malaysia and Qatar are tied to solid contracts or are based on speculation. Number 563 MR. MORGAN said he believed they are linked to solid contracts. Number 564 MR. MILLER said, generally, expansion and new projects in the LNG business have contracts drawn before the project begins. Number 568 CO-CHAIRMAN GREEN asked if the contracts stay firm once they are established. Number 575 MR. MORGAN said yes, the contracts would remain firm for a 25 year period. He said the Japanese government is establishing what the right diversity is for fuel consumption, but this needs to finished soon because their energy demand is increasing. Number 582 CO-CHAIRMAN GREEN asked if there was a target price which would make the LNG project competitive. MR. MORGAN said he couldn't answer that questions because everything is so interwoven. He again mentioned that fiscal certainty, lowering costs, market timing and build up need to be understood to make this project competitive and that he couldn't give a price. Number 597 CO-CHAIRMAN GREEN discussed various roles the state could play such a deferred royalty either in a flat rate or as royalty earning and ownership and asked if those possibilities were included in the proposed project development. Number 608 MR. MORGAN said, for the record, the producers are not advocating or requesting state involvement in the project. He referred to other countries involvement in LNG projects and that the state might want to examine what has been done. Number 624 MR. THOMPSON said the project is not at the stage where they are drawing in investors, but at the time the project is ready, the state might want to look at what other countries are doing to help LNG projects. He said, at this point, the three gas producers are mainly interested in working with the state on the mentioned key concepts. Number 630 CO-CHAIRMAN GREEN said state involvement might shorten the time frame of this project. Number 634 REPRESENTATIVE BUNDE mentioned the federal governments unfriendly approach to development in Alaska. He asked if the gas producers have taken that into consideration in establishing the time frame. Number 645 MR. MORGAN said it is important to work with the state to develop a comprehensive plan to progress the permitting and the fiscal issues at the state and federal levels as was done with Arctic National Wildlife Refuge and lifting the export ban. Number 655 CO-CHAIRMAN GREEN clarified that oil loss is not seen as an impediment, and then asked if the gas sales sources were being pursued with the same vigor as oil sales sources. Number 665 MR. MORGAN representing BP, said yes, and added that the expansion projects that were listed have a competitive advantage. He said that the Alaskan project will be promoted as hard as the other grass roots projects. Number 675 MR. MILLER said, speaking for Exxon, that they have no competitive LNG projects currently, but are developing six potential projects which would compete with the Alaska project. No priorities regarding one project over the other have been stated, but instead he hoped that all would find their place in the market. Number 686 MR. THOMPSON said ARCO has discovered potential gas sources which one day might be competitive, but delineation drilling must first establish the size of the field. ARCO would like to participate in any and all commercial projects. He mentioned Shell and Mobile are the dominant companies in the LNG business and were not mentioned in the Yukon Pacific Corporation presentation. TAPE 96-7, SIDE A Number 000 REPRESENTATIVE ALAN AUSTERMAN asked about liquefying the gas so that it could be pumped through the TAPS pipeline. MR. THOMPSON said it is referred to as gas conversion and said it is a technology for this type of scale, but is not commercial as of yet. Only three plants use this technology currently and said it probably take 10 to 20 years to utilize it. Number 032 WILSON L. CONDON, Commissioner, Department of Revenue (DOR), was next to testify. He said he would discuss the position of the state and what it can do to facilitate the commercialization of the North Slope gas resource. He mentioned a memorandum, sent to the Governor from the Cabinet Heads which included the Commissioners of DOR, the Department of Natural Resources, Commerce and Economic Development, and the Attorney General. This memorandum, dated January 22, 1996, and is located in the committee packet. He said that memorandum makes 14 recommendations, 13 of which are pertinent to the proposed LNG pipeline. The Governor has accepted the 14 recommendations and has told the cabinet heads to proceed. COMMISSIONER CONDON said the memorandum is a baseline planning document and some items might change over time. He said it invites suggestions and participation from the legislature to make the commercialization of North Slope gas feasible. COMMISSIONER CONDON said he wanted to talk about feasibility, revenue forecasts, where gas revenue fits into revenue forecasts and provide general comments. He referred to a slide, the first was titled, "State Revenue, North Slope Natural Gas, 50 Cent per Million Cubic Feet Wellhead Value." He listed three variables including at what price LNG can be sold in the Far East market, project and transportation costs and rate of return for investors. He said LNG is currently being sold in the market for $3.55 per million British Thermal Units (BTUs) and is linked to oil prices. He said BTU is the common energy unit. He said to buy a BTU derived from LNG, the cost is 115 percent of the cost of a BTU derived from oil. He restated that there is a 15 percent premium on a BTU derived from LNG in the Far East market. COMMISSIONER CONDON said the market price for LNG can be calculated from world oil prices. The $17.50 per barrel cost of oil, divided by five, results in a figure of $3.55 is derived. Number 203 COMMISSIONER CONDON said a $15 billion project cost, with a rate of return less than that derived from the TAPS pipeline a well as transportation cost, involves a $5.00 per million BTUs price. He said a market price, under current conditions and the return that investors might require, a $4.50 price would be required. If a $12 billion project would reduce the price to $4.00 per million BTUs. A $10 billion project cost would reduce the price down to current market price which makes it competitive. This scenario incorporates a zero wellhead price and is based on the assumptions that he outlined. Number 225 COMMISSIONER CONDON said the state of Alaska can assist in lowering project cost and create an attractive investment climate where investors are willing to accept a lower rate of return. He said the 14 steps listed in the memorandum outline how the state can assist in these two ways. Number 250 COMMISSIONER CONDON said at the Senate Resources Committee, he was asked to refer specifically to state revenues from this proposed project. He said in order to get the gas resource to achieve a 50 cent per million cubic feet wellhead value, on a $15 million project, it would require a $5.50 per million BTUs price. He said that energy prices would have to rise to $27.50 per barrel level of North Slope gas, and added that world energy prices would have to increase by 60 percent. If this happened, state revenue would be derived initially from the $220 million property tax, half of which is shared with local municipalities. The properties taxed include the pipeline, conditioning facility at PBU, and the liquification plant at Valdez which amounts to a total appraised value of $11 billion. He said as the property value depreciates annually, the property tax revenue would decrease at a rate of $9 million per year. COMMISSIONER CONDON said at 50 cents per million cubic feet, the state would receive royalties, a severance tax and state corporate income tax of $30 million each for a total of $90 million. He concluded that the total state revenue would be $200 million and another $100 million going to local communities. Number 314 COMMISSIONER CONDON said this does not figure to be a rich project, but it is a large resource and the state should assist in its development. Number 317 CO-CHAIRMAN GREEN asked if the BTU referred to methane. Number 319 COMMISSIONER CONDON said the financial projections were based on the idea that there would be a significant enhancement of the BTU content for the volumes delivered as a consequence of including methane, propane and butane in the product. Number 328 CO-CHAIRMAN GREEN asked if the Administration figures were based on spiked gas. Number 329 COMMISSIONER CONDON said the figures are based on the producers worst case scenario of a $15 million project that takes five years to ramp up to full delivery. He said a shorter ramp up would reduce the figures substantially and the three gas producers as well as Yukon Pacific Corporation have proposed other ways to reduce project costs. Number 343 CO-CHAIRMAN GREEN received clarification from Commissioner Condon that the report used a hotter gas. Number 345 CHAIRMAN ROKEBERG said the memorandum helps focus the issues. He then asked what the Administration is doing to modify the fiscal situation and create stability. Number 357 COMMISSIONER CONDON said he was not in the position to make a recommendation today, but the Administration has made a list of things to look at and this list will incorporate suggestions. He said the three gas producers and Yukon Pacific Corporation have made suggestions for the Administration to look at, but have not told them specific things that the state must do. Number 373 REPRESENTATIVE SCOTT OGAN asked if the Far East market was a situation where demand will outstrip the supply during a window of opportunity, he then asked if it is a reasonable assertion that the market will re-correct itself, making it cost feasible. He referred to the Natuna project, which is being built at a cost of $20 million, and asked why would that project be built if it was thought there wouldn't be a demand. He said, it seemed to him, that whoever gets there first with the production capabilities will get to adjust the market price because of the supply problem. Number 387 COMMISSIONER CONDON said the balance between supply and demand has a great deal to do with the price. He said this is a larger energy market and the LNG prices do not exactly coincide with oil prices. He said, if the price of LNG doubled, the power companies would most likely chose another fuel, despite the environmental advantages of LNG. During the next few decades, LNG will be competing with oil and coal as a source of energy in the Far East markets. He said other grass roots projects are attempting to create opportunities in the market place. Number 413 CHAIRMAN ROKEBERG said the number 12 footnote, on page 21 of the memorandum, refers to the interfield compensatory agreements between the various gas cap and oil rim members. He then asked if the dispute over those agreements are having an impact on the development of the gas pipeline project. Number 425 COMMISSIONER CONDON said there have been disagreements in the past over the implementation of the agreements. He said the specific references in that footnote, issues resolution agreement, are complex. Generally this agreement was an attempt to resolve disagreements. The second agreement that is referred to, involved the obligation to supply the material that is used for the missable injectant enhanced oil project at PBU and the operation of the central gas facility. Today there is a major disagreement involving the natural gas liquids recovered from the field, but this disagreement does not affect this proposed gas pipeline project. He said the state is closely monitoring the disagreements between the oil and gas producers. Number 453 CHAIRMAN ROKEBERG thanked the commissioner for clarification that these disputes should be monitored. COMMISSIONER CONDON said it is important, because the state's interests are affected if they get into a dispute. Number 460 CHAIRMAN ROKEBERG discussed the tools available to the state to assist the gas pipeline project. COMMISSIONER CONDON said those are all areas that the state will study. Number 469 CO-CHAIRMAN GREEN asked if the state had considered a larger volume of LNG and if so, would that economy of scale affect the states current figures. Number 473 COMMISSIONER CONDON said the larger figures would certainly have an impact on the figures because the investment would be spread over a lot more units of product. Number 476 CO-CHAIRMAN GREEN asked if written questions could be submitted for response to the operators and the Administration. He received confirmation from all parties that this was possible. ADJOURNMENT There being no business to come before the Joint House Standing Committee on Resources and the House Special Committee on Oil and Gas, Co-Chairman Green adjourned the meeting at 10:12 a.m.