JOINT HOUSE RESOURCES STANDING COMMITTEE/ HOUSE SPECIAL COMMITTEE ON OIL AND GAS January 28, 1997 10:08 a.m. RESOURCES MEMBERS PRESENT Representative Scott Ogan, Co-Chairman Representative Beverly Masek, Vice Chair Representative Ramona Barnes Representative Fred Dyson Representative Joe Green Representative William K. ("Bill") Williams Representative Irene Nicholia Representative Reggie Joule RESOURCES MEMBERS ABSENT Representative Bill Hudson, Co-Chairman OIL & GAS MEMBERS PRESENT Representative Mark Hodgins, Chairman (Representative Scott Ogan) Representative Norman Rokeberg Representative Joe Ryan Representative Con Bunde Representative Tom Brice Representative J. Allen Kemplen OIL & GAS MEMBERS ABSENT All Oil & Gas members present OTHER HOUSE MEMBERS PRESENT Representative Gene Kubina COMMITTEE CALENDAR HOUSE CONCURRENT RESOLUTION NO. 1 Relating to a new Alaska liquefied natural gas project. - MOVED CSHCR 1(WTR) OUT OF COMMITTEE PREVIOUS ACTION BILL: HCR 1 SHORT TITLE: NORTH SLOPE NATURAL GAS SPONSOR(S): REPRESENTATIVE(S) BARNES, Phillips, Rokeberg, Kubina, Kott, Sanders, Williams, James, Vezey, Austerman, Davis, Hodgins, Ryan, Dyson, Davies JRN-DATE JRN-PG ACTION 01/13/97 20 (H) READ THE FIRST TIME - REFERRAL(S) 01/13/97 20 (H) WTR, OIL & GAS 01/16/97 92 (H) RES REFERRAL ADDED 01/23/97 (H) WTR AT 3:00 PM CAPITOL 124 01/23/97 (H) MINUTE(WTR) 01/24/97 134 (H) WTR RPT CS(WTR) 7DP 01/24/97 135 (H) DP: PHILLIPS, COWDERY, AUSTERMAN 01/24/97 135 (H) KUBINA, KOTT, NICHOLIA, BARNES 01/24/97 135 (H) 2 ZERO FISCAL NOTES (DNR, REV) 01/24/97 135 (H) REFERRED TO RESOURCES 01/24/97 139 (H) COSPONSOR(S): DAVIES 01/28/97 (H) RES AT 10:00 AM HOUSE FINANCE 519 01/28/97 (H) O&G AT 10:00 AM HOUSE FINANCE 519 WITNESS REGISTER JOHN T. SHIVELY, Commissioner Department of Natural Resources 400 Willoughby Avenue Juneau, Alaska 99801-1724 Telephone: (907) 465-2400 POSITION STATEMENT: Provided department's position and answered questions regarding CSHCR 1(WTR). DAVID LAWRENCE, Gas Commercialization and Marketing Manager ARCO Alaska, Inc. P.O. Box 100360 Anchorage, Alaska 99501 Telephone: (907) 263-4939 POSITION STATEMENT: Provided overview and testified in support of CSHCR 1(WTR). MARK BENDERSKY, Commercial Manager for Gas BP Exploration (Alaska) Inc. P.O. Box 196612 Anchorage, Alaska 99519-6612 Telephone: (907) 564-4666 POSITION STATEMENT: Testified in support of CSHCR 1(WTR). BEVERLY MENTZER, Manager Business Development Natural Gas Department Exxon Company, U.S.A. P.O. Box 2180 Houston, Texas 77252-2180 Telephone: (713) 656-6145 POSITION STATEMENT: Testified in support of CSHCR 1(WTR). WAYNE LEWIS, Vice President Yukon Pacific Corporation 1049 West 5th Avenue Anchorage, Alaska 99501 Telephone: (907) 265-3100 POSITION STATEMENT: Testified in support of CSHCR 1(WTR). ACTION NARRATIVE TAPE 97-4, SIDE A Number 0001 CO-CHAIRMAN SCOTT OGAN called the Joint House Resources Standing Committee/House Special Committee on Oil and Gas meeting to order at 10:08 a.m. Present at the call to order were Representatives Ogan, Masek, Barnes, Dyson, Williams, Joule, Hodgins, Ryan, Kemplen and Brice. Representatives Rokeberg, Bunde and Nicholia joined the meeting at 10:10 a.m., 10:12 a.m. and 10:14 a.m., respectively. Co-Chairman Ogan announced that Representative Green was at a news conference; he joined the meeting at 10:45 a.m. Absent was Representative Hudson, who was out of town. HCR 1 - NORTH SLOPE NATURAL GAS Number 0043 CO-CHAIRMAN OGAN announced the purpose of the meeting was to consider CS for House Concurrent Resolution No. 1(WTR), relating to a new Alaska liquefied natural gas project. He advised that although the committees were meeting jointly, only the House Resources Committee could vote or take other action. CO-CHAIRMAN OGAN stated that CSHRC 1(WTR) is important for Alaska's future. "Many people in the last few years have been predicting doom and gloom for the state, and I believe them to be wrong," he said. "And I believe that Alaska has a bright future in ... natural resource development. And this gas pipeline will play a huge role in that future. I want to assure those Alaskans who are watching today that we, the legislature, will be doing all we can to make sure this gas line becomes a reality. I want to assure the oil companies that this issue will not be dropped, and that as chairman of this Resources Committee, I ... and others in this legislature will be doing everything we can to facilitate ... this project." CO-CHAIRMAN OGAN believed responsible development of Alaska's resources would ensure a strong and diversified economy. He concluded by saying, "The people of Alaska are who we serve, and they are the reason why this project is so important." Number 0080 CO-CHAIRMAN OGAN invited Representative Hodgins, Chairman of the House Special Committee on Oil and Gas, to comment before Representative Barnes presented the resolution. CHAIRMAN MARK HODGINS deferred to Representative Barnes. Number 0086 REPRESENTATIVE RAMONA BARNES, sponsor of CSHRC 1(WTR), explained that the resolution was the outgrowth of a task force created by the legislature under HJR 54 the previous session. "We on the task force, Representative Kubina, Senator Sharp and Senator Duncan, worked all during the interim to find out what we needed to do to make the gas line a reality," she said. "We've had a number of hearings. We are charged by the resolution to present to the legislative body a report by February 1. That report will be ready. It will be on your desk. And the outgrowth of all those hearings is House Concurrent Resolution No. 1." Number 0111 REPRESENTATIVE BARNES noted that before the committees was CSHCR 1(WTR). The House Special Committee on World Trade and State/Federal Relations had added a section on page 4, lines 2 through 6, which had inadvertently been omitted in the drafting of HCR 1. That section spoke to the year 2005 as being the targeted time frame. Number 0120 REPRESENTATIVE BARNES read the sponsor statement for the resolution: "CSHCR 1(WTR) urges the establishment of a stable fiscal and regulatory environment in order to provide the best opportunity for a new LNG project to be economically viable and attractive. To ensure economic viability, a huge volume of 14 [million] metric tons of gas must be sold per year. The proposed LNG project would transport and market the North Slope gas resources in the Asian Far East market. It is believed that there exists an opportunity in 2005, when demand in that market will rise enough to accept the volume of gas which this project will provide. A critical element is the likelihood Alaska's huge volume of gas could be displaced from the market for many years if smaller, more easily placed projects come on-line first. "CSHCR 1(WTR) encourages the Governor to work with the North Slope leaseholders as well as the legislature, the federal government and Congress to develop and complete the LNG project. "The Governor is asked to work with leaseholders to develop a contract for execution with those who appear likely to become sponsors of the project. The contract would point out the nature, degree and duration of fiscal terms for the project and contractually guaranteeing the terms. The contract would be submitted to the legislature for ratification. The Governor would also provide the legislature with enabling legislation to authorize the State of Alaska to formally enter into the contract. "The legislature encourages potential sponsors of the LNG project to find suitable measures to support and encourage Alaska businesses and residents to participate in construction and operation of the project. "If built, the project would also be constructed so as to enable the marketing of the gas to Alaska communities. "The Governor is asked to work with leaseholders and Alaska's congressional delegation to identify appropriate federal action to help expedite the project. He is also asked to identify and report to the legislature the form of participation in the project by the State of Alaska." Number 0169 REPRESENTATIVE BARNES believed if competing projects worldwide entered the liquefied natural gas (LNG) market before Alaska's contracts were in place, it would doom Alaska's natural gas pipeline "in our lifetime" because of the huge volume of gas that Alaska needed to put into that pipeline. "The ramp of time that is needed is a very short ramp of time to make this project economically feasible," she concluded. Number 0186 REPRESENTATIVE NORMAN ROKEBERG commended the interim task force. He referred to recent news reports discussing the potential diminution of gas availability in the Cook Inlet area, which he found disturbing. He asked, "Did the committee consider that potentiality? I know there's been discussions of a potentiality for a spur line going to tide water in the Cook Inlet area. Do you think that would be appropriate, to add a further resolve here, or did you consider that in your hearings?" Number 0202 REPRESENTATIVE BARNES replied, "There is a resolve in the resolution that talks about the use of gas within the Alaska community. Cook Inlet specifically was not an issue until most recently. Most recently, I understand that there has been discussion of the Marathon contracts. They have applied for a continuation to export gas. There is discussion that that gas might not be available. Unocal, there's discussion that they may have to ... move the fertilizer plant. There is plenty of use for some of this volume of gas to be used in the state of Alaska, not just in the Cook Inlet area." REPRESENTATIVE BARNES continued, "At the point of termination of this pipeline, I also believe that up and down the railbelt, as we work toward interties to tie the railbelt together in a utility corridor, there exists that possibility of using some of the natural gas, because you and I both know without a form of energy that is both cost-effective and stable over a long term, then Alaska will never reach its potential. So there is embodied in this resolution the answer to your question in the form of some of this gas being made ... to be used in the Alaska community." CO-CHAIRMAN OGAN noted that Representatives Rokeberg, Bunde and Nicholia had joined the meeting. Number 0235 REPRESENTATIVE CON BUNDE referred to media reports about possible new taxes on the gas industry if they did not comply with certain requirements. He asked if those fell under the stable fiscal policy Representative Barnes had mentioned. Number 0145 REPRESENTATIVE BARNES responded, "If there is no gas in the marketplace, or this gas pipeline was not built, we won't have to worry about a stable fiscal policy." She held up a chart entitled "TAGS Competition: Other `Grass Roots' LNG Projects." She said, "[T]hat statement was made by me not in the World Trade committee but in the working group, and it was based on this schematic, showing all the projects in the world, that if we aren't able to bring forward our gas pipeline in a timely manner, that these projects are competing with our gas pipeline." Representative Barnes said if one or more oil company was dragging its feet on this pipeline, another way must be found to encourage them to bring the gas line into production. REPRESENTATIVE BUNDE suggested that changed the philosophy of this legislature regarding taxes. Number 0263 REPRESENTATIVE BARNES said it did not change her policy. She emphasized she had never been involved with legislation that created a tax. However, she was not above finding ways to ensure development of this gas pipeline in a timely manner. She said, "This is a resource belonging to the people of this state, and no one has the right to deny that resource being put into the marketplace." Number 0278 REPRESENTATIVE BILL WILLIAMS referred to Representative Barnes's mention of getting gas to the people of Alaska as well. Noting one proposed schematic for a gas pipeline from Fairbanks to Valdez, he asked about other possible routes including Anchorage. REPRESENTATIVE BARNES indicated other routes were possible. However, the only permits available, to her knowledge, were from Prudhoe Bay to Valdez. She was unaware of any discussions of putting that gas pipeline in any other direction. She believed to do that would require an extensive time period to bring new permits into the system. REPRESENTATIVE BARNES recalled that during task force discussions, mention had been made of bringing gas to market across Western Alaska. She stated, "My position on that, and it is contained in the report that will be submitted to the legislature, is that to bring this gas to market across Western Alaska, there were no permits, there are still no permits. It would delay the project probably 20 years. So, when you are dealing with a permitted project, where the permits are in place, versus a pie-in-the-sky scheme, then you have to look to what is feasible in a short time frame to get us into the world market." Number 0311 REPRESENTATIVE WILLIAMS acknowledged the permit system was complicated and time-consuming. However, he wondered if the rail corridor had been considered. He was trying to get the gas to Anchorage, where Alaskans could use it first. Electrical power was expensive and yet here was a large resource. "And we can't get it to our people," he said. "We're going to export it." Number 0329 REPRESENTATIVE BARNES noted that the Cook Inlet Basin and the developed gas fields in Cook Inlet were some 150 miles from Anchorage. "And we are using that gas from those fields presently," she said. "And I do believe that if this route were from Prudhoe Bay to Valdez, that we would also have access to that gas, and it would also be, of course, usable. If it's usable in Anchorage, it would be usable in the Copper Valley area as well as in Fairbanks." Number 0339 REPRESENTATIVE ROKEBERG said the key to this resolution was the requirement that the Governor enter into negotiations with the producers on the North Slope. He asked Representative Barnes how she contemplated the legislature having any input into the terms and conditions of this contract. He said it appeared there was no specified time frame for delivery to the legislature of the LNG project contract. REPRESENTATIVE BARNES responded that she did not believe the legislature could impose upon the Administration a time certain when they should come back. She believed they understood the short time frame required. "They have been working on it, just as the task force has been," she said. Representative Barnes explained, "[W]hat we have said in this resolution, how the legislature as the representatives of the people would be involved, that the Administration must bring back to the legislature for ratification any contracts that they might enter into, and that they have to bring back also a piece of enabling legislation to allow them to ... do that. That is the way the legislative branch would have the opportunity to look at the terms and to see if those were acceptable to the people they represent." Number 0368 REPRESENTATIVE TOM BRICE said to Representative Barnes, "You do ... have a resolve, then, where the Governor will ask the legislature to ratify a contract." He asked whether she envisioned a special session if an agreement were made and a contract were offered during the interim. REPRESENTATIVE BARNES replied that because the Administration had been working for some time with the producers and holders of the permits, she hoped they could bring it before this legislature prior to adjournment. However, she would not oppose a special session for this particular issue because of the time frame facing Alaska in getting this gas into the world market. REPRESENTATIVE BARNES pointed out there was a big difference between gas and oil. "In the form of oil, you can go to the spot market and sell oil," she explained. "With gas, you cannot. Gas, ... because it's a very specific the way it's sold, you have to have contracts in place. And before the buyers of this product which we have to sell will commit to signed contracts themselves, they have to understand that there is a long-term fiscal control, that they won't sign these contracts one day and have them jacked up to where they couldn't afford to buy any longer." Number 0400 REPRESENTATIVE JOE RYAN mentioned a natural gas pipeline through Canada proposed some years earlier. He believed methane was the only thing required to be delivered at that time. He noted certain components were used for the manufacture of plastics. "And somewhere along the line those things were disappearing because they were coming from Prudhoe, but methane was all that was going to be delivered in Minneapolis," Representative Ryan said. He asked what would happen to those same products. He further asked whether Alaska would get its royalty share of those under the proposed scenario. REPRESENTATIVE BARNES said she had a vague recollection of the Canadian route for the pipeline. She did recall that the cost of that pipeline was so prohibitive that they were asking the state of Alaska to invest something like $25 billion into the project. "It was an atrocious amount," she said. Representative Barnes did not remember the details of "how the gas broke down" but offered to get that information for Representative Ryan. REPRESENTATIVE BARNES thanked the two committees for their expeditious handling of CSHRC 1(WTR). Number 0429 JOHN T. SHIVELY, Commissioner, Department of Natural Resources (DNR), came forward to testify. He indicated Wilson Condon, Commissioner of the Department of Revenue, was the more appropriate commissioner to speak; however, Mr. Condon was either on his way to Calgary or already there working on this project. COMMISSIONER SHIVELY said the Administration supported CSHRC 1(WTR) and recommended its adoption. He commended Representative Barnes and the other members of the task force for their work over the interim. The project required a great deal of cooperation among the legislature, the Administration, the producers, the permit holders, perhaps the buyers and a variety of other people, he said. The Administration wanted to continue the good relationship they had with the work group. COMMISSIONER SHIVELY stated, "This is a very important project for Alaska. I think that when we started this project, particularly Commissioner Condon was very skeptical of the economics. And at this point I must say that I don't think anyone has shown that the economics are there to build this. The opportunity is there; there is no question that there is a market opportunity. There is a lot of debate, and you'll hear some of this, probably, from the producers, about whether we have a window or a door. And at this point, I'm not prepared to make a comment on that one way or the other." Number 0454 COMMISSIONER SHIVELY believed it was clear the opportunity would begin around the year 2005. "It is also clear that there are other competing projects within all three of the major producers, some of which may not be actually be able to compete with even our difficult economics," he said. The marketplace needed the gas and understood that, he said. Japan really drove the market at this point, and Commissioner Shively believed it would continue to do so in the foreseeable future. "Of course, it is ... in their interest to encourage as many projects as possible, because that just drives their costs down," he added. Number 0464 COMMISSIONER SHIVELY said the risk was more with the investors in the line than with the buyers, who would probably sign a contract with price provisions and know what they were going to pay. The question was whether the investors, at that price, could get their investment back and make a profit. This was driven by several issues, including the project's actual cost and the selling price of the gas. There were other, more subtle issues such as the state's take, how it would come and whether it should be changed. COMMISSIONER SHIVELY believed everyone agreed upon the importance to the project of a long-term, stable fiscal climate. "And I think the method that we've discussed is similar to what Representative Barnes talked about, which is getting authority to negotiate a long-term contract and then to bring that back to the legislature for adoption," he said. Number 0480 COMMISSIONER SHIVELY indicated there were two issues the legislature should be aware of. "It is one thing to basically enshrine in a long-term contract the fiscal situation as it presently exists today," he stated. "And if that is our task, we probably can do that. If, on the other hand, part of the negotiations involves a change in the state fiscal regime, those changes need to relate to the economics of the project." COMMISSIONER SHIVELY advised that the economics of the project were related to issues he had raised earlier. "[W]e would not be in a position right now to say that some of those changes were needed," he said. "We've identified one, for instance, that we know has a very positive impact on the economics, and that is not having an ad valorem tax during the construction phase, not collecting that until the project actually produces revenue. However, I think there are certain communities in the state that might not see that as ... part of the participation that they wanted to make." Commissioner Shively said despite difficult issues, this was an important project. He commended Representative Barnes for her work and the legislature for their interest, emphasizing this would have to be a cooperative effort. Number 0498 CO-CHAIRMAN OGAN agreed and said he was encouraged by the increased awareness and cooperation. He believed the progress had been significant since the issue was brought forth the previous year. CHAIRMAN MARK HODGINS referred to the unit on the North Slope that encompassed the gas, noting there were several producers within that unit. He asked Commissioner Shively, "If one producer decides not to become involved with this, what happens ... to the gas? Is there a way of purchasing that gas ...?" Number 0513 COMMISSIONER SHIVELY replied there were two issues: the people that want to invest in the project and whether or not those investors will want to make sure there's a direct sale. "I'm not sure that all three producers necessarily have to be investors," he said. "If there was a market and there was a return on the resource, I think a producer, whether or not they were a investor, might just want to sell their gas into the project, just as there are oil producers ... on the North Slope who don't own a piece of the oil pipeline but yet sell their oil." COMMISSIONER SHIVELY cautioned he was not familiar enough with the economics of the project to say what would happen if one producer withheld all of its gas for another purpose. He understood it could probably be accomplished with two of the three producers, plus the state, which was the fourth largest owner of gas there because of its 12-1/2 percent royalty interest. Number 0528 REPRESENTATIVE BUNDE asked for clarification. He further asked whether the Administration's position was that the window of opportunity existed. COMMISSIONER SHIVELY replied, "The way I put it, I think, was we agree that the opportunity exists starting in the year 2005. Representative Barnes and others are very committed to `if we don't get in at that time, no matter what the long-term situation is, we will lose any opportunity to sell the gas.' I do not believe that the Administration has come quite that far at this point, to be frank. But we do realize that there is that opportunity in the year 2005." Number 0538 REPRESENTATIVE BUNDE referred to Commissioner Shively's use of the term "enshrine" in discussing a stable financial atmosphere. He also referred to the need for flexibility as things changed. Representative Bunde asked whether the Administration anticipated a change in tax policy regarding Alaska's gas. COMMISSIONER SHIVELY responded, "We are just completing a study done by Pedro Van Meurs, who is a well-known international consultant out of Calgary. Actually, the reason Commissioner Condon is not here is he's over talking about the first draft of that study to get it finalized. That study will look at our fiscal regime, compare it to our international competitors and make certain recommendations to us. Some of those recommendations could well result in a look at changing our fiscal structure, but until we get that report, I'm not prepared to comment. But at this point, we have not made any definitive decision that we need to change our current fiscal regime." Number 0556 REPRESENTATIVE RYAN asked whether Commissioner Shively was familiar with the Arctic coal transportation study done two or three years ago. COMMISSIONER SHIVELY replied he knew there was a study done. REPRESENTATIVE RYAN said it was a 300-page study, mostly a rehash of old studies on railroad infrastructure. "But there was a portion of it that delineated specific energy markets along the Pacific Rim," he stated. "It told exactly which industries it would be for, and they were talking about ... from 100 million metric tons to 300 [million] by the year 2020." Representative Ryan asked whether that same market, instead of using coal, could change over to natural gas. Number 0566 COMMISSIONER SHIVELY answered, "Countries, particularly Japan, manage what sources they get their energy from, and Japan gets it from a variety including nuclear, LNG and coal." He agreed there was the ability, particularly in a country like Japan that had a relatively managed economy, for a change in thought from ten years ago to today. He understood that the Japanese government originally had thought nuclear power would make up a fair amount of the opportunity for growth in the economy. However, nuclear power in Japan, as with other places, had become fairly controversial. One reason, although not the only one, for an increased potential for LNG was the possibility of substitution there. Commissioner Shively explained, "I'm not aware of what they're doing in terms of looking at LNG and coal. Because you have to have processing facilities and different burning facilities, ... particularly for energy production, you have to make those decisions fairly far in advance." Number 0583 REPRESENTATIVE ROKEBERG referred to Commissioner Shively's indication there were two primary issues the legislature should be aware of. "And one was basically, as I recall, basically what should be the fiscal positioning of the State of Alaska," he said. "But it was tied to the economics of the project, and I think part of that, the economics of the project, will require at least phase 2 conceptual engineering and further development on the part of the engineering side of the project to determine economics. This looks like it's kind of a chicken-and-egg-type of a situation. And I've got some concerns about that in terms of meeting some time frames. Given that type of a background, ... what do you contemplate as a reasonable time frame to respond to the legislature, based on the request made in this resolution?" COMMISSIONER SHIVELY responded, "We do not have a time frame right now. As I said, if what people want is to enshrine our current fiscal regime by contract, we might be able to do that in a relatively short time frame. If what people are interested in is making changes in the official -- in our fiscal regime, based on the economics of the project, I would concur with you that we need the next step in engineering and in fiscal analysis in order to come back to the legislature and make a recommendation to do that. I do not believe that you would see that this session. I believe the earliest you could possibly see it would be next (indisc.)." Number 0604 REPRESENTATIVE BEVERLY MASEK asked, "With the Venetie court ruling on the issue of sovereignty, tribal sovereignty, I wonder if the Department of Law might be able to answer this question on how it would affect investors if ... the case with the Venetie issue is -- I know what the ramifications would be, but as far as ... the tribal land, if this issue is resolved at the higher court level, and what the relationship would be at the state level in dealing with the Native organizations that are wanting to have tribal sovereignty, how would this affect the project? You may not be able to answer it, but I'd like to get some type of a response from the Administration on this issue." COMMISSIONER SHIVELY replied, "I can give you an initial response, and that is that, interestingly enough, at the same time they decided for Venetie, as you may recall, they decided against Copper Center's ability to tax the oil pipeline because they say Congress had specifically designated that as federal use land. And I think if we stay within that corridor, and/or if it was changed off of lands that at least are village corporation lands, which is where the Venetie case sits now, it would not be an issue. If there was some change in that, it could be in this whole issue of taxing jurisdiction. Whether there's dual jurisdiction or whether the tribal governments have (indisc.) taxing jurisdiction is something that I have not looked into. There certainly is a great deal of national law about it because `Indian country' exists in a number of states, and all of them, I believe, have had to address that kind of situation." CO-CHAIRMAN OGAN asked if there were further questions of Commissioner Shively. He noted that Representative Green had joined the meeting. He then called upon David Lawrence to testify. Number 0636 DAVID LAWRENCE, Gas Commercialization and Marketing Manager, ARCO Alaska, Inc., stated he had two purposes. The first was to indicate ARCO's support for the resolution and to thank Representative Barnes for her work. The second was to provide a brief overview of what he called "some of ARCO's learnings from the Far Eastern LNG market." MR. LAWRENCE stated, "ARCO has made many trips to the Far East over the past few years, and especially over the last 12 months. And most recently, in November, we visited Japan and Korea with BP and Exxon and the Governor and his trade mission. In addition, we have for many years had a permanent representative in Tokyo, Mr. Takao Enomoto, who maintains our day-to-day marketing effort and contacts with all the major LNG buyers in the Far East. "When we visit the market, we typically meet as many of the potential buyers and trading houses as possible, and especially those buyers who we would classify as the large buyers of LNG. And here I'm talking about the major utility companies in Japan and Korea and Taiwan, and especially the power utility companies. Naturally, these meetings are given some importance by the potential buyers, because when we go to the Far East, we can actually demonstrate that we do have gas to sell. Our gas is a proven reserve from Prudhoe Bay, and that's very important for the buyers to recognize. They also acknowledge that when they talk to our company, and I guess some of the other ... potential producers of North Slope gas, they're talking to companies with financial strength and experience, and they could be credible project sponsors for an Alaska North Slope gas project. "Potential buyers in the Far East consistently say that they want to see three characteristics in a viable LNG project. The first of these is that the gas supply must be assured for the total life of the contract. And we're fortunate in that regard because in Alaska, where our gas resources have already been identified, this is not a major concern. "Secondly, they tell us that they want the project's commercial structure to be clear and strong and recognizable to them. Now, strong means having participating companies with financial strength and without any conflicts of interest. And both buyers and potential bankers for the project need to have confidence that the project sponsors can pull the deal together. As we've indicated many times in the past, developing a commercial structure of this type is one of the major activities that our company is now engaged in. "Thirdly, on the buyers' interests, we find that the buyers do want to understand in depth, and I really do mean in depth, that the project is economically viable in a competitive market, at competitive market prices. In our market visits, we find that the large buyers are especially sophisticated and do have real knowledge about our project costs and how we need to reduce them. I can't emphasize that too much. We find them a particularly well- informed group of people to talk to. The buyers also recognize, and are concerned from time to time, that we have, sitting behind our project, a fiscal and regulatory environment that is stable and appropriate for the project. As again, I think you're all aware, our work activities have been focusing both on project costs, and recognizing the need to reduce them, and on appropriate fiscal terms for the project." TAPE 97-4, SIDE B Number 0006 MR. LAWRENCE noted that Alaska had some expensive facilities that needed to be kept at maximum utilization. He believed desire on the part of the buyer was the beginning of a natural commercial negotiation that would be expected on any gas project. He expressed confidence that solutions could be developed through cooperation and a dialogue with the buyers. MR. LAWRENCE stated, "It's also clear that the buyers do not see premium prices for Alaskan gas. They tell us this every time we meet them. They readily acknowledge the benefits of us knowing our gas resources, a stable political context, improving balance of trade with the U.S.A., and the fact that the project will have, potentially, some strong sponsors." However, none of these factors, either individually or together, would be significant enough to attract any premium to the price, Mr. Lawrence stated. "There's just too much supply competition out there for us to expect a premium price or any special contract terms. But again, I suspect that this is the start of a negotiation, and that is something which we will have to work on with the buyers in the context of our ongoing discussions with them." Number 0038 MR. LAWRENCE continued: "The buyers have told us recently that they believe that from about 1998 onwards, they will need to engage in serious discussions and negotiations to secure supplies for the 2005-to-2010 period. Now in the one sense, we shouldn't expect, then, to see too many new market developments this year with the buyers. But I'd quickly say, though, that we do plan to continue our regular marketing activities in order to build up the necessary long-term relationships that we will have to have to get a project of this size off the ground, and perhaps importantly as well, to exchange all the relevant data with the buyers, to ensure that we are well-placed to start more detailed discussions with them when they are ready to do so. "Finally, all demand projections that we certainly are aware of do show continued growth in the demand for LNG in the Far East over the period we're talking about, although there are some uncertainties country-by-country. For example, LNG demand will, and we just heard about this in the discussion with Commissioner Shively, LNG demand will be affected by coal and nuclear power plant construction and retirements, and also, perhaps, by the evolution of new, independent power projects. Also, deregulation, particularly in Korea and Taiwan, of the utility companies will have a major bearing on their ability to move swiftly and to commit to gas from our project. There's also an important issue which is under debate, particularly in the Far East, over the level of carbon dioxide emissions that those countries will be allowed to have over forthcoming years, and this will have a bearing on the type of fuel that they are allowed to burn in the future." Number 0079 MR. LAWRENCE concluded by saying ARCO's market visits have been very productive and were always well-received. They intended to continue these visits throughout 1997, and they hoped to make their next trip to Tokyo in the next few weeks. Mr. Lawrence offered to provide additional details or answer questions. Number 0097 CO-CHAIRMAN OGAN asked whether ARCO was comfortable with the memorandum of understanding as written. MR. LAWRENCE answered, "Yes, we are. We are comfortable with the memorandum of understanding, subject to a final review of the actual version provided to us." Number 0105 CO-CHAIRMAN OGAN asked whether Mr. Lawrence had seen the state's financial model referenced on page 6 of the memorandum of understanding. MR. LAWRENCE said yes, they were familiar with that. CO-CHAIRMAN OGAN asked if the model was adequate. He further asked whether Mr. Lawrence or another ARCO representative had personally looked at the model or worked with it. MR. LAWRENCE responded, "We have, over the last few months, had the opportunity to work closely with the Department of Revenue on the construction of that model. We maintain our own model, which is obviously slightly different, but we do find that the state's model provides similar results to the modeling that we would be using. In that sense, yes, it is ... adequate for its purpose." Number 0122 CO-CHAIRMAN OGAN referred to language regarding dispute settlement procedures on page 9 of the memorandum of understanding. He asked, "Has there been any negotiations as far as how any disputes may be resolved? And when do you think that might be in place?" MR. LAWRENCE replied, "I'm not aware of any discussions that have taken place. I'm sure it's a subject which will need to be discussed, but again, I'm not aware of any plans to have those discussions." Number 0133 CO-CHAIRMAN OGAN referred to page 12 of the memorandum of understanding and noted there was language indicating at an appropriate time, ARCO would evaluate YPC's existing work. He asked Mr. Lawrence, "When do you anticipate the appropriate time would be? What do you have to do to get there, I guess?" Number 0141 MR. LAWRENCE replied, "I guess we have to do sufficient work ourselves to be able to understand the value of those permits to the project as we see it. That work is in progress at the moment. And I'm hopeful that we'll be at that point as soon as possible." CO-CHAIRMAN OGAN asked Mr. Lawrence to speculate on what "as soon as possible" might be, whether it was six months, a year, or how long. Number 0150 MR. LAWRENCE stated, "We've got an ongoing work program at the moment, which is focused -- focuses, as I mentioned earlier, on finding the best ways to get the cost reduced, look at the fiscal system for the project, the marketing activities, and (indisc.) the commercial arrangements for the project. Permitting for us is not on that critical path. It is part of our general technical review of the project. And in that sense, I think that we will be focused on our four main activities first, before we spend a significant amount of time investigating where the permits fit into things." Number 0161 REPRESENTATIVE RYAN expressed interest in a market that seemed to be left out, the People's Republic of China, which had a birth rate of 14 to 15 percent a year. He asked whether it was lack of infrastructure or other factors that made entering that market prohibitive. Representative Ryan believed China had tremendous energy needs and said, "1.2 billion people seems like a pretty nice market." Number 0173 MR. LAWRENCE responded, "Yes, I do believe that the Chinese market is a potential market for this project. As you allude there, the Chinese infrastructure is nowhere near as well-developed as in the other three countries which I mentioned, Japan, Korea and Taiwan. They already have regassification facilities, ports for receiving LNG, gas pipeline transmission networks, gassified power plants. They all exist in those three countries. So in that sense, they are the natural markets that you would look to, to move this project forward quickly. There's no doubt ... the Chinese market could be a potential market for this gas, but it's going to need significant development, both on their side and on ours, to actually find a home for our gas there. So in my mind, it is definitely a potential market, but it's not perhaps the first one that you would look to if you're trying to move the project forward quickly." Number 0193 REPRESENTATIVE J. ALLEN KEMPLEN referred to Mr. Lawrence's indication that buyers were extremely well-informed about natural gas projects. He asked Mr. Lawrence to elaborate on the buyers' perceptions of the true costs and what they feel needs to be done to make this project viable. Number 0202 MR. LAWRENCE responded, "The buyers are sophisticated. They monitor events in Alaska extremely closely. And I'm sure that the hearing today will find its way back into Tokyo probably by the end of today or tomorrow. They follow things very, very closely, which is a good indication that they are very seriously interested in this project. "They maintain all their own cost-estimating models and their own economic analyses for all the projects that they would potentially buy from. They need to do that, obviously, to make sure that they are getting ... the best deal that they possibly can, obviously. They obviously take a view on the Alaskan project that we have some extensive infrastructure that can be utilized for this project, and so it is very good, and we have proven reserves, which is very good. "But they also see the difficulties ahead of us of building the new pipeline across Alaska. And that is ... one of the things which we have to do which none of the other projects that they're looking at have to do. So there is a disadvantage. And so they look to us to provide them with information on the pipeline, demonstrate to them how it will be constructed and how it will be done efficiently, and how ultimately we are going to be able to guarantee deliveries to them in a timely fashion. So it's a confidence-building exercise as much as anything else." Number 0230 REPRESENTATIVE KEMPLEN expressed his understanding that it was not a question of facilities at the beginning of the process, nor facilities in Valdez at the end of the pipeline, nor the fleet to transport the material, but rather the pipeline itself that was the major sticking point for the buyers. Number 0239 MR. LAWRENCE responded, "I think that it is, in a way, because the other facilities that we will need to build are not unique to ... Alaska. They're the sort of things that probably ... all the other LNG projects around the world are having to do. So the pipeline makes us unique. "I think the other thing that makes us unique is the scale of our project, as well. It is much bigger than any of the other projects that they're looking at. And what they will have to do is they will have to make tremendous investments themselves in order to be able to absorb our gas into their market, new gassification facilities, new transmission pipelines, certainly new power stations. They will have to invest very nearly as much as we will, and they have to do it over a similar sort of planning period and a similar sort of time, as well. "So it's very important that we do communicate with them and work closely with them, because we're going to have to recognize that they have almost as much work to do as we do, which is why they will look very, very closely at us to determine the confidence that they have, or that they need to have in us, and us in them, in order to be able to bring the project together." Number 0257 CO-CHAIRMAN OGAN noted that Representative Kubina was present and invited him to join the committees at the table. REPRESENTATIVE BUNDE referred to Mr. Lawrence's statement that the buyers are very aware of what is happening in Alaska. He asked Mr. Lawrence to speculate on the impact of the resolution in the buyer community. Number 0295 MR. LAWRENCE responded, "I would like to speculate on that, because I think that's very important, a very important point that you raise. The market is very well-informed. The buyers are very well-informed. They manage to get copies of the Anchorage Daily News almost as quickly as I do at home. It's surprising. And I think that the concept of the MOU and the resolution will help significantly in building confidence in the marketplace that Alaska is very serious about this project, and the people of Alaska and the legislature of Alaska and the oil companies are very serious about this project. And it will help tremendously in my discussions, certainly, when I go to meet with them. So, yes, yes, I would like to speculate. And ... I hope it will help the project greatly." Number 0286 REPRESENTATIVE BUNDE referred to Mr. Lawrence's mention of continued demand and the notion of a window of opportunity. He asked whether historically the price of gas had risen. He also asked Mr. Lawrence to speculate whether, not just in five or ten years but in fifty, the demand for Alaska's gas would continue to escalate. Number 0295 MR. LAWRENCE responded, "That's a much more difficult area to speculate on. And in fact, if I could speculate on price, I probably wouldn't be sitting here today. I think that we're looking at countries ... with natural economic demand. And that is reflected in their fuel purchasing needs. Japan is a mature economy, and so the rate of growth in demand in that country will be less than in Korea and Taiwan. And certainly, as we've already acknowledge, the market in China is a huge potential, untapped market for LNG. "I think there are other pressures, as well, which include environmental pressures towards burning cleaner fuels, which again will help the demand for LNG and gas in those markets. And we also see some pressures in those countries, particularly in Japan, related to ... their ability to construct plants, electricity plants, of other types. Nuclear and coal and oil are becoming increasingly difficult for them to construct, whereas gas plants, having a smaller footprint, being able to be built a little faster, and of course producing less emissions, are perhaps going to ... make gas the fuel of choice in those countries. So I'm hopeful that the demand will grow, but it is also subject to natural economic, world economic changes, as well." Number 0321 REPRESENTATIVE ROKEBERG asked, "Of the number of competing LNG projects contemplated, which ones do you look at as the biggest threat to the ability to move LNG gas? And then secondly, without going into great detail, what impact do you believe the Japanese economy, which basically has been in recession for a number of years, is going to have on the ability to market the gas to (indisc.)?" Number 0330 MR. LAWRENCE replied, "I think the Alaskan project is characterized by its size. And in that sense, you probably do have to look at its natural competitors as being the other very large gas resources which are within reasonable shipping distance of the markets that we're talking about. I introduced the concept of reasonable shipping distance because the Middle Eastern markets and the big gas fields in the Middle East are at a significant disadvantage to us in terms of extra ... shipping distance. And so that should give us ... some help. "Any large gas accumulation which is within a similar shipping distance as Alaska is a potential competitor to this, particularly when we look at the very large-scale projects. And the large-scale ones that naturally form into that category are Sakhalin and Natuna. "Your second question was on the Japanese economy. And I think the Japanese economy ... has been in recession, as far as I understand it. I sense that it is moving slowly ... out of recession. Again, it's one of those areas of speculation and crystal-ball gazing, and I'm ... not an international economist in that sense. But I think all our projections do show steady if not spectacular growth in the Japanese economy over the next 10-to-15 years." Number 0356 REPRESENTATIVE RYAN referred to Mr. Lawrence's indication that large buyers would have certain developmental infrastructure costs coinciding with Alaska's. He asked whether, to sweeten the pie, anyone had proposed to joint venture. MR. LAWRENCE replied no, he had not heard of those suggestions. On the other hand, he had heard suggestions that perhaps some larger Japanese, Korean and Taiwan companies might look to be potential investors or sponsors of an Alaskan project, alongside companies like ARCO. However, ARCO had not yet come across any examples of joint venturing at the market end. Number 0369 REPRESENTATIVE RYAN commented, "There's a long, 2000-year history of Far East dealings where they become your partner and then they become your owner." Number 0373 CHAIRMAN HODGINS indicated he would ask his question of all the producers. He asked whether Mr. Lawrence foresaw this project going forward if one or two other major producers did not become investors, and whether it would be possible to put other investors together to keep the project on-line. Number 0380 MR. LAWRENCE replied, "I think the structure of the project is one which will clearly bear a lot of investigation and a lot of discussion over the next few months. I believe it is possible ... to put together an Alaskan project in many different ways. And we know that there are many potential people out there who could become investors in the downstream part of the project, which is clearly the part of the project that we don't have at the moment. "We have an upstream part of the project. We have a, really an existing Prudhoe Bay field, an infrastructure to produce gas. It's the downstream part of the project that we're talking about. And in that sense, ... I believe there are many potential sponsors of a downstream part of the project. Clearly, that downstream project will require gas and require gas to ... be supplied from the North Slope. And I'm hopeful that ... the North Slope producers will want to supply gas into that project." Number 0396 CO-CHAIRMAN OGAN advised there were three more producers wishing to testify in the remaining 45 minutes. He called on Mark Bendersky to testify. Number 0402 MARK BENDERSKY, Commercial Manager for Gas, BP Exploration (Alaska) Inc., thanked Representative Barnes and the task force for their good work over the interim. Mr. Bendersky stated that BP supports the resolution and then offered to answer questions. Number 0415 REPRESENTATIVE BUNDE said, "You mentioned that you support the resolution, and that includes the resolve that recognizes a window of opportunity. You're endorsing that it's important that we function within that window?" Number 0424 MR. BENDERSKY replied, "We agree that there will be market demand starting around the year 2005 for new suppliers into the market. And 2005 is an excellent goal to shoot for. However, it is a ... buyers' market. There are a lot of suppliers. Some of them have smaller projects. Some of the projects may be more cost-effective. So we are working very hard to do our best to make Alaskan gas as (indisc.) as possible. And there will probably be new contracts let beginning in 2005. "We don't see, however, that if we are not the very first supplier in the market, that we're going to be shut out for a particularly long time. The market has told us that they welcome Alaska gas. They desire it very much for purposes of supply diversification. And should we come to them with an economic project, they're going to be very interested in buying our gas." Number 0442 REPRESENTATIVE BUNDE indicated he had heard concern about smaller fields that might come on-line, precluding Alaska's entry into the market. He asked, "Is there some other economics that come into play here, some dynamics, where we have such a huge supply? ... [C]an we offer a volume discount and then perhaps capture more of a market than the smaller fields that would not have the immense amount of gas that we have to supply? I'm not suggesting you sell your gas any cheaper. I'm just saying that, are there counter- balancing arguments here?" Number 0442 MR. BENDERSKY replied, "The advantage smaller fields have are they can line up a smaller amount of buyers to arrange the volume and the timing and ... find a happy medium. ... We have a tremendous marketing challenge because we'll be bringing on board, once we get to our plateau, almost twice, 14 million tons, almost twice what any other project has ever done. So we're probably looking at ... at least two countries and I don't know how many buyers, but they'll be numerous. And our challenge will be to work with the buyers so that their new construction and all of their lead-time work all comes together, orchestrated, so that when ... our ships ... land in their ports, they're ready. ... All the timing has to match because their investments and our investments are huge." Number 0469 REPRESENTATIVE KEMPLEN referred to Mr. Lawrence's mention that the pipeline itself was the big cost. He asked Mr. Bendersky what in the pipeline construction was the major cost issue. He speculated the issue might be materials having to come from American manufacturers, the Arctic and sub-Arctic environments, or labor costs. Number 0480 MR. BENDERSKY said the major cost issue with the pipeline was the installation cost, not so much the cost of the pipe itself. He believed, based on the TAPS project, it could be accomplished in a smarter way and less expensively. The cost estimate of the pipeline was what made the project currently uneconomic, he explained. They needed to amortize all costs, including the conditioning plant, pipeline, liquefaction and ships, over all of the gas. It was that extra pipeline component that really hurt the economics, particularly since the pipeline needed to be installed up-front. Number 0498 REPRESENTATIVE RYAN said, "I've been told by those folks with whom I deal in the oil industry that the Saudis can produce their light crude and deliver it anywhere in the world for $3 a barrel, and yet it costs us $10 or $12 from Alaska .... They have a very competitive advantage on us. It would seem to me that if they could produce this oil and deliver it at that price, the gas should be comparable. I've also been told by most people I know in the oil industry that if there ever becomes a real market for gas, the Saudis have all the gas in the world." REPRESENTATIVE RYAN continued, "Now, according to the shipping schedules and that little diagram [that] was there, they have perhaps twice as far to ship as we do, to reach the same markets. But considering their advantage on their cost and production, it would seem they could still ship and deliver a heck of a lot cheaper than we can." He asked whether his assumption was correct. Number 0511 MR. BENDERSKY replied, "My understanding is that new projects coming on-line in the Middle East, the LNG projects, ... are coming on and they're economic. ... They're getting bank financing. And it is true if those projects can use some of the existing infrastructure that's there, like ports, that expansions of those projects will even be more economic. But the way gas is priced has not been so much based on the cost of production of gas. It has to do with the link to the price of oil delivered in the market. So there are price formulas that, as oil prices go up and down, LNG prices have tracked them. So people are trying to get as much revenue as possible for their product. It is possible for Middle Eastern suppliers to undercut us on price if they wished, just like they could do on oil right now. But we're hopeful that because of the buyers' desire for supply diversification, that gives us our best hope and chance for making an Alaskan gas project happen." Number 0536 CO-CHAIRMAN OGAN pointed out the stable political climate existing in the United States as compared to parts of the Middle East. Number 0541 REPRESENTATIVE ROKEBERG asked, "Within BP do you have a counterpart that's in Papua New Guinea and Canberra, Australia, doing the same thing you're doing?" MR. BENDERSKY replied, "Yes. BP is in the LNG business. We have working interests in both Abu Dhabi and in the northwest shelf of Australia. Both of those projects have been expanded already, and we are ... hopeful that we'll be expanding our northwest shelf project another time. We have representative offices in mainland China, Korea, Taiwan and Tokyo. We've been in the business ... over 20 years. And everyone is trying to ... progress their own projects." Number 0557 REPRESENTATIVE ROKEBERG asked whether those projects were offshore. He further asked, "And also, where are they in terms of their development in their time lines, as juxtaposed to TAGS' line?" MR. BENDERSKY responded, "The northwest shelf project, which is operated by Woodside (ph) Petroleum, is an offshore project, and the expansion of that project could be in the 2003-to-2005 time frame for deliveries, ... based on press reports. We have another gas discovery in Papua New Guinea. The two largest working- interest owners are BP and Exxon. The discovery is in the central part of the island, very mountainous, and ... I would have to characterize it as -- that more appraisal drilling is required before sufficient reserves are confirmed to have a project. That project has ... a lot of challenges ahead of it, reserves and the whole gamut of challenges." REPRESENTATIVE ROKEBERG asked, "Well, is the Australian project in production of LNG now ...?" MR. BENDERSKY replied yes, he believed it had been going 20 years. It was producing 7 to 7.5 tons per year. "I believe it has eight ships serving primarily Japan," he said. Number 0581 CO-CHAIRMAN OGAN referred to page 12 of the memorandum of understanding, the language regarding the appropriate time to evaluate YPC's existing work to determine whether or not it was something BP wanted to work into their plan. He asked, "Can you speculate on when that appropriate time would be and what you have to do to get there?" Number 0586 MR. BENDERSKY replied, "YPC has done an excellent job in getting its permits, which are specific to the existing right-of-way corridor. YPC has done an excellent job of putting their information into the public domain. We have been and will continue to evaluate the information that they have put in the public domain. They've made it very easy for anyone to do that; so I'd like to commend them." MR. BENDERSKY continued, "For us, the important thing to make this project a reality is to get hold of our -- you know, one important thing is to get hold of our costs, our capital costs, our operating costs, our taxes. And in getting hold of our costs, we're going to have to define what the specific project is, what makes the most cost sense. And once we're at that point, we will then be looking for what's the most cost-efficient way to get that specific project permitted. And we'll take that most cost-efficient path. ... I can't predict when we'll know when the specific project is defined. But that's the path we're going to be taking." Number 0623 CO-CHAIRMAN OGAN referred to the Limitations section on page 13 of the memorandum of understanding. He asked, "Hopefully you won't get there, but if you get to the point that you can't agree and that this is not something that BP wants to invest in, would you be willing to ... sell the gas at a well-head price?" Number 0612 MR. BENDERSKY replied, "I believe so, yes. ... We won't stand in the way of this project. ... We are interested in having as high a well-head price as possible. That's good for both the state and us. And we haven't made any decisions on whether we're going to be a downstream player or not, but we're certainly studying that very, very hard. And one of the earlier questions was ... if one party doesn't want to sell his gas, could that prevent the project from going ahead. And we believe that there's certainly enough gas that if two parties and the state wanted to go ahead, that it could certainly go ahead." CO-CHAIRMAN OGAN asked if anyone else had BP-specific questions. He thanked Mr. Bendersky for his time and then called on Beverly Mentzer to testify. Number 0625 BEVERLY MENTZER, Manager, Business Development, Natural Gas Department, Exxon Company, U.S.A., thanked the task force for their work during the interim and on the soon-to-be-published report. She also thanked the committees for their efforts in supporting issues to help progress the project. MS. MENTZER stated, "I'd like to first re-emphasize that Exxon is very committed to commercializing Alaska's gas reserves on the North Slope. Exxon has been involved in commercialization of the gas reserves since the discovery of Prudhoe Bay in the '67-68 time period. Since then, we've spent $90 million within our company alone on looking at various options to develop the gas reserves, and that time period focused quite a bit on pipeline transportation options to the Lower 48. "Since 1992, the producer studies have focused primarily on the LNG export option, and from '92 through '96 jointly spent about $12 million in those efforts. Right now Exxon has over 40 people working on various aspects of commercialization of an LNG export project, and we're leading multiple teams in this joint effort. "Exxon is strongly supportive of HCR 1. As pointed out in the resolution, Alaska has abundant gas resources. Benefits to Alaskans will include jobs and domestic natural gas supplies. There is strong international competition to supply the Far East LNG market. And we agree there appears to be an opportunity in the marketplace, beginning around 2005, to begin placing new LNG supplies in the market and that those opportunities will continue to grow. "The market has told us that an Alaska LNG project must be economically viable at competitive prices. Also, to make investment in a new LNG project viable, there must be long-term contractual relationships established between facility owners, gas buyers and purchasers, financial institutions and other participants. So a major new commitment such as this must be backed by a long-term, stable and appropriate fiscal and regulatory regime. "Therefore, consistent with this resolution, Exxon agrees that the state should work to provide this stable and appropriate fiscal and regulatory environment, to give a new Alaska LNG project the best opportunity it can to become economically attractive to investors and compete on the worldwide market with other LNG projects and other competing fields. We look forward to working with the state administration and legislature to develop a contract that sets out those terms and are committed to pursuing that effort." TAPE 97-5, SIDE A Number 0001 REPRESENTATIVE BUNDE stated, "A while back, there was a considerable concern about reinjection of gas, I think. Does it still hold true that a barrel of oil is worth many times much more than a cubic foot of gas to the State of Alaska, or whatever unit we want to compare, that basically oil is far more valuable than gas per unit, whatever the unit is?" MS. MENTZER replied, "Uh-huh." REPRESENTATIVE BUNDE asked, "And do you and other producers now have some reasonable comfort levels that we are not jeopardizing oil production by moving forward in gas production?" Number 0022 MS. MENTZER responded, "It is true that oil, on a barrel basis, has more value than gas, and the impact of gas development and sales on recovery of oil reserves is included in the financial models that are being developed. It's our objective as leaseholders of those reserves to develop and optimize the entire hydrocarbon resource, not oil or gas one at the benefit of the other. So we look at the optimization of the whole, and looking at the impact on that, is it -- it is in the economics, and the negative aspects of any deferred oil recovery or changes in that are more than significantly overwhelmed by the economic benefits of the LNG sales." Number 0046 REPRESENTATIVE BUNDE said, "Well, that makes me just a little nervous. I thought I heard you say that as long as there's money to be made, you wouldn't let the through-put of the pipeline decrease, and of course, at least for me, that scares me because then we've got to tear up the pipeline." He asked if that was an oversimplification of what Ms. Mentzer said, that as long as there was a greater net gain financially, the through-put of the pipeline would be allowed to decrease. MS. MENTZER clarified, "The point I was trying to make is we want to optimize the overall hydrocarbon recovery of the reservoir. And whatever is the best answer to do that economically is what we want to do. And in this case, the earlier you develop the gas reserves, the more significant the impact it might have on estimate -- ultimate oil recovery. So there would be some decline if you look at the ultimate end-life of the oil reserves by themselves, with and without any gas sales. It is slightly lower with gas sales than it is without." Number 0074 REPRESENTATIVE BUNDE suggested that "the earlier we develop, then, the sooner we reduce the through-put of the pipeline to the point where the pipeline would have to be dismantled." Number 0076 MS. MENTZER responded, "I don't know that you can take what I've said and translate that into rate, because that relates to a lot of reservoir mechanics as to the rate of decline. So in the end there would be less oil. As to what the rate would be, I can't speak specifically to that." Number 0083 REPRESENTATIVE BUNDE said, "I've looked at oil and gas in the ground as money in the bank. And again, putting on your crystal ball, do you see the value of either that oil or gas diminishing in the next hundred years? If we don't develop it tomorrow, is it still, in 50 years, going to have value and perhaps increased value?" MS. MENTZER replied, "I really don't feel qualified to speak to that." Number 0099 REPRESENTATIVE BARNES stated, "I think it's important to clear the record, because Beverly, correct if I'm wrong, but during the process of selling the gas, because we have such a huge volume of gas, that the gas would still be available, that that's not being transported, to use to develop the oil. Would you comment on that?" Number 0110 MS. MENTZER agreed that was true and explained, "We are currently reinjecting 7.5 billion cubic feet of gas per day and would plan to take off for sales 2 billion cubic feet of that. So it does retain value in pressure maintenance in the reservoir in aiding oil recovery." REPRESENTATIVE BARNES said, "And you're also using not just strictly gas to raise the oil, but you're -- you call it `minuscule' recovery, using both gas and water, is that not true?" MS. MENTZER responded, "Yes, the miscible injectant ..." REPRESENTATIVE BARNES said, "Yes." MS. MENTZER continued, "... for enhanced oil recovery is being used." Number 0021 REPRESENTATIVE BARNES said, "And the value of the oil and gas staying in the ground over the long term, don't you also have to look to places like Russia and other countries which have huge deposits of both oil and gas that stands to displace Alaska's gas and make it fairly worthless if we are not able to market it in a timely period?" MS. MENTZER agreed and said, "You would look both at the price gas might be selling on the market and the demand." Number 0132 REPRESENTATIVE BUNDE stated, "But we haven't found that they're ... producing any new gas and that -- it's a finite resource. And if another country uses theirs up, and we still have some, ours will still retain value." MS. MENTZER replied, "Our gas would still retain value as long as there's a purchaser willing to buy it at a reasonable market price." REPRESENTATIVE ROKEBERG suggested it was a bad economic idea to bank hydrocarbons on the North Slope for the future generations of Alaska. REPRESENTATIVE BUNDE commented, "Your grandchildren might object." Number 0155 CHAIRMAN HODGINS said to Ms. Mentzer, "I'd asked the other producers about the role of maybe this project going forward with one or two producers being involved in the investing of it." He asked about Exxon's thoughts on that. Number 0162 MS. MENTZER explained, "The current Prudhoe Bay agreements allow for any gas owner to take their gas in-kind. And the agreements have been developed to make the provision for a major gas sale. So contractually it is possible for one, two or all three gas owners to take their gas and proceed with the project. If you look at how long that project could last, then you're looking at the gas reserves in the ground. For example, three owners could sell gas for 30 years, two owners for approximately 20 years. But there are options available for gas to either be sold at the well-head or producers to make individual decisions in regards to the options available to commercialize the gas." Number 0180 REPRESENTATIVE RYAN indicated he had heard about a well drilled across the Colville River from Umiat that was capped; it subsequently blew and burned. "And Mr. Adair (ph) from Texas had to come up and put it out," he said. "And it was a natural gas well and supposedly has tremendous reserves underneath it." He asked whether Ms. Mentzer was aware of it and what the potential might be for developing what was underneath those particular reservoirs. MS. MENTZER responded, "I'm not aware of that to comment, but I will look into it." Number 0192 REPRESENTATIVE ROKEBERG referred to the "potential conflict of interest that arises internally within a corporation." He said, "And I think Exxon is particularly subject to that scrutiny. So what is your individual position? Are you solely responsible for Alaskan gas or are you looking at ... other projects ... in the purview or the scope of your employment? And then additionally, I am really concerned about the major investments in the Sakhalin Islands and Natuna, which ... are the obvious competing projects of greatest concern." Number 0205 MS. MENTZER responded, "Personally, my only responsibility is for the development of the Alaskan gas reserves as an LNG project. Also within my company, Exxon Company, U.S.A., it is the only LNG project that we have to promote. All the other projects are in Exxon Company International. And we have no priority (indisc.) within the big company, Exxon Corporation, there is no prioritization in any way of the worldwide LNG projects. Each project has significant hurdles to overcome, and each project team works the best they can to move their projects forward. And our Alaska project needs to compete with those projects and all other ones that are out there, even ones that none of the current producers here may be involved in, to make our project the most competitive when we take it to the market. "In addressing your question specifically regarding Sakhalin and Natuna, the Sakhalin project now, they have negotiated fiscal terms with the government, and they're currently undergoing exploration. It's a joint oil and gas field, and so there are issues as to, you know, how those would be produced, sequentially or concurrently. So there's a lot of work to be developed there. "In the Natuna project, they have also established fiscal terms with the government. The lead case right now [that] they're looking at is a pipeline to Thailand to sell approximately half of the reserves, still keeping LNG export (indisc. -- coughing) but focusing on the pipeline-to-Thailand case right now." Number 0238 REPRESENTATIVE ROKEBERG asked, "Do you have a marketing arm of your folks in Asia, particularly, and Tokyo and Japan? And how ... can your marketing people that are internationally involved separate the various competing projects to help you push the TAGS line vis- a-vis the other competing projects? How does that work?" MS. MENTZER replied, "The way we utilize our marketing people in the Far East, we use them primarily for intelligence gathering and staying in touch with the market. When each project goes to discuss specific terms, they're represented themselves in talking to the market, as far as advancing their project." CO-CHAIRMAN OGAN thanked Ms. Mentzer. He then called upon Wayne Lewis to testify. Number 0256 WAYNE LEWIS, Vice President, Yukon Pacific Corporation (YPC), noted that YPC was a business unit of CSX Corporation, which was headquartered in Richmond, Virginia. He stated, "As you know, Yukon Pacific is sponsor of the Trans-Alaska Gas System or TAGS project and together with CSX has been involved since 1986, a bit earlier just as YPC, but with CSX since 1986, in moving this project forward." MR. LEWIS expressed appreciation for the opportunity to testify in support of HCR 1. He noted that the previous week Jeff Lowenfels, President and CEO of Yukon Pacific, had testified before the four- member joint working group and the House Special Committee on World Trade and State/Federal Regulations, both chaired by Representative Barnes, discussing a number of issues relating to North Slope gas and the evolution of the TAGS project. MR. LEWIS said although Mr. Lowenfels was travelling back East and could not be there that day, "he certainly joins me on behalf of YPC and CSX in urging the two committees convened here today to pass this resolution as amended, so that it may be considered ... by the full House and the Senate. We also want to express our sincere appreciation to the legislature, to Representative Barnes, to the Administration, for the attention, and the level of understanding that has resulted from that attention, that you've devoted to this very critical issue. We look forward to working with all of you and the North Slope producers as we continue to advance this concept to reality." Number 0298 REPRESENTATIVE BRICE noted the resolution states 14 million tons per annum needed to be produced. He asked, "What is the capacity of the pipeline itself? For a 42-inch pipeline 800 miles long, what is the daily capacity?" MR. LEWIS responded, "It's a function of compression. And in essence you add more compression ... and you install capacity at both ends of the line. But without getting into hydraulics, which you don't want to hear from me on anyway, I promise you, because I'm not expert, but essentially, a 42-inch line, as you add more compression, can potentially go up ... an ultimate production level of between 25 and 28 million metric tons of LNG per annum." Number 320 REPRESENTATIVE BRICE asked, "What kind of impact is that going to have on state revenues as well as the private sector? Well, for you folks, in general." MR. LEWIS replied, "Well, essentially, if you go up to those volumes, in gross revenues, you double them from the 14 million tons. In net revenues, however, the impact is enormous because you have effectively, except for additional compression, paid for the pipeline off the 14 million metric tons. So the expansion economics of this project are probably unrivaled in the world." Number 0332 CHAIRMAN HODGINS indicated he had three questions and said, "One is I want to make certain that Yukon Pacific wants to be an investor and an owner in the line. Two, I'd like to know the thoughts, and very quickly, on a trunk line into Southcentral Alaska to help feed the industry (indisc. -- coughing) Kenai, plus the domestic use in Anchorage. And then one thing I haven't asked the other producers, and I apologize for that, but I'm very, very interested in Alaska- hire and having our training -- and if you could give us a quick thought on that." Number 0342 MR. LEWIS responded, "CSX, really since the inception of their involvement in this project and certainly through Yukon Pacific, has expressed in every possible forum we can, both public and private, our desire to ... continue to be an investor in the ultimate project structure. As to how that would actually be defined, ... I just can't say because no one quite knows how that will evolve. It will be a hybrid modeled after other projects. Certainly it could include one or all of the North Slope producers, Yukon Pacific as the permit holders, the buyers themselves typically take an equity position in their own supply projects together with trading companies. So we have, in a generic sense, expressed that in the end, when the final equity mix is done, we expect that, again depending on how it evolves, that CSX and Yukon Pacific could own 10 to 25 percent of the ultimate project equity mix. "I think your second question related to Cook Inlet gas. We have worked over the past couple of months with prospective users who are now operating in Cook Inlet, prospective users who would enjoy the benefit of a North Slope gas pipeline by taking off gas with a new pipeline at Glenallen, bringing it down into the Wasilla area, and tying into the existing Enstar infrastructure there, which could ... in a backwards sense begin to supply all those users, not only Enstar's users but ultimately Unocal and Phillips and others. "The date we have been asked to consider is around 2004 or 2005. The volumes are on the order of 300 million cubic feet per day, up to 500 million cubic feet of gas a day. Now recall, at 14 million metric tons we would essentially be bringing down about 2 billion cubic feet of gas per day from the North Slope. Cook Inlet usage of North Slope gas has a very positive effect on the ramp-up that we talked about here and on project economics ... for the TAGS projects. So we have been working on hydraulics and other concerns that I'm, believe me, not expert enough to talk about. I'm just saying configurations of what that might look like in terms of pressure and composition of the supply taking off from Glenallen." MR. LEWIS addressed training and Alaska-hire, saying, "We have had a number of conversations with organized labor over a long period of time regarding Alaska-hire. I have lived here, as has Representative Rokeberg, since the beginning of time, basically. ... And we are, and so is CSX, committed to this being an Alaska project in every possible way it can be under the law. And we're aware of the training facilities in Kenai. We've worked with organized labor to see how we might train people rather than import people." Number 0405 REPRESENTATIVE ROKEBERG mentioned a list of ten or more permits and asked, "In a nutshell, what would be your opinion about the ability to obtain permitting separate from these, and what type of time frame will it take to go through this -- we're in this battle now - - vis-a-vis the time that these were obtained?" Number 0413 MR. LEWIS said, "Having endured it, it wasn't a very pleasant process. These were all very public permits. Some of them are exclusive to Yukon Pacific, some could probably be duplicated by others. I would suggest that ... it doesn't seem very necessary, given the body of work that sits here and the assets that we would contribute to the project. I don't know that its doable. I know it's not necessary. I think it constitutes a very grave threat to the time line that I think we all agree on, to bring this project on-line around the year 2005. "We have worked very, very closely with the environmental community, very quietly. We have funded something called the TAGS Environmental Review Committee approaching now nine years. This is a committee formed and funded, really, through the Alaska Conservation Foundation, funded by Yukon Pacific. They in turn pick the people involved. There's a coordinator with whom we interface on a nearly-daily basis. We have worked diligently to inform the environmental community throughout this permitting process about the impacts of the project, about everything about the project, so that they would understand the nuances in a way they might not otherwise. And it's been an extremely valuable experiment that, insofar as I know, has never been done anywhere else. So it's hard to quantify how that impacts these. I just want to suggest to you it was at work throughout this whole process." Number 0444 CO-CHAIRMAN OGAN advised that due to time constraints, questions would be closed at that time. He thanked all the producers, Yukon Pacific Corporation and the committee members. He noted that the international press had released possible negative perceptions. "And I would like to focus on the positive," he stated, "and the fact that there has been ... really significant progress made in the last year or so .... I think all the players, I expect that they're all coming to the table in good faith with this memorandum of understanding. And I personally, as chairman of the Resources Committee, will be very intensely interested in furthering of this process and will do whatever I can to facilitate that spirit of cooperation that I believe we all expect here." He concluded, "It's imperative that we all work together ... as a team to facilitate this." CO-CHAIRMAN OGAN advised that the House Special Committee on Oil and Gas planned to waive the resolution. CHAIRMAN HODGINS indicated the necessary signatures had been obtained. Number 0470 REPRESENTATIVE BARNES made a motion to move CSHCR 1(WTR) from the House Resources Standing Committee with individual recommendations and the two accompanying zero fiscal notes. She asked unanimous consent. CO-CHAIRMAN OGAN asked if there were objections. There being none, CSHCR 1(WTR) moved from the House Resources Standing Committee. ADJOURNMENT CO-CHAIRMAN OGAN adjourned the Joint House Resources Standing Committee/Special Committee on Oil and Gas meeting at 12:01 p.m.