HOUSE SPECIAL COMMITTEE ON OIL AND GAS March 7, 2000 10:10 a.m. COMMITTEE CALENDAR PRESENTATIONS: FOOTHILLS PIPE LINES ALASKA UNDERGROUND TANK OWNERS & OPERATORS ASSOC. TAPE 00-18, SIDES A AND B CALL TO ORDER REPRESENTATIVE JIM WHITAKER reconvened the House Special Committee on Oil and Gas meeting at 10:10 a.m. [Note: Please refer to Tape 00-17 for the separate tape recording and corresponding minutes that were created for the meeting on HB 414, which was held on the same day at 10:01 a.m.] PRESENT Members present at the reconvening were: Representatives Whitaker, Dyson, Green, Harris, Porter, Kemplen and Smalley. SUMMARY OF INFORMATION CHAIRMAN WHITAKER announced that the presentation was related to "what should be the legislature's highest priority, taking Alaska's North Slope gas to market." He then introduced the presenters from Foothills Pipe Lines, Ltd.: Bob Pierce, Chairman; John Ellwood, Vice President of Engineering, and Harry Hobbs, Vice President of Transportation. Mr. Pierce then introduced Curtis Moffatt of the Van Ness Feldman firm of Washington. MR. PIERCE stated that he had participated in the original hearings on this gas line project before the Federal Trade Commission and the National Energy Board, when then-Secretary of Energy Jim Schlessinger and the Canadian Prime Minister negotiated the deal that was then ratified by legislation and executive orders, and is still in effect. MR. PIERCE explained that Foothills is the chair of the Alaska partnership. It has two active members, Foothills and Trans Canada Pipelines, and they think the time is right to complete the Alaska Highway Pipeline. He stated that the pipeline is cost effective, environmentally sound and politically palatable. MR. PIERCE described the three original proposals to move Alaska gas. The "El Paso" project would pipeline gas to a liquefied natural gas (LNG) facility at Valdez and then ship it to California. The "Arctic Gas" project would pipeline it across the North Slope to the Mackenzie Valley and through Canada to the United States. The third project, Foothills, calls for an overland pipeline along the Dalton and Alaskan Highway through Alaska and Canada to the Lower 48. MR. PIERCE said that the U.S. and Canada had agreed that, all things considered, the Alaska Highway route was the best option. Certificates were issued, international agreements were signed by the President of the U.S. and the Prime Minister of Canada, agreements were ratified by Congress and by Parliament. The decisions, the agreement and the legislation selecting the highway route have the force and effect of a treaty between the two countries. MR. PIERCE discussed the latest proposal to take Alaskan gas via the Mackenzie valley to join the Canadian pipeline route, saying the only difference between this one and the earlier proposal is that the pipeline will be laid under the ocean ice. He predicted that this proposal will fail for the same reasons as before: economics, environment and politics. MR. PIERCE stated that the renewed interest in a gas pipeline project is based upon rising U.S. demand and escalating gas prices, driven primarily by the demand for gas-fired electrical generation. Most analysts predict a 30 TCF U.S. market and a $3 mcf price by the second half of this decade. MR. PIERCE said that recently, the chairman of the National Energy Board of Canada warned of a 2 bcf per day shortfall in Canada by 2001. He pointed out that Alaska is the largest unconnected gas reserve in North America and described how Alberta solved its stranded gas problem. Capital investments in the petrochemical industry there are now approaching $7 billion (Canadian), with more than 400 construction jobs created for each $1 billion investment. MR. PIERCE said he believes that Chicago gas prices will allow for the profitable movement of Alaska gas. He believes the Alaska Highway project is the best option. Mr. Pierce said the projected capital cost to build the 1,700 mile pipeline from the North Slope to the Canadian grid is approximately $6 billion (U.S.). It would be a high-pressure pipeline, with a beginning capacity between 2.5 and 3 bcf per day. Because Foothills has many of the key approvals in hand, its pipeline could be in operation as early as 2006. MR. PIERCE, answering why the cost is so much lower now than in previous estimates, stated that a sizeable portion has already been pre-built. Also, Foothills is using smaller diameter pipe, and new welding techniques increase productivity in the construction phase. MR. PIERCE described throughput volumes, discussing market and transportation tolls. He went on to say that the Alaska North Slope LNG project and the Alaska Highway project could work together. He concluded by comparing the Foothills project favorably with the proposal to go under the ocean ice, citing costs, environmental concerns and the political factor. And, he said, the Alaska pipeline project would produce more jobs in Alaska than a project that ran predominantly through Canada. JOHN ELLWOOD answered a question from Representative Green, describing plans to move gas liquids as well as gas through the stream. HARRY HOBBS answered a question from Representative Dyson about the environmental objection to a pipeline under the Beaufort Sea, stating that he believes there would be the same objections in Canada. MR. PIERCE added that one would have to start from scratch to take a gas line through the Mackenzie Delta, and that the Foothills project has a distinct advantage in its permits. REPRESENTATIVE KEMPLEN asked what needs to happen in order to meet Foothills' target date of 2006 for the pipeline. Mr. Pierce stated it would require an agreement between the people who own the gas and the pipeline company, "and once you've got that agreement, then you can proceed to the other things." He added that those discussions are now in progress. In response to Representative Kemplen's follow-up question as to whether Foothills would be willing to commit to a project large enough to handle LNG as well, Mr. Pierce said one always builds in excess capacity. He added that people do not drill for gas unless there is a pipeline to take it to market, and that Alaska might be surprised to discover how much gas it really has if people started looking for it. REPRESENTATIVE SMALLEY ASKED about the opportunity for tax-free revenue bonding and tax free revenues. Mr. Pierce stated that they have no tax free revenue bonding, that Canada is quite the opposite. REPRESENTATIVE GREEN asked if $3 netback at the wellhead would be enough. Mr. Pierce said they think it would be. MR. ELLWOOD described the demand and supply for the Lower 48 market, and said Alaskan gas will be required to meet the demand. CHAIRMAN WHITAKER commented that the 30 tcf might be a conservative number due to a restricted supply, and Mr. Pierce agreed. In answer to a subsequent question by Chairman Whitaker, Mr. Hobbs stated that to his knowledge the leaseholders in the Mackenzie Delta are, Imperial Oil(Exxon), Shell Canada, Gulf Canada, Petro Canada and Anderson Exploration. CHAIRMAN WHITAKER observed that the market is growing, the supply is restricted, and a huge supply exists in Alaska. He asked what it will take to "break that log jam." MR. HOBBS said Foothills thinks it is a matter of getting together the producers, the shippers and the players in the marketplace. MR. PIERCE stated that historically, it is the buyer that one needs to "get on the hook," but utility companies (in the U.S.) have begun to enter into purchase agreements themselves, and producers are now in a position to deal with the buyers directly. To REPRESENTATIVE DYSON'S question regarding the effect of North American National security concerns on supply decisions, Mr. Pierce commented that Jim Schlessinger had testified before U.S. Senator Frank Murkowski's committee that the high cost of crude oil was to be blamed on the administration, and that the time has come to move gas from Alaska down the highway project that Congress had approved. CHAIRMAN WHITAKER announced a brief at-ease, while the next group came forward to give a presentation on the Storage Tank Board of Assistance. CHAIRMAN WHITAKER reconvened the meeting at 11:09 a.m. and introduced Mr. John Barnett of the Storage Tank Board of Assistance, stating that the committee hoped to gain enough information to waive a bill that would extend the sunset of the Board of Assistance, should one be introduced and referred to the committee. JOHN BARNETT described the history, purpose and authority of the Storage Tank Board of Assistance. It was originally established as an appeals board and to provide oversight to the Department of Environmental Conservation (DEC) regulations pertaining to storage tanks. The storage tank fund, which provided grants and loans to owners of tanks that faced cleanup issues, was established at the same time as the board. The idea behind the grant and loan fund was that if the state did not provide some type of program to help those businesses, they would not be able to pay for the cleanup, and the state would be left holding the bag. The program operated fairly successfully for nine years, but last year, due to budget constraints, Senate Bill 128 changed the grant program to a loan program and reduced the amounts available to tank owners. The Board has acted as an appeals board for disputes over what qualified for the program and has reviewed regulations put forth by DEC with regard to storage tanks. There are now tank owners waiting for loans, and the Board feels there are going to be disputes over the qualifications. If the board is dissolved on June 30, there will still be grants available and unfinished loan applications. Mr. Barnett would like to keep the board in place for at least three more years to keep tank-related disputes out of the court system. Another concern of the Tank Owners and Operators Association is that there are currently over 2,000 sites waiting to be certified as "clean" by DEC, and there is no recourse for the owners. He suggested that the board could help with that. CHAIRMAN WHITAKER asked Mr. Barnett to clarify points in his testimony about the number of sites awaiting "no further action" letters and the ability of the board to act as a mediator. MR. BARNETT, in response to a question from Representative Green, said that to issue a "no further action" letter, the department has to be satisfied that all contamination at the site has been identified and a means is in place to monitor and assure that no further contamination is taking place or that all of the contamination has been removed. Because the board can only deal with sites that have participated in the loan program, it would be able to mediate only about 200 of the 2,000 outstanding claims unless the board's authority were expanded. He also pointed out that many of the 2,000 sites had not been identified during the window of opportunity for them to qualify for the loan program, thereby leaving them outside the authority of the board. JIM HAYDEN, Manager, Underground Storage Tank Program, Department of Environmental Conservation, answered a question from Representative Green. He stated that the monies repaid from the loan program will come back into the loan fund account and could be loaned out again. He also pointed out that other money for the loan fund comes from registration fees paid by the tank owners. Following a request by Representative Porter, John Barnett went through the draft legislation that will be introduced by the Resources Committee to extend the sunset date of the board as well as its authority to act as mediator and to review cleanup decisions and plans. COMMITTEE ACTION The committee took no action. ADJOURNMENT CHAIRMAN WHITAKER adjourned the meeting at 11:41 a.m. NOTE: The meeting was recorded and handwritten log notes were taken. A copy of the tape(s) and log notes may be obtained by contacting the House Records Office at 129 6th Street, Suite 229, Juneau, Alaska 99801-2197, (907) 465-2214, and after adjournment of the second session of the Twenty-first Alaska State Legislature this information may be obtained by contacting the Legislative Reference Library at 129 6th Street, Suite 102, (907) 465-3808.